Customer Due Diligence Requirements for Financial Institutions, 13046-13055 [2012-5187]
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Federal Register / Vol. 77, No. 43 / Monday, March 5, 2012 / Proposed Rules
Branch, ANM–150S, FAA, Seattle Aircraft
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Issued in Renton, Washington, on February
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[FR Doc. 2012–5180 Filed 3–2–12; 8:45 am]
BILLING CODE 4910–13–P
instructions for submitting comments.
Include RIN 1506–AB15 in the
submission. Refer to Docket Number
FINCEN–2012–0001.
• Mail: FinCEN, P.O. Box 39, Vienna,
VA 22183. Include 1506–AB15 in the
body of the text.
Please submit comments by one
method only. All comments submitted
in response to this ANPRM will become
a matter of public record. Therefore, you
should submit only information that
you wish to make publicly available.
Inspection of comments: Comments
may be inspected, between 10 a.m. and
4 p.m., in the FinCEN reading room in
Vienna, VA. Persons wishing to inspect
the comments submitted must request
an appointment with the Disclosure
Officer by telephoning (703) 905–5034
(not a toll free call). In general, FinCEN
will make all comments publicly
available by posting them on https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
FinCEN: Regulatory Policy and
Programs Division, Financial Crimes
Enforcement Network, (800) 949–2732
and select option 6.
SUPPLEMENTARY INFORMATION:
31 CFR Chapter X
I. Scope of ANPRM
RIN 1506–AB15
The scope of this ANPRM includes all
of the industries that have anti-money
laundering (AML) program
requirements under FinCEN’s
regulations. At this time, and as an
initial matter, FinCEN is considering
developing a CDD rule to cover banks,
brokers or dealers in securities, mutual
funds, futures commission merchants,
and introducing brokers in
commodities; accordingly, this ANPRM
is focused primarily on these
institutions. However, FinCEN believes
that a CDD rule may be appropriate for
all financial institutions subject to
FinCEN’s regulations, and will consider
extending such a rule to such other
financial institutions in the future.
Therefore, in addition to focusing on
input from those types of institutions
that would be subject to an initial
rulemaking, FinCEN is also specifically
requesting comment from other
institutions, such as money services
businesses (including providers of
prepaid access), insurance companies,
casinos, dealers in precious metals,
stones and jewels, non-bank mortgage
lenders or originators, and other entities
under FinCEN’s regulations, in
particular regarding issues related to
identification and verification of
customers as discussed in Section IV A.
of this ANPRM. While these institutions
currently are not mandated to obtain the
minimum mandatory information
Customer Due Diligence Requirements
for Financial Institutions
Financial Crimes Enforcement
Network (FinCEN), Treasury.
ACTION: Advance notice of proposed
rulemaking.
AGENCY:
FinCEN, after consulting with
staffs of various Federal supervisory
authorities, is issuing this advance
notice of proposed rulemaking
(ANPRM) to solicit public comment on
a wide range of questions pertaining to
the development of a customer due
diligence (CDD) regulation that would
codify, clarify, consolidate, and
strengthen existing CDD regulatory
requirements and supervisory
expectations, and establish a categorical
requirement for financial institutions to
identify beneficial ownership of their
accountholders, subject to risk-based
verification and pursuant to an
alternative definition of beneficial
ownership as described below.
DATES: Written comments on this
ANPRM must be received on or before
May 4, 2012.
ADDRESSES: Comments may be
submitted, identified by Regulatory
Identification Number (RIN) 1506–
AB15, by any of the following methods:
• Federal E-rulemaking Portal: https://
www.regulations.gov. Follow the
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SUMMARY:
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required to identify customers as is
mandated in regulations pertaining to
depository institutions, brokers or
dealers, and others described above, in
some cases they still must, on a riskbased approach, obtain all relevant and
appropriate customer-related
information necessary to administer an
effective anti-money laundering
program.1
II. Background
FinCEN exercises regulatory functions
primarily under the Currency and
Financial Transactions Reporting Act of
1970, as amended by the USA PATRIOT
Act of 2001 (the Act) and other
legislation, which legislative framework
is commonly referred to as the ‘‘Bank
Secrecy Act’’ (BSA),2 which authorizes
the Secretary of the Treasury (Secretary)
to require financial institutions to keep
records and file reports that ‘‘have a
high degree of usefulness in criminal,
tax, or regulatory investigations or
proceedings, or in the conduct of
intelligence or counterintelligence
activities, including analysis, to protect
against international terrorism’’ 3 The
Secretary has delegated to the Director
of FinCEN the authority to implement,
administer and enforce compliance with
the BSA and associated regulations.4
FinCEN is authorized to impose AML
program requirements on financial
institutions,5 as well as to require
financial institutions to maintain
procedures to ensure compliance with
the BSA and FinCEN’s implementing
regulations or guard against money
laundering.6
As reflected in recent guidance and
enforcement actions, the cornerstone of
a strong BSA/AML compliance program
is the adoption and implementation of
internal controls, which include
comprehensive CDD policies,
procedures, and processes for all
customers, particularly those that
present a high risk for money
laundering or terrorist financing.7 As
1 See, e.g., ‘‘Anti-Money Laundering Programs for
Insurance Companies,’’ 31 CFR 1025.210(b)(1).
2 The BSA is codified at 12 U.S.C. 1829b, 12
U.S.C. 1951–1959, 18 U.S.C. 1956, 1957, and 1960,
and 31 U.S.C. 5311–5314 and 5316–5332 and notes
thereto, with implementing regulations at 31 CFR
Chapter X. See 31 CFR 1010.100(e).
3 31 U.S.C. 5311.
4 Treasury Order 180–01 (Sept. 26, 2002).
5 31 U.S.C. 5318(h)(2).
6 31 U.S.C. 5318(a)(2).
7 FIN–2010–G001, ‘‘Guidance on Obtaining and
Retaining Beneficial Ownership Information, March
5, 2010, p.1 (‘‘Beneficial Ownership Guidance’’).
See also Federal Financial Institution Examination
Council Bank Secrecy Act Anti-Money Laundering
Examination Manual (2010) (‘‘FFIEC Manual’’),
available at: https://www.ffiec.gov/
bsa_aml_infobase/documents/
BSA_AML_Man_2010.pdf; Financial Industry
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part of their basic business model,
financial institutions seek at some level
to identify their customers and their
needs in order to best service them. The
requirement that a financial institution
know its customers, and the risks
presented by its customers, is basic and
fundamental to the development and
implementation of an effective BSA/
AML compliance program.8 In
particular, appropriate CDD policies,
procedures, and processes assist a
financial institution in identifying,
detecting, and evaluating unusual or
suspicious activity.9 Furthermore,
financial institutions may not be able to
perform effective risk assessments of
their customers or account bases
without conducting adequate due
diligence throughout customer
relationships.
As discussed in more detail below,
despite the basis for a CDD obligation
implicit in BSA requirements, such as
the AML program and suspicious
activity reporting (SAR) rules, FinCEN
believes that issuing an express CDD
rule that requires financial institutions
to perform CDD, including an obligation
to categorically obtain beneficial
ownership information, may be
necessary to protect the United States
financial system from criminal abuse
and to guard against terrorist financing,
money laundering and other financial
crimes. Despite efforts to highlight and
clarify CDD and beneficial ownership
expectations over the past several years,
FinCEN is concerned that there is a lack
of uniformity and consistency in the
way financial institutions address these
implicit CDD obligations and collect
beneficial ownership information
within and across industries. In the
absence of a broader definition of the
term ‘‘beneficial owner,’’ in particular a
definition that can be applied across
lines of business and customer
categories in the context of CDD, it may
be difficult for a financial institution to
(1) identify the risk scenarios that would
require the identification of beneficial
owners; and (2) collect sufficient
information to adequately address
identified risk. The lack of consistency
and uniformity also severely limits the
ability of financial institutions to rely on
the CDD efforts of other financial
institutions, which would promote
greater efficiency and eliminate
Regulatory Authority, Updated AML Template for
Small Firms (Jan. 2010) (‘‘FINRA Small Firm
Template’’), available at https://www.finra.org/
Industry/Issues/AML/p006340; National
Association of Securities Dealers, Notice to
Members 02–21 at 7 (Apr. 2002) (‘‘NASD NTM 02–
21’’).
8 See supra note 7.
9 See supra note 7.
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instances of duplication of effort in
transactions involving multiple
financial institutions.
FinCEN believes that an explicit CDD
program rule codifying, clarifying and
(with respect to beneficial ownership
information) strengthening existing CDD
expectations for U.S. financial
institutions could enhance efforts to
combat money laundering, terrorist
financing, tax evasion and other
financial crimes by:
(i) Strengthening the ability of
financial institutions to identify and
report illicit financial transactions and
comply with all existing legal
requirements, including FinCEN
regulations implementing the BSA, the
International Emergency Economic
Powers Act (IEEPA),10 and related
authorities;
(ii) Promoting consistency in the
implementation of, examination for, and
enforcement of CDD program
requirements across and within sectors
of the U.S. financial system;
(iii) Assisting financial investigations
by law enforcement, particularly by
enhancing the availability of beneficial
ownership and other information held
by U.S. financial institutions;
(iv) Facilitating reporting and
investigations in support of tax
compliance; and
(v) Promoting global financial
transparency and efforts to combat
transnational illicit finance, consistent
with international standards.
We are exploring an express CDD
program rule as one key element of a
broader U.S. Department of the Treasury
strategy to enhance financial
transparency in order to strengthen
efforts to combat financial crime,
including money laundering, terrorist
financing, and tax evasion. Illicit actors
continue to create legal entities,
masking beneficial ownership
information in order to facilitate access
to the financial system and conduct
financial crimes. Enhancing financial
transparency to address such ongoing
abuse of legal entities requires a broad
approach. Other key elements of this
strategy include: (i) Improving the
availability of beneficial ownership
information of legal entities created in
the United States; and (ii) facilitating
global implementation of international
standards regarding beneficial
ownership of legal entities and trusts
and CDD by financial institutions.
While these three elements of the U.S.
government’s strategy for combating
criminal abuse of legal entities are
proceeding independent of each other,
10 Title II of Public Law 95–223, codified at 50
U.S.C. 1701–1707.
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together they establish a comprehensive
approach to effectively combat the
criminal abuse of legal entities. As such,
strengthening CDD program
requirements for financial institutions
complements the Administration’s
ongoing work with Congress to adopt
legislation that would require the
collection of beneficial ownership
information at the time that legal
entities are created in the United States.
These efforts are also consistent with
Treasury’s ongoing work with the Group
of Twenty Finance Ministers and
Central Bank Governors (G20), the
Financial Action Task Force (FATF),
and other financial centers around the
world to clarify and strengthen
implementation of international
standards on identifying and
understanding beneficial ownership,
particularly with respect to CDD by
financial institutions and the creation of
legal entities.
The Importance of CDD in
Strengthening the Ability of Financial
Institutions To Deter Illicit Transactions
and Comply With Existing Legal
Requirements
The establishment and maintenance
of strong AML programs that include
CDD policies, procedures, and processes
has been a long-standing regulatory and
supervisory expectation of certain
Federal financial regulatory agencies,
and is implicit in regulations requiring
financial institutions to maintain an
effective BSA compliance program that
is reasonably designed to assure and
monitor compliance with the
recordkeeping and reporting
requirements of the BSA.11 An effective
CDD program should provide a financial
institution with sufficient information
to develop a customer risk profile that
can then be used by the financial
institution to identify higher-risk
customers and accounts, including
customers and accounts subject to
special or enhanced due diligence
requirements.12 The financial
11 See, e.g., FFIEC Manual, FINRA Small Firm
Template, NASD NTM 02–21.
12 See, e.g., FFIEC Manual, pp. 63–66; Beneficial
Ownership Guidance; FIN–2006–G009, Application
of the Regulations Requiring Special Due Diligence
Programs for Certain Foreign Accounts to the
Securities Industries (May 10, 2006) (‘‘Finally, we
remind securities and futures firms that the
correspondent account rule supplements their antimoney laundering obligations—it does not
supersede such obligations. A securities or futures
firm’s anti-money laundering program should
contain policies, procedures, and controls for
conducting appropriate, ongoing due diligence on
foreign entities including, among other things,
whether or not they are foreign financial
institutions for the purposes of the correspondent
account rule. Such policies, procedures, and
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institution also should apply
appropriate internal controls to identify
and investigate unusual and suspicious
activity and make an informed decision
whether or not to file a SAR.13 In the
event that a financial institution files a
SAR, CDD information collected could
enhance the information included in the
SAR and thereby enhance law
enforcement’s ability to initiate and
pursue the successful investigation and
prosecution of criminal activity. The
failure to obtain adequate CDD
information may impede a financial
institution’s ability to detect and report
suspicious or unusual activity or
provide information in a filing that is
useful to law enforcement. Several of
the consent orders and enforcement
actions issued over the last few years
have identified the lack of effective CDD
policies, procedures, and processes, or
the underlying elements thereof, as
rendering AML programs inadequate,
being a significant deficiency, and an
underlying factor in supervisory
actions.14
Although appropriate and adequate
CDD policies, procedures, and processes
have generally been an expectation of
controls should include, where appropriate,
ascertaining the foreign entity’s ownership and the
nature of its business. In high-risk situations
involving any account, an anti-money laundering
program should include provisions for obtaining
any necessary and appropriate information about
the customers underlying such an account.’’)
(emphasis added).
13 See, e.g., 31 CFR 1021.210(b)(2)(i).
14 See, e.g., Pacific National Bank, Miami, FL,
Comptroller of the Currency (OCC) #2011–021
(2011); HSBC Bank USA, N.A., McLean, VA, OCC
#2010–199 (2010); Consent Order issued by the
OCC in the Matter of Wachovia Bank, N.A.,
Charlotte, NC. OCC #2010–037 (2010); Public
Savings Bank, Huntington Valley, PA, FDIC–11–
107b (2011); First Financial Holding Co., Ltd,
Taipei, Taiwan, Board of Governors of the Federal
Reserve System (FRB), Docket Nos. 11–019–WA/
RB–FH et seq. (2011); Bank Hapoalim, B.M., Tel
Aviv, Israel, FRB, Docket Nos. 09–083–WA/RB–FB
(2009); Westfield Bank, Westfield, MA, Office of
Thrift Supervision Order No. NE–11–20 (2011);
Chapin, Davis, Baltimore MD, FINRA Case
#2010021065701 (2011); FINRA, Letter of
Acceptance, Waiver and Consent No.
