[Federal Register Volume 79, Number 149 (Monday, August 4, 2014)]
[Proposed Rules]
[Pages 45151-45174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18036]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Parts 1010, 1020, 1023, 1024, and 1026

RIN 1506-AB25


Customer Due Diligence Requirements for Financial Institutions

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

[[Page 45152]]


ACTION: Notice of proposed rulemaking.

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SUMMARY: The Financial Crimes Enforcement Network (FinCEN), after 
consulting with staff from various federal supervisory authorities, is 
proposing rules under the Bank Secrecy Act to clarify and strengthen 
customer due diligence requirements for: Banks; brokers or dealers in 
securities; mutual funds; and futures commission merchants and 
introducing brokers in commodities. The proposed rules would contain 
explicit customer due diligence requirements and would include a new 
regulatory requirement to identify beneficial owners of legal entity 
customers, subject to certain exemptions.

DATES: Written comments on the Notice of Proposed Rulemaking (NPRM) 
must be received on or before October 3, 2014.

ADDRESSES: Comments may be submitted, identified by Regulatory 
Identification Number (RIN) 1506-AB25, by any of the following methods:
     Federal E-rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. Include RIN 1506-AB25 
in the submission. Refer to Docket Number FINCEN-2014-0001.
     Mail: Policy Division, Financial Crimes Enforcement 
Network, P.O. Box 39, Vienna, VA 22183. Include 1506-AB25 in the body 
of the text. Please submit comments by one method only. All comments 
submitted in response to this NPRM 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 Resource Center at 1-800-767-
2825 or 1-703-905-3591 (not a toll free number) and select option 3 for 
regulatory questions. Email inquiries can be sent to [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    FinCEN exercises regulatory functions primarily under the Currency 
and Foreign Transactions Reporting Act of 1970, as amended by the USA 
PATRIOT Act of 2001 (PATRIOT Act) and other legislation, which 
legislative framework is commonly referred to as the ``Bank Secrecy 
Act'' (BSA).\1\ The BSA 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.'' \2\
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    \1\ 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).
    \2\ 31 U.S.C. 5311.
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    The Secretary has delegated to the Director of FinCEN the authority 
to implement, administer and enforce compliance with the BSA and 
associated regulations.\3\ FinCEN is authorized to impose anti-money 
laundering (AML) program requirements on financial institutions,\4\ as 
well as to require financial institutions to maintain procedures to 
ensure compliance with the BSA and the regulations promulgated 
thereunder or to guard against money laundering.\5\
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    \3\ Treasury Order 180-01 (March 24, 2003).
    \4\ 31 U.S.C. 5318(h)(2).
    \5\ 31 U.S.C. 5318(a)(2).
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    FinCEN, in consultation with the staffs of the federal functional 
regulators and the Department of Justice, has determined that more 
explicit rules for covered financial institutions \6\ with respect to 
customer due diligence (CDD) are necessary to clarify and strengthen 
CDD within the BSA regime. As demonstrated further below, such changes 
will enhance financial transparency and safeguard the financial system 
against illicit use. Requiring financial institutions to perform 
effective CDD so that they know their customers--both who they are and 
what transactions they conduct--is a critical aspect of combating all 
forms of illicit financial activity, from terrorist financing and 
sanctions evasion to more traditional financial crimes, including money 
laundering, fraud, and tax evasion. For FinCEN, the key elements of CDD 
include: (i) Identifying and verifying the identity of customers; (ii) 
identifying and verifying the identity of beneficial owners of legal 
entity customers (i.e., the natural persons who own or control legal 
entities); (iii) understanding the nature and purpose of customer 
relationships; and (iv) conducting ongoing monitoring to maintain and 
update customer information and to identify and report suspicious 
transactions. Collectively, these elements comprise the minimum 
standard of CDD, which FinCEN believes is fundamental to an effective 
AML program.
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    \6\ For purposes of this preamble, a ``covered financial 
institution'' refers to: (i) Banks; (ii) brokers or dealers in 
securities; (iii) mutual funds; and (iv) futures commission 
merchants and introducing brokers in commodities.
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    Accordingly, this Notice of Proposed Rulemaking (NPRM) proposes to 
amend FinCEN's existing rules so that each of these pillars is 
explicitly referenced in a corresponding requirement within FinCEN's 
program rules. The first element, identifying and verifying the 
identity of customers, is already included in the existing regulatory 
requirement to have a customer identification program (CIP). Given this 
fact, FinCEN is addressing the need to have explicit requirements with 
respect to the three remaining elements via two rule changes. First, 
FinCEN is addressing the need to collect beneficial owner information 
on the natural persons behind legal entities by proposing a new 
separate requirement to identify and verify the beneficial owners of 
legal entity customers, subject to certain exemptions. Second, FinCEN 
is proposing to add explicit CDD requirements with respect to 
understanding the nature and purpose of customer relationships and 
conducting ongoing monitoring as components in each covered financial 
institution's core AML program requirements. Within this context, 
FinCEN is also updating its regulations to include explicit reference 
to all four of the pre-existing core requirements of an AML program, 
sometimes referred to as ``pillars,'' so that all of these requirements 
are visible within FinCEN's rules. As discussed in more detail below, 
these existing core requirements are already laid out in the BSA as 
minimum requirements and are substantively the same as those already 
included within regulations or rules issued by federal functional 
regulatory agencies and self-regulatory organizations (SROs), and 
therefore we believe they do not add to or otherwise change the covered 
financial institutions' existing obligations under these regulations or 
rules.
    FinCEN wishes to emphasize at the outset that nothing in this 
proposal is intended to lower, reduce, or limit the due diligence 
expectations of the federal functional regulators or in any way limit 
their existing regulatory discretion. To clarify this point, this 
proposal incorporates the CDD elements on nature and purpose and 
ongoing monitoring into FinCEN's existing AML program requirements, 
which generally provide that an AML program is

[[Page 45153]]

adequate if, among other things, the program complies with the 
regulation of its federal functional regulator (or, where applicable, 
self-regulatory organization) governing such programs.\7\ In addition, 
the Treasury Department intends for the requirements contained in this 
customer due diligence and beneficial ownership proposal to be 
consistent with, and not to supersede, any regulations, guidance or 
authority of any federal banking agency, the Securities and Exchange 
Commission (SEC), the Commodity Futures Trading Commission (CFTC), or 
of any self-regulatory organization (SRO) relating to customer 
identification, including with respect to the verification of the 
identities of legal entity customers.
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    \7\ See, e.g., 31 CFR 1020.210, which currently provides that a 
financial institution regulated by a Federal functional regulator 
that is not subject to the regulations of a self-regulatory 
organization shall be deemed to satisfy the requirements of 31 
U.S.C. 5318(h)(1) if it implements and maintains an anti-money 
laundering program that complies with the regulation of its Federal 
functional regulator governing such programs. (emphasis added).
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    The remainder of this background section provides: (a) An overview 
of the importance of CDD; (b) a description of the Advance Notice of 
Proposed Rulemaking (ANPRM),\8\ which initiated this rulemaking process 
and Treasury's subsequent outreach to the private sector; and (c) an 
overview of Treasury's efforts to enhance financial transparency more 
broadly.
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    \8\ See 77 FR 13046, March 5, 2012.
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A. Importance of Customer Due Diligence

