Customer Due Diligence Requirements for Financial Institutions, 45151-45174 [2014-18036]
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Federal Register / Vol. 79, No. 149 / Monday, August 4, 2014 / Proposed Rules
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In consideration of the foregoing, the
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Executive Order 13045 (Protection of
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PART 790—CONGESTION MITIGATION
AND AIR QUALITY IMPROVEMENT
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790.102 Applicability.
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790.104 Weighting factor for determining
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The purpose of this part is to establish
the weighting factors, as directed by 23
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proposed rulemaking addresses the
weighting factor for the PM2.5 areas for
use in determining the weighted
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Authority: 23 U.S.C. 149; 49 CFR 1.85.
§ 790.101
§ 790.103
Purpose.
Applicability.
This part applies to all States that
have a PM2.5 nonattainment or
maintenance area.
§ 790.105
Definitions.
Unless otherwise specified in this
part, the definitions in 23 U.S.C. 101(a)
are applicable to this part. As used in
this part:
Criteria pollutant means any pollutant
for which there is established a NAAQS
at 40 CFR part 50. The transportation
related criteria pollutants per 40 CFR
93.102(b) are carbon monoxide, nitrogen
dioxide, ozone and particulate matter
(PM10 and PM2.5).
Maintenance area means any
geographic region of the United States
that the Environmental Protection
Agency (EPA) previously designated as
a nonattainment area for one or more
pollutants pursuant to the Clean Air Act
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National Ambient Air Quality
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Act.
Nonattainment area means any
geographic region of the United States
that EPA has designated as
nonattainment under section 107 of the
Clean Air Act for any pollutant for
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which a national ambient air quality
standard exists.
Weighted population means the
population of each county within a
designated ozone, carbon monoxide
(CO), and PM2.5 nonattainment and
maintenance area that would be given a
relative value, or weighting to reflect the
severity of the pollutant classification or
designation.
§ 790.107 Weighting factors for
determining weighted population.
(a) For purposes of 23 U.S.C.
149(k)(1), for an ozone nonattainment
and maintenance area, the weighting
factors determined are as follows:
(1) Marginal nonattainment area, the
weighting factor is 1.0.
(2) Moderate nonattainment area, the
weighting factor is 1.1.
(3) Serious nonattainment area, the
weighting factor is 1.2.
(4) Severe nonattainment area, the
weighting factor is 1.3.
(5) Extreme nonattainment area, the
weighting factor is 1.4.
(6) Maintenance area, the weighting
factor is 1.0.
(b) For purposes of 23 U.S.C.
149(k)(1), for a carbon monoxide
nonattainment and maintenance area,
the weighting factor is 1.0.
(c) For purposes of 23 U.S.C.
149(k)(1), for areas that are designated
nonattainment or maintenance for ozone
and carbon monoxide, the weighting
factor is 1.2 multiplied by the applicable
ozone factor as defined in paragraph (a)
of this section.
(d) For purposes of 23 U.S.C.
149(k)(1), for a PM2.5 nonattainment
area, the weighting factor is 5.0. For a
PM2.5 maintenance area, the weighting
factor is 1.0.
(e) For purposes of 23 U.S.C.
149(k)(1), for areas that are designated
nonattainment or maintenance for ozone
and nonattainment for PM2.5, the
weighting factor is 5.0 multiplied by the
applicable ozone factor as defined in
paragraph (a) of this section.
[FR Doc. 2014–17786 Filed 8–1–14; 8:45 am]
BILLING CODE 4910–22–P
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010, 1020, 1023, 1024,
and 1026
RIN 1506–AB25
Customer Due Diligence Requirements
for Financial Institutions
Financial Crimes Enforcement
Network (FinCEN), Treasury.
AGENCY:
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ACTION:
Federal Register / Vol. 79, No. 149 / Monday, August 4, 2014 / Proposed Rules
Notice of proposed rulemaking.
The Financial Crimes
Enforcement Network (FinCEN), after
consulting with staff from various
federal supervisory authorities, is
proposing rules under the Bank Secrecy
Act to clarify and strengthen customer
due diligence requirements for: Banks;
brokers or dealers in securities; mutual
funds; and futures commission
merchants and introducing brokers in
commodities. The proposed rules would
contain explicit customer due diligence
requirements and would include a new
regulatory requirement to identify
beneficial owners of legal entity
customers, subject to certain
exemptions.
DATES: Written comments on the Notice
of Proposed Rulemaking (NPRM) must
be received on or before October 3,
2014.
ADDRESSES: Comments may be
submitted, identified by Regulatory
Identification Number (RIN) 1506–
AB25, by any of the following methods:
• Federal E-rulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Include RIN 1506–AB25 in the
submission. Refer to Docket Number
FINCEN–2014–0001.
• Mail: Policy Division, Financial
Crimes Enforcement Network, P.O. Box
39, Vienna, VA 22183. Include 1506–
AB25 in the body of the text. Please
submit comments by one method only.
All comments submitted in response to
this NPRM 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 Resource Center at 1–800–767–
2825 or 1–703–905–3591 (not a toll free
number) and select option 3 for
regulatory questions. Email inquiries
can be sent to FRC@fincen.gov.
SUPPLEMENTARY INFORMATION:
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SUMMARY:
I. Background
FinCEN exercises regulatory functions
primarily under the Currency and
Foreign Transactions Reporting Act of
1970, as amended by the USA PATRIOT
Act of 2001 (PATRIOT Act) and other
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legislation, which legislative framework
is commonly referred to as the ‘‘Bank
Secrecy Act’’ (BSA).1 The BSA
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.’’ 2
The Secretary has delegated to the
Director of FinCEN the authority to
implement, administer and enforce
compliance with the BSA and
associated regulations.3 FinCEN is
authorized to impose anti-money
laundering (AML) program
requirements on financial institutions,4
as well as to require financial
institutions to maintain procedures to
ensure compliance with the BSA and
the regulations promulgated thereunder
or to guard against money laundering.5
FinCEN, in consultation with the
staffs of the federal functional regulators
and the Department of Justice, has
determined that more explicit rules for
covered financial institutions 6 with
respect to customer due diligence (CDD)
are necessary to clarify and strengthen
CDD within the BSA regime. As
demonstrated further below, such
changes will enhance financial
transparency and safeguard the financial
system against illicit use. Requiring
financial institutions to perform
effective CDD so that they know their
customers—both who they are and what
transactions they conduct—is a critical
aspect of combating all forms of illicit
financial activity, from terrorist
financing and sanctions evasion to more
traditional financial crimes, including
money laundering, fraud, and tax
evasion. For FinCEN, the key elements
of CDD include: (i) Identifying and
verifying the identity of customers; (ii)
identifying and verifying the identity of
beneficial owners of legal entity
customers (i.e., the natural persons who
own or control legal entities); (iii)
understanding the nature and purpose
of customer relationships; and (iv)
1 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).
2 31 U.S.C. 5311.
3 Treasury Order 180–01 (March 24, 2003).
4 31 U.S.C. 5318(h)(2).
5 31 U.S.C. 5318(a)(2).
6 For purposes of this preamble, a ‘‘covered
financial institution’’ refers to: (i) Banks; (ii) brokers
or dealers in securities; (iii) mutual funds; and (iv)
futures commission merchants and introducing
brokers in commodities.
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conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions. Collectively,
these elements comprise the minimum
standard of CDD, which FinCEN
believes is fundamental to an effective
AML program.
Accordingly, this Notice of Proposed
Rulemaking (NPRM) proposes to amend
FinCEN’s existing rules so that each of
these pillars is explicitly referenced in
a corresponding requirement within
FinCEN’s program rules. The first
element, identifying and verifying the
identity of customers, is already
included in the existing regulatory
requirement to have a customer
identification program (CIP). Given this
fact, FinCEN is addressing the need to
have explicit requirements with respect
to the three remaining elements via two
rule changes. First, FinCEN is
addressing the need to collect beneficial
owner information on the natural
persons behind legal entities by
proposing a new separate requirement
to identify and verify the beneficial
owners of legal entity customers, subject
to certain exemptions. Second, FinCEN
is proposing to add explicit CDD
requirements with respect to
understanding the nature and purpose
of customer relationships and
conducting ongoing monitoring as
components in each covered financial
institution’s core AML program
requirements. Within this context,
FinCEN is also updating its regulations
to include explicit reference to all four
of the pre-existing core requirements of
an AML program, sometimes referred to
as ‘‘pillars,’’ so that all of these
requirements are visible within
FinCEN’s rules. As discussed in more
detail below, these existing core
requirements are already laid out in the
BSA as minimum requirements and are
substantively the same as those already
included within regulations or rules
issued by federal functional regulatory
agencies and self-regulatory
organizations (SROs), and therefore we
believe they do not add to or otherwise
change the covered financial
institutions’ existing obligations under
these regulations or rules.
FinCEN wishes to emphasize at the
outset that nothing in this proposal is
intended to lower, reduce, or limit the
due diligence expectations of the federal
functional regulators or in any way limit
their existing regulatory discretion. To
clarify this point, this proposal
incorporates the CDD elements on
nature and purpose and ongoing
monitoring into FinCEN’s existing AML
program requirements, which generally
provide that an AML program is
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Federal Register / Vol. 79, No. 149 / Monday, August 4, 2014 / Proposed Rules
adequate if, among other things, the
program complies with the regulation of
its federal functional regulator (or,
where applicable, self-regulatory
organization) governing such programs.7
In addition, the Treasury Department
intends for the requirements contained
in this customer due diligence and
beneficial ownership proposal to be
consistent with, and not to supersede,
any regulations, guidance or authority of
any federal banking agency, the
Securities and Exchange Commission
(SEC), the Commodity Futures Trading
Commission (CFTC), or of any selfregulatory organization (SRO) relating to
customer identification, including with
respect to the verification of the
identities of legal entity customers.
The remainder of this background
section provides: (a) An overview of the
importance of CDD; (b) a description of
the Advance Notice of Proposed
Rulemaking (ANPRM),8 which initiated
this rulemaking process and Treasury’s
subsequent outreach to the private
sector; and (c) an overview of Treasury’s
efforts to enhance financial
transparency more broadly.
A. Importance of Customer Due
Diligence
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Clarifying and strengthening CDD
requirements for U.S. financial
institutions, including an obligation to
identify beneficial owners, advances the
purposes of the BSA by:
• Enhancing the availability to law
enforcement, as well as to the federal
functional regulators and SROs, of
beneficial ownership information of
legal entity customers obtained by U.S.
financial institutions, which assists law
enforcement financial investigations
and regulatory examinations and
investigations;
• Increasing the ability of financial
institutions, law enforcement, and the
intelligence community to identify the
assets and accounts of terrorist
organizations, money launderers, drug
kingpins, weapons of mass destruction
proliferators, and other national security
threats, which strengthens compliance
with sanctions programs designed to
undercut financing and support for such
persons;
• Helping financial institutions assess
and mitigate risk, and comply with all
7 See, e.g., 31 CFR 1020.210, which currently
provides that a financial institution regulated by a
Federal functional regulator that is not subject to
the regulations of a self-regulatory organization
shall be deemed to satisfy the requirements of 31
U.S.C. 5318(h)(1) if it implements and maintains an
anti-money laundering program that complies with
the regulation of its Federal functional regulator
governing such programs. (emphasis added).
8 See 77 FR 13046, March 5, 2012.
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existing legal requirements, including
the BSA and related authorities;
• Facilitating reporting and
investigations in support of tax
compliance, and advancing national
commitments made to foreign
counterparts in connection with the
provisions commonly known as the
Foreign Account Tax Compliance Act
(FATCA); 9 and
• Promoting consistency in
implementing and enforcing CDD
regulatory expectations across and
within financial sectors.
i. Assisting Financial Investigations by
Law Enforcement
The abuse of legal entities to disguise
involvement in illicit financial activity
remains a longstanding vulnerability
that facilitates crime, threatens national
security, and jeopardizes the integrity of
the financial system. Criminals have
exploited the anonymity that can be
provided by legal entities to engage in
a variety of financial crimes, including
money laundering, corruption, fraud,
terrorist financing, and sanctions
evasion.
There are numerous examples. Law
enforcement officials have found that
major drug trafficking organizations use
shell companies to launder drug
proceeds.10 In 2011, a World Bank
report highlighted how corrupt actors
consistently abuse legal entities to
conceal the proceeds of corruption,
which the report estimates to aggregate
to at least $40 billion per year in illicit
activity.11 Other criminals also make
aggressive use of front companies,
which may also conduct legitimate
business activity, to disguise the
deposit, withdrawal, or transfer of illicit
proceeds that are intermingled with
legitimate funds.
Strong CDD practices that include
identifying the natural persons behind a
legal entity—i.e., the beneficial
owners—help defend against these
abuses in a variety of ways. Armed with
beneficial ownership information,
financial institutions can provide law
enforcement with key details about the
legal structures used by suspected
9 Hiring Incentives to Restore Employment Act of
2010, Public Law 111–147, Section 501(a).
10 Combating Transnational Organized Crime:
International Money Laundering as a Threat to Our
Financial System, Before the Subcomm. on Crime,
Terrorism, and Homeland Security, H. Comm. on
the Judiciary, 112th Cong. (February 8, 2012)
(statement of Jennifer Shasky Calvery as Chief,
Asset Forfeiture and Money Laundering Section,
Criminal Division of the U.S. Department of
Justice).
11 The Puppet Masters: How the Corrupt Use
Legal Structures to Hide Stolen Assets and What to
Do About It, The International Bank for
Reconstruction and Development/The World Bank
(2011).
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criminals to conceal their illicit activity
and assets. Moreover, requiring legal
entities seeking access to financial
institutions to disclose identifying
information, such as the name, date of
birth, and social security number of a
natural person, will make such entities
more transparent, and thus less
attractive to criminals and those who
assist them. Even if an illicit actor tries
to thwart such transparency by
providing false beneficial ownership
information to a financial institution,
law enforcement has advised FinCEN
that such information can still be useful
in demonstrating unlawful intent and in
generating leads to identify additional
evidence or co-conspirators.
ii. Advancing Counterterrorism and
Broader National Security Interests
As noted, criminals often abuse legal
entities to evade sanctions or other
targeted financial measures designed to
combat terrorism and other national
security threats. The success of such
targeted financial measures depends, in
part, on the ability of financial
institutions, law enforcement, and
intelligence agencies to identify a
target’s assets and accounts. These
measures are thwarted when legal
entities are abused to obfuscate
ownership interests. Effective CDD
helps prevent such abuses by requiring
the collection of critical information,
including beneficial ownership
information, which may be helpful in
implementing sanctions or other similar
measures.
iii. Improving a Financial Institution’s
Ability To Assess and Mitigate Risk
Express CDD requirements would also
enable financial institutions to more
effectively assess and mitigate risk. It is
through CDD that financial institutions
are able to develop risk profiles of their
customers. Comprehensive risk profiles
enable a financial institution to monitor
accounts more effectively, and evaluate
activity to determine whether it is
unusual or suspicious, as required
under suspicious activity reporting
obligations.12 Further, in the event that
a financial institution files a suspicious
activity report (SAR), information
gathered through CDD enhances SARs,
which in turn helps law enforcement,
intelligence, national security and tax
authorities investigate and pursue illicit
financing activity.
iv. Facilitating Tax Compliance
Customer due diligence also
facilitates tax reporting, investigations
and compliance. For example,
12 See,
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e.g., 31 CFR 1020.320.
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information held by banks and other
financial institutions about the
ownership of companies can be used to
assist law enforcement in identifying
the true owners of assets and their true
tax liabilities. 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. Strengthening CDD is
an important part of that effort, and it
will dovetail with other efforts to create
greater transparency, such as the new
tax reporting provisions under the
Foreign Account Tax Compliance Act
(FATCA).13 FATCA requires foreign
financial institutions to identify U.S.
account holders, including legal entities
with substantial U.S. ownership, and to
report certain information about those
accounts to the Internal Revenue
Service (IRS).14 The United States has
collaborated with foreign governments
to enter into intergovernmental
agreements that facilitate the effective
and efficient implementation of these
requirements. These agreements and, to
a lesser extent, the applicable FATCA
regulations, allow foreign financial
institutions to rely on existing AML
practices in a number of circumstances,
including, in the case of the agreements,
for purposes of determining whether
certain legal entity customers have
substantial owners. Pursuant to many of
these agreements, the United States has
committed to pursuing reciprocity with
respect to collecting and reporting to the
authorities of the FATCA partner
information on the U.S. accounts of
residents of the FATCA partner. A
general requirement for U.S. financial
institutions to obtain beneficial
ownership information for AML
purposes advances this commitment,
and puts 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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v. Promoting Clear and Consistent
Expectations and Practices
Customer due diligence is universally
recognized as fundamental to mitigating
illicit finance risk, even though not all
covered financial institutions use the
13 Hiring Incentives to Restore Employment Act
of 2010, Public Law 111–147, Section 501(a).
14 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,’’ RIN 1545–BK68
(January 28, 2013), available at https://www.irs.gov/
PUP/businesses/corporations/TD9610.pdf . For
further updates on FATCA regulations, see https://
www.irs.gov/Businesses/Corporations/ForeignAccount-Tax-Compliance-Act-(FATCA).
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specific term ‘‘customer due diligence’’
to describe their practices. While
Treasury understands from its outreach
to the private sector that financial
institutions broadly accept this
principle and implement CDD practices
in some form under a risk-based
approach, covered financial institutions
have expressed disparate views about
what precise activity CDD entails. At
public hearings held after the comment
period to the ANPRM, discussed below,
financial institutions described widely
divergent CDD practices, especially with
respect to identifying beneficial owners
outside of limited circumstances
prescribed by statute.15
FinCEN believes that this disparity
adversely affects efforts to mitigate risk
and can promote an uneven playing
field across and within financial sectors.
Covered financial institutions have
noted that unclear CDD expectations
can result in inconsistent regulatory
examinations, potentially causing them
to devote their limited resources to
managing derivative legal risk rather
than fundamental illicit finance risk.
Private sector representatives have also
noted that inconsistent expectations can
effectively discourage best practices,
because covered financial institutions
with robust compliance procedures may
believe that they risk losing customers
to other, more lax institutions. Greater
consistency across the financial system
could also facilitate reliance on the CDD
efforts of other financial institutions.
Providing a consolidated and clear
CDD framework would help address
these issues. As part of this framework,
expressly stating CDD requirements in
rule or regulation with respect to (i)
understanding the nature and purpose
of customer relationships and (ii)
conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions, will facilitate
more consistent implementation,
supervision and enforcement of these
expectations. With respect to the
beneficial ownership proposal,
requiring all covered financial
institutions to identify beneficial
owners in the same manner and
pursuant to the same definition also
promotes consistency across the
industry. Requiring covered financial
institutions to operate under one clear
CDD framework will promote a more
15 See, e.g., Summary of Public Hearing: Advance
Notice of Proposed Rulemaking on Customer Due
Diligence (October 5, 2012), available at https://
www.fincen.gov/whatsnew/html/
20121130NYC.html (‘‘Participants expressed varied
views as to whether, how and in what
circumstances, financial institutions obtain
beneficial ownership information.’’).
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level playing field across and within
financial sectors.
B. Issuance of the Advance Notice of
Proposed Rulemaking and Subsequent
Outreach
FinCEN formally commenced this
rulemaking process in March 2012 by
issuing an ANPRM that described
FinCEN’s potential proposal for
codifying explicit CDD requirements,
including customer identification,
understanding the nature and purpose
of accounts, ongoing monitoring, and
obtaining beneficial ownership
information.16
FinCEN received approximately 90
comments, mostly from banks, credit
unions, securities and derivatives firms,
mutual funds, casinos, and money
services businesses. In general, and as
described in greater detail below, these
commenters primarily raised concerns
about the potential costs and practical
challenges associated with a categorical
requirement to obtain beneficial
ownership information. They also
reflected some confusion with respect to
FinCEN’s articulation of the other
components of CDD, suggesting that
FinCEN was imposing new
requirements rather than explicitly
codifying pre-existing obligations.
To better understand and address
these concerns, Treasury held five
public hearings in Washington, DC,
Chicago, New York, Los Angeles and
Miami.17 At these meetings, participants
expressed their views on the ANPRM
and offered specific recommendations
about how best to minimize the burden
associated with obtaining beneficial
ownership information. These
16 Two years prior to that, in March 2010,
FinCEN, along with several other agencies,
published Joint Guidance on Obtaining and
Retaining Beneficial Ownership Information, FIN–
2010–G001 (March 5, 2010). Industry reaction to
this guidance has been one reason for pursuit of the
clarity entailed in making requirements with
respect to CDD and beneficial ownership explicit
within FinCEN’s regulations.
17 Summary of Public Hearing: Advance Notice of
Proposed Rulemaking on Customer Due Diligence
(July 31, 2012), available at https://www.regulations.
gov/#!documentDetail;D=FINCEN-2012-0001-0094;
Summary of Public Hearing: Advance Notice of
Proposed Rulemaking on Customer Due Diligence
(September 28, 2012, available at https://www.
fincen.gov/whatsnew/html/20121130CHI.html;
Summary of Public Hearing: Advance Notice of
Proposed Rulemaking on Customer Due Diligence
(October 5, 2012), available at https://www.fincen.
gov/whatsnew/html/20121130NYC.html; Summary
of Public Hearing: Advance Notice of Proposed
Rulemaking on Customer Due Diligence (October
29, 2012), available at https://www.fincen.gov/
whatsnew/html/20121130LA.html; Summary of
Public Hearing: Advance Notice of Proposed
Rulemaking on Customer Due Diligence (December
3, 2012), available at https://www.fincen.gov/
whatsnew/pdf/SummaryofHearing-MiamiDec3.pdf.
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discussions were critical in the
development of this proposal.
C. Treasury’s Broad Strategy To
Enhance Financial Transparency
Clarifying and strengthening CDD is
an important component of Treasury’s
broader three-part strategy to enhance
financial transparency. Other key
elements of this strategy include: (i)
Increasing the transparency of U.S. legal
entities through the collection of
beneficial ownership information at the
time of the legal entity’s formation and
(ii) facilitating global implementation of
international standards regarding CDD
and beneficial ownership of legal
entities and trusts.
This proposal thus complements the
Administration’s ongoing work with
Congress to facilitate adoption of
legislation that would require the
collection of beneficial ownership
information at the time that legal
entities are formed in the United States.
This proposal also advances Treasury’s
ongoing work with the Group of Twenty
Finance Ministers and Central Bank
Governors (G–20), the Financial Action
Task Force (FATF), and other global
partners, who have emphasized the
importance of improving CDD practices
and requiring the disclosure of
beneficial ownership information at the
time of company formation or transfer.
Moreover, this proposal furthers the
United States’ Group of Eight (G–8)
commitment as set forth in the United
States G–8 Action Plan for Transparency
of Company Ownership and Control,
published on June 18, 2013.18 This
Action Plan is in line with principles
agreed to by the G–8, which the White
House noted ‘‘are crucial to preventing
the misuse of companies by illicit
actors.’’ 19 While these elements are all
proceeding independently, together they
establish a comprehensive approach to
promoting financial transparency.
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II. Scope of and Rationale for the
Proposed Rule
This section describes: (i) The range
of financial institutions covered by this
proposal; (ii) FinCEN’s continued
interest in potentially extending the
proposed rule to additional financial
institutions in the future, and (iii) the
basis for proposing explicit
18 United States G–8 Action Plan for
Transparency of Company Ownership and Control,
available at https://www.whitehouse.gov/the-pressoffice/2013/06/18/united-states-g-8-action-plantransparency-company-ownership-and-control.
19 White House Fact Sheet: U.S. National Action
Plan on Preventing the Misuse of Companies and
Legal Arrangements (June 18, 2013), available at
https://www.whitehouse.gov/the-press-office/2013/
06/18/fact-sheet-us-national-action-planpreventing-misuse-companies-and-legal.
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requirements that, in conjunction with
the existing customer identification
program (CIP) requirement, will create a
clearer CDD framework.
As an initial matter, this proposal
covers only those financial institutions
subject to a CIP requirement under
FinCEN regulations. At this time, such
financial institutions are: (i) Banks; (ii)
brokers or dealers in securities; (iii)
mutual funds; and (iv) futures
commission merchants and introducing
brokers in commodities.20 FinCEN
believes that initially covering only
these sectors is an appropriate exercise
of its discretion to engage in
incremental rulemaking. These sectors
represent a primary means by which
individuals and businesses maintain
accounts with access to the financial
system. In addition, because these
covered financial institutions have been
subject to CIP rules, FinCEN believes
that it is logical to commence
implementation with those financial
institutions already equipped to
leverage CIP practices to the extent
possible, as the proposal contemplates.
In addition to input from covered
financial institutions, FinCEN sought
and received comments on the ANPRM
from financial institutions not subject to
CIP requirements, such as money
services businesses, casinos, insurance
companies, and other entities subject to
FinCEN regulations. Based on these
comments and discussions with the
private sector, FinCEN believes that
extending CDD requirements in the
future to these, and potentially other
types of financial institutions, may
ultimately promote a more consistent,
reliable, and effective AML regulatory
structure across the financial system.
Several comments questioned the
need for proposing a CDD rule that
contained all four elements, when three
of the four elements are already
consistent with existing requirements or
supervisory expectations. FinCEN
believes that proposing clear CDD
requirements is the most effective way
of clarifying, consolidating, and
harmonizing expectations and practices
across all covered financial institutions.
Expressly stating the requirements
facilitates the goal that financial
institutions, regulators, and law
enforcement all operate under the same
set of clearly articulated principles. The
proposed CDD requirements are
intended to set forth a clear framework
of minimum expectations that can be
broadly applied to varying risk
20 31 CFR 1020.220 (Banks); 31 CFR 1023.220
(Broker-Dealers); 31 CFR 1024.220 (Mutual Funds);
31 CFR 1026.220 (Futures Commission Merchants
and Introducing Brokers in Commodities).
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scenarios across multiple financial
sectors and can be tailored by financial
institutions to account for the risks
unique to them. For this reason, and as
part of a broader global agenda
supported by Treasury, many other
jurisdictions have already imposed
requirements similar to those proposed
herein.21 These global developments
promote a level playing field
internationally and mitigate the threat of
illicit finance presented by an
increasingly interconnected financial
system.
Furthermore, additional discussions
with the private sector reaffirmed
FinCEN’s view that a beneficial
ownership requirement is best
understood in the context of broader
due diligence conducted on customers.
Beneficial ownership information is
only one component of a broader profile
that is necessary for financial
institutions to develop when assessing a
particular customer’s risk. Beneficial
ownership information is a means of
building a more comprehensive risk
profile; it is not an end in and of itself.
Thus, in addition to proposing a specific
requirement for the collection of the
beneficial ownership information,
FinCEN is also proposing amendments
to its AML program rules to specifically
reference the two components of CDD
that were not elsewhere explicitly
included in its regulations, i.e.,
understanding the nature and purpose
of an account and conducting ongoing
monitoring.
III. Elements of the Proposed Rule
A. Overview
As described briefly above, it is
FinCEN’s position that CDD consists, at
a minimum, of four elements:
D Identifying and Verifying the
Identity of Customers;
D Identifying and Verifying the
Identity of Beneficial Owners of Legal
Entity Customers;
D Understanding the Nature and
Purpose of Customer Relationships; and
D Conducting Ongoing Monitoring to
Maintain and Update Customer
Information and to Identify and Report
Suspicious Transactions.
Because the first element of CDD is
already satisfied by existing CIP
21 For example, all European Union member
states, as well as Switzerland, Singapore, Hong
Kong, and other financial centers generally require
financial institutions to conduct due diligence as
proposed in this rulemaking, including obtaining
beneficial ownership information as part of their
CDD requirements. See, e.g., Third European Union
Money Laundering Directive, 2005/60/EC, Article
3(6) (Oct. 26, 2005).
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requirements,22 this NPRM proposes to
address the remaining three elements of
CDD.
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Beneficial Ownership
The second element of CDD requires
financial institutions to identify and
verify the beneficial owners of legal
entity customers. In this NPRM, FinCEN
proposes a new requirement that
financial institutions identify the
natural persons who are beneficial
owners of legal entity customers, subject
to certain exemptions. The definition of
‘‘beneficial owner’’ proposed herein
requires that the person identified as a
beneficial owner be a natural person (as
opposed to another legal entity). A
financial institution must satisfy this
requirement by obtaining at the time a
new account is opened a standard
certification form (attached hereto as
Appendix A) directly from the
individual opening the new account on
behalf of the legal entity customer.
The term ‘‘beneficial owner’’ has been
defined differently in different contexts.
In the AML context, the Financial
Action Task Force (FATF), the global
standard setter for combating money
laundering and the financing of
terrorism and proliferation, defines the
beneficial owner as ‘‘the natural
person(s) who ultimately owns or
controls a customer and/or the person
on whose behalf a transaction is being
conducted. It also incorporates those
persons who exercise ultimate effective
control over a legal person or
arrangement.’’ That definition, initially
adopted in 2003, has been retained in
the revised FATF standards adopted in
2012.23 FinCEN has endeavored to
capture both the concept of ownership
and of effective control in its proposed
definition.
Financial institutions would be
required to verify the identity of
beneficial owners consistent with their
existing CIP practices. However,
FinCEN is not proposing to require that
financial institutions verify that the
natural persons identified on the form
are in fact the beneficial owners. In
other words, the requirement focuses on
verifying the identity of the beneficial
owners, but does not require the
verification of their status as beneficial
owners. This proposed requirement
states minimum standards. As will be
22 See,
e.g., 31 CFR 1010.220.
Standards on Combating Money
Laundering and the Financing of Terrorism &
Proliferation—The FATF Recommendations,’’
February 2012, General Glossary, at 109, available
at https://www.fatf-gafi.org/topics/fatf
recommendations/documents/international
standardsoncombatingmoneylaunderingandthe
financingofterrorismproliferation-thefat
frecommendations.html.
23 ‘‘International
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described in greater detail below,
FinCEN believes that the beneficial
ownership requirement is the only new
requirement imposed by this
rulemaking. As such, although
beneficial ownership identification is
but one of four requirements for a
comprehensive CDD scheme, the
proposed beneficial ownership rule is
being proposed as a separate provision
in FinCEN’s regulations; other
components of this rulemaking will be
addressed via amendments to existing
provisions, as described below.
Understanding the Nature and Purpose
of Customer Relationships/Monitoring
for Suspicious Activity
The NPRM also addresses the third
and fourth elements of CDD by
proposing amendments to the AML
program rule that harmonize these
elements of CDD with existing AML
obligations. The third element of CDD
requires financial institutions to
understand the nature and purpose of
customer relationships in order to
develop a customer risk profile. This is
a necessary and critical step in
complying with the existing
requirement to identify and report
suspicious transactions as required
under the BSA. The fourth element of
CDD requires financial institutions to
conduct ongoing monitoring. As with
the third element, ongoing monitoring is
a necessary part of maintaining and
updating customer information and
identifying and reporting suspicious
transactions as required under the BSA.
The third and fourth elements are
consistent with, and in fact necessary in
order to comply with, the existing
requirement to report suspicious
activity, as this obligation inherently
requires a financial institution to
understand expected customer activity
in order to develop a customer risk
profile and to monitor customer activity
so that it can identify transactions that
appear unusual or suspicious. As such,
the third and fourth elements are
intended to explicitly state already
existing expectations for the purpose of
codifying the baseline standard of due
diligence that is fundamental to an
effective AML program.
