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Beneficial Ownership Fact Sheet 

Significant Increases in Anti-Money Laundering Rules 

Last updated: April 1, 2019

Executive Summary

Overview of the Rule: Generally, the Beneficial Ownership rule requires financial institutions to develop processes and procedures in order to identify and verify owners of a legal entity that is the institution’s customer. The rule is one element of a series of laws and regulations designed to prevent and identify money laundering or illicit finance. 

Coverage: Covered financial institutions are defined in statute and regulation and generally include banks, broker-dealers in securities, credit unions, and mutual funds.

Legal Entity Customer: The rule defines Legal Entity Customers as corporations, limited liability companies, or other entities that are created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. The rule also excludes a number of entities, generally government, large companies, and regulated entities.     

Beneficial Owner: Under the new guidelines, there is a two-pronged test to identify natural persons related to the legal entity: control and ownership. The control test requires the identity of a single person with significant responsibility to control or manage the organization (e.g., a CEO). The ownership test includes all individuals who directly or indirectly own 25% of the legal entity customer.   

Information Collected: At a minimum, the institution must collect the Beneficial Owner(s) name, date of birth, physical address, and identification number (see Additional Background & History for more details).

Effects on  CRE: Since most real estate transactions involve legal entities specifically set up for the transaction, regulated financial institutions now must collect and maintain additional customer data with each new account. There also may be privacy and other concerns related to these requirements.

Beneficial Ownership Quick Facts

  • Beneficial Ownership is one of many Anti Money Laundering (AML) regulations aimed at stopping illicit finance.  
  • The Treasury’s Financial Crimes Enforcement Network (FinCEN) has rulemaking authority on AML regs. Banking regulators supervise institutions for compliance. 
  • The Beneficial Ownership rule was finalized May 11, 2016, as part of changes to Customer Due Diligence Requirement under the Bank Secrecy Act (BSA). The compliance date began on May 11, 2018. The rule is not retroactive and institutions do not need to gather information on old accounts. 
  • Policies & Procedures Govern: While the rule implements minimum standards, institutions may design their requirements to be more stringent. AML regulations also incorporate risk-based analysis, i.e. a riskier customer may require extra diligence to fully comply. 
  • Regulators may convene an interagency working group to evaluate the ongoing implementation and challenges of AML regulation. Congress also has several reform measures in the works. 

Resources

Beneficial Ownership Resources
Beneficial Ownership Rule: 31 C.F.R. § 1010.230
Customer Due Diligence Final Rule (81 Federal Register 29398)
FinCEN FAQs Regarding Customer Due Diligence Requirements for Financial Institutions (April 3, 2018)
FFIEC Examiner’s Guide to Beneficial Ownership Requirements
Joint Interagency Statement on Innovative Efforts to Combat Money Laundering (Dec. 3, 2018)

For further Information, visit CREFC’s Resource Center at: https://www.crefc.org/library

