FinCEN is Shaping Rules on Customer Due Diligence: Opportunity for Banks Oct. 5 in NYC

by Pillsbury Winthrop Shaw Pittman LLP

[authors: Aaron R. Hutman, Joseph T. Lynyak, III]

The U.S. Treasury Department is preparing a Proposed Rule to clarify, and potentially expand, requirements for financial institutions to conduct customer due diligence and assess beneficial ownership. FinCEN (Financial Crimes Enforcement Network) has announced a Roundtable Discussion on October 5, 2012 in New York. Requests to attend must be made no later than September 28 with space limited. FinCEN published its Advance Notice of Proposed Rulemaking on March 5, 2012 and closed comments on June 11, 2012. For Financial Institutions seeking input on this important rulemaking, the October 5th Roundtable offers a strategic opportunity to influence the Proposed Rule.

FinCEN’s expected Proposed Rule is intended to address customer due diligence (“CDD”) requirements for financial institutions under the Bank Secrecy Act and USA PATRIOT Act, including clarifying requirements related to information on beneficial ownership. The March 5, 2012 Advance Notice of Proposed Rulemaking (77 Fed. Reg. 13046) identifies the following four elements as parts of an effective CDD program:

(1) Conducting initial due diligence on customers, including identifying the customer and verifying that customer’s identity as appropriate on a risk basis, at the time of account opening;

(2) Understanding the purpose and intended nature of the account, and expected activity associated with the account for the purpose of assessing risk and identifying and reporting suspicious activity;

(3) Identifying the beneficial owner(s) of all customers, and verifying the beneficial owner(s)’ identity pursuant to a risk-based approach; and

(4) Conducting ongoing monitoring of the customer relationship and conducting additional CDD as appropriate, based on such monitoring and scrutiny, for the purposes of identifying and reporting suspicious activity.

The bulk of the analysis in the Advance Notice was directed toward the beneficial ownership standards.

FinCEN would require certain financial institutions to identify and verify the beneficial owners of all customers pursuant to a risk-based approach. Under existing rules, financial institutions are required to obtain beneficial ownership information in two limited situations – (a) private bank accounts in covered financial institutions (a defined group including most banks and credit unions); and (b) certain correspondent accounts for foreign financial institutions. See 31 CFR §§ 1010.620(b)(1) and 1010.610(b)(1)(iii)(A).

For the two situations described above, regulations have defined beneficial ownership as:

[A]n individual who has a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the account. ...

31 CFR § 1010.605(a). While this definition would continue for those particular situations, FinCEN proposed a new definition where, in the case of legal entities, beneficial ownership would include:

(1) either:

(a) each of the individual(s) who, directly or indirectly, through any contract, arrangement, understanding, relationship, intermediary, tiered entity, or otherwise, owns more than 25 percent of the equity interests in the entity; or

(b) if there is no individual who satisfies (a), then the individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, intermediary, tiered entity, or otherwise, has at least as great an equity interest in the entity as any other individual, and

(2) the individual with greater responsibility than any other individual for managing or directing the regular affairs of the entity.

For the October 5th Roundtable, FinCEN has acknowledged the comment period revealed industry concern with this definition and the “categorical requirement” for financial institutions to identify beneficial ownership as opposed to on a risk or other basis. The Roundtable notice also identified several additional questions relating to how financial institutions currently seek beneficial ownership information. FinCEN is seeking detailed information on alternative definitions and approaches, indicating that this is an area of potential influence by Roundtable participants.

In addition to seeking comment on the proposed definition of beneficial ownership, FinCEN addressed the following additional issues and requested comment in the Advance Notice of Proposed Rulemaking –

  • FinCEN intends to limit the rule, initially, to banks; brokers or dealers in securities; mutual funds; futures commission merchants; and introducing brokers in commodities. However, comments were welcomed from other businesses defined as “financial institutions” and FinCEN indicated the new rule could be expanded to cover all financial institutions.
  • Should legal-entity customers who are currently exempt from customer identification program requirements also be exempt from beneficial ownership rules? In particular, FinCEN noted the exemption for existing customers and asked how beneficial ownership identification might be phased into ongoing CDD efforts.
  • Accounts opened by intermediaries for the benefit of another party could pose money-laundering risks. FinCEN requested comment on potential alternative definitions of “beneficial owner” in instances where obtaining information about the beneficial owners of assets in an account may be warranted. FinCEN acknowledged this could pose difficulties for certain account structures, such as omnibus accounts.
  • Where a customer is acting as an agent for another party (e.g., law or accounting firms), it can pose challenges for beneficial ownership identification. FinCEN suggested requiring any individual or entity opening an account at a financial institution to state he/she or the entity is not acting on behalf of any other person.

In the notice of the October 5th Roundtable, FinCEN noted several additional areas for comment. This includes treatment of trusts, foreign legal entities and shell companies. This notice is available at:

The March 5, 2012 Advance Notice of Proposed Rulemaking is available at:

Financial institutions interested in engaging with FinCEN officials on these issues are encouraged to sign up for the October 5th Roundtable. It may be advisable for attendees to consult with counsel to discuss strategy given the complexity of the issues and regulator concerns. Requests should be submitted to the FinCEN BSA Resource Center at and further instructions are contained in the notice. Given space and time limitations, not all requests to attend may be honored, so early registration is encouraged.

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.

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