[Federal Register Volume 77, Number 43 (Monday, March 5, 2012)]
[Proposed Rules]
[Pages 13046-13055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-5187]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Chapter X
RIN 1506-AB15
Customer Due Diligence Requirements for Financial Institutions
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: FinCEN, after consulting with staffs of various Federal
supervisory authorities, is issuing this advance notice of proposed
rulemaking (ANPRM) to solicit public comment on a wide range of
questions pertaining to the development of a customer due diligence
(CDD) regulation that would codify, clarify, consolidate, and
strengthen existing CDD regulatory requirements and supervisory
expectations, and establish a categorical requirement for financial
institutions to identify beneficial ownership of their accountholders,
subject to risk-based verification and pursuant to an alternative
definition of beneficial ownership as described below.
DATES: Written comments on this ANPRM must be received on or before May
4, 2012.
ADDRESSES: Comments may be submitted, identified by Regulatory
Identification Number (RIN) 1506-AB15, by any of the following methods:
Federal E-rulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Include RIN 1506-AB15
in the submission. Refer to Docket Number FINCEN-2012-0001.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-
AB15 in the body of the text.
Please submit comments by one method only. All comments submitted
in response to this ANPRM will become a matter of public record.
Therefore, you should submit only information that you wish to make
publicly available.
Inspection of comments: Comments may be inspected, between 10 a.m.
and 4 p.m., in the FinCEN reading room in Vienna, VA. Persons wishing
to inspect the comments submitted must request an appointment with the
Disclosure Officer by telephoning (703) 905-5034 (not a toll free
call). In general, FinCEN will make all comments publicly available by
posting them on http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
FinCEN: Regulatory Policy and Programs Division, Financial Crimes
Enforcement Network, (800) 949-2732 and select option 6.
SUPPLEMENTARY INFORMATION:
I. Scope of ANPRM
The scope of this ANPRM includes all of the industries that have
anti-money laundering (AML) program requirements under FinCEN's
regulations. At this time, and as an initial matter, FinCEN is
considering developing a CDD rule to cover banks, brokers or dealers in
securities, mutual funds, futures commission merchants, and introducing
brokers in commodities; accordingly, this ANPRM is focused primarily on
these institutions. However, FinCEN believes that a CDD rule may be
appropriate for all financial institutions subject to FinCEN's
regulations, and will consider extending such a rule to such other
financial institutions in the future.
Therefore, in addition to focusing on input from those types of
institutions that would be subject to an initial rulemaking, FinCEN is
also specifically requesting comment from other institutions, such as
money services businesses (including providers of prepaid access),
insurance companies, casinos, dealers in precious metals, stones and
jewels, non-bank mortgage lenders or originators, and other entities
under FinCEN's regulations, in particular regarding issues related to
identification and verification of customers as discussed in Section IV
A. of this ANPRM. While these institutions currently are not mandated
to obtain the minimum mandatory information required to identify
customers as is mandated in regulations pertaining to depository
institutions, brokers or dealers, and others described above, in some
cases they still must, on a risk-based approach, obtain all relevant
and appropriate customer-related information necessary to administer an
effective anti-money laundering program.\1\
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\1\ See, e.g., ``Anti-Money Laundering Programs for Insurance
Companies,'' 31 CFR 1025.210(b)(1).
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II. Background
FinCEN exercises regulatory functions primarily under the Currency
and Financial Transactions Reporting Act of 1970, as amended by the USA
PATRIOT Act of 2001 (the Act) and other legislation, which legislative
framework is commonly referred to as the ``Bank Secrecy Act'' (BSA),\2\
which authorizes the Secretary of the Treasury (Secretary) to require
financial institutions to keep records and file reports that ``have a
high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings, or in the conduct of intelligence or
counterintelligence activities, including analysis, to protect against
international terrorism'' \3\ The Secretary has delegated to the
Director of FinCEN the authority to implement, administer and enforce
compliance with the BSA and associated regulations.\4\ FinCEN is
authorized to impose AML program requirements on financial
institutions,\5\ as well as to require financial institutions to
maintain procedures to ensure compliance with the BSA and FinCEN's
implementing regulations or guard against money laundering.\6\
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\2\ The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959,
18 U.S.C. 1956, 1957, and 1960, and 31 U.S.C. 5311-5314 and 5316-
5332 and notes thereto, with implementing regulations at 31 CFR
Chapter X. See 31 CFR 1010.100(e).
\3\ 31 U.S.C. 5311.
\4\ Treasury Order 180-01 (Sept. 26, 2002).
\5\ 31 U.S.C. 5318(h)(2).
\6\ 31 U.S.C. 5318(a)(2).
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As reflected in recent guidance and enforcement actions, the
cornerstone of a strong BSA/AML compliance program is the adoption and
implementation of internal controls, which include comprehensive CDD
policies, procedures, and processes for all customers, particularly
those that present a high risk for money laundering or terrorist
financing.\7\ As
[[Page 13047]]
part of their basic business model, financial institutions seek at some
level to identify their customers and their needs in order to best
service them. The requirement that a financial institution know its
customers, and the risks presented by its customers, is basic and
fundamental to the development and implementation of an effective BSA/
AML compliance program.\8\ In particular, appropriate CDD policies,
procedures, and processes assist a financial institution in
identifying, detecting, and evaluating unusual or suspicious
activity.\9\ Furthermore, financial institutions may not be able to
perform effective risk assessments of their customers or account bases
without conducting adequate due diligence throughout customer
relationships.
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\7\ FIN-2010-G001, ``Guidance on Obtaining and Retaining
Beneficial Ownership Information, March 5, 2010, p.1 (``Beneficial
Ownership Guidance''). See also Federal Financial Institution
Examination Council Bank Secrecy Act Anti-Money Laundering
Examination Manual (2010) (``FFIEC Manual''), available at: http://www.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2010.pdf;
Financial Industry Regulatory Authority, Updated AML Template for
Small Firms (Jan. 2010) (``FINRA Small Firm Template''), available
at http://www.finra.org/Industry/Issues/AML/p006340; National
Association of Securities Dealers, Notice to Members 02-21 at 7
(Apr. 2002) (``NASD NTM 02-21'').
\8\ See supra note 7.
\9\ See supra note 7.
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As discussed in more detail below, despite the basis for a CDD
obligation implicit in BSA requirements, such as the AML program and
suspicious activity reporting (SAR) rules, FinCEN believes that issuing
an express CDD rule that requires financial institutions to perform
CDD, including an obligation to categorically obtain beneficial
ownership information, may be necessary to protect the United States
financial system from criminal abuse and to guard against terrorist
financing, money laundering and other financial crimes. Despite efforts
to highlight and clarify CDD and beneficial ownership expectations over
the past several years, FinCEN is concerned that there is a lack of
uniformity and consistency in the way financial institutions address
these implicit CDD obligations and collect beneficial ownership
information within and across industries. In the absence of a broader
definition of the term ``beneficial owner,'' in particular a definition
that can be applied across lines of business and customer categories in
the context of CDD, it may be difficult for a financial institution to
(1) identify the risk scenarios that would require the identification
of beneficial owners; and (2) collect sufficient information to
adequately address identified risk. The lack of consistency and
uniformity also severely limits the ability of financial institutions
to rely on the CDD efforts of other financial institutions, which would
promote greater efficiency and eliminate instances of duplication of
effort in transactions involving multiple financial institutions.
