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October 27, 2017 at 06:32 AM
Starting May 11, 2018, compliance officers at broker-dealers will have one more responsibility to add to their checklists. On that day, a new Financial Crimes Enforcement Network (FinCEN) rule goes into effect that requires broker-dealers (and certain other financial institutions) to identify and verify the identity of beneficial owners of legal entity customers at the time of account opening. With the new beneficial ownership rules right around the corner, now is the time for broker-dealers to incorporate the new requirements into their existing AML compliance policies and procedures.
FinCEN, part of the U.S. Treasury, along with the Securities and Exchange Commission and FINRA, administers the anti-money laundering (AML) rules for broker-dealers and other financial institutions under the Bank Secrecy Act (BSA). Among other obligations, the BSA requires broker dealers to implement Customer Identification Programs (CIPs) and perform Customer Due Diligence (CDD) (colloquially, “Know Your Customer” or KYC).
When the new beneficial ownership rule becomes mandatory in May 2018, broker-dealers will be required to obtain from their legal entity customers the identity of (1) beneficial owners of 25% or more of the entity; and (2) a single individual with significant control over the entity, taken together to mean “beneficial owners.” The legal entity customer is generally responsible for identifying the beneficial owners, and broker-dealers may generally rely on the information provided by legal entity customers. FinCEN provides a sample Certification Form that account applicants may complete to provide beneficial ownership information, but broker-dealers are not required to use it.
For any legal entity customer there must be between one and five beneficial owners. For example, if no individuals have a 25% or greater equity interest, then the only beneficial owner will be the control person. At most, there will be four individuals with 25% equity interest plus the control person. A “legal entity” is a corporation, LLC or other entity “created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.” There are a number of exclusions for certain types of legal entity customers, such as those listed on major U.S. stock exchanges, investment companies and other regulated companies.
Note that broker-dealers are not required to verify an individual’s status as a beneficial owner. Rather, the broker-dealer’s verification procedures are limited to the individual’s or entity’s identity and must include the elements required under existing CIP requirements, including collection of customer information and use of documents or non-documentary methods for verification. One exception is that broker-dealers will be permitted to rely on photocopies of documents identifying beneficial owners.