Because these two elements are
consistent with (and necessary in order
to comply with) existing BSA
requirements as adopted in regulations
or rules issued by federal functional
regulators and SROs, nothing in this
proposed rule should be interpreted in
a manner inconsistent with previous
guidance issued by FinCEN or guidance,
regulations, or supervisory expectations
of the appropriate federal functional
regulator or SRO with respect to these
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elements.24 For example, the Federal
Financial Institutions Examination
Council (FFIEC) 25 provided supervisory
expectations for examinations related to
CDD in the FFIEC BSA/AML
Examination Manual.26 FinCEN believes
that, aside from the new beneficial
ownership requirement, the other
proposed CDD elements are consistent
with the regulatory expectations of the
federal functional regulators and should
be interpreted accordingly.27 Of course,
as the CDD requirements proposed
herein state minimum standards,
existing or future guidance, regulations
or supervisory expectations may
provide for additional requirements or
steps that should be taken to mitigate
risk.
The sections below further describe
each of the three CDD elements
addressed in this rulemaking in detail
by providing a general overview of these
elements as discussed in the ANPRM, a
summary of the comments received, and
FinCEN’s specific proposal.
B. Identifying and Verifying the Identity
of Beneficial Owners of Legal Entity
Customers
With respect to this element of CDD,28
the ANPRM explored a categorical
requirement for financial institutions to
identify the beneficial owners of legal
entity customers. Unlike the other
elements of CDD, this element would
impose a new regulatory obligation on
financial institutions. Currently, certain
financial institutions are explicitly
24 While FinCEN reserves overall compliance and
enforcement authority with respect to all
regulations it issues under the under the BSA,
FinCEN has, by regulation, delegated authority to
the federal functional regulators to examine
institutions under their jurisdiction for compliance
with BSA regulations, including the AML program
requirements. See 31 CFR 1010.810.
25 The FFIEC is a formal interagency body
empowered to prescribe uniform principles,
standards, and report forms for the federal
examination of financial institutions by 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, and the Consumer
Financial Protection Bureau, and to make
recommendations to promote uniformity in the
supervision of financial institutions.
26 The Bank Secrecy Act Anti-Money Laundering
Examination Manual, issued by the Federal
Financial Institutions Examination Council (as
amended, the ‘‘BSA/AML Manual’’).
27 The future status of previous guidance related
to identifying beneficial owners of legal entity
customers, such as the Joint Guidance on Obtaining
and Retaining Beneficial Ownership Information,
FIN–2010–G001 (March 5, 2010), will be addressed
at the time of the issuance of a final rule.
28 For purposes of clarity, this NPRM references
the elements of CDD in a different order than was
used in the ANPRM; Identifying and Verifying the
Identity of the Beneficial Owners of Legal Entity
Customers is now listed before Understanding the
Nature and Purpose of Customer Relationships.
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required to take reasonable steps to
identify beneficial owners in only two
limited situations.29
i. Summary of Comments
1. Private Sector Comments
While a number of private sector
comments offered general support for a
reasonable expansion of the beneficial
ownership requirement and noted that
many financial institutions already
identify beneficial owners in certain
circumstances beyond those explicitly
required under the regulations
implementing Section 312 of the
PATRIOT Act, most expressed the
following primary criticisms and
concerns:
• The burden and costs associated
with a categorical (versus a risk-based)
obligation to collect beneficial
ownership information may outweigh
the benefits;
• An express beneficial ownership
requirement should be (at least in part)
risk-based to account for the wide
variety of financial institutions, account
types, products, and customers that
comprise the financial system, and to
avoid requiring financial institutions to
misallocate scarce compliance resources
away from high-risk customers;
• A categorical requirement should
include exemptions, including for those
customers currently exempt from
customer identification requirements;
• Any definition of ‘‘beneficial
owner’’ should be practical and easily
understood by financial institution
employees and customers;
• Financial institutions may be
unable to verify the status of a beneficial
owner absent an independent source of
beneficial ownership information, such
as a state registry; and
• FinCEN should consider the
compliance challenges associated with
specific account and relationship types,
such as intermediated relationships and
trusts.
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2. Law Enforcement Comments
Most of the comment letters
submitted by law enforcement agencies
and non-governmental organizations
29 Under FinCEN regulations implementing
Section 312 of the USA PATRIOT Act (Section 312),
covered financial institutions that offer private
banking accounts are required to take reasonable
steps to identify the nominal and beneficial owners
of such accounts, 31 CFR 1010.620(b)(1), and
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, 31 CFR 1010.610(b)(1)(iii)(A).
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also focused on the beneficial
ownership element of the CDD rule. In
general, these letters highlighted the
following benefits that such an
obligation would provide:
• A beneficial ownership rule would
require financial institutions to retain
more useful customer information,
which would significantly improve law
enforcement’s ability to pursue new
leads with respect to legal entities under
investigation;
• Beneficial ownership information
would improve financial institutions’
monitoring capabilities, and put them in
a position to file higher quality SARs;
and
• Obtaining beneficial ownership
information for U.S. legal entities would
enhance the United States’ ability to
respond to a foreign jurisdiction’s
request for investigative assistance. This
would assist in efforts to join with
foreign counterparts in global efforts to
disrupt organized crime and terrorism.
ii. Key Issues and FinCEN Proposals
As described above, Treasury has
engaged in extensive outreach with the
private sector and law enforcement
agencies to better understand and
address these issues. Such discussions
were essential in further developing the
initial proposals set forth in the ANPRM
to better conform with existing practices
and more comprehensively account for
regulatory burden and sector-specific
complexities. Key issues raised during
the comment period included: The
definition of ‘‘beneficial owner’’ and
‘‘legal entity customer’’; exemptions and
exclusions from the definition;
application of the requirement to trusts,
intermediated account relationships and
pooled investment vehicles; verification
of beneficial owners through a standard
certification; updating beneficial
ownership information; and reliance on
other financial institutions to satisfy the
requirement. Each of these issues is
described in further detail below.
1. Definition of ‘‘Beneficial Owner’’
The ANPRM explored a definition of
‘‘beneficial owner’’ with two
independent components, referred to as
‘‘prongs.’’ 30 The first prong was an
30 The ANPRM suggested the following definition
of ‘‘beneficial owner’’: (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
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ownership prong, the purpose of which
is to identify individuals with
substantial equity ownership interests.
The second prong was a control prong,
the purpose of which was to identify
individuals with actual managerial
control.
Many private sector commenters
stated that the definition discussed in
the ANPRM was conceptually confusing
and unworkable in practice. For
example, some commenters questioned
the feasibility of engaging in a
comparative analysis of every owner for
purposes of determining who ‘‘has at
least as great an equity interest in the
entity as any other individual.’’ A
similar type of comparative analysis
existed with respect to the control
prong. Other commenters were
uncertain as to whether an individual
must satisfy both the ownership prong
and the control prong to be considered
a beneficial owner, or whether each
prong was intended to be independently
applied to identify separate individuals.
Other challenges identified in the
comments included, among other
things: (i) Shifting ownership
percentages; (ii) managerial changes;
and (iii) the ability of financial
institution personnel and customers to
understand and respond to the
definition.
FinCEN agrees that the definition of
‘‘beneficial owner’’ must be clear to
employees and customers of financial
institutions. To that end, and in light of
the comments received, FinCEN
proposes the following definition of
‘‘beneficial owner’’ of a legal entity
customer, which, again, includes an
ownership prong and a control prong:
Ownership Prong:
1. Each individual, if any, who,
directly or indirectly, through any
contract, arrangement, understanding,
relationship or otherwise, owns 25
percent or more of the equity interests
of a legal entity customer; and
Control Prong:
2. An individual with significant
responsibility to control, manage, or
direct a legal entity customer, including
(A) An executive officer or senior
manager (e.g., a Chief Executive Officer,
Chief Financial Officer, Chief Operating
Officer, Managing Member, General
Partner, President, Vice President, or
Treasurer); or
(B) Any other individual who
regularly performs similar functions.
Each prong is intended to be an
independent test. Under the ownership
any other individual for managing or directing the
regular affairs of the entity.
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prong (i.e., clause (1)), a financial
institution must identify each
individual who owns 25 percent or
more of the equity interests.
Accordingly, a financial institution
would be required to identify no more
than four individuals under this prong,
and, if no one individual owns 25
percent or more of the equity interests,
then the financial institution may
identify no individuals under the
ownership prong. Under the control
prong (clause (2)), a financial institution
must identify one individual. In cases
where an individual is both a 25 percent
owner and meets the definition for
control, that same individual could be
identified as a beneficial owner under
both prongs.
FinCEN believes this definition
provides clarity and effectiveness. In
contrast to the definition suggested in
the ANPRM, this definition provides
greater flexibility to financial
institutions and customers in
responding to the control prong of the
definition by permitting the
identification in clause (ii) of any
individual with significant managerial
control, which could include a
President, Chief Executive Officer or
other senior executive, or any other
individual acting in a similar capacity.
Moreover, this definition does not
require a financial institution to
comparatively assess individuals to
determine who has the greatest equity
stake in the legal entity. The 25 percent
equity ownership threshold set forth in
the ownership prong of the definition
sets a clear standard that can be broadly
applied. At the same time, the 25
percent threshold retains the benefits of
identifying key individuals with a
substantial ownership interest in the
legal entity.
Commenters expressed concern that
identifying beneficial owners under the
ownership prong would be difficult for
legal entity customers that have
complex legal ownership structures.
FinCEN acknowledges that identifying
the individuals who own, directly or
indirectly, 25 percent or more of the
equity interests of a legal entity may not
be straightforward in every
circumstance. For instances where legal
entities are held by other legal entities,
determining ownership may require
several intermediate analytical steps.
FinCEN’s expectation is that a financial
institution will identify the natural
person or persons who exercise control
of a legal entity customer through a 25%
or greater ownership interest, regardless
of how many corporate parents or
holding companies removed the natural
person is from the legal entity customer.
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Consequently, the term ‘‘equity
interests’’ should be interpreted broadly
to apply to a variety of different legal
structures and ownership situations. In
short, ‘‘equity interests’’ refers to an
ownership interest in a business entity.
Examples of ‘‘equity interests’’ include
shares or stock in a corporation,
membership interests in a limited
liability company, and other similar
ownership interests in a legal entity.
FinCEN has deliberately avoided use of
more specific terms of art associated
with the exercise of control through
ownership, based on the preferences
expressed by many members of
industry, who have urged FinCEN to
avoid creating a definition with
complex legal terms that front-line
employees at financial institutions, and
the individuals opening accounts on
behalf of legal entity customers, might
have difficulty understanding and
applying.
Moreover, the phrase ‘‘directly or
indirectly’’ in the ownership prong of
the definition is intended to make clear
that where a legal entity customer is
owned by (or controlled through) one or
more other legal entities, the proposed
rule requires customers to look through
those other legal entities to determine
which natural persons own 25 percent
or more of the equity interests of the
legal entity customer. FinCEN
recognizes that identifying such
individuals may be challenging where
the legal entity customer has a complex
legal structure with multiple levels of
ownership, but FinCEN does not expect
financial institutions—or customers—to
undergo complex and exhaustive
analysis to determine with legal
certainty whether an individual is a
beneficial owner under the definition.
Instead, FinCEN expects financial
institutions to be able to rely generally
on the representations of the customer
when answering the financial
institution’s questions about the
individual persons behind the legal
entity, including whether someone
identified as a beneficial owner is in fact
a beneficial owner under this definition.
FinCEN believes that this approach
provides greater flexibility to financial
institutions and customers in complying
with the proposed beneficial ownership
requirement. In addition, by using the
term ‘‘directly or indirectly,’’ FinCEN
does not intend for financial institutions
to assess under this prong whether
individuals are acting in concert with
one another to collectively own 25
percent of more of the legal entity where
each of them has an independent
contributing stake; FinCEN is
concerned, however, with the use of de
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facto or de jure nominees to give a
single individual an effective ownership
stake of 25 percent or more. In this
instance as well, however, FinCEN
expects financial institutions to be able
to rely generally on the representations
of the customer when answering the
financial institution’s questions about
the individual persons behind the legal
entity.
FinCEN has learned through its
outreach that some financial institutions
may already identify beneficial owners
using a lower ownership threshold,
such as 10 percent. FinCEN reiterates
that the proposed CDD requirements,
including the beneficial ownership
requirement, are intended to set forth
minimum due diligence expectations.
Accordingly, a financial institution may
determine, based on its own assessment
of risk, that a lower percentage
threshold, such as 10 percent, is
warranted. A financial institution may
also identify other individuals that
technically fall outside the proposed
definition of ‘‘beneficial owner,’’ but
may be relevant to mitigate risk. For
example, as noted above, a financial
institution may be aware of a situation
in which multiple individuals with
independent holdings may act in
concert with each other to structure
their ownership interest to avoid the 25
percent threshold. A financial
institution may also be aware of an
individual who effectively controls a
legal entity customer through a
substantial debt position. While these
individuals do not fall within the
proposed definition of ‘‘beneficial
owner,’’ the proposed rule is not
intended to preclude a financial
institution from identifying them, and
verifying their identity, when it deems
it appropriate to do so.
Commenters also sought clarity as to
how this beneficial ownership
requirement would affect the
application of FinCEN regulations
implementing Section 312 of the USA
PATRIOT Act. The proposed
requirement would apply to all legal
entity customers, including legal
entities that open a foreign private
banking account that meets the
definition in § 1010.605(m). However,
the new requirements would not apply
to the beneficial owner of funds or
assets in a payable-through account of
the type described in
§ 1010.610(b)(1)(iii), since the owner of
such funds or assets does not have an
account relationship with the covered
financial institution. In such instances,
compliance with the information
requirements included in
§ 1010.610(b)(1)(iii) will suffice, and the
particulars of this new requirement,
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such as use of a certification form with
respect to the beneficial owner of funds
or assets in a payable-through account,
would not apply.
2. Definition of Legal Entity Customer
While the ANPRM sought comment
on whether certain legal entity
customers should be exempt from the
beneficial ownership requirement, it did
not include a discussion of the scope of
the definition of legal entity customer,
which is also relevant to the notion of
the exemptions. FinCEN proposes to
define legal entity customers to include
corporations, limited liability
companies, partnerships or other similar
business entities (whether formed under
the laws of a state or of the United
States or a foreign jurisdiction), that
open a new account after the
implementing date of the regulation.
FinCEN would interpret this to include
all entities that are formed by a filing
with the Secretary of State (or similar
office), as well as general partnerships
and unincorporated nonprofit
associations. It does not include trusts
other than those that might be created
through a filing with a state (e.g.,
statutory business trusts).
3. Exemptions and Exclusion From the
Beneficial Ownership Requirement
Many commenters strongly
recommended that, at a minimum, any
customer exempt from identification
under the CIP rules should also be
exempt from the beneficial ownership
requirement. The commenters noted
that a contrary approach would
effectively nullify the CIP exemption
since a financial institution would be
unable to identify a beneficial owner
without first identifying the customer.
Many commenters recommended that
other customers should also be exempt
if they are well-regulated or otherwise
present a low money laundering risk.
The proposed rule incorporates a
number of these suggestions by
exempting all types of entities that are
exempt from CIP, as well as allowing for
other specific exemptions.
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a. Customers Exempt From CIP
FinCEN proposes to exempt from the
beneficial ownership requirement those
types of entities that are exempt from
the customer identification
requirements under the CIP rules.31
31 Although we propose to include the types of
entities exempted from the CIP requirements, the
exemption proposed for this rule would not cover
all the entities included in the exemption from the
CIP requirements. This is because FinCEN does not
propose to include an exemption for legal entities
with existing accounts that open new accounts after
the implementation date of the rule. The inclusion
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Those types of entities include, but are
not limited to, financial institutions
regulated by a federal functional
regulator (i.e., federally regulated banks,
brokers or dealers in securities, mutual
funds, futures commission merchants
and introducing brokers in
commodities), publicly held companies
traded on certain U.S. stock exchanges,
domestic government agencies and
instrumentalities and certain legal
entities that exercise governmental
authority.32 These exemptions are
incorporated into the proposed
beneficial ownership requirement by
excluding these entities from the
definition of ‘‘legal entity customer,’’
which corresponds to how these entities
are exempted from CIP (i.e., by
excluding them from the definition of
‘‘customer’’).33 Consequently, the
definition of ‘‘legal entity customer’’ for
purposes of the beneficial ownership
requirement excludes all the same types
of entities as the definition of
‘‘customer’’ for purposes of the CIP
rules, including exclusions based on
guidance issued by FinCEN and the
federal functional regulators with regard
to the applicability of the CIP rules. For
example, where previous guidance has
clarified who a ‘‘customer’’ is in a
particular relationship, that same
analysis would generally apply in
determining whether an entity is a
‘‘legal entity customer’’ for purposes of
the proposed beneficial ownership
requirement.34
of such an exemption would parallel the exemption
in the CIP requirements per the definition of
‘‘customer.’’ See, e.g. 31 CFR 1020.100(c)(2)(iii) and
1023.100(d)(2)(iii). However, FinCEN believes that
such an approach would not serve the purposes of
the present rule. In situations where a legal entity
is opening an account in addition to a previously
existing account, the new requirement will apply.
If the pre-existing account pre-dates the
implementation date of the rule, the financial
institution will need to obtain the certification
form. If the pre-existing account was established
after the implementation date, it may be reasonable
for a financial institution to rely on the certification
obtained when opening the first account in some
circumstances. In other circumstances, collection of
an additional certificate may be necessary. The
likelihood of change in beneficial ownership since
the time of the previous account opening would be
a key factor in a financial institution’s approach to
the requirement.
32 See, e.g., 31 CFR 1020.100(c)(2)(i).
33 See, e.g., 31 CFR 1020.100(c)(2)(ii).
34 See, e.g., FinCEN Guidance, FIN–2007–G001,
Application of the Customer Identification Program
Rule to Futures Commission Merchants Operating
as Executing and Clearing Brokers in Give-Up
Arrangements (April 20, 2007), available at https://
www.fincen.gov/statutes_regs/guidance/html/cftc_
fincen_guidance.html; FinCEN Guidance, FIN–
2006–G004, Frequently Asked Question Regarding
Customer Identification Programs for Futures
Commission Merchants and Introducing Brokers (31
CFR 103.123 (February 14, 2006)), available at
https://www.fincen.gov/statutes_regs/guidance/
html/futures_omnibus_account_qa_final.html;
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b. Additional Exemptions for Certain
Legal Entity Customers
In addition to incorporating
exemptions applicable to the CIP rules,
and consistent with various suggestions
provided in the comment letters,
FinCEN proposes that the following
entities also be exempt from the
beneficial ownership requirement when
opening a new account because their
beneficial ownership information is
generally available from other credible
sources:
• An issuer of a class of securities
registered under Section 12 of the
Securities Exchange Act of 1934 or that
is required to file reports under Section
15(d) of that Act;
• Any majority-owned domestic
subsidiary of any entity whose
securities are listed on a U.S. stock
exchange;
• An investment company, as defined
in Section 3 of the Investment Company
Act of 1940, that is registered with the
SEC under that Act;
• An investment adviser, as defined
in Section 202(a)(11) of the Investment
Advisers Act of 1940, that is registered
with the SEC under that Act;
• An exchange or clearing agency, as
defined in Section 3 of the Securities
Exchange Act of 1934, that is registered
under Section 6 or 17A of that Act;
• Any other entity registered with the
Securities and Exchange Commission
under the Securities and Exchange Act
of 1934.
• A registered entity, commodity pool
operator, commodity trading advisor,
retail foreign exchange dealer, swap
dealer, or major swap participant, each
as defined in section 1a of the
Commodity Exchange Act, that is
registered with the CFTC;
• A public accounting firm registered
under section 102 of the Sarbanes-Oxley
Act; and
• A charity or nonprofit entity that is
described in Sections 501(c), 527, or
4947(a)(1) of the Internal Revenue Code
of 1986, that has not been denied tax
exempt status, and that is required to
and has filed the most recently required
annual information return with the
Internal Revenue Service.
FinCEN notes that exempting these
entities from the beneficial ownership
Interagency Interpretive Guidance on Customer
Identification Program Requirements under Section
326 of the USA PATRIOT Act at Question 9 (April
28, 2005), available at https://www.fincen.gov/
statutes_regs/guidance/html/faqsfinalciprule.html;
Guidance from the Staffs of the Department of the
Treasury and the U.S. Securities and Exchange
Commission, Question and Answer Regarding the
Broker-Dealer Customer Identification Program Rule
(31 CFR 103.122) (October 1, 2003), available at
https://www.fincen.gov/statutes_regs/guidance/
html/20031001.html.
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requirement does not necessarily imply
that they all present a low risk of money
laundering or terrorist financing. For
example, a charity may present a high
risk of terrorist financing and therefore
require additional due diligence.
However, charities are exempt because
the legal structure of a charity as a tax
exempt organization does not create a
beneficial ownership interest in the
sense discussed above. Rather the
primary interests created by a charitable
structure include donors, board
oversight and management, employees,
and beneficiaries. Under such a
structure, board oversight is akin to
ownership, and management is akin to
control. In order to obtain and maintain
such a legal structure under the tax code
the charity must report and annually
update its donors, board and
management to the Internal Revenue
Service. Such reports must be publicly
available.35
c. Existing and New Customers
FinCEN also sought comment on
whether and how a beneficial
ownership requirement should apply to
customers of financial institutions
where such relationships have been
established prior to the implementation
date of this rule. Financial institutions
noted that a requirement to ‘‘look back’’
to obtain beneficial ownership
information from existing customers
would be a substantial burden. FinCEN
proposes that the beneficial ownership
requirement will apply only with
respect to legal entity customers that
open new accounts going forward from
the date of implementation. Thus, the
definition of ‘‘legal entity customer’’ is
limited to legal entities that open a new
account after the implementation date.
Although FinCEN is not proposing a
prescriptive rule requiring financial
institutions to look back and obtain
beneficial ownership information for
pre-existing accounts, we are aware that,
as a matter of practice, financial
institutions may also consider
identifying beneficial owners of existing
customers when updating customer
information on a risk basis, as discussed
more fully below.36
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4. Trusts
Several comments described potential
challenges in applying a beneficial
35 See Public Disclosure and Availability of
Exempt Organizations Returns and Applications:
Documents Subject to Public Disclosure, available
at https://www.irs.gov/Charities-&-Non-Profits/
Public-Disclosure-and-Availability-of-ExemptOrganizations-Returns-and-Applications:Documents-Subject-to-Public-Disclosure.
36 See the discussion in Section III.d of this
notice, entitled ‘‘Ongoing Monitoring.’’
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ownership requirement to a customer
that is a trust. There are many types of
trusts. While a small proportion may fall
within the scope of the proposed
definition of legal entity customer (e.g.,
statutory trusts), most will not. Unlike
the legal entity customers that are
subject to the proposed beneficial
ownership requirement (corporations,
limited liability companies, etc.), a trust
is generally a contractual arrangement
between the person who provides the
funds and specifies the trust terms (i.e.,
the settlor or grantor) and the person
with control over the funds (i.e., the
trustee) for the benefit of those who
benefit from the trust (i.e., the
beneficiaries). This arrangement does
not generally require the approval by or
other action of a state to become
effective. FinCEN notes that in order to
engage in the business of acting as a
fiduciary it is necessary for a trust
company to be federally- or statechartered. As the comments noted,
identifying a ‘‘beneficial owner’’ among
the parties to such an arrangement for
AML purposes, based on the proposed
definition of beneficial owner, would
not be practical. At this point, FinCEN
is choosing not to impose this
requirement. In this context we note
that, although the trust is defined in the
CIP rules as the financial institution’s
customer, the signatory on the account
will necessarily be the trustee, who is
required by law to control the trust
assets (including financial institution
accounts) and to know the beneficiaries
(by name or class) and act in their best
interest. Therefore, in the context of an
investigation, law enforcement would
be able to obtain from the financial
institution a point of contact required by
law to have information about relevant
individuals associated with the trust.
The decision not to propose specific
requirements in the context of trusts
does not mean, however, that FinCEN
necessarily considers trusts to pose a
reduced money laundering or terrorist
financing risk relative to the business
entities included within the definition
of ‘‘legal entity customer.’’ Through its
outreach, FinCEN learned that, in
addition to identifying and verifying the
identity of the trust for purposes of CIP,
financial institutions generally also
identify and verify the identity of the
trustee, who would necessarily have to
open the account for the trust. In
addition, guidance for banks provides
that ‘‘in certain circumstances involving
revocable trusts, the bank may need to
gather information about the settlor,
grantor, trustee, or other persons with
the authority to direct the trustee, and
who thus have authority or control over
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the account, in order to establish the
true identity of the customer.’’ 37 In
other words, given the variety of
possible trust arrangements and the
number of persons who may have roles
in them, financial institutions are
already taking a risk-based approach to
collecting information with respect to
various persons for the purpose of
knowing their customer. FinCEN
expects financial institutions to
continue these practices as part of their
overall efforts to safeguard against
money laundering and terrorist
financing, and will consider additional
rulemaking or guidance to strengthen or
clarify this expectation.
5. Intermediated Account Relationships
and Pooled Investment Vehicles
The ANPRM sought comment on
whether and how a beneficial
ownership requirement should be
applied to accounts held by
intermediaries on behalf of third parties.
An intermediary generally refers to a
customer that maintains an account for
the primary benefit of others, such as
the intermediary’s own underlying
clients. For example, certain
correspondent banking relationships
may involve intermediation whereby
the respondent bank of a correspondent
bank acts on behalf of its own clients.
Intermediation is also very common in
the securities and derivatives industries.
For example, a broker-dealer may
establish omnibus accounts for a
financial intermediary (such as an
investment adviser) that, in turn,
establishes sub-accounts for the
intermediary’s clients, whose
information may or may not be
disclosed to the broker-dealer. An issue
raised in the comments, especially those
from the securities and derivatives
industries, is whether a financial
institution would be required to identify
the intermediary’s own underlying
clients or their beneficial owners. This
issue is distinct from whether a
financial institution must identify the
beneficial owners of the intermediary
(i.e., the direct customer), which would
be the case unless the intermediary is
exempt under one of the specific
exemptions described above.
Commenters cautioned that a
requirement to identify an
intermediary’s underlying clients or
their beneficial owners could have
significant detrimental consequences to
the efficiency of the U.S. financial
markets, because it would require
financial institutions to modify
longstanding practices. They suggested
that, consistent with existing CIP
37 FFIEC
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guidance related to certain
intermediated relationships, a beneficial
ownership requirement should apply
only with respect to a financial
institution’s immediate customer, the
intermediary, and not the intermediary’s
underlying clients.
FinCEN is concerned about the illicit
finance risks posed by underlying
clients of intermediary customers
because of the lack of insight a financial
institution has into those clients and
their activities. However, FinCEN
recognizes that this risk may be more
effectively managed through other
means. These would include proper
customer due diligence conducted by
financial institutions on their direct
customers who serve as intermediaries,
and appropriate regulation of the
intermediaries themselves.38 Therefore,
for purposes of the beneficial ownership
requirement, if an intermediary is the
customer, and the financial institution
has no CIP obligation with respect to the
intermediary’s underlying clients
pursuant to existing guidance, a
financial institution should treat the
intermediary, and not the intermediary’s
underlying clients, as its legal entity
customer.
Existing FinCEN guidance related to
CIP practices is applicable in
determining a financial institution’s
beneficial ownership obligations in
these circumstances. For example, a
broker-dealer that appropriately
maintains an omnibus account for an
intermediary, under the conditions set
forth in the 2003 Omnibus Guidance for
Broker-Dealers,39 may treat the
intermediary, and not the underlying
clients, as its legal entity customer for
purposes of the beneficial ownership
requirement.40 Pursuant to a clearing
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38 FinCEN
recognizes that some such
intermediary entities are already subject to BSA
requirements, while others or not. FinCEN
continues to consider which additional entities may
need to be brought within the scope of the FinCEN’s
regulations.
39 Guidance from the Staffs of the Department of
the Treasury and the U.S. Securities and Exchange
Commission, Question and Answer Regarding the
Broker-Dealer Customer Identification Program
Rule (31 CFR 103.122) (October 1, 2003), available
at https://www.fincen.gov/statutes_regs/guidance/
html/20031001.html.
40 See also Guidance from the Staffs of the
Department of the Treasury and the U.S.
Commodity Futures Trading Commission,
Frequently Asked Question regarding Customer
Identification Programs for Futures Commission
Merchants and Introducing Brokers (31 CFR
103.123), available at https://www.fincen.gov/
statutes_regs/guidance/html/futures_omnibus_
account_qa_final.html; FinCEN Guidance, FIN–
2006–G009, Application of the Regulations
Requiring Special Due Diligence Programs for
Certain Foreign Accounts to the Securities and
Futures Industries (May 10, 2006), available at
https://www.fincen.gov/statutes_regs/guidance/
html/312securities_futures_guidance.html. FinCEN
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agreement that allocates functions in the
manner described in the 2008 NoAction Position Respecting BrokerDealers Operating Under Fully
Disclosed Clearing Agreements
According to Certain Functional
Allocations,41 only the introducing firm
would be obligated to obtain beneficial
ownership information of the customers
introduced to the clearing firm.
Similarly, based on guidance issued to
the futures industry in the context of
give-up arrangements, because the
clearing broker, and not the executing
broker, has a formal relationship with
its customer, only the clearing broker
would be responsible for obtaining
beneficial ownership information
regarding the underlying customer.42
Notwithstanding the foregoing,
consistent with other elements of CDD,
a financial institution’s AML program
should contain risk-based policies,
procedures, and controls for assessing
the money laundering risk posed by
underlying clients of a financial
intermediary, for monitoring and
mitigating that risk, and for detecting
and reporting suspicious activity. While
a financial intermediary’s underlying
clients may not be subject to the
beneficial ownership requirement, a
financial institution would nonetheless
be obligated to monitor for and report
suspicious activity associated with
intermediated accounts, including
activity related to underlying clients.
FinCEN understands that this is
consistent with current industry
practice. As multiple comments noted,
securities and derivatives firms
generally monitor activity in
intermediated accounts and follow up
on an event-driven basis, with such
follow-up potentially including asking
questions about the underlying owners
of assets after detection of possible
suspicious activity.43 Such practice is
also consistent with the third and fourth
elements of the CDD requirements
also notes that in such circumstances, the
intermediary itself may be exempt from the
beneficial ownership requirement if it satisfies one
of the specific exemptions.
41 FinCEN Guidance, FIN–2008–G002, Customer
Identification Program Rule No-Action Position
Respecting Broker-Dealers Operating Under Fully
Disclosed Clearing Agreements According to
Certain Functional Allocations (March 4, 2008),
available at https://www.fincen.gov/statutes_regs/
guidance/html/fin-2008-g002.html.
42 FinCEN Guidance, FIN–2007–G001,
Application of the Customer Identification Program
Rule to Future Commission Merchants Operating as
Executing and Clearing Brokers in Give-Up
Arrangements (April 20, 2007), available at https://
www.fincen.gov/statutes_regs/guidance/html/cftc_
fincen_guidance.html.
43 See, e.g., letter from SIFMA dated June 8, 2012
at 7, available at https://www.sifma.org/issues/
item.aspx?id=8589938990.
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described below. FinCEN thus expects
financial institutions to continue
engaging in this practice.
Several comments, particularly from
the securities and futures industries,
also highlighted the potential challenges
associated with identifying beneficial
owners of non-exempt pooled
investment vehicles, such as hedge
funds, whose ownership structure may
continuously fluctuate.44 The comments
noted that identifying beneficial owners
of these entities based on a percentage
ownership threshold may create
unreasonable operational challenges for
the purpose of obtaining information
that may only be accurate for a limited
period of time.