FinCEN believes that an explicit CDD program rule codifying,
clarifying and (with respect to beneficial ownership information)
strengthening existing CDD expectations for U.S. financial institutions
could enhance efforts to combat money laundering, terrorist financing,
tax evasion and other financial crimes by:
(i) Strengthening the ability of financial institutions to identify
and report illicit financial transactions and comply with all existing
legal requirements, including FinCEN regulations implementing the BSA,
the International Emergency Economic Powers Act (IEEPA),\10\ and
related authorities;
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\10\ Title II of Public Law 95-223, codified at 50 U.S.C. 1701-
1707.
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(ii) Promoting consistency in the implementation of, examination
for, and enforcement of CDD program requirements across and within
sectors of the U.S. financial system;
(iii) Assisting financial investigations by law enforcement,
particularly by enhancing the availability of beneficial ownership and
other information held by U.S. financial institutions;
(iv) Facilitating reporting and investigations in support of tax
compliance; and
(v) Promoting global financial transparency and efforts to combat
transnational illicit finance, consistent with international standards.
We are exploring an express CDD program rule as one key element of
a broader U.S. Department of the Treasury strategy to enhance financial
transparency in order to strengthen efforts to combat financial crime,
including money laundering, terrorist financing, and tax evasion.
Illicit actors continue to create legal entities, masking beneficial
ownership information in order to facilitate access to the financial
system and conduct financial crimes. Enhancing financial transparency
to address such ongoing abuse of legal entities requires a broad
approach. Other key elements of this strategy include: (i) Improving
the availability of beneficial ownership information of legal entities
created in the United States; and (ii) facilitating global
implementation of international standards regarding beneficial
ownership of legal entities and trusts and CDD by financial
institutions.
While these three elements of the U.S. government's strategy for
combating criminal abuse of legal entities are proceeding independent
of each other, together they establish a comprehensive approach to
effectively combat the criminal abuse of legal entities. As such,
strengthening CDD program requirements for financial institutions
complements the Administration's ongoing work with Congress to adopt
legislation that would require the collection of beneficial ownership
information at the time that legal entities are created in the United
States. These efforts are also consistent with Treasury's ongoing work
with the Group of Twenty Finance Ministers and Central Bank Governors
(G20), the Financial Action Task Force (FATF), and other financial
centers around the world to clarify and strengthen implementation of
international standards on identifying and understanding beneficial
ownership, particularly with respect to CDD by financial institutions
and the creation of legal entities.
The Importance of CDD in Strengthening the Ability of Financial
Institutions To Deter Illicit Transactions and Comply With Existing
Legal Requirements
The establishment and maintenance of strong AML programs that
include CDD policies, procedures, and processes has been a long-
standing regulatory and supervisory expectation of certain Federal
financial regulatory agencies, and is implicit in regulations requiring
financial institutions to maintain an effective BSA compliance program
that is reasonably designed to assure and monitor compliance with the
recordkeeping and reporting requirements of the BSA.\11\ An effective
CDD program should provide a financial institution with sufficient
information to develop a customer risk profile that can then be used by
the financial institution to identify higher-risk customers and
accounts, including customers and accounts subject to special or
enhanced due diligence requirements.\12\ The financial
[[Page 13048]]
institution also should apply appropriate internal controls to identify
and investigate unusual and suspicious activity and make an informed
decision whether or not to file a SAR.\13\ In the event that a
financial institution files a SAR, CDD information collected could
enhance the information included in the SAR and thereby enhance law
enforcement's ability to initiate and pursue the successful
investigation and prosecution of criminal activity. The failure to
obtain adequate CDD information may impede a financial institution's
ability to detect and report suspicious or unusual activity or provide
information in a filing that is useful to law enforcement. Several of
the consent orders and enforcement actions issued over the last few
years have identified the lack of effective CDD policies, procedures,
and processes, or the underlying elements thereof, as rendering AML
programs inadequate, being a significant deficiency, and an underlying
factor in supervisory actions.\14\
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\11\ See, e.g., FFIEC Manual, FINRA Small Firm Template, NASD
NTM 02-21.
\12\ See, e.g., FFIEC Manual, pp. 63-66; Beneficial Ownership
Guidance; FIN-2006-G009, Application of the Regulations Requiring
Special Due Diligence Programs for Certain Foreign Accounts to the
Securities Industries (May 10, 2006) (``Finally, we remind
securities and futures firms that the correspondent account rule
supplements their anti-money laundering obligations--it does not
supersede such obligations. A securities or futures firm's anti-
money laundering program should contain policies, procedures, and
controls for conducting appropriate, ongoing due diligence on
foreign entities including, among other things, whether or not they
are foreign financial institutions for the purposes of the
correspondent account rule. Such policies, procedures, and controls
should include, where appropriate, ascertaining the foreign entity's
ownership and the nature of its business. In high-risk situations
involving any account, an anti-money laundering program should
include provisions for obtaining any necessary and appropriate
information about the customers underlying such an account.'')
(emphasis added).
\13\ See, e.g., 31 CFR 1021.210(b)(2)(i).
\14\ See, e.g., Pacific National Bank, Miami, FL, Comptroller of
the Currency (OCC) 2011-021 (2011); HSBC Bank USA, N.A.,
McLean, VA, OCC 2010-199 (2010); Consent Order issued by
the OCC in the Matter of Wachovia Bank, N.A., Charlotte, NC. OCC
2010-037 (2010); Public Savings Bank, Huntington Valley,
PA, FDIC-11-107b (2011); First Financial Holding Co., Ltd, Taipei,
Taiwan, Board of Governors of the Federal Reserve System (FRB),
Docket Nos. 11-019-WA/RB-FH et seq. (2011); Bank Hapoalim, B.M., Tel
Aviv, Israel, FRB, Docket Nos. 09-083-WA/RB-FB (2009); Westfield
Bank, Westfield, MA, Office of Thrift Supervision Order No. NE-11-20
(2011); Chapin, Davis, Baltimore MD, FINRA Case
2010021065701 (2011); FINRA, Letter of Acceptance, Waiver
and Consent No. 2007007328101, Terra Nova Financial, LLC (2009);
FINRA, Letter of Acceptance, Waiver and Consent No. 2007007139501,
Synergy Investment Group, LLC (2009); FINRA, Letter of Acceptance,
Waiver and Consent No. 2008011725001, ViewTrade Securities, Inc.,
(2009); In the Matter of I Trade FX, NFA Case No. 08-BCC-014 (filed
April 24, 2009) (finding that I Trade failed to follow up on red
flags and investigate suspicious activity, including following up
where the customer's account had inflows of funds well beyond the
known income or resources of the customer); In the Matter of Forex
Capital Markets LLC (FXCM), NFA Case No. 11-BCC-016 (filed Aug. 12,
2011) (consent order based on allegations in the complaint that FXCM
failed to conduct an investigation of suspicious activity involving
unexplained wire activity, unexplained transfers between accounts,
and deposits that were in excess of the clients' net worth and/or
liquid assets identified on their opening account documents).
