On February 16, 2012, the Financial Crimes Enforcement Network (“FinCEN”) released Advance Notice of Proposed Rulemaking and a Request for Comment pertaining to the potential expansion of customer due diligence (“CDD”) obligations for financial institutions. Specifically, FinCEN proposes to enhance CDD requirements for determining beneficial ownership of accounts.

The two main components of the proposed rules are an expansion of the definition of the term “beneficial owner” and establishing “a categorical requirement for financial institutions to identify beneficial ownership of their accountholders.” FinCEN cites a “lack of uniformity and consistency” in the manner in which financial institutions approach the topic of beneficial ownership as a reason for the proposed rule, stating that they would like to “codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations.” FinCEN also believes that such a rule could better promote financial transparency, protect the financial system from abuse, and deter illicit transactions.

The scope of the proposed expanded regulations would include depository institutions, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, though FinCEN has also stated that they will consider extending the rule to all financial institutions subject to FinCEN regulations in the future.
Currently, covered financial institutions only have to determine beneficial ownership in two limited circumstances: (1) when they offer certain forms of private banking and (2) when they offer correspondent accounts for certain foreign financial institutions. Under the proposed rule, the requirement to obtain beneficial ownership information could be expanded to all customers. FinCEN anticipates that it will provide additional guidance regarding when customers would be low risk and therefore exempt from the requirement, when customers would require only identification of the beneficial owner, and when customers would be considered as presenting heightened risk requiring both identification and verification of the beneficial owner.

Currently, the definition of a beneficial owner is “an individual who has a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the account.” The expanded definition would define a beneficial owner as either: (a) individuals that directly or indirectly control 25% of the equity interests in an entity (or an individual who has at least a great an equity interest as any other if no one controls at least 25%) and (b) the individual with greater responsibility than any other individual in managing or directing the regular affairs of the entity. FinCEN beliefs this definition of “beneficial owner” could be “applied across lines of business and customer categories.”

In connection with the proposed rule, FinCEN is seeking comment from interested parties concerning, among other things, the changes that would be required in the CDD processes of financial institutions as a result of the proposed rules, whether the alternate definition of “beneficial ownership” is clear and easily understood, and how financial institutions currently obtain beneficial ownership information. FinCEN Director James H. Freis, Jr. stated that “The comments we receive will help us balance the information needs of law enforcement with the responsibilities placed on the financial industry.”

Comments will be accepted until May 4, 2012. The proposed rules, as well as a list of all issues for which FinCEN is seeking comment, can be accessed at: https://www.federalregister.gov/articles/2012/03/05/2012-5187/customer-due-diligence-requirements-for-financial-institutions.

Covered financial institutions should move quickly to provide relevant commentary, and may want to consult with counsel to gain a thorough understanding of the proposed rules.