2007007328101, Terra Nova Financial, LLC (2009);
FINRA, Letter of Acceptance, Waiver and Consent
No. 2007007139501, Synergy Investment Group,
LLC (2009); FINRA, Letter of Acceptance, Waiver
and Consent No. 2008011725001, ViewTrade
Securities, Inc., (2009); In the Matter of I Trade FX,
NFA Case No. 08–BCC–014 (filed April 24, 2009)
(finding that I Trade failed to follow up on red flags
and investigate suspicious activity, including
following up where the customer’s account had
inflows of funds well beyond the known income or
resources of the customer); In the Matter of Forex
Capital Markets LLC (FXCM), NFA Case No. 11–
BCC–016 (filed Aug. 12, 2011) (consent order based
on allegations in the complaint that FXCM failed to
conduct an investigation of suspicious activity
involving unexplained wire activity, unexplained
transfers between accounts, and deposits that were
in excess of the clients’ net worth and/or liquid
assets identified on their opening account
documents).
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the Federal financial regulatory
agencies, FinCEN believes that an
express CDD program rule will
strengthen compliance with and
enforcement of CDD program
requirements by clarifying,
consolidating, and harmonizing such
agencies’ minimum expectations with
respect to CDD policies, procedures, and
processes, including the fundamental
elements necessary for an effective CDD
program.
As described in detail below, FinCEN
believes that one fundamental element
necessary for an effective CDD program
is obtaining beneficial ownership
information for all account holders,
possibly subject to limited exceptions
based upon lower risk. An express CDD
program rule would enable FinCEN to
establish such a clear requirement,
thereby strengthening the ability of
financial institutions to detect and
address suspicious activity. Establishing
a categorical beneficial ownership
information requirement through a CDD
program rule also would address current
concerns regarding potential confusion
or inconsistency across financial sectors
regarding obligations to obtain
beneficial ownership information
outside of statutorily prescribed
circumstances. Recent industry
commentary and feedback indicated a
lack of common understanding and
consistent practice across the financial
services industry for collecting
beneficial ownership information. For
example, an industry survey conducted
by FinCEN in 2008 indicated certain
inconsistencies in financial institutions’
practices related to collecting and
maintaining beneficial ownership
information both within and across
industries. Moreover, industry
commentary following the issuance of
the Beneficial Ownership Guidance 15
indicated that there is at least some
question about the nature of a financial
institution’s obligation to conduct CDD
and to obtain beneficial ownership
information.16
The Importance of CDD in Assisting
Criminal Investigations
As discussed previously, an effective
CDD program is important in facilitating
effective suspicious activity monitoring,
which in turn facilitates the filing of
quality SARs containing information
that is both meaningful and useful to
law enforcement. The lack of such
information has been a source of
15 Supra
note 7.
e.g., Letter from the Investment Company
Institute, the Securities Industry and Financial
Markets Association, and the Futures Industry
Association (June 9, 2010), available at: https://
www.ici.org/pdf/24354.pdf.
16 See,
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growing concern to law enforcement in
its efforts to conduct successful criminal
investigations, both domestically and in
conjunction with international
counterparts. For example, the Chief of
DOJ’s Asset Forfeiture and Money
Laundering Section (AFMLS) has stated
that, with respect to international law
enforcement cases, ‘‘the lack of
beneficial ownership information can
also hamper our ability to respond to
requests for assistance from our foreign
counterparts. This problem not only
damages our reputation, but also
undermines our efforts to join with
foreign counterparts in a global
offensive against organized crime and
terrorism.’’ 17
The Importance of CDD in Facilitating
Tax Reporting, Investigations and
Compliance
The collection of CDD information by
financial institutions is also
fundamentally important in facilitating
tax reporting, investigations and
compliance. For example, a variety of
information may be needed in a tax
enquiry including information held by
banks and other financial institutions as
well as information concerning the
ownership of companies or the identity
of interest holders in other persons or
entities, such as partnerships and trusts.
The United States has long been a global
leader in establishing and promoting the
adoption of international standards for
transparency and information exchange
to combat cross-border tax evasion and
other financial crimes, and
strengthening the CDD procedures of
financial institutions is an important
part of that effort. Moreover, the United
States has an extensive network of
agreements for the exchange of tax
information that meet international
standards. In addition, new tax
reporting provisions under the Foreign
Account Tax Compliance Act
(FATCA) 18 would require overseas
financial institutions to identify U.S.
account holders, including foreign
entities with significant U.S. ownership,
and to report certain information about
their accounts to the IRS.19 In many
17 Shasky Calvery, Jennifer, ‘‘Priorities and
Initiatives of the Asset Forfeiture and Money
Laundering Section (AFMLS), U.S. Department of
Justice’’ The SAR Activity Review, Trends, Tips,
and Issues, p. 44. (May 2011), available at https://
www.fincen.gov/news_room/rp/files/sar_tti_19.pdf.
18 Hiring Incentives to Restore Employment Act
of 2010, Pub.L. 111–147, Section 501(a).
19 See generally, Internal Revenue Service,
‘‘Regulations Relating to Information Reporting by
Foreign Financial Institutions and Withholding on
Certain Payments to Foreign Financial Institutions
and Other Foreign Entities,’’ REG–121647–10
(February 8, 2012), available at https://www.irs.gov/
pub/newsroom/reg-121647-10.pdf.
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cases, implementing these provisions
will require the cooperation of foreign
governments to address impediments
under foreign law. Requiring U.S.
financial institutions to obtain similar
ownership information would put the
United States in a better position to
work with foreign governments to
combat offshore tax evasion and other
financial crimes.
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The Importance of CDD in Promoting
Financial Transparency and Protecting
the Financial System From Abuse
Consistent With International Standards
An effective CDD program supports
effective suspicious activity monitoring,
strengthens national anti-money
laundering and counter-financing of
terrorism (AML/CFT) regimes, and
promotes the integrity of the
international financial system as a
whole. This importance was recognized
by the G20 in several Leaders’
Statements supporting the strengthening
of CDD procedures. During the
Pittsburgh Summit in 2009, the G20
asked the Financial Action Task Force
(FATF) 20 to ‘‘help detect and deter the
proceeds of corruption by prioritizing
work to strengthen standards on
customer due diligence.’’ 21 In
November 2010, the G20 specifically
urged the FATF to clarify and
strengthen beneficial ownership as an
element of CDD and as a key component
of its Anti-Corruption Action Plan.22
Additionally, effective adoption and
implementation of CDD by financial
institutions is consistent with the
FATF’s global AML/CFT standards to
combat money laundering and the
financing of terrorism.23
The G20 recognition of the
importance of CDD is also reflected in
the work of other international standard
setting bodies. In October 2001, the
20 The FATF, an inter-governmental organization
of which the United States, thirty-four other
jurisdictions and two regional organizations are
members, is the global standard setter and policymaking body for AML/CFT. https://www.fatfgafi.org/pages/
0,2987,en_32250379_32235720_1_1_1_1_1,00.html.
21 Group of Twenty Finance Ministers and Central
Bank Governors, ‘‘Leaders’ Statement: The
Pittsburgh Summit’’ (September 24–25, 2009).
22 See Group of Twenty Finance Ministers and
Central Bank Governors, Annex III, ‘‘G20 AntiCorruption Action Plan: G20 Agenda for Action on
Combating Corruption, Promoting Market Integrity,
and Supporting a Clean Business Environment,’’ p.
2 (November 11–12, 2010).
23 Financial Action Task Force, ‘‘International
Standards on Combating Money Laundering and the
Financing of Terrorism & Proliferation—The FATF
Recommendations,’’ February 2012,
Recommendation 10, pp. 14–15, available at
https://www.fatf-gafi.org/dataoecd/49/29/
49684543.pdf. Following a review to update and
strengthen global AML/CFT standards, the FATF
issued its revised Recommendations on February
16, 2012.
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Basel Committee on Banking
Supervision (BCBS) published a report
on CDD, supporting the FATF’s efforts
in fighting money laundering. The
report states that sound CDD-related
procedures are not only critical in
combating financial crime, but ‘‘critical
in protecting the safety and soundness
of banks and the integrity of the banking
systems.’’ 24 Similarly, in light of the
FATF’s and other international
organizations’ work, in October 2002 the
International Organization of Securities
Commissions (IOSCO) established a
Task Force on Client Identification and
Beneficial Ownership to survey existing
securities regulatory regimes relating to
the identification of clients and
beneficial owners and to develop
principles that address aspects of the
CDD process.25 In May 2004, IOSCO
published a report describing principles
for client identification and beneficial
ownership in the securities industry.26
Among other things, the report noted
that while ‘‘[t]he CDD process is a key
component of securities regulatory
requirements intended to achieve the
principal objectives of securities
regulation, the protection of investors;
ensuring that markets are fair, efficient
and transparent; and the prevention of
the illegal use of the securities
industry,’’ it also ‘‘contributes to the
pursuit of other policy goals related to
the prevention of the illegal use of the
securities industry such as money
laundering and the financing of
terrorism that are generally within the
competence of other authorities.’’ 27
III. Treasury’s Efforts To Address CDD,
Including Beneficial Ownership Issues
The identification of beneficial
ownership interests as noted previously
has become increasingly relevant to
AML/CFT efforts both within the United
States and beyond its borders. Treasury
also has consistently engaged with the
Federal financial regulatory agencies
and financial institutions for the
purpose of understanding and clarifying
the efforts of financial institutions with
respect to CDD and identifying
beneficial ownership interests. Most
notably:
i. Following the adoption of the Act
in 2001, the Treasury Department and
the federal financial regulatory agencies
engaged the financial industry in order
24 Basel Committee on Banking Supervision,
‘‘Customer Due Diligence for Banks,’’ 2001, p. 2,
available at www.bis.org/publ/bcbs85.pdf.
25 International Organization of Securities
Commissions, ‘‘Principles on Client Identification
and Beneficial Ownership for the Securities
Industry,’’ p. 2 (May 2004).
26 Id.
27 Id.
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13049
to develop customer identification
program (‘‘CIP’’) and special due
diligence requirements in accordance
with Sections 326 and 312 of the Act,
respectively.
ii. In November 2006, FinCEN issued
a report on ‘‘The Role of Domestic Shell
Companies in Financial Crime and
Money Laundering: Limited Liability
Companies.’’ The report highlights the
need for financial institutions to assess
and manage the risks of providing
financial services to shell companies in
order to identify and report potential
money laundering activity.28
iii. In 2008, FinCEN submitted a
survey to industry to solicit feedback on
how and when financial institutions
obtain and retain beneficial ownership
information. The survey results
indicated certain inconsistencies in
financial institutions’ understanding of
requirements related to collecting and
maintaining beneficial ownership
information both within and across
industries.
iv. In November 2009, the Department
of the Treasury’s then-Assistant
Secretary, and current Under Secretary,
David Cohen, testified before the Senate
Committee on Homeland Security and
Governmental Affairs and outlined
Treasury’s comprehensive plan, the
elements of which are designed to
enhance the transparency of legal
entities with respect to beneficial
ownership. Treasury’s plan involves: (i)
Working with Congress to promote
legislation that enhances transparency
of legal entities in the company
formation process; (ii) clarifying and
strengthening requirements for U.S.
financial institutions with respect to the
beneficial ownership of legal entity
accountholders, and (iii) clarifying and
facilitating the implementation of
international standards regarding
beneficial ownership, including with
respect to company formation by
jurisdictional authorities and CDD by
financial institutions.
v. In March 2010, FinCEN, jointly
with the Board of Governors of the
Federal Reserve System, the Federal
Deposit Insurance Corporation, the
National Credit Union Administration,
the Office of the Comptroller of the
Currency, the Office of Thrift
Supervision, and the Securities and
Exchange Commission, and in
consultation with staff of the
Commodity Futures Trading
Commission, issued the Beneficial
28 Financial Crimes Enforcement Network, ‘‘The
Role of Domestic Shell Companies in Financial
Crime and Money Laundering: Limited Liability
Companies,’’ (November 2006), available at https://
www.fincen.gov/news_room/rp/files/
LLCAssessment_FINAL.pdf.
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Ownership Guidance to clarify and
consolidate existing regulatory
expectations for obtaining beneficial
ownership information for certain
accounts and customer relationships.29
vi. In November 2011, the Department
of the Treasury’s Assistant Secretary
Daniel Glaser testified before the Senate
Committee on the Judiciary,
Subcommittee on Crime and Terrorism
to discuss efforts to combat
international organized crime. In his
testimony, Assistant Secretary Glaser
discussed the importance of financial
transparency in mitigating threats posed
by transnational organized crime and
other forms of illicit finance as well as
the Treasury Department’s work to
clarify and strengthen CDD
requirements for financial institutions.
vii. In February 2012, the Department
of the Treasury’s Deputy Assistant
Secretary Luke Bronin testified before
the House Committee on the Judiciary,
Subcommittee on Crime, Terrorism, and
Homeland Security to discuss key
vulnerabilities in the U.S. financial
system related to transnational
organized crime. The testimony
included highlighting the importance of
CDD as essential to an AML regime.
Additionally, Deputy Assistant
Secretary Bronin discussed the
importance of effective implementation
of CDD and the need to clarify,
consolidate, and strengthen CDD
requirements for financial institutions.
IV. Elements of CDD
Based on the past efforts outlined
above and ongoing industry and
regulatory consultation and outreach,
FinCEN believes that an effective CDD
program includes the following
elements:
(i) Conducting initial due diligence on
customers, which includes identifying
the customer, and verifying that
customer’s identity as appropriate on a
risk basis, at the time of account
opening;
(ii) 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;
(iii) Except as otherwise provided,
identifying the beneficial owner(s) of all
customers, and verifying the beneficial
owner(s)’ identity pursuant to a riskbased approach; and
(iv) Conducting ongoing monitoring of
the customer relationship and
conducting additional CDD as
appropriate, based on such monitoring
and scrutiny, for the purposes of
29 See
generally, supra note 7.
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identifying and reporting suspicious
activity.
FinCEN’s understanding of how U.S.
financial institutions currently perform
certain aspects of CDD in accordance
with these elements under existing
regulations and FinCEN’s proposal for
codifying these elements in a CDD rule
are described below.