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Although appropriate and adequate CDD policies, procedures, and
processes have generally been an expectation of the Federal financial
regulatory agencies, FinCEN believes that an express CDD program rule
will strengthen compliance with and enforcement of CDD program
requirements by clarifying, consolidating, and harmonizing such
agencies' minimum expectations with respect to CDD policies,
procedures, and processes, including the fundamental elements necessary
for an effective CDD program.
As described in detail below, FinCEN believes that one fundamental
element necessary for an effective CDD program is obtaining beneficial
ownership information for all account holders, possibly subject to
limited exceptions based upon lower risk. An express CDD program rule
would enable FinCEN to establish such a clear requirement, thereby
strengthening the ability of financial institutions to detect and
address suspicious activity. Establishing a categorical beneficial
ownership information requirement through a CDD program rule also would
address current concerns regarding potential confusion or inconsistency
across financial sectors regarding obligations to obtain beneficial
ownership information outside of statutorily prescribed circumstances.
Recent industry commentary and feedback indicated a lack of common
understanding and consistent practice across the financial services
industry for collecting beneficial ownership information. For example,
an industry survey conducted by FinCEN in 2008 indicated certain
inconsistencies in financial institutions' practices related to
collecting and maintaining beneficial ownership information both within
and across industries. Moreover, industry commentary following the
issuance of the Beneficial Ownership Guidance \15\ indicated that there
is at least some question about the nature of a financial institution's
obligation to conduct CDD and to obtain beneficial ownership
information.\16\
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\15\ Supra note 7.
\16\ See, e.g., Letter from the Investment Company Institute,
the Securities Industry and Financial Markets Association, and the
Futures Industry Association (June 9, 2010), available at: http://www.ici.org/pdf/24354.pdf.
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The Importance of CDD in Assisting Criminal Investigations
As discussed previously, an effective CDD program is important in
facilitating effective suspicious activity monitoring, which in turn
facilitates the filing of quality SARs containing information that is
both meaningful and useful to law enforcement. The lack of such
information has been a source of growing concern to law enforcement in
its efforts to conduct successful criminal investigations, both
domestically and in conjunction with international counterparts. For
example, the Chief of DOJ's Asset Forfeiture and Money Laundering
Section (AFMLS) has stated that, with respect to international law
enforcement cases, ``the lack of beneficial ownership information can
also hamper our ability to respond to requests for assistance from our
foreign counterparts. This problem not only damages our reputation, but
also undermines our efforts to join with foreign counterparts in a
global offensive against organized crime and terrorism.'' \17\
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\17\ Shasky Calvery, Jennifer, ``Priorities and Initiatives of
the Asset Forfeiture and Money Laundering Section (AFMLS), U.S.
Department of Justice'' The SAR Activity Review, Trends, Tips, and
Issues, p. 44. (May 2011), available at http://www.fincen.gov/news_room/rp/files/sar_tti_19.pdf.
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The Importance of CDD in Facilitating Tax Reporting, Investigations and
Compliance
The collection of CDD information by financial institutions is also
fundamentally important in facilitating tax reporting, investigations
and compliance. For example, a variety of information may be needed in
a tax enquiry including information held by banks and other financial
institutions as well as information concerning the ownership of
companies or the identity of interest holders in other persons or
entities, such as partnerships and trusts. The United States has long
been a global leader in establishing and promoting the adoption of
international standards for transparency and information exchange to
combat cross-border tax evasion and other financial crimes, and
strengthening the CDD procedures of financial institutions is an
important part of that effort. Moreover, the United States has an
extensive network of agreements for the exchange of tax information
that meet international standards. In addition, new tax reporting
provisions under the Foreign Account Tax Compliance Act (FATCA) \18\
would require overseas financial institutions to identify U.S. account
holders, including foreign entities with significant U.S. ownership,
and to report certain information about their accounts to the IRS.\19\
In many
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cases, implementing these provisions will require the cooperation of
foreign governments to address impediments under foreign law. Requiring
U.S. financial institutions to obtain similar ownership information
would put the United States in a better position to work with foreign
governments to combat offshore tax evasion and other financial crimes.
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\18\ Hiring Incentives to Restore Employment Act of 2010, Pub.L.
111-147, Section 501(a).
\19\ See generally, Internal Revenue Service, ``Regulations
Relating to Information Reporting by Foreign Financial Institutions
and Withholding on Certain Payments to Foreign Financial
Institutions and Other Foreign Entities,'' REG-121647-10 (February
8, 2012), available at http://www.irs.gov/pub/newsroom/reg-121647-10.pdf.
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The Importance of CDD in Promoting Financial Transparency and
Protecting the Financial System From Abuse Consistent With
International Standards
An effective CDD program supports effective suspicious activity
monitoring, strengthens national anti-money laundering and counter-
financing of terrorism (AML/CFT) regimes, and promotes the integrity of
the international financial system as a whole. This importance was
recognized by the G20 in several Leaders' Statements supporting the
strengthening of CDD procedures. During the Pittsburgh Summit in 2009,
the G20 asked the Financial Action Task Force (FATF) \20\ to ``help
detect and deter the proceeds of corruption by prioritizing work to
strengthen standards on customer due diligence.'' \21\ In November
2010, the G20 specifically urged the FATF to clarify and strengthen
beneficial ownership as an element of CDD and as a key component of its
Anti-Corruption Action Plan.\22\ Additionally, effective adoption and
implementation of CDD by financial institutions is consistent with the
FATF's global AML/CFT standards to combat money laundering and the
financing of terrorism.\23\
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\20\ The FATF, an inter-governmental organization of which the
United States, thirty-four other jurisdictions and two regional
organizations are members, is the global standard setter and policy-
making body for AML/CFT. http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html.
\21\ Group of Twenty Finance Ministers and Central Bank
Governors, ``Leaders' Statement: The Pittsburgh Summit'' (September
24-25, 2009).
\22\ See Group of Twenty Finance Ministers and Central Bank
Governors, Annex III, ``G20 Anti-Corruption Action Plan: G20 Agenda
for Action on Combating Corruption, Promoting Market Integrity, and
Supporting a Clean Business Environment,'' p. 2 (November 11-12,
2010).
\23\ Financial Action Task Force, ``International Standards on
Combating Money Laundering and the Financing of Terrorism &
Proliferation--The FATF Recommendations,'' February 2012,
Recommendation 10, pp. 14-15, available at http://www.fatf-gafi.org/dataoecd/49/29/49684543.pdf. Following a review to update and
strengthen global AML/CFT standards, the FATF issued its revised
Recommendations on February 16, 2012.