FinCEN is considering whether
nonexempt pooled investment vehicles
that are operated or advised by financial
institutions that are proposed to be
exempt, should also be exempt from this
requirement. Additionally, in the event
that such institutions are not exempt,
FinCEN is considering whether covered
financial institutions should only be
required to identify beneficial owners of
such non-exempt pooled investment
vehicles 45 under the control prong of
the ‘‘beneficial owner’’ definition, as
opposed to both the ownership prong
and control prong, in order to alleviate
the operational and logistical difficulties
that would be associated with
complying with the ownership prong.
FinCEN is also considering whether
such an approach, if adopted, may best
be addressed through inclusion of such
vehicles within the scope of the rule
with subsequent guidance or a specific
exemption or exception from the
application of the ownership prong of
the requirement. FinCEN believes this
44 For purposes of this discussion, a ‘‘non-exempt
pooled investment vehicle’’ means (i) any company
that would be an investment company as defined
in Section 3(a) of the Investment Company Act of
1940, but for the exclusion provided by either
Section 3(c)(1) or Section 3(c)(7) of that Act; or (ii)
any commodity pool under section 1a(10) of the
Commodity Exchange Act (CEA) that is operated by
a commodity pool operator registered with the
CFTC under Section 4m of the CEA.
45 See, e.g., Securities Industry and Financial
Markets Association (SIFMA) Anti-Money
Laundering and Financial Crimes Committee, AntiMoney Laundering Suggested Due Diligence
Practices for Hedge Funds (2009), available at
https://www.sifma.org/uploadedfiles/issues/legal,_
compliance_and_administration/anti-money_
laundering_compliance/issues_antimoney%20laundering_suggested%20due%20
diligence%20practices%20for%20hedge%20
funds.pdf; Securities Industry Association AntiMoney Laundering Committee, Suggested Practices
for Customer Identification Programs, § 3.9,
available at https://www.sifma.org/uploadedfiles/
issues/legal,_compliance_and_administration/antimoney_laundering_compliance/issues_antimoney%20laundering_suggested%20practices
%20for%20customer%20identification
%20programs.pdf.
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approach may sufficiently balance
benefit with burden given the unique
ownership structure of pooled
investment vehicles.
6. Verification of Beneficial Owners
a. Standard Certification Form
At the public hearings, participants
discussed the efficacy of having a
certification form that would
standardize collection of beneficial
ownership information and permit
reliance on the information provided.
FinCEN believes that providing such a
form would promote consistent
practices and regulatory expectations,
significantly reduce compliance burden,
and preserve the benefits of obtaining
the information. A standard form would
also promote a uniform customer
experience across U.S. financial sectors.
This was of particular concern to
representatives from financial
institutions with practices that exceed
existing regulatory requirements, which
noted that they often lose customers to
institutions with less rigorous
standards.
Accordingly, FinCEN proposes that a
financial institution must satisfy the
requirement to identify beneficial
owners by obtaining, at the time a new
account is opened, the standard
certification form attached hereto as
Appendix A. To promote consistent
customer expectations and
understanding, the form in Appendix A
plainly describes the beneficial
ownership requirement and the
information sought from the individual
opening the account on behalf of the
legal entity customer. To facilitate
reliance by financial institutions, the
form also requires the individual
opening the account on behalf of the
legal entity customer to certify that the
information provided on the form is true
and accurate to the best of his or her
knowledge. This certification is also
helpful for law enforcement purposes in
demonstrating unlawful intent in the
event the individual completing the
form knowingly provides false
information.
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b. Verification of Beneficial Owners
The ANPRM sought comment on
whether and how financial institutions
could verify beneficial ownership
information provided by customers. As
described in the ANPRM, verification
could have two meanings. One meaning
would require verifying the identity of
an individual identified as a beneficial
owner (i.e., to verify the existence of the
identified beneficial owner by
collecting, for example, a driver’s
license or other similar identification
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document). The second possible
meaning would require financial
institutions to verify that an individual
identified as a beneficial owner is in fact
a beneficial owner (i.e., to verify the
status of an individual as a beneficial
owner).
Many comments cautioned that a
requirement to verify the status of a
beneficial owner would be prohibitively
costly and impracticable in many
circumstances. They recommended that
financial institutions be permitted to
rely on information provided by the
customer. With respect to verifying the
identity of a beneficial owner,
participants at the public hearings
generally acknowledged that this would
be a manageable task so long as the
verification procedures are comparable
to current CIP requirements. Many
participants further agreed that
verification of identity would
substantially improve the credibility of
the beneficial ownership information
collected. In addition, law enforcement
has indicated that verification of
identity would also facilitate
investigations, even if the verified
individual is not the true beneficial
owner because of the ability to locate
and investigate that person.
In light of these considerations,
FinCEN is not proposing to require that
financial institutions verify the status of
a beneficial owner. Financial
institutions may rely on the beneficial
ownership information provided by the
customer on the standard certification
form. FinCEN believes this addresses a
key concern raised by the private sector
about the burden and costs associated
with a beneficial ownership
requirement.
For verifying the identity of a
beneficial owner, FinCEN proposes that
financial institutions verify the identity
using existing risk-based CIP practices.
As such, the proposed rule provides that
a financial institution must implement
risk-based procedures to verify the
identity of each beneficial owner
according to procedures that comply
with the CIP requirements to verify the
identity of customers that are natural
persons. Therefore, a financial
institution may verify the identity of a
beneficial owner using documentary or
non-documentary methods, as it deems
appropriate under its procedures for
verifying the identity of customers that
are natural persons. These procedures
should enable the financial institution
to form a reasonable belief that it knows
the true identity of the beneficial owner
of each legal entity customer. A
financial institution must also include
procedures for responding to
circumstances in which it cannot form
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a reasonable belief that it knows the true
identity of the beneficial owner, as
described under the CIP rules. Because
these practices are already wellestablished and understood at covered
financial institutions, FinCEN expects
that these institutions will leverage
existing compliance procedures.
7. Updating Beneficial Ownership
Information
Many financial institutions sought
clarity as to whether they would be
required to update or refresh
periodically the beneficial ownership
information obtained under this rule.
FinCEN is not proposing such a
requirement but notes that, as a general
matter, a financial institution should
keep CDD information, including
beneficial ownership information, as
current as possible and update as
appropriate on a risk-basis. For
example, a financial institution may
determine that updating beneficial
ownership information is appropriate
after a customer has been identified as
engaging in suspicious activity or
exhibits other red flags, which FinCEN
believes is generally consistent with
existing practice for updating other
customer information.
Factors that may be relevant in
considering whether and when to
update beneficial ownership
information could include the type of
business engaged in by the legal entity
customer, changes in business
operations or management of which the
financial institution becomes aware,
indications of possible misuse of a shell
company in the account history, or
changes in address or signatories on the
account. As some financial institutions
currently update CIP information at
periodic intervals based on risk or when
updating other customer information as
part of routine account maintenance,
financial institutions may consider
updating beneficial ownership
information on a similar basis. Each
financial institution’s policies and
procedures should be based on its
assessment of risk and tailored to,
among other things, its customer base
and products and services offered. In
addition, financial institutions should
update beneficial ownership
information in connection with ongoing
monitoring, as described below in the
Section III.d ‘‘Ongoing Monitoring.’’
8. Reliance
Some comments requested that
FinCEN extend the reliance provisions
in the CIP rules to the beneficial
ownership requirement. In general, a
financial institution may rely upon
another financial institution to conduct
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CIP with respect to shared customers,
provided that: (i) Such reliance is
reasonable; (ii) the other financial
institution is subject to an AML program
rule and is regulated by a federal
functional regulator, and (iii) the other
financial institution enters into a
contract and provides annual
certifications regarding its AML
program and CIP requirements.46
Similarly, FinCEN proposes to permit
such reliance for purposes of complying
with the beneficial ownership
requirement, including obtaining the
certification form required under the
proposed rule. Existing guidance with
respect to whether a financial
institution can rely on another financial
institution to conduct CIP with respect
to shared customers also would apply
for the purposes of complying with the
beneficial ownership requirement.47 As
was the case with the CIP rules, a
covered financial institution will not be
held responsible for the failure of the
relied-upon financial institution to
adequately fulfill the covered financial
institution’s beneficial ownership
responsibilities, provided it can
establish that its reliance was reasonable
and that it has obtained the requisite
contracts and certifications.
C. Understanding the Nature and
Purpose of Customer Relationships
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The third element of CDD requires
financial institutions to understand the
nature and purpose of customer
relationships in order to develop a
customer risk profile.48 Many comments
questioned whether such information is
helpful for detecting suspicious activity,
and expressed concern that financial
institutions would be required to
demonstrate compliance by formalizing
this element in their policies and
procedures. They suggest that it should
not become a required question that
must be asked of each customer during
the account opening process, so long as
it is understood by the financial
institution.
FinCEN understands that it is
industry practice to gain an
understanding of a customer in order to
assess the risk associated with that
customer to help inform when the
customer’s activity might be considered
‘‘suspicious.’’ FinCEN does not intend
46 See,
e.g., 31 CFR 1020.220(a)(6).
e.g., CFTC letter No. 05–05 (March 14,
2005) (FCMs and IBs are permitted to rely on CTAs
to conduct CIP in certain circumstances).
48 The ANPRM characterized this third element as
‘‘understand[ing] 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.’’ 77
FR 13050.
47 See,
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for this element to necessarily require
modifications to existing practice or
customer onboarding procedures, and
does not expect financial institutions to
ask each customer for a statement as to
the nature and purpose of the
relationship or to collect information
not already collected pursuant to
existing requirements. Rather, the
amendment to the AML program rule
that incorporates this element is
intended to clarify existing expectations
for financial institutions to understand
the relationship for purposes of
identifying transactions in which the
customer would not normally be
expected to engage. Identifying such
transactions is a critical and necessary
aspect of complying with the existing
requirement to report suspicious
activity and maintain an effective AML
program.
FinCEN intends for this amendment
to be consistent with existing rules and
related guidance. For example, the
requirement for financial institutions to
report suspicious activity requires that
they file a report on a transaction that,
among other things, has ‘‘no business or
apparent lawful purpose or is not the
sort in which the particular customer
would normally be expected to
engage.’’ 49 In the context of depository
institutions, it is well understood that
‘‘a bank should obtain information at
account opening sufficient to develop
an understanding of normal and
expected activity for the customer’s
occupation or business operations.’’ 50
This is also true in other contexts.51
FinCEN intends for this proposed CDD
element to be consistent with these
types of expectations.
FinCEN believes that in some
circumstances an understanding of the
nature and purpose of a customer
relationship can also be developed by
inherent or self-evident information
about the product or customer type, or
basic information about the customer.
FinCEN recognizes that inherent
information about a customer
relationship, such as the type of
customer, the type of account opened,
or the service or product offered, may be
49 31 CFR 1020.320(a)(2)(iii); see also
§§ 1023.320(a)(2)(iii), 1024.320(a)(2)(iii), and
1026.320(a)(2)(iii).
50 BSA/AML Manual at *64.
51 See, e.g., CFTC Regulation 1.37(a)(1) and NFA
Compliance Rule 2–30 which require futures
commission merchants and introducing brokers to
obtain certain information from individuals and
other unsophisticated customers during the
onboarding process and to verify annually whether
the information continues to be materially accurate.
Although these requirements are intended to
address the inherent risks of trading futures and the
need for adequate risk disclosure, this information
could be relevant for understanding the nature and
purpose of such customer relationships.
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sufficient to understand the nature and
purpose of the relationship. Obtaining
basic information about the customer,
such as annual income, net worth,
domicile, or principal occupation or
business, may similarly be relevant
depending on the facts and
circumstances.52 In addition,
longstanding customers of a financial
institution may have a robust history of
activity that could also be highly
relevant in understanding future
expected activity for purposes of
detecting aberrations. At the same time,
FinCEN recognizes that certain financial
institutions, such as securities and
futures firms, often maintain accounts
in which expected activity can vary
significantly over time based on
numerous factors, and that prior
transaction history or information
obtained from the client upon account
opening may not be a reliable indicator
of future conduct. Each case depends on
the facts and circumstances unique to
the financial institution and its
customers.
Accordingly, FinCEN believes that
financial institutions should already be
satisfying this element by complying
with the requirement to report
suspicious activity, as this element is an
essential step in the process of
identifying such activity. In addition,
because this is a necessary step to
identifying and reporting suspicious
activities, which obligation applies to
all ‘‘transactions . . . conducted or
attempted by, at or through’’ the covered
financial institution, its scope should
not be limited to ‘‘customers’’ for
purposes of the CIP rules, but rather
should extend more broadly to
encompass all accounts established by
the institution.53
D. Ongoing Monitoring
The fourth element of CDD requires
financial institutions to conduct
ongoing monitoring for the purpose of
maintaining and updating customer
information and identifying and
reporting suspicious activity.54 As with
52 The BSA/AML Manual also notes that an
understanding of normal and expected activity for
the customer’s occupation or business operations
may be ‘‘based on account type or customer
classification.’’ BSA/AML Manual at 64.
53 See, e.g., 31 CFR 1020.100(a) and (c), which
note that the definitions, and exemptions, for
account and customer apply in the context of CIP.
Within the context of CDD, ‘‘customer relationship’’
is a broader term, not subject to the exemptions
referenced in definitions used for CIP.
54 By comparison, the ANPRM suggested that
‘‘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
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the third element, FinCEN intends for
this element to be consistent with a
financial institution’s current suspicious
activity reporting 55 and AML program
requirements. A financial institution
required to have an AML program must,
among other things, develop internal
policies, procedures and controls to
assure compliance with the BSA,56
including the SAR requirements. As a
practical matter, compliance with these
obligations implicitly requires financial
institutions to conduct ongoing
monitoring. The BSA/AML Manual
notes that the internal controls of a
bank’s AML Program should ‘‘provide
sufficient controls and monitoring
systems for timely detection and
reporting of suspicious activity.’’ 57
Similarly, under rules promulgated by
the Financial Industry Regulatory
Authority (FINRA), a broker-dealer’s
AML program shall include policies and
procedures that can be reasonably
expected to detect and cause the
reporting of transactions required under
31 U.S.C. 5318(g) and the implementing
regulations thereunder.58 Codifying
these supervisory and regulatory
expectations as explicit requirements
within FinCEN’s AML program
requirements is necessary to make clear
that the minimum standards of CDD
include ongoing monitoring of all
transactions by, at, or through the
financial institution.
Some commenters expressed
confusion as to whether this fourth
element would impose a categorical
requirement to periodically update, or
‘‘refresh,’’ customer information that
was obtained during the account
opening process, including beneficial
ownership information. This element
does not impose such a categorical
requirement. Rather, the requirement
additional CDD as appropriate based on such
monitoring for the purpose of the identification and
reporting of suspicious activity.’’ 77 FR 13053.
55 Under the suspicious activity reporting rules, a
financial institution must report, among other
things, 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.
31 CFR 1020.320(a)(2)(i)–(iii); 31 CFR
1023.320(a)(2)(i)–(iii); 31 CFR 1024.320(a)(2)(i)–(iii);
31 CFR 1026.320(a)(2)(i)–(iii).
56 See, e.g., 31 U.S.C. 5318(h)(1); 12 U.S.C.
1818(s)(1); 31 CFR 1020.210.
57 BSA/AML Manual at 33–34.
58 FINRA Rule 3310.
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that the financial institution ‘‘conduct
ongoing monitoring to maintain and
update customer information’’ means
that, when in the course of monitoring
the financial institution becomes aware
of information relevant to assessing the
risk posed by a customer, it is expected
to update the customer’s relevant
information accordingly.59 FinCEN
understands that industry practice
generally involves using activity data to
inform what types of transactions might
be considered ‘‘normal’’ or
‘‘suspicious.’’ Furthermore, FinCEN
understands that information that might
result from monitoring could be relevant
to the assessment of risk posed by a
particular customer. The proposed
requirement to update a customer’s
profile as a result of ongoing monitoring
(including obtaining beneficial
ownership information for existing
customers on a risk basis), is different
and distinct from a categorical
requirement to update or refresh the
information received from the customer
at the outset of the account relationship
at prescribed periods, as was noted in
the discussion of existing customers set
forth in Section III.b of this proposal.
Because financial institutions are
already implicitly required to engage in
ongoing monitoring, FinCEN expects
that financial institutions would satisfy
the fourth element of CDD by
continuing their current monitoring
practices, consistent with existing
guidance and regulatory expectations.60
FinCEN reiterates that all elements of
CDD discussed in this proposal are
minimum standards and should not be
interpreted or construed as lowering,
reducing or limiting the expectations
established by the appropriate federal
functional regulator. Finally, as noted
above with respect to the obligation to
understand the nature and purpose of
customer relationships, monitoring is
also a necessary element of detecting
and reporting suspicious activities, and
as such must apply not only to
‘‘customers’’ for purposes of the CIP
rules, but more broadly to all account
relationships maintained by the covered
financial institution.
59 See, e.g., BSA/AML Manual at 64 (‘‘CDD
processes should include periodic risk-based
monitoring of the customer relationship to
determine whether there are substantive changes to
the original CDD information (e.g., change in
employment or business operations).’’).
60 See, e.g., BSA/AML Manual at 67–85
(‘‘Suspicious Activity Reporting—Overview’’);
NFA’s Interpretive Notice accompanying NFA
Compliance Rule 2–9 (FCMs and IBs must train
appropriate staff to monitor cash activity and
trading activity in order to detect unusual
transactions).
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E. Rule Timing and Effective Date
Financial institutions have requested
sufficient time to implement any new
CDD requirements. Specifically, to
manage costs, financial institutions
requested sufficient time to incorporate
these requirements into cyclical updates
of their systems and processes. FinCEN
believes that the two CDD requirements
set forth in this proposal will not in fact
require covered financial institutions to
perform any additional activities or
operations, although it may necessitate
revisions to written policies and
procedures. FinCEN also recognizes that
financial institutions will be required to
modify existing customer onboarding
processes to incorporate the beneficial
ownership requirement, and therefore
proposes an effective date of one year
from the date the final rule is issued.
IV. Section-by-Section Analysis
A. Beneficial Ownership Information
Collection
Section 1010.230 Beneficial
Ownership Requirements for Legal
Entity Customers
Section 1010.230(a) General. This
section sets forth the general
requirement for covered financial
institutions to identify the beneficial
owners of each legal entity customer (as
defined).
Section 1010.230(b) Identification and
Verification. In order to identify the
beneficial owner, a covered financial
institution must obtain a certification
from the individual opening the account
on behalf of the legal entity customer (at
the time of account opening) in the form
of Appendix A. The form requires the
individual opening the account on
behalf of the legal entity customer to
identify the beneficial owner(s) of the
legal entity customer by providing the
beneficial owner’s name, date of birth,
address and social security number (for
U.S. persons).61 This information is
consistent with the information required
under the CIP rules for identifying
customers that are natural persons. The
form also requires the individual
opening the account on behalf of the
legal entity customer to certify, to the
best of his or her knowledge, that the
information provided on the form is
complete and correct. Obtaining a
signed and completed form from the
individual opening the account on
behalf of the legal entity customer shall
satisfy the requirement to identify the
61 For foreign persons, the form requires a
passport number and country of issuance, or other
similar identification number.
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beneficial owners under Section
1010.230(a).
This section also requires financial
institutions to verify the identity of the
individuals identified as beneficial
owners on the certification form. The
procedures for verification are to be
identical to the procedures applicable to
an individual opening an account under
the existing CIP rules. Accordingly, the
financial institution must verify a
beneficial owner’s identity using the
information provided on the
certification form (name, date of birth,
address, and social security number (for
U.S. persons), etc.), according to the
same documentary and nondocumentary methods the financial
institution may use in connection with
its customer identification program (to
the extent applicable to customers that
are individuals), within a reasonable
time after the account is opened. A
financial institution must also include
procedures for responding to
circumstances in which it cannot form
a reasonable belief that it knows the true
identity of the beneficial owner, as
described under the CIP rules.62
Section 1010.230(c) Beneficial Owner.
As more fully described above, the
proposed definition of ‘‘beneficial
owner’’ includes two independent
prongs: An ownership prong (clause (1))
and a control prong (clause (2)). A
covered financial institution must
identify each individual under the
ownership prong (i.e., each individual
who owns 25 percent or more of the
equity interests), in addition to one
individual for the control prong (i.e.,
any individual with significant
managerial control). If no individual
owns 25 percent or more of the equity
interests, then the financial institution
may identify a beneficial owner under
the control prong only. If appropriate,
the same individual(s) may be identified
under both criteria.
Section 1010.230(d) Legal Entity
Customer. For purposes of the beneficial
ownership requirement described under
this Section, the proposed rule defines
‘‘legal entity customer’’ to mean a
corporation, limited liability company,
partnership or similar business entity
(whether formed under the laws of a
state or of the United States or a foreign
jurisdiction), that opens a new account.
The reference to ‘‘new account’’ makes
62 See, e.g., 31 CFR 1020.220(a)(2)(iii). Such
procedures must address (a) when it should not
open an account; (b) the terms under which the
customer may use the account while the institution
attempts to verify the identity of the beneficial
owner; (c) when the institution should close the
account, after attempts to verify the beneficial
owner’s identity have failed; and (d) when it should
file a SAR.
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clear that the obligation to identify
beneficial owners under Section
1010.230 applies to legal entity
customers opening new accounts after
the date of rule’s implementation, and
not retrospectively. Previously issued
guidance that clarifies who a customer
is under certain circumstances shall be
instructive to the extent applicable to
the proposed beneficial ownership
requirement.63
Section 1010.230(e) Covered financial
Institution. This term has the meaning
set forth in 31 CFR 1010.605(e)(1),
which defines the term for purposes of
the regulations implementing Sect 312
of the PATRIOT Act.
Section 1010.230(f) Retention of
Records. A financial institution must
have procedures for maintaining a
record of all information obtained in
connection with identifying and
verifying the beneficial owners under
1010.230(b). These procedures must
include retaining the beneficial
ownership certification form, and any
other related identifying information
collected, for a period of five years after
the date the account is closed. It must
also retain in its records, for a period of
five years after such record is made, a
description of (i) every document relied
on for verification, (ii) any nondocumentary methods and results of
measures undertaken for verification,
and (iii) the resolution of any
substantive discrepancies discovered in
verifying the identification information.
The proposed rule leverages off of
industry familiarity with the
recordkeeping requirements relative to
identifying and verifying the identity of
individual customers under the CIP
rules, and proposes an identical
recordkeeping standard here. This is
with the understanding that identical
standards will help relieve
implementation burden with respect to
the new requirement.
Section 1010.230(g) Reliance on
Another Financial Institution. The
proposed rule permits reliance on
another financial institution under the
same conditions set forth in the
applicable CIP rules.64
63 See, e.g., Interagency Interpretive Guidance on
Customer Identification Program Requirements
under Section 326 of the USA PATRIOT Act at
Question 9 (April 28, 2005), available at https://
www.fincen.gov/statutes_regs/guidance/html/
faqsfinalciprule.html; Guidance from the Staffs of
the Department of the Treasury and the U.S.
Securities and Exchange Commission, Question and
Answer Regarding the Broker-Dealer Customer
Identification Program Rule (31 CFR 103.122)
(October 1, 2003), available at https://
www.fincen.gov/statutes_regs/guidance/html/
20031001.html.
64 See, e.g., 31 CFR 1020.220(a)(6).
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B. Amendments to AML Program
Requirements
Overview
FinCEN’s existing AML program
requirements applicable to each type of
covered financial institution are being
amended to ensure alignment between
existing AML requirements and CDD
minimum standards. As described in
Section III above, CDD consists of four
fundamental components. The first
component, customer identification, is
already sufficiently included in the
existing Customer Identification
Program requirements issued jointly by
FinCEN and its regulatory colleagues.
The second component, identification of
the beneficial ownership of legal entity
customers, is proposed as a separate
rule in 31 CFR 1010.230, as outlined
above. The third and fourth components
of CDD—understanding the nature and
purpose of an account and ongoing
monitoring—which have been
understood as necessary facets of other
regulatory requirements, are now being
explicitly included in applicable AML
program rules, as described in more
detail below. Covered financial
institutions are expected to apply these
procedures on a risk-based approach
with respect to the breadth of their
account relationships, consistent with
their obligation to identify and report
suspicious activities.
FinCEN is incorporating these CDD
procedures into the AML program
requirements to make clear that CDD is
a core element of a financial
institution’s policies and procedures to
guard against money laundering.
Furthermore, incorporating these CDD
requirements into the AML program
requirements, which require the AML
program to also comply with the
regulation of its federal functional
regulator governing such programs,
makes clear that a financial institution’s
procedures with respect to these
requirements are subject to examination
and enforcement by the appropriate
federal functional regulator or selfregulatory organization in a manner
consistent with current supervisory
authorities and expectations. As such,
this proposed rule is not intended to
limit the federal functional regulators’
supervisory role or, where applicable,
its ability to oversee an SRO’s effective
examination and enforcement of BSA
compliance.
Nothing in this proposal is intended
to lower, reduce, or limit the due
diligence expectations of the federal
functional regulators or in any way limit
their existing regulatory discretion. To
clarify this point, this proposal
incorporates the CDD elements on
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nature and purpose and ongoing
monitoring into FinCEN’s existing AML
program requirements, which generally
provide that an AML program is
adequate if, among other things, the
program complies with the regulation of
its federal functional regulator (or,
where applicable, self-regulatory
organization) governing such
programs.65 In addition, the Treasury
Department intends for the
requirements contained in this customer
due diligence and beneficial ownership
proposal to be consistent with, and not
to supersede, any regulations, guidance
or authority of any federal banking
agency, the SEC, the CFTC, or of any
SRO relating to customer identification,
including with respect to the
verification of the identities of legal
entity customers.
The FinCEN AML Program rules (for
banks, securities broker-dealers, mutual
funds, and futures commission
merchants and introducing brokers in
commodities) are also being amended to
ensure that FinCEN’s regulations
explicitly include the existing core
requirements that are currently included
within the AML program rules issued by
the federal functional regulators or their
appointed self-regulatory organizations
(SROs). These existing core pillars,
referenced in 31 U.S.C. 5318(h) as
‘‘minimum’’ requirements, include: (i)
The development of internal policies,
procedures and controls; (ii) the
designation of a compliance officer; (iii)
an ongoing employee training program;
and (iv) an independent audit program
to test functions. While there are slight
differences in the wording of the
regulatory requirements across the rules
applicable to each industry, FinCEN
considers them to all be the same in
practice at their core. FinCEN sees
utility for industry in having these rules
clearly spelled out in FinCEN’s own
regulations and believes that there is
further utility in making these rules
more uniform, particularly given the
number of industry actors that have
constituent components subject to
multiple rules. FinCEN also
acknowledges, however, that the core
requirements set forth by SROs, as
approved by the federal functional
regulator supervising them, sometimes
include details deemed warranted with
65 See, e.g., 31 CFR 1020.210, which currently
provides: ‘‘A financial institution regulated by a
Federal functional regulator that is not subject to
the regulations of a self-regulatory organization
shall be deemed to satisfy the requirements of 31
U.S.C. 5318(h)(1) if it implements and maintains an
anti-money laundering program that complies with
. . . the regulation of its Federal functional
regulator governing such programs.’’ (emphasis
added).
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respect to the SROs’ oversight of those
industries. While such detail may not be
included in FinCEN’s rules, FinCEN and
the supervising regulator have
coordinated in the past to ensure that
such rules are consistent with the
purposes of the BSA. There is no intent
in this rulemaking to undermine the
nuances that currently exist with
respect to those rules, and they can be
followed in tandem with rules set forth
here.
Section 1020.210 Anti-Money
Laundering Program Requirements for
Financial Institutions Regulated by a
Federal Functional Regulator, Including
Banks, Savings Associations and Credit
Unions
FinCEN is rewriting its existing AML
program rule to include the existing
core provisions already included in
regulations issued by the relevant
banking agencies and adding to these
core provisions a fifth pillar that
includes the components of CDD
pertaining to understanding the nature
and purpose of customer relationships
and ongoing monitoring, as discussed
above.
Section 1023.210 Anti-Money
Laundering Program Requirements for
Brokers or Dealers in Securities
FinCEN is rewriting its AML program
rule for brokers or dealers in securities
to the include the existing core
requirements already applicable to the
industry and adding to these core
provisions a new pillar that includes the
components of CDD pertaining to
understanding the nature and purpose
of customer relationships and ongoing
monitoring, as discussed above.
FinCEN notes that its proposed AML
program rule for brokers or dealers
differs from the current program rule
issued by FINRA. This is chiefly
because FINRA has included as a pillar
within its AML program rule a
requirement with respect to suspicious
activity reporting. This is different from
the rules issued with respect to other
sectors where the SAR requirement has
been treated separately. FinCEN is not
proposing to incorporate, as FINRA has
done, a SAR reporting requirement as a
separate pillar, as the existing standalone SAR rule within FinCEN’s
regulations is sufficient. However, the
decision to not include this within the
pillars of the FinCEN rule is not meant
to affect its treatment within the FINRA
rule. FinCEN sees no practical
difference in effect as a result of this
difference and is proposing its
amendments to the FinCEN AML
program rule for brokers or dealers in
securities in a manner that is consistent
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with its other AML program rules.
FinCEN will continue to engage with
the SEC and FINRA to determine
whether there is a need for, and how,
the FinCEN and FINRA provisions
might be made more consistent with
respect to this particular structural
difference in the regulations.
Section 1024.210 Anti-Money
Laundering Program Requirements for
Mutual Funds
FinCEN is maintaining its existing
AML program rule for mutual funds
with the addition to the core
requirements of a fifth pillar that
includes the components of CDD
pertaining to understanding the nature
and purpose of customer relationships
and ongoing monitoring, as discussed
above.
Section 1026.210 Anti-Money
Laundering Program Requirements for
Futures Commission Merchants and
Introducing Brokers in Commodities
FinCEN is rewriting its AML program
rule for futures commission merchants
and introducing brokers to include the
existing core requirements already
applicable to the industry and adding to
these core provisions a fifth pillar that
includes the components of CDD
pertaining to understanding the nature
and purpose of customer relationships
and ongoing monitoring, as discussed
above.
V. Request for Comments
FinCEN invites comments on all
aspects of the NPRM, and specifically
seeks comments on the following issues:
Definition of Beneficial Owner
FinCEN seeks general comments on
the proposed definition of beneficial
owner, including the inclusion of two
prongs, and whether each prong is
sufficiently clear.
FinCEN seeks comment specifically
on whether the term ‘‘equity interests’’
in the ownership prong of the proposed
beneficial ownership definition will be
sufficiently understood and clear to
financial institutions and customers.
Definition of Legal Entity Customer
FinCEN seeks comment on the
proposed definition of legal entity
customer, and in particular whether it
provides adequate clarity.
Existing Accounts
FinCEN seeks comment as to whether
FinCEN should extend the proposed
requirement on covered financial
insitutions to collect beneficial
ownership information so that it would
apply retroactively with respect to legal
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entity accounts established before the
implementation date of a final rule as
well as comment on the potential costs
of such an expansion of the rule.
Proposed Exemptions From the
Beneficial Ownership Rule
FinCEN seeks comment on the
proposed exemptions from the
definition of ‘‘legal entity customer,’’
including whether the exemptions are
appropriate, whether other exemptions
should be included, and if so, what
exemptions.
individual opening the account on
behalf of the legal entity customer)
through other means, such as an
automated electronic account opening
process.
Verification of Beneficial Owners
FinCEN seeks comment on whether
requiring financial institutions to utilize
existing CIP procedures for verification
of the identity of beneficial owners is
sufficiently clear and is an appropriate
and efficient means for achieving this
objective.