A. Identification and Verification of the
Customer
Various AML obligations are
dependent on financial institutions at
least obtaining, and in some instances
verifying, certain basic customer
identification information. For example,
financial institutions subject to the CIP
rules implementing Section 326 of the
Act must identify and verify the identity
of certain ‘‘customers’’ seeking to open
an account.30 In identifying such
customers, a financial institution must
obtain the customer’s name; for
individuals, date of birth, address, and
an identification number (e.g., taxpayer
identification number, passport number,
or alien identification card number) and
for a person other than an individual
(such as a corporation, partnership or
trust), a principal place of business,
local office, or other physical location,
and identification number.31 For the
purposes of the CIP requirement, the
definition of ‘‘customer’’ is the
accountholder, regardless of whether
the accountholder is also the beneficial
owner.32
In addition to identifying customers
covered by the CIP rule, a financial
institution’s CIP must include riskbased procedures for verifying the
identity of each customer to the extent
reasonable and practicable such that the
institution can form a reasonable belief
that it knows the true identity of each
customer.33 These procedures must be
based on the institution’s assessment of
the relevant risks, including those
presented by the various types of
accounts maintained by the institution,
the various methods of opening
accounts provided by the institution,
the various types of identifying
information available, and the
institution’s size, location, and customer
base.34 Further, the CIP must include
procedures that describe when the
30 See 31 CFR 1020.220(a), 1023.220(a),
1024.220(a), and 1026.220(a).
31 See 31 CFR 1020.220(a)(2)(i)(A),
1023.220(a)(2)(i)(A), 1024.220(a)(2)(i)(A), and
1026.220(a)(2)(i)(A).
32 See, e.g. 31 CFR 1023.100(d) and Customer
Identification Programs for Broker-Dealers, 68 FR
25,113, 116 (May 9, 2003).
33 31 CFR 1020.220(a)(2), 1023.220(a)(2),
1024.220(a)(2), and 1026.220(a)(2).
34 Id.
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financial institution will use
documents, non-documentary methods,
or a combination of both methods to
verify a customer’s identity.35 In
addition, for customer relationships
where the customer is not an individual,
based on the financial institution’s risk
assessment of the account, the financial
institution must obtain information
about the individuals with authority or
control over such account.36 Consistent
with these explicit regulatory
requirements and guidance, FinCEN is
exploring an express customer
identification and risk-based
verification component of CDD, which
does not create a new CIP obligation,
but would be satisfied by compliance
with the financial institution’s current
CIP obligations. The identification and
verification component of a CDD
requirement may state, generally:
Covered financial institutions shall
identify, and on a risk-basis verify, the
identity of each customer, to the extent
reasonable, such that the institution can form
a reasonable belief that it knows the true
identity of each customer.
If a financial institution is compliant
with its current CIP obligations, a
financial institution would be compliant
with this part of the CDD program rule
and therefore there will be no new or
additional regulatory obligation.
FinCEN notes that, although certain
customers are exempt from the CIP
requirements (i.e., the customers that
are excluded from the definition of
‘‘customer’’ for purposes of the CIP
requirement),37 those customers would
not be exempt from the requirements to
understand the nature and purpose of
the account and to conduct ongoing
monitoring. As discussed below,
FinCEN is seeking comment on whether
the beneficial ownership requirement
35 31 CFR 1020.220(a)(2)(ii), 1023.220(a)(2)(ii),
1024.220(a)(2)(ii), and 1026(a)(2)(ii).
36 31 CFR 1020.220(a)(2)(ii)(C);
1023.220(a)(2)(ii)(C); 1024.220(a)(2)(ii)(C); and
1026.220(a)(2)(ii)(C). This verification method
applies only when the financial institution cannot
verify the customer’s true identity using the
verification methods described in the rule.
However, the preamble to the final CIP Rule noted
that, in addition to the requirements of this
paragraph, ‘‘the due diligence procedures required
under other provisions of the BSA or the securities
laws may require broker-dealers to look through to
owners of certain types of accounts.’’ Customer
Identification Programs for Broker-Dealers, 68 FR
25113, 116, n. 30 and accompanying text (May 9,
2003).
37 Among other persons, the definition of
‘‘customer’’ for purposes of the CIP requirement
excludes: Existing customers, as long as the
financial institution has a reasonable belief that it
knows the customer’s true identity; Federally
regulated banks; banks regulated by a state bank
regulator; governmental entities; and publicly
traded companies. See, e.g., 31 CFR 1020.100(c)(2),
1023.100(d)(2), 1024.100(c)(2), 1026.100(d)(2).
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should apply with respect to those
exempt customers.
the risk and identifying and reporting
suspicious activity.
B. Understanding the Nature and
Purpose of the Account
Because in FinCEN’s view, a financial
institution must understand the nature
and purpose of an account in order to
assess risk and satisfy its obligation to
appropriately detect and report
suspicious activity, FinCEN does not
believe that this will impose a new or
additional requirement.
As a general business matter, financial
institutions seek to understand the
needs of their customers in order to
serve them. Financial institutions
should understand the nature and
purpose of an account or customer
relationship so that they can
appropriately assess the risk presented
by the relationship and appropriately
monitor for suspicious activity.
Pursuant to suspicious activity reporting
procedures, financial institutions
compare the available facts of a
transaction or series of transactions,
including their type, volume, and
possible purpose, against the type of
transaction in which the customer
would normally be expected to
engage.38 In other words, in discerning
whether a transaction or series of
transactions is suspicious, a financial
institution must determine if the
activity varies from the normal activities
or activities appropriate for the
particular customer or class of customer,
and has no apparent reasonable
explanation.39 FinCEN has also issued
guidance highlighting the need to
understand the nature and purpose of
an account, in order to assess the risk
and determine the appropriate level of
due diligence for the account.40
Accordingly, and in keeping with the
SAR obligation and related regulatory
guidance, FinCEN is specifically
considering including an express
obligation to understand the nature and
purpose of the account or customer
relationship as an element of a CDD
program rule. This element of a CDD
program rule may state, generally:
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covered financial institutions shall
understand the nature and purpose of the
account and expected activity associated
with the account for the purpose of assessing
38 See, e.g., 31 CFR 1020.320(a)(2)(iii),
1023.320(a)(2)(iii), 1024.320(a)(2)(iii), and
1026.320(a)(2)(iii).
39 See 61 FR 4328 (February 5, 1996).
40 See, e.g., FIN–2006–G009, Application of the
Regulations Requiring Special Due Diligence
Programs for Certain Foreign Accounts to the
Securities Industries (May 10, 2006). (‘‘A clearing
firm’s anti-money laundering program should
contain risk-based policies, procedures, and
controls for monitoring introduced business, which
includes knowing whether the introducing firm
may establish or maintain correspondent accounts
for foreign financial institutions and the nature and
scope of that business, including the nature of the
introducing firm’s account base.’’) See also FIN–
2008–G002, Customer Identification Program Rule
No-Action Position Respecting Broker-Dealers
Operating Under Fully Disclosed Clearing
Agreements According to Certain Functional
Allocations (Mar. 4, 2008).
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C. Obtaining Beneficial Ownership
Information
Potential Beneficial Ownership
Obligation Under a CDD Program Rule
Under existing FinCEN regulations,
there are two limited situations where
financial institutions are expressly
obligated to obtain beneficial ownership
information. Specifically, under the
rules implementing Section 312 of the
Act, there are two situations where
certain ‘‘covered financial
institutions’’ 41 are required to take
reasonable steps to obtain beneficial
ownership information: (i) covered
financial institutions that offer private
banking accounts are required to take
reasonable steps to identify the nominal
and beneficial owners of such
accounts; 42 and (ii) covered financial
institutions that offer correspondent
accounts for certain foreign financial
institutions are required to take
reasonable steps to obtain information
from the foreign financial institution
about the identity of any person with
authority to direct transactions through
any correspondent account that is a
payable-through account, and the
sources and beneficial owner of funds or
other assets in the payable-through
account.43
In addition to these explicit
requirements to obtain beneficial
ownership information, under the CIP
rules, a financial institution’s CIP must
address situations where, based on the
financial institution’s risk assessment of
a new account opened by a customer
that is not an individual, the financial
institution will obtain information about
individuals with authority or control
over such account.44 Moreover, FinCEN
and the federal financial regulatory
agencies have issued guidance stating
that there are other situations when
financial institutions should consider
whether it is appropriate to obtain
beneficial ownership information.45
Consistent with these explicit and
implicit beneficial ownership
information obligations, FinCEN is
41 31
CFR 1010.605(e)(1).
CFR 1010.620(b)(1).
43 31 CFR 1010.610(b)(1)(iii)(A).
44 See supra note 36.
45 Supra note 7.
13051
considering expanding the requirement
to obtain beneficial ownership
information to all customers. Such a
beneficial ownership information
requirement would constitute an
essential element of an effective CDD
program. This element of the CDD
program rule may state, generally:
Except as otherwise provided, financial
institutions shall identify the beneficial
owner(s) of all customers, and verify the
beneficial owners’ identity pursuant to a riskbased approach.
FinCEN anticipates that it would
provide additional guidance regarding
customers that may be considered low
risk (and therefore exempt for purposes
of this beneficial ownership
requirement), as well as identifying
types of customers that may simply
necessitate identification of the
beneficial owner, and those that are of
heightened risk requiring both
identification and verification of the
beneficial owner. Similar to the CIP
requirement, FinCEN also anticipates
that it would provide guidance to
financial institutions on what they
should do in the event they are unable
to identify or verify a beneficial owner.
This component of the CDD program
rule would create a new express
regulatory obligation to obtain beneficial
ownership information, given the
limited circumstances in which
financial institutions are currently
expressly obligated to obtain this
information.
Potential Additional Definition of
Beneficial Owner
In the limited instances where
reasonable steps to obtain beneficial
ownership information are currently
required, FinCEN has defined the
beneficial owner of an account as ‘‘an
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 * * *’’ 46 This
definition was designed specifically for
accounts referred to above where
beneficial ownership information is
required and may not be useful for
application to the wide range of other
accounts offered by financial
institutions.
In addition to FinCEN’s current
definition of beneficial owner, federal
regulatory agencies 47 and various
international organizations and foreign
jurisdictions define beneficial
ownership in ways that may be useful
42 31
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46 31
CFR 1010.605(a).
Exchange Act Rule 13d–3, 17 CFR
240.13d–3.
47 Securities
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in assisting financial institutions with
understanding beneficial ownership in
the CDD framework.48 For purposes of
the CDD program requirement discussed
above, and not affecting the limited
instances in which beneficial ownership
information is currently required,
FinCEN is considering a definition to be
used that would, in the case of legal
entities, 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.
FinCEN anticipates that such a specific
and limited definition of beneficial
ownership may be necessary to
accommodate the vast array of complex
ownership structures of legal entities 49
that may become customers of financial
institutions. FinCEN further anticipates
that this specific limited definition
would be applied generally to legal
entity customers pursuant to the explicit
beneficial ownership requirement
described above, while the existing
definition would continue to be applied
for purposes of 31 CFR 1010.610 and
1010.620.
FinCEN emphasizes that the potential
new beneficial ownership requirement
and definition discussed in this ANPRM
is not intended to supersede existing
BSA obligations to obtain beneficial
ownership information.
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Potential Exemptions From Beneficial
Ownership Requirement
FinCEN recognizes that there may be
instances in which obtaining beneficial
ownership information about a legal
entity customer may not be warranted
given the AML/CFT risk or other factors
associated with that entity. For example,
48 See e.g., FATF Recommendations, General
Glossary, p. 110, available at https://www.fatfgafi.org/dataoecd/49/29/49684543.pdf; European
Parliament and Council, ‘‘Third European Union
Money Laundering Directive,’’ 2005/60/EC, Article
3(6) (October 26, 2005); United Kingdom Money
Laundering Regulations, 2007 No. 2157 Part 2, p.
10 (December 15, 2007).
49 Legal entities would generally include all
entities that are established or organized under the
laws of a state or of the United States, including
corporations, limited liability companies, limited
partnerships, and similar entities.
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FinCEN is considering whether legal
entity customers that are exempt from
identification as customers under the
CIP Rules (e.g., financial institutions
regulated by a federal regulatory agency
and publicly traded companies), should
also be exempt from the beneficial
ownership requirement, both because
beneficial ownership information for
these entities may not be particularly
relevant to the money laundering risks
associated with such entities, and
because their beneficial ownership
information is readily available to law
enforcement and regulators.
Accordingly, FinCEN seeks comment on
a potential exemption from the
beneficial ownership requirement for
legal entity customers that are exempt
under the CIP Rules.
FinCEN recognizes that financial
institutions may not have beneficial
ownership information on existing
customers (which are also exempt from
the CIP Rules), outside those requiring
such information, and is also
considering whether and how a
potential beneficial ownership
requirement would apply to existing
customers of financial institutions. In
this regard, FinCEN is considering
adopting a risk-based approach similar
to that utilized in the case of the CIP
Rules, whereby this potential
requirement would apply to all new
customers. With respect to existing
customers, FinCEN is seeking comment
on how a beneficial ownership
identification requirement could be
phased into ongoing CDD.
Beneficial Owners of Assets in Accounts
Held by Intermediaries
Given the particular money
laundering risks posed by some legal
entities, the beneficial ownership
requirement and potential definition of
‘‘beneficial owner’’ under consideration
as discussed above are designed to
identify the beneficial owner of a legal
entity customer, as distinct from the
beneficial owner of assets in an account.
However, there may be instances in
which obtaining information about the
beneficial owners of assets in an
account may be warranted instead, such
as where a legal entity (e.g. a foreign or
regulated or unregulated domestic
financial institution) opens an account
for the benefit of its customers (as
opposed to for its own benefit), as those
customers could pose a money
laundering risk through their ability to
access the financial system through that
account relationship. In such instances,
FinCEN recognizes that the potential
definition of ‘‘beneficial owner’’
described above may not generally be
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relevant or appropriate for AML/CFT
purposes.
Accordingly, FinCEN seeks 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 also
seeks comment on how financial
institutions currently address the
potential money laundering risks
presented by the beneficial owners of
assets in an account pursuant to
financial institutions’ existing legal
obligations and expectations under
FinCEN’s regulations and related
guidance, whether there are any issues
or practical difficulties in doing so, and
whether further guidance or rulemaking
on this particular issue would be
beneficial.
FinCEN recognizes that there may be
impediments to identifying the
beneficial owner of assets in an account
in certain instances and account
structures (e.g., omnibus accounts or
other intermediated accounts), such as
where there are layers of intermediated
relationships or where there are
numerous beneficial owners of assets in
the account. FinCEN seeks comment on
the difficulties associated with
identifying beneficial owners of assets
of such an account. FinCEN further
requests comment on whether a
potential explicit obligation to identify
the beneficial owners of assets in an
account should be based upon the
financial institution’s risk assessment of
the customer, or whether a more
specific obligation would be
appropriate.