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The G20 recognition of the importance of CDD is also reflected in
the work of other international standard setting bodies. In October
2001, the Basel Committee on Banking Supervision (BCBS) published a
report on CDD, supporting the FATF's efforts in fighting money
laundering. The report states that sound CDD-related procedures are not
only critical in combating financial crime, but ``critical in
protecting the safety and soundness of banks and the integrity of the
banking systems.'' \24\ Similarly, in light of the FATF's and other
international organizations' work, in October 2002 the International
Organization of Securities Commissions (IOSCO) established a Task Force
on Client Identification and Beneficial Ownership to survey existing
securities regulatory regimes relating to the identification of clients
and beneficial owners and to develop principles that address aspects of
the CDD process.\25\ In May 2004, IOSCO published a report describing
principles for client identification and beneficial ownership in the
securities industry.\26\ Among other things, the report noted that
while ``[t]he CDD process is a key component of securities regulatory
requirements intended to achieve the principal objectives of securities
regulation, the protection of investors; ensuring that markets are
fair, efficient and transparent; and the prevention of the illegal use
of the securities industry,'' it also ``contributes to the pursuit of
other policy goals related to the prevention of the illegal use of the
securities industry such as money laundering and the financing of
terrorism that are generally within the competence of other
authorities.'' \27\
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\24\ Basel Committee on Banking Supervision, ``Customer Due
Diligence for Banks,'' 2001, p. 2, available at www.bis.org/publ/bcbs85.pdf.
\25\ International Organization of Securities Commissions,
``Principles on Client Identification and Beneficial Ownership for
the Securities Industry,'' p. 2 (May 2004).
\26\ Id.
\27\ Id.
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III. Treasury's Efforts To Address CDD, Including Beneficial Ownership
Issues
The identification of beneficial ownership interests as noted
previously has become increasingly relevant to AML/CFT efforts both
within the United States and beyond its borders. Treasury also has
consistently engaged with the Federal financial regulatory agencies and
financial institutions for the purpose of understanding and clarifying
the efforts of financial institutions with respect to CDD and
identifying beneficial ownership interests. Most notably:
i. Following the adoption of the Act in 2001, the Treasury
Department and the federal financial regulatory agencies engaged the
financial industry in order to develop customer identification program
(``CIP'') and special due diligence requirements in accordance with
Sections 326 and 312 of the Act, respectively.
ii. In November 2006, FinCEN issued a report on ``The Role of
Domestic Shell Companies in Financial Crime and Money Laundering:
Limited Liability Companies.'' The report highlights the need for
financial institutions to assess and manage the risks of providing
financial services to shell companies in order to identify and report
potential money laundering activity.\28\
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\28\ Financial Crimes Enforcement Network, ``The Role of
Domestic Shell Companies in Financial Crime and Money Laundering:
Limited Liability Companies,'' (November 2006), available at http://www.fincen.gov/news_room/rp/files/LLCAssessment_FINAL.pdf.
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iii. In 2008, FinCEN submitted a survey to industry to solicit
feedback on how and when financial institutions obtain and retain
beneficial ownership information. The survey results indicated certain
inconsistencies in financial institutions' understanding of
requirements related to collecting and maintaining beneficial ownership
information both within and across industries.
iv. In November 2009, the Department of the Treasury's then-
Assistant Secretary, and current Under Secretary, David Cohen,
testified before the Senate Committee on Homeland Security and
Governmental Affairs and outlined Treasury's comprehensive plan, the
elements of which are designed to enhance the transparency of legal
entities with respect to beneficial ownership. Treasury's plan
involves: (i) Working with Congress to promote legislation that
enhances transparency of legal entities in the company formation
process; (ii) clarifying and strengthening requirements for U.S.
financial institutions with respect to the beneficial ownership of
legal entity accountholders, and (iii) clarifying and facilitating the
implementation of international standards regarding beneficial
ownership, including with respect to company formation by
jurisdictional authorities and CDD by financial institutions.
v. In March 2010, FinCEN, jointly with the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, the Office of the Comptroller
of the Currency, the Office of Thrift Supervision, and the Securities
and Exchange Commission, and in consultation with staff of the
Commodity Futures Trading Commission, issued the Beneficial
[[Page 13050]]
Ownership Guidance to clarify and consolidate existing regulatory
expectations for obtaining beneficial ownership information for certain
accounts and customer relationships.\29\
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\29\ See generally, supra note 7.
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vi. In November 2011, the Department of the Treasury's Assistant
Secretary Daniel Glaser testified before the Senate Committee on the
Judiciary, Subcommittee on Crime and Terrorism to discuss efforts to
combat international organized crime. In his testimony, Assistant
Secretary Glaser discussed the importance of financial transparency in
mitigating threats posed by transnational organized crime and other
forms of illicit finance as well as the Treasury Department's work to
clarify and strengthen CDD requirements for financial institutions.
vii. In February 2012, the Department of the Treasury's Deputy
Assistant Secretary Luke Bronin testified before the House Committee on
the Judiciary, Subcommittee on Crime, Terrorism, and Homeland Security
to discuss key vulnerabilities in the U.S. financial system related to
transnational organized crime. The testimony included highlighting the
importance of CDD as essential to an AML regime. Additionally, Deputy
Assistant Secretary Bronin discussed the importance of effective
implementation of CDD and the need to clarify, consolidate, and
strengthen CDD requirements for financial institutions.
IV. Elements of CDD
Based on the past efforts outlined above and ongoing industry and
regulatory consultation and outreach, FinCEN believes that an effective
CDD program includes the following elements:
(i) Conducting initial due diligence on customers, which includes
identifying the customer, and verifying that customer's identity as
appropriate on a risk basis, at the time of account opening;
(ii) Understanding the purpose and intended nature of the account,
and expected activity associated with the account for the purpose of
assessing risk and identifying and reporting suspicious activity;
(iii) Except as otherwise provided, identifying the beneficial
owner(s) of all customers, and verifying the beneficial owner(s)'
identity pursuant to a risk-based approach; and
(iv) Conducting ongoing monitoring of the customer relationship and
conducting additional CDD as appropriate, based on such monitoring and
scrutiny, for the purposes of identifying and reporting suspicious
activity.
FinCEN's understanding of how U.S. financial institutions currently
perform certain aspects of CDD in accordance with these elements under
existing regulations and FinCEN's proposal for codifying these elements
in a CDD rule are described below.
A. Identification and Verification of the Customer
Various AML obligations are dependent on financial institutions at
least obtaining, and in some instances verifying, certain basic
customer identification information. For example, financial
institutions subject to the CIP rules implementing Section 326 of the
Act must identify and verify the identity of certain ``customers''
seeking to open an account.\30\ In identifying such customers, a
financial institution must obtain the customer's name; for individuals,
date of birth, address, and an identification number (e.g., taxpayer
identification number, passport number, or alien identification card
number) and for a person other than an individual (such as a
corporation, partnership or trust), a principal place of business,
local office, or other physical location, and identification
number.\31\ For the purposes of the CIP requirement, the definition of
``customer'' is the accountholder, regardless of whether the
accountholder is also the beneficial owner.\32\
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\30\ See 31 CFR 1020.220(a), 1023.220(a), 1024.220(a), and
1026.220(a).
\31\ See 31 CFR 1020.220(a)(2)(i)(A), 1023.220(a)(2)(i)(A),
1024.220(a)(2)(i)(A), and 1026.220(a)(2)(i)(A).
