Monday, August 18, 2014

Department of the Treasury Proposes That Banks Must Know Who Controls and Owns Business Entity Customers

Department of the Treasury Proposes That Banks Must Know Who Controls and Owns Business Entity Customers


            On June 30, the US Department of the Treasury issued a NPR (“Notice of Proposed Rulemaking") that, if put in place, would amend the Bank Secrecy Act (the “BSA”) to impose new limitations upon banks and other financial industry participants requiring that they solicit and receive information as to the ownership and control of various business entity clients.  As set forth in the summary accompanying the regulatory proposal, the Financial Crimes Enforcement Network of the Department of the Treasury:

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 exceptions.

This requirement to collect information as to the persons behind legal entities is intended to address:


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.

            Less onerous than certain other proposals for the required reporting of beneficial ownership (see, e.g., Rutledge, Requiring Disclosure of Business Entity Ownership: Proposed New Laws are Burdensome, But With the Benefit of Being Ineffective, J. Passthrough Entities (July/Aug. 2010); a copy of that article is available THROUGH THIS LINK), the rules set forth in the NPR would require, at the time an account is opened, that the bank or other financial institution collect:


  • Identifying information as to each natural person who directly or indirectly owns 25% or more of the equity/ownership interests in the client; and

  • Identifying information as to each person with “significant responsibility for managing the legal entity customer.”

This information would be collected on a form set forth in the NPR.  For each persons there wold be collected their:

  • name;
  • address;
  • date of birth; and
  • social security number (country of issuance and passport number for non-US persons).

While certain entities would be functionally exempt from the obligation to report any beneficial owners if none meet of exceed the 25% ownership threshold (at least until such time as the regulations might in the future be amended to reduce that threshold), every entity will have at least one natural person with significant management responsibility.

While the bank or other financial institution will be required to “verify” the identifying information as to the persons identified (presumably an effort to address fictitious persons), there is no obligation to verify the control position with the entity.

The rule, as proposed, is prospective only; it applies only to accounts opened after its effective date.  That said, the regulation sets a floor, and a financial institution may require the information for already existing accounts.

The NPR was published in the Federal Register on August 4, 2014; comments on the proposal are due within 60 days thereof.

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