Customer Acting as an Agent
FinCEN believes that, although the
use of legal entities to mask beneficial
ownership presents the primary illicit
finance vulnerability and accordingly
the need for beneficial ownership
identification, the question of beneficial
ownership can also arise in the context
of accounts established by an individual
or entity (e.g. law or accounting firm)
which could be acting on behalf of
another individual or individuals
without disclosing this fact. FinCEN is
considering how to best address this
potential vulnerability. A possible
solution would be to require any
individual or entity (other than a
regulated financial institution) opening
an account at a financial institution to
state that he, she, or it is not acting on
behalf of any other person. Such
approach would be analogous to
longstanding FinCEN transaction
reporting requirements, under which a
financial institution must record
identifying information with respect to
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‘‘any person or entity on whose behalf
such transaction is to be effected.’’ 50 For
individuals and entities acting on behalf
of another person, the beneficial
ownership element of a CDD program
requirement would apply to the person
on whose behalf the account is being
opened. FinCEN seeks comment on this
approach, as well as suggestions for
other approaches.
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Obtaining and Verifying Beneficial
Ownership Information
FinCEN anticipates that, in general,
the individual opening the account on
behalf of a legal entity customer will
identify its beneficial owner, and that
covered financial institutions will
generally be able to rely upon the
beneficial ownership information
presented by the customer, absent
information that indicates reason to
question the veracity of the information
or an elevated risk of money laundering
or terrorist financing. Verification of the
beneficial owner could have two
possible meanings. One meaning would
require verifying the identity of the
individual identified by the customer as
the beneficial owner of the account, i.e.,
verifying the existence of the identified
beneficial owner. This would
presumably be accomplished by using
procedures similar to those currently
required pursuant to the CIP Rules (e.g.,
obtaining a copy of a government-issued
identity document of the individual),
but applied to the identified beneficial
owner rather than to an individual
customer. The second possible meaning
would require that the financial
institution verify that the individual
identified by the customer as the
beneficial owner, is indeed the
beneficial owner of the customer, i.e., to
verify the status of the identified
individual. FinCEN is considering that,
in each case the required procedures
would need to be reasonable and
practicable, and sufficient to form a
reasonable belief that the financial
institution knows the identity or status,
as the case may be, of the beneficial
owner. FinCEN is seeking comment
below regarding these two possible
meanings, and the appropriateness and
challenges associated with each.
D. Conducting Ongoing CDD
Due diligence is an on-going
obligation, and for this reason financial
institutions should have in place
policies and procedures to maintain the
accuracy of their customer risk profiles
and risk assessments. Financial
institutions should update CDD
information as necessary based on the
50 See,
31 CFR 1010.312.
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overall risk of the customer, and may
need to update or conduct additional
CDD in association with specific events
that would result in material changes in
a customer’s risk profile, such as
volume of alerts or red flags relating to
the account, change in control, change
in occupation or account purpose, or the
occurrence of a transaction or activity
that is unusual for the customer.
Pursuant to suspicious activity
reporting requirements, financial
institutions must report a transaction
that: (i) Involves funds derived from
illegal activity or is conducted to hide
or disguise funds or assets derived from
illegal activity as part of a plan to
violate or evade any federal law or
regulation or to avoid any federal
transaction reporting requirement; (ii) is
designed to evade any requirements of
the BSA or its implementing
regulations; or (iii) has no business or
apparent lawful purpose or is not the
sort in which the particular customer
would normally be expected to engage,
and the financial institution knows of
no reasonable explanation for the
transaction after examining the available
facts, including the background and
possible purpose of the transaction.51
Financial institutions’ ongoing
monitoring and due diligence are
critical elements of effectively
complying with current suspicious
activity reporting requirements.
FinCEN is exploring an ongoing
monitoring and due diligence
requirement as an express element of a
CDD program rule. This element of the
CDD program rule may state:
Consistent with its suspicious activity
reporting requirements, covered financial
institutions shall establish and maintain
appropriate policies, procedures, and
processes for conducting on-going
monitoring of all customer relationships, and
additional CDD as appropriate based on such
monitoring for the purpose of the
identification and reporting of suspicious
activity.
FinCEN understands that the obligations
in this potential element of an ongoing
CDD monitoring rule are already
included in the requirements contained
in the AML program and SAR rules and,
therefore, there would be no new or
additional requirement.
V. Issues for Comment
Existing CDD requirements are an
implicit, but essential, part of
complying with AML program
regulations. However, as discussed
above, FinCEN is considering expressly
51 See generally, 31 CFR 1020.320(a)(2)(i)–(iii),
1023.320(a)(2)(i)–(iii), 1024.320(a)(2)(i)–(iii), and
1026.320(a)(2)(i)–(iii).
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13053
requiring that financial institutions
conduct CDD as part of their existing
AML program requirements, and as part
of this requirement, collect beneficial
ownership information for all
customers, with limited exceptions. For
this reason, FinCEN is seeking comment
from industry and other interested
parties concerning the implementation
of CDD programs in general pursuant to
existing rules and guidance described
above. FinCEN is also interested in
better understanding what types of CDD
information are currently collected,
specifically in relation to beneficial
ownership information, and under what
circumstances the information is
collected.
1. Aside from policies and procedures
with respect to beneficial ownership,
what changes would be required in a
financial institution’s CDD processes as
a result of the adoption by FinCEN of an
express CDD rule as described in this
ANPRM?
Aside from beneficial ownership,
FinCEN believes that the other elements
of a potential CDD rule as described
above are already being implemented by
a substantial number of financial
institutions, due to three of the four
proposed elements of CDD being
explicit or implicit under existing
FinCEN regulations and related
regulatory and supervisory expectations.
For this reason, FinCEN believes an
explicit regulatory requirement with
respect to these elements of CDD should
not be onerous, particularly for those
industries where CIP requirements are
already in place. However, FinCEN is
interested in obtaining a better
understanding from all industry sectors
of anticipated issues and concerns that
may arise from creating an explicit
regulatory requirement with respect to
these three potential elements of CDD,
including any additional costs that
would be incurred to comply with these
three elements.
2. What changes would be required in
a financial institution’s CDD process, as
a result of the adoption by FinCEN of a
categorical requirement to obtain (and
in some cases verify) beneficial
ownership information, as described in
this ANPRM? Is FinCEN’s suggested
alternate definition of ‘‘beneficial
owner,’’ discussed above, a clear and
easily understood definition for the
purpose of obtaining beneficial
ownership information for legal entities
in the context of complying with a CDD
obligation? If not, would you suggest a
better definition? In addition, how do
financial institutions currently address
the money laundering risks that might
be presented by the beneficial owners of
assets in an account held by an
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intermediary, what difficulties are
presented in this regard, would further
guidance or regulation be appropriate,
should any requirement in this area be
risk-based, and how should FinCEN
define beneficial ownership for this
purpose?
FinCEN is seeking comment on the
impact on financial institutions of the
adoption of a categorical requirement to
obtain beneficial ownership information
for most customers, as described in this
ANPRM. FinCEN is also seeking
comment as to whether financial
institutions have concerns regarding the
proposed alternative definition of
beneficial ownership discussed above
and whether it may cause difficulties
with financial institution compliance
with a categorical beneficial ownership
obligation. In addition, FinCEN is
seeking comment on whether it would
be confusing to adopt an alternate
definition of beneficial ownership as
proposed for a general CDD program
requirement, except in the limited
instances in which the current
definition for beneficial owner that is
required pursuant to 31 CFR 1010.610
and 1010.620 would continue to be
used, and whether the potential
beneficial ownership requirement and
associated potential definition would be
relevant with respect to certain types of
intermediated accounts, such as
omnibus accounts, and if not, what
definition would be more appropriate.
Also, please comment on appropriate
exemptions from a potential beneficial
ownership requirement, including with
respect to existing customers, and the
practicality of phasing a requirement
into ongoing CDD. Please also comment
on possible approaches to preventing
the misuse of a financial institution
account by an individual or entity
acting on behalf of another without
disclosing this fact. Finally, please
comment regarding the costs of
complying with a categorical beneficial
ownership requirement, in the case
where the beneficial ownership
requirement would apply only to new
customers, as well as where it would
apply to all existing customers.
3. Under what circumstances does a
financial institution currently obtain
beneficial ownership information on a
customer or accountholder?
Current FinCEN regulations require
financial institutions to obtain
beneficial ownership information as a
component of CDD on private banking
and foreign correspondent customers.
Existing BSA obligations, including
regulatory and supervisory expectations,
require financial institutions to collect
this information, as appropriate, as part
of CDD/EDD on higher-risk customers.
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For this reason, FinCEN requests
information from industry regarding the
circumstances under which a financial
institution currently determines that it
is necessary or prudent to obtain
beneficial ownership information from a
customer, who is neither a private
banking nor foreign correspondent
customer, whether as part of their
customer identification program
procedures, anti-money laundering
program requirements, transaction/
account monitoring procedures, or for
other purposes. For example, are there
types of customers, types of accounts,
levels of account activity, forms of
suspicious activity, or other indicia that
lead a financial institution to make
decisions as to when there may be no
risk, moderate risk or substantial risk in
not obtaining beneficial ownership
information?
4. How do financial institutions
currently obtain beneficial ownership
information?
FinCEN requests information on how
financial institutions collect such
information and, specifically, what
methods, both documentary and nondocumentary, are used to identify and/
or verify the beneficial owner (e.g.
public documents, identification
numbers, etc.). When or if financial
institutions collect beneficial ownership
information other than as specifically
required pursuant to 31 CFR 1010.610
and 1010.620, FinCEN requests
comments on whether financial
institutions use the same definition of
beneficial ownership as that which is
applicable under these regulations for
private banking and certain foreign
correspondent accounts, or other
definitions, such as those referenced
above in the description of a potential
additional definition of beneficial
owner.
5. Is the current, primarily risk-based,
approach to a CDD program
requirement resulting in varied
approaches across industries or varied
approaches within industries?
FinCEN is seeking comment on
whether financial institutions are aware
of varied approaches either across or
within industries relating to current
CDD expectations, including beneficial
ownership obligations. For example,
FinCEN seeks comment on whether
financial institutions are aware of
circumstances in which one financial
institution may turn down an account
due to lack of beneficial ownership
information, later to learn that the
accountholder has established an
account with another institution that
did not require the accountholder to
provide beneficial ownership
information. Alternatively, are there
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Frm 00040
Fmt 4702
Sfmt 4702
circumstances under which financial
institutions have concerns about their
ability to rely on CDD undertaken by
other financial institutions due to
inconsistent practices or expectations?
6. Are there other elements of CDD
that would be more effective in
facilitating compliance with AML
program requirements and other
obligations under FinCEN’s regulations?
The four elements of CDD listed above
were selected based on consistency with
existing regulatory requirements and
expectations; the importance of
beneficial ownership information and
other elements of CDD to financial
investigations pertaining to money
laundering, terrorist financing, and tax
evasion, and IEEPA violations; and,
consistency with international
standards and financial transparency.
FinCEN seeks comment on whether
other elements of CDD, aside from those
listed in this ANPRM would be more
effective and efficient in advancing
these interests.
7. What information should be
required in order to identify, and verify
on a risk basis, the identity of the
beneficial owner?
Should the required identification
information on beneficial owners be
consistent with the customer
identification information currently
required under the CIP regulations (i.e.,
name, address, date of birth and
identification number) or should
additional information be required? In
addition, what should be required of
financial institutions to verify the
identity of the beneficial owner?
FinCEN is exploring two possible
meanings for verification of beneficial
ownership information: One meaning
would require verifying the identity of
the natural person identified by the
customer to be the beneficial owner.
This would require that the financial
institution, for example, obtain a copy
of a government-issued identification
document bearing a photograph of the
individual identified by the customer as
its beneficial owner, to verify that the
individual exists. The second meaning
would require verifying that the
individual identified by the customer as
its beneficial owner is, in fact, the
beneficial owner of the legal entity
customer. FinCEN is seeking comment
as to challenges posed by each of these
possible verification requirements.
8. Are there any products and
services, or customers that should be
exempted from the requirement to
obtain beneficial ownership information
due to there being (i) substantially less
risk of money laundering or terrorist
financing associated with the account;
(ii) limited value associated with the
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beneficial ownership information in
mitigating money laundering/terrorist
financing risk; or (iii) an inability to
obtain the required information due to
other legal requirements?
FinCEN is seeking comment to
determine if there are certain types of,
or thresholds for, products, services, or
customers, with respect to which a
financial institution should not be
required to obtain beneficial ownership
information, due to substantially
reduced risk. For example, should
customers that are exempt from the CIP
Rules, also be exempt from beneficial
ownership identification? Additionally,
FinCEN is seeking comment as to
whether there are certain products or
services offered by financial institutions
that, due to ancillary statutory or
regulatory obligations, would prohibit
compliance with a CDD requirement to
obtain beneficial ownership information
as outlined in this ANPRM. FinCEN is
also seeking comment on whether there
are significant differences in risks or
perceived ability to obtain beneficial
ownership information with respect to
foreign versus domestic customers and/
or beneficial owners.
9. What financial institutions should
not be covered by a CDD rule based on
products and services offered?
FinCEN is considering whether a CDD
program rule as described in this
ANPRM should be more widely
applicable to financial institutions not
currently subject to a CIP Rule, and is
seeking comments from industry and
interested parties to determine if there
are types of financial institutions
currently covered under FinCEN’s
regulations and subject to SAR and
AML Program rules, that should not be
covered by a CDD obligation, either
because the products and services
offered are not consistent with the
information sought in a CDD obligation
or for any other reason.
10. What would be the impact on
consumers or other customers of a CDD
program including the elements
identified above?
FinCEN is seeking comment regarding
the potential impact on consumers or
customers of financial institutions.
What are the benefits and challenges of
the above suggested CDD requirements
that may exist between financial
institutions and customers taking into
account the objective of increasing the
inclusion in the financial system of
traditionally underserved individuals?
Will a CDD program affect the
willingness or ability of consumers or
others to use or access certain financial
institutions or services?
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VI. Conclusion
13055
Comments must be received on
or before April 4, 2012.
With this ANPRM, FinCEN is seeking
ADDRESSES: Submit your comments,
input on the questions set forth above.
identified by Docket ID No. EPA–R04–
FinCEN also is soliciting comments on
OAR–2012–0118, by one of the
the impact to law enforcement or
following methods:
authorities, regulatory agencies, and
1. www.regulations.gov: Follow the
consumers, and welcomes comments on
on-line instructions for submitting
all aspects of the ANPRM, and all
comments.
interested parties are encouraged to
2. Email: benjamin.lynorae@epa.gov.
provide their views.
3. Fax: (404) 562–9019.
Dated: February 28, 2012.
4. Mail: EPA–R04–OAR–2012–0118,
James H. Freis, Jr.,
Regulatory Development Section, Air
Director, Financial Crimes Enforcement
Planning Branch, Air, Pesticides and
Network.
Toxics Management Division, U.S.
[FR Doc. 2012–5187 Filed 3–2–12; 8:45 am]
Environmental Protection Agency,
BILLING CODE 4810–02–P
Region 4, 61 Forsyth Street SW.,
Atlanta, Georgia 30303–8960.