\32\ See, e.g. 31 CFR 1023.100(d) and Customer Identification
Programs for Broker-Dealers, 68 FR 25,113, 116 (May 9, 2003).
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In addition to identifying customers covered by the CIP rule, a
financial institution's CIP must include risk-based procedures for
verifying the identity of each customer to the extent reasonable and
practicable such that the institution can form a reasonable belief that
it knows the true identity of each customer.\33\ These procedures must
be based on the institution's assessment of the relevant risks,
including those presented by the various types of accounts maintained
by the institution, the various methods of opening accounts provided by
the institution, the various types of identifying information
available, and the institution's size, location, and customer base.\34\
Further, the CIP must include procedures that describe when the
financial institution will use documents, non-documentary methods, or a
combination of both methods to verify a customer's identity.\35\ In
addition, for customer relationships where the customer is not an
individual, based on the financial institution's risk assessment of the
account, the financial institution must obtain information about the
individuals with authority or control over such account.\36\ Consistent
with these explicit regulatory requirements and guidance, FinCEN is
exploring an express customer identification and risk-based
verification component of CDD, which does not create a new CIP
obligation, but would be satisfied by compliance with the financial
institution's current CIP obligations. The identification and
verification component of a CDD requirement may state, generally:
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\33\ 31 CFR 1020.220(a)(2), 1023.220(a)(2), 1024.220(a)(2), and
1026.220(a)(2).
\34\ Id.
\35\ 31 CFR 1020.220(a)(2)(ii), 1023.220(a)(2)(ii),
1024.220(a)(2)(ii), and 1026(a)(2)(ii).
\36\ 31 CFR 1020.220(a)(2)(ii)(C); 1023.220(a)(2)(ii)(C);
1024.220(a)(2)(ii)(C); and 1026.220(a)(2)(ii)(C). This verification
method applies only when the financial institution cannot verify the
customer's true identity using the verification methods described in
the rule. However, the preamble to the final CIP Rule noted that, in
addition to the requirements of this paragraph, ``the due diligence
procedures required under other provisions of the BSA or the
securities laws may require broker-dealers to look through to owners
of certain types of accounts.'' Customer Identification Programs for
Broker-Dealers, 68 FR 25113, 116, n. 30 and accompanying text (May
9, 2003).
Covered financial institutions shall identify, and on a risk-
basis verify, the identity of each customer, to the extent
reasonable, such that the institution can form a reasonable belief
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that it knows the true identity of each customer.
If a financial institution is compliant with its current CIP
obligations, a financial institution would be compliant with this part
of the CDD program rule and therefore there will be no new or
additional regulatory obligation. FinCEN notes that, although certain
customers are exempt from the CIP requirements (i.e., the customers
that are excluded from the definition of ``customer'' for purposes of
the CIP requirement),\37\ those customers would not be exempt from the
requirements to understand the nature and purpose of the account and to
conduct ongoing monitoring. As discussed below, FinCEN is seeking
comment on whether the beneficial ownership requirement
[[Page 13051]]
should apply with respect to those exempt customers.
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\37\ Among other persons, the definition of ``customer'' for
purposes of the CIP requirement excludes: Existing customers, as
long as the financial institution has a reasonable belief that it
knows the customer's true identity; Federally regulated banks; banks
regulated by a state bank regulator; governmental entities; and
publicly traded companies. See, e.g., 31 CFR 1020.100(c)(2),
1023.100(d)(2), 1024.100(c)(2), 1026.100(d)(2).
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B. Understanding the Nature and Purpose of the Account
As a general business matter, financial institutions seek to
understand the needs of their customers in order to serve them.
Financial institutions should understand the nature and purpose of an
account or customer relationship so that they can appropriately assess
the risk presented by the relationship and appropriately monitor for
suspicious activity. Pursuant to suspicious activity reporting
procedures, financial institutions compare the available facts of a
transaction or series of transactions, including their type, volume,
and possible purpose, against the type of transaction in which the
customer would normally be expected to engage.\38\ In other words, in
discerning whether a transaction or series of transactions is
suspicious, a financial institution must determine if the activity
varies from the normal activities or activities appropriate for the
particular customer or class of customer, and has no apparent
reasonable explanation.\39\ FinCEN has also issued guidance
highlighting the need to understand the nature and purpose of an
account, in order to assess the risk and determine the appropriate
level of due diligence for the account.\40\ Accordingly, and in keeping
with the SAR obligation and related regulatory guidance, FinCEN is
specifically considering including an express obligation to understand
the nature and purpose of the account or customer relationship as an
element of a CDD program rule. This element of a CDD program rule may
state, generally:
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\38\ See, e.g., 31 CFR 1020.320(a)(2)(iii), 1023.320(a)(2)(iii),
1024.320(a)(2)(iii), and 1026.320(a)(2)(iii).
\39\ See 61 FR 4328 (February 5, 1996).
\40\ See, e.g., FIN-2006-G009, Application of the Regulations
Requiring Special Due Diligence Programs for Certain Foreign
Accounts to the Securities Industries (May 10, 2006). (``A clearing
firm's anti-money laundering program should contain risk-based
policies, procedures, and controls for monitoring introduced
business, which includes knowing whether the introducing firm may
establish or maintain correspondent accounts for foreign financial
institutions and the nature and scope of that business, including
the nature of the introducing firm's account base.'') See also FIN-
2008-G002, Customer Identification Program Rule No-Action Position
Respecting Broker-Dealers Operating Under Fully Disclosed Clearing
Agreements According to Certain Functional Allocations (Mar. 4,
2008).
covered financial institutions shall understand the nature and
purpose of the account and expected activity associated with the
account for the purpose of assessing the risk and identifying and
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reporting suspicious activity.
Because in FinCEN's view, a financial institution must understand the
nature and purpose of an account in order to assess risk and satisfy
its obligation to appropriately detect and report suspicious activity,
FinCEN does not believe that this will impose a new or additional
requirement.
C. Obtaining Beneficial Ownership Information
Potential Beneficial Ownership Obligation Under a CDD Program Rule
Under existing FinCEN regulations, there are two limited situations
where financial institutions are expressly obligated to obtain
beneficial ownership information. Specifically, under the rules
implementing Section 312 of the Act, there are two situations where
certain ``covered financial institutions'' \41\ are required to take
reasonable steps to obtain beneficial ownership information: (i)
covered financial institutions that offer private banking accounts are
required to take reasonable steps to identify the nominal and
beneficial owners of such accounts; \42\ and (ii) covered financial
institutions that offer correspondent accounts for certain foreign
financial institutions are required to take reasonable steps to obtain
information from the foreign financial institution about the identity
of any person with authority to direct transactions through any
correspondent account that is a payable-through account, and the
sources and beneficial owner of funds or other assets in the payable-
through account.\43\
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\41\ 31 CFR 1010.605(e)(1).
\42\ 31 CFR 1010.620(b)(1).
\43\ 31 CFR 1010.610(b)(1)(iii)(A).