    Clarifying and strengthening CDD requirements for U.S. financial 
institutions, including an obligation to identify beneficial owners, 
advances the purposes of the BSA by:
     Enhancing the availability to law enforcement, as well as 
to the federal functional regulators and SROs, of beneficial ownership 
information of legal entity customers obtained by U.S. financial 
institutions, which assists law enforcement financial investigations 
and regulatory examinations and investigations;
     Increasing the ability of financial institutions, law 
enforcement, and the intelligence community to identify the assets and 
accounts of terrorist organizations, money launderers, drug kingpins, 
weapons of mass destruction proliferators, and other national security 
threats, which strengthens compliance with sanctions programs designed 
to undercut financing and support for such persons;
     Helping financial institutions assess and mitigate risk, 
and comply with all existing legal requirements, including the BSA and 
related authorities;
     Facilitating reporting and investigations in support of 
tax compliance, and advancing national commitments made to foreign 
counterparts in connection with the provisions commonly known as the 
Foreign Account Tax Compliance Act (FATCA); \9\ and
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    \9\ Hiring Incentives to Restore Employment Act of 2010, Public 
Law 111-147, Section 501(a).
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     Promoting consistency in implementing and enforcing CDD 
regulatory expectations across and within financial sectors.
i. Assisting Financial Investigations by Law Enforcement
    The abuse of legal entities to disguise involvement in illicit 
financial activity remains a longstanding vulnerability that 
facilitates crime, threatens national security, and jeopardizes the 
integrity of the financial system. Criminals have exploited the 
anonymity that can be provided by legal entities to engage in a variety 
of financial crimes, including money laundering, corruption, fraud, 
terrorist financing, and sanctions evasion.
    There are numerous examples. Law enforcement officials have found 
that major drug trafficking organizations use shell companies to 
launder drug proceeds.\10\ In 2011, a World Bank report highlighted how 
corrupt actors consistently abuse legal entities to conceal the 
proceeds of corruption, which the report estimates to aggregate to at 
least $40 billion per year in illicit activity.\11\ Other criminals 
also make aggressive use of front companies, which may also conduct 
legitimate business activity, to disguise the deposit, withdrawal, or 
transfer of illicit proceeds that are intermingled with legitimate 
funds.
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    \10\ Combating Transnational Organized Crime: International 
Money Laundering as a Threat to Our Financial System, Before the 
Subcomm. on Crime, Terrorism, and Homeland Security, H. Comm. on the 
Judiciary, 112th Cong. (February 8, 2012) (statement of Jennifer 
Shasky Calvery as Chief, Asset Forfeiture and Money Laundering 
Section, Criminal Division of the U.S. Department of Justice).
    \11\ The Puppet Masters: How the Corrupt Use Legal Structures to 
Hide Stolen Assets and What to Do About It, The International Bank 
for Reconstruction and Development/The World Bank (2011).
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    Strong CDD practices that include identifying the natural persons 
behind a legal entity--i.e., the beneficial owners--help defend against 
these abuses in a variety of ways. Armed with beneficial ownership 
information, financial institutions can provide law enforcement with 
key details about the legal structures used by suspected criminals to 
conceal their illicit activity and assets. Moreover, requiring legal 
entities seeking access to financial institutions to disclose 
identifying information, such as the name, date of birth, and social 
security number of a natural person, will make such entities more 
transparent, and thus less attractive to criminals and those who assist 
them. Even if an illicit actor tries to thwart such transparency by 
providing false beneficial ownership information to a financial 
institution, law enforcement has advised FinCEN that such information 
can still be useful in demonstrating unlawful intent and in generating 
leads to identify additional evidence or co-conspirators.
ii. Advancing Counterterrorism and Broader National Security Interests
    As noted, criminals often abuse legal entities to evade sanctions 
or other targeted financial measures designed to combat terrorism and 
other national security threats. The success of such targeted financial 
measures depends, in part, on the ability of financial institutions, 
law enforcement, and intelligence agencies to identify a target's 
assets and accounts. These measures are thwarted when legal entities 
are abused to obfuscate ownership interests. Effective CDD helps 
prevent such abuses by requiring the collection of critical 
information, including beneficial ownership information, which may be 
helpful in implementing sanctions or other similar measures.
iii. Improving a Financial Institution's Ability To Assess and Mitigate 
Risk
    Express CDD requirements would also enable financial institutions 
to more effectively assess and mitigate risk. It is through CDD that 
financial institutions are able to develop risk profiles of their 
customers. Comprehensive risk profiles enable a financial institution 
to monitor accounts more effectively, and evaluate activity to 
determine whether it is unusual or suspicious, as required under 
suspicious activity reporting obligations.\12\ Further, in the event 
that a financial institution files a suspicious activity report (SAR), 
information gathered through CDD enhances SARs, which in turn helps law 
enforcement, intelligence, national security and tax authorities 
investigate and pursue illicit financing activity.
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    \12\ See, e.g., 31 CFR 1020.320.
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iv. Facilitating Tax Compliance
    Customer due diligence also facilitates tax reporting, 
investigations and compliance. For example,

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information held by banks and other financial institutions about the 
ownership of companies can be used to assist law enforcement in 
identifying the true owners of assets and their true tax liabilities. 
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. Strengthening CDD is an important part of that 
effort, and it will dovetail with other efforts to create greater 
transparency, such as the new tax reporting provisions under the 
Foreign Account Tax Compliance Act (FATCA).\13\ FATCA requires foreign 
financial institutions to identify U.S. account holders, including 
legal entities with substantial U.S. ownership, and to report certain 
information about those accounts to the Internal Revenue Service 
(IRS).\14\ The United States has collaborated with foreign governments 
to enter into intergovernmental agreements that facilitate the 
effective and efficient implementation of these requirements. These 
agreements and, to a lesser extent, the applicable FATCA regulations, 
allow foreign financial institutions to rely on existing AML practices 
in a number of circumstances, including, in the case of the agreements, 
for purposes of determining whether certain legal entity customers have 
substantial owners. Pursuant to many of these agreements, the United 
States has committed to pursuing reciprocity with respect to collecting 
and reporting to the authorities of the FATCA partner information on 
the U.S. accounts of residents of the FATCA partner. A general 
requirement for U.S. financial institutions to obtain beneficial 
ownership information for AML purposes advances this commitment, and 
puts 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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    \13\ Hiring Incentives to Restore Employment Act of 2010, Public 
Law 111-147, Section 501(a).
    \14\ 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,'' RIN 1545-BK68 (January 
28, 2013), available at http://www.irs.gov/PUP/businesses/corporations/TD9610.pdf . For further updates on FATCA regulations, 
see http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA).
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v. Promoting Clear and Consistent Expectations and Practices
    Customer due diligence is universally recognized as fundamental to 
mitigating illicit finance risk, even though not all covered financial 
institutions use the specific term ``customer due diligence'' to 
describe their practices. While Treasury understands from its outreach 
to the private sector that financial institutions broadly accept this 
principle and implement CDD practices in some form under a risk-based 
approach, covered financial institutions have expressed disparate views 
about what precise activity CDD entails. At public hearings held after 
the comment period to the ANPRM, discussed below, financial 
institutions described widely divergent CDD practices, especially with 
respect to identifying beneficial owners outside of limited 
circumstances prescribed by statute.\15\
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    \15\ See, e.g., Summary of Public Hearing: Advance Notice of 
Proposed Rulemaking on Customer Due Diligence (October 5, 2012), 
available at http://www.fincen.gov/whatsnew/html/20121130NYC.html 
(``Participants expressed varied views as to whether, how and in 
what circumstances, financial institutions obtain beneficial 
ownership information.'').
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    FinCEN believes that this disparity adversely affects efforts to 
mitigate risk and can promote an uneven playing field across and within 
financial sectors. Covered financial institutions have noted that 
unclear CDD expectations can result in inconsistent regulatory 
examinations, potentially causing them to devote their limited 
resources to managing derivative legal risk rather than fundamental 
illicit finance risk. Private sector representatives have also noted 
that inconsistent expectations can effectively discourage best 
practices, because covered financial institutions with robust 
compliance procedures may believe that they risk losing customers to 
other, more lax institutions. Greater consistency across the financial 
system could also facilitate reliance on the CDD efforts of other 
financial institutions.
    Providing a consolidated and clear CDD framework would help address 
these issues. As part of this framework, expressly stating CDD 
requirements in rule or regulation with respect to (i) understanding 
the nature and purpose of customer relationships and (ii) conducting 
ongoing monitoring to maintain and update customer information and to 
identify and report suspicious transactions, will facilitate more 
consistent implementation, supervision and enforcement of these 
expectations. With respect to the beneficial ownership proposal, 
requiring all covered financial institutions to identify beneficial 
owners in the same manner and pursuant to the same definition also 
promotes consistency across the industry. Requiring covered financial 
institutions to operate under one clear CDD framework will promote a 
more level playing field across and within financial sectors.