5. Hand Delivery or Courier: Lynorae
Benjamin, Chief, Regulatory
ENVIRONMENTAL PROTECTION
Development Section, Air Planning
AGENCY
Branch, Air, Pesticides and Toxics
40 CFR Part 52
Management Division, U.S.
Environmental Protection Agency,
[EPA–R04–OAR–2012–0118; FRL–9642–9]
Region 4, 61 Forsyth Street SW.,
Atlanta, Georgia 30303–8960. Such
Approval and Promulgation of
deliveries are only accepted during the
Implementation Plans; Alabama:
Regional Office’s normal hours of
Removal of State Low-Reid Vapor
operation. The Regional Office’s official
Pressure Requirement for the
hours of business are Monday through
Birmingham Area
Friday, 8:30 to 4:30, excluding federal
holidays.
AGENCY: Environmental Protection
Instructions: Direct your comments to
Agency (EPA).
Docket ID No. EPA–R04–OAR–2012–
ACTION: Proposed rule.
0118. EPA’s policy is that all comments
received will be included in the public
SUMMARY: EPA is proposing to approve,
docket without change and may be
through parallel processing, a draft
made available online at
revision to the Alabama State
www.regulations.gov, including any
Implementation Plan (SIP), submitted
personal information provided, unless
by the Alabama Department of
the comment includes information
Environmental Management (ADEM),
claimed to be Confidential Business
on January 10, 2012. The proposed
Information (CBI) or other information
revision modifies Alabama’s SIP to
whose disclosure is restricted by statute.
move Chapter 335–3–20 ‘‘Control of
Do not submit through
Fuels,’’ which includes the regulation
www.regulations.gov or email,
that governs the State’s 7.0 pounds per
information that you consider to be CBI
square inch (psi) requirement for the
or otherwise protected. The
low-Reid Vapor Pressure (RVP) fuel
www.regulations.gov Web site is an
program in Jefferson and Shelby
‘‘anonymous access’’ system, which
Counties (hereafter referred to as the
means EPA will not know your identity
‘‘Birmingham Area’’) from the active
or contact information unless you
measures portion of the Alabama SIP to
provide it in the body of your comment.
the contingency measures portions of
If you send an email comment directly
the maintenance plans for the
Birmingham Area for the ozone national to EPA without going through
www.regulations.gov, your email
ambient air quality standards (NAAQS
address will be automatically captured
or standards), and of the proposed
and included as part of the comment
maintenance plans for the 1997 annual
fine particulate matter (PM2.5) standards, that is placed in the public docket and
made available on the Internet. If you
and the 2006 24-hour PM2.5 standards,
submit an electronic comment, EPA
if finalized. If this change to the SIP is
recommends that you include your
finalized, the federal RVP requirement
of 7.8 psi will apply for the Birmingham name and other contact information in
the body of your comment and with any
Area. EPA is proposing to approve this
disk or CD–ROM you submit. If EPA
SIP revision because the State has
cannot read your comment due to
demonstrated that it is consistent with
technical difficulties and cannot contact
section 110 of the Clean Air Act (CAA
you for clarification, EPA may not be
or Act).
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DATES:
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]]>Agencies
[Federal Register Volume 77, Number 43 (Monday, March 5, 2012)]
[Proposed Rules]
[Pages 13046-13055]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5187]
=======================================================================
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Chapter X
RIN 1506-AB15
Customer Due Diligence Requirements for Financial Institutions
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: FinCEN, after consulting with staffs of various Federal
supervisory authorities, is issuing this advance notice of proposed
rulemaking (ANPRM) to solicit public comment on a wide range of
questions pertaining to the development of a customer due diligence
(CDD) regulation that would codify, clarify, consolidate, and
strengthen existing CDD regulatory requirements and supervisory
expectations, and establish a categorical requirement for financial
institutions to identify beneficial ownership of their accountholders,
subject to risk-based verification and pursuant to an alternative
definition of beneficial ownership as described below.
DATES: Written comments on this ANPRM must be received on or before May
4, 2012.
ADDRESSES: Comments may be submitted, identified by Regulatory
Identification Number (RIN) 1506-AB15, by any of the following methods:
Federal E-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Include RIN 1506-AB15
in the submission. Refer to Docket Number FINCEN-2012-0001.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-
AB15 in the body of the text.
Please submit comments by one method only. All comments submitted
in response to this ANPRM will become a matter of public record.
Therefore, you should submit only information that you wish to make
publicly available.
Inspection of comments: Comments may be inspected, between 10 a.m.
and 4 p.m., in the FinCEN reading room in Vienna, VA. Persons wishing
to inspect the comments submitted must request an appointment with the
Disclosure Officer by telephoning (703) 905-5034 (not a toll free
call). In general, FinCEN will make all comments publicly available by
posting them on https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
FinCEN: Regulatory Policy and Programs Division, Financial Crimes
Enforcement Network, (800) 949-2732 and select option 6.
SUPPLEMENTARY INFORMATION:
I. Scope of ANPRM
The scope of this ANPRM includes all of the industries that have
anti-money laundering (AML) program requirements under FinCEN's
regulations. At this time, and as an initial matter, FinCEN is
considering developing a CDD rule to cover banks, brokers or dealers in
securities, mutual funds, futures commission merchants, and introducing
brokers in commodities; accordingly, this ANPRM is focused primarily on
these institutions. However, FinCEN believes that a CDD rule may be
appropriate for all financial institutions subject to FinCEN's
regulations, and will consider extending such a rule to such other
financial institutions in the future.
Therefore, in addition to focusing on input from those types of
institutions that would be subject to an initial rulemaking, FinCEN is
also specifically requesting comment from other institutions, such as
money services businesses (including providers of prepaid access),
insurance companies, casinos, dealers in precious metals, stones and
jewels, non-bank mortgage lenders or originators, and other entities
under FinCEN's regulations, in particular regarding issues related to
identification and verification of customers as discussed in Section IV
A. of this ANPRM. While these institutions currently are not mandated
to obtain the minimum mandatory information required to identify
customers as is mandated in regulations pertaining to depository
institutions, brokers or dealers, and others described above, in some
cases they still must, on a risk-based approach, obtain all relevant
and appropriate customer-related information necessary to administer an
effective anti-money laundering program.\1\
---------------------------------------------------------------------------
\1\ See, e.g., ``Anti-Money Laundering Programs for Insurance
Companies,'' 31 CFR 1025.210(b)(1).
---------------------------------------------------------------------------
II. Background
FinCEN exercises regulatory functions primarily under the Currency
and Financial Transactions Reporting Act of 1970, as amended by the USA
PATRIOT Act of 2001 (the Act) and other legislation, which legislative
framework is commonly referred to as the ``Bank Secrecy Act'' (BSA),\2\
which authorizes the Secretary of the Treasury (Secretary) to require
financial institutions to keep records and file reports that ``have a
high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings, or in the conduct of intelligence or
counterintelligence activities, including analysis, to protect against
international terrorism'' \3\ The Secretary has delegated to the
Director of FinCEN the authority to implement, administer and enforce
compliance with the BSA and associated regulations.\4\ FinCEN is
authorized to impose AML program requirements on financial
institutions,\5\ as well as to require financial institutions to
maintain procedures to ensure compliance with the BSA and FinCEN's
implementing regulations or guard against money laundering.\6\
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\2\ The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959,
18 U.S.C. 1956, 1957, and 1960, and 31 U.S.C. 5311-5314 and 5316-
5332 and notes thereto, with implementing regulations at 31 CFR
Chapter X. See 31 CFR 1010.100(e).
\3\ 31 U.S.C. 5311.
\4\ Treasury Order 180-01 (Sept. 26, 2002).
\5\ 31 U.S.C. 5318(h)(2).
\6\ 31 U.S.C. 5318(a)(2).
---------------------------------------------------------------------------
As reflected in recent guidance and enforcement actions, the
cornerstone of a strong BSA/AML compliance program is the adoption and
implementation of internal controls, which include comprehensive CDD
policies, procedures, and processes for all customers, particularly
those that present a high risk for money laundering or terrorist
financing.\7\ As
[[Page 13047]]
part of their basic business model, financial institutions seek at some
level to identify their customers and their needs in order to best
service them. The requirement that a financial institution know its
customers, and the risks presented by its customers, is basic and
fundamental to the development and implementation of an effective BSA/
AML compliance program.\8\ In particular, appropriate CDD policies,
procedures, and processes assist a financial institution in
identifying, detecting, and evaluating unusual or suspicious
activity.\9\ Furthermore, financial institutions may not be able to
perform effective risk assessments of their customers or account bases
without conducting adequate due diligence throughout customer
relationships.
---------------------------------------------------------------------------
\7\ FIN-2010-G001, ``Guidance on Obtaining and Retaining
Beneficial Ownership Information, March 5, 2010, p.1 (``Beneficial
Ownership Guidance''). See also Federal Financial Institution
Examination Council Bank Secrecy Act Anti-Money Laundering
Examination Manual (2010) (``FFIEC Manual''), available at: https://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2010.pdf;
Financial Industry Regulatory Authority, Updated AML Template for
Small Firms (Jan. 2010) (``FINRA Small Firm Template''), available
at https://www.finra.org/Industry/Issues/AML/p006340; National
Association of Securities Dealers, Notice to Members 02-21 at 7
(Apr. 2002) (``NASD NTM 02-21'').
\8\ See supra note 7.
\9\ See supra note 7.
---------------------------------------------------------------------------
As discussed in more detail below, despite the basis for a CDD
obligation implicit in BSA requirements, such as the AML program and
suspicious activity reporting (SAR) rules, FinCEN believes that issuing
an express CDD rule that requires financial institutions to perform
CDD, including an obligation to categorically obtain beneficial
ownership information, may be necessary to protect the United States
financial system from criminal abuse and to guard against terrorist
financing, money laundering and other financial crimes. Despite efforts
to highlight and clarify CDD and beneficial ownership expectations over
the past several years, FinCEN is concerned that there is a lack of
uniformity and consistency in the way financial institutions address
these implicit CDD obligations and collect beneficial ownership
information within and across industries. In the absence of a broader
definition of the term ``beneficial owner,'' in particular a definition
that can be applied across lines of business and customer categories in
the context of CDD, it may be difficult for a financial institution to
(1) identify the risk scenarios that would require the identification
of beneficial owners; and (2) collect sufficient information to
adequately address identified risk. The lack of consistency and
uniformity also severely limits the ability of financial institutions
to rely on the CDD efforts of other financial institutions, which would
promote greater efficiency and eliminate instances of duplication of
effort in transactions involving multiple financial institutions.
FinCEN believes that an explicit CDD program rule codifying,
clarifying and (with respect to beneficial ownership information)
strengthening existing CDD expectations for U.S. financial institutions
could enhance efforts to combat money laundering, terrorist financing,
tax evasion and other financial crimes by:
(i) Strengthening the ability of financial institutions to identify
and report illicit financial transactions and comply with all existing
legal requirements, including FinCEN regulations implementing the BSA,
the International Emergency Economic Powers Act (IEEPA),\10\ and
related authorities;
---------------------------------------------------------------------------
\10\ Title II of Public Law 95-223, codified at 50 U.S.C. 1701-
1707.
---------------------------------------------------------------------------
(ii) Promoting consistency in the implementation of, examination
for, and enforcement of CDD program requirements across and within
sectors of the U.S. financial system;
(iii) Assisting financial investigations by law enforcement,
particularly by enhancing the availability of beneficial ownership and
other information held by U.S. financial institutions;
(iv) Facilitating reporting and investigations in support of tax
compliance; and
(v) Promoting global financial transparency and efforts to combat
transnational illicit finance, consistent with international standards.
We are exploring an express CDD program rule as one key element of
a broader U.S. Department of the Treasury strategy to enhance financial
transparency in order to strengthen efforts to combat financial crime,
including money laundering, terrorist financing, and tax evasion.
Illicit actors continue to create legal entities, masking beneficial
ownership information in order to facilitate access to the financial
system and conduct financial crimes. Enhancing financial transparency
to address such ongoing abuse of legal entities requires a broad
approach. Other key elements of this strategy include: (i) Improving
the availability of beneficial ownership information of legal entities
created in the United States; and (ii) facilitating global
implementation of international standards regarding beneficial
ownership of legal entities and trusts and CDD by financial
institutions.
While these three elements of the U.S. government's strategy for
combating criminal abuse of legal entities are proceeding independent
of each other, together they establish a comprehensive approach to
effectively combat the criminal abuse of legal entities. As such,
strengthening CDD program requirements for financial institutions
complements the Administration's ongoing work with Congress to adopt
legislation that would require the collection of beneficial ownership
information at the time that legal entities are created in the United
States. These efforts are also consistent with Treasury's ongoing work
with the Group of Twenty Finance Ministers and Central Bank Governors
(G20), the Financial Action Task Force (FATF), and other financial
centers around the world to clarify and strengthen implementation of
international standards on identifying and understanding beneficial
ownership, particularly with respect to CDD by financial institutions
and the creation of legal entities.
The Importance of CDD in Strengthening the Ability of Financial
Institutions To Deter Illicit Transactions and Comply With Existing
Legal Requirements
The establishment and maintenance of strong AML programs that
include CDD policies, procedures, and processes has been a long-
standing regulatory and supervisory expectation of certain Federal
financial regulatory agencies, and is implicit in regulations requiring
financial institutions to maintain an effective BSA compliance program
that is reasonably designed to assure and monitor compliance with the
recordkeeping and reporting requirements of the BSA.\11\ An effective
CDD program should provide a financial institution with sufficient
information to develop a customer risk profile that can then be used by
the financial institution to identify higher-risk customers and
accounts, including customers and accounts subject to special or
enhanced due diligence requirements.\12\ The financial
[[Page 13048]]
institution also should apply appropriate internal controls to identify
and investigate unusual and suspicious activity and make an informed
decision whether or not to file a SAR.\13\ In the event that a
financial institution files a SAR, CDD information collected could
enhance the information included in the SAR and thereby enhance law
enforcement's ability to initiate and pursue the successful
investigation and prosecution of criminal activity. The failure to
obtain adequate CDD information may impede a financial institution's
ability to detect and report suspicious or unusual activity or provide
information in a filing that is useful to law enforcement. Several of
the consent orders and enforcement actions issued over the last few
years have identified the lack of effective CDD policies, procedures,
and processes, or the underlying elements thereof, as rendering AML
programs inadequate, being a significant deficiency, and an underlying
factor in supervisory actions.\14\
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\11\ See, e.g., FFIEC Manual, FINRA Small Firm Template, NASD
NTM 02-21.
