Beneficial Ownership Due Diligence Requirements

by Michael Volkov

The new FinCEN regulations requiring financial institutions to secure beneficial ownership information is fast approaching – May 2018. The US has been way behind in this regulatory area. As a result, money-laundering activity in the US is fairly common. The EU has fast outpaced the US with its 4th Anti-Money Laundering Directive, and with the UK’s initiation of an ownership registry for UK companies.

Prosecutors will scour through regulatory filings relating to beneficial ownership. It is a great source of information that can quickly focus a government investigation. Criminals will seek to circumvent the regulations and continue to employ corporate organizations in the British Virgin Islands and other locations where ownership information is not required. Customers that want access to the US financial system will be required to divulge important ownership information.

An effective compliance program, however, should be collecting this information already. In order to identify potential corruption and sanctions risks, companies as a best practice should be securing proof of beneficial ownership information. It is easy to understand the importance of such information.

A company customer, vendor/supplier or other third party may be partially owned by a government official as a means to launder or secure illegal proceeds. Government owners are known risks and their presence in a legal entity may be a means by which to further criminal activity. Additionally, a sanctioned entity may seek to disguise its ownership interest to escape detection by a company.

For these reasons, as part of any due diligence or onboarding process, companies should be collecting and verifying such information to avoid corruption, money laundering and sanctions risks.

Under the new FinCEN customer due diligence regulations, financial institutions will be required to secure beneficial ownership information from 1 to 5 people connected to a legal entity. The new regulations require a financial institution to secure beneficial ownership information from each person that owns 25 percent or more of a legal entity. As a result, a financial institution will have to identify and verify ownership information from up to 4 persons (i.e. 25 percent each) who have an ownership interest in the company.

The FinCEN regulations also require a financial institution to identify and verify the ownership interest of one “controlling” person who exercises controlling management authority over a legal entity. In most cases, this would fall on the CEO, assuming that the CEO does not own 25 percent or more of the company’s stock.

Under the regulations, as can be seen, financial institutions will have to identify and verify up to 4 owners and one controlling person (a non-owner or owner with less than 25 percent) who exercises management and operational control of the legal entity.

Luckily for financial institutions, they can comply with the beneficial ownership regulations by securing certifications from the beneficial owners as to their information and identity. Also, financial institutions will not be required to retroactively obtain such information from existing customers prior to the March 2018 effective date.

Prosecutors and regulatory attorneys will vigorously enforce the new regulations as a means to promote careful compliance. Prosecutors will use the information as an important investigative source of information to further criminal investigations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

Written by:

Michael Volkov

The Volkov Law Group on:

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