United States

FinCEN proposes customer due diligence to identify beneficial owners


The Financial Crimes Enforcement Network (FinCEN) has proposed a new rule to enhance the customer due diligence requirements of the Bank Secrecy Act (BSA). Customer due diligence is a practice in which all financial institutions must implement within their BSA program to adequately identify their customers. The purpose of an effective customer due diligence process is to know your customers, specifically who they are as well as their expected and actual transaction activity.

The new proposed rule will require financial institutions to identify the beneficial owner(s) of entity customers. The proposal requires the identified beneficial owner(s) to be a natural person rather than another legal entity. To identify beneficial owners, the institutions will be required to conduct customer identification and customer due diligence practices consistent with existing procedures. FinCEN clearly states within the proposal that financial institutions will not be required to verify the identified individuals' status as a beneficial owner. As proposed, financial institutions will be required to obtain this information directly from the individual at the account opening in written form.

All entities will be subject to this new proposal except those already exempt from FinCEN's customer identification program rules (i.e. the definition of "legal entity customer" for purposes of the beneficial ownership requirement excludes all the same types of entities as the definition of "customer" for purposes of the CIP rules). However, FinCEN explains within this proposal that the different types of entities already exempt from CIP requirements will be exempt from beneficial ownership requirements. If the entity opens a new account after the implementation of the rule, financial institutions will be required to apply the new rule to the existing entity at that point. In other words, the CIP definition of customer excluded existing customers whereas the proposed legal entity customer definition does not exclude existing customers that open a new account after the implementation date.

Comments on the proposed rule are to be received on or before Oct. 3.

Read more about the proposal