B. Issuance of the Advance Notice of Proposed Rulemaking and Subsequent 
Outreach

    FinCEN formally commenced this rulemaking process in March 2012 by 
issuing an ANPRM that described FinCEN's potential proposal for 
codifying explicit CDD requirements, including customer identification, 
understanding the nature and purpose of accounts, ongoing monitoring, 
and obtaining beneficial ownership information.\16\
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    \16\ Two years prior to that, in March 2010, FinCEN, along with 
several other agencies, published Joint Guidance on Obtaining and 
Retaining Beneficial Ownership Information, FIN-2010-G001 (March 5, 
2010). Industry reaction to this guidance has been one reason for 
pursuit of the clarity entailed in making requirements with respect 
to CDD and beneficial ownership explicit within FinCEN's 
regulations.
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    FinCEN received approximately 90 comments, mostly from banks, 
credit unions, securities and derivatives firms, mutual funds, casinos, 
and money services businesses. In general, and as described in greater 
detail below, these commenters primarily raised concerns about the 
potential costs and practical challenges associated with a categorical 
requirement to obtain beneficial ownership information. They also 
reflected some confusion with respect to FinCEN's articulation of the 
other components of CDD, suggesting that FinCEN was imposing new 
requirements rather than explicitly codifying pre-existing obligations.
    To better understand and address these concerns, Treasury held five 
public hearings in Washington, DC, Chicago, New York, Los Angeles and 
Miami.\17\ At these meetings, participants expressed their views on the 
ANPRM and offered specific recommendations about how best to minimize 
the burden associated with obtaining beneficial ownership information. 
These

[[Page 45155]]

discussions were critical in the development of this proposal.
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    \17\ Summary of Public Hearing: Advance Notice of Proposed 
Rulemaking on Customer Due Diligence (July 31, 2012), available at 
http://www.regulations.gov/#!documentDetail;D=FINCEN-2012-0001-0094; 
Summary of Public Hearing: Advance Notice of Proposed Rulemaking on 
Customer Due Diligence (September 28, 2012, available at http://www.fincen.gov/whatsnew/html/20121130CHI.html; Summary of Public 
Hearing: Advance Notice of Proposed Rulemaking on Customer Due 
Diligence (October 5, 2012), available at http://www.fincen.gov/whatsnew/html/20121130NYC.html; Summary of Public Hearing: Advance 
Notice of Proposed Rulemaking on Customer Due Diligence (October 29, 
2012), available at http://www.fincen.gov/whatsnew/html/20121130LA.html; Summary of Public Hearing: Advance Notice of 
Proposed Rulemaking on Customer Due Diligence (December 3, 2012), 
available at http://www.fincen.gov/whatsnew/pdf/SummaryofHearing-MiamiDec3.pdf.
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C. Treasury's Broad Strategy To Enhance Financial Transparency

    Clarifying and strengthening CDD is an important component of 
Treasury's broader three-part strategy to enhance financial 
transparency. Other key elements of this strategy include: (i) 
Increasing the transparency of U.S. legal entities through the 
collection of beneficial ownership information at the time of the legal 
entity's formation and (ii) facilitating global implementation of 
international standards regarding CDD and beneficial ownership of legal 
entities and trusts.
    This proposal thus complements the Administration's ongoing work 
with Congress to facilitate adoption of legislation that would require 
the collection of beneficial ownership information at the time that 
legal entities are formed in the United States. This proposal also 
advances Treasury's ongoing work with the Group of Twenty Finance 
Ministers and Central Bank Governors (G-20), the Financial Action Task 
Force (FATF), and other global partners, who have emphasized the 
importance of improving CDD practices and requiring the disclosure of 
beneficial ownership information at the time of company formation or 
transfer. Moreover, this proposal furthers the United States' Group of 
Eight (G-8) commitment as set forth in the United States G-8 Action 
Plan for Transparency of Company Ownership and Control, published on 
June 18, 2013.\18\ This Action Plan is in line with principles agreed 
to by the G-8, which the White House noted ``are crucial to preventing 
the misuse of companies by illicit actors.'' \19\ While these elements 
are all proceeding independently, together they establish a 
comprehensive approach to promoting financial transparency.
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    \18\ United States G-8 Action Plan for Transparency of Company 
Ownership and Control, available at http://www.whitehouse.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control.
    \19\ White House Fact Sheet: U.S. National Action Plan on 
Preventing the Misuse of Companies and Legal Arrangements (June 18, 
2013), available at http://www.whitehouse.gov/the-press-office/2013/06/18/fact-sheet-us-national-action-plan-preventing-misuse-companies-and-legal.
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II. Scope of and Rationale for the Proposed Rule

    This section describes: (i) The range of financial institutions 
covered by this proposal; (ii) FinCEN's continued interest in 
potentially extending the proposed rule to additional financial 
institutions in the future, and (iii) the basis for proposing explicit 
requirements that, in conjunction with the existing customer 
identification program (CIP) requirement, will create a clearer CDD 
framework.
    As an initial matter, this proposal covers only those financial 
institutions subject to a CIP requirement under FinCEN regulations. At 
this time, such financial institutions are: (i) Banks; (ii) brokers or 
dealers in securities; (iii) mutual funds; and (iv) futures commission 
merchants and introducing brokers in commodities.\20\ FinCEN believes 
that initially covering only these sectors is an appropriate exercise 
of its discretion to engage in incremental rulemaking. These sectors 
represent a primary means by which individuals and businesses maintain 
accounts with access to the financial system. In addition, because 
these covered financial institutions have been subject to CIP rules, 
FinCEN believes that it is logical to commence implementation with 
those financial institutions already equipped to leverage CIP practices 
to the extent possible, as the proposal contemplates.
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    \20\ 31 CFR 1020.220 (Banks); 31 CFR 1023.220 (Broker-Dealers); 
31 CFR 1024.220 (Mutual Funds); 31 CFR 1026.220 (Futures Commission 
Merchants and Introducing Brokers in Commodities).
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    In addition to input from covered financial institutions, FinCEN 
sought and received comments on the ANPRM from financial institutions 
not subject to CIP requirements, such as money services businesses, 
casinos, insurance companies, and other entities subject to FinCEN 
regulations. Based on these comments and discussions with the private 
sector, FinCEN believes that extending CDD requirements in the future 
to these, and potentially other types of financial institutions, may 
ultimately promote a more consistent, reliable, and effective AML 
regulatory structure across the financial system.
    Several comments questioned the need for proposing a CDD rule that 
contained all four elements, when three of the four elements are 
already consistent with existing requirements or supervisory 
expectations. FinCEN believes that proposing clear CDD requirements is 
the most effective way of clarifying, consolidating, and harmonizing 
expectations and practices across all covered financial institutions. 
Expressly stating the requirements facilitates the goal that financial 
institutions, regulators, and law enforcement all operate under the 
same set of clearly articulated principles. The proposed CDD 
requirements are intended to set forth a clear framework of minimum 
expectations that can be broadly applied to varying risk scenarios 
across multiple financial sectors and can be tailored by financial 
institutions to account for the risks unique to them. For this reason, 
and as part of a broader global agenda supported by Treasury, many 
other jurisdictions have already imposed requirements similar to those 
proposed herein.\21\ These global developments promote a level playing 
field internationally and mitigate the threat of illicit finance 
presented by an increasingly interconnected financial system.
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    \21\ For example, all European Union member states, as well as 
Switzerland, Singapore, Hong Kong, and other financial centers 
generally require financial institutions to conduct due diligence as 
proposed in this rulemaking, including obtaining beneficial 
ownership information as part of their CDD requirements. See, e.g., 
Third European Union Money Laundering Directive, 2005/60/EC, Article 
3(6) (Oct. 26, 2005).
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    Furthermore, additional discussions with the private sector 
reaffirmed FinCEN's view that a beneficial ownership requirement is 
best understood in the context of broader due diligence conducted on 
customers. Beneficial ownership information is only one component of a 
broader profile that is necessary for financial institutions to develop 
when assessing a particular customer's risk. Beneficial ownership 
information is a means of building a more comprehensive risk profile; 
it is not an end in and of itself. Thus, in addition to proposing a 
specific requirement for the collection of the beneficial ownership 
information, FinCEN is also proposing amendments to its AML program 
rules to specifically reference the two components of CDD that were not 
elsewhere explicitly included in its regulations, i.e., understanding 
the nature and purpose of an account and conducting ongoing monitoring.