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In addition to these explicit requirements to obtain beneficial
ownership information, under the CIP rules, a financial institution's
CIP must address situations where, based on the financial institution's
risk assessment of a new account opened by a customer that is not an
individual, the financial institution will obtain information about
individuals with authority or control over such account.\44\ Moreover,
FinCEN and the federal financial regulatory agencies have issued
guidance stating that there are other situations when financial
institutions should consider whether it is appropriate to obtain
beneficial ownership information.\45\
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\44\ See supra note 36.
\45\ Supra note 7.
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Consistent with these explicit and implicit beneficial ownership
information obligations, FinCEN is considering expanding the
requirement to obtain beneficial ownership information to all
customers. Such a beneficial ownership information requirement would
constitute an essential element of an effective CDD program. This
element of the CDD program rule may state, generally:
Except as otherwise provided, financial institutions shall
identify the beneficial owner(s) of all customers, and verify the
beneficial owners' identity pursuant to a risk-based approach.
FinCEN anticipates that it would provide additional guidance regarding
customers that may be considered low risk (and therefore exempt for
purposes of this beneficial ownership requirement), as well as
identifying types of customers that may simply necessitate
identification of the beneficial owner, and those that are of
heightened risk requiring both identification and verification of the
beneficial owner. Similar to the CIP requirement, FinCEN also
anticipates that it would provide guidance to financial institutions on
what they should do in the event they are unable to identify or verify
a beneficial owner.
This component of the CDD program rule would create a new express
regulatory obligation to obtain beneficial ownership information, given
the limited circumstances in which financial institutions are currently
expressly obligated to obtain this information.
Potential Additional Definition of Beneficial Owner
In the limited instances where reasonable steps to obtain
beneficial ownership information are currently required, FinCEN has
defined the beneficial owner of an account as ``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 * * *'' \46\
This definition was designed specifically for accounts referred to
above where beneficial ownership information is required and may not be
useful for application to the wide range of other accounts offered by
financial institutions.
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\46\ 31 CFR 1010.605(a).
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In addition to FinCEN's current definition of beneficial owner,
federal regulatory agencies \47\ and various international
organizations and foreign jurisdictions define beneficial ownership in
ways that may be useful
[[Page 13052]]
in assisting financial institutions with understanding beneficial
ownership in the CDD framework.\48\ For purposes of the CDD program
requirement discussed above, and not affecting the limited instances in
which beneficial ownership information is currently required, FinCEN is
considering a definition to be used that would, in the case of legal
entities, include:
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\47\ Securities Exchange Act Rule 13d-3, 17 CFR 240.13d-3.
\48\ See e.g., FATF Recommendations, General Glossary, p. 110,
available at http://www.fatf-gafi.org/dataoecd/49/29/49684543.pdf;
European Parliament and Council, ``Third European Union Money
Laundering Directive,'' 2005/60/EC, Article 3(6) (October 26, 2005);
United Kingdom Money Laundering Regulations, 2007 No. 2157 Part 2,
p. 10 (December 15, 2007).
(1) Either:
(a) Each of the individual(s) who, directly or indirectly,
through any contract, arrangement, understanding, relationship,
intermediary, tiered entity, or otherwise, owns more than 25 percent
of the equity interests in the entity; or
(b) If there is no individual who satisfies (a), then the
individual who, directly or indirectly, through any contract,
arrangement, understanding, relationship, intermediary, tiered
entity, or otherwise, has at least as great an equity interest in
the entity as any other individual, and
(2) The individual with greater responsibility than any other
individual for managing or directing the regular affairs of the
entity.
FinCEN anticipates that such a specific and limited definition of
beneficial ownership may be necessary to accommodate the vast array of
complex ownership structures of legal entities \49\ that may become
customers of financial institutions. FinCEN further anticipates that
this specific limited definition would be applied generally to legal
entity customers pursuant to the explicit beneficial ownership
requirement described above, while the existing definition would
continue to be applied for purposes of 31 CFR 1010.610 and 1010.620.
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\49\ Legal entities would generally include all entities that
are established or organized under the laws of a state or of the
United States, including corporations, limited liability companies,
limited partnerships, and similar entities.
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FinCEN emphasizes that the potential new beneficial ownership
requirement and definition discussed in this ANPRM is not intended to
supersede existing BSA obligations to obtain beneficial ownership
information.
Potential Exemptions From Beneficial Ownership Requirement
FinCEN recognizes that there may be instances in which obtaining
beneficial ownership information about a legal entity customer may not
be warranted given the AML/CFT risk or other factors associated with
that entity. For example, FinCEN is considering whether legal entity
customers that are exempt from identification as customers under the
CIP Rules (e.g., financial institutions regulated by a federal
regulatory agency and publicly traded companies), should also be exempt
from the beneficial ownership requirement, both because beneficial
ownership information for these entities may not be particularly
relevant to the money laundering risks associated with such entities,
and because their beneficial ownership information is readily available
to law enforcement and regulators. Accordingly, FinCEN seeks comment on
a potential exemption from the beneficial ownership requirement for
legal entity customers that are exempt under the CIP Rules.
FinCEN recognizes that financial institutions may not have
beneficial ownership information on existing customers (which are also
exempt from the CIP Rules), outside those requiring such information,
and is also considering whether and how a potential beneficial
ownership requirement would apply to existing customers of financial
institutions. In this regard, FinCEN is considering adopting a risk-
based approach similar to that utilized in the case of the CIP Rules,
whereby this potential requirement would apply to all new customers.
With respect to existing customers, FinCEN is seeking comment on how a
beneficial ownership identification requirement could be phased into
ongoing CDD.
Beneficial Owners of Assets in Accounts Held by Intermediaries
Given the particular money laundering risks posed by some legal
entities, the beneficial ownership requirement and potential definition
of ``beneficial owner'' under consideration as discussed above are
designed to identify the beneficial owner of a legal entity customer,
as distinct from the beneficial owner of assets in an account. However,
there may be instances in which obtaining information about the
beneficial owners of assets in an account may be warranted instead,
such as where a legal entity (e.g. a foreign or regulated or
unregulated domestic financial institution) opens an account for the
benefit of its customers (as opposed to for its own benefit), as those
customers could pose a money laundering risk through their ability to
access the financial system through that account relationship. In such
instances, FinCEN recognizes that the potential definition of
``beneficial owner'' described above may not generally be relevant or
appropriate for AML/CFT purposes.
Accordingly, FinCEN seeks comment on potential alternative
definitions of ``beneficial owner'' in instances where obtaining
information about the beneficial owners of assets in an account may be
warranted. FinCEN also seeks comment on how financial institutions
currently address the potential money laundering risks presented by the
beneficial owners of assets in an account pursuant to financial
institutions' existing legal obligations and expectations under
FinCEN's regulations and related guidance, whether there are any issues
or practical difficulties in doing so, and whether further guidance or
rulemaking on this particular issue would be beneficial.
FinCEN recognizes that there may be impediments to identifying the
beneficial owner of assets in an account in certain instances and
account structures (e.g., omnibus accounts or other intermediated
accounts), such as where there are layers of intermediated
relationships or where there are numerous beneficial owners of assets
in the account. FinCEN seeks comment on the difficulties associated
with identifying beneficial owners of assets of such an account. FinCEN
further requests comment on whether a potential explicit obligation to
identify the beneficial owners of assets in an account should be based
upon the financial institution's risk assessment of the customer, or
whether a more specific obligation would be appropriate.