Intermediated Accounts
FinCEN seeks comment on whether
the proposed treatment of intermediated
accounts in general is sufficiently clear
to address any issues that may be
expected to arise.
Pooled Investment Vehicles
FinCEN seeks comment specifically
on whether pooled investment vehicles
that are not proposed to be exempt from
the beneficial ownership requirement
but are operated or advised by financial
institutions that are proposed to be
exempt, should also be exempt from the
beneficial ownership requirement, and
if not, whether covered financial
institutions should be required to
identify beneficial owners of such nonexempt pooled investment vehicles
under only the control prong of the
‘‘beneficial owner’’ definition, as
opposed to both the ownership prong
and control prong.
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Trusts
FinCEN seeks comment on
procedures used by financial
institutions to collect and record
information on trusts during their CDD
process and whether that information is
readily searchable and retrievable and
accessible to law enforcement. FinCEN
seeks comment from law enforcement
regarding the accessibility of
information regarding trusts when
sought from financial institutions and
the value of such information.
Certification Form
FinCEN seeks comment on the
proposed certification form and the
practical ability of financial institutions
to incorporate the form into their
account opening processes. Further,
while FinCEN believes that requiring all
legal entity customers to complete the
same form is useful in promoting clarity
and consistency across the financial
industry, FinCEN seeks comment on
whether financial institutions should be
permitted to obtain the same
information that the form requires
(including the certification from the
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identical across FinCEN’s rules; and,
whether there is a need for FinCEN’s
rules and those of its sister
organizations to be identical,
notwithstanding FinCEN’s belief that
the core pillars are essentially the same
across various industries despite any
differences in legacy regulatory text.
Based on industry feedback, FinCEN
will weigh the benefits of possibly
finalizing the program rules so that
currently existing wording differences
with respect to each pillar may be
reduced.
Updating of Beneficial Ownership
Information
FinCEN seeks comment as to whether
setting a mandated timeframe for the
updating of beneficial ownership
information would result in better
information being available on
beneficial ownership than relying on
financial institutions to update the
information in due course, consistent
with the risk-based approach.
Effective Date of the Rule
Recordkeeping Requirements
FinCEN seeks comment as to whether
requiring recordkeeping procedures
identical to those required with respect
to CIP recordkeeping requirements is a
sufficiently clear and efficient standard
in the context of beneficial ownership
verification information collection.
VI. Regulatory Analysis
Understanding the Nature and Purpose
of Customer Relationships and Ongoing
Monitoring
FinCEN seeks comment on whether
the proposed requirements regarding
understanding the nature and purpose
of customer relationships and ongoing
monitoring are sufficiently clear. In this
regard, should FinCEN define any of the
terms used in those proposed
requirements to clarify that such
requirements apply broadly to all
account relationships maintained by
covered financial institutions? Should
FinCEN define the term ‘‘customer risk
profile,’’ or is this term sufficiently
understood by covered financial
institutions? FinCEN also seeks
comment from industry as to whether
there are any covered financial
institutions that have been able to meet
the existing AML program requirements
and SAR requirements without
understanding the nature and purpose
of customer relationships and
conducting ongoing monitoring.
Proposed Amendments to the AML
Program Rules
FinCEN seeks industry comment as to
whether industry feels that it is
necessary for the language of each AML
program pillar requirement to be
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FinCEN seeks comment on whether
the proposed effective date of one year
from the date of the issuance of the final
rule is sufficient to enable financial
institutions to work any necessary
changes into their systems or
procedures in tandem with other
cyclical updates, and thereby enable
financial institutions to reduce
implementation costs.
A. Executive Orders 13563 and 12866
Executive Orders 13563 and 12866
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. This rule
has been designated a ‘‘significant
regulatory action’’ although not
economically significant, under section
3(f) of Executive Order 12866.
Accordingly, the rule has been reviewed
by the Office of Management and
Budget.
FinCEN has determined that the
primary cost for covered financial
institutions associated with the
proposed rule results from the
requirement that they obtain from their
non-exempt legal entity customers a
certification identifying their beneficial
owners. FinCEN has not been able to
obtain from any source an estimate of
the total number of accounts opened
annually for legal entities by covered
financial institutions. Based on outreach
and discussions with major financial
service companies, FinCEN believes that
there are approximately eight million
such accounts opened annually by
covered financial institutions. Based on
the total number of covered financial
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institutions,66 this would result in each
covered financial institution opening
approximately 368 such accounts per
year, or 1.5 per day.67 Estimating an
average time for a covered financial
institution to receive the certification
and verify the information of 20 minutes
and an average cost of $20 per hour, this
results in a cost of approximately $54
million.68
Estimating the amount of illicit funds
flow facilitated through legal entities
used to mask beneficial ownership
would be difficult.69 However, the
benefit of the rule will be greater clarity
with respect to a regulatory definition of
beneficial ownership and a greater
percentage of situations in which this
information will be collected, as
appropriate, by the covered financial
institutions, and, therefore, available to
law enforcement. Based on a survey
conducted in 2008, FinCEN determined
that perhaps as little as one third of its
private sector constituents felt that they
had a clear understanding of the term
beneficial ownership and that
significant percentages varying across
industries did not collect information
on beneficial ownership consistently.
Since the issuance of that survey,
further engagement with industry via
the issuance of interagency guidance 70
and FinCEN’s ANPRM provided
opportunities for greater common
understanding of the issues, but
questions remain.
FinCEN believes that with the clarity
of a regulatory definition and a clear
requirement to collect beneficial
ownership in specific situations,
industry understanding of beneficial
ownership and the collection of
beneficial ownership information will
increase, and that the increased
availability of such information to law
enforcement will enhance government
efforts to identify and address illicit
actors operating in the financial system
through legal entities. FinCEN requests
comment on the benefits, and any
estimates of costs savings, associated
with a requirement to collect beneficial
ownership information, including any
66 See ‘‘Paperwork Reduction Act (PRA),’’
‘‘Estimated Number of Respondents,’’ infra note 81.
67 FinCEN also believes that the largest covered
financial institutions likely open far more such
accounts per day than the smaller institutions.
68 See PRA, ‘‘Estimated Reporting Burden,’’ infra.
This includes the cost of one hour per covered
financial institution to develop new beneficial
ownership procedures.
69 For one general discussion of the difficulty of
deriving estimates of money laundering activity in
narcotrafficking and other transactional criminal
activity, see ‘‘Estimating Illicit Financial Flows
Resulting from Drug Trafficking and Other
Transnational Organized Crimes,’’ United Nations
Office on Drugs and Crime (October 2011).
70 See footnote 15.
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economic or statistical data or thirdparty/independent research.
Regulatory Flexibility Act
When an agency issues a rule
proposal, the Regulatory Flexibility Act
(RFA) requires the agency to either
provide an Initial Regulatory Flexibility
Analysis or, in lieu of preparing an
analysis, to certify that the proposed
rule is not expected to have a significant
economic impact on a substantial
number of small entities.71
Estimate of the number of small
entities to which the proposed rule will
apply:
This proposed rulemaking will apply
to all federally regulated depository
institutions and trust companies, and all
brokers or dealers in securities, mutual
funds, and futures commission
merchants and introducing brokers, as
each is defined in the BSA. Based upon
current data, for the purposes of the
RFA, there are approximately 5470
small federally regulated banks
(comprising 80% of the total number of
banks); 72 47 small federally regulated
trust companies (comprising 72% of the
total); 73 4,325 small federally regulated
credit unions (comprising 66% of the
total),74 871 small brokers or dealers in
securities (comprising 17% of the
total); 75 116 small mutual funds
(comprising 7% of the total); 76 no small
futures commission merchants; 77 and
71 5
U.S.C. 601–612.
Small Business Administration (‘‘SBA’’)
defines a depository institution other than a credit
union as a small business if it has assets of $500
million or less. Based on publicly available
information as of December 31, 2013 there are 6,821
federally regulated depository institutions (other
than credit unions) of which approximately 5,470,
or 80% are categorized as small businesses.
73 The SBA defines a trust company as a small
business if it has assets of $35.5 million or less.
Based on publicly available information as of
September 30, 2013, there are 65 federally regulated
trust companies, of which 47, or 72%, are
categorized as small businesses.
74 The NCUA defines small credit unions as those
having under $50 million in assets. As of December
31, 2013, there were 6,554 federally regulated credit
unions.
75 With regard to the definition of small entity as
it applies to broker dealers in securities and mutual
funds, FinCEN is using the SEC’s definitions found
at 17 CFR 240.0–10(c), and 17 CFR 270.0–10,
respectively. Of the 5,100 brokers or dealers in
securities, 871 or 17% are categorized as a small
business.
76 Of the 1,660 open-end mutual funds, 116 or 7%
are categorized as a small business.
77 The CFTC has determined that futures
commission merchants are not small entities for
purposes of the RFA, and, thus, the requirements
of the RFA do not apply to them. The CFTC’s
determination was based, in part, upon the
obligation of futures commission merchants to meet
the minimum financial requirements established by
the CFTC to enhance the protection of customers’
segregated funds and protect the financial condition
of futures commission merchants generally. Small
introducing brokers in commodities are defined by
72 The
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1,186 small introducing brokers
(comprising 95% of the total). Because
the proposed rule would apply to all of
these financial institutions, FinCEN
concludes that the proposed rule will
apply to a substantial number of small
entities.
Description of the projected reporting,
recordkeeping, and other requirements
of the proposed rule: This proposed
rulemaking imposes on all covered
financial institutions (including those
that are small entities) a new
requirement to identify and to verify the
identity of the beneficial owners of their
legal entity customers. The proposed
rule would require that this be
accomplished by obtaining and
maintaining a certification from each
legal entity customer that opens a new
account. The certification will contain
identifying information regarding each
listed beneficial owner. The financial
institution will also be required to verify
such identity by documentary or nondocumentary methods and to maintain
in its records for five years a description
of (i) any document relied on for
verification, (ii) any non-documentary
methods and results of measures
undertaken, and (iii) the resolution of
any substantive discrepancies
discovered in verifying the
identification information.
Although FinCEN has only limited
available information to assess the
average number of beneficial owners of
legal entity customers for which
accounts may be established after the
effective date of the rule, FinCEN notes
that the maximum number is five, and
believes that it is reasonable to assume
that the great majority of such customers
who establish accounts at small
institutions are more likely to have
simpler ownership structures that will
result in one or two beneficial owners.
In addition, since all covered financial
institutions have been subject to CIP
rules for more than ten years, and the
proposal utilizes CIP rule procedures,
small institutions will be able to
leverage these procedures in complying
with this requirement. As a result,
FinCEN believes that it is reasonable to
estimate that it will require, on average,
20 minutes to perform the beneficial
ownership identification, verification
and recordkeeping requirements in the
proposal. Furthermore, FinCEN has
anecdotal evidence that in general, the
customers of small institutions are
primarily individuals and that they do
not frequently establish accounts for
the SBA as those having less than $7 million in
gross receipts annually. Of the 1,249 introducing
brokers in commodities, 1,186 or 95% are
categorized as a small business.
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legal entities, which would also reduce
the impact of the proposed requirement
on small entities.78 However, because
statistical data does not exist regarding
either the average number of beneficial
owners of legal entity customers of
small institutions or how many such
accounts they establish in any time
period, FinCEN is seeking comment on
these questions.
The proposed rule would also require
that covered financial institutions
include in their AML programs,
customer due diligence procedures,
including understanding the nature and
purpose of customer relationships and
conducting ongoing monitoring of these
relationships. Because these
requirements are already a part of
existing AML and SAR practices, they
will not impose any new obligations,
and therefore will have no economic
impact, on any small entities.
Finally, the proposed rule would
require each covered financial
institution to amend its AML program to
include the new requirement contained
in the proposal, to train its employees
regarding the new requirement, and to
update its data systems to include the
beneficial ownership information.
FinCEN understands from its outreach
that in general, most covered financial
institutions, including those that are
small entities, periodically update their
AML programs, conduct AML training,
and upgrade their IT systems. FinCEN
also understands that most small
institutions outsource their IT
requirements and so would acquire the
required updated program from a
vendor. FinCEN intends to extend the
implementation date for the proposed
rule for one year from issuance for the
purpose of enabling financial
institutions to integrate these new
program, training and data collection
requirements into their cyclical updates
with minimal additional cost.
Consideration of Significant
Alternatives: The proposed rule would
apply to all covered financial
institutions. FinCEN has determined
that identifying the beneficial owner of
a financial institution’s legal entity
customers and verifying that identity is
a necessary part of an effective AML
program. FinCEN has not identified any
alternative means for obtaining this
information, other than imposing this as
78 FinCEN notes that, while its estimate of the
aggregate burden on industry resulting from the
beneficial ownership requirement is based on an
average of 1.5 legal entity accounts per day for each
institution (see ‘‘Executive Orders 13563 and
12866’’ supra), it understands from its outreach that
large institutions likely open hundreds or even
thousands such accounts per day, while small
institutions likely open, on average, far fewer than
1.5 such accounts per day.
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a requirement for opening new legal
entity accounts for all covered financial
institutions. Were FinCEN to exempt
small entities from this requirement,
those entities would be potentially more
subject to abuse by money launderers
and other financial criminals.
Certification: The additional burden
proposed by the rule would be a
requirement to maintain an AML
program that includes collection and
verification of beneficial owner
information. It would also require
financial institutions, large and small, to
update their AML programs, train
relevant employees, and modify data
collection systems. As discussed above,
FinCEN estimates that the impact from
this requirement would not be
significant. Accordingly, FinCEN
certifies that the proposed rule would
not have a significant economic impact
on a substantial number of small
entities.
Questions for comment: Please
provide comment on any or all of the
provisions of the proposed rule with
regard to their economic impact on
small entities (including costs and
benefits), and what less burdensome
alternatives, if any, FinCEN should
consider. In particular, FinCEN is
seeking comment on the economic
burden associated with the proposed
beneficial ownership requirement,
including the number of new accounts
opened for legal entities by small
covered financial institutions and the
estimated time that would be required
to comply with the proposed
requirements for the identification and
verification of the beneficial owners of
such new legal entity customers, as well
as the costs associated with the program
updates and necessary training and IT
system modifications.
B. Paperwork Reduction Act
The new recordkeeping requirement
contained in this proposed rule (31 CFR
1010.230) is being submitted to the
Office of Management and Budget
(OMB) for review in accordance with
the Paperwork Reduction Act of 1995
(PRA), 44 U.S.C. 3501 et seq., which
imposes certain requirements on
Federal agencies in connection with
their conducting or sponsoring any
collection of information as defined by
the PRA. Under the PRA, an agency may
not conduct or sponsor, and an
individual is not required to respond to,
a collection of information unless it
displays a valid OMB control number.
Comments concerning the estimated
burden and other questions should be
sent to the Desk Officer for the
Department of Treasury, Office of
Information and Regulatory Affairs,
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Office of Management and Budget,
Paperwork Reduction Project (1506),
Washington, DC 20503 with a copy to
FinCEN by mail. Comments may also be
submitted by email to oira_submission@
omb.eop.gov. Please submit comments
by one method only. Comments are
welcome and must be received by
October 3, 2014.
In summary, the proposed rule would
require covered financial institutions to
maintain records of the information
used to identify and verify the identity
of the names of the beneficial owners of
legal entity customers.79
Type of Review: Initial review of the
proposed information collection
elements of the ‘‘Certification of
Beneficial Owner(s)’’ in support of the
beneficial ownership requirements for
financial institutions.80
Affected Public: Businesses or other
for-profit and not-for-profit entities, and
certain financial institutions.
OMB Control Number: 1506–00XX.
Frequency: As required.
Estimated Reporting Burden:
a. Develop and maintain beneficial
ownership identification procedures: 1
hour.81
b. Customer identification,
verification, and review and
recordkeeping of the ‘‘Certification of
Beneficial Owner(s)’’: 20 minutes per
financial institution.
Estimated Number of Respondents:
21,550.82
Estimated Total Annual Responses:
8,081,250.83
Estimated Recordkeeping and
Reporting Burden: 2,715,300 hours.84
The numbers presented assume that
the number of account openings in 2013
is representative for an average yearly
79 This requirement applies to accounts
established for legal entities. A legal entity
generally includes a corporation, limited liability
company, partnership, or any other similar business
entity formed in the United States or a foreign
country.
80 A copy of the proposed certification, which
would be required by 31 CFR 1010.230, appears at
the end of this notice.
81 A burden of one hour to develop the initial
procedures is recognized. Once developed, an
annual burden of twenty minutes is recognized for
maintenance.
82 This includes depository institutions (13,375),
trust companies (65), broker-dealers in securities
(5,100), future commission merchants (101),
introducing brokers in commodities (1,249), and
open-end mutual funds (1,660), each as defined
under the BSA. These figures represent the total
number of entities that would be subject to the
proposed requirements in this notice.
83 Based on initial research, each covered
financial institution will open, on average, 1.5 new
legal entity accounts per business day. There are
250 business days per year.
84 8,081,250 × 20 minutes per account established
÷ 60 minutes per hour = 2,693,750 hours plus
development time of 21,550 hours for a total of
2,715,300 hours the first year.
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establishment of accounts for new legal
entities. Records are required to be
retained pursuant to the beneficial
ownership requirement for five years.
Request for Comments:
Comments submitted in response to
this notice will be summarized and/or
included in the request for OMB
approval. All comments will become a
matter of public record.
Comments are invited on: (i) Whether
the collection of information is
necessary for the proper performance of
the functions of the agency, including
whether the information shall have
practical utility; (ii) the accuracy of the
agency’s estimate of the burden of the
collection of information; (iii) ways to
enhance the quality, utility, and clarity
of the information to be collected; (iv)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
(v) the reasonableness of the estimated
number of new annual account
openings for legal entities; and (vi)
estimates of capital or start-up costs and
costs of operation, maintenance, and
purchase of services to provide
information.
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C. Unfunded Mandates Act of 1995
Statement
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (Unfunded Mandates Act)
requires that an agency prepare a
budgetary impact statement before
promulgating a rule that includes a
Federal mandate that may result in
expenditure by state, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
in any one year. If a budgetary impact
statement is required, section 205 of the
Unfunded Mandates Act also requires
an agency to identify and consider a
reasonable number of regulatory
alternatives before promulgating a rule.
FinCEN has determined that this
proposed rule will not result in
expenditures by state, local, and tribal
governments, or by the private sector, of
$100 million or more. Accordingly,
FinCEN has not prepared a budgetary
impact statement or specifically
addressed the regulatory alternatives
considered.
List of Subjects in 31 CFR Parts 1010,
1020, 1023, 1024, and 1026
Administrative practice and
procedure, Banks, Banking, Brokers,
Currency, Federal home loan banks,
Foreign banking, Foreign currencies,
Gambling, Investigations, Mortgages,
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Penalties, Reporting and recordkeeping
requirements, Securities, Terrorism.
Authority and Issuance
For the reasons set forth in the
preamble, Chapter X of Title 31 of the
Code of Federal Regulations is proposed
to be amended as follows:
PART 1010—GENERAL PROVISIONS
1. The authority citation for part 1010
continues to read as follows:
■
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314 and 5316–5332;
title III, sec. 314 Pub. L. 107–56, 115 Stat.
307.
2. Add § 1010.230 in subpart B to read
as follows:
■
§ 1010.230 Beneficial ownership
requirements for legal entity customers.
(a) In general. Covered financial
institutions are required to establish and
maintain written procedures that are
reasonably designed to identify and
verify beneficial owners of legal entity
customers.
(b) Identification and verification.
With respect to legal entity customers,
the covered financial institution’s
customer due diligence procedures
should enable the institution to:
(1) Identify the beneficial owner(s) of
each legal entity customer, unless
otherwise exempt pursuant to paragraph
(d) of this section. To identify the
beneficial owner(s), a covered financial
institution must obtain at the time a
new account is opened a certification in
the form of Appendix A of this section
from the individual opening the account
on behalf of the legal entity customer;
and
(2) Verify the identity of each
beneficial owner identified to the
covered financial institution, according
to risk-based procedures to the extent
reasonable and practicable. At a
minimum, these procedures must be
identical to the covered financial
institution’s Customer Identification
Program procedures required for
verifying the identity of customers that
are individuals under § 1020.220(a)(2) of
this chapter (for banks); § 1023.220(a)(2)
of this chapter (for brokers or dealers in
securities); § 1024.220(a)(2) of this
chapter (for mutual funds); or
§ 1026.220(a)(2) of this chapter (for
futures commission merchants or
introducing brokers in commodities).
(c) Beneficial owner. For purposes of
this section, Beneficial Owner means
each of the following:
(1) Each individual, if any, who,
directly or indirectly, through any
contract, arrangement, understanding,
relationship or otherwise, owns 25% or
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more of the equity interests of a legal
entity customer;
(2) A single individual with
significant responsibility to control,
manage, or direct a legal entity
customer, including
(i) An executive officer or senior
manager (e.g., a Chief Executive Officer,
Chief Financial Officer, Chief Operating
Officer, Managing Member, General
Partner, President, Vice President, or
Treasurer); or
(ii) Any other individual who
regularly performs similar functions.
Note to paragraph (c): The number of
individuals that satisfy the definition of
‘‘beneficial owner,’’ and therefore must be
identified and verified pursuant to this
section, may vary. Under paragraph (c)(1) of
this section, depending on the factual
circumstances, up to four individuals may
need to be identified. Under paragraph (c)(2)
of this section, only one individual must be
identified. It is possible that in some
circumstances the same person or persons
might be identified pursuant to paragraphs
(c)(1) and (2) of this section. A covered
financial institution may also identify
additional individuals as part of its customer
due diligence if it deems appropriate on the
basis of risk.
(d) Legal entity customer. For the
purposes of this section,
(1) Legal entity customer means: A
corporation, limited liability company,
partnership or other similar business
entity (whether formed under the laws
of a state or of the United States or a
foreign jurisdiction) that opens a new
account.
(2) Legal entity customer does not
include:
(i) A financial institution regulated by
a Federal functional regulator or a bank
regulated by a State bank regulator;
(ii) A person described in
§ 1020.315(b)(2) through (5) of this
chapter;
(iii) An issuer of a class of securities
registered under section 12 of the
Securities Exchange Act of 1934 or that
is required to file reports under section
15(d) of that Act;
(iv) An investment company, as
defined in section 3 of the Investment
Company Act of 1940, that is registered
with the Securities and Exchange
Commission under that Act;
(v) An investment adviser, as defined
in section 202(a)(11) of the Investment
Advisers Act of 1940, that is registered
with the Securities and Exchange
Commission under that Act;
(vi) An exchange or clearing agency,
as defined in section 3 of the Securities
Exchange Act of 1934, that is registered
under section 6 or 17A of the Securities
Exchange Act of that Act;
(vii) Any other entity registered with
the Securities and Exchange
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Commission under the Securities
Exchange Act of 1934;
(viii) A registered entity, commodity
pool operator, commodity trading
advisor, retail foreign exchange dealer,
swap dealer, or major swap participant,
each as defined in section 1a of the
Commodity Exchange Act, that is
registered with the Commodity Futures
Trading Commission;
(ix) A public accounting firm
registered under section 102 of the
Sarbanes-Oxley Act; and
(x) A charity or nonprofit entity that
is described in sections 501(c), 527, or
4947(a)(1) of the Internal Revenue Code
of 1986, has not been denied tax exempt
status, and is required to and has filed
the most recently due annual
information return with the Internal
Revenue Service.
(e) Covered financial institution. For
the purposes of this section, covered
financial institution has the meaning set
forth in § 1010.605(e)(1).
(f) Recordkeeping. A covered financial
institution must establish procedures for
making and maintaining a record of all
information obtained under the
procedures implementing paragraph (b)
of this section.
(1) Required records. At a minimum
the record must include:
(i) For identification, the certification
form described in paragraph (b) of this
section, and any other identifying
information obtained by the covered
financial institution; and
(ii) For verification, a description of
any document relied on (noting the
type, any identification number, place
of issuance and; if any, date of issuance
and expiration), of any nondocumentary methods and the results of
any measures undertaken, and of the
resolution of each substantive
discrepancy.
(2) Retention of records. A covered
financial institution must retain the
records made under paragraph (f)(1)(i)
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of this section for five years after the
date the account is closed, and the
records made under paragraph (f)(1)(ii)
of this section for five years after the
record is made.
(g) Reliance on another financial
institution. A covered financial
institution may rely on the performance
by another financial institution
(including an affiliate) of the
requirements of this section with
respect to any legal entity customer of
the covered financial institution that is
opening, or has opened, an account or
has established a similar business
relationship with the other financial
institution to provide or engage in
services, dealings, or other financial
transactions, provided that:
(1) Such reliance is reasonable under
the circumstances;
(2) The other financial institution is
subject to a rule implementing 31 U.S.C.
5318(h) and is regulated by a Federal
functional regulator; and
(3) The other financial institution
enters into a contract requiring it to
certify annually to the covered financial
institution that it has implemented its
anti-money laundering program, and
that it will perform (or its agent will
perform) the specified requirements of
the covered financial institution’s
procedures to comply with the
requirements of this section.
APPENDIX A—CERTIFICATION
REGARDING BENEFICIAL OWNERS
OF LEGAL ENTITY CUSTOMERS
I. GENERAL INSTRUCTIONS
What is this form?
To help the government fight
financial crime, federal regulation
requires certain financial institutions to
obtain, verify, and record information
about the beneficial owners of legal
entity customers. Legal entities can be
abused to disguise involvement in
terrorist financing, money laundering,
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45171
tax evasion, corruption, fraud, and other
financial crimes. Requiring the
disclosure of key individuals who
ultimately own or control a legal entity
(i.e., the beneficial owners) helps law
enforcement investigate and prosecute
these crimes.
Who has to complete this form?
This form must be completed by the
person opening a new account on behalf
of a legal entity with any of the
following U.S. financial institutions: (i)
A bank or credit union; (ii) a broker or
dealer in securities; (iii) a mutual fund;
(iv) a futures commission merchant; or
(v) an introducing broker in
commodities.
For the purposes of this form, a legal
entity includes a corporation, limited
liability company, partnership, and any
other similar business entity formed in
the United States or a foreign country.
What information do I have to provide?
This form requires you to provide the
name, address, date of birth and social
security number (or passport number or
other similar information, in the case of
foreign persons) for the following
individuals (i.e., the beneficial owners):
(i) Each individual, if any, who owns,
directly or indirectly, 25 percent or
more of the equity interests of the legal
entity customer (e.g., each natural
person that owns 25 percent or more of
the shares of a corporation); and
(ii) An individual with significant
responsibility for managing the legal
entity customer (e.g., a Chief Executive
Officer, Chief Financial Officer, Chief
Operating Officer, Managing Member,
General Partner, President, Vice
President or Treasurer).
The financial institution may also ask
to see a copy of a driver’s license or
other identifying document for each
beneficial owner listed on this form.
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II.
CERTIFICATION OF BENEFICIAL OWNER(S)
Persons opening an account on behalf of a legal entity must provide the following information:
a.
Name ofPerson Opening Account:
b.
Name o.fLegal Entity for Which the Account is Being Opened:
c.
The following information for each individual, if any, who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests
of the legal entity listed above:
(If no individual meets this definition, please write "Not Applicable.")
Date ofBirth
Name
d.
Address
For US. Persons:
Social Security
Number
For Foreign Persons:
Passport Number and
Country of Issuance, or
other similar
identification number 1
The following information for one individual with significant responsibility .for managing the legal
entity listed above, such as:
• An executive officer or senior manager (e.g., Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, Managing Member, General Partner, President, Vice President,
Treasurer); or
• Any other individual who regularly performs similar jimctions.
(If appropriate, an individual listed under section (c) above may also be listed in this section
(d)).
Name
Date ofBirth
Address
For US. Persons:
Social Security
Number
For Foreign Persons:
Passport Number and
Country of Issuance, or
other similar
identification number 1
I,
(name ofperson opening account), hereby certify, to the best of my knowledge,
that the information provided above is complete and correct.
In lieu of a passport number, foreign persons may also provide an alien identification card number, or number and
country of issuance of any other government-issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.
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S i g n a t u r e : - - - - - - - - - - - - - - - - - - - - - - Date: _ _ _ _ _ __
Federal Register / Vol. 79, No. 149 / Monday, August 4, 2014 / Proposed Rules
PART 1020—RULES FOR BANKS
3. The authority citation for part 1020
continues to read as follows:
■
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314 and 5316–5332;
title III, sec. 314 Pub. L. 107–56, 115 Stat.
307.
4. Revise § 1020.210 in subpart B to
read as follows:
■
§ 1020.210 Anti-money laundering
program requirements for financial
institutions regulated only by a Federal
functional regulator, including banks,
savings associations, and credit unions.
A financial institution regulated by a
Federal functional regulator that is not
subject to the regulations of a selfregulatory organization shall be deemed
to satisfy the requirements of 31 U.S.C.
5318(h)(1) if the financial institution
implements and maintains an antimoney laundering program that:
(a) Complies with the requirements of
§§ 1010.610 and 1010.620 of this
chapter;
(b) Includes, at a minimum:
(1) A system of internal controls to
assure ongoing compliance;
(2) Independent testing for
compliance to be conducted by bank
personnel or by an outside party;
(3) Designation of an individual or
individuals responsible for coordinating
and monitoring day-to-day compliance;
(4) Training for appropriate
personnel; and
(5) Appropriate risk-based procedures
for conducting ongoing customer due
diligence, to include, but not be limited
to:
(i) Understanding the nature and
purpose of customer relationships for
the purpose of developing a customer
risk profile; and
(ii) Conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions; and
(c) Complies with the regulation of its
Federal functional regulator governing
such programs.
PART 1023—RULES FOR BROKERS
OR DEALERS IN SECURITIES
5. The authority citation for part 1023
continues to read as follows:
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■
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314 and 5316–5332;
title III, sec. 314 Pub. L. 107–56, 115 Stat.
307.
6. Revise § 1023.210 in subpart B to
read as follows:
■
31 U.S.C. 5318(h)(1) if the broker-dealer
implements and maintains a written
anti-money laundering program
approved by senior management that:
(a) Complies with the requirements of
§§ 1010.610 and 1010.620 of this
chapter and any applicable regulation of
its Federal functional regulator
governing the establishment and
implementation of anti-money
laundering programs;
(b) Includes, at a minimum:
(1) The establishment and
implementation of policies, procedures,
and internal controls reasonably
designed to achieve compliance with
the applicable provisions of the Bank
Secrecy Act and the implementing
regulations thereunder;
(2) Independent testing for
compliance to be conducted by the
broker-dealer’s personnel or by a
qualified outside party;
(3) Designation of an individual or
individuals responsible for
implementing and monitoring the
operations and internal controls of the
program;
(4) Ongoing training for appropriate
persons; and
(5) Appropriate risk-based procedures
for conducting ongoing customer due
diligence, to include, but not be limited
to:
(i) Understanding the nature and
purpose of customer relationships for
the purpose of developing a customer
risk profile; and
(ii) Conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions; and
(c) Complies with the rules,
regulations, or requirements of its selfregulatory organization governing such
programs; provided that the rules,
regulations, or requirements of the selfregulatory organization governing such
programs have been made effective
under the Securities Exchange Act of
1934 by the appropriate Federal
functional regulator in consultation
with FinCEN.
PART 1024—RULES FOR MUTUAL
FUNDS
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314 and 5316–5332;
title III, sec. 314 Pub. L. 107–56, 115 Stat.
307.
PART 1026—RULES FOR FUTURES
COMMISSION MERCHANTS AND
INTRODUCING BROKERS IN
COMMODITIES
■
8. Revise § 1024.210 in subpart B to
read as follows:
■
§ 1024.210 Anti-money laundering
program requirements for mutual funds.
