Starting on May 11, 2018, financial institutions operating in the United States have been required to create written policies and procedures designed to identify certain beneficial owners of most legal entities customers opening an account with the financial institution and to verify the information obtained. It should be noted that the term “account” has a broad definition, including opening of deposit accounts, extending credit, providing cash management services, providing safe deposit boxes, and “other financial transactions.” This requirement was enacted in Title 31 of the Code of Federal Regulations, Section 230 (the “Act”), primarily to combat money laundering and is overseen by the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”). In complying with the beneficial ownership requirements of the Act, this article focuses on both the parties subject to the requirements of the Act, as well as the required information needed to comply and the verification thereof.

Parties

With respect to financial institutions that are required to comply, the Act uses the term “covered financial institution” to define the financial institutions required to comply with the terms of the Act. It includes, among other parties, insured banks, commercial banks, federally insured credit unions, savings associations, and trust companies. The definition of covered financial institutions also includes other parties, such as mutual funds and registered securities brokers.

In defining what parties fall under the “legal entity customer” classification, the Act generally includes the following: (i) any entity created by filing a document with the applicable Secretary of State or similar office (e.g. corporations, LLCs, and limited partnerships), (ii) general partnerships, and (iii) any similarly formed entity created under foreign laws that opens an account with the covered financial institution. With respect to legal entity customers, the Act goes further to exclude certain entities. Among some of the excluded entities are state and federal regulated financial institutions, entity registered under the Securities and Exchange Act of 1934, state regulated insurance companies and certain registered public account firms. Although not specifically excluded, it is noteworthy that most trusts/trustees are not legal entity customers.

As for Parties deemed to be a “beneficial owner” of a legal entity customer under the Act, there are basically three possibilities. First, a beneficial owner is any individual who directly or indirectly owns twenty-five percent (25%) or more of a legal entity customer. Second, a beneficial owner is any one individual that has significant responsibility to control, manage and/or direct a legal entity customer. Depending on the type of entity, this will usually be the chief executive officer (e.g. CEO, president, chief manager, general partner, managing member, etc.). Third, a trustee of a trust will be a beneficial owner if a trust owns, directly or indirectly, twenty-five percent (25%) or more of the legal entity customer. With respect to beneficial owners, there are a few items worth noting:

1. All of the listed beneficial owners will be individuals;
2. With respect to ownership, as opposed to control, it can be either direct or indirect ownership, which requires the covered financial institution to not only filter down the ownership if there are multiple layers of entities but also to aggregate it;
3. With respect to a trust’s ownership of a legal entity customer where the trust has two or more co-trustees, FinCEN has provided guidance that the covered financial institution only needs to collect the information for one of the co-trustees but the covered financial institution may opt to identify additional co-trustees.

Required Information and Verification

Once the beneficial owners of a legal entity customer are identified, the covered financial institution must, at a minimum, obtain each beneficial owner’s name, date of birth, address, and identification number. The identification number will generally be a person’s social security number or taxpayer identification number. However, for a non-U.S. person, it may also be passport number and country of issuance, alien identification card or a number and country of issuance of a non-U.S. issued government document having a picture or other acceptable safeguard. The required information may be obtained by use of a certification of beneficial owner(s), an example of which can be found 31 C.F.R. 1010.230, Appendix A, or by another means that the individual certifies is true and correct. Once obtained, the covered financial institution must then verify the required information received on the beneficial owner. To properly verify the information, covered financial institutions will generally follow the same procedures as their customer identification process (CIP) related to individuals.

Lastly, it should be noted that covered financial institutions need to keep any information identifying a beneficial owner, including the covered financial institution’s verification of the identifying information, regardless of how it is obtained, for as long as the account is open and for a period of five (5) years after it is closed.

For more information on the requirements related to the Act, please contact us at Questions@JellumLaw.com.