Customer Acting as an Agent
FinCEN believes that, although the use of legal entities to mask
beneficial ownership presents the primary illicit finance vulnerability
and accordingly the need for beneficial ownership identification, the
question of beneficial ownership can also arise in the context of
accounts established by an individual or entity (e.g. law or accounting
firm) which could be acting on behalf of another individual or
individuals without disclosing this fact. FinCEN is considering how to
best address this potential vulnerability. A possible solution would be
to require any individual or entity (other than a regulated financial
institution) opening an account at a financial institution to state
that he, she, or it is not acting on behalf of any other person. Such
approach would be analogous to longstanding FinCEN transaction
reporting requirements, under which a financial institution must record
identifying information with respect to
[[Page 13053]]
``any person or entity on whose behalf such transaction is to be
effected.'' \50\ For individuals and entities acting on behalf of
another person, the beneficial ownership element of a CDD program
requirement would apply to the person on whose behalf the account is
being opened. FinCEN seeks comment on this approach, as well as
suggestions for other approaches.
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\50\ See, 31 CFR 1010.312.
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Obtaining and Verifying Beneficial Ownership Information
FinCEN anticipates that, in general, the individual opening the
account on behalf of a legal entity customer will identify its
beneficial owner, and that covered financial institutions will
generally be able to rely upon the beneficial ownership information
presented by the customer, absent information that indicates reason to
question the veracity of the information or an elevated risk of money
laundering or terrorist financing. Verification of the beneficial owner
could have two possible meanings. One meaning would require verifying
the identity of the individual identified by the customer as the
beneficial owner of the account, i.e., verifying the existence of the
identified beneficial owner. This would presumably be accomplished by
using procedures similar to those currently required pursuant to the
CIP Rules (e.g., obtaining a copy of a government-issued identity
document of the individual), but applied to the identified beneficial
owner rather than to an individual customer. The second possible
meaning would require that the financial institution verify that the
individual identified by the customer as the beneficial owner, is
indeed the beneficial owner of the customer, i.e., to verify the status
of the identified individual. FinCEN is considering that, in each case
the required procedures would need to be reasonable and practicable,
and sufficient to form a reasonable belief that the financial
institution knows the identity or status, as the case may be, of the
beneficial owner. FinCEN is seeking comment below regarding these two
possible meanings, and the appropriateness and challenges associated
with each.
D. Conducting Ongoing CDD
Due diligence is an on-going obligation, and for this reason
financial institutions should have in place policies and procedures to
maintain the accuracy of their customer risk profiles and risk
assessments. Financial institutions should update CDD information as
necessary based on the overall risk of the customer, and may need to
update or conduct additional CDD in association with specific events
that would result in material changes in a customer's risk profile,
such as volume of alerts or red flags relating to the account, change
in control, change in occupation or account purpose, or the occurrence
of a transaction or activity that is unusual for the customer.
Pursuant to suspicious activity reporting requirements, financial
institutions must report a transaction that: (i) Involves funds derived
from illegal activity or is conducted to hide or disguise funds or
assets derived from illegal activity as part of a plan to violate or
evade any federal law or regulation or to avoid any federal transaction
reporting requirement; (ii) is designed to evade any requirements of
the BSA or its implementing regulations; or (iii) has no business or
apparent lawful purpose or is not the sort in which the particular
customer would normally be expected to engage, and the financial
institution knows of no reasonable explanation for the transaction
after examining the available facts, including the background and
possible purpose of the transaction.\51\ Financial institutions'
ongoing monitoring and due diligence are critical elements of
effectively complying with current suspicious activity reporting
requirements.
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\51\ See generally, 31 CFR 1020.320(a)(2)(i)-(iii),
1023.320(a)(2)(i)-(iii), 1024.320(a)(2)(i)-(iii), and
1026.320(a)(2)(i)-(iii).
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FinCEN is exploring an ongoing monitoring and due diligence
requirement as an express element of a CDD program rule. This element
of the CDD program rule may state:
Consistent with its suspicious activity reporting requirements,
covered financial institutions shall establish and maintain
appropriate policies, procedures, and processes for conducting on-
going monitoring of all customer relationships, and additional CDD
as appropriate based on such monitoring for the purpose of the
identification and reporting of suspicious activity.
FinCEN understands that the obligations in this potential element of an
ongoing CDD monitoring rule are already included in the requirements
contained in the AML program and SAR rules and, therefore, there would
be no new or additional requirement.
V. Issues for Comment
Existing CDD requirements are an implicit, but essential, part of
complying with AML program regulations. However, as discussed above,
FinCEN is considering expressly requiring that financial institutions
conduct CDD as part of their existing AML program requirements, and as
part of this requirement, collect beneficial ownership information for
all customers, with limited exceptions. For this reason, FinCEN is
seeking comment from industry and other interested parties concerning
the implementation of CDD programs in general pursuant to existing
rules and guidance described above. FinCEN is also interested in better
understanding what types of CDD information are currently collected,
specifically in relation to beneficial ownership information, and under
what circumstances the information is collected.
1. Aside from policies and procedures with respect to beneficial
ownership, what changes would be required in a financial institution's
CDD processes as a result of the adoption by FinCEN of an express CDD
rule as described in this ANPRM?
Aside from beneficial ownership, FinCEN believes that the other
elements of a potential CDD rule as described above are already being
implemented by a substantial number of financial institutions, due to
three of the four proposed elements of CDD being explicit or implicit
under existing FinCEN regulations and related regulatory and
supervisory expectations. For this reason, FinCEN believes an explicit
regulatory requirement with respect to these elements of CDD should not
be onerous, particularly for those industries where CIP requirements
are already in place. However, FinCEN is interested in obtaining a
better understanding from all industry sectors of anticipated issues
and concerns that may arise from creating an explicit regulatory
requirement with respect to these three potential elements of CDD,
including any additional costs that would be incurred to comply with
these three elements.
2. What changes would be required in a financial institution's CDD
process, as a result of the adoption by FinCEN of a categorical
requirement to obtain (and in some cases verify) beneficial ownership
information, as described in this ANPRM? Is FinCEN's suggested
alternate definition of ``beneficial owner,'' discussed above, a clear
and easily understood definition for the purpose of obtaining
beneficial ownership information for legal entities in the context of
complying with a CDD obligation? If not, would you suggest a better
definition? In addition, how do financial institutions currently
address the money laundering risks that might be presented by the
beneficial owners of assets in an account held by an
[[Page 13054]]
intermediary, what difficulties are presented in this regard, would
further guidance or regulation be appropriate, should any requirement
in this area be risk-based, and how should FinCEN define beneficial
ownership for this purpose?
FinCEN is seeking comment on the impact on financial institutions
of the adoption of a categorical requirement to obtain beneficial
ownership information for most customers, as described in this ANPRM.
