On May 11, 2016, the Financial Crimes Enforcement Network ("FinCEN") issued final rules under the Bank Secrecy Act that will require financial institutions (including mutual funds) (i) to adopt anti-money laundering (AML) programs containing four core requirements for customer due diligence and (ii) to identify beneficial owners of "legal entity customers."
In its adopting release, FinCEN stated that there are four key elements that all AML programs of financial institutions should address: (1) customer identification and verification; (2) beneficial ownership identification and verification; (3) understanding the nature and purpose of customer relationships to develop a customer risk profile; and (4) ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information. FinCEN noted that existing AML program requirements explicitly require the first, and these new final rules explicitly incorporate the second, third and fourth requirements.
Under the new rules, a "legal entity customer" is defined, with certain exceptions, as a corporation, limited liability company, partnership or other similar business entity created by filing a public document, or any similar entity formed under the laws of a foreign jurisdiction that opens an account. The new rules will require mutual funds to identify beneficial owners of any legal entity customer of a fund using a two-pronged test. For this purpose, a "beneficial owner" is:
Each individual, if any, who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer (the "ownership prong"); and
A single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager, or any other individual who regularly performs similar functions (the "control prong").
Mutual funds will be required to verify the identity of each beneficial owner of a legal entity customer identified by the two-pronged test using risk-based procedures that are similar to those required for verifying the identity of individual customers under existing Customer Identification Program ("CIP") requirements.
FinCEN noted that, where previous guidance regarding CIPs permits a mutual fund to treat an intermediary, and not the intermediary's underlying clients, as its customer, the mutual fund may treat the intermediary as its legal entity customer for purposes of the new rules.
Subject to certain exemptions and exclusions, mutual funds will be required to begin identifying the beneficial owner(s) of each of their legal entity customers at the time they open a new account for such customers on or after May 11, 2018.
Click here to access the Rule.