\12\ See, e.g., FFIEC Manual, pp. 63-66; Beneficial Ownership
Guidance; FIN-2006-G009, Application of the Regulations Requiring
Special Due Diligence Programs for Certain Foreign Accounts to the
Securities Industries (May 10, 2006) (``Finally, we remind
securities and futures firms that the correspondent account rule
supplements their anti-money laundering obligations--it does not
supersede such obligations. A securities or futures firm's anti-
money laundering program should contain policies, procedures, and
controls for conducting appropriate, ongoing due diligence on
foreign entities including, among other things, whether or not they
are foreign financial institutions for the purposes of the
correspondent account rule. Such policies, procedures, and controls
should include, where appropriate, ascertaining the foreign entity's
ownership and the nature of its business. In high-risk situations
involving any account, an anti-money laundering program should
include provisions for obtaining any necessary and appropriate
information about the customers underlying such an account.'')
(emphasis added).
\13\ See, e.g., 31 CFR 1021.210(b)(2)(i).
\14\ See, e.g., Pacific National Bank, Miami, FL, Comptroller of
the Currency (OCC) 2011-021 (2011); HSBC Bank USA, N.A.,
McLean, VA, OCC 2010-199 (2010); Consent Order issued by
the OCC in the Matter of Wachovia Bank, N.A., Charlotte, NC. OCC
2010-037 (2010); Public Savings Bank, Huntington Valley,
PA, FDIC-11-107b (2011); First Financial Holding Co., Ltd, Taipei,
Taiwan, Board of Governors of the Federal Reserve System (FRB),
Docket Nos. 11-019-WA/RB-FH et seq. (2011); Bank Hapoalim, B.M., Tel
Aviv, Israel, FRB, Docket Nos. 09-083-WA/RB-FB (2009); Westfield
Bank, Westfield, MA, Office of Thrift Supervision Order No. NE-11-20
(2011); Chapin, Davis, Baltimore MD, FINRA Case
2010021065701 (2011); FINRA, Letter of Acceptance, Waiver
and Consent No. 2007007328101, Terra Nova Financial, LLC (2009);
FINRA, Letter of Acceptance, Waiver and Consent No. 2007007139501,
Synergy Investment Group, LLC (2009); FINRA, Letter of Acceptance,
Waiver and Consent No. 2008011725001, ViewTrade Securities, Inc.,
(2009); In the Matter of I Trade FX, NFA Case No. 08-BCC-014 (filed
April 24, 2009) (finding that I Trade failed to follow up on red
flags and investigate suspicious activity, including following up
where the customer's account had inflows of funds well beyond the
known income or resources of the customer); In the Matter of Forex
Capital Markets LLC (FXCM), NFA Case No. 11-BCC-016 (filed Aug. 12,
2011) (consent order based on allegations in the complaint that FXCM
failed to conduct an investigation of suspicious activity involving
unexplained wire activity, unexplained transfers between accounts,
and deposits that were in excess of the clients' net worth and/or
liquid assets identified on their opening account documents).
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Although appropriate and adequate CDD policies, procedures, and
processes have generally been an expectation of the Federal financial
regulatory agencies, FinCEN believes that an express CDD program rule
will strengthen compliance with and enforcement of CDD program
requirements by clarifying, consolidating, and harmonizing such
agencies' minimum expectations with respect to CDD policies,
procedures, and processes, including the fundamental elements necessary
for an effective CDD program.
As described in detail below, FinCEN believes that one fundamental
element necessary for an effective CDD program is obtaining beneficial
ownership information for all account holders, possibly subject to
limited exceptions based upon lower risk. An express CDD program rule
would enable FinCEN to establish such a clear requirement, thereby
strengthening the ability of financial institutions to detect and
address suspicious activity. Establishing a categorical beneficial
ownership information requirement through a CDD program rule also would
address current concerns regarding potential confusion or inconsistency
across financial sectors regarding obligations to obtain beneficial
ownership information outside of statutorily prescribed circumstances.
Recent industry commentary and feedback indicated a lack of common
understanding and consistent practice across the financial services
industry for collecting beneficial ownership information. For example,
an industry survey conducted by FinCEN in 2008 indicated certain
inconsistencies in financial institutions' practices related to
collecting and maintaining beneficial ownership information both within
and across industries. Moreover, industry commentary following the
issuance of the Beneficial Ownership Guidance \15\ indicated that there
is at least some question about the nature of a financial institution's
obligation to conduct CDD and to obtain beneficial ownership
information.\16\
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\15\ Supra note 7.
\16\ See, e.g., Letter from the Investment Company Institute,
the Securities Industry and Financial Markets Association, and the
Futures Industry Association (June 9, 2010), available at: https://www.ici.org/pdf/24354.pdf.
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The Importance of CDD in Assisting Criminal Investigations
As discussed previously, an effective CDD program is important in
facilitating effective suspicious activity monitoring, which in turn
facilitates the filing of quality SARs containing information that is
both meaningful and useful to law enforcement. The lack of such
information has been a source of growing concern to law enforcement in
its efforts to conduct successful criminal investigations, both
domestically and in conjunction with international counterparts. For
example, the Chief of DOJ's Asset Forfeiture and Money Laundering
Section (AFMLS) has stated that, with respect to international law
enforcement cases, ``the lack of beneficial ownership information can
also hamper our ability to respond to requests for assistance from our
foreign counterparts. This problem not only damages our reputation, but
also undermines our efforts to join with foreign counterparts in a
global offensive against organized crime and terrorism.'' \17\
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\17\ Shasky Calvery, Jennifer, ``Priorities and Initiatives of
the Asset Forfeiture and Money Laundering Section (AFMLS), U.S.
Department of Justice'' The SAR Activity Review, Trends, Tips, and
Issues, p. 44. (May 2011), available at https://www.fincen.gov/news_room/rp/files/sar_tti_19.pdf.
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The Importance of CDD in Facilitating Tax Reporting, Investigations and
Compliance
The collection of CDD information by financial institutions is also
fundamentally important in facilitating tax reporting, investigations
and compliance. For example, a variety of information may be needed in
a tax enquiry including information held by banks and other financial
institutions as well as information concerning the ownership of
companies or the identity of interest holders in other persons or
entities, such as partnerships and trusts. The United States has long
been a global leader in establishing and promoting the adoption of
international standards for transparency and information exchange to
combat cross-border tax evasion and other financial crimes, and
strengthening the CDD procedures of financial institutions is an
important part of that effort. Moreover, the United States has an
extensive network of agreements for the exchange of tax information
that meet international standards. In addition, new tax reporting
provisions under the Foreign Account Tax Compliance Act (FATCA) \18\
would require overseas financial institutions to identify U.S. account
holders, including foreign entities with significant U.S. ownership,
and to report certain information about their accounts to the IRS.\19\
In many
[[Page 13049]]
cases, implementing these provisions will require the cooperation of
foreign governments to address impediments under foreign law. Requiring
U.S. financial institutions to obtain similar ownership information
would put the United States in a better position to work with foreign
governments to combat offshore tax evasion and other financial crimes.
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\18\ Hiring Incentives to Restore Employment Act of 2010, Pub.L.
111-147, Section 501(a).
\19\ See generally, Internal Revenue Service, ``Regulations
Relating to Information Reporting by Foreign Financial Institutions
and Withholding on Certain Payments to Foreign Financial
Institutions and Other Foreign Entities,'' REG-121647-10 (February
8, 2012), available at https://www.irs.gov/pub/newsroom/reg-121647-10.pdf.
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The Importance of CDD in Promoting Financial Transparency and
Protecting the Financial System From Abuse Consistent With
International Standards
An effective CDD program supports effective suspicious activity
monitoring, strengthens national anti-money laundering and counter-
financing of terrorism (AML/CFT) regimes, and promotes the integrity of
the international financial system as a whole. This importance was
recognized by the G20 in several Leaders' Statements supporting the
strengthening of CDD procedures. During the Pittsburgh Summit in 2009,
the G20 asked the Financial Action Task Force (FATF) \20\ to ``help
detect and deter the proceeds of corruption by prioritizing work to
strengthen standards on customer due diligence.'' \21\ In November
2010, the G20 specifically urged the FATF to clarify and strengthen
beneficial ownership as an element of CDD and as a key component of its
Anti-Corruption Action Plan.\22\ Additionally, effective adoption and
implementation of CDD by financial institutions is consistent with the
FATF's global AML/CFT standards to combat money laundering and the
financing of terrorism.\23\
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\20\ The FATF, an inter-governmental organization of which the
United States, thirty-four other jurisdictions and two regional
organizations are members, is the global standard setter and policy-
making body for AML/CFT. https://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html.
\21\ Group of Twenty Finance Ministers and Central Bank
Governors, ``Leaders' Statement: The Pittsburgh Summit'' (September
24-25, 2009).
\22\ See Group of Twenty Finance Ministers and Central Bank
Governors, Annex III, ``G20 Anti-Corruption Action Plan: G20 Agenda
for Action on Combating Corruption, Promoting Market Integrity, and
Supporting a Clean Business Environment,'' p. 2 (November 11-12,
2010).
\23\ Financial Action Task Force, ``International Standards on
Combating Money Laundering and the Financing of Terrorism &
Proliferation--The FATF Recommendations,'' February 2012,
Recommendation 10, pp. 14-15, available at https://www.fatf-gafi.org/dataoecd/49/29/49684543.pdf. Following a review to update and
strengthen global AML/CFT standards, the FATF issued its revised
Recommendations on February 16, 2012.
---------------------------------------------------------------------------
The G20 recognition of the importance of CDD is also reflected in
the work of other international standard setting bodies. In October
2001, the Basel Committee on Banking Supervision (BCBS) published a
report on CDD, supporting the FATF's efforts in fighting money
laundering. The report states that sound CDD-related procedures are not
only critical in combating financial crime, but ``critical in
protecting the safety and soundness of banks and the integrity of the
banking systems.'' \24\ Similarly, in light of the FATF's and other
international organizations' work, in October 2002 the International
Organization of Securities Commissions (IOSCO) established a Task Force
on Client Identification and Beneficial Ownership to survey existing
securities regulatory regimes relating to the identification of clients
and beneficial owners and to develop principles that address aspects of
the CDD process.\25\ In May 2004, IOSCO published a report describing
principles for client identification and beneficial ownership in the
securities industry.\26\ Among other things, the report noted that
while ``[t]he CDD process is a key component of securities regulatory
requirements intended to achieve the principal objectives of securities
regulation, the protection of investors; ensuring that markets are
fair, efficient and transparent; and the prevention of the illegal use
of the securities industry,'' it also ``contributes to the pursuit of
other policy goals related to the prevention of the illegal use of the
securities industry such as money laundering and the financing of
terrorism that are generally within the competence of other
authorities.'' \27\
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\24\ Basel Committee on Banking Supervision, ``Customer Due
Diligence for Banks,'' 2001, p. 2, available at www.bis.org/publ/bcbs85.pdf.
\25\ International Organization of Securities Commissions,
``Principles on Client Identification and Beneficial Ownership for
the Securities Industry,'' p. 2 (May 2004).
\26\ Id.
\27\ Id.
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III. Treasury's Efforts To Address CDD, Including Beneficial Ownership
Issues
The identification of beneficial ownership interests as noted
previously has become increasingly relevant to AML/CFT efforts both
within the United States and beyond its borders. Treasury also has
consistently engaged with the Federal financial regulatory agencies and
financial institutions for the purpose of understanding and clarifying
the efforts of financial institutions with respect to CDD and
identifying beneficial ownership interests. Most notably:
i. Following the adoption of the Act in 2001, the Treasury
Department and the federal financial regulatory agencies engaged the
financial industry in order to develop customer identification program
(``CIP'') and special due diligence requirements in accordance with
Sections 326 and 312 of the Act, respectively.
ii. In November 2006, FinCEN issued a report on ``The Role of
Domestic Shell Companies in Financial Crime and Money Laundering:
Limited Liability Companies.'' The report highlights the need for
financial institutions to assess and manage the risks of providing
financial services to shell companies in order to identify and report
potential money laundering activity.\28\
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\28\ Financial Crimes Enforcement Network, ``The Role of
Domestic Shell Companies in Financial Crime and Money Laundering:
Limited Liability Companies,'' (November 2006), available at https://www.fincen.gov/news_room/rp/files/LLCAssessment_FINAL.pdf.
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iii. In 2008, FinCEN submitted a survey to industry to solicit
feedback on how and when financial institutions obtain and retain
beneficial ownership information. The survey results indicated certain
inconsistencies in financial institutions' understanding of
requirements related to collecting and maintaining beneficial ownership
information both within and across industries.
iv. In November 2009, the Department of the Treasury's then-
Assistant Secretary, and current Under Secretary, David Cohen,
testified before the Senate Committee on Homeland Security and
Governmental Affairs and outlined Treasury's comprehensive plan, the
elements of which are designed to enhance the transparency of legal
entities with respect to beneficial ownership. Treasury's plan
involves: (i) Working with Congress to promote legislation that
enhances transparency of legal entities in the company formation
process; (ii) clarifying and strengthening requirements for U.S.
financial institutions with respect to the beneficial ownership of
legal entity accountholders, and (iii) clarifying and facilitating the
implementation of international standards regarding beneficial
ownership, including with respect to company formation by
jurisdictional authorities and CDD by financial institutions.
v. In March 2010, FinCEN, jointly with the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, the Office of the Comptroller
of the Currency, the Office of Thrift Supervision, and the Securities
and Exchange Commission, and in consultation with staff of the
Commodity Futures Trading Commission, issued the Beneficial
[[Page 13050]]
Ownership Guidance to clarify and consolidate existing regulatory
expectations for obtaining beneficial ownership information for certain
accounts and customer relationships.\29\
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\29\ See generally, supra note 7.
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vi. In November 2011, the Department of the Treasury's Assistant
Secretary Daniel Glaser testified before the Senate Committee on the
Judiciary, Subcommittee on Crime and Terrorism to discuss efforts to
combat international organized crime. In his testimony, Assistant
Secretary Glaser discussed the importance of financial transparency in
mitigating threats posed by transnational organized crime and other
forms of illicit finance as well as the Treasury Department's work to
clarify and strengthen CDD requirements for financial institutions.
vii. In February 2012, the Department of the Treasury's Deputy
Assistant Secretary Luke Bronin testified before the House Committee on
the Judiciary, Subcommittee on Crime, Terrorism, and Homeland Security
to discuss key vulnerabilities in the U.S. financial system related to
transnational organized crime. The testimony included highlighting the
importance of CDD as essential to an AML regime. Additionally, Deputy
Assistant Secretary Bronin discussed the importance of effective
implementation of CDD and the need to clarify, consolidate, and
strengthen CDD requirements for financial institutions.