Additional Background & History

  • Anti-Money Laundering Overview: In 2016, the Financial Crimes Enforcement Network (FinCEN), an agency within the Department of the Treasury, finalized a number of customer due diligence (CDD) rules under the Bank Secrecy Act (BSA), which is the statute establishing requirements for financial institutions’ responsibilities relating to detecting and preventing money laundering. Laws and regulation related to money laundering and illicit finance prevention are collectively referred to as AML. As part of the 2016 CDD rulemaking, FinCEN implemented a new requirement that financial institutions must identify and verify the beneficial owners of legal entity customer who open new accounts with the financial institution. The Beneficial Ownership rule was finalized on May 11, 2016 with a two-year implementation window; the compliance date began on May 11, 2018. The rule is not retroactive and institutions do not need to gather information for existing customers on old account. However, if an existing legal entity customer were to open a new account, a Beneficial Owner check would likely be required. 
  • Covered Financial Institutions: Statute and regulation list what institutions are required to have AML programs, which generally include banks, broker-dealers in securities, credit unions, mutual funds, and futures commission merchants or introducing broker in commodities. See, 31 C.F.R. § 1010.100.
  • Beneficial Ownership: According to the final rule, covered financial institutions must: “Identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are excluded).” The rule includes a standard certification form, but also allows financial institutions to comply by other means, as long as the substantive requirements are met. Key elements of the rule are described in detail below.
    • Legal Entity Customer: These are the entities targeted by the rule. Essentially, the rule is trying to connect natural persons to legal entities to help ensure money launderers, blocked, or sanctioned persons do not use shell companies to facilitate banking activities. The rule defines a Legal Entity Customer as: “A corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.” 31 C.F.R. § 1010.230(e)(1). The regulation also excludes a number of entities from coverage, including regulated banks, SEC registrants, large companies, government agencies, etc. 
    • Beneficial Owner Threshold: The financial institution must identify all Beneficial Owners as defined by the rule. The rule defines a Beneficial Owner by separately examining control and ownership. Based on the criteria below, a legal entity would have at least one and a maximum of five Beneficial Owners.
      • Ownership: Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer;
      • Control: A single individual with significant responsibility to control, manage, or direct a legal entity customer, including: (i) An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (ii) Any other individual who regularly performs similar functions. 
    • Account: The rule cross references other regulations for the definition of “account” based on the type of company that is reporting (e.g., bank, broker dealer, mutual fund). For example, an account at a bank is defined as: “Account means a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. Account also includes a relationship established to provide a safety deposit box or other safekeeping services, or cash management, custodian, and trust services.” 31 C.F.R. § 1020.100(a).
  • Individual Information Collected: The standard form developed by FinCEN requires financial institutions to collect basic information from Beneficial Owners and verify their identity (e.g., a photocopy of a driver’s license). While the institution must verify the identity of the Beneficial Owner(s), the institution may rely on the customer for naming those individuals who meet the criteria. In other words, the legal entity customer can provide the list of Beneficial Owners; the financial institution doesn’t have to investigate whether those individuals are, in fact, Beneficial Owners (unless they suspect otherwise). The data that must be collected for each Beneficial Owner is listed below:
    • Name;
    • Date of Birth;
    • Address (Residential or Business Street); andAddress (Residential or Business Street); andAddress (Residential or Business Street); andDate of Birth;Date of Birth;
    • Identification Number (Social Security for U.S. persons/Passport or Similar Number for Foreign Persons)
  • Implementation Questions: The Beneficial Ownership rule necessarily interacts with other aspects of an AML compliance program (customer due diligence, customer identification program, etc.), and the complex nature of financial transactions and legal entity ownership have given rise to numerous implementation questions. The collection of personally identifiable information also may raise privacy concerns. Additionally, AML regulations are often written in a way that sets out minimum requirements that financial institutions are required to operationalize through policies and procedures. The above requirements represent a baseline level of compliance; certain risk factors may require more thorough documentation, investigation, or certification. On April 3, 2018, FinCEN released Frequently Asked Questions that seek to address a number of concerns.  
  • Corporate Transparency Act:  Rep. Carolyn Maloney (D-NY) has introduced legislation, the Corporate Transparency Act 2019 that would essentially create a federal database of legal entities with information on beneficial owners and control administered by Treasury’s Financial Crimes Enforcement Network (FinCEN). Beneficial Ownership and control information would be submitted shortly after entity formation and updated 60 days after any changes. Notably, this would relieve financial institutions of their current obligation to collect the information since it would already be in the hands of law enforcement. Financial institutions, according to Maloney, would be able to access the information with the consent of their customers. The legislation doesn’t propose bright-line thresholds like the current regulations, so some critics have questioned whether the standard would be workable or overly broad. 
  • French Hill Legislation: A similar draft proposal has been offered by Rep. French Hill (R-AR), with the main difference being the IRS would be the collector and repository of information rather than FinCEN. If the IRS were the repository, experts have opined that a law enforcement agency would need a court order or a warrant to retrieve the beneficial ownership information from the IRS – they wouldn’t need a court if it were held by FinCEN.
 

Disclaimer


The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as legal, financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2019 CRE Finance Council. All rights reserved.
 
 

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