A broker or dealer in securities shall
be deemed to satisfy the requirements of
(a) Effective July 24, 2002, each
mutual fund shall develop and
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implement a written anti-money
laundering program reasonably
designed to prevent the mutual fund
from being used for money laundering
or the financing of terrorist activities
and to achieve and monitor compliance
with the applicable requirements of the
Bank Secrecy Act (31 U.S.C. 5311, et
seq.), and the implementing regulations
promulgated thereunder by the
Department of the Treasury. Each
mutual fund’s anti-money laundering
program must be approved in writing by
its board of directors or trustees. A
mutual fund shall make its anti-money
laundering program available for
inspection by the U.S. Securities and
Exchange Commission.
(b) The anti-money laundering
program shall at a minimum:
(1) Establish and implement policies,
procedures, and internal controls
reasonably designed to prevent the
mutual fund from being used for money
laundering or the financing of terrorist
activities and to achieve compliance
with the applicable provisions of the
Bank Secrecy Act and implementing
regulations thereunder;
(2) Provide for independent testing for
compliance to be conducted by the
mutual fund’s personnel or by a
qualified outside party;
(3) Designate a person or persons
responsible for implementing and
monitoring the operations and internal
controls of the program;
(4) Provide ongoing training for
appropriate personnel; and
(5) Implement appropriate risk-based
procedures for conducting ongoing
customer due diligence, to include, but
not be limited to:
(i) Understanding the nature and
purpose of customer relationships for
the purpose of developing a customer
risk profile; and
(ii) conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions.
7. The authority citation for part 1024
continues to read as follows:
■
§ 1023.210 Anti-money laundering
program requirements for brokers or
dealers in securities.
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9. The authority citation for part 1026
continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314 and 5316–5332;
title III, sec. 314 Pub. L. 107–56, 115 Stat.
307.
10. Revise § 1026.210 in subpart B to
read as follows:
■
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under the Commodity Exchange Act by
the appropriate Federal functional
regulator in consultation with FinCEN.
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§ 1026.210 Anti-money laundering
program requirements for futures
commission merchants and introducing
brokers in commodities.
A futures commission merchant and
an introducing broker in commodities
shall be deemed to satisfy the
requirements of 31 U.S.C. 5318(h)(1) if
the futures commission merchant or
introducing broker in commodities
implements and maintains a written
anti-money laundering program
approved by senior management that:
(a) Complies with the requirements of
§§ 1010.610 and 1010.620 of this
chapter and any applicable regulation of
its Federal functional regulator
governing the establishment and
implementation of anti-money
laundering programs;
(b) Includes, at a minimum:
(1) The establishment and
implementation of policies, procedures,
and internal controls reasonably
designed to prevent the financial
institution from being used for money
laundering or the financing of terrorist
activities and to achieve compliance
with the applicable provisions of the
Bank Secrecy Act and the implementing
regulations thereunder;
(2) Independent testing for
compliance to be conducted by the
futures commission merchant or
introducing broker in commodities’
personnel or by a qualified outside
party;
(3) Designation of an individual or
individuals responsible for
implementing and monitoring the
operations and internal controls of the
program;
(4) Ongoing training for appropriate
persons;
(5) Appropriate risk-based procedures
for conducting ongoing customer due
diligence, to include, but not be limited
to:
(i) Understanding the nature and
purpose of customer relationships for
the purpose of developing a customer
risk profile; and
(ii) Conducting ongoing monitoring to
maintain and update customer
information and to identify and report
suspicious transactions; and
(c) Complies with the rules,
regulations, or requirements of its selfregulatory organization governing such
programs; provided that the rules,
regulations, or requirements of the selfregulatory organization governing such
programs have been made effective
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Dated: July 23, 2014.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement
Network.
[FR Doc. 2014–18036 Filed 7–31–14; 11:15 am]
BILLING CODE 4810–02–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 52 and 70
[EPA–R07–OAR–2014–0468; FRL–9914–51–
Region 7]
Approval and Promulgation of
Implementation Plans; State of
Nebraska; Fine Particulate Matter New
Source Review Requirements.
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:
The Environmental Protection
Agency (EPA) proposes to approve the
State Implementation Plan (SIP)
revision submitted by the State of
Nebraska. This proposed action will
amend the SIP to include revisions to
Nebraska’s Air Quality Regulations
‘‘Definitions’’, ‘‘Construction Permits—
When Required’’, and ‘‘Prevention of
Significant Deterioration of Air Quality’’
to make the state regulations consistent
with the Federal regulations for the fine
Particulate Matter (PM2.5) Prevention of
Significant Deterioration (PSD) program.
This proposed revision will amend the
state minor source construction
permitting program including the
addition of a minor source permitting
threshold for PM2.5. These revisions are
necessary to properly manage the
increment requirements (maximum
allowable deterioration to the air
quality) of the PSD program and assure
continued attainment with the PM2.5
National Ambient Air Quality Standards
(NAAQS). This proposed action also
recognizes the state’s request to not
include, into the SIP, provisions relating
to Significant Impact Levels (SILs) and
Significant Monitoring Concentrations
(SMCs). These provisions were vacated
and remanded by the U.S. Court of
Appeals for the District of Columbia on
January 22, 2013.
SUMMARY:
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Comments on this proposed
action must be received in writing by
September 3, 2014.
ADDRESSES: Submit your comments,
identified by Docket ID No. EPA–R07–
OAR–2014–0468, by mail to Greg
Crable, Environmental Protection
Agency, Air Planning and Development
Branch, 11201 Renner Boulevard,
Lenexa, Kansas 66219. Comments may
also be submitted electronically or
through hand delivery/courier by
following the detailed instructions in
the ADDRESSES section of the direct final
rule located in the rules section of this
Federal Register.
FOR FURTHER INFORMATION CONTACT: Greg
Crable, Environmental Protection
Agency, Air Planning and Development
Branch, 11201 Renner Boulevard,
Lenexa, Kansas 66219 at (913) 551–
7391, or by email at crable.gregory@
epa.gov.
DATES:
In the
final rules section of the Federal
Register, EPA is approving the state’s
SIP revision as a direct final rule
without prior proposal because the
Agency views this as a noncontroversial
revision amendment and anticipates no
relevant adverse comments to this
action. A detailed rationale for the
approval is set forth in the direct final
rule. If no relevant adverse comments
are received in response to this action,
no further activity is contemplated in
relation to this action. If EPA receives
relevant adverse comments, the direct
final rule will be withdrawn and all
public comments received will be
addressed in a subsequent final rule
based on this proposed action. EPA will
not institute a second comment period
on this action. Any parties interested in
commenting on this action should do so
at this time. Please note that if EPA
receives adverse comment on part of
this rule and if that part can be severed
from the remainder of the rule, EPA may
adopt as final those parts of the rule that
are not the subject of an adverse
comment. For additional information,
see the direct final rule which is located
in the rules section of this Federal
Register.
SUPPLEMENTARY INFORMATION:
Dated: July 21, 2014.
Mike Brincks,
Acting Regional Administrator, Region 7.
[FR Doc. 2014–18249 Filed 8–1–14; 8:45 am]
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Agencies
[Federal Register Volume 79, Number 149 (Monday, August 4, 2014)]
[Proposed Rules]
[Pages 45151-45174]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18036]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010, 1020, 1023, 1024, and 1026
RIN 1506-AB25
Customer Due Diligence Requirements for Financial Institutions
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
[[Page 45152]]
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Financial Crimes Enforcement Network (FinCEN), after
consulting with staff from various federal supervisory authorities, is
proposing rules under the Bank Secrecy Act to clarify and strengthen
customer due diligence requirements for: Banks; brokers or dealers in
securities; mutual funds; and futures commission merchants and
introducing brokers in commodities. The proposed rules would contain
explicit customer due diligence requirements and would include a new
regulatory requirement to identify beneficial owners of legal entity
customers, subject to certain exemptions.
DATES: Written comments on the Notice of Proposed Rulemaking (NPRM)
must be received on or before October 3, 2014.
ADDRESSES: Comments may be submitted, identified by Regulatory
Identification Number (RIN) 1506-AB25, by any of the following methods:
Federal E-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Include RIN 1506-AB25
in the submission. Refer to Docket Number FINCEN-2014-0001.
Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Include 1506-AB25 in the body
of the text. Please submit comments by one method only. All comments
submitted in response to this NPRM 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 Resource Center at 1-800-767-
2825 or 1-703-905-3591 (not a toll free number) and select option 3 for
regulatory questions. Email inquiries can be sent to FRC@fincen.gov.
SUPPLEMENTARY INFORMATION:
I. Background
FinCEN exercises regulatory functions primarily under the Currency
and Foreign Transactions Reporting Act of 1970, as amended by the USA
PATRIOT Act of 2001 (PATRIOT Act) and other legislation, which
legislative framework is commonly referred to as the ``Bank Secrecy
Act'' (BSA).\1\ The BSA 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.'' \2\
---------------------------------------------------------------------------
\1\ 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).
\2\ 31 U.S.C. 5311.
---------------------------------------------------------------------------
The Secretary has delegated to the Director of FinCEN the authority
to implement, administer and enforce compliance with the BSA and
associated regulations.\3\ FinCEN is authorized to impose anti-money
laundering (AML) program requirements on financial institutions,\4\ as
well as to require financial institutions to maintain procedures to
ensure compliance with the BSA and the regulations promulgated
thereunder or to guard against money laundering.\5\
---------------------------------------------------------------------------
\3\ Treasury Order 180-01 (March 24, 2003).
\4\ 31 U.S.C. 5318(h)(2).
\5\ 31 U.S.C. 5318(a)(2).
---------------------------------------------------------------------------
FinCEN, in consultation with the staffs of the federal functional
regulators and the Department of Justice, has determined that more
explicit rules for covered financial institutions \6\ with respect to
customer due diligence (CDD) are necessary to clarify and strengthen
CDD within the BSA regime. As demonstrated further below, such changes
will enhance financial transparency and safeguard the financial system
against illicit use. Requiring financial institutions to perform
effective CDD so that they know their customers--both who they are and
what transactions they conduct--is a critical aspect of combating all
forms of illicit financial activity, from terrorist financing and
sanctions evasion to more traditional financial crimes, including money
laundering, fraud, and tax evasion. For FinCEN, the key elements of CDD
include: (i) Identifying and verifying the identity of customers; (ii)
identifying and verifying the identity of beneficial owners of legal
entity customers (i.e., the natural persons who own or control legal
entities); (iii) understanding the nature and purpose of customer
relationships; and (iv) conducting ongoing monitoring to maintain and
update customer information and to identify and report suspicious
transactions. Collectively, these elements comprise the minimum
standard of CDD, which FinCEN believes is fundamental to an effective
AML program.
---------------------------------------------------------------------------
\6\ For purposes of this preamble, a ``covered financial
institution'' refers to: (i) Banks; (ii) brokers or dealers in
securities; (iii) mutual funds; and (iv) futures commission
merchants and introducing brokers in commodities.
---------------------------------------------------------------------------
Accordingly, this Notice of Proposed Rulemaking (NPRM) proposes to
amend FinCEN's existing rules so that each of these pillars is
explicitly referenced in a corresponding requirement within FinCEN's
program rules. The first element, identifying and verifying the
identity of customers, is already included in the existing regulatory
requirement to have a customer identification program (CIP). Given this
fact, FinCEN is addressing the need to have explicit requirements with
respect to the three remaining elements via two rule changes. First,
FinCEN is addressing the need to collect beneficial owner information
on the natural persons behind legal entities by proposing a new
separate requirement to identify and verify the beneficial owners of
legal entity customers, subject to certain exemptions. Second, FinCEN
is proposing to add explicit CDD requirements with respect to
understanding the nature and purpose of customer relationships and
conducting ongoing monitoring as components in each covered financial
institution's core AML program requirements. Within this context,
FinCEN is also updating its regulations to include explicit reference
to all four of the pre-existing core requirements of an AML program,
sometimes referred to as ``pillars,'' so that all of these requirements
are visible within FinCEN's rules. As discussed in more detail below,
these existing core requirements are already laid out in the BSA as
minimum requirements and are substantively the same as those already
included within regulations or rules issued by federal functional
regulatory agencies and self-regulatory organizations (SROs), and
therefore we believe they do not add to or otherwise change the covered
financial institutions' existing obligations under these regulations or
rules.
FinCEN wishes to emphasize at the outset that nothing in this
proposal is intended to lower, reduce, or limit the due diligence
expectations of the federal functional regulators or in any way limit
their existing regulatory discretion. To clarify this point, this
proposal incorporates the CDD elements on nature and purpose and
ongoing monitoring into FinCEN's existing AML program requirements,
which generally provide that an AML program is
[[Page 45153]]
adequate if, among other things, the program complies with the
regulation of its federal functional regulator (or, where applicable,
self-regulatory organization) governing such programs.\7\ In addition,
the Treasury Department intends for the requirements contained in this
customer due diligence and beneficial ownership proposal to be
consistent with, and not to supersede, any regulations, guidance or
authority of any federal banking agency, the Securities and Exchange
Commission (SEC), the Commodity Futures Trading Commission (CFTC), or
of any self-regulatory organization (SRO) relating to customer
identification, including with respect to the verification of the
identities of legal entity customers.
---------------------------------------------------------------------------
\7\ See, e.g., 31 CFR 1020.210, which currently provides that a
financial institution regulated by a Federal functional regulator
that is not subject to the regulations of a self-regulatory
organization shall be deemed to satisfy the requirements of 31
U.S.C. 5318(h)(1) if it implements and maintains an anti-money
laundering program that complies with the regulation of its Federal
functional regulator governing such programs. (emphasis added).
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The remainder of this background section provides: (a) An overview
of the importance of CDD; (b) a description of the Advance Notice of
Proposed Rulemaking (ANPRM),\8\ which initiated this rulemaking process
and Treasury's subsequent outreach to the private sector; and (c) an
overview of Treasury's efforts to enhance financial transparency more
broadly.
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\8\ See 77 FR 13046, March 5, 2012.
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A. Importance of Customer Due Diligence
Clarifying and strengthening CDD requirements for U.S. financial
institutions, including an obligation to identify beneficial owners,
advances the purposes of the BSA by:
Enhancing the availability to law enforcement, as well as
to the federal functional regulators and SROs, of beneficial ownership
information of legal entity customers obtained by U.S. financial
institutions, which assists law enforcement financial investigations
and regulatory examinations and investigations;
Increasing the ability of financial institutions, law
enforcement, and the intelligence community to identify the assets and
accounts of terrorist organizations, money launderers, drug kingpins,
weapons of mass destruction proliferators, and other national security
threats, which strengthens compliance with sanctions programs designed
to undercut financing and support for such persons;
Helping financial institutions assess and mitigate risk,
and comply with all existing legal requirements, including the BSA and
related authorities;
Facilitating reporting and investigations in support of
tax compliance, and advancing national commitments made to foreign
counterparts in connection with the provisions commonly known as the
Foreign Account Tax Compliance Act (FATCA); \9\ and
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\9\ Hiring Incentives to Restore Employment Act of 2010, Public
Law 111-147, Section 501(a).
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Promoting consistency in implementing and enforcing CDD
regulatory expectations across and within financial sectors.
i. Assisting Financial Investigations by Law Enforcement
The abuse of legal entities to disguise involvement in illicit
financial activity remains a longstanding vulnerability that
facilitates crime, threatens national security, and jeopardizes the
integrity of the financial system. Criminals have exploited the
anonymity that can be provided by legal entities to engage in a variety
of financial crimes, including money laundering, corruption, fraud,
terrorist financing, and sanctions evasion.
There are numerous examples. Law enforcement officials have found
that major drug trafficking organizations use shell companies to
launder drug proceeds.\10\ In 2011, a World Bank report highlighted how
corrupt actors consistently abuse legal entities to conceal the
proceeds of corruption, which the report estimates to aggregate to at
least $40 billion per year in illicit activity.\11\ Other criminals
also make aggressive use of front companies, which may also conduct
legitimate business activity, to disguise the deposit, withdrawal, or
transfer of illicit proceeds that are intermingled with legitimate
funds.
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\10\ Combating Transnational Organized Crime: International
Money Laundering as a Threat to Our Financial System, Before the
Subcomm. on Crime, Terrorism, and Homeland Security, H. Comm. on the
Judiciary, 112th Cong. (February 8, 2012) (statement of Jennifer
Shasky Calvery as Chief, Asset Forfeiture and Money Laundering
Section, Criminal Division of the U.S. Department of Justice).
\11\ The Puppet Masters: How the Corrupt Use Legal Structures to
Hide Stolen Assets and What to Do About It, The International Bank
for Reconstruction and Development/The World Bank (2011).
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Strong CDD practices that include identifying the natural persons
behind a legal entity--i.e., the beneficial owners--help defend against
these abuses in a variety of ways. Armed with beneficial ownership
information, financial institutions can provide law enforcement with
key details about the legal structures used by suspected criminals to
conceal their illicit activity and assets. Moreover, requiring legal
entities seeking access to financial institutions to disclose
identifying information, such as the name, date of birth, and social
security number of a natural person, will make such entities more
transparent, and thus less attractive to criminals and those who assist
them. Even if an illicit actor tries to thwart such transparency by
providing false beneficial ownership information to a financial
institution, law enforcement has advised FinCEN that such information
can still be useful in demonstrating unlawful intent and in generating
leads to identify additional evidence or co-conspirators.
ii. Advancing Counterterrorism and Broader National Security Interests
As noted, criminals often abuse legal entities to evade sanctions
or other targeted financial measures designed to combat terrorism and
other national security threats. The success of such targeted financial
measures depends, in part, on the ability of financial institutions,
law enforcement, and intelligence agencies to identify a target's
assets and accounts. These measures are thwarted when legal entities
are abused to obfuscate ownership interests. Effective CDD helps
prevent such abuses by requiring the collection of critical
information, including beneficial ownership information, which may be
helpful in implementing sanctions or other similar measures.
iii. Improving a Financial Institution's Ability To Assess and Mitigate
Risk
Express CDD requirements would also enable financial institutions
to more effectively assess and mitigate risk. It is through CDD that
financial institutions are able to develop risk profiles of their
customers. Comprehensive risk profiles enable a financial institution
to monitor accounts more effectively, and evaluate activity to
determine whether it is unusual or suspicious, as required under
suspicious activity reporting obligations.\12\ Further, in the event
that a financial institution files a suspicious activity report (SAR),
information gathered through CDD enhances SARs, which in turn helps law
enforcement, intelligence, national security and tax authorities
investigate and pursue illicit financing activity.
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\12\ See, e.g., 31 CFR 1020.320.
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iv. Facilitating Tax Compliance
Customer due diligence also facilitates tax reporting,
investigations and compliance. For example,
[[Page 45154]]
information held by banks and other financial institutions about the
ownership of companies can be used to assist law enforcement in
identifying the true owners of assets and their true tax liabilities.
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. Strengthening CDD is an important part of that
effort, and it will dovetail with other efforts to create greater
transparency, such as the new tax reporting provisions under the
Foreign Account Tax Compliance Act (FATCA).\13\ FATCA requires foreign
financial institutions to identify U.S. account holders, including
legal entities with substantial U.S. ownership, and to report certain
information about those accounts to the Internal Revenue Service
(IRS).\14\ The United States has collaborated with foreign governments
to enter into intergovernmental agreements that facilitate the
effective and efficient implementation of these requirements. These
agreements and, to a lesser extent, the applicable FATCA regulations,
allow foreign financial institutions to rely on existing AML practices
in a number of circumstances, including, in the case of the agreements,
for purposes of determining whether certain legal entity customers have
substantial owners. Pursuant to many of these agreements, the United
States has committed to pursuing reciprocity with respect to collecting
and reporting to the authorities of the FATCA partner information on
the U.S. accounts of residents of the FATCA partner. A general
requirement for U.S. financial institutions to obtain beneficial
ownership information for AML purposes advances this commitment, and
puts 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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\13\ Hiring Incentives to Restore Employment Act of 2010, Public
Law 111-147, Section 501(a).
\14\ 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,'' RIN 1545-BK68 (January
28, 2013), available at https://www.irs.gov/PUP/businesses/corporations/TD9610.pdf . For further updates on FATCA regulations,
see https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA).
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v. Promoting Clear and Consistent Expectations and Practices
Customer due diligence is universally recognized as fundamental to
mitigating illicit finance risk, even though not all covered financial
institutions use the specific term ``customer due diligence'' to
describe their practices. While Treasury understands from its outreach
to the private sector that financial institutions broadly accept this
principle and implement CDD practices in some form under a risk-based
approach, covered financial institutions have expressed disparate views
about what precise activity CDD entails. At public hearings held after
the comment period to the ANPRM, discussed below, financial
institutions described widely divergent CDD practices, especially with
respect to identifying beneficial owners outside of limited
circumstances prescribed by statute.\15\
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\15\ See, e.g., Summary of Public Hearing: Advance Notice of
Proposed Rulemaking on Customer Due Diligence (October 5, 2012),
available at https://www.fincen.gov/whatsnew/html/20121130NYC.html
(``Participants expressed varied views as to whether, how and in
what circumstances, financial institutions obtain beneficial
ownership information.'').
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FinCEN believes that this disparity adversely affects efforts to
mitigate risk and can promote an uneven playing field across and within
financial sectors. Covered financial institutions have noted that
unclear CDD expectations can result in inconsistent regulatory
examinations, potentially causing them to devote their limited
resources to managing derivative legal risk rather than fundamental
illicit finance risk. Private sector representatives have also noted
that inconsistent expectations can effectively discourage best
practices, because covered financial institutions with robust
compliance procedures may believe that they risk losing customers to
other, more lax institutions. Greater consistency across the financial
system could also facilitate reliance on the CDD efforts of other
financial institutions.
Providing a consolidated and clear CDD framework would help address
these issues. As part of this framework, expressly stating CDD
requirements in rule or regulation with respect to (i) understanding
the nature and purpose of customer relationships and (ii) conducting
ongoing monitoring to maintain and update customer information and to
identify and report suspicious transactions, will facilitate more
consistent implementation, supervision and enforcement of these
expectations. With respect to the beneficial ownership proposal,
requiring all covered financial institutions to identify beneficial
owners in the same manner and pursuant to the same definition also
promotes consistency across the industry. Requiring covered financial
institutions to operate under one clear CDD framework will promote a
more level playing field across and within financial sectors.
B. Issuance of the Advance Notice of Proposed Rulemaking and Subsequent
Outreach
FinCEN formally commenced this rulemaking process in March 2012 by
issuing an ANPRM that described FinCEN's potential proposal for
codifying explicit CDD requirements, including customer identification,
understanding the nature and purpose of accounts, ongoing monitoring,
and obtaining beneficial ownership information.\16\
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\16\ Two years prior to that, in March 2010, FinCEN, along with
several other agencies, published Joint Guidance on Obtaining and
Retaining Beneficial Ownership Information, FIN-2010-G001 (March 5,
2010). Industry reaction to this guidance has been one reason for
pursuit of the clarity entailed in making requirements with respect
to CDD and beneficial ownership explicit within FinCEN's
regulations.
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FinCEN received approximately 90 comments, mostly from banks,
credit unions, securities and derivatives firms, mutual funds, casinos,
and money services businesses. In general, and as described in greater
detail below, these commenters primarily raised concerns about the
potential costs and practical challenges associated with a categorical
requirement to obtain beneficial ownership information. They also
reflected some confusion with respect to FinCEN's articulation of the
other components of CDD, suggesting that FinCEN was imposing new
requirements rather than explicitly codifying pre-existing obligations.
To better understand and address these concerns, Treasury held five
public hearings in Washington, DC, Chicago, New York, Los Angeles and
Miami.\17\ At these meetings, participants expressed their views on the
ANPRM and offered specific recommendations about how best to minimize
the burden associated with obtaining beneficial ownership information.
These
[[Page 45155]]
discussions were critical in the development of this proposal.
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\17\ Summary of Public Hearing: Advance Notice of Proposed
Rulemaking on Customer Due Diligence (July 31, 2012), available at
https://www.regulations.gov/#!documentDetail;D=FINCEN-2012-0001-0094;
Summary of Public Hearing: Advance Notice of Proposed Rulemaking on
Customer Due Diligence (September 28, 2012, available at https://www.fincen.gov/whatsnew/html/20121130CHI.html; Summary of Public
Hearing: Advance Notice of Proposed Rulemaking on Customer Due
Diligence (October 5, 2012), available at https://www.fincen.gov/whatsnew/html/20121130NYC.html; Summary of Public Hearing: Advance
Notice of Proposed Rulemaking on Customer Due Diligence (October 29,
2012), available at https://www.fincen.gov/whatsnew/html/20121130LA.html; Summary of Public Hearing: Advance Notice of
Proposed Rulemaking on Customer Due Diligence (December 3, 2012),
available at https://www.fincen.gov/whatsnew/pdf/SummaryofHearing-MiamiDec3.pdf.
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C. Treasury's Broad Strategy To Enhance Financial Transparency
Clarifying and strengthening CDD is an important component of
Treasury's broader three-part strategy to enhance financial
transparency. Other key elements of this strategy include: (i)
Increasing the transparency of U.S. legal entities through the
collection of beneficial ownership information at the time of the legal
entity's formation and (ii) facilitating global implementation of
international standards regarding CDD and beneficial ownership of legal
entities and trusts.
This proposal thus complements the Administration's ongoing work
with Congress to facilitate adoption of legislation that would require
the collection of beneficial ownership information at the time that
legal entities are formed in the United States. This proposal also
advances Treasury's ongoing work with the Group of Twenty Finance
Ministers and Central Bank Governors (G-20), the Financial Action Task
Force (FATF), and other global partners, who have emphasized the
importance of improving CDD practices and requiring the disclosure of
beneficial ownership information at the time of company formation or
transfer. Moreover, this proposal furthers the United States' Group of
Eight (G-8) commitment as set forth in the United States G-8 Action
Plan for Transparency of Company Ownership and Control, published on
June 18, 2013.\18\ This Action Plan is in line with principles agreed
to by the G-8, which the White House noted ``are crucial to preventing
the misuse of companies by illicit actors.'' \19\ While these elements
are all proceeding independently, together they establish a
comprehensive approach to promoting financial transparency.
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\18\ United States G-8 Action Plan for Transparency of Company
Ownership and Control, available at https://www.whitehouse.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control.
\19\ White House Fact Sheet: U.S. National Action Plan on
Preventing the Misuse of Companies and Legal Arrangements (June 18,
2013), available at https://www.whitehouse.gov/the-press-office/2013/06/18/fact-sheet-us-national-action-plan-preventing-misuse-companies-and-legal.
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II. Scope of and Rationale for the Proposed Rule
This section describes: (i) The range of financial institutions
covered by this proposal; (ii) FinCEN's continued interest in
potentially extending the proposed rule to additional financial
institutions in the future, and (iii) the basis for proposing explicit
requirements that, in conjunction with the existing customer
identification program (CIP) requirement, will create a clearer CDD
framework.
As an initial matter, this proposal covers only those financial
institutions subject to a CIP requirement under FinCEN regulations. At
this time, such financial institutions are: (i) Banks; (ii) brokers or
dealers in securities; (iii) mutual funds; and (iv) futures commission
merchants and introducing brokers in commodities.\20\ FinCEN believes
that initially covering only these sectors is an appropriate exercise
of its discretion to engage in incremental rulemaking. These sectors
represent a primary means by which individuals and businesses maintain
accounts with access to the financial system. In addition, because
these covered financial institutions have been subject to CIP rules,
FinCEN believes that it is logical to commence implementation with
those financial institutions already equipped to leverage CIP practices
to the extent possible, as the proposal contemplates.
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\20\ 31 CFR 1020.220 (Banks); 31 CFR 1023.220 (Broker-Dealers);
31 CFR 1024.220 (Mutual Funds); 31 CFR 1026.220 (Futures Commission
Merchants and Introducing Brokers in Commodities).
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In addition to input from covered financial institutions, FinCEN
sought and received comments on the ANPRM from financial institutions
not subject to CIP requirements, such as money services businesses,
casinos, insurance companies, and other entities subject to FinCEN
regulations. Based on these comments and discussions with the private
sector, FinCEN believes that extending CDD requirements in the future
to these, and potentially other types of financial institutions, may
ultimately promote a more consistent, reliable, and effective AML
regulatory structure across the financial system.
Several comments questioned the need for proposing a CDD rule that
contained all four elements, when three of the four elements are
already consistent with existing requirements or supervisory
expectations. FinCEN believes that proposing clear CDD requirements is
the most effective way of clarifying, consolidating, and harmonizing
expectations and practices across all covered financial institutions.
Expressly stating the requirements facilitates the goal that financial
institutions, regulators, and law enforcement all operate under the
same set of clearly articulated principles. The proposed CDD
requirements are intended to set forth a clear framework of minimum
expectations that can be broadly applied to varying risk scenarios
across multiple financial sectors and can be tailored by financial
institutions to account for the risks unique to them. For this reason,
and as part of a broader global agenda supported by Treasury, many
other jurisdictions have already imposed requirements similar to those
proposed herein.\21\ These global developments promote a level playing
field internationally and mitigate the threat of illicit finance
presented by an increasingly interconnected financial system.
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\21\ For example, all European Union member states, as well as
Switzerland, Singapore, Hong Kong, and other financial centers
generally require financial institutions to conduct due diligence as
proposed in this rulemaking, including obtaining beneficial
ownership information as part of their CDD requirements. See, e.g.,
Third European Union Money Laundering Directive, 2005/60/EC, Article
3(6) (Oct. 26, 2005).
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Furthermore, additional discussions with the private sector
reaffirmed FinCEN's view that a beneficial ownership requirement is
best understood in the context of broader due diligence conducted on
customers. Beneficial ownership information is only one component of a
broader profile that is necessary for financial institutions to develop
when assessing a particular customer's risk. Beneficial ownership
information is a means of building a more comprehensive risk profile;
it is not an end in and of itself. Thus, in addition to proposing a
specific requirement for the collection of the beneficial ownership
information, FinCEN is also proposing amendments to its AML program
rules to specifically reference the two components of CDD that were not
elsewhere explicitly included in its regulations, i.e., understanding
the nature and purpose of an account and conducting ongoing monitoring.
III. Elements of the Proposed Rule
A. Overview
As described briefly above, it is FinCEN's position that CDD
consists, at a minimum, of four elements:
[ssquf] Identifying and Verifying the Identity of Customers;
[ssquf] Identifying and Verifying the Identity of Beneficial Owners
of Legal Entity Customers;
[ssquf] Understanding the Nature and Purpose of Customer
Relationships; and
[ssquf] Conducting Ongoing Monitoring to Maintain and Update
Customer Information and to Identify and Report Suspicious
Transactions.
Because the first element of CDD is already satisfied by existing CIP
[[Page 45156]]
requirements,\22\ this NPRM proposes to address the remaining three
elements of CDD.
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\22\ See, e.g., 31 CFR 1010.220.
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Beneficial Ownership
The second element of CDD requires financial institutions to
identify and verify the beneficial owners of legal entity customers. In
this NPRM, FinCEN proposes a new requirement that financial
institutions identify the natural persons who are beneficial owners of
legal entity customers, subject to certain exemptions. The definition
of ``beneficial owner'' proposed herein requires that the person
identified as a beneficial owner be a natural person (as opposed to
another legal entity). A financial institution must satisfy this
requirement by obtaining at the time a new account is opened a standard
certification form (attached hereto as Appendix A) directly from the
individual opening the new account on behalf of the legal entity
customer.
