What is the beneficial ownership rule?

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On May 11, 2018, the Financial Crimes Enforcement Network implemented a rule with the intention of fighting against illegal financial activities committed by many businesses. Some of these crimes include fraud, tax evasion and money laundering. This new rule is known as the beneficial ownership rule, and it has many implications for businesses who engages in scandalous activities.

What does the beneficial ownership rule entail?

According to legislation by the Financial Crimes Enforcement Network, the beneficial ownership rule states that financial institutions have to verify information from all major owners of businesses as well as their accounts. When a new account is opened, all of this information has to be verified immediately. This rule applies to corporations, general partnerships, LLC’s or any other entity that was created through a public document with the Secretary of State.

The beneficial ownership rule works in compliance with the Customer Due Diligence (CDD) rule. This rule was implemented on the same date two years prior to the beneficial ownership rule. Also known as the “Final Rule”, this is an extension of requirements under the Bank Secrecy Act. The purpose was to combat Anti-Money Laundering procedures which facilitates the collection of information regarding beneficial ownership.

What is a Beneficial Owner?

A major, or in this case, a beneficial owner, is described to be an individual who holds at least 25% of equity interest within the legal interest. This legal entity or business typically has maximum of five of these beneficial owners according to the threshold that the FinCEN has created. It up to the discretion of the institution of who the beneficial owners are, but the banks can interpret who the owners are by having stricter equity threshold requirements.

Ownership and Control Prongs

Furthermore, this beneficial ownership rule goes on to describe ownership and control prongs. Control prongs (businesses must have at least one) hold the most influence and responsibility over the account. This is most commonly known as the company president, COO or CEO of the business. The ownership prong, are those who own at least 25% of equity interests in the account. The same level of personal information does not have to be dispensed if they fall under one of the exclusions or exemptions that the government has regulated.

Exclusions and Exemptions

The exclusions include unincorporated associations, sole proprietorships, non-account owners, authorized credit card users and trusts. These would be the parties that do not need to collect evidence to support them being excluded. As for the exemptions, they entail government agencies, financial institutions that are regulated by the United States, unincorporated associations, entities on the stock exchange and charities among others. Institutions who are exempted need to complete forms that prove why they are exempted and must be signed by the NAP.

Compliance

The next step in the beneficial ownership rule is compliance. This is where institutions who are not exempted or excluded have to verify name, date of birth, address and ID number (this is typically tax ID number and Social Security). Depending on the situation, banks may also ask for specific percentage of ownership, residency status and license information. Procedures are established for the maintenance of these records, and these come in the form of certification forms and document descriptions.

How Information is Transferred to Financial Institutions

Banks are also not required to verify customers who exist, but under certain circumstances, such as when a financial institution becomes aware of a change in beneficial ownership, a new certificate and verification is necessary. If an accounts happens to expire, maintenance of the ownership is five years. In addition, banks must utilize these same forms to verify the beneficial ownership.

Upon verifying the necessary information, these institutions are able to use the information that the organization provided to the, provided that there is no knowledge revealed to suggest that the information isn’t accurate. If they choose, FinCEN provides a formal certification form that banks can use to confirm all the necessary information fields. These forms are completed by customers and different forms must be completed for subsequent accounts that are opened.

Requirements for Financial Institutions

In terms of what requirements the financial institutions have to abide by, it mainly entails:

  • enhancing due diligence practices when new accounts are opened by obtaining pertinent information
  • amending Anti-Money laundering requirements for information collecting
  • establishing procedures to identify beneficial owners

How Businesses Can Adapt to These Rules

For many businesses, they will have to adapt to these rules, as the collection of this verified information is a gargantuan effort. In today’s day and age, compliance to the beneficial ownership rule can mean the prolonged success or collapse of any organization. For businesses, it is recommended to take advantage of modern technology to support methods that make them more organized.

Some of the areas that businesses should focus on in order to improve compliance include customer onboarding, data collection, master data management, entity verification, compliance screening and ownership structure automation. Investing time and money into these areas will facilitate intelligence to executives to make for a smooth transition. In doing so, organizations will be able to have a better understanding of the challenges faced before them and reduce the amount of effort needed to cross different departments.

Even though there is no legal requirement for banks to check for existing accounts, constant maintenance is still required, and businesses have to be weary of the “event-driven triggers” that can precipitate information that may be need to be disseminated. These specific triggers include results of negative media search programs, the length of time since customer information was gathered and the risk profile was assessed and red flags attributed to suspicious activity. Other triggers could include changes in business operation, employment, ownership or business entity. The triggering event is also determined based on risk, but doesn’t necessarily change the customer risk profile.

Beneficial owners still have to remain careful when it comes to providing required personal information. During the exchange of information, there is transparency expected out of both parties. It is expected that the business will be honest in providing the necessary information that is required. It is also expected that the bank or financial institution are clear regarding not only what documentation they need, but the purpose of why they need the information to begin with.

The beneficial ownership rule was an initiative created for an impact on a global scale. If no global accountability standard exists, then the global financial system becomes increasingly vulnerable in the process.