IV. Elements of CDD
Based on the past efforts outlined above and ongoing industry and
regulatory consultation and outreach, FinCEN believes that an effective
CDD program includes the following elements:
(i) Conducting initial due diligence on customers, which includes
identifying the customer, and verifying that customer's identity as
appropriate on a risk basis, at the time of account opening;
(ii) 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;
(iii) Except as otherwise provided, identifying the beneficial
owner(s) of all customers, and verifying the beneficial owner(s)'
identity pursuant to a risk-based approach; and
(iv) 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.
FinCEN's understanding of how U.S. financial institutions currently
perform certain aspects of CDD in accordance with these elements under
existing regulations and FinCEN's proposal for codifying these elements
in a CDD rule are described below.
A. Identification and Verification of the Customer
Various AML obligations are dependent on financial institutions at
least obtaining, and in some instances verifying, certain basic
customer identification information. For example, financial
institutions subject to the CIP rules implementing Section 326 of the
Act must identify and verify the identity of certain ``customers''
seeking to open an account.\30\ In identifying such customers, a
financial institution must obtain the customer's name; for individuals,
date of birth, address, and an identification number (e.g., taxpayer
identification number, passport number, or alien identification card
number) and for a person other than an individual (such as a
corporation, partnership or trust), a principal place of business,
local office, or other physical location, and identification
number.\31\ For the purposes of the CIP requirement, the definition of
``customer'' is the accountholder, regardless of whether the
accountholder is also the beneficial owner.\32\
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\30\ See 31 CFR 1020.220(a), 1023.220(a), 1024.220(a), and
1026.220(a).
\31\ See 31 CFR 1020.220(a)(2)(i)(A), 1023.220(a)(2)(i)(A),
1024.220(a)(2)(i)(A), and 1026.220(a)(2)(i)(A).
\32\ See, e.g. 31 CFR 1023.100(d) and Customer Identification
Programs for Broker-Dealers, 68 FR 25,113, 116 (May 9, 2003).
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In addition to identifying customers covered by the CIP rule, a
financial institution's CIP must include risk-based procedures for
verifying the identity of each customer to the extent reasonable and
practicable such that the institution can form a reasonable belief that
it knows the true identity of each customer.\33\ These procedures must
be based on the institution's assessment of the relevant risks,
including those presented by the various types of accounts maintained
by the institution, the various methods of opening accounts provided by
the institution, the various types of identifying information
available, and the institution's size, location, and customer base.\34\
Further, the CIP must include procedures that describe when the
financial institution will use documents, non-documentary methods, or a
combination of both methods to verify a customer's identity.\35\ In
addition, for customer relationships where the customer is not an
individual, based on the financial institution's risk assessment of the
account, the financial institution must obtain information about the
individuals with authority or control over such account.\36\ Consistent
with these explicit regulatory requirements and guidance, FinCEN is
exploring an express customer identification and risk-based
verification component of CDD, which does not create a new CIP
obligation, but would be satisfied by compliance with the financial
institution's current CIP obligations. The identification and
verification component of a CDD requirement may state, generally:
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\33\ 31 CFR 1020.220(a)(2), 1023.220(a)(2), 1024.220(a)(2), and
1026.220(a)(2).
\34\ Id.
\35\ 31 CFR 1020.220(a)(2)(ii), 1023.220(a)(2)(ii),
1024.220(a)(2)(ii), and 1026(a)(2)(ii).
\36\ 31 CFR 1020.220(a)(2)(ii)(C); 1023.220(a)(2)(ii)(C);
1024.220(a)(2)(ii)(C); and 1026.220(a)(2)(ii)(C). This verification
method applies only when the financial institution cannot verify the
customer's true identity using the verification methods described in
the rule. However, the preamble to the final CIP Rule noted that, in
addition to the requirements of this paragraph, ``the due diligence
procedures required under other provisions of the BSA or the
securities laws may require broker-dealers to look through to owners
of certain types of accounts.'' Customer Identification Programs for
Broker-Dealers, 68 FR 25113, 116, n. 30 and accompanying text (May
9, 2003).
Covered financial institutions shall identify, and on a risk-
basis verify, the identity of each customer, to the extent
reasonable, such that the institution can form a reasonable belief
---------------------------------------------------------------------------
that it knows the true identity of each customer.
If a financial institution is compliant with its current CIP
obligations, a financial institution would be compliant with this part
of the CDD program rule and therefore there will be no new or
additional regulatory obligation. FinCEN notes that, although certain
customers are exempt from the CIP requirements (i.e., the customers
that are excluded from the definition of ``customer'' for purposes of
the CIP requirement),\37\ those customers would not be exempt from the
requirements to understand the nature and purpose of the account and to
conduct ongoing monitoring. As discussed below, FinCEN is seeking
comment on whether the beneficial ownership requirement
[[Page 13051]]
should apply with respect to those exempt customers.
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\37\ Among other persons, the definition of ``customer'' for
purposes of the CIP requirement excludes: Existing customers, as
long as the financial institution has a reasonable belief that it
knows the customer's true identity; Federally regulated banks; banks
regulated by a state bank regulator; governmental entities; and
publicly traded companies. See, e.g., 31 CFR 1020.100(c)(2),
1023.100(d)(2), 1024.100(c)(2), 1026.100(d)(2).
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B. Understanding the Nature and Purpose of the Account
As a general business matter, financial institutions seek to
understand the needs of their customers in order to serve them.
Financial institutions should understand the nature and purpose of an
account or customer relationship so that they can appropriately assess
the risk presented by the relationship and appropriately monitor for
suspicious activity. Pursuant to suspicious activity reporting
procedures, financial institutions compare the available facts of a
transaction or series of transactions, including their type, volume,
and possible purpose, against the type of transaction in which the
customer would normally be expected to engage.\38\ In other words, in
discerning whether a transaction or series of transactions is
suspicious, a financial institution must determine if the activity
varies from the normal activities or activities appropriate for the
particular customer or class of customer, and has no apparent
reasonable explanation.\39\ FinCEN has also issued guidance
highlighting the need to understand the nature and purpose of an
account, in order to assess the risk and determine the appropriate
level of due diligence for the account.\40\ Accordingly, and in keeping
with the SAR obligation and related regulatory guidance, FinCEN is
specifically considering including an express obligation to understand
the nature and purpose of the account or customer relationship as an
element of a CDD program rule. This element of a CDD program rule may
state, generally:
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\38\ See, e.g., 31 CFR 1020.320(a)(2)(iii), 1023.320(a)(2)(iii),
1024.320(a)(2)(iii), and 1026.320(a)(2)(iii).
\39\ See 61 FR 4328 (February 5, 1996).
\40\ See, e.g., FIN-2006-G009, Application of the Regulations
Requiring Special Due Diligence Programs for Certain Foreign
Accounts to the Securities Industries (May 10, 2006). (``A clearing
firm's anti-money laundering program should contain risk-based
policies, procedures, and controls for monitoring introduced
business, which includes knowing whether the introducing firm may
establish or maintain correspondent accounts for foreign financial
institutions and the nature and scope of that business, including
the nature of the introducing firm's account base.'') See also FIN-
2008-G002, Customer Identification Program Rule No-Action Position
Respecting Broker-Dealers Operating Under Fully Disclosed Clearing
Agreements According to Certain Functional Allocations (Mar. 4,
2008).
covered financial institutions shall understand the nature and
purpose of the account and expected activity associated with the
account for the purpose of assessing the risk and identifying and
---------------------------------------------------------------------------
reporting suspicious activity.
Because in FinCEN's view, a financial institution must understand the
nature and purpose of an account in order to assess risk and satisfy
its obligation to appropriately detect and report suspicious activity,
FinCEN does not believe that this will impose a new or additional
requirement.
C. Obtaining Beneficial Ownership Information
Potential Beneficial Ownership Obligation Under a CDD Program Rule
Under existing FinCEN regulations, there are two limited situations
where financial institutions are expressly obligated to obtain
beneficial ownership information. Specifically, under the rules
implementing Section 312 of the Act, there are two situations where
certain ``covered financial institutions'' \41\ are required to take
reasonable steps to obtain beneficial ownership information: (i)
covered financial institutions that offer private banking accounts are
required to take reasonable steps to identify the nominal and
beneficial owners of such accounts; \42\ and (ii) covered financial
institutions that offer correspondent accounts for certain foreign
financial institutions are required to take reasonable steps to obtain
information from the foreign financial institution about the identity
of any person with authority to direct transactions through any
correspondent account that is a payable-through account, and the
sources and beneficial owner of funds or other assets in the payable-
through account.\43\
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\41\ 31 CFR 1010.605(e)(1).
\42\ 31 CFR 1010.620(b)(1).
\43\ 31 CFR 1010.610(b)(1)(iii)(A).
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In addition to these explicit requirements to obtain beneficial
ownership information, under the CIP rules, a financial institution's
CIP must address situations where, based on the financial institution's
risk assessment of a new account opened by a customer that is not an
individual, the financial institution will obtain information about
individuals with authority or control over such account.\44\ Moreover,
FinCEN and the federal financial regulatory agencies have issued
guidance stating that there are other situations when financial
institutions should consider whether it is appropriate to obtain
beneficial ownership information.\45\
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\44\ See supra note 36.
\45\ Supra note 7.
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Consistent with these explicit and implicit beneficial ownership
information obligations, FinCEN is considering expanding the
requirement to obtain beneficial ownership information to all
customers. Such a beneficial ownership information requirement would
constitute an essential element of an effective CDD program. This
element of the CDD program rule may state, generally:
Except as otherwise provided, financial institutions shall
identify the beneficial owner(s) of all customers, and verify the
beneficial owners' identity pursuant to a risk-based approach.
FinCEN anticipates that it would provide additional guidance regarding
customers that may be considered low risk (and therefore exempt for
purposes of this beneficial ownership requirement), as well as
identifying types of customers that may simply necessitate
identification of the beneficial owner, and those that are of
heightened risk requiring both identification and verification of the
beneficial owner. Similar to the CIP requirement, FinCEN also
anticipates that it would provide guidance to financial institutions on
what they should do in the event they are unable to identify or verify
a beneficial owner.
This component of the CDD program rule would create a new express
regulatory obligation to obtain beneficial ownership information, given
the limited circumstances in which financial institutions are currently
expressly obligated to obtain this information.
Potential Additional Definition of Beneficial Owner
In the limited instances where reasonable steps to obtain
beneficial ownership information are currently required, FinCEN has
defined the beneficial owner of an account as ``an 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 * * *'' \46\
This definition was designed specifically for accounts referred to
above where beneficial ownership information is required and may not be
useful for application to the wide range of other accounts offered by
financial institutions.
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\46\ 31 CFR 1010.605(a).
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In addition to FinCEN's current definition of beneficial owner,
federal regulatory agencies \47\ and various international
organizations and foreign jurisdictions define beneficial ownership in
ways that may be useful
[[Page 13052]]
in assisting financial institutions with understanding beneficial
ownership in the CDD framework.\48\ For purposes of the CDD program
requirement discussed above, and not affecting the limited instances in
which beneficial ownership information is currently required, FinCEN is
considering a definition to be used that would, in the case of legal
entities, include:
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\47\ Securities Exchange Act Rule 13d-3, 17 CFR 240.13d-3.
\48\ See e.g., FATF Recommendations, General Glossary, p. 110,
available at https://www.fatf-gafi.org/dataoecd/49/29/49684543.pdf;
European Parliament and Council, ``Third European Union Money
Laundering Directive,'' 2005/60/EC, Article 3(6) (October 26, 2005);
United Kingdom Money Laundering Regulations, 2007 No. 2157 Part 2,
p. 10 (December 15, 2007).
(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.
FinCEN anticipates that such a specific and limited definition of
beneficial ownership may be necessary to accommodate the vast array of
complex ownership structures of legal entities \49\ that may become
customers of financial institutions. FinCEN further anticipates that
this specific limited definition would be applied generally to legal
entity customers pursuant to the explicit beneficial ownership
requirement described above, while the existing definition would
continue to be applied for purposes of 31 CFR 1010.610 and 1010.620.
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\49\ Legal entities would generally include all entities that
are established or organized under the laws of a state or of the
United States, including corporations, limited liability companies,
limited partnerships, and similar entities.
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FinCEN emphasizes that the potential new beneficial ownership
requirement and definition discussed in this ANPRM is not intended to
supersede existing BSA obligations to obtain beneficial ownership
information.
Potential Exemptions From Beneficial Ownership Requirement
FinCEN recognizes that there may be instances in which obtaining
beneficial ownership information about a legal entity customer may not
be warranted given the AML/CFT risk or other factors associated with
that entity. For example, FinCEN is considering whether legal entity
customers that are exempt from identification as customers under the
CIP Rules (e.g., financial institutions regulated by a federal
regulatory agency and publicly traded companies), should also be exempt
from the beneficial ownership requirement, both because beneficial
ownership information for these entities may not be particularly
relevant to the money laundering risks associated with such entities,
and because their beneficial ownership information is readily available
to law enforcement and regulators. Accordingly, FinCEN seeks comment on
a potential exemption from the beneficial ownership requirement for
legal entity customers that are exempt under the CIP Rules.
FinCEN recognizes that financial institutions may not have
beneficial ownership information on existing customers (which are also
exempt from the CIP Rules), outside those requiring such information,
and is also considering whether and how a potential beneficial
ownership requirement would apply to existing customers of financial
institutions. In this regard, FinCEN is considering adopting a risk-
based approach similar to that utilized in the case of the CIP Rules,
whereby this potential requirement would apply to all new customers.
With respect to existing customers, FinCEN is seeking comment on how a
beneficial ownership identification requirement could be phased into
ongoing CDD.
Beneficial Owners of Assets in Accounts Held by Intermediaries
Given the particular money laundering risks posed by some legal
entities, the beneficial ownership requirement and potential definition
of ``beneficial owner'' under consideration as discussed above are
designed to identify the beneficial owner of a legal entity customer,
as distinct from the beneficial owner of assets in an account. However,
there may be instances in which obtaining information about the
beneficial owners of assets in an account may be warranted instead,
such as where a legal entity (e.g. a foreign or regulated or
unregulated domestic financial institution) opens an account for the
benefit of its customers (as opposed to for its own benefit), as those
customers could pose a money laundering risk through their ability to
access the financial system through that account relationship. In such
instances, FinCEN recognizes that the potential definition of
``beneficial owner'' described above may not generally be relevant or
appropriate for AML/CFT purposes.