The term ``beneficial owner'' has been defined differently in
different contexts. In the AML context, the Financial Action Task Force
(FATF), the global standard setter for combating money laundering and
the financing of terrorism and proliferation, defines the beneficial
owner as ``the natural person(s) who ultimately owns or controls a
customer and/or the person on whose behalf a transaction is being
conducted. It also incorporates those persons who exercise ultimate
effective control over a legal person or arrangement.'' That
definition, initially adopted in 2003, has been retained in the revised
FATF standards adopted in 2012.\23\ FinCEN has endeavored to capture
both the concept of ownership and of effective control in its proposed
definition.
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\23\ ``International Standards on Combating Money Laundering and
the Financing of Terrorism & Proliferation--The FATF
Recommendations,'' February 2012, General Glossary, at 109,
available at https://www.fatf-gafi.org/topics/fatfrecommendations/documents/internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation-thefatfrecommendations.html.
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Financial institutions would be required to verify the identity of
beneficial owners consistent with their existing CIP practices.
However, FinCEN is not proposing to require that financial institutions
verify that the natural persons identified on the form are in fact the
beneficial owners. In other words, the requirement focuses on verifying
the identity of the beneficial owners, but does not require the
verification of their status as beneficial owners. This proposed
requirement states minimum standards. As will be described in greater
detail below, FinCEN believes that the beneficial ownership requirement
is the only new requirement imposed by this rulemaking. As such,
although beneficial ownership identification is but one of four
requirements for a comprehensive CDD scheme, the proposed beneficial
ownership rule is being proposed as a separate provision in FinCEN's
regulations; other components of this rulemaking will be addressed via
amendments to existing provisions, as described below.
Understanding the Nature and Purpose of Customer Relationships/
Monitoring for Suspicious Activity
The NPRM also addresses the third and fourth elements of CDD by
proposing amendments to the AML program rule that harmonize these
elements of CDD with existing AML obligations. The third element of CDD
requires financial institutions to understand the nature and purpose of
customer relationships in order to develop a customer risk profile.
This is a necessary and critical step in complying with the existing
requirement to identify and report suspicious transactions as required
under the BSA. The fourth element of CDD requires financial
institutions to conduct ongoing monitoring. As with the third element,
ongoing monitoring is a necessary part of maintaining and updating
customer information and identifying and reporting suspicious
transactions as required under the BSA.
The third and fourth elements are consistent with, and in fact
necessary in order to comply with, the existing requirement to report
suspicious activity, as this obligation inherently requires a financial
institution to understand expected customer activity in order to
develop a customer risk profile and to monitor customer activity so
that it can identify transactions that appear unusual or suspicious. As
such, the third and fourth elements are intended to explicitly state
already existing expectations for the purpose of codifying the baseline
standard of due diligence that is fundamental to an effective AML
program.
Because these two elements are consistent with (and necessary in
order to comply with) existing BSA requirements as adopted in
regulations or rules issued by federal functional regulators and SROs,
nothing in this proposed rule should be interpreted in a manner
inconsistent with previous guidance issued by FinCEN or guidance,
regulations, or supervisory expectations of the appropriate federal
functional regulator or SRO with respect to these elements.\24\ For
example, the Federal Financial Institutions Examination Council (FFIEC)
\25\ provided supervisory expectations for examinations related to CDD
in the FFIEC BSA/AML Examination Manual.\26\ FinCEN believes that,
aside from the new beneficial ownership requirement, the other proposed
CDD elements are consistent with the regulatory expectations of the
federal functional regulators and should be interpreted
accordingly.\27\ Of course, as the CDD requirements proposed herein
state minimum standards, existing or future guidance, regulations or
supervisory expectations may provide for additional requirements or
steps that should be taken to mitigate risk.
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\24\ While FinCEN reserves overall compliance and enforcement
authority with respect to all regulations it issues under the under
the BSA, FinCEN has, by regulation, delegated authority to the
federal functional regulators to examine institutions under their
jurisdiction for compliance with BSA regulations, including the AML
program requirements. See 31 CFR 1010.810.
\25\ The FFIEC is a formal interagency body empowered to
prescribe uniform principles, standards, and report forms for the
federal examination of financial institutions by 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, and the Consumer
Financial Protection Bureau, and to make recommendations to promote
uniformity in the supervision of financial institutions.
\26\ The Bank Secrecy Act Anti-Money Laundering Examination
Manual, issued by the Federal Financial Institutions Examination
Council (as amended, the ``BSA/AML Manual'').
\27\ The future status of previous guidance related to
identifying beneficial owners of legal entity customers, such as the
Joint Guidance on Obtaining and Retaining Beneficial Ownership
Information, FIN-2010-G001 (March 5, 2010), will be addressed at the
time of the issuance of a final rule.
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The sections below further describe each of the three CDD elements
addressed in this rulemaking in detail by providing a general overview
of these elements as discussed in the ANPRM, a summary of the comments
received, and FinCEN's specific proposal.
B. Identifying and Verifying the Identity of Beneficial Owners of Legal
Entity Customers
With respect to this element of CDD,\28\ the ANPRM explored a
categorical requirement for financial institutions to identify the
beneficial owners of legal entity customers. Unlike the other elements
of CDD, this element would impose a new regulatory obligation on
financial institutions. Currently, certain financial institutions are
explicitly
[[Page 45157]]
required to take reasonable steps to identify beneficial owners in only
two limited situations.\29\
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\28\ For purposes of clarity, this NPRM references the elements
of CDD in a different order than was used in the ANPRM; Identifying
and Verifying the Identity of the Beneficial Owners of Legal Entity
Customers is now listed before Understanding the Nature and Purpose
of Customer Relationships.
\29\ Under FinCEN regulations implementing Section 312 of the
USA PATRIOT Act (Section 312), covered financial institutions that
offer private banking accounts are required to take reasonable steps
to identify the nominal and beneficial owners of such accounts, 31
CFR 1010.620(b)(1), and 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, 31
CFR 1010.610(b)(1)(iii)(A).
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i. Summary of Comments
1. Private Sector Comments
While a number of private sector comments offered general support
for a reasonable expansion of the beneficial ownership requirement and
noted that many financial institutions already identify beneficial
owners in certain circumstances beyond those explicitly required under
the regulations implementing Section 312 of the PATRIOT Act, most
expressed the following primary criticisms and concerns:
The burden and costs associated with a categorical (versus
a risk-based) obligation to collect beneficial ownership information
may outweigh the benefits;
An express beneficial ownership requirement should be (at
least in part) risk-based to account for the wide variety of financial
institutions, account types, products, and customers that comprise the
financial system, and to avoid requiring financial institutions to
misallocate scarce compliance resources away from high-risk customers;
A categorical requirement should include exemptions,
including for those customers currently exempt from customer
identification requirements;
Any definition of ``beneficial owner'' should be practical
and easily understood by financial institution employees and customers;
Financial institutions may be unable to verify the status
of a beneficial owner absent an independent source of beneficial
ownership information, such as a state registry; and
FinCEN should consider the compliance challenges
associated with specific account and relationship types, such as
intermediated relationships and trusts.
2. Law Enforcement Comments
Most of the comment letters submitted by law enforcement agencies
and non-governmental organizations also focused on the beneficial
ownership element of the CDD rule. In general, these letters
highlighted the following benefits that such an obligation would
provide:
A beneficial ownership rule would require financial
institutions to retain more useful customer information, which would
significantly improve law enforcement's ability to pursue new leads
with respect to legal entities under investigation;
Beneficial ownership information would improve financial
institutions' monitoring capabilities, and put them in a position to
file higher quality SARs; and
Obtaining beneficial ownership information for U.S. legal
entities would enhance the United States' ability to respond to a
foreign jurisdiction's request for investigative assistance. This would
assist in efforts to join with foreign counterparts in global efforts
to disrupt organized crime and terrorism.
ii. Key Issues and FinCEN Proposals
As described above, Treasury has engaged in extensive outreach with
the private sector and law enforcement agencies to better understand
and address these issues. Such discussions were essential in further
developing the initial proposals set forth in the ANPRM to better
conform with existing practices and more comprehensively account for
regulatory burden and sector-specific complexities. Key issues raised
during the comment period included: The definition of ``beneficial
owner'' and ``legal entity customer''; exemptions and exclusions from
the definition; application of the requirement to trusts, intermediated
account relationships and pooled investment vehicles; verification of
beneficial owners through a standard certification; updating beneficial
ownership information; and reliance on other financial institutions to
satisfy the requirement. Each of these issues is described in further
detail below.
1. Definition of ``Beneficial Owner''
The ANPRM explored a definition of ``beneficial owner'' with two
independent components, referred to as ``prongs.'' \30\ The first prong
was an ownership prong, the purpose of which is to identify individuals
with substantial equity ownership interests. The second prong was a
control prong, the purpose of which was to identify individuals with
actual managerial control.
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\30\ The ANPRM suggested the following definition of
``beneficial owner'': (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.
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Many private sector commenters stated that the definition discussed
in the ANPRM was conceptually confusing and unworkable in practice. For
example, some commenters questioned the feasibility of engaging in a
comparative analysis of every owner for purposes of determining who
``has at least as great an equity interest in the entity as any other
individual.'' A similar type of comparative analysis existed with
respect to the control prong. Other commenters were uncertain as to
whether an individual must satisfy both the ownership prong and the
control prong to be considered a beneficial owner, or whether each
prong was intended to be independently applied to identify separate
individuals. Other challenges identified in the comments included,
among other things: (i) Shifting ownership percentages; (ii) managerial
changes; and (iii) the ability of financial institution personnel and
customers to understand and respond to the definition.
FinCEN agrees that the definition of ``beneficial owner'' must be
clear to employees and customers of financial institutions. To that
end, and in light of the comments received, FinCEN proposes the
following definition of ``beneficial owner'' of a legal entity
customer, which, again, includes an ownership prong and a control
prong:
Ownership Prong:
1. Each individual, if any, who, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise,
owns 25 percent or more of the equity interests of a legal entity
customer; and
Control Prong:
2. An individual with significant responsibility to control,
manage, or direct a legal entity customer, including
(A) An executive officer or senior manager (e.g., a Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer, Managing
Member, General Partner, President, Vice President, or Treasurer); or
(B) Any other individual who regularly performs similar functions.
Each prong is intended to be an independent test. Under the ownership
[[Page 45158]]
prong (i.e., clause (1)), a financial institution must identify each
individual who owns 25 percent or more of the equity interests.
Accordingly, a financial institution would be required to identify no
more than four individuals under this prong, and, if no one individual
owns 25 percent or more of the equity interests, then the financial
institution may identify no individuals under the ownership prong.
Under the control prong (clause (2)), a financial institution must
identify one individual. In cases where an individual is both a 25
percent owner and meets the definition for control, that same
individual could be identified as a beneficial owner under both prongs.
FinCEN believes this definition provides clarity and effectiveness.
In contrast to the definition suggested in the ANPRM, this definition
provides greater flexibility to financial institutions and customers in
responding to the control prong of the definition by permitting the
identification in clause (ii) of any individual with significant
managerial control, which could include a President, Chief Executive
Officer or other senior executive, or any other individual acting in a
similar capacity. Moreover, this definition does not require a
financial institution to comparatively assess individuals to determine
who has the greatest equity stake in the legal entity. The 25 percent
equity ownership threshold set forth in the ownership prong of the
definition sets a clear standard that can be broadly applied. At the
same time, the 25 percent threshold retains the benefits of identifying
key individuals with a substantial ownership interest in the legal
entity.
Commenters expressed concern that identifying beneficial owners
under the ownership prong would be difficult for legal entity customers
that have complex legal ownership structures. FinCEN acknowledges that
identifying the individuals who own, directly or indirectly, 25 percent
or more of the equity interests of a legal entity may not be
straightforward in every circumstance. For instances where legal
entities are held by other legal entities, determining ownership may
require several intermediate analytical steps. FinCEN's expectation is
that a financial institution will identify the natural person or
persons who exercise control of a legal entity customer through a 25%
or greater ownership interest, regardless of how many corporate parents
or holding companies removed the natural person is from the legal
entity customer. Consequently, the term ``equity interests'' should be
interpreted broadly to apply to a variety of different legal structures
and ownership situations. In short, ``equity interests'' refers to an
ownership interest in a business entity. Examples of ``equity
interests'' include shares or stock in a corporation, membership
interests in a limited liability company, and other similar ownership
interests in a legal entity. FinCEN has deliberately avoided use of
more specific terms of art associated with the exercise of control
through ownership, based on the preferences expressed by many members
of industry, who have urged FinCEN to avoid creating a definition with
complex legal terms that front-line employees at financial
institutions, and the individuals opening accounts on behalf of legal
entity customers, might have difficulty understanding and applying.
Moreover, the phrase ``directly or indirectly'' in the ownership
prong of the definition is intended to make clear that where a legal
entity customer is owned by (or controlled through) one or more other
legal entities, the proposed rule requires customers to look through
those other legal entities to determine which natural persons own 25
percent or more of the equity interests of the legal entity customer.
FinCEN recognizes that identifying such individuals may be challenging
where the legal entity customer has a complex legal structure with
multiple levels of ownership, but FinCEN does not expect financial
institutions--or customers--to undergo complex and exhaustive analysis
to determine with legal certainty whether an individual is a beneficial
owner under the definition. Instead, FinCEN expects financial
institutions to be able to rely generally on the representations of the
customer when answering the financial institution's questions about the
individual persons behind the legal entity, including whether someone
identified as a beneficial owner is in fact a beneficial owner under
this definition. FinCEN believes that this approach provides greater
flexibility to financial institutions and customers in complying with
the proposed beneficial ownership requirement. In addition, by using
the term ``directly or indirectly,'' FinCEN does not intend for
financial institutions to assess under this prong whether individuals
are acting in concert with one another to collectively own 25 percent
of more of the legal entity where each of them has an independent
contributing stake; FinCEN is concerned, however, with the use of de
facto or de jure nominees to give a single individual an effective
ownership stake of 25 percent or more. In this instance as well,
however, FinCEN expects financial institutions to be able to rely
generally on the representations of the customer when answering the
financial institution's questions about the individual persons behind
the legal entity.
FinCEN has learned through its outreach that some financial
institutions may already identify beneficial owners using a lower
ownership threshold, such as 10 percent. FinCEN reiterates that the
proposed CDD requirements, including the beneficial ownership
requirement, are intended to set forth minimum due diligence
expectations. Accordingly, a financial institution may determine, based
on its own assessment of risk, that a lower percentage threshold, such
as 10 percent, is warranted. A financial institution may also identify
other individuals that technically fall outside the proposed definition
of ``beneficial owner,'' but may be relevant to mitigate risk. For
example, as noted above, a financial institution may be aware of a
situation in which multiple individuals with independent holdings may
act in concert with each other to structure their ownership interest to
avoid the 25 percent threshold. A financial institution may also be
aware of an individual who effectively controls a legal entity customer
through a substantial debt position. While these individuals do not
fall within the proposed definition of ``beneficial owner,'' the
proposed rule is not intended to preclude a financial institution from
identifying them, and verifying their identity, when it deems it
appropriate to do so.
Commenters also sought clarity as to how this beneficial ownership
requirement would affect the application of FinCEN regulations
implementing Section 312 of the USA PATRIOT Act. The proposed
requirement would apply to all legal entity customers, including legal
entities that open a foreign private banking account that meets the
definition in Sec. 1010.605(m). However, the new requirements would
not apply to the beneficial owner of funds or assets in a payable-
through account of the type described in Sec. 1010.610(b)(1)(iii),
since the owner of such funds or assets does not have an account
relationship with the covered financial institution. In such instances,
compliance with the information requirements included in Sec.
1010.610(b)(1)(iii) will suffice, and the particulars of this new
requirement,
[[Page 45159]]
such as use of a certification form with respect to the beneficial
owner of funds or assets in a payable-through account, would not apply.
2. Definition of Legal Entity Customer
While the ANPRM sought comment on whether certain legal entity
customers should be exempt from the beneficial ownership requirement,
it did not include a discussion of the scope of the definition of legal
entity customer, which is also relevant to the notion of the
exemptions. FinCEN proposes to define legal entity customers to include
corporations, limited liability companies, partnerships or other
similar business entities (whether formed under the laws of a state or
of the United States or a foreign jurisdiction), that open a new
account after the implementing date of the regulation. FinCEN would
interpret this to include all entities that are formed by a filing with
the Secretary of State (or similar office), as well as general
partnerships and unincorporated nonprofit associations. It does not
include trusts other than those that might be created through a filing
with a state (e.g., statutory business trusts).
3. Exemptions and Exclusion From the Beneficial Ownership Requirement
Many commenters strongly recommended that, at a minimum, any
customer exempt from identification under the CIP rules should also be
exempt from the beneficial ownership requirement. The commenters noted
that a contrary approach would effectively nullify the CIP exemption
since a financial institution would be unable to identify a beneficial
owner without first identifying the customer. Many commenters
recommended that other customers should also be exempt if they are
well-regulated or otherwise present a low money laundering risk. The
proposed rule incorporates a number of these suggestions by exempting
all types of entities that are exempt from CIP, as well as allowing for
other specific exemptions.
a. Customers Exempt From CIP
FinCEN proposes to exempt from the beneficial ownership requirement
those types of entities that are exempt from the customer
identification requirements under the CIP rules.\31\ Those types of
entities include, but are not limited to, financial institutions
regulated by a federal functional regulator (i.e., federally regulated
banks, brokers or dealers in securities, mutual funds, futures
commission merchants and introducing brokers in commodities), publicly
held companies traded on certain U.S. stock exchanges, domestic
government agencies and instrumentalities and certain legal entities
that exercise governmental authority.\32\ These exemptions are
incorporated into the proposed beneficial ownership requirement by
excluding these entities from the definition of ``legal entity
customer,'' which corresponds to how these entities are exempted from
CIP (i.e., by excluding them from the definition of ``customer'').\33\
Consequently, the definition of ``legal entity customer'' for purposes
of the beneficial ownership requirement excludes all the same types of
entities as the definition of ``customer'' for purposes of the CIP
rules, including exclusions based on guidance issued by FinCEN and the
federal functional regulators with regard to the applicability of the
CIP rules. For example, where previous guidance has clarified who a
``customer'' is in a particular relationship, that same analysis would
generally apply in determining whether an entity is a ``legal entity
customer'' for purposes of the proposed beneficial ownership
requirement.\34\
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\31\ Although we propose to include the types of entities
exempted from the CIP requirements, the exemption proposed for this
rule would not cover all the entities included in the exemption from
the CIP requirements. This is because FinCEN does not propose to
include an exemption for legal entities with existing accounts that
open new accounts after the implementation date of the rule. The
inclusion of such an exemption would parallel the exemption in the
CIP requirements per the definition of ``customer.'' See, e.g. 31
CFR 1020.100(c)(2)(iii) and 1023.100(d)(2)(iii). However, FinCEN
believes that such an approach would not serve the purposes of the
present rule. In situations where a legal entity is opening an
account in addition to a previously existing account, the new
requirement will apply. If the pre-existing account pre-dates the
implementation date of the rule, the financial institution will need
to obtain the certification form. If the pre-existing account was
established after the implementation date, it may be reasonable for
a financial institution to rely on the certification obtained when
opening the first account in some circumstances. In other
circumstances, collection of an additional certificate may be
necessary. The likelihood of change in beneficial ownership since
the time of the previous account opening would be a key factor in a
financial institution's approach to the requirement.
\32\ See, e.g., 31 CFR 1020.100(c)(2)(i).
\33\ See, e.g., 31 CFR 1020.100(c)(2)(ii).
\34\ See, e.g., FinCEN Guidance, FIN-2007-G001, Application of
the Customer Identification Program Rule to Futures Commission
Merchants Operating as Executing and Clearing Brokers in Give-Up
Arrangements (April 20, 2007), available at https://www.fincen.gov/statutes_regs/guidance/html/cftc_fincen_guidance.html; FinCEN
Guidance, FIN-2006-G004, Frequently Asked Question Regarding
Customer Identification Programs for Futures Commission Merchants
and Introducing Brokers (31 CFR 103.123 (February 14, 2006)),
available at https://www.fincen.gov/statutes_regs/guidance/html/futures_omnibus_account_qa_final.html; Interagency Interpretive
Guidance on Customer Identification Program Requirements under
Section 326 of the USA PATRIOT Act at Question 9 (April 28, 2005),
available at https://www.fincen.gov/statutes_regs/guidance/html/faqsfinalciprule.html; Guidance from the Staffs of the Department of
the Treasury and the U.S. Securities and Exchange Commission,
Question and Answer Regarding the Broker-Dealer Customer
Identification Program Rule (31 CFR 103.122) (October 1, 2003),
available at https://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
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b. Additional Exemptions for Certain Legal Entity Customers
In addition to incorporating exemptions applicable to the CIP
rules, and consistent with various suggestions provided in the comment
letters, FinCEN proposes that the following entities also be exempt
from the beneficial ownership requirement when opening a new account
because their beneficial ownership information is generally available
from other credible sources:
An issuer of a class of securities registered under
Section 12 of the Securities Exchange Act of 1934 or that is required
to file reports under Section 15(d) of that Act;
Any majority-owned domestic subsidiary of any entity whose
securities are listed on a U.S. stock exchange;
An investment company, as defined in Section 3 of the
Investment Company Act of 1940, that is registered with the SEC under
that Act;
An investment adviser, as defined in Section 202(a)(11) of
the Investment Advisers Act of 1940, that is registered with the SEC
under that Act;
An exchange or clearing agency, as defined in Section 3 of
the Securities Exchange Act of 1934, that is registered under Section 6
or 17A of that Act;
Any other entity registered with the Securities and
Exchange Commission under the Securities and Exchange Act of 1934.
A registered entity, commodity pool operator, commodity
trading advisor, retail foreign exchange dealer, swap dealer, or major
swap participant, each as defined in section 1a of the Commodity
Exchange Act, that is registered with the CFTC;
A public accounting firm registered under section 102 of
the Sarbanes-Oxley Act; and
A charity or nonprofit entity that is described in
Sections 501(c), 527, or 4947(a)(1) of the Internal Revenue Code of
1986, that has not been denied tax exempt status, and that is required
to and has filed the most recently required annual information return
with the Internal Revenue Service.
FinCEN notes that exempting these entities from the beneficial
ownership
[[Page 45160]]
requirement does not necessarily imply that they all present a low risk
of money laundering or terrorist financing. For example, a charity may
present a high risk of terrorist financing and therefore require
additional due diligence. However, charities are exempt because the
legal structure of a charity as a tax exempt organization does not
create a beneficial ownership interest in the sense discussed above.
Rather the primary interests created by a charitable structure include
donors, board oversight and management, employees, and beneficiaries.
Under such a structure, board oversight is akin to ownership, and
management is akin to control. In order to obtain and maintain such a
legal structure under the tax code the charity must report and annually
update its donors, board and management to the Internal Revenue
Service. Such reports must be publicly available.\35\
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\35\ See Public Disclosure and Availability of Exempt
Organizations Returns and Applications: Documents Subject to Public
Disclosure, available at https://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosure.
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c. Existing and New Customers
FinCEN also sought comment on whether and how a beneficial
ownership requirement should apply to customers of financial
institutions where such relationships have been established prior to
the implementation date of this rule. Financial institutions noted that
a requirement to ``look back'' to obtain beneficial ownership
information from existing customers would be a substantial burden.
FinCEN proposes that the beneficial ownership requirement will apply
only with respect to legal entity customers that open new accounts
going forward from the date of implementation. Thus, the definition of
``legal entity customer'' is limited to legal entities that open a new
account after the implementation date. Although FinCEN is not proposing
a prescriptive rule requiring financial institutions to look back and
obtain beneficial ownership information for pre-existing accounts, we
are aware that, as a matter of practice, financial institutions may
also consider identifying beneficial owners of existing customers when
updating customer information on a risk basis, as discussed more fully
below.\36\
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\36\ See the discussion in Section III.d of this notice,
entitled ``Ongoing Monitoring.''
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4. Trusts
Several comments described potential challenges in applying a
beneficial ownership requirement to a customer that is a trust. There
are many types of trusts. While a small proportion may fall within the
scope of the proposed definition of legal entity customer (e.g.,
statutory trusts), most will not. Unlike the legal entity customers
that are subject to the proposed beneficial ownership requirement
(corporations, limited liability companies, etc.), a trust is generally
a contractual arrangement between the person who provides the funds and
specifies the trust terms (i.e., the settlor or grantor) and the person
with control over the funds (i.e., the trustee) for the benefit of
those who benefit from the trust (i.e., the beneficiaries). This
arrangement does not generally require the approval by or other action
of a state to become effective. FinCEN notes that in order to engage in
the business of acting as a fiduciary it is necessary for a trust
company to be federally- or state-chartered. As the comments noted,
identifying a ``beneficial owner'' among the parties to such an
arrangement for AML purposes, based on the proposed definition of
beneficial owner, would not be practical. At this point, FinCEN is
choosing not to impose this requirement. In this context we note that,
although the trust is defined in the CIP rules as the financial
institution's customer, the signatory on the account will necessarily
be the trustee, who is required by law to control the trust assets
(including financial institution accounts) and to know the
beneficiaries (by name or class) and act in their best interest.
Therefore, in the context of an investigation, law enforcement would be
able to obtain from the financial institution a point of contact
required by law to have information about relevant individuals
associated with the trust.
The decision not to propose specific requirements in the context of
trusts does not mean, however, that FinCEN necessarily considers trusts
to pose a reduced money laundering or terrorist financing risk relative
to the business entities included within the definition of ``legal
entity customer.'' Through its outreach, FinCEN learned that, in
addition to identifying and verifying the identity of the trust for
purposes of CIP, financial institutions generally also identify and
verify the identity of the trustee, who would necessarily have to open
the account for the trust. In addition, guidance for banks provides
that ``in certain circumstances involving revocable trusts, the bank
may need to gather information about the settlor, grantor, trustee, or
other persons with the authority to direct the trustee, and who thus
have authority or control over the account, in order to establish the
true identity of the customer.'' \37\ In other words, given the variety
of possible trust arrangements and the number of persons who may have
roles in them, financial institutions are already taking a risk-based
approach to collecting information with respect to various persons for
the purpose of knowing their customer. FinCEN expects financial
institutions to continue these practices as part of their overall
efforts to safeguard against money laundering and terrorist financing,
and will consider additional rulemaking or guidance to strengthen or
clarify this expectation.
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\37\ FFIEC BSA Exam/AML Manual at 286-87.
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5. Intermediated Account Relationships and Pooled Investment Vehicles
The ANPRM sought comment on whether and how a beneficial ownership
requirement should be applied to accounts held by intermediaries on
behalf of third parties. An intermediary generally refers to a customer
that maintains an account for the primary benefit of others, such as
the intermediary's own underlying clients. For example, certain
correspondent banking relationships may involve intermediation whereby
the respondent bank of a correspondent bank acts on behalf of its own
clients. Intermediation is also very common in the securities and
derivatives industries. For example, a broker-dealer may establish
omnibus accounts for a financial intermediary (such as an investment
adviser) that, in turn, establishes sub-accounts for the intermediary's
clients, whose information may or may not be disclosed to the broker-
dealer. An issue raised in the comments, especially those from the
securities and derivatives industries, is whether a financial
institution would be required to identify the intermediary's own
underlying clients or their beneficial owners. This issue is distinct
from whether a financial institution must identify the beneficial
owners of the intermediary (i.e., the direct customer), which would be
the case unless the intermediary is exempt under one of the specific
exemptions described above.
Commenters cautioned that a requirement to identify an
intermediary's underlying clients or their beneficial owners could have
significant detrimental consequences to the efficiency of the U.S.
financial markets, because it would require financial institutions to
modify longstanding practices. They suggested that, consistent with
existing CIP
[[Page 45161]]
guidance related to certain intermediated relationships, a beneficial
ownership requirement should apply only with respect to a financial
institution's immediate customer, the intermediary, and not the
intermediary's underlying clients.
FinCEN is concerned about the illicit finance risks posed by
underlying clients of intermediary customers because of the lack of
insight a financial institution has into those clients and their
activities. However, FinCEN recognizes that this risk may be more
effectively managed through other means. These would include proper
customer due diligence conducted by financial institutions on their
direct customers who serve as intermediaries, and appropriate
regulation of the intermediaries themselves.\38\ Therefore, for
purposes of the beneficial ownership requirement, if an intermediary is
the customer, and the financial institution has no CIP obligation with
respect to the intermediary's underlying clients pursuant to existing
guidance, a financial institution should treat the intermediary, and
not the intermediary's underlying clients, as its legal entity
customer.
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\38\ FinCEN recognizes that some such intermediary entities are
already subject to BSA requirements, while others or not. FinCEN
continues to consider which additional entities may need to be
brought within the scope of the FinCEN's regulations.
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Existing FinCEN guidance related to CIP practices is applicable in
determining a financial institution's beneficial ownership obligations
in these circumstances. For example, a broker-dealer that appropriately
maintains an omnibus account for an intermediary, under the conditions
set forth in the 2003 Omnibus Guidance for Broker-Dealers,\39\ may
treat the intermediary, and not the underlying clients, as its legal
entity customer for purposes of the beneficial ownership
requirement.\40\ Pursuant to a clearing agreement that allocates
functions in the manner described in the 2008 No-Action Position
Respecting Broker-Dealers Operating Under Fully Disclosed Clearing
Agreements According to Certain Functional Allocations,\41\ only the
introducing firm would be obligated to obtain beneficial ownership
information of the customers introduced to the clearing firm.
Similarly, based on guidance issued to the futures industry in the
context of give-up arrangements, because the clearing broker, and not
the executing broker, has a formal relationship with its customer, only
the clearing broker would be responsible for obtaining beneficial
ownership information regarding the underlying customer.\42\
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\39\ Guidance from the Staffs of the Department of the Treasury
and the U.S. Securities and Exchange Commission, Question and Answer
Regarding the Broker-Dealer Customer Identification Program Rule (31
CFR 103.122) (October 1, 2003), available at https://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
\40\ See also Guidance from the Staffs of the Department of the
Treasury and the U.S. Commodity Futures Trading Commission,
Frequently Asked Question regarding Customer Identification Programs
for Futures Commission Merchants and Introducing Brokers (31 CFR
103.123), available at https://www.fincen.gov/statutes_regs/guidance/html/futures_omnibus_account_qa_final.html; FinCEN
Guidance, FIN-2006-G009, Application of the Regulations Requiring
Special Due Diligence Programs for Certain Foreign Accounts to the
Securities and Futures Industries (May 10, 2006), available at
https://www.fincen.gov/statutes_regs/guidance/html/312securities_futures_guidance.html. FinCEN also notes that in such
circumstances, the intermediary itself may be exempt from the
beneficial ownership requirement if it satisfies one of the specific
exemptions.
\41\ FinCEN Guidance, FIN-2008-G002, Customer Identification
Program Rule No-Action Position Respecting Broker-Dealers Operating
Under Fully Disclosed Clearing Agreements According to Certain
Functional Allocations (March 4, 2008), available at https://www.fincen.gov/statutes_regs/guidance/html/fin-2008-g002.html.
\42\ FinCEN Guidance, FIN-2007-G001, Application of the Customer
Identification Program Rule to Future Commission Merchants Operating
as Executing and Clearing Brokers in Give-Up Arrangements (April 20,
2007), available at https://www.fincen.gov/statutes_regs/guidance/html/cftc_fincen_guidance.html.
