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"Treasury Proposes New Transparency Rule to Identify “Beneficial Owners” of Accounts – Comments Due October 3rd," Crowell & Moring's Public Policy Bulletin

August 18, 2014

Co-Authors: Cari N. Stinebower and Edward Goetz.

The Financial Crimes Enforcement Network (FinCEN), published a Notice of Proposed Rulemaking (NPR) to amend the Bank Secrecy Act (BSA) with a new Customer Due Diligence (CDD) requirement for certain Financial Institutions (FI) to identify and verify the identity of beneficial owners of legal entity customers. This long-awaited NPR is the result of the Announced Notice of Proposed Rulemaking, published on February 29, 2012, and subsequent industry sector round tables in order to strike a balance between law enforcement’s desire for additional beneficial ownership information and a reasonable burden on financial institutions to collect and maintain additional beneficial ownership information.

Treasury Secretary Jack Lew acknowledged the NPR sounds very technical, but that it is necessary because “banks and brokerages often do not know the identity of the people behind the businesses that open accounts.” He added, “This makes it easier for financial criminals, terrorist financiers, and sanctions busters to move and launder their dirty money through anonymous shell companies, front companies, and other types of legal entities.” This NPR is the result of much outreach with the private sector through industry round tables and is intended to establish a single set of requirements rather than leaving the CDD process up to individual industry sectors to develop and define.

A beneficial owner is “the natural person(s) who ultimately owns or controls a customer and/or the person on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.”

Although the NPR requires an FI to verify the identity of the beneficial owner, it does not require the verification of their status as beneficial owners. This requirement is designed to provide law enforcement with additional needed information for investigation purposes while limiting additional burdens on covered financial institutions.

Invoking FinCEN’s incremental rule making authority, the proposed rule will be limited to FIs with Customer Identification Programs (CIP). These include banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities.

An additional aspect of this change is Treasury’s desire to harmonize what it considers the four “pillars” of Customer Due Diligence within existing Anti-Money Laundering (AML) programs. The beneficial ownerships proposal is one of these.

The others are: (1) identifying and verifying the identity of customers; (2) understanding the nature and purpose of customer relationships; and (3) conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions. Number (1) is already part of every CIP requirements, so the AML program requirements would be amended to include numbers (2) and (3).

FinCEN believes these two requirements are substantively the same as those included within regulations or rules issued by federal functional regulatory agencies and self-regulatory organizations, and that formalizing these in AML programs will not add or change the covered FIs obligations. Comments to the NPR are due by October 3, 2014. Crowell’s attorneys can advise and assist FIs in how to best advocate their positions.