FinCEN is also seeking comment as to whether financial institutions
have concerns regarding the proposed alternative definition of
beneficial ownership discussed above and whether it may cause
difficulties with financial institution compliance with a categorical
beneficial ownership obligation. In addition, FinCEN is seeking comment
on whether it would be confusing to adopt an alternate definition of
beneficial ownership as proposed for a general CDD program requirement,
except in the limited instances in which the current definition for
beneficial owner that is required pursuant to 31 CFR 1010.610 and
1010.620 would continue to be used, and whether the potential
beneficial ownership requirement and associated potential definition
would be relevant with respect to certain types of intermediated
accounts, such as omnibus accounts, and if not, what definition would
be more appropriate. Also, please comment on appropriate exemptions
from a potential beneficial ownership requirement, including with
respect to existing customers, and the practicality of phasing a
requirement into ongoing CDD. Please also comment on possible
approaches to preventing the misuse of a financial institution account
by an individual or entity acting on behalf of another without
disclosing this fact. Finally, please comment regarding the costs of
complying with a categorical beneficial ownership requirement, in the
case where the beneficial ownership requirement would apply only to new
customers, as well as where it would apply to all existing customers.
3. Under what circumstances does a financial institution currently
obtain beneficial ownership information on a customer or accountholder?
Current FinCEN regulations require financial institutions to obtain
beneficial ownership information as a component of CDD on private
banking and foreign correspondent customers. Existing BSA obligations,
including regulatory and supervisory expectations, require financial
institutions to collect this information, as appropriate, as part of
CDD/EDD on higher-risk customers. For this reason, FinCEN requests
information from industry regarding the circumstances under which a
financial institution currently determines that it is necessary or
prudent to obtain beneficial ownership information from a customer, who
is neither a private banking nor foreign correspondent customer,
whether as part of their customer identification program procedures,
anti-money laundering program requirements, transaction/account
monitoring procedures, or for other purposes. For example, are there
types of customers, types of accounts, levels of account activity,
forms of suspicious activity, or other indicia that lead a financial
institution to make decisions as to when there may be no risk, moderate
risk or substantial risk in not obtaining beneficial ownership
information?
4. How do financial institutions currently obtain beneficial
ownership information?
FinCEN requests information on how financial institutions collect
such information and, specifically, what methods, both documentary and
non-documentary, are used to identify and/or verify the beneficial
owner (e.g. public documents, identification numbers, etc.). When or if
financial institutions collect beneficial ownership information other
than as specifically required pursuant to 31 CFR 1010.610 and 1010.620,
FinCEN requests comments on whether financial institutions use the same
definition of beneficial ownership as that which is applicable under
these regulations for private banking and certain foreign correspondent
accounts, or other definitions, such as those referenced above in the
description of a potential additional definition of beneficial owner.
5. Is the current, primarily risk-based, approach to a CDD program
requirement resulting in varied approaches across industries or varied
approaches within industries?
FinCEN is seeking comment on whether financial institutions are
aware of varied approaches either across or within industries relating
to current CDD expectations, including beneficial ownership
obligations. For example, FinCEN seeks comment on whether financial
institutions are aware of circumstances in which one financial
institution may turn down an account due to lack of beneficial
ownership information, later to learn that the accountholder has
established an account with another institution that did not require
the accountholder to provide beneficial ownership information.
Alternatively, are there circumstances under which financial
institutions have concerns about their ability to rely on CDD
undertaken by other financial institutions due to inconsistent
practices or expectations?
6. Are there other elements of CDD that would be more effective in
facilitating compliance with AML program requirements and other
obligations under FinCEN's regulations?
The four elements of CDD listed above were selected based on
consistency with existing regulatory requirements and expectations; the
importance of beneficial ownership information and other elements of
CDD to financial investigations pertaining to money laundering,
terrorist financing, and tax evasion, and IEEPA violations; and,
consistency with international standards and financial transparency.
FinCEN seeks comment on whether other elements of CDD, aside from those
listed in this ANPRM would be more effective and efficient in advancing
these interests.
7. What information should be required in order to identify, and
verify on a risk basis, the identity of the beneficial owner?
Should the required identification information on beneficial owners
be consistent with the customer identification information currently
required under the CIP regulations (i.e., name, address, date of birth
and identification number) or should additional information be
required? In addition, what should be required of financial
institutions to verify the identity of the beneficial owner? FinCEN is
exploring two possible meanings for verification of beneficial
ownership information: One meaning would require verifying the identity
of the natural person identified by the customer to be the beneficial
owner. This would require that the financial institution, for example,
obtain a copy of a government-issued identification document bearing a
photograph of the individual identified by the customer as its
beneficial owner, to verify that the individual exists. The second
meaning would require verifying that the individual identified by the
customer as its beneficial owner is, in fact, the beneficial owner of
the legal entity customer. FinCEN is seeking comment as to challenges
posed by each of these possible verification requirements.
8. Are there any products and services, or customers that should be
exempted from the requirement to obtain beneficial ownership
information due to there being (i) substantially less risk of money
laundering or terrorist financing associated with the account; (ii)
limited value associated with the
[[Page 13055]]
beneficial ownership information in mitigating money laundering/
terrorist financing risk; or (iii) an inability to obtain the required
information due to other legal requirements?
FinCEN is seeking comment to determine if there are certain types
of, or thresholds for, products, services, or customers, with respect
to which a financial institution should not be required to obtain
beneficial ownership information, due to substantially reduced risk.
For example, should customers that are exempt from the CIP Rules, also
be exempt from beneficial ownership identification? Additionally,
FinCEN is seeking comment as to whether there are certain products or
services offered by financial institutions that, due to ancillary
statutory or regulatory obligations, would prohibit compliance with a
CDD requirement to obtain beneficial ownership information as outlined
in this ANPRM. FinCEN is also seeking comment on whether there are
significant differences in risks or perceived ability to obtain
beneficial ownership information with respect to foreign versus
domestic customers and/or beneficial owners.
9. What financial institutions should not be covered by a CDD rule
based on products and services offered?
FinCEN is considering whether a CDD program rule as described in
this ANPRM should be more widely applicable to financial institutions
not currently subject to a CIP Rule, and is seeking comments from
industry and interested parties to determine if there are types of
financial institutions currently covered under FinCEN's regulations and
subject to SAR and AML Program rules, that should not be covered by a
CDD obligation, either because the products and services offered are
not consistent with the information sought in a CDD obligation or for
any other reason.
10. What would be the impact on consumers or other customers of a
CDD program including the elements identified above?
FinCEN is seeking comment regarding the potential impact on
consumers or customers of financial institutions. What are the benefits
and challenges of the above suggested CDD requirements that may exist
between financial institutions and customers taking into account the
objective of increasing the inclusion in the financial system of
traditionally underserved individuals? Will a CDD program affect the
willingness or ability of consumers or others to use or access certain
financial institutions or services?
VI. Conclusion
With this ANPRM, FinCEN is seeking input on the questions set forth
above. FinCEN also is soliciting comments on the impact to law
enforcement or authorities, regulatory agencies, and consumers, and
welcomes comments on all aspects of the ANPRM, and all interested
parties are encouraged to provide their views.
Dated: February 28, 2012.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2012-5187 Filed 3-2-12; 8:45 am]
BILLING CODE 4810-02-P