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Notwithstanding the foregoing, consistent with other elements of
CDD, a financial institution's AML program should contain risk-based
policies, procedures, and controls for assessing the money laundering
risk posed by underlying clients of a financial intermediary, for
monitoring and mitigating that risk, and for detecting and reporting
suspicious activity. While a financial intermediary's underlying
clients may not be subject to the beneficial ownership requirement, a
financial institution would nonetheless be obligated to monitor for and
report suspicious activity associated with intermediated accounts,
including activity related to underlying clients. FinCEN understands
that this is consistent with current industry practice. As multiple
comments noted, securities and derivatives firms generally monitor
activity in intermediated accounts and follow up on an event-driven
basis, with such follow-up potentially including asking questions about
the underlying owners of assets after detection of possible suspicious
activity.\43\ Such practice is also consistent with the third and
fourth elements of the CDD requirements described below. FinCEN thus
expects financial institutions to continue engaging in this practice.
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\43\ See, e.g., letter from SIFMA dated June 8, 2012 at 7,
available at https://www.sifma.org/issues/item.aspx?id=8589938990.
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Several comments, particularly from the securities and futures
industries, also highlighted the potential challenges associated with
identifying beneficial owners of non-exempt pooled investment vehicles,
such as hedge funds, whose ownership structure may continuously
fluctuate.\44\ The comments noted that identifying beneficial owners of
these entities based on a percentage ownership threshold may create
unreasonable operational challenges for the purpose of obtaining
information that may only be accurate for a limited period of time.
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\44\ For purposes of this discussion, a ``non-exempt pooled
investment vehicle'' means (i) any company that would be an
investment company as defined in Section 3(a) of the Investment
Company Act of 1940, but for the exclusion provided by either
Section 3(c)(1) or Section 3(c)(7) of that Act; or (ii) any
commodity pool under section 1a(10) of the Commodity Exchange Act
(CEA) that is operated by a commodity pool operator registered with
the CFTC under Section 4m of the CEA.
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FinCEN is considering whether nonexempt pooled investment vehicles
that are operated or advised by financial institutions that are
proposed to be exempt, should also be exempt from this requirement.
Additionally, in the event that such institutions are not exempt,
FinCEN is considering whether covered financial institutions should
only be required to identify beneficial owners of such non-exempt
pooled investment vehicles \45\ under the control prong of the
``beneficial owner'' definition, as opposed to both the ownership prong
and control prong, in order to alleviate the operational and logistical
difficulties that would be associated with complying with the ownership
prong. FinCEN is also considering whether such an approach, if adopted,
may best be addressed through inclusion of such vehicles within the
scope of the rule with subsequent guidance or a specific exemption or
exception from the application of the ownership prong of the
requirement. FinCEN believes this
[[Page 45162]]
approach may sufficiently balance benefit with burden given the unique
ownership structure of pooled investment vehicles.
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\45\ See, e.g., Securities Industry and Financial Markets
Association (SIFMA) Anti-Money Laundering and Financial Crimes
Committee, Anti-Money Laundering Suggested Due Diligence Practices
for Hedge Funds (2009), available at https://www.sifma.org/uploadedfiles/issues/legal,_compliance_and_administration/anti-money_laundering_compliance/issues_anti-money%20laundering_suggested%20due%20diligence%20practices%20for%20hedge%20funds.pdf;
Securities Industry Association Anti-Money Laundering Committee,
Suggested Practices for Customer Identification Programs, Sec. 3.9,
available at https://www.sifma.org/uploadedfiles/issues/legal,_compliance_and_administration/anti-money_laundering_compliance/issues_anti-money%20laundering_suggested%20practices%20for%20customer%20identification%20programs.pdf.
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6. Verification of Beneficial Owners
a. Standard Certification Form
At the public hearings, participants discussed the efficacy of
having a certification form that would standardize collection of
beneficial ownership information and permit reliance on the information
provided. FinCEN believes that providing such a form would promote
consistent practices and regulatory expectations, significantly reduce
compliance burden, and preserve the benefits of obtaining the
information. A standard form would also promote a uniform customer
experience across U.S. financial sectors. This was of particular
concern to representatives from financial institutions with practices
that exceed existing regulatory requirements, which noted that they
often lose customers to institutions with less rigorous standards.
Accordingly, FinCEN proposes that a financial institution must
satisfy the requirement to identify beneficial owners by obtaining, at
the time a new account is opened, the standard certification form
attached hereto as Appendix A. To promote consistent customer
expectations and understanding, the form in Appendix A plainly
describes the beneficial ownership requirement and the information
sought from the individual opening the account on behalf of the legal
entity customer. To facilitate reliance by financial institutions, the
form also requires the individual opening the account on behalf of the
legal entity customer to certify that the information provided on the
form is true and accurate to the best of his or her knowledge. This
certification is also helpful for law enforcement purposes in
demonstrating unlawful intent in the event the individual completing
the form knowingly provides false information.
b. Verification of Beneficial Owners
The ANPRM sought comment on whether and how financial institutions
could verify beneficial ownership information provided by customers. As
described in the ANPRM, verification could have two meanings. One
meaning would require verifying the identity of an individual
identified as a beneficial owner (i.e., to verify the existence of the
identified beneficial owner by collecting, for example, a driver's
license or other similar identification document). The second possible
meaning would require financial institutions to verify that an
individual identified as a beneficial owner is in fact a beneficial
owner (i.e., to verify the status of an individual as a beneficial
owner).
Many comments cautioned that a requirement to verify the status of
a beneficial owner would be prohibitively costly and impracticable in
many circumstances. They recommended that financial institutions be
permitted to rely on information provided by the customer. With respect
to verifying the identity of a beneficial owner, participants at the
public hearings generally acknowledged that this would be a manageable
task so long as the verification procedures are comparable to current
CIP requirements. Many participants further agreed that verification of
identity would substantially improve the credibility of the beneficial
ownership information collected. In addition, law enforcement has
indicated that verification of identity would also facilitate
investigations, even if the verified individual is not the true
beneficial owner because of the ability to locate and investigate that
person.
In light of these considerations, FinCEN is not proposing to
require that financial institutions verify the status of a beneficial
owner. Financial institutions may rely on the beneficial ownership
information provided by the customer on the standard certification
form. FinCEN believes this addresses a key concern raised by the
private sector about the burden and costs associated with a beneficial
ownership requirement.
For verifying the identity of a beneficial owner, FinCEN proposes
that financial institutions verify the identity using existing risk-
based CIP practices. As such, the proposed rule provides that a
financial institution must implement risk-based procedures to verify
the identity of each beneficial owner according to procedures that
comply with the CIP requirements to verify the identity of customers
that are natural persons. Therefore, a financial institution may verify
the identity of a beneficial owner using documentary or non-documentary
methods, as it deems appropriate under its procedures for verifying the
identity of customers that are natural persons. These procedures should
enable the financial institution to form a reasonable belief that it
knows the true identity of the beneficial owner of each legal entity
customer. A financial institution must also include procedures for
responding to circumstances in which it cannot form a reasonable belief
that it knows the true identity of the beneficial owner, as described
under the CIP rules. Because these practices are already well-
established and understood at covered financial institutions, FinCEN
expects that these institutions will leverage existing compliance
procedures.
7. Updating Beneficial Ownership Information
Many financial institutions sought clarity as to whether they would
be required to update or refresh periodically the beneficial ownership
information obtained under this rule. FinCEN is not proposing such a
requirement but notes that, as a general matter, a financial
institution should keep CDD information, including beneficial ownership
information, as current as possible and update as appropriate on a
risk-basis. For example, a financial institution may determine that
updating beneficial ownership information is appropriate after a
customer has been identified as engaging in suspicious activity or
exhibits other red flags, which FinCEN believes is generally consistent
with existing practice for updating other customer information.
Factors that may be relevant in considering whether and when to
update beneficial ownership information could include the type of
business engaged in by the legal entity customer, changes in business
operations or management of which the financial institution becomes
aware, indications of possible misuse of a shell company in the account
history, or changes in address or signatories on the account. As some
financial institutions currently update CIP information at periodic
intervals based on risk or when updating other customer information as
part of routine account maintenance, financial institutions may
consider updating beneficial ownership information on a similar basis.
Each financial institution's policies and procedures should be based on
its assessment of risk and tailored to, among other things, its
customer base and products and services offered. In addition, financial
institutions should update beneficial ownership information in
connection with ongoing monitoring, as described below in the Section
III.d ``Ongoing Monitoring.''
8. Reliance
Some comments requested that FinCEN extend the reliance provisions
in the CIP rules to the beneficial ownership requirement. In general, a
financial institution may rely upon another financial institution to
conduct
[[Page 45163]]
CIP with respect to shared customers, provided that: (i) Such reliance
is reasonable; (ii) the other financial institution is subject to an
AML program rule and is regulated by a federal functional regulator,
and (iii) the other financial institution enters into a contract and
provides annual certifications regarding its AML program and CIP
requirements.\46\ Similarly, FinCEN proposes to permit such reliance
for purposes of complying with the beneficial ownership requirement,
including obtaining the certification form required under the proposed
rule. Existing guidance with respect to whether a financial institution
can rely on another financial institution to conduct CIP with respect
to shared customers also would apply for the purposes of complying with
the beneficial ownership requirement.\47\ As was the case with the CIP
rules, a covered financial institution will not be held responsible for
the failure of the relied-upon financial institution to adequately
fulfill the covered financial institution's beneficial ownership
responsibilities, provided it can establish that its reliance was
reasonable and that it has obtained the requisite contracts and
certifications.
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\46\ See, e.g., 31 CFR 1020.220(a)(6).
\47\ See, e.g., CFTC letter No. 05-05 (March 14, 2005) (FCMs and
IBs are permitted to rely on CTAs to conduct CIP in certain
circumstances).
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C. Understanding the Nature and Purpose of Customer Relationships
The third element of CDD requires financial institutions to
understand the nature and purpose of customer relationships in order to
develop a customer risk profile.\48\ Many comments questioned whether
such information is helpful for detecting suspicious activity, and
expressed concern that financial institutions would be required to
demonstrate compliance by formalizing this element in their policies
and procedures. They suggest that it should not become a required
question that must be asked of each customer during the account opening
process, so long as it is understood by the financial institution.
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\48\ The ANPRM characterized this third element as
``understand[ing] 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.'' 77 FR
13050.
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FinCEN understands that it is industry practice to gain an
understanding of a customer in order to assess the risk associated with
that customer to help inform when the customer's activity might be
considered ``suspicious.'' FinCEN does not intend for this element to
necessarily require modifications to existing practice or customer
onboarding procedures, and does not expect financial institutions to
ask each customer for a statement as to the nature and purpose of the
relationship or to collect information not already collected pursuant
to existing requirements. Rather, the amendment to the AML program rule
that incorporates this element is intended to clarify existing
expectations for financial institutions to understand the relationship
for purposes of identifying transactions in which the customer would
not normally be expected to engage. Identifying such transactions is a
critical and necessary aspect of complying with the existing
requirement to report suspicious activity and maintain an effective AML
program.
FinCEN intends for this amendment to be consistent with existing
rules and related guidance. For example, the requirement for financial
institutions to report suspicious activity requires that they file a
report on a transaction that, among other things, has ``no business or
apparent lawful purpose or is not the sort in which the particular
customer would normally be expected to engage.'' \49\ In the context of
depository institutions, it is well understood that ``a bank should
obtain information at account opening sufficient to develop an
understanding of normal and expected activity for the customer's
occupation or business operations.'' \50\ This is also true in other
contexts.\51\ FinCEN intends for this proposed CDD element to be
consistent with these types of expectations.
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\49\ 31 CFR 1020.320(a)(2)(iii); see also Sec. Sec.
1023.320(a)(2)(iii), 1024.320(a)(2)(iii), and 1026.320(a)(2)(iii).
\50\ BSA/AML Manual at *64.
\51\ See, e.g., CFTC Regulation 1.37(a)(1) and NFA Compliance
Rule 2-30 which require futures commission merchants and introducing
brokers to obtain certain information from individuals and other
unsophisticated customers during the onboarding process and to
verify annually whether the information continues to be materially
accurate. Although these requirements are intended to address the
inherent risks of trading futures and the need for adequate risk
disclosure, this information could be relevant for understanding the
nature and purpose of such customer relationships.
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FinCEN believes that in some circumstances an understanding of the
nature and purpose of a customer relationship can also be developed by
inherent or self-evident information about the product or customer
type, or basic information about the customer. FinCEN recognizes that
inherent information about a customer relationship, such as the type of
customer, the type of account opened, or the service or product
offered, may be sufficient to understand the nature and purpose of the
relationship. Obtaining basic information about the customer, such as
annual income, net worth, domicile, or principal occupation or
business, may similarly be relevant depending on the facts and
circumstances.\52\ In addition, longstanding customers of a financial
institution may have a robust history of activity that could also be
highly relevant in understanding future expected activity for purposes
of detecting aberrations. At the same time, FinCEN recognizes that
certain financial institutions, such as securities and futures firms,
often maintain accounts in which expected activity can vary
significantly over time based on numerous factors, and that prior
transaction history or information obtained from the client upon
account opening may not be a reliable indicator of future conduct. Each
case depends on the facts and circumstances unique to the financial
institution and its customers.
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\52\ The BSA/AML Manual also notes that an understanding of
normal and expected activity for the customer's occupation or
business operations may be ``based on account type or customer
classification.'' BSA/AML Manual at 64.
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Accordingly, FinCEN believes that financial institutions should
already be satisfying this element by complying with the requirement to
report suspicious activity, as this element is an essential step in the
process of identifying such activity. In addition, because this is a
necessary step to identifying and reporting suspicious activities,
which obligation applies to all ``transactions . . . conducted or
attempted by, at or through'' the covered financial institution, its
scope should not be limited to ``customers'' for purposes of the CIP
rules, but rather should extend more broadly to encompass all accounts
established by the institution.\53\
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\53\ See, e.g., 31 CFR 1020.100(a) and (c), which note that the
definitions, and exemptions, for account and customer apply in the
context of CIP. Within the context of CDD, ``customer relationship''
is a broader term, not subject to the exemptions referenced in
definitions used for CIP.
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D. Ongoing Monitoring
The fourth element of CDD requires financial institutions to
conduct ongoing monitoring for the purpose of maintaining and updating
customer information and identifying and reporting suspicious
activity.\54\ As with
[[Page 45164]]
the third element, FinCEN intends for this element to be consistent
with a financial institution's current suspicious activity reporting
\55\ and AML program requirements. A financial institution required to
have an AML program must, among other things, develop internal
policies, procedures and controls to assure compliance with the
BSA,\56\ including the SAR requirements. As a practical matter,
compliance with these obligations implicitly requires financial
institutions to conduct ongoing monitoring. The BSA/AML Manual notes
that the internal controls of a bank's AML Program should ``provide
sufficient controls and monitoring systems for timely detection and
reporting of suspicious activity.'' \57\ Similarly, under rules
promulgated by the Financial Industry Regulatory Authority (FINRA), a
broker-dealer's AML program shall include policies and procedures that
can be reasonably expected to detect and cause the reporting of
transactions required under 31 U.S.C. 5318(g) and the implementing
regulations thereunder.\58\ Codifying these supervisory and regulatory
expectations as explicit requirements within FinCEN's AML program
requirements is necessary to make clear that the minimum standards of
CDD include ongoing monitoring of all transactions by, at, or through
the financial institution.
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\54\ By comparison, the ANPRM suggested that ``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.'' 77 FR 13053.
\55\ Under the suspicious activity reporting rules, a financial
institution must report, among other things, 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. 31
CFR 1020.320(a)(2)(i)-(iii); 31 CFR 1023.320(a)(2)(i)-(iii); 31 CFR
1024.320(a)(2)(i)-(iii); 31 CFR 1026.320(a)(2)(i)-(iii).
\56\ See, e.g., 31 U.S.C. 5318(h)(1); 12 U.S.C. 1818(s)(1); 31
CFR 1020.210.
\57\ BSA/AML Manual at 33-34.
\58\ FINRA Rule 3310.
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Some commenters expressed confusion as to whether this fourth
element would impose a categorical requirement to periodically update,
or ``refresh,'' customer information that was obtained during the
account opening process, including beneficial ownership information.
This element does not impose such a categorical requirement. Rather,
the requirement that the financial institution ``conduct ongoing
monitoring to maintain and update customer information'' means that,
when in the course of monitoring the financial institution becomes
aware of information relevant to assessing the risk posed by a
customer, it is expected to update the customer's relevant information
accordingly.\59\ FinCEN understands that industry practice generally
involves using activity data to inform what types of transactions might
be considered ``normal'' or ``suspicious.'' Furthermore, FinCEN
understands that information that might result from monitoring could be
relevant to the assessment of risk posed by a particular customer. The
proposed requirement to update a customer's profile as a result of
ongoing monitoring (including obtaining beneficial ownership
information for existing customers on a risk basis), is different and
distinct from a categorical requirement to update or refresh the
information received from the customer at the outset of the account
relationship at prescribed periods, as was noted in the discussion of
existing customers set forth in Section III.b of this proposal.
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\59\ See, e.g., BSA/AML Manual at 64 (``CDD processes should
include periodic risk-based monitoring of the customer relationship
to determine whether there are substantive changes to the original
CDD information (e.g., change in employment or business
operations).'').
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Because financial institutions are already implicitly required to
engage in ongoing monitoring, FinCEN expects that financial
institutions would satisfy the fourth element of CDD by continuing
their current monitoring practices, consistent with existing guidance
and regulatory expectations.\60\ FinCEN reiterates that all elements of
CDD discussed in this proposal are minimum standards and should not be
interpreted or construed as lowering, reducing or limiting the
expectations established by the appropriate federal functional
regulator. Finally, as noted above with respect to the obligation to
understand the nature and purpose of customer relationships, monitoring
is also a necessary element of detecting and reporting suspicious
activities, and as such must apply not only to ``customers'' for
purposes of the CIP rules, but more broadly to all account
relationships maintained by the covered financial institution.
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\60\ See, e.g., BSA/AML Manual at 67-85 (``Suspicious Activity
Reporting--Overview''); NFA's Interpretive Notice accompanying NFA
Compliance Rule 2-9 (FCMs and IBs must train appropriate staff to
monitor cash activity and trading activity in order to detect
unusual transactions).
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E. Rule Timing and Effective Date
Financial institutions have requested sufficient time to implement
any new CDD requirements. Specifically, to manage costs, financial
institutions requested sufficient time to incorporate these
requirements into cyclical updates of their systems and processes.
FinCEN believes that the two CDD requirements set forth in this
proposal will not in fact require covered financial institutions to
perform any additional activities or operations, although it may
necessitate revisions to written policies and procedures. FinCEN also
recognizes that financial institutions will be required to modify
existing customer onboarding processes to incorporate the beneficial
ownership requirement, and therefore proposes an effective date of one
year from the date the final rule is issued.
IV. Section-by-Section Analysis
A. Beneficial Ownership Information Collection
Section 1010.230 Beneficial Ownership Requirements for Legal Entity
Customers
Section 1010.230(a) General. This section sets forth the general
requirement for covered financial institutions to identify the
beneficial owners of each legal entity customer (as defined).
Section 1010.230(b) Identification and Verification. In order to
identify the beneficial owner, a covered financial institution must
obtain a certification from the individual opening the account on
behalf of the legal entity customer (at the time of account opening) in
the form of Appendix A. The form requires the individual opening the
account on behalf of the legal entity customer to identify the
beneficial owner(s) of the legal entity customer by providing the
beneficial owner's name, date of birth, address and social security
number (for U.S. persons).\61\ This information is consistent with the
information required under the CIP rules for identifying customers that
are natural persons. The form also requires the individual opening the
account on behalf of the legal entity customer to certify, to the best
of his or her knowledge, that the information provided on the form is
complete and correct. Obtaining a signed and completed form from the
individual opening the account on behalf of the legal entity customer
shall satisfy the requirement to identify the
[[Page 45165]]
beneficial owners under Section 1010.230(a).
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\61\ For foreign persons, the form requires a passport number
and country of issuance, or other similar identification number.
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This section also requires financial institutions to verify the
identity of the individuals identified as beneficial owners on the
certification form. The procedures for verification are to be identical
to the procedures applicable to an individual opening an account under
the existing CIP rules. Accordingly, the financial institution must
verify a beneficial owner's identity using the information provided on
the certification form (name, date of birth, address, and social
security number (for U.S. persons), etc.), according to the same
documentary and non-documentary methods the financial institution may
use in connection with its customer identification program (to the
extent applicable to customers that are individuals), within a
reasonable time after the account is opened. A financial institution
must also include procedures for responding to circumstances in which
it cannot form a reasonable belief that it knows the true identity of
the beneficial owner, as described under the CIP rules.\62\
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\62\ See, e.g., 31 CFR 1020.220(a)(2)(iii). Such procedures must
address (a) when it should not open an account; (b) the terms under
which the customer may use the account while the institution
attempts to verify the identity of the beneficial owner; (c) when
the institution should close the account, after attempts to verify
the beneficial owner's identity have failed; and (d) when it should
file a SAR.
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Section 1010.230(c) Beneficial Owner. As more fully described
above, the proposed definition of ``beneficial owner'' includes two
independent prongs: An ownership prong (clause (1)) and a control prong
(clause (2)). A covered financial institution must identify each
individual under the ownership prong (i.e., each individual who owns 25
percent or more of the equity interests), in addition to one individual
for the control prong (i.e., any individual with significant managerial
control). If no individual owns 25 percent or more of the equity
interests, then the financial institution may identify a beneficial
owner under the control prong only. If appropriate, the same
individual(s) may be identified under both criteria.
Section 1010.230(d) Legal Entity Customer. For purposes of the
beneficial ownership requirement described under this Section, the
proposed rule defines ``legal entity customer'' to mean a corporation,
limited liability company, partnership or similar business entity
(whether formed under the laws of a state or of the United States or a
foreign jurisdiction), that opens a new account. The reference to ``new
account'' makes clear that the obligation to identify beneficial owners
under Section 1010.230 applies to legal entity customers opening new
accounts after the date of rule's implementation, and not
retrospectively. Previously issued guidance that clarifies who a
customer is under certain circumstances shall be instructive to the
extent applicable to the proposed beneficial ownership requirement.\63\
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\63\ See, e.g., Interagency Interpretive Guidance on Customer
Identification Program Requirements under Section 326 of the USA
PATRIOT Act at Question 9 (April 28, 2005), available at https://www.fincen.gov/statutes_regs/guidance/html/faqsfinalciprule.html;
Guidance from the Staffs of the Department of the Treasury and the
U.S. Securities and Exchange Commission, Question and Answer
Regarding the Broker-Dealer Customer Identification Program Rule (31
CFR 103.122) (October 1, 2003), available at https://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
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Section 1010.230(e) Covered financial Institution. This term has
the meaning set forth in 31 CFR 1010.605(e)(1), which defines the term
for purposes of the regulations implementing Sect 312 of the PATRIOT
Act.
Section 1010.230(f) Retention of Records. A financial institution
must have procedures for maintaining a record of all information
obtained in connection with identifying and verifying the beneficial
owners under 1010.230(b). These procedures must include retaining the
beneficial ownership certification form, and any other related
identifying information collected, for a period of five years after the
date the account is closed. It must also retain in its records, for a
period of five years after such record is made, a description of (i)
every document relied on for verification, (ii) any non-documentary
methods and results of measures undertaken for verification, and (iii)
the resolution of any substantive discrepancies discovered in verifying
the identification information. The proposed rule leverages off of
industry familiarity with the recordkeeping requirements relative to
identifying and verifying the identity of individual customers under
the CIP rules, and proposes an identical recordkeeping standard here.
This is with the understanding that identical standards will help
relieve implementation burden with respect to the new requirement.
Section 1010.230(g) Reliance on Another Financial Institution. The
proposed rule permits reliance on another financial institution under
the same conditions set forth in the applicable CIP rules.\64\
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\64\ See, e.g., 31 CFR 1020.220(a)(6).
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B. Amendments to AML Program Requirements
Overview
FinCEN's existing AML program requirements applicable to each type
of covered financial institution are being amended to ensure alignment
between existing AML requirements and CDD minimum standards. As
described in Section III above, CDD consists of four fundamental
components. The first component, customer identification, is already
sufficiently included in the existing Customer Identification Program
requirements issued jointly by FinCEN and its regulatory colleagues.
The second component, identification of the beneficial ownership of
legal entity customers, is proposed as a separate rule in 31 CFR
1010.230, as outlined above. The third and fourth components of CDD--
understanding the nature and purpose of an account and ongoing
monitoring--which have been understood as necessary facets of other
regulatory requirements, are now being explicitly included in
applicable AML program rules, as described in more detail below.
Covered financial institutions are expected to apply these procedures
on a risk-based approach with respect to the breadth of their account
relationships, consistent with their obligation to identify and report
suspicious activities.
FinCEN is incorporating these CDD procedures into the AML program
requirements to make clear that CDD is a core element of a financial
institution's policies and procedures to guard against money
laundering. Furthermore, incorporating these CDD requirements into the
AML program requirements, which require the AML program to also comply
with the regulation of its federal functional regulator governing such
programs, makes clear that a financial institution's procedures with
respect to these requirements are subject to examination and
enforcement by the appropriate federal functional regulator or self-
regulatory organization in a manner consistent with current supervisory
authorities and expectations. As such, this proposed rule is not
intended to limit the federal functional regulators' supervisory role
or, where applicable, its ability to oversee an SRO's effective
examination and enforcement of BSA compliance.
Nothing in this proposal is intended to lower, reduce, or limit the
due diligence expectations of the federal functional regulators or in
any way limit their existing regulatory discretion. To clarify this
point, this proposal incorporates the CDD elements on
[[Page 45166]]
nature and purpose and ongoing monitoring into FinCEN's existing AML
program requirements, which generally provide that an AML program is
adequate if, among other things, the program complies with the
regulation of its federal functional regulator (or, where applicable,
self-regulatory organization) governing such programs.\65\ In addition,
the Treasury Department intends for the requirements contained in this
customer due diligence and beneficial ownership proposal to be
consistent with, and not to supersede, any regulations, guidance or
authority of any federal banking agency, the SEC, the CFTC, or of any
SRO relating to customer identification, including with respect to the
verification of the identities of legal entity customers.
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\65\ See, e.g., 31 CFR 1020.210, which currently provides: ``A
financial institution regulated by a Federal functional regulator
that is not subject to the regulations of a self-regulatory
organization shall be deemed to satisfy the requirements of 31
U.S.C. 5318(h)(1) if it implements and maintains an anti-money
laundering program that complies with . . . the regulation of its
Federal functional regulator governing such programs.'' (emphasis
added).
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The FinCEN AML Program rules (for banks, securities broker-dealers,
mutual funds, and futures commission merchants and introducing brokers
in commodities) are also being amended to ensure that FinCEN's
regulations explicitly include the existing core requirements that are
currently included within the AML program rules issued by the federal
functional regulators or their appointed self-regulatory organizations
(SROs). These existing core pillars, referenced in 31 U.S.C. 5318(h) as
``minimum'' requirements, include: (i) The development of internal
policies, procedures and controls; (ii) the designation of a compliance
officer; (iii) an ongoing employee training program; and (iv) an
independent audit program to test functions. While there are slight
differences in the wording of the regulatory requirements across the
rules applicable to each industry, FinCEN considers them to all be the
same in practice at their core. FinCEN sees utility for industry in
having these rules clearly spelled out in FinCEN's own regulations and
believes that there is further utility in making these rules more
uniform, particularly given the number of industry actors that have
constituent components subject to multiple rules. FinCEN also
acknowledges, however, that the core requirements set forth by SROs, as
approved by the federal functional regulator supervising them,
sometimes include details deemed warranted with respect to the SROs'
oversight of those industries. While such detail may not be included in
FinCEN's rules, FinCEN and the supervising regulator have coordinated
in the past to ensure that such rules are consistent with the purposes
of the BSA. There is no intent in this rulemaking to undermine the
nuances that currently exist with respect to those rules, and they can
be followed in tandem with rules set forth here.
Section 1020.210 Anti-Money Laundering Program Requirements for
Financial Institutions Regulated by a Federal Functional Regulator,
Including Banks, Savings Associations and Credit Unions
FinCEN is rewriting its existing AML program rule to include the
existing core provisions already included in regulations issued by the
relevant banking agencies and adding to these core provisions a fifth
pillar that includes the components of CDD pertaining to understanding
the nature and purpose of customer relationships and ongoing
monitoring, as discussed above.
Section 1023.210 Anti-Money Laundering Program Requirements for Brokers
or Dealers in Securities
FinCEN is rewriting its AML program rule for brokers or dealers in
securities to the include the existing core requirements already
applicable to the industry and adding to these core provisions a new
pillar that includes the components of CDD pertaining to understanding
the nature and purpose of customer relationships and ongoing
monitoring, as discussed above.
FinCEN notes that its proposed AML program rule for brokers or
dealers differs from the current program rule issued by FINRA. This is
chiefly because FINRA has included as a pillar within its AML program
rule a requirement with respect to suspicious activity reporting. This
is different from the rules issued with respect to other sectors where
the SAR requirement has been treated separately. FinCEN is not
proposing to incorporate, as FINRA has done, a SAR reporting
requirement as a separate pillar, as the existing stand-alone SAR rule
within FinCEN's regulations is sufficient. However, the decision to not
include this within the pillars of the FinCEN rule is not meant to
affect its treatment within the FINRA rule. FinCEN sees no practical
difference in effect as a result of this difference and is proposing
its amendments to the FinCEN AML program rule for brokers or dealers in
securities in a manner that is consistent with its other AML program
rules. FinCEN will continue to engage with the SEC and FINRA to
determine whether there is a need for, and how, the FinCEN and FINRA
provisions might be made more consistent with respect to this
particular structural difference in the regulations.
Section 1024.210 Anti-Money Laundering Program Requirements for Mutual
Funds
FinCEN is maintaining its existing AML program rule for mutual
funds with the addition to the core requirements of a fifth pillar that
includes the components of CDD pertaining to understanding the nature
and purpose of customer relationships and ongoing monitoring, as
discussed above.
Section 1026.210 Anti-Money Laundering Program Requirements for Futures
Commission Merchants and Introducing Brokers in Commodities
FinCEN is rewriting its AML program rule for futures commission
merchants and introducing brokers to include the existing core
requirements already applicable to the industry and adding to these
core provisions a fifth pillar that includes the components of CDD
pertaining to understanding the nature and purpose of customer
relationships and ongoing monitoring, as discussed above.
V. Request for Comments
FinCEN invites comments on all aspects of the NPRM, and
specifically seeks comments on the following issues:
Definition of Beneficial Owner
FinCEN seeks general comments on the proposed definition of
beneficial owner, including the inclusion of two prongs, and whether
each prong is sufficiently clear.
FinCEN seeks comment specifically on whether the term ``equity
interests'' in the ownership prong of the proposed beneficial ownership
definition will be sufficiently understood and clear to financial
institutions and customers.
Definition of Legal Entity Customer
FinCEN seeks comment on the proposed definition of legal entity
customer, and in particular whether it provides adequate clarity.
Existing Accounts
FinCEN seeks comment as to whether FinCEN should extend the
proposed requirement on covered financial insitutions to collect
beneficial ownership information so that it would apply retroactively
with respect to legal
[[Page 45167]]
entity accounts established before the implementation date of a final
rule as well as comment on the potential costs of such an expansion of
the rule.
Proposed Exemptions From the Beneficial Ownership Rule
FinCEN seeks comment on the proposed exemptions from the definition
of ``legal entity customer,'' including whether the exemptions are
appropriate, whether other exemptions should be included, and if so,
what exemptions.
Intermediated Accounts
FinCEN seeks comment on whether the proposed treatment of
intermediated accounts in general is sufficiently clear to address any
issues that may be expected to arise.
