Some Beneficial Ownership Rules Paused

June 29, 2018 | dehs

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FinCEN (the Financial Crimes Enforcement Network) published a Customer Due Diligence final rule on May 11, 2016,[1] including new requirements for covered financial institutions (FIs) to identify and verify the identity of beneficial owners of legal entity customers. Davenport Evans lawyer Rita M. Edwards explains in the July edition of the Davenport Evans Banking eNews. The rule requires FIs to obtain information about each individual who directly or indirectly owns 25% or more of a legal entity customer each time a new banking relationship is established or a new account is opened.[2] The original applicable compliance date was to be May 11, 2018; however, in a ruling issued May 16, 2018,[3] (and made retroactive to May 11, 2018,) FinCEN granted a limited temporary 90-day exception (through and including August 9, 2018,) from the requirement for products and services established before the compliance date but expected to roll over or renew thereafter.

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The rule requires FIs to obtain beneficial ownership information for legal entity customers each time a new account or formal banking relationship is established, even if the entity is an existing customer. FinCEN issued guidance[4] discussing the definition of “account” in the context of Customer Identification Procedure rules. Regarding the rule’s applicability to product or service renewals, FinCEN stated that “each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is established.” As a result, upon any loan renewal or CD roll-over occurring after May 11, 2018, a FI would be required to collect the entity’s beneficial ownership information.

FinCEN recognized that many FIs do not treat loan renewals or CD roll-overs as new accounts and new banking relationships, and that indeed the FIs have automatic processes that continue the banking relationship with the customer. Because many FIs expressed concern regarding their ability to comply with the Beneficial Ownership Rule because of automatic processes and the continuing relationship, FinCEN determined that it needed to further consider the issue. As a result, it granted a temporary exception through August 9, 2018, from the requirement to collect beneficial ownership information on automatic rollovers and renewals when the original accounts were established before the rule’s May 11, 2018, applicable date. By that August expiration date, FinCEN expects to determine whether and to what extent additional exceptive relief may be appropriate.

Stay tuned to dehs.com and Financial Institutions eNews for further developments.

[1] 81 FR 29398

[2] Beneficial Ownership Rule, 31 CFR § 1010.230

[3] FIN-2018-R002 (May 16, 2018)

[4] FIN-2018-G001, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, (April 3, 2018)

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.