This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.
Under the dark cover of the Panama Papers scandal, FinCEN moved quickly to issue its beneficial ownership regulations. For all of the U.S. regulatory and financial industry bluster, it is about time. The United States stands far behind other countries in requiring transparency with regard to financial ownership. It is unfortunate that it took the Panama Papers scandal to give FinCEN the political opportunity to move the long-stalled beneficial ownership regulations.
With that being said, there are some important issues to highlight in the newly-adopted regulations. First and most significantly, the new rules are not effective for two years, or until May 11, 2018.
The new customer due diligence (CDD) rules require covered financial institutions, including banks, credit unions, broker-dealers, mutual funds, futures merchants and a host of other entities, to identify the natural persons who own and control legal entities, commonly referred to as “beneficial owners.”
The rule imposes a number of requirements with respect to the documentation and identification of owners of “legal entity customers” (e.g. corporations, limited liability companies, general partnerships and other entities). The definition of “legal entity customers” does not include investment advisers and other entities registered with the Securities and Exchange Commission. For each customer that opens an account, including existing customers, the financial institution must identify the beneficial owners using a two-prong test: an ownership prong and a control prong.
Specifically, the financial institution must identify:
- Each individual who owns 25 percent or more of the equity interests in the legal entity; and
- At least one individual who exercises significant managerial control over the customer.
Of course, the same individual may be identified under both prongs. If no individual owns 25 percent or more of the entity, the financial institution may identify only one person who satisfies the managerial control prong. The financial institution must verify the identity of each beneficial owner.
A key component of the new regulations is the ability of a financial institution to rely on the certification regarding the individual’s status as a beneficial owner. However, the financial institution must obtain personal identifying information about each beneficial owner. This information must be documented and preserved in the bank’s files. The regulations include a sample form for collecting such information, but banks are free to develop their own forms, so long as they collect the required information.
In response to significant industry concerns, FinCEN carved out any monitoring requirement for beneficial ownership information. In other words, even if the bank learns of new information that may conflict with prior beneficial ownership information, the bank is not required to refresh its beneficial ownership information unless the customer opens a new account. To the extent that the bank learns such information in accordance with existing monitoring programs, however, the bank will be required to update its files regarding the client’s beneficial ownership.
Interestingly, at the same time that it adopted the new beneficial ownership rules, FinCEN issues a proposed rule-making to require financial institutions to identify beneficial owners of foreign-owned, single-member LLCs. FinCEN noted that this requirement would close a current loophole in the system that allows a foreign person to use LLCs in the United States to hide assets both in the U.S. and outside the U.S.
Michael Volkov is the CEO of The Volkov Law Group LLC, where he provides compliance, internal investigation and white collar defense services. He can be reached at 