III. Elements of the Proposed Rule

A. Overview

    As described briefly above, it is FinCEN's position that CDD 
consists, at a minimum, of four elements:
    [ssquf] Identifying and Verifying the Identity of Customers;
    [ssquf] Identifying and Verifying the Identity of Beneficial Owners 
of Legal Entity Customers;
    [ssquf] Understanding the Nature and Purpose of Customer 
Relationships; and
    [ssquf] Conducting Ongoing Monitoring to Maintain and Update 
Customer Information and to Identify and Report Suspicious 
Transactions.

Because the first element of CDD is already satisfied by existing CIP

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requirements,\22\ this NPRM proposes to address the remaining three 
elements of CDD.
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    \22\ See, e.g., 31 CFR 1010.220.
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Beneficial Ownership
    The second element of CDD requires financial institutions to 
identify and verify the beneficial owners of legal entity customers. In 
this NPRM, FinCEN proposes a new requirement that financial 
institutions identify the natural persons who are beneficial owners of 
legal entity customers, subject to certain exemptions. The definition 
of ``beneficial owner'' proposed herein requires that the person 
identified as a beneficial owner be a natural person (as opposed to 
another legal entity). A financial institution must satisfy this 
requirement by obtaining at the time a new account is opened a standard 
certification form (attached hereto as Appendix A) directly from the 
individual opening the new account on behalf of the legal entity 
customer.
    The term ``beneficial owner'' has been defined differently in 
different contexts. In the AML context, the Financial Action Task Force 
(FATF), the global standard setter for combating money laundering and 
the financing of terrorism and proliferation, defines the beneficial 
owner as ``the natural person(s) who ultimately owns or controls a 
customer and/or the person on whose behalf a transaction is being 
conducted. It also incorporates those persons who exercise ultimate 
effective control over a legal person or arrangement.'' That 
definition, initially adopted in 2003, has been retained in the revised 
FATF standards adopted in 2012.\23\ FinCEN has endeavored to capture 
both the concept of ownership and of effective control in its proposed 
definition.
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    \23\ ``International Standards on Combating Money Laundering and 
the Financing of Terrorism & Proliferation--The FATF 
Recommendations,'' February 2012, General Glossary, at 109, 
available at http://www.fatf-gafi.org/topics/fatfrecommendations/documents/internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation-thefatfrecommendations.html.
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    Financial institutions would be required to verify the identity of 
beneficial owners consistent with their existing CIP practices. 
However, FinCEN is not proposing to require that financial institutions 
verify that the natural persons identified on the form are in fact the 
beneficial owners. In other words, the requirement focuses on verifying 
the identity of the beneficial owners, but does not require the 
verification of their status as beneficial owners. This proposed 
requirement states minimum standards. As will be described in greater 
detail below, FinCEN believes that the beneficial ownership requirement 
is the only new requirement imposed by this rulemaking. As such, 
although beneficial ownership identification is but one of four 
requirements for a comprehensive CDD scheme, the proposed beneficial 
ownership rule is being proposed as a separate provision in FinCEN's 
regulations; other components of this rulemaking will be addressed via 
amendments to existing provisions, as described below.
Understanding the Nature and Purpose of Customer Relationships/
Monitoring for Suspicious Activity
    The NPRM also addresses the third and fourth elements of CDD by 
proposing amendments to the AML program rule that harmonize these 
elements of CDD with existing AML obligations. The third element of CDD 
requires financial institutions to understand the nature and purpose of 
customer relationships in order to develop a customer risk profile. 
This is a necessary and critical step in complying with the existing 
requirement to identify and report suspicious transactions as required 
under the BSA. The fourth element of CDD requires financial 
institutions to conduct ongoing monitoring. As with the third element, 
ongoing monitoring is a necessary part of maintaining and updating 
customer information and identifying and reporting suspicious 
transactions as required under the BSA.
    The third and fourth elements are consistent with, and in fact 
necessary in order to comply with, the existing requirement to report 
suspicious activity, as this obligation inherently requires a financial 
institution to understand expected customer activity in order to 
develop a customer risk profile and to monitor customer activity so 
that it can identify transactions that appear unusual or suspicious. As 
such, the third and fourth elements are intended to explicitly state 
already existing expectations for the purpose of codifying the baseline 
standard of due diligence that is fundamental to an effective AML 
program.
    Because these two elements are consistent with (and necessary in 
order to comply with) existing BSA requirements as adopted in 
regulations or rules issued by federal functional regulators and SROs, 
nothing in this proposed rule should be interpreted in a manner 
inconsistent with previous guidance issued by FinCEN or guidance, 
regulations, or supervisory expectations of the appropriate federal 
functional regulator or SRO with respect to these elements.\24\ For 
example, the Federal Financial Institutions Examination Council (FFIEC) 
\25\ provided supervisory expectations for examinations related to CDD 
in the FFIEC BSA/AML Examination Manual.\26\ FinCEN believes that, 
aside from the new beneficial ownership requirement, the other proposed 
CDD elements are consistent with the regulatory expectations of the 
federal functional regulators and should be interpreted 
accordingly.\27\ Of course, as the CDD requirements proposed herein 
state minimum standards, existing or future guidance, regulations or 
supervisory expectations may provide for additional requirements or 
steps that should be taken to mitigate risk.
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    \24\ While FinCEN reserves overall compliance and enforcement 
authority with respect to all regulations it issues under the under 
the BSA, FinCEN has, by regulation, delegated authority to the 
federal functional regulators to examine institutions under their 
jurisdiction for compliance with BSA regulations, including the AML 
program requirements. See 31 CFR 1010.810.
    \25\ The FFIEC is a formal interagency body empowered to 
prescribe uniform principles, standards, and report forms for the 
federal examination of financial institutions by 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, and the Consumer 
Financial Protection Bureau, and to make recommendations to promote 
uniformity in the supervision of financial institutions.
    \26\ The Bank Secrecy Act Anti-Money Laundering Examination 
Manual, issued by the Federal Financial Institutions Examination 
Council (as amended, the ``BSA/AML Manual'').
    \27\ The future status of previous guidance related to 
identifying beneficial owners of legal entity customers, such as the 
Joint Guidance on Obtaining and Retaining Beneficial Ownership 
Information, FIN-2010-G001 (March 5, 2010), will be addressed at the 
time of the issuance of a final rule.
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    The sections below further describe each of the three CDD elements 
addressed in this rulemaking in detail by providing a general overview 
of these elements as discussed in the ANPRM, a summary of the comments 
received, and FinCEN's specific proposal.