Pooled Investment Vehicles
FinCEN seeks comment specifically on whether pooled investment
vehicles that are not proposed to be exempt from the beneficial
ownership requirement but are operated or advised by financial
institutions that are proposed to be exempt, should also be exempt from
the beneficial ownership requirement, and if not, whether covered
financial institutions should be required to identify beneficial owners
of such non-exempt pooled investment vehicles under only the control
prong of the ``beneficial owner'' definition, as opposed to both the
ownership prong and control prong.
Trusts
FinCEN seeks comment on procedures used by financial institutions
to collect and record information on trusts during their CDD process
and whether that information is readily searchable and retrievable and
accessible to law enforcement. FinCEN seeks comment from law
enforcement regarding the accessibility of information regarding trusts
when sought from financial institutions and the value of such
information.
Certification Form
FinCEN seeks comment on the proposed certification form and the
practical ability of financial institutions to incorporate the form
into their account opening processes. Further, while FinCEN believes
that requiring all legal entity customers to complete the same form is
useful in promoting clarity and consistency across the financial
industry, FinCEN seeks comment on whether financial institutions should
be permitted to obtain the same information that the form requires
(including the certification from the individual opening the account on
behalf of the legal entity customer) through other means, such as an
automated electronic account opening process.
Verification of Beneficial Owners
FinCEN seeks comment on whether requiring financial institutions to
utilize existing CIP procedures for verification of the identity of
beneficial owners is sufficiently clear and is an appropriate and
efficient means for achieving this objective.
Updating of Beneficial Ownership Information
FinCEN seeks comment as to whether setting a mandated timeframe for
the updating of beneficial ownership information would result in better
information being available on beneficial ownership than relying on
financial institutions to update the information in due course,
consistent with the risk-based approach.
Recordkeeping Requirements
FinCEN seeks comment as to whether requiring recordkeeping
procedures identical to those required with respect to CIP
recordkeeping requirements is a sufficiently clear and efficient
standard in the context of beneficial ownership verification
information collection.
Understanding the Nature and Purpose of Customer Relationships and
Ongoing Monitoring
FinCEN seeks comment on whether the proposed requirements regarding
understanding the nature and purpose of customer relationships and
ongoing monitoring are sufficiently clear. In this regard, should
FinCEN define any of the terms used in those proposed requirements to
clarify that such requirements apply broadly to all account
relationships maintained by covered financial institutions? Should
FinCEN define the term ``customer risk profile,'' or is this term
sufficiently understood by covered financial institutions? FinCEN also
seeks comment from industry as to whether there are any covered
financial institutions that have been able to meet the existing AML
program requirements and SAR requirements without understanding the
nature and purpose of customer relationships and conducting ongoing
monitoring.
Proposed Amendments to the AML Program Rules
FinCEN seeks industry comment as to whether industry feels that it
is necessary for the language of each AML program pillar requirement to
be identical across FinCEN's rules; and, whether there is a need for
FinCEN's rules and those of its sister organizations to be identical,
notwithstanding FinCEN's belief that the core pillars are essentially
the same across various industries despite any differences in legacy
regulatory text. Based on industry feedback, FinCEN will weigh the
benefits of possibly finalizing the program rules so that currently
existing wording differences with respect to each pillar may be
reduced.
Effective Date of the Rule
FinCEN seeks comment on whether the proposed effective date of one
year from the date of the issuance of the final rule is sufficient to
enable financial institutions to work any necessary changes into their
systems or procedures in tandem with other cyclical updates, and
thereby enable financial institutions to reduce implementation costs.
VI. Regulatory Analysis
A. Executive Orders 13563 and 12866
Executive Orders 13563 and 12866 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
This rule has been designated a ``significant regulatory action''
although not economically significant, under section 3(f) of Executive
Order 12866. Accordingly, the rule has been reviewed by the Office of
Management and Budget.
FinCEN has determined that the primary cost for covered financial
institutions associated with the proposed rule results from the
requirement that they obtain from their non-exempt legal entity
customers a certification identifying their beneficial owners. FinCEN
has not been able to obtain from any source an estimate of the total
number of accounts opened annually for legal entities by covered
financial institutions. Based on outreach and discussions with major
financial service companies, FinCEN believes that there are
approximately eight million such accounts opened annually by covered
financial institutions. Based on the total number of covered financial
[[Page 45168]]
institutions,\66\ this would result in each covered financial
institution opening approximately 368 such accounts per year, or 1.5
per day.\67\ Estimating an average time for a covered financial
institution to receive the certification and verify the information of
20 minutes and an average cost of $20 per hour, this results in a cost
of approximately $54 million.\68\
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\66\ See ``Paperwork Reduction Act (PRA),'' ``Estimated Number
of Respondents,'' infra note 81.
\67\ FinCEN also believes that the largest covered financial
institutions likely open far more such accounts per day than the
smaller institutions.
\68\ See PRA, ``Estimated Reporting Burden,'' infra. This
includes the cost of one hour per covered financial institution to
develop new beneficial ownership procedures.
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Estimating the amount of illicit funds flow facilitated through
legal entities used to mask beneficial ownership would be
difficult.\69\ However, the benefit of the rule will be greater clarity
with respect to a regulatory definition of beneficial ownership and a
greater percentage of situations in which this information will be
collected, as appropriate, by the covered financial institutions, and,
therefore, available to law enforcement. Based on a survey conducted in
2008, FinCEN determined that perhaps as little as one third of its
private sector constituents felt that they had a clear understanding of
the term beneficial ownership and that significant percentages varying
across industries did not collect information on beneficial ownership
consistently. Since the issuance of that survey, further engagement
with industry via the issuance of interagency guidance \70\ and
FinCEN's ANPRM provided opportunities for greater common understanding
of the issues, but questions remain.
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\69\ For one general discussion of the difficulty of deriving
estimates of money laundering activity in narcotrafficking and other
transactional criminal activity, see ``Estimating Illicit Financial
Flows Resulting from Drug Trafficking and Other Transnational
Organized Crimes,'' United Nations Office on Drugs and Crime
(October 2011).
\70\ See footnote 15.
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FinCEN believes that with the clarity of a regulatory definition
and a clear requirement to collect beneficial ownership in specific
situations, industry understanding of beneficial ownership and the
collection of beneficial ownership information will increase, and that
the increased availability of such information to law enforcement will
enhance government efforts to identify and address illicit actors
operating in the financial system through legal entities. FinCEN
requests comment on the benefits, and any estimates of costs savings,
associated with a requirement to collect beneficial ownership
information, including any economic or statistical data or third-party/
independent research.
Regulatory Flexibility Act
When an agency issues a rule proposal, the Regulatory Flexibility
Act (RFA) requires the agency to either provide an Initial Regulatory
Flexibility Analysis or, in lieu of preparing an analysis, to certify
that the proposed rule is not expected to have a significant economic
impact on a substantial number of small entities.\71\
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\71\ 5 U.S.C. 601-612.
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Estimate of the number of small entities to which the proposed rule
will apply:
This proposed rulemaking will apply to all federally regulated
depository institutions and trust companies, and all brokers or dealers
in securities, mutual funds, and futures commission merchants and
introducing brokers, as each is defined in the BSA. Based upon current
data, for the purposes of the RFA, there are approximately 5470 small
federally regulated banks (comprising 80% of the total number of
banks); \72\ 47 small federally regulated trust companies (comprising
72% of the total); \73\ 4,325 small federally regulated credit unions
(comprising 66% of the total),\74\ 871 small brokers or dealers in
securities (comprising 17% of the total); \75\ 116 small mutual funds
(comprising 7% of the total); \76\ no small futures commission
merchants; \77\ and 1,186 small introducing brokers (comprising 95% of
the total). Because the proposed rule would apply to all of these
financial institutions, FinCEN concludes that the proposed rule will
apply to a substantial number of small entities.
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\72\ The Small Business Administration (``SBA'') defines a
depository institution other than a credit union as a small business
if it has assets of $500 million or less. Based on publicly
available information as of December 31, 2013 there are 6,821
federally regulated depository institutions (other than credit
unions) of which approximately 5,470, or 80% are categorized as
small businesses.
\73\ The SBA defines a trust company as a small business if it
has assets of $35.5 million or less. Based on publicly available
information as of September 30, 2013, there are 65 federally
regulated trust companies, of which 47, or 72%, are categorized as
small businesses.
\74\ The NCUA defines small credit unions as those having under
$50 million in assets. As of December 31, 2013, there were 6,554
federally regulated credit unions.
\75\ With regard to the definition of small entity as it applies
to broker dealers in securities and mutual funds, FinCEN is using
the SEC's definitions found at 17 CFR 240.0-10(c), and 17 CFR 270.0-
10, respectively. Of the 5,100 brokers or dealers in securities, 871
or 17% are categorized as a small business.
\76\ Of the 1,660 open-end mutual funds, 116 or 7% are
categorized as a small business.
\77\ The CFTC has determined that futures commission merchants
are not small entities for purposes of the RFA, and, thus, the
requirements of the RFA do not apply to them. The CFTC's
determination was based, in part, upon the obligation of futures
commission merchants to meet the minimum financial requirements
established by the CFTC to enhance the protection of customers'
segregated funds and protect the financial condition of futures
commission merchants generally. Small introducing brokers in
commodities are defined by the SBA as those having less than $7
million in gross receipts annually. Of the 1,249 introducing brokers
in commodities, 1,186 or 95% are categorized as a small business.
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Description of the projected reporting, recordkeeping, and other
requirements of the proposed rule: This proposed rulemaking imposes on
all covered financial institutions (including those that are small
entities) a new requirement to identify and to verify the identity of
the beneficial owners of their legal entity customers. The proposed
rule would require that this be accomplished by obtaining and
maintaining a certification from each legal entity customer that opens
a new account. The certification will contain identifying information
regarding each listed beneficial owner. The financial institution will
also be required to verify such identity by documentary or non-
documentary methods and to maintain in its records for five years a
description of (i) any document relied on for verification, (ii) any
non-documentary methods and results of measures undertaken, and (iii)
the resolution of any substantive discrepancies discovered in verifying
the identification information.
Although FinCEN has only limited available information to assess
the average number of beneficial owners of legal entity customers for
which accounts may be established after the effective date of the rule,
FinCEN notes that the maximum number is five, and believes that it is
reasonable to assume that the great majority of such customers who
establish accounts at small institutions are more likely to have
simpler ownership structures that will result in one or two beneficial
owners. In addition, since all covered financial institutions have been
subject to CIP rules for more than ten years, and the proposal utilizes
CIP rule procedures, small institutions will be able to leverage these
procedures in complying with this requirement. As a result, FinCEN
believes that it is reasonable to estimate that it will require, on
average, 20 minutes to perform the beneficial ownership identification,
verification and recordkeeping requirements in the proposal.
Furthermore, FinCEN has anecdotal evidence that in general, the
customers of small institutions are primarily individuals and that they
do not frequently establish accounts for
[[Page 45169]]
legal entities, which would also reduce the impact of the proposed
requirement on small entities.\78\ However, because statistical data
does not exist regarding either the average number of beneficial owners
of legal entity customers of small institutions or how many such
accounts they establish in any time period, FinCEN is seeking comment
on these questions.
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\78\ FinCEN notes that, while its estimate of the aggregate
burden on industry resulting from the beneficial ownership
requirement is based on an average of 1.5 legal entity accounts per
day for each institution (see ``Executive Orders 13563 and 12866''
supra), it understands from its outreach that large institutions
likely open hundreds or even thousands such accounts per day, while
small institutions likely open, on average, far fewer than 1.5 such
accounts per day.
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The proposed rule would also require that covered financial
institutions include in their AML programs, customer due diligence
procedures, including understanding the nature and purpose of customer
relationships and conducting ongoing monitoring of these relationships.
Because these requirements are already a part of existing AML and SAR
practices, they will not impose any new obligations, and therefore will
have no economic impact, on any small entities.
Finally, the proposed rule would require each covered financial
institution to amend its AML program to include the new requirement
contained in the proposal, to train its employees regarding the new
requirement, and to update its data systems to include the beneficial
ownership information. FinCEN understands from its outreach that in
general, most covered financial institutions, including those that are
small entities, periodically update their AML programs, conduct AML
training, and upgrade their IT systems. FinCEN also understands that
most small institutions outsource their IT requirements and so would
acquire the required updated program from a vendor. FinCEN intends to
extend the implementation date for the proposed rule for one year from
issuance for the purpose of enabling financial institutions to
integrate these new program, training and data collection requirements
into their cyclical updates with minimal additional cost.
Consideration of Significant Alternatives: The proposed rule would
apply to all covered financial institutions. FinCEN has determined that
identifying the beneficial owner of a financial institution's legal
entity customers and verifying that identity is a necessary part of an
effective AML program. FinCEN has not identified any alternative means
for obtaining this information, other than imposing this as a
requirement for opening new legal entity accounts for all covered
financial institutions. Were FinCEN to exempt small entities from this
requirement, those entities would be potentially more subject to abuse
by money launderers and other financial criminals.
Certification: The additional burden proposed by the rule would be
a requirement to maintain an AML program that includes collection and
verification of beneficial owner information. It would also require
financial institutions, large and small, to update their AML programs,
train relevant employees, and modify data collection systems. As
discussed above, FinCEN estimates that the impact from this requirement
would not be significant. Accordingly, FinCEN certifies that the
proposed rule would not have a significant economic impact on a
substantial number of small entities.
Questions for comment: Please provide comment on any or all of the
provisions of the proposed rule with regard to their economic impact on
small entities (including costs and benefits), and what less burdensome
alternatives, if any, FinCEN should consider. In particular, FinCEN is
seeking comment on the economic burden associated with the proposed
beneficial ownership requirement, including the number of new accounts
opened for legal entities by small covered financial institutions and
the estimated time that would be required to comply with the proposed
requirements for the identification and verification of the beneficial
owners of such new legal entity customers, as well as the costs
associated with the program updates and necessary training and IT
system modifications.
B. Paperwork Reduction Act
The new recordkeeping requirement contained in this proposed rule
(31 CFR 1010.230) is being submitted to the Office of Management and
Budget (OMB) for review in accordance with the Paperwork Reduction Act
of 1995 (PRA), 44 U.S.C. 3501 et seq., which imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. Under
the PRA, an agency may not conduct or sponsor, and an individual is not
required to respond to, a collection of information unless it displays
a valid OMB control number. Comments concerning the estimated burden
and other questions should be sent to the Desk Officer for the
Department of Treasury, Office of Information and Regulatory Affairs,
Office of Management and Budget, Paperwork Reduction Project (1506),
Washington, DC 20503 with a copy to FinCEN by mail. Comments may also
be submitted by email to oira_submission@omb.eop.gov. Please submit
comments by one method only. Comments are welcome and must be received
by October 3, 2014.
In summary, the proposed rule would require covered financial
institutions to maintain records of the information used to identify
and verify the identity of the names of the beneficial owners of legal
entity customers.\79\
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\79\ This requirement applies to accounts established for legal
entities. A legal entity generally includes a corporation, limited
liability company, partnership, or any other similar business entity
formed in the United States or a foreign country.
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Type of Review: Initial review of the proposed information
collection elements of the ``Certification of Beneficial Owner(s)'' in
support of the beneficial ownership requirements for financial
institutions.\80\
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\80\ A copy of the proposed certification, which would be
required by 31 CFR 1010.230, appears at the end of this notice.
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Affected Public: Businesses or other for-profit and not-for-profit
entities, and certain financial institutions.
OMB Control Number: 1506-00XX.
Frequency: As required.
Estimated Reporting Burden:
a. Develop and maintain beneficial ownership identification
procedures: 1 hour.\81\
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\81\ A burden of one hour to develop the initial procedures is
recognized. Once developed, an annual burden of twenty minutes is
recognized for maintenance.
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b. Customer identification, verification, and review and
recordkeeping of the ``Certification of Beneficial Owner(s)'': 20
minutes per financial institution.
Estimated Number of Respondents: 21,550.\82\
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\82\ This includes depository institutions (13,375), trust
companies (65), broker-dealers in securities (5,100), future
commission merchants (101), introducing brokers in commodities
(1,249), and open-end mutual funds (1,660), each as defined under
the BSA. These figures represent the total number of entities that
would be subject to the proposed requirements in this notice.
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Estimated Total Annual Responses: 8,081,250.\83\
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\83\ Based on initial research, each covered financial
institution will open, on average, 1.5 new legal entity accounts per
business day. There are 250 business days per year.
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Estimated Recordkeeping and Reporting Burden: 2,715,300 hours.\84\
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\84\ 8,081,250 x 20 minutes per account established / 60 minutes
per hour = 2,693,750 hours plus development time of 21,550 hours for
a total of 2,715,300 hours the first year.
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The numbers presented assume that the number of account openings in
2013 is representative for an average yearly
[[Page 45170]]
establishment of accounts for new legal entities. Records are required
to be retained pursuant to the beneficial ownership requirement for
five years.
Request for Comments:
Comments submitted in response to this notice will be summarized
and/or included in the request for OMB approval. All comments will
become a matter of public record.
Comments are invited on: (i) Whether the collection of information
is necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility; (ii)
the accuracy of the agency's estimate of the burden of the collection
of information; (iii) ways to enhance the quality, utility, and clarity
of the information to be collected; (iv) ways to minimize the burden of
the collection of information on respondents, including through the use
of automated collection techniques or other forms of information
technology; (v) the reasonableness of the estimated number of new
annual account openings for legal entities; and (vi) estimates of
capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
C. Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. FinCEN has determined that
this proposed rule will not result in expenditures by state, local, and
tribal governments, or by the private sector, of $100 million or more.
Accordingly, FinCEN has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.
List of Subjects in 31 CFR Parts 1010, 1020, 1023, 1024, and 1026
Administrative practice and procedure, Banks, Banking, Brokers,
Currency, Federal home loan banks, Foreign banking, Foreign currencies,
Gambling, Investigations, Mortgages, Penalties, Reporting and
recordkeeping requirements, Securities, Terrorism.
Authority and Issuance
For the reasons set forth in the preamble, Chapter X of Title 31 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
2. Add Sec. 1010.230 in subpart B to read as follows:
Sec. 1010.230 Beneficial ownership requirements for legal entity
customers.
(a) In general. Covered financial institutions are required to
establish and maintain written procedures that are reasonably designed
to identify and verify beneficial owners of legal entity customers.
(b) Identification and verification. With respect to legal entity
customers, the covered financial institution's customer due diligence
procedures should enable the institution to:
(1) Identify the beneficial owner(s) of each legal entity customer,
unless otherwise exempt pursuant to paragraph (d) of this section. To
identify the beneficial owner(s), a covered financial institution must
obtain at the time a new account is opened a certification in the form
of Appendix A of this section from the individual opening the account
on behalf of the legal entity customer; and
(2) Verify the identity of each beneficial owner identified to the
covered financial institution, according to risk-based procedures to
the extent reasonable and practicable. At a minimum, these procedures
must be identical to the covered financial institution's Customer
Identification Program procedures required for verifying the identity
of customers that are individuals under Sec. 1020.220(a)(2) of this
chapter (for banks); Sec. 1023.220(a)(2) of this chapter (for brokers
or dealers in securities); Sec. 1024.220(a)(2) of this chapter (for
mutual funds); or Sec. 1026.220(a)(2) of this chapter (for futures
commission merchants or introducing brokers in commodities).
(c) Beneficial owner. For purposes of this section, Beneficial
Owner means each of the following:
(1) Each individual, if any, who, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise,
owns 25% or more of the equity interests of a legal entity customer;
(2) A single individual with significant responsibility to control,
manage, or direct a legal entity customer, including
(i) An executive officer or senior manager (e.g., a Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer, Managing
Member, General Partner, President, Vice President, or Treasurer); or
(ii) Any other individual who regularly performs similar functions.
Note to paragraph (c): The number of individuals that satisfy
the definition of ``beneficial owner,'' and therefore must be
identified and verified pursuant to this section, may vary. Under
paragraph (c)(1) of this section, depending on the factual
circumstances, up to four individuals may need to be identified.
Under paragraph (c)(2) of this section, only one individual must be
identified. It is possible that in some circumstances the same
person or persons might be identified pursuant to paragraphs (c)(1)
and (2) of this section. A covered financial institution may also
identify additional individuals as part of its customer due
diligence if it deems appropriate on the basis of risk.
(d) Legal entity customer. For the purposes of this section,
(1) Legal entity customer means: A corporation, limited liability
company, partnership or other similar business entity (whether formed
under the laws of a state or of the United States or a foreign
jurisdiction) that opens a new account.
(2) Legal entity customer does not include:
(i) A financial institution regulated by a Federal functional
regulator or a bank regulated by a State bank regulator;
(ii) A person described in Sec. 1020.315(b)(2) through (5) of this
chapter;
(iii) An issuer of a class of securities registered under section
12 of the Securities Exchange Act of 1934 or that is required to file
reports under section 15(d) of that Act;
(iv) An investment company, as defined in section 3 of the
Investment Company Act of 1940, that is registered with the Securities
and Exchange Commission under that Act;
(v) An investment adviser, as defined in section 202(a)(11) of the
Investment Advisers Act of 1940, that is registered with the Securities
and Exchange Commission under that Act;
(vi) An exchange or clearing agency, as defined in section 3 of the
Securities Exchange Act of 1934, that is registered under section 6 or
17A of the Securities Exchange Act of that Act;
(vii) Any other entity registered with the Securities and Exchange
[[Page 45171]]
Commission under the Securities Exchange Act of 1934;
(viii) A registered entity, commodity pool operator, commodity
trading advisor, retail foreign exchange dealer, swap dealer, or major
swap participant, each as defined in section 1a of the Commodity
Exchange Act, that is registered with the Commodity Futures Trading
Commission;
(ix) A public accounting firm registered under section 102 of the
Sarbanes-Oxley Act; and
(x) A charity or nonprofit entity that is described in sections
501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 1986, has
not been denied tax exempt status, and is required to and has filed the
most recently due annual information return with the Internal Revenue
Service.
(e) Covered financial institution. For the purposes of this
section, covered financial institution has the meaning set forth in
Sec. 1010.605(e)(1).
(f) Recordkeeping. A covered financial institution must establish
procedures for making and maintaining a record of all information
obtained under the procedures implementing paragraph (b) of this
section.
(1) Required records. At a minimum the record must include:
(i) For identification, the certification form described in
paragraph (b) of this section, and any other identifying information
obtained by the covered financial institution; and
(ii) For verification, a description of any document relied on
(noting the type, any identification number, place of issuance and; if
any, date of issuance and expiration), of any non-documentary methods
and the results of any measures undertaken, and of the resolution of
each substantive discrepancy.
(2) Retention of records. A covered financial institution must
retain the records made under paragraph (f)(1)(i) of this section for
five years after the date the account is closed, and the records made
under paragraph (f)(1)(ii) of this section for five years after the
record is made.
(g) Reliance on another financial institution. A covered financial
institution may rely on the performance by another financial
institution (including an affiliate) of the requirements of this
section with respect to any legal entity customer of the covered
financial institution that is opening, or has opened, an account or has
established a similar business relationship with the other financial
institution to provide or engage in services, dealings, or other
financial transactions, provided that:
(1) Such reliance is reasonable under the circumstances;
(2) The other financial institution is subject to a rule
implementing 31 U.S.C. 5318(h) and is regulated by a Federal functional
regulator; and
(3) The other financial institution enters into a contract
requiring it to certify annually to the covered financial institution
that it has implemented its anti-money laundering program, and that it
will perform (or its agent will perform) the specified requirements of
the covered financial institution's procedures to comply with the
requirements of this section.
APPENDIX A--CERTIFICATION REGARDING BENEFICIAL OWNERS OF LEGAL ENTITY
CUSTOMERS
I. GENERAL INSTRUCTIONS
What is this form?
To help the government fight financial crime, federal regulation
requires certain financial institutions to obtain, verify, and record
information about the beneficial owners of legal entity customers.
Legal entities can be abused to disguise involvement in terrorist
financing, money laundering, tax evasion, corruption, fraud, and other
financial crimes. Requiring the disclosure of key individuals who
ultimately own or control a legal entity (i.e., the beneficial owners)
helps law enforcement investigate and prosecute these crimes.
Who has to complete this form?
This form must be completed by the person opening a new account on
behalf of a legal entity with any of the following U.S. financial
institutions: (i) A bank or credit union; (ii) a broker or dealer in
securities; (iii) a mutual fund; (iv) a futures commission merchant; or
(v) an introducing broker in commodities.
For the purposes of this form, a legal entity includes a
corporation, limited liability company, partnership, and any other
similar business entity formed in the United States or a foreign
country.
What information do I have to provide?
This form requires you to provide the name, address, date of birth
and social security number (or passport number or other similar
information, in the case of foreign persons) for the following
individuals (i.e., the beneficial owners):
(i) Each individual, if any, who owns, directly or indirectly, 25
percent or more of the equity interests of the legal entity customer
(e.g., each natural person that owns 25 percent or more of the shares
of a corporation); and
(ii) An individual with significant responsibility for managing the
legal entity customer (e.g., a Chief Executive Officer, Chief Financial
Officer, Chief Operating Officer, Managing Member, General Partner,
President, Vice President or Treasurer).
The financial institution may also ask to see a copy of a driver's
license or other identifying document for each beneficial owner listed
on this form.
BILLING CODE 4810-02-P
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[GRAPHIC] [TIFF OMITTED] TP04AU14.008
BILLING CODE 4810-02-C
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PART 1020--RULES FOR BANKS
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3. The authority citation for part 1020 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
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4. Revise Sec. 1020.210 in subpart B to read as follows:
Sec. 1020.210 Anti-money laundering program requirements for
financial institutions regulated only by a Federal functional
regulator, including banks, savings associations, and credit unions.
A financial institution regulated by a Federal functional regulator
that is not subject to the regulations of a self-regulatory
organization shall be deemed to satisfy the requirements of 31 U.S.C.
5318(h)(1) if the financial institution implements and maintains an
anti-money laundering program that:
(a) Complies with the requirements of Sec. Sec. 1010.610 and
1010.620 of this chapter;
(b) Includes, at a minimum:
(1) A system of internal controls to assure ongoing compliance;
(2) Independent testing for compliance to be conducted by bank
personnel or by an outside party;
(3) Designation of an individual or individuals responsible for
coordinating and monitoring day-to-day compliance;
(4) Training for appropriate personnel; and
(5) Appropriate risk-based procedures for conducting ongoing
customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to maintain and update customer
information and to identify and report suspicious transactions; and
(c) Complies with the regulation of its Federal functional
regulator governing such programs.
PART 1023--RULES FOR BROKERS OR DEALERS IN SECURITIES
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5. The authority citation for part 1023 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
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6. Revise Sec. 1023.210 in subpart B to read as follows:
Sec. 1023.210 Anti-money laundering program requirements for brokers
or dealers in securities.
A broker or dealer in securities shall be deemed to satisfy the
requirements of 31 U.S.C. 5318(h)(1) if the broker-dealer implements
and maintains a written anti-money laundering program approved by
senior management that:
(a) Complies with the requirements of Sec. Sec. 1010.610 and
1010.620 of this chapter and any applicable regulation of its Federal
functional regulator governing the establishment and implementation of
anti-money laundering programs;
(b) Includes, at a minimum:
(1) The establishment and implementation of policies, procedures,
and internal controls reasonably designed to achieve compliance with
the applicable provisions of the Bank Secrecy Act and the implementing
regulations thereunder;
(2) Independent testing for compliance to be conducted by the
broker-dealer's personnel or by a qualified outside party;
(3) Designation of an individual or individuals responsible for
implementing and monitoring the operations and internal controls of the
program;
(4) Ongoing training for appropriate persons; and
(5) Appropriate risk-based procedures for conducting ongoing
customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to maintain and update customer
information and to identify and report suspicious transactions; and
(c) Complies with the rules, regulations, or requirements of its
self-regulatory organization governing such programs; provided that the
rules, regulations, or requirements of the self-regulatory organization
governing such programs have been made effective under the Securities
Exchange Act of 1934 by the appropriate Federal functional regulator in
consultation with FinCEN.
PART 1024--RULES FOR MUTUAL FUNDS
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7. The authority citation for part 1024 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
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8. Revise Sec. 1024.210 in subpart B to read as follows:
Sec. 1024.210 Anti-money laundering program requirements for mutual
funds.
(a) Effective July 24, 2002, each mutual fund shall develop and
implement a written anti-money laundering program reasonably designed
to prevent the mutual fund from being used for money laundering or the
financing of terrorist activities and to achieve and monitor compliance
with the applicable requirements of the Bank Secrecy Act (31 U.S.C.
5311, et seq.), and the implementing regulations promulgated thereunder
by the Department of the Treasury. Each mutual fund's anti-money
laundering program must be approved in writing by its board of
directors or trustees. A mutual fund shall make its anti-money
laundering program available for inspection by the U.S. Securities and
Exchange Commission.
(b) The anti-money laundering program shall at a minimum:
(1) Establish and implement policies, procedures, and internal
controls reasonably designed to prevent the mutual fund from being used
for money laundering or the financing of terrorist activities and to
achieve compliance with the applicable provisions of the Bank Secrecy
Act and implementing regulations thereunder;
(2) Provide for independent testing for compliance to be conducted
by the mutual fund's personnel or by a qualified outside party;
(3) Designate a person or persons responsible for implementing and
monitoring the operations and internal controls of the program;
(4) Provide ongoing training for appropriate personnel; and
(5) Implement appropriate risk-based procedures for conducting
ongoing customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) conducting ongoing monitoring to maintain and update customer
information and to identify and report suspicious transactions.
PART 1026--RULES FOR FUTURES COMMISSION MERCHANTS AND INTRODUCING
BROKERS IN COMMODITIES
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9. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
10. Revise Sec. 1026.210 in subpart B to read as follows:
[[Page 45174]]
Sec. 1026.210 Anti-money laundering program requirements for futures
commission merchants and introducing brokers in commodities.
A futures commission merchant and an introducing broker in
commodities shall be deemed to satisfy the requirements of 31 U.S.C.
5318(h)(1) if the futures commission merchant or introducing broker in
commodities implements and maintains a written anti-money laundering
program approved by senior management that:
(a) Complies with the requirements of Sec. Sec. 1010.610 and
1010.620 of this chapter and any applicable regulation of its Federal
functional regulator governing the establishment and implementation of
anti-money laundering programs;
(b) Includes, at a minimum:
(1) The establishment and implementation of policies, procedures,
and internal controls reasonably designed to prevent the financial
institution from being used for money laundering or the financing of
terrorist activities and to achieve compliance with the applicable
provisions of the Bank Secrecy Act and the implementing regulations
thereunder;
(2) Independent testing for compliance to be conducted by the
futures commission merchant or introducing broker in commodities'
personnel or by a qualified outside party;
(3) Designation of an individual or individuals responsible for
implementing and monitoring the operations and internal controls of the
program;
(4) Ongoing training for appropriate persons;
(5) Appropriate risk-based procedures for conducting ongoing
customer due diligence, to include, but not be limited to:
(i) Understanding the nature and purpose of customer relationships
for the purpose of developing a customer risk profile; and
(ii) Conducting ongoing monitoring to maintain and update customer
information and to identify and report suspicious transactions; and
(c) Complies with the rules, regulations, or requirements of its
self-regulatory organization governing such programs; provided that the
rules, regulations, or requirements of the self-regulatory organization
governing such programs have been made effective under the Commodity
Exchange Act by the appropriate Federal functional regulator in
consultation with FinCEN.
Dated: July 23, 2014.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2014-18036 Filed 7-31-14; 11:15 am]
BILLING CODE 4810-02-P