Covered financial institutions include banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities.
The rules contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions.
Covered financial institutions are not presently required to know the identity of the individuals who own or control their legal entity customers (also known as beneficial owners). This enables criminals and others looking to hide ill-gotten proceeds to access the financial system anonymously. The beneficial ownership requirement addresses this weakness and provides information that will assist law enforcement in financial investigations, help prevent evasion of targeted financial sanctions, improve the ability of financial institutions to assess risk, facilitate tax compliance, and advance U.S. compliance with international standards and commitments.
Introducing Brokers and Futures Commission Merchants must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened.
Identification and verification may occur through the use of a standard certification form supplied by FINCEN or by any other means that comply with the substantive requirements of this obligation. Beneficial ownership information supplied by the customer may be relied upon provided that the FCM/IB has no knowledge of facts that would reasonably call into question the reliability of the information.
Beneficial owner means 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 a single individual with significant responsibility to control, manage, or direct a legal entity customer.
Legal entity customer means a corporation, limited liability company, or other entity that is 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. Excluded entity customers include banks, investment companies, investment advisers, exchanges or clearing agencies, commodity pool operators, commodity trading advisors, retail foreign exchange dealers, swap dealers, major swap participants, public accounting firms, bank holding companies, savings and loan holding companies, pooled investment vehicles, insurance companies, foreign financial institutions established in a jurisdiction where the regulator of such institution maintains beneficial ownership information regarding such institutions, and any legal entity only to the extent that it opens a private banking account.
When a financial institution detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Such information could include, e.g., a
significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason or a significant change in the volume of activity without explanation.
In order to ensure adherence to the final customer due diligence rule compliance officers will have to revise their financial institution’s AML program procedures (for example, account onboarding).
The final rule requires that covered financial institutions include in their AML programs customer due diligence procedures, including understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile and conducting ongoing monitoring of these relationships to identify and report suspicious activities and, on a risk basis, to maintain and update customer information. FCM and IB current AML Programs generally include (1) The establishment and implementation of policies, procedures, and internal controls; (2) Independent testing; (3) Designation of an AML Compliance Officer; and (4) Ongoing training. The following will need to be included in the FCM/IB’s AML Program (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 identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
FCMs and IBs are required to maintain records of the beneficial ownership information they obtain. An FCM or more likely and IB may rely on the performance by another financial institution (including an affiliate) to obtain appropriate information to identify and verify the beneficial owners of a legal entity customer. Reliance standards are the same as those required for customer identification and verification procedures (“CIP”).
If you have any questions please feel free to contact Joseph Mazza from Compliance Supervisors International Inc. at jmazza@compliancesupervisors.com or (732) 335-5740.