Implementing CDD ‘beneficial ownership’ rule, and navigating the maze of exemptions

Now that the US Treasury has dropped the long-awaited rule requiring banks to snare the “beneficial owners” of companies, institutions still can’t create a blanket policy, but must expertly navigate a thicket of exemptions betwixt the more than 200 pages of text.

The finalization last week of the rule from the Financial Crimes Enforcement Network (FinCEN) has sent shockwaves through the financial crime compliance space, with experts weighing the pros and cons of the initiative, even as anti-money laundering (AML) teams wrestle with fresh implementation challenges and law enforcement readies for a flood of new intelligence. To read an ACFCS analysis of the new rule, please click here.

The new rule requires financial institutions to collects the details of real people – including individuals with “significant responsibility” and control over a company or owning 25 percent – so that these banks can screen these names for potential ties to frauds, terror groups, organized crime and other illicit networks.

So what are the entities exempted from the new beneficial ownership rules? Here is a list with some condensed reasons as to why they are exempt:

A financial institution regulated by a Federal functional regulator or a bank regulated by a State bank regulator: Excluded because they are subject to Federal or State regulation and information regarding their beneficial ownership and management is available from the relevant Federal or State agencies.

An issuer of a class of securities: These issuers are excluded because they are required to publicly disclose the beneficial owners of five percent or more of each class of the issuer’s voting securities in periodic filings with the SEC, to the extent the information is known to the issuer or can be ascertained from public filings.

An investment adviser: These entities are excluded because registered investment companies and registered investment advisers already publicly report beneficial ownership in their filings with the SEC.

An exchange or clearing agency: These entities are excluded because the SEC registration process requires disclosure and regular updating of information about beneficial owners of those entities, as well as senior management and other control persons.

A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer, or major swap participant, already registered with the Commodities Futures Trading Commission (CFTC): These entities are excluded because the CFTC registration process requires disclosure and regular updating of information about beneficial owners of those entities, as well as senior management and other control persons.

A public accounting firm: Such firms are those that audit publicly traded companies and SEC-registered broker-dealers. These firms are required to register with the Public Company Accounting Oversight Board (PCAOB) and are required to file annual and special reports with the PCAOB. In addition, States require public accounting firms to register and to file annual reports identifying their members and shareholders.

A bank holding company: have been excluded from the beneficial ownership requirement in the final rule because the Federal Reserve Board maintains beneficial ownership information on all of these companies. Savings and loan holding companies are excluded for the same reason.

A pooled investment vehicle that is operated or advised by a financial institution: In response to several commenters who noted that beneficial ownership information would be available regarding the operator or adviser of such pooled vehicles, FinCEN has determined that the pooled vehicle should also be excluded from this requirement.

A state-regulated insurance company: All State regulated insurance companies are required to file an Annual Statement with their State regulators, identifying senior management, directors, and trustees, so thus are exempt.

Financial market utility: Exempt because such entities are already subject to extensive regulation.

Foreign financial institution: A foreign financial institution established in a jurisdiction where the regulator of such institution maintains beneficial ownership information regarding such institution.

A non-U.S. governmental department, agency or political subdivision that engages only in governmental rather than commercial activities:  FinCEN agreed that certain departments, agencies, and political subdivisions of non-U.S. governments—specifically, those that engage only in governmental (and not commercial) activities—should not fall within the definition of legal entity customer, and should therefore be excluded from the requirement.

Intermediated relationships: Banks need to get beneficial ownership information on the intermediary, but not the underlying accounts. For instance, FinCEN believes that attorney escrow and client trust accounts should be treated like other intermediated accounts described above, and we accordingly deem such escrow accounts intermediated accounts for purposes of the beneficial ownership requirement.

Charities and Nonprofit Entities: FinCEN has determined that it would be simpler, as well as more efficient and more logical, to exclude all nonprofit entities (whether or not tax-exempt) from the ownership prong of the requirement, particularly considering the fact that nonprofit entities do not have ownership interests, and require only that they identify an individual with significant responsibility to control, manage, or direct the customer.