Editorial · March 15, 2018
Beneficial Ownership Rule: What Banks Will Ask of You
The beneficial ownership rule is a new federal rule that makes banks learn who really owns and runs each company that opens an account. If you own a business, expect your bank to ask for names and personal details of your owners by May 11, 2018. This post explains what the rule says and what to have ready.
What the rule says
The U.S. Treasury's Financial Crimes Enforcement Network, known as FinCEN, published its customer due diligence final rule on May 11, 2016. The rule took effect on July 11, 2016. Banks and other covered institutions have until May 11, 2018 to comply.
The rule covers banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities. It adds a plain duty: when a company opens a new account, the institution must identify the real people behind it and verify who they are. FinCEN wrote that the aim is to make it harder for criminals to hide money behind legal structures.
Who counts as a beneficial owner
The rule uses two tests. The first is ownership. Each individual who owns, directly or indirectly, 25 percent or more of the equity of the company is a beneficial owner. Depending on how the shares are split, a company may have as few as zero or as many as four people under this test.
The second test is control. Every company must name one individual with significant responsibility to control, manage or direct it. That can be an executive officer, a senior manager, or someone who does a similar job. Even a company with no 25 percent owner must name one such person.
The phrase "directly or indirectly" matters. FinCEN said the company should name its ultimate owners, not nominees or stand-ins. If a trust or another company holds the stake, expect the bank to ask who stands behind it.
Which companies are covered
The rule applies to a "legal entity customer." FinCEN defines that as a corporation, a limited liability company, or another entity created by filing a public document with a Secretary of State or similar office. A general partnership also counts, as do similar entities formed under foreign law.
Some entities are excluded from the definition, and some kinds of accounts are exempt. If you think your company falls in one of those groups, ask your bank. Do not assume. The bank decides what applies to its own forms and accounts.
What the bank will ask for
Banks must collect this at the time each new account is opened. They may use a standard certification form, which FinCEN published as Appendix A to the rule, or any other method that meets the same requirements. Expect to give each beneficial owner's name, date of birth and address, plus an identification number such as a Social Security number for a U.S. person.
The bank must also verify who each person is, using steps much like those it uses for an individual customer. It may rely on what you tell it, as long as it has no reason to doubt that the information is reliable. That puts the weight on you to give accurate answers.
The rule does not set a fixed schedule for refreshing this information. FinCEN said banks should update it based on risk, for example when monitoring shows something that changes the picture.
How to get ready
You can prepare now, before your bank sends a form. These steps take little time.
- List every person who owns 25 percent or more, directly or through another company or trust.
- Pick the one person who will be named as the control person, and confirm that they agree.
- Gather each person's legal name, date of birth, home address and ID number.
- Keep your ownership records, such as your operating agreement or stock ledger, up to date and easy to find.
- Tell your owners that the bank may ask to see government ID.
Plan for questions when you open a new account, and when you move a banking relationship to a new bank. A company with clean, current records will clear these checks faster. One with unclear ownership may face delays.
Sources
- Financial Crimes Enforcement Network, Department of the Treasury, "Customer Due Diligence Requirements for Financial Institutions," final rule, 81 Federal Register 29398, May 11, 2016: https://www.federalregister.gov/documents/2016/05/11/2016-10567/customer-due-diligence-requirements-for-financial-institutions
- Same rule, Government Publishing Office edition: https://www.govinfo.gov/content/pkg/FR-2016-05-11/html/2016-10567.htm