Accordingly, FinCEN seeks 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 also seeks comment on how financial institutions
currently address the potential money laundering risks presented by the
beneficial owners of assets in an account pursuant to financial
institutions' existing legal obligations and expectations under
FinCEN's regulations and related guidance, whether there are any issues
or practical difficulties in doing so, and whether further guidance or
rulemaking on this particular issue would be beneficial.
FinCEN recognizes that there may be impediments to identifying the
beneficial owner of assets in an account in certain instances and
account structures (e.g., omnibus accounts or other intermediated
accounts), such as where there are layers of intermediated
relationships or where there are numerous beneficial owners of assets
in the account. FinCEN seeks comment on the difficulties associated
with identifying beneficial owners of assets of such an account. FinCEN
further requests comment on whether a potential explicit obligation to
identify the beneficial owners of assets in an account should be based
upon the financial institution's risk assessment of the customer, or
whether a more specific obligation would be appropriate.
Customer Acting as an Agent
FinCEN believes that, although the use of legal entities to mask
beneficial ownership presents the primary illicit finance vulnerability
and accordingly the need for beneficial ownership identification, the
question of beneficial ownership can also arise in the context of
accounts established by an individual or entity (e.g. law or accounting
firm) which could be acting on behalf of another individual or
individuals without disclosing this fact. FinCEN is considering how to
best address this potential vulnerability. A possible solution would be
to require any individual or entity (other than a regulated financial
institution) opening an account at a financial institution to state
that he, she, or it is not acting on behalf of any other person. Such
approach would be analogous to longstanding FinCEN transaction
reporting requirements, under which a financial institution must record
identifying information with respect to
[[Page 13053]]
``any person or entity on whose behalf such transaction is to be
effected.'' \50\ For individuals and entities acting on behalf of
another person, the beneficial ownership element of a CDD program
requirement would apply to the person on whose behalf the account is
being opened. FinCEN seeks comment on this approach, as well as
suggestions for other approaches.
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\50\ See, 31 CFR 1010.312.
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Obtaining and Verifying Beneficial Ownership Information
FinCEN anticipates that, in general, the individual opening the
account on behalf of a legal entity customer will identify its
beneficial owner, and that covered financial institutions will
generally be able to rely upon the beneficial ownership information
presented by the customer, absent information that indicates reason to
question the veracity of the information or an elevated risk of money
laundering or terrorist financing. Verification of the beneficial owner
could have two possible meanings. One meaning would require verifying
the identity of the individual identified by the customer as the
beneficial owner of the account, i.e., verifying the existence of the
identified beneficial owner. This would presumably be accomplished by
using procedures similar to those currently required pursuant to the
CIP Rules (e.g., obtaining a copy of a government-issued identity
document of the individual), but applied to the identified beneficial
owner rather than to an individual customer. The second possible
meaning would require that the financial institution verify that the
individual identified by the customer as the beneficial owner, is
indeed the beneficial owner of the customer, i.e., to verify the status
of the identified individual. FinCEN is considering that, in each case
the required procedures would need to be reasonable and practicable,
and sufficient to form a reasonable belief that the financial
institution knows the identity or status, as the case may be, of the
beneficial owner. FinCEN is seeking comment below regarding these two
possible meanings, and the appropriateness and challenges associated
with each.
D. Conducting Ongoing CDD
Due diligence is an on-going obligation, and for this reason
financial institutions should have in place policies and procedures to
maintain the accuracy of their customer risk profiles and risk
assessments. Financial institutions should update CDD information as
necessary based on the overall risk of the customer, and may need to
update or conduct additional CDD in association with specific events
that would result in material changes in a customer's risk profile,
such as volume of alerts or red flags relating to the account, change
in control, change in occupation or account purpose, or the occurrence
of a transaction or activity that is unusual for the customer.
Pursuant to suspicious activity reporting requirements, financial
institutions must report a transaction that: (i) Involves funds derived
from illegal activity or is conducted to hide or disguise funds or
assets derived from illegal activity as part of a plan to violate or
evade any federal law or regulation or to avoid any federal transaction
reporting requirement; (ii) is designed to evade any requirements of
the BSA or its implementing regulations; or (iii) has no business or
apparent lawful purpose or is not the sort in which the particular
customer would normally be expected to engage, and the financial
institution knows of no reasonable explanation for the transaction
after examining the available facts, including the background and
possible purpose of the transaction.\51\ Financial institutions'
ongoing monitoring and due diligence are critical elements of
effectively complying with current suspicious activity reporting
requirements.
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\51\ See generally, 31 CFR 1020.320(a)(2)(i)-(iii),
1023.320(a)(2)(i)-(iii), 1024.320(a)(2)(i)-(iii), and
1026.320(a)(2)(i)-(iii).
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FinCEN is exploring an ongoing monitoring and due diligence
requirement as an express element of a CDD program rule. This element
of the CDD program rule may state:
Consistent with its suspicious activity reporting requirements,
covered financial institutions shall establish and maintain
appropriate policies, procedures, and processes for conducting on-
going monitoring of all customer relationships, and additional CDD
as appropriate based on such monitoring for the purpose of the
identification and reporting of suspicious activity.
FinCEN understands that the obligations in this potential element of an
ongoing CDD monitoring rule are already included in the requirements
contained in the AML program and SAR rules and, therefore, there would
be no new or additional requirement.
V. Issues for Comment
Existing CDD requirements are an implicit, but essential, part of
complying with AML program regulations. However, as discussed above,
FinCEN is considering expressly requiring that financial institutions
conduct CDD as part of their existing AML program requirements, and as
part of this requirement, collect beneficial ownership information for
all customers, with limited exceptions. For this reason, FinCEN is
seeking comment from industry and other interested parties concerning
the implementation of CDD programs in general pursuant to existing
rules and guidance described above. FinCEN is also interested in better
understanding what types of CDD information are currently collected,
specifically in relation to beneficial ownership information, and under
what circumstances the information is collected.
1. Aside from policies and procedures with respect to beneficial
ownership, what changes would be required in a financial institution's
CDD processes as a result of the adoption by FinCEN of an express CDD
rule as described in this ANPRM?
Aside from beneficial ownership, FinCEN believes that the other
elements of a potential CDD rule as described above are already being
implemented by a substantial number of financial institutions, due to
three of the four proposed elements of CDD being explicit or implicit
under existing FinCEN regulations and related regulatory and
supervisory expectations. For this reason, FinCEN believes an explicit
regulatory requirement with respect to these elements of CDD should not
be onerous, particularly for those industries where CIP requirements
are already in place. However, FinCEN is interested in obtaining a
better understanding from all industry sectors of anticipated issues
and concerns that may arise from creating an explicit regulatory
requirement with respect to these three potential elements of CDD,
including any additional costs that would be incurred to comply with
these three elements.
2. What changes would be required in a financial institution's CDD
process, as a result of the adoption by FinCEN of a categorical
requirement to obtain (and in some cases verify) beneficial ownership
information, as described in this ANPRM? Is FinCEN's suggested
alternate definition of ``beneficial owner,'' discussed above, a clear
and easily understood definition for the purpose of obtaining
beneficial ownership information for legal entities in the context of
complying with a CDD obligation? If not, would you suggest a better
definition? In addition, how do financial institutions currently
address the money laundering risks that might be presented by the
beneficial owners of assets in an account held by an
[[Page 13054]]
intermediary, what difficulties are presented in this regard, would
further guidance or regulation be appropriate, should any requirement
in this area be risk-based, and how should FinCEN define beneficial
ownership for this purpose?
FinCEN is seeking comment on the impact on financial institutions
of the adoption of a categorical requirement to obtain beneficial
ownership information for most customers, as described in this ANPRM.
FinCEN is also seeking comment as to whether financial institutions
have concerns regarding the proposed alternative definition of
beneficial ownership discussed above and whether it may cause
difficulties with financial institution compliance with a categorical
beneficial ownership obligation. In addition, FinCEN is seeking comment
on whether it would be confusing to adopt an alternate definition of
beneficial ownership as proposed for a general CDD program requirement,
except in the limited instances in which the current definition for
beneficial owner that is required pursuant to 31 CFR 1010.610 and
1010.620 would continue to be used, and whether the potential
beneficial ownership requirement and associated potential definition
would be relevant with respect to certain types of intermediated
accounts, such as omnibus accounts, and if not, what definition would
be more appropriate. Also, please comment on appropriate exemptions
from a potential beneficial ownership requirement, including with
respect to existing customers, and the practicality of phasing a
requirement into ongoing CDD. Please also comment on possible
approaches to preventing the misuse of a financial institution account
by an individual or entity acting on behalf of another without
disclosing this fact. Finally, please comment regarding the costs of
complying with a categorical beneficial ownership requirement, in the
case where the beneficial ownership requirement would apply only to new
customers, as well as where it would apply to all existing customers.
3. Under what circumstances does a financial institution currently
obtain beneficial ownership information on a customer or accountholder?
Current FinCEN regulations require financial institutions to obtain
beneficial ownership information as a component of CDD on private
banking and foreign correspondent customers. Existing BSA obligations,
including regulatory and supervisory expectations, require financial
institutions to collect this information, as appropriate, as part of
CDD/EDD on higher-risk customers. For this reason, FinCEN requests
information from industry regarding the circumstances under which a
financial institution currently determines that it is necessary or
prudent to obtain beneficial ownership information from a customer, who
is neither a private banking nor foreign correspondent customer,
whether as part of their customer identification program procedures,
anti-money laundering program requirements, transaction/account
monitoring procedures, or for other purposes. For example, are there
types of customers, types of accounts, levels of account activity,
forms of suspicious activity, or other indicia that lead a financial
institution to make decisions as to when there may be no risk, moderate
risk or substantial risk in not obtaining beneficial ownership
information?
4. How do financial institutions currently obtain beneficial
ownership information?
FinCEN requests information on how financial institutions collect
such information and, specifically, what methods, both documentary and
non-documentary, are used to identify and/or verify the beneficial
owner (e.g. public documents, identification numbers, etc.). When or if
financial institutions collect beneficial ownership information other
than as specifically required pursuant to 31 CFR 1010.610 and 1010.620,
FinCEN requests comments on whether financial institutions use the same
definition of beneficial ownership as that which is applicable under
these regulations for private banking and certain foreign correspondent
accounts, or other definitions, such as those referenced above in the
description of a potential additional definition of beneficial owner.
5. Is the current, primarily risk-based, approach to a CDD program
requirement resulting in varied approaches across industries or varied
approaches within industries?
FinCEN is seeking comment on whether financial institutions are
aware of varied approaches either across or within industries relating
to current CDD expectations, including beneficial ownership
obligations. For example, FinCEN seeks comment on whether financial
institutions are aware of circumstances in which one financial
institution may turn down an account due to lack of beneficial
ownership information, later to learn that the accountholder has
established an account with another institution that did not require
the accountholder to provide beneficial ownership information.
Alternatively, are there circumstances under which financial
institutions have concerns about their ability to rely on CDD
undertaken by other financial institutions due to inconsistent
practices or expectations?
6. Are there other elements of CDD that would be more effective in
facilitating compliance with AML program requirements and other
obligations under FinCEN's regulations?
The four elements of CDD listed above were selected based on
consistency with existing regulatory requirements and expectations; the
importance of beneficial ownership information and other elements of
CDD to financial investigations pertaining to money laundering,
terrorist financing, and tax evasion, and IEEPA violations; and,
consistency with international standards and financial transparency.
FinCEN seeks comment on whether other elements of CDD, aside from those
listed in this ANPRM would be more effective and efficient in advancing
these interests.
7. What information should be required in order to identify, and
verify on a risk basis, the identity of the beneficial owner?
Should the required identification information on beneficial owners
be consistent with the customer identification information currently
required under the CIP regulations (i.e., name, address, date of birth
and identification number) or should additional information be
required? In addition, what should be required of financial
institutions to verify the identity of the beneficial owner? FinCEN is
exploring two possible meanings for verification of beneficial
ownership information: One meaning would require verifying the identity
of the natural person identified by the customer to be the beneficial
owner. This would require that the financial institution, for example,
obtain a copy of a government-issued identification document bearing a
photograph of the individual identified by the customer as its
beneficial owner, to verify that the individual exists. The second
meaning would require verifying that the individual identified by the
customer as its beneficial owner is, in fact, the beneficial owner of
the legal entity customer. FinCEN is seeking comment as to challenges
posed by each of these possible verification requirements.
8. Are there any products and services, or customers that should be
exempted from the requirement to obtain beneficial ownership
information due to there being (i) substantially less risk of money
laundering or terrorist financing associated with the account; (ii)
limited value associated with the
[[Page 13055]]
beneficial ownership information in mitigating money laundering/
terrorist financing risk; or (iii) an inability to obtain the required
information due to other legal requirements?
FinCEN is seeking comment to determine if there are certain types
of, or thresholds for, products, services, or customers, with respect
to which a financial institution should not be required to obtain
beneficial ownership information, due to substantially reduced risk.
For example, should customers that are exempt from the CIP Rules, also
be exempt from beneficial ownership identification? Additionally,
FinCEN is seeking comment as to whether there are certain products or
services offered by financial institutions that, due to ancillary
statutory or regulatory obligations, would prohibit compliance with a
CDD requirement to obtain beneficial ownership information as outlined
in this ANPRM. FinCEN is also seeking comment on whether there are
significant differences in risks or perceived ability to obtain
beneficial ownership information with respect to foreign versus
domestic customers and/or beneficial owners.
9. What financial institutions should not be covered by a CDD rule
based on products and services offered?
FinCEN is considering whether a CDD program rule as described in
this ANPRM should be more widely applicable to financial institutions
not currently subject to a CIP Rule, and is seeking comments from
industry and interested parties to determine if there are types of
financial institutions currently covered under FinCEN's regulations and
subject to SAR and AML Program rules, that should not be covered by a
CDD obligation, either because the products and services offered are
not consistent with the information sought in a CDD obligation or for
any other reason.
10. What would be the impact on consumers or other customers of a
CDD program including the elements identified above?
FinCEN is seeking comment regarding the potential impact on
consumers or customers of financial institutions. What are the benefits
and challenges of the above suggested CDD requirements that may exist
between financial institutions and customers taking into account the
objective of increasing the inclusion in the financial system of
traditionally underserved individuals? Will a CDD program affect the
willingness or ability of consumers or others to use or access certain
financial institutions or services?
VI. Conclusion
With this ANPRM, FinCEN is seeking input on the questions set forth
above. FinCEN also is soliciting comments on the impact to law
enforcement or authorities, regulatory agencies, and consumers, and
welcomes comments on all aspects of the ANPRM, and all interested
parties are encouraged to provide their views.
Dated: February 28, 2012.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2012-5187 Filed 3-2-12; 8:45 am]
BILLING CODE 4810-02-P
