Sheri Levine-Shea, Counsel, Financial Crime Legal, Barclays

Below is an insight into what can be expected from Sheri’s session at Financial Crime USA 2024

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

Why is it important for financial institutions to communicate requirements and timelines to legal entities?

Financial institutions are not legally obligated to communicate requirements and timelines to legal entities. However, financial institutions should encourage compliance with the reporting requirements to support the U.S. Department of Treasury’s objectives to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system.   Further, financial institutions should expect questions by legal entity clients and should consider developing talking points in response to questions regarding the requirements.  There could be overlap between a client’s requirement to provide beneficial ownership information to financial institutions under the FinCEN Beneficial Ownership Rule (31 CFR 1010.230) and the CTA reporting obligations.  Clients could be confused about why they need to report their beneficial ownership information (BOI) to both FinCEN and financial institutions.

How is FinCEN planning to enhance its methods for collecting information aimed at identifying beneficial owners? Could this bring any benefits to financial institutions?

FinCEN is creating a repository for collecting and maintaining BOI from reporting companies.  FinCEN is also offering a FinCEN Identifier, which is a unique identifying number that FinCEN will issue to individuals or entities upon request. The FinCEN Identifier will permit a reporting company to report the FinCEN Identifier in lieu of the individual’s BOI.  The FinCEN Identifier will increase data security of an individual’s personal identifying information (PII).  It will also benefit Company Applicants who the reporting company must disclose along with their BOI if they formed a reporting company on or after January 1, 2024.

Currently, the repository and FinCEN Identifier will offer limited benefits to financial institutions.  The Access and Safeguards Rule (Access Rule) was finalized on December 22, 2023.  FinCEN will allow financial institution to use BOI to satisfy customer due diligence requirements.  In responses to comments in the proposed Access Rule, FinCEN expanded the meaning of “customer due diligence requirements” to include “any legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the United States, to comply with which it is reasonably necessary for financial institution to obtain or verify beneficial ownership information of a legal entity customer.”    This means that a financial institution can use BOI for CDD, CIP, SAR investigations, sanctions compliance, etc.  In addition, the final Access Rule permits financial institutions to redisclose the information within the financial institution with limited exceptions, so long as it is for the particular purpose or activity for which the BOI was requested.  The final Access Rule also requires consent of the reporting company client for the financial institution to access and use the BOI information obtained from FinCEN.  Financial institutions will need to submit identifying information on the Reporting Company to receive a transcript with the company’s BOI.  Access to the database will be a phased approach, with financial institutions in the last phase.

The database will have limited utility to financial institutions as it is designed today, in part because FinCEN is not verifying the BOI provided by reporting companies so financial institutions will still have to conduct CIP on beneficial owners of reporting companies that are clients.  Consequently, financial institutions will need to continue to collect the client’s BOI to satisfy its regulatory obligations. Also, financial institutions will have to develop controls, policies and procedures to segregate information collected from FinCEN from information received by the reporting company client as part of its AML program.  Segregation of information is necessary to comply with the Access Rule, which will need to include flagging FinCEN information in systems, obtaining consent from the reporting company customer, and ensuring the information is used only for the purpose for which it was obtained (e.g. CIP or CDD).

What is the most effective way to utilize the beneficial ownership registry?

1. 1. The most effective way to utilize the beneficial ownership registry is as an additional CDD tool to confirm information that clients provide to financial institutions or to assist with investigations.

What are the key contradictions brought by the beneficial ownership rule and beneficial ownership registry?

1. 1. First, the terminology used to refer to the legal entity is different. The BOI Reporting Rule refers to Reporting Companies and the Beneficial Ownership Rule refers to Legal Entity Customers. They are both defined differently. Reporting Companies have 23 exemptions from the definition of a Reporting Company where the Beneficial Ownership Rule has 16 exemptions and they do not align. This could result in the client having to provide BOI to financial institutions but not FinCEN or vice versa.   FinCEN will be amending the  Beneficial Ownership Rule (a/k/a the CDD Rule), but it is not clear whether it will align the two definitions.  Until FinCEN amends the Beneficial Ownership Rule, financial institutions will have to comply with it as written.

Second, the BOI Reporting Rule requires the reporting of all beneficial owners that hold 25% or more of their ownership interests or exercises “substantial control” over the Reporting Company.  The Reporting Rule defines “substantial control” as an individual who serves as a senior officer of the company, has authority over appointment or removal of any senior officer or a majority of the board of directors, directs, determines or has substantial influence over important decision by the Reporting Company, or has any other form of substantial control.   In contrast, the Beneficial Ownership Rule requires the Legal Entity Customer to report only one person with significant responsibility to control, manage, or direct a legal entity customer.  The Beneficial Ownership Rule provides examples that include the CEO, CFR, COO Managing Member, General Partner, President, Vice President, or Treasurer or any other individual who regularly performs similar functions.

Third, the BOI Reporting Rule does not require FinCEN to collect the beneficial owner’s social security number.  However, the Beneficial Ownership Rule requires financial institutions to collect it, which is typically used for their verification process.  This could cause more confusion for clients.