The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) has stated that it is taking the last steps in the process to finalize its long-awaited beneficial ownership rule, which it proposed in 2014. If finalized as proposed, the rule would, for the first time, extend Customer Due Diligence (“CDD”) requirements under Bank Secrecy Act (“BSA”) rules to the natural persons behind a legal entity. FinCEN has indicated that the rule will now go to the White House’s Office of Management and Budget (“OMB”) for review, a process that generally can take up to 90 days, before a final rule can be issued. FinCEN did not confirm any concrete time frame for this process.  

This apparent push to issue a final rule comes in the wake of the media leak of the so-called “Panama Papers,” which provoked a public outcry over the purported hiding of wealth by public officials and wealthy individuals through offshore shell companies. The Panama Papers are a leaked set of 11.5 million confidential documents of the Panamanian law firm Mossack Fonseca that provide detailed information about more than 214,000 offshore companies, including the identities of shareholders and directors of the companies. The documents show how wealthy individuals from across the world, including public officials, hide their money from government regulation and public scrutiny using shell companies. Investigative reporters have found that some of the shell companies may have been used for illegal purposes, including fraud, drug trafficking, and tax evasion.

While, as of the date of this post, few U.S. persons had been identified in the Panama Papers, the U.S. system already allows quite a bit of opacity through the creation of shell companies. To date, the BSA rules have not required CDD to involve an inquiry as to the identity of beneficial owners—the natural persons behind a company that is the financial institution’s customer. The FinCEN rule would require the CDD processes of U.S. financial institutions to identify the human individual(s) behind companies that are customers of such financial institutions  and, to the extent practicable, verify the identities of those owners by the same risk-based methodology employed for verifying customers who are individuals. Specifically, the rules would require banks and numerous other entities subject to CDD obligations to have policies and procedures to collect and maintain information on individuals who hold 25 percent or more of an interest in a customer or who otherwise “control” the customer, as determined by certain specified criteria. 

FinCEN emphasized in the proposal 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, 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,’’ FinCEN stated that 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.

The rule would require that financial institutions collect beneficial owner information at the time a new account is opened using a standard certification form for verifying the identity of beneficial owners. Notably, though, the final FinCEN rule is not expected to require financial institutions to verify that information through its own independent investigation. Some industry commenters  have stated that there is no way for banks to verify beneficial ownership information because while they can collect the information, there is currently no mechanism to verify it or keep it updated other than asking the entity for that information. 

In anticipation of issuance of the final rule, financial institutions should be considering the likelihood of complex business structures or relationships in their customer base. Financial institutions should also evaluate their current identification, verification and monitoring processes to determine whether changes may be warranted. Financial institutions should also be prepared to train their employees when the final rule is issued. These actions will be critical to complying with the final rule upon its effective date.