New Treasury Rule May Trigger Notifications to Business Owners from Banks

Many financial institutions recently notified their customers of a new rule issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) requiring banks to update their policies and procedures regarding the identification of beneficial owners of legal entities that are customers of the bank.

On May 11, the Customer Due Diligence Requirements for Financial Institutions (the CDD Rule) became effective.  FinCEN issued the rule to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit financial activities and launder their ill-gotten gains.

The CDD Rule requires banks and other covered financial institutions to identify and verify the identity of the natural owners (known as beneficial owners) of their legal entity customers.

Covered institutions are federally regulated financial institutions, such as banks, credit unions and mutual funds.  A Legal Entity Customer is defined as a corporation, limited liability company, limited partnership, general partnership, business trust, or any other entity created by filing with a state office or with a Secretary of State.

A beneficial owner is someone who benefits from or is responsible for the legal entity. The CDD adopts a two-part definition of beneficial owner, with an ownership prong and a control prong.  Under this approach, each covered financial institution must identify:

  • Each individual who owns 25% or more of the equity interests in the legal entity customer; and
  • At least one individual who exercises significant managerial control over the customer.

The number of reportable individuals may vary between one and five: up to four individuals under the ownership prong, and only one individual to satisfy the control prong. It is possible for the same person to be identified under both prongs.

To obtain these individuals’ identities, the bank must require the person opening the account for the entity to certify who those persons are. The bank then must verify the identity of each beneficial owner. The required information may be obtained by using a certification form provided by FinCEN or an institution’s internal form.

Financial institutions may use documentary or non-documentary methods, or a combination of both methods for identity verification. The rule expressly authorizes covered financial institutions to verify the identity of a beneficial owner who does not appear in person through a photocopy or other reproduction.

The CDD Rule does provide an exemption from the requirement to identify a legal entity customer’s beneficial owners for equipment finance and lease accounts – including those for construction machinery and general business equipment – established at a covered financial institution.

For more information please see the FinCEN Guidance Document issued April 3 or contact David Jaffe at 800-368-5242 x8317 or Becky Froass at x8529.

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