B. Identifying and Verifying the Identity of Beneficial Owners of Legal 
Entity Customers

    With respect to this element of CDD,\28\ the ANPRM explored a 
categorical requirement for financial institutions to identify the 
beneficial owners of legal entity customers. Unlike the other elements 
of CDD, this element would impose a new regulatory obligation on 
financial institutions. Currently, certain financial institutions are 
explicitly

[[Page 45157]]

required to take reasonable steps to identify beneficial owners in only 
two limited situations.\29\
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    \28\ For purposes of clarity, this NPRM references the elements 
of CDD in a different order than was used in the ANPRM; Identifying 
and Verifying the Identity of the Beneficial Owners of Legal Entity 
Customers is now listed before Understanding the Nature and Purpose 
of Customer Relationships.
    \29\ Under FinCEN regulations implementing Section 312 of the 
USA PATRIOT Act (Section 312), covered financial institutions that 
offer private banking accounts are required to take reasonable steps 
to identify the nominal and beneficial owners of such accounts, 31 
CFR 1010.620(b)(1), and 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, 31 
CFR 1010.610(b)(1)(iii)(A).
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i. Summary of Comments
1. Private Sector Comments
    While a number of private sector comments offered general support 
for a reasonable expansion of the beneficial ownership requirement and 
noted that many financial institutions already identify beneficial 
owners in certain circumstances beyond those explicitly required under 
the regulations implementing Section 312 of the PATRIOT Act, most 
expressed the following primary criticisms and concerns:
     The burden and costs associated with a categorical (versus 
a risk-based) obligation to collect beneficial ownership information 
may outweigh the benefits;
     An express beneficial ownership requirement should be (at 
least in part) risk-based to account for the wide variety of financial 
institutions, account types, products, and customers that comprise the 
financial system, and to avoid requiring financial institutions to 
misallocate scarce compliance resources away from high-risk customers;
     A categorical requirement should include exemptions, 
including for those customers currently exempt from customer 
identification requirements;
     Any definition of ``beneficial owner'' should be practical 
and easily understood by financial institution employees and customers;
     Financial institutions may be unable to verify the status 
of a beneficial owner absent an independent source of beneficial 
ownership information, such as a state registry; and
     FinCEN should consider the compliance challenges 
associated with specific account and relationship types, such as 
intermediated relationships and trusts.
2. Law Enforcement Comments
    Most of the comment letters submitted by law enforcement agencies 
and non-governmental organizations also focused on the beneficial 
ownership element of the CDD rule. In general, these letters 
highlighted the following benefits that such an obligation would 
provide:
     A beneficial ownership rule would require financial 
institutions to retain more useful customer information, which would 
significantly improve law enforcement's ability to pursue new leads 
with respect to legal entities under investigation;
     Beneficial ownership information would improve financial 
institutions' monitoring capabilities, and put them in a position to 
file higher quality SARs; and
     Obtaining beneficial ownership information for U.S. legal 
entities would enhance the United States' ability to respond to a 
foreign jurisdiction's request for investigative assistance. This would 
assist in efforts to join with foreign counterparts in global efforts 
to disrupt organized crime and terrorism.
ii. Key Issues and FinCEN Proposals
    As described above, Treasury has engaged in extensive outreach with 
the private sector and law enforcement agencies to better understand 
and address these issues. Such discussions were essential in further 
developing the initial proposals set forth in the ANPRM to better 
conform with existing practices and more comprehensively account for 
regulatory burden and sector-specific complexities. Key issues raised 
during the comment period included: The definition of ``beneficial 
owner'' and ``legal entity customer''; exemptions and exclusions from 
the definition; application of the requirement to trusts, intermediated 
account relationships and pooled investment vehicles; verification of 
beneficial owners through a standard certification; updating beneficial 
ownership information; and reliance on other financial institutions to 
satisfy the requirement. Each of these issues is described in further 
detail below.
1. Definition of ``Beneficial Owner''
    The ANPRM explored a definition of ``beneficial owner'' with two 
independent components, referred to as ``prongs.'' \30\ The first prong 
was an ownership prong, the purpose of which is to identify individuals 
with substantial equity ownership interests. The second prong was a 
control prong, the purpose of which was to identify individuals with 
actual managerial control.
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    \30\ The ANPRM suggested the following definition of 
``beneficial owner'': (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.
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    Many private sector commenters stated that the definition discussed 
in the ANPRM was conceptually confusing and unworkable in practice. For 
example, some commenters questioned the feasibility of engaging in a 
comparative analysis of every owner for purposes of determining who 
``has at least as great an equity interest in the entity as any other 
individual.'' A similar type of comparative analysis existed with 
respect to the control prong. Other commenters were uncertain as to 
whether an individual must satisfy both the ownership prong and the 
control prong to be considered a beneficial owner, or whether each 
prong was intended to be independently applied to identify separate 
individuals. Other challenges identified in the comments included, 
among other things: (i) Shifting ownership percentages; (ii) managerial 
changes; and (iii) the ability of financial institution personnel and 
customers to understand and respond to the definition.
    FinCEN agrees that the definition of ``beneficial owner'' must be 
clear to employees and customers of financial institutions. To that 
end, and in light of the comments received, FinCEN proposes the 
following definition of ``beneficial owner'' of a legal entity 
customer, which, again, includes an ownership prong and a control 
prong:

Ownership Prong:

    1. Each individual, if any, who, directly or indirectly, through 
any contract, arrangement, understanding, relationship or otherwise, 
owns 25 percent or more of the equity interests of a legal entity 
customer; and

Control Prong:

    2. An individual with significant responsibility to control, 
manage, or direct a legal entity customer, including
    (A) An executive officer or senior manager (e.g., a Chief Executive 
Officer, Chief Financial Officer, Chief Operating Officer, Managing 
Member, General Partner, President, Vice President, or Treasurer); or
    (B) Any other individual who regularly performs similar functions.

Each prong is intended to be an independent test. Under the ownership

[[Page 45158]]

prong (i.e., clause (1)), a financial institution must identify each 
individual who owns 25 percent or more of the equity interests. 
Accordingly, a financial institution would be required to identify no 
more than four individuals under this prong, and, if no one individual 
owns 25 percent or more of the equity interests, then the financial 
institution may identify no individuals under the ownership prong. 
Under the control prong (clause (2)), a financial institution must 
identify one individual. In cases where an individual is both a 25 
percent owner and meets the definition for control, that same 
individual could be identified as a beneficial owner under both prongs.

