FinCEN wants Natural Persons

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FinCEN wants Natural Persons

The Financial Crimes Enforcement Network (FinCEN), has proposing rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for: (i) banks; (ii) brokers or dealers in securities; (iii) mutual funds; and (iv) 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, all the way down to the natural persons – not just intermediate entities.

FinCEN believes this more aggressive definition provides clarity and effectiveness. This revised proposed 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 will 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.

Industry insiders expressed significant concern that identifying beneficial owners under the ownership prong would be difficult for legal entity customers that have complex legal ownership structures. FinCEN acknowledged 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 and the institution may incur additional costs. 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. (Emphasis added)

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.

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.

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. Those types of entities include, but are not limited to, financial institutions. 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 noted that exempting these entities from the beneficial ownership requirement does not necessarily imply that they all present a low risk of money laundering or terrorist financing. For example, a charity may present high risk 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.

Much of this was from the comments published by FinCen. They want those subject to the BSA to be required to drill down and find the humans who are either in control and or ownership. The issue of control is about management and those who possess the power of discretion. The ownership threshold is down to 25% looking for the natural you – no matter how many layers of ownership is required to be drilled through.

Problems with the requirement are simple and numerous. Once ownership is atomized below 25% by entities, it can be consolidated through other entities. Once the threshold of 25% has been reached, the financial institutions will stop there and do no more digging. I do not blame them. Furthermore, the rules ignore a whole host of semi exotic agreements such as profit sharing, revenue assignments, as well as the ease of establishing entitles for the wealthy, those they are looking for, to structure and establish exempt entities.

It will be a burden on us all, a simple thing to avoid for the wealthy, and will not produce the desired results.

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