Beneficial Ownership Rule: Overview & Best Practices

beneficial ownership rule|FinCEN Final Rule timeline|

September 7, 2021

Anti money-laundering (AML) and Know Your Customer (KYC) requirements form the critical underpinning of financial regulation. In recent years, there has been increased pressure on regulators to introduce additional AML and KYC reforms as a result of some high profile controversies involving offshore money laundering. As a result, the US Financial Crimes Enforcement Network (FinCEN) has implemented a new regulatory framework for customer due diligence (CDD) focused on identifying beneficial ownership when a new customer account is opened.

What is the Final Rule?

The FinCEN “Final Rule” takes effect on May 11, 2018 and brings with it new requirements for customer due diligence (CDD) for organizations that are subject to Customer Identification (CIP) requirements, including banks, broker-dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities. Known as the “fifth pillar” of AML/BSA compliance, the Final Rule requires financial institutions to identify all beneficial owners who own 25 percent or more of legal entity customers when a new account is opened.

A beneficial owner is anyone who has specific property rights in equity even though the property is legally in someone else’s name. For example, this could be someone who benefits from the profits of a business or an investment. Under the Final Rule, affected financial institutions will have to report on KYC and AML for up to four beneficial owners, rather than a single business owner.

The Final Rule states:

Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted).

Many other entities in the financial services industry, while not legally obligated to comply with CIP requirements, are contractually bound to do so by their lenders. So why all of the activity around AML and KYC, and why now?

The evolution of the Final Rule and CDD requirements

While the Final Rule deadline is just around the corner, increased regulation around AML and KYC in the United States has been a long time in the making. As early as 2006, AML controls in the United States were identified as being only “partially compliant” with intergovernmental CDD standards. Over the next decade, the FinCEN Final Rule came to take shape, exacerbated by the Panama Papers scandal of 2014 which divulged an extensive network of shell corporations used to launder money and shelter assets from international authorities.


FinCEN Final Rule timeline

To whom is the Final Rule relevant?

FinCEN due diligence must be performed on the following “legal entity customers” to comply with the Final Rule:

  • Corporations
  • Limited Liability Companies
  • Limited Partnerships
  • General Partnerships
  • Business Trusts

Any other entity created by a filing with a state office, or any similar entities formed under the laws of a non-US jurisdiction are also included under the Final Rule. The FinCEN Final Rule does not include Natural Persons, Sole Proprietorships, Unincorporated Associations, Trusts, Federal or State Financial Institutions, and some other exceptions.

So what do I need to do about it?

The Beneficial Ownership Rule goes into effect on May 11, 2018. To comply with the Final Rule, you must conduct the following processes:

  • Add fields to your application forms: Rather than asking for one, legal owner, you must ask for the information of all people with 25 percent or more beneficial ownership. This means having space for, and collecting information for up to four people.
  • Add steps to your current AML and KYC due diligence: You will now be required to conduct customer due diligence to know your customer and run anti-money laundering checks on each of the beneficial owners, not just the one legal owner. Your underwriting team will have up to four times as much work to do in this area.
  • Conduct regular customer due diligence (CDD) checks: Consult with a lawyer on how frequently you should run due diligence checks on your existing customers. Depending on your business, they may recommend that you run KYC and AML checks on all beneficial owners once a month, quarterly, or annually.
  • Track all the actions taken to comply: To prove you have complied with everything outlined in the Final Rule, you must product auditable records of your new processes, along with date and time stamps of when each check was conducted for each customer.
  • Get legal advice. Consult with a lawyer on how the nuances of the Final Rule should be interpreted for your business to ensure you put the proper compliance processes in place.

Payment service providers are faced with up to four times as much CDD work, tasked to the same sized underwriting team. These companies must make a critical choice: hire more underwriters or automate as much of the process as possible to aid their existing underwriters with the work and documentation.

The Agreement Express FinCEN Scorecard provides a quick solution to meet the minimum requirements for the FinCEN Rule. It is an add-on piece to the existing Agreement Express Risk Scorecard for automated underwriting. Both scorecards leverage third party data to conduct web crawls, KYC, and AML for you. It can be set up to automatically accept or reject incoming customers, or present its findings for your team to make the decision.

The FinCEN Scorecard not only expedites the CDD for incoming customers, but can also process full customer lists as frequently as your business requires. Conduct regular CDD checks in bulk, or check individual customer’s beneficial ownership KYC and AML using the FinCEN Scorecard to ensure that you have proof of due diligence for your entire customer base.

A Two-Pronged Approach

The FinCEN Scorecard will run OFAC Screening (watchlist checks for the Office of Foreign Assets Control) on the Ownership Prong and the Control Prong of an entity. The Ownership Prong is all information related to the people who have 25 percent or greater beneficial ownership. The FinCEN Scorecard allows up to four Beneficial Owners to be provided for the required checks to be performed.

The Control Prong is all information related to the single person associated with the entity who has ‘significant managerial control’. The FinCEN Scorecard will provide auditable records that these tasks have been performed, complete with date and time stamps.

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