    FinCEN believes this definition provides clarity and effectiveness. 
In contrast to the definition suggested in the ANPRM, this definition 
provides greater flexibility to financial institutions and customers in 
responding to the control prong of the definition by permitting the 
identification in clause (ii) of any individual with significant 
managerial control, which could include a President, Chief Executive 
Officer or other senior executive, or any other individual acting in a 
similar capacity. Moreover, this definition does not require a 
financial institution to comparatively assess individuals to determine 
who has the greatest equity stake in the legal entity. The 25 percent 
equity ownership threshold set forth in the ownership prong of the 
definition sets a clear standard that can be broadly applied. At the 
same time, the 25 percent threshold retains the benefits of identifying 
key individuals with a substantial ownership interest in the legal 
entity.
    Commenters expressed concern that identifying beneficial owners 
under the ownership prong would be difficult for legal entity customers 
that have complex legal ownership structures. FinCEN acknowledges that 
identifying the individuals who own, directly or indirectly, 25 percent 
or more of the equity interests of a legal entity may not be 
straightforward in every circumstance. For instances where legal 
entities are held by other legal entities, determining ownership may 
require several intermediate analytical steps. FinCEN's expectation is 
that a financial institution will identify the natural person or 
persons who exercise control of a legal entity customer through a 25% 
or greater ownership interest, regardless of how many corporate parents 
or holding companies removed the natural person is from the legal 
entity customer. Consequently, the term ``equity interests'' should be 
interpreted broadly to apply to a variety of different legal structures 
and ownership situations. In short, ``equity interests'' refers to an 
ownership interest in a business entity. Examples of ``equity 
interests'' include shares or stock in a corporation, membership 
interests in a limited liability company, and other similar ownership 
interests in a legal entity. FinCEN has deliberately avoided use of 
more specific terms of art associated with the exercise of control 
through ownership, based on the preferences expressed by many members 
of industry, who have urged FinCEN to avoid creating a definition with 
complex legal terms that front-line employees at financial 
institutions, and the individuals opening accounts on behalf of legal 
entity customers, might have difficulty understanding and applying.
    Moreover, the phrase ``directly or indirectly'' in the ownership 
prong of the definition is intended to make clear that where a legal 
entity customer is owned by (or controlled through) one or more other 
legal entities, the proposed rule requires customers to look through 
those other legal entities to determine which natural persons own 25 
percent or more of the equity interests of the legal entity customer. 
FinCEN recognizes that identifying such individuals may be challenging 
where the legal entity customer has a complex legal structure with 
multiple levels of ownership, but FinCEN does not expect financial 
institutions--or customers--to undergo complex and exhaustive analysis 
to determine with legal certainty whether an individual is a beneficial 
owner under the definition. Instead, FinCEN expects financial 
institutions to be able to rely generally on the representations of the 
customer when answering the financial institution's questions about the 
individual persons behind the legal entity, including whether someone 
identified as a beneficial owner is in fact a beneficial owner under 
this definition. FinCEN believes that this approach provides greater 
flexibility to financial institutions and customers in complying with 
the proposed beneficial ownership requirement. In addition, by using 
the term ``directly or indirectly,'' FinCEN does not intend for 
financial institutions to assess under this prong whether individuals 
are acting in concert with one another to collectively own 25 percent 
of more of the legal entity where each of them has an independent 
contributing stake; FinCEN is concerned, however, with the use of de 
facto or de jure nominees to give a single individual an effective 
ownership stake of 25 percent or more. In this instance as well, 
however, FinCEN expects financial institutions to be able to rely 
generally on the representations of the customer when answering the 
financial institution's questions about the individual persons behind 
the legal entity.
    FinCEN has learned through its outreach that some financial 
institutions may already identify beneficial owners using a lower 
ownership threshold, such as 10 percent. FinCEN reiterates that the 
proposed CDD requirements, including the beneficial ownership 
requirement, are intended to set forth minimum due diligence 
expectations. Accordingly, a financial institution may determine, based 
on its own assessment of risk, that a lower percentage threshold, such 
as 10 percent, is warranted. A financial institution may also identify 
other individuals that technically fall outside the proposed definition 
of ``beneficial owner,'' but may be relevant to mitigate risk. For 
example, as noted above, a financial institution may be aware of a 
situation in which multiple individuals with independent holdings may 
act in concert with each other to structure their ownership interest to 
avoid the 25 percent threshold. A financial institution may also be 
aware of an individual who effectively controls a legal entity customer 
through a substantial debt position. While these individuals do not 
fall within the proposed definition of ``beneficial owner,'' the 
proposed rule is not intended to preclude a financial institution from 
identifying them, and verifying their identity, when it deems it 
appropriate to do so.
    Commenters also sought clarity as to how this beneficial ownership 
requirement would affect the application of FinCEN regulations 
implementing Section 312 of the USA PATRIOT Act. The proposed 
requirement would apply to all legal entity customers, including legal 
entities that open a foreign private banking account that meets the 
definition in Sec.  1010.605(m). However, the new requirements would 
not apply to the beneficial owner of funds or assets in a payable-
through account of the type described in Sec.  1010.610(b)(1)(iii), 
since the owner of such funds or assets does not have an account 
relationship with the covered financial institution. In such instances, 
compliance with the information requirements included in Sec.  
1010.610(b)(1)(iii) will suffice, and the particulars of this new 
requirement,

[[Page 45159]]

such as use of a certification form with respect to the beneficial 
owner of funds or assets in a payable-through account, would not apply.
2. Definition of Legal Entity Customer
    While the ANPRM sought comment on whether certain legal entity 
customers should be exempt from the beneficial ownership requirement, 
it did not include a discussion of the scope of the definition of legal 
entity customer, which is also relevant to the notion of the 
exemptions. FinCEN proposes to define legal entity customers to include 
corporations, limited liability companies, partnerships or other 
similar business entities (whether formed under the laws of a state or 
of the United States or a foreign jurisdiction), that open a new 
account after the implementing date of the regulation. FinCEN would 
interpret this to include all entities that are formed by a filing with 
the Secretary of State (or similar office), as well as general 
partnerships and unincorporated nonprofit associations. It does not 
include trusts other than those that might be created through a filing 
with a state (e.g., statutory business trusts).
3. Exemptions and Exclusion From the Beneficial Ownership Requirement
    Many commenters strongly recommended that, at a minimum, any 
customer exempt from identification under the CIP rules should also be 
exempt from the beneficial ownership requirement. The commenters noted 
that a contrary approach would effectively nullify the CIP exemption 
since a financial institution would be unable to identify a beneficial 
owner without first identifying the customer. Many commenters 
recommended that other customers should also be exempt if they are 
well-regulated or otherwise present a low money laundering risk. The 
proposed rule incorporates a number of these suggestions by exempting 
all types of entities that are exempt from CIP, as well as allowing for 
other specific exemptions.
a. Customers Exempt From CIP
    FinCEN proposes to exempt from the beneficial ownership requirement 
those types of entities that are exempt from the customer 
identification requirements under the CIP rules.\31\ Those types of 
entities include, but are not limited to, financial institutions 
regulated by a federal functional regulator (i.e., federally regulated 
banks, brokers or dealers in securities, mutual funds, futures 
commission merchants and introducing brokers in commodities), publicly 
held companies traded on certain U.S. stock exchanges, domestic 
government agencies and instrumentalities and certain legal entities 
that exercise governmental authority.\32\ These exemptions are 
incorporated into the proposed beneficial ownership requirement by 
excluding these entities from the definition of ``legal entity 
customer,'' which corresponds to how these entities are exempted from 
CIP (i.e., by excluding them from the definition of ``customer'').\33\ 
Consequently, 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, including exclusions based on guidance issued by FinCEN and the 
federal functional regulators with regard to the applicability of the 
CIP rules. For example, where previous guidance has clarified who a 
``customer'' is in a particular relationship, that same analysis would 
generally apply in determining whether an entity is a ``legal entity 
customer'' for purposes of the proposed beneficial ownership 
requirement.\34\
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    \31\ Although we propose to include the types of entities 
exempted from the CIP requirements, the exemption proposed for this 
rule would not cover all the entities included in the exemption from 
the CIP requirements. This is because FinCEN does not propose to 
include an exemption for legal entities with existing accounts that 
open new accounts after the implementation date of the rule. The 
inclusion of such an exemption would parallel the exemption in the 
CIP requirements per the definition of ``customer.'' See, e.g. 31 
CFR 1020.100(c)(2)(iii) and 1023.100(d)(2)(iii). However, FinCEN 
believes that such an approach would not serve the purposes of the 
present rule. In situations where a legal entity is opening an 
account in addition to a previously existing account, the new 
requirement will apply. If the pre-existing account pre-dates the 
implementation date of the rule, the financial institution will need 
to obtain the certification form. If the pre-existing account was 
established after the implementation date, it may be reasonable for 
a financial institution to rely on the certification obtained when 
opening the first account in some circumstances. In other 
circumstances, collection of an additional certificate may be 
necessary. The likelihood of change in beneficial ownership since 
the time of the previous account opening would be a key factor in a 
financial institution's approach to the requirement.
    \32\ See, e.g., 31 CFR 1020.100(c)(2)(i).
    \33\ See, e.g., 31 CFR 1020.100(c)(2)(ii).
    \34\ See, e.g., FinCEN Guidance, FIN-2007-G001, Application of 
the Customer Identification Program Rule to Futures Commission 
Merchants Operating as Executing and Clearing Brokers in Give-Up 
Arrangements (April 20, 2007), available at http://www.fincen.gov/statutes_regs/guidance/html/cftc_fincen_guidance.html; FinCEN 
Guidance, FIN-2006-G004, Frequently Asked Question Regarding 
Customer Identification Programs for Futures Commission Merchants 
and Introducing Brokers (31 CFR 103.123 (February 14, 2006)), 
available at http://www.fincen.gov/statutes_regs/guidance/html/futures_omnibus_account_qa_final.html; Interagency Interpretive 
Guidance on Customer Identification Program Requirements under 
Section 326 of the USA PATRIOT Act at Question 9 (April 28, 2005), 
available at http://www.fincen.gov/statutes_regs/guidance/html/faqsfinalciprule.html; Guidance from the Staffs of the Department of 
the Treasury and the U.S. Securities and Exchange Commission, 
Question and Answer Regarding the Broker-Dealer Customer 
Identification Program Rule (31 CFR 103.122) (October 1, 2003), 
available at http://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
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b. Additional Exemptions for Certain Legal Entity Customers
    In addition to incorporating exemptions applicable to the CIP 
rules, and consistent with various suggestions provided in the comment 
letters, FinCEN proposes that the following entities also be exempt 
from the beneficial ownership requirement when opening a new account 
because their beneficial ownership information is generally available 
from other credible sources:
     An issuer of a class of securities registered under 
Section 12 of the Securities Exchange Act of 1934 or that is required 
to file reports under Section 15(d) of that Act;
     Any majority-owned domestic subsidiary of any entity whose 
securities are listed on a U.S. stock exchange;
     An investment company, as defined in Section 3 of the 
Investment Company Act of 1940, that is registered with the SEC under 
that Act;
     An investment adviser, as defined in Section 202(a)(11) of 
the Investment Advisers Act of 1940, that is registered with the SEC 
under that Act;
     An exchange or clearing agency, as defined in Section 3 of 
the Securities Exchange Act of 1934, that is registered under Section 6 
or 17A of that Act;
     Any other entity registered with the Securities and 
Exchange Commission under the Securities and Exchange Act of 1934.
     A registered entity, commodity pool operator, commodity 
trading advisor, retail foreign exchange dealer, swap dealer, or major 
swap participant, each as defined in section 1a of the Commodity 
Exchange Act, that is registered with the CFTC;
     A public accounting firm registered under section 102 of 
the Sarbanes-Oxley Act; and
     A charity or nonprofit entity that is described in 
Sections 501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 
1986, that has not been denied tax exempt status, and that is required 
to and has filed the most recently required annual information return 
with the Internal Revenue Service.
    FinCEN notes that exempting these entities from the beneficial 
ownership

[[Page 45160]]

requirement does not necessarily imply that they all present a low risk 
of money laundering or terrorist financing. For example, a charity may 
present a high risk of terrorist financing and therefore require 
additional due diligence. However, charities are exempt because the 
legal structure of a charity as a tax exempt organization does not 
create a beneficial ownership interest in the sense discussed above. 
Rather the primary interests created by a charitable structure include 
donors, board oversight and management, employees, and beneficiaries. 
Under such a structure, board oversight is akin to ownership, and 
management is akin to control. In order to obtain and maintain such a 
legal structure under the tax code the charity must report and annually 
update its donors, board and management to the Internal Revenue 
Service. Such reports must be publicly available.\35\
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    \35\ See Public Disclosure and Availability of Exempt 
Organizations Returns and Applications: Documents Subject to Public 
Disclosure, available at http://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosure.
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c. Existing and New Customers
    FinCEN also sought comment on whether and how a beneficial 
ownership requirement should apply to customers of financial 
institutions where such relationships have been established prior to 
the implementation date of this rule. Financial institutions noted that 
a requirement to ``look back'' to obtain beneficial ownership 
information from existing customers would be a substantial burden. 
FinCEN proposes that the beneficial ownership requirement will apply 
only with respect to legal entity customers that open new accounts 
going forward from the date of implementation. Thus, the definition of 
``legal entity customer'' is limited to legal entities that open a new 
account after the implementation date. Although FinCEN is not proposing 
a prescriptive rule requiring financial institutions to look back and 
obtain beneficial ownership information for pre-existing accounts, we 
are aware that, as a matter of practice, financial institutions may 
also consider identifying beneficial owners of existing customers when 
updating customer information on a risk basis, as discussed more fully 
below.\36\
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    \36\ See the discussion in Section III.d of this notice, 
entitled ``Ongoing Monitoring.''
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4. Trusts
    Several comments described potential challenges in applying a 
beneficial ownership requirement to a customer that is a trust. There 
are many types of trusts. While a small proportion may fall within the 
scope of the proposed definition of legal entity customer (e.g., 
statutory trusts), most will not. Unlike the legal entity customers 
that are subject to the proposed beneficial ownership requirement 
(corporations, limited liability companies, etc.), a trust is generally 
a contractual arrangement between the person who provides the funds and 
specifies the trust terms (i.e., the settlor or grantor) and the person 
with control over the funds (i.e., the trustee) for the benefit of 
those who benefit from the trust (i.e., the beneficiaries). This 
arrangement does not generally require the approval by or other action 
of a state to become effective. FinCEN notes that in order to engage in 
the business of acting as a fiduciary it is necessary for a trust 
company to be federally- or state-chartered. As the comments noted, 
identifying a ``beneficial owner'' among the parties to such an 
arrangement for AML purposes, based on the proposed definition of 
beneficial owner, would not be practical. At this point, FinCEN is 
choosing not to impose this requirement. In this context we note that, 
although the trust is defined in the CIP rules as the financial 
institution's customer, the signatory on the account will necessarily 
be the trustee, who is required by law to control the trust assets 
(including financial institution accounts) and to know the 
beneficiaries (by name or class) and act in their best interest. 
Therefore, in the context of an investigation, law enforcement would be 
able to obtain from the financial institution a point of contact 
required by law to have information about relevant individuals 
associated with the trust.
    The decision not to propose specific requirements in the context of 
trusts does not mean, however, that FinCEN necessarily considers trusts 
to pose a reduced money laundering or terrorist financing risk relative 
to the business entities included within the definition of ``legal 
entity customer.'' Through its outreach, FinCEN learned that, in 
addition to identifying and verifying the identity of the trust for 
purposes of CIP, financial institutions generally also identify and 
verify the identity of the trustee, who would necessarily have to open 
the account for the trust. In addition, guidance for banks provides 
that ``in certain circumstances involving revocable trusts, the bank 
may need to gather information about the settlor, grantor, trustee, or 
other persons with the authority to direct the trustee, and who thus 
have authority or control over the account, in order to establish the 
true identity of the customer.'' \37\ In other words, given the variety 
of possible trust arrangements and the number of persons who may have 
roles in them, financial institutions are already taking a risk-based 
approach to collecting information with respect to various persons for 
the purpose of knowing their customer. FinCEN expects financial 
institutions to continue these practices as part of their overall 
efforts to safeguard against money laundering and terrorist financing, 
and will consider additional rulemaking or guidance to strengthen or 
clarify this expectation.
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    \37\ FFIEC BSA Exam/AML Manual at 286-87.
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5. Intermediated Account Relationships and Pooled Investment Vehicles
    The ANPRM sought comment on whether and how a beneficial ownership 
requirement should be applied to accounts held by intermediaries on 
behalf of third parties. An intermediary generally refers to a customer 
that maintains an account for the primary benefit of others, such as 
the intermediary's own underlying clients. For example, certain 
correspondent banking relationships may involve intermediation whereby 
the respondent bank of a correspondent bank acts on behalf of its own 
clients. Intermediation is also very common in the securities and 
derivatives industries. For example, a broker-dealer may establish 
omnibus accounts for a financial intermediary (such as an investment 
adviser) that, in turn, establishes sub-accounts for the intermediary's 
clients, whose information may or may not be disclosed to the broker-
dealer. An issue raised in the comments, especially those from the 
securities and derivatives industries, is whether a financial 
institution would be required to identify the intermediary's own 
underlying clients or their beneficial owners. This issue is distinct 
from whether a financial institution must identify the beneficial 
owners of the intermediary (i.e., the direct customer), which would be 
the case unless the intermediary is exempt under one of the specific 
exemptions described above.
    Commenters cautioned that a requirement to identify an 
intermediary's underlying clients or their beneficial owners could have 
significant detrimental consequences to the efficiency of the U.S. 
financial markets, because it would require financial institutions to 
modify longstanding practices. They suggested that, consistent with 
existing CIP

[[Page 45161]]

guidance related to certain intermediated relationships, a beneficial 
ownership requirement should apply only with respect to a financial 
institution's immediate customer, the intermediary, and not the 
intermediary's underlying clients.
    FinCEN is concerned about the illicit finance risks posed by 
underlying clients of intermediary customers because of the lack of 
insight a financial institution has into those clients and their 
activities. However, FinCEN recognizes that this risk may be more 
effectively managed through other means. These would include proper 
customer due diligence conducted by financial institutions on their 
direct customers who serve as intermediaries, and appropriate 
regulation of the intermediaries themselves.\38\ Therefore, for 
purposes of the beneficial ownership requirement, if an intermediary is 
the customer, and the financial institution has no CIP obligation with 
respect to the intermediary's underlying clients pursuant to existing 
guidance, a financial institution should treat the intermediary, and 
not the intermediary's underlying clients, as its legal entity 
customer.
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    \38\ FinCEN recognizes that some such intermediary entities are 
already subject to BSA requirements, while others or not. FinCEN 
continues to consider which additional entities may need to be 
brought within the scope of the FinCEN's regulations.
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    Existing FinCEN guidance related to CIP practices is applicable in 
determining a financial institution's beneficial ownership obligations 
in these circumstances. For example, a broker-dealer that appropriately 
maintains an omnibus account for an intermediary, under the conditions 
set forth in the 2003 Omnibus Guidance for Broker-Dealers,\39\ may 
treat the intermediary, and not the underlying clients, as its legal 
entity customer for purposes of the beneficial ownership 
requirement.\40\ Pursuant to a clearing agreement that allocates 
functions in the manner described in the 2008 No-Action Position 
Respecting Broker-Dealers Operating Under Fully Disclosed Clearing 
Agreements According to Certain Functional Allocations,\41\ only the 
introducing firm would be obligated to obtain beneficial ownership 
information of the customers introduced to the clearing firm. 
Similarly, based on guidance issued to the futures industry in the 
context of give-up arrangements, because the clearing broker, and not 
the executing broker, has a formal relationship with its customer, only 
the clearing broker would be responsible for obtaining beneficial 
ownership information regarding the underlying customer.\42\
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    \39\ Guidance from the Staffs of the Department of the Treasury 
and the U.S. Securities and Exchange Commission, Question and Answer 
Regarding the Broker-Dealer Customer Identification Program Rule (31 
CFR 103.122) (October 1, 2003), available at http://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
    \40\ See also Guidance from the Staffs of the Department of the 
Treasury and the U.S. Commodity Futures Trading Commission, 
Frequently Asked Question regarding Customer Identification Programs 
for Futures Commission Merchants and Introducing Brokers (31 CFR 
103.123), available at http://www.fincen.gov/statutes_regs/guidance/html/futures_omnibus_account_qa_final.html; FinCEN 
Guidance, FIN-2006-G009, Application of the Regulations Requiring 
Special Due Diligence Programs for Certain Foreign Accounts to the 
Securities and Futures Industries (May 10, 2006), available at 
http://www.fincen.gov/statutes_regs/guidance/html/312securities_futures_guidance.html. FinCEN also notes that in such 
circumstances, the intermediary itself may be exempt from the 
beneficial ownership requirement if it satisfies one of the specific 
exemptions.
    \41\ FinCEN Guidance, FIN-2008-G002, Customer Identification 
Program Rule No-Action Position Respecting Broker-Dealers Operating 
Under Fully Disclosed Clearing Agreements According to Certain 
Functional Allocations (March 4, 2008), available at http://www.fincen.gov/statutes_regs/guidance/html/fin-2008-g002.html.
    \42\ FinCEN Guidance, FIN-2007-G001, Application of the Customer 
Identification Program Rule to Future Commission Merchants Operating 
as Executing and Clearing Brokers in Give-Up Arrangements (April 20, 
2007), available at http://www.fincen.gov/statutes_regs/guidance/html/cftc_fincen_guidance.html.
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    Notwithstanding the foregoing, consistent with other elements of 
CDD, a financial institution's AML program should contain risk-based 
policies, procedures, and controls for assessing the money laundering 
risk posed by underlying clients of a financial intermediary, for 
monitoring and mitigating that risk, and for detecting and reporting 
suspicious activity. While a financial intermediary's underlying 
clients may not be subject to the beneficial ownership requirement, a 
financial institution would nonetheless be obligated to monitor for and 
report suspicious activity associated with intermediated accounts, 
including activity related to underlying clients. FinCEN understands 
that this is consistent with current industry practice. As multiple 
comments noted, securities and derivatives firms generally monitor 
activity in intermediated accounts and follow up on an event-driven 
basis, with such follow-up potentially including asking questions about 
the underlying owners of assets after detection of possible suspicious 
activity.\43\ Such practice is also consistent with the third and 
fourth elements of the CDD requirements described below. FinCEN thus 
expects financial institutions to continue engaging in this practice.
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    \43\ See, e.g., letter from SIFMA dated June 8, 2012 at 7, 
available at http://www.sifma.org/issues/item.aspx?id=8589938990.
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    Several comments, particularly from the securities and futures 
industries, also highlighted the potential challenges associated with 
identifying beneficial owners of non-exempt pooled investment vehicles, 
such as hedge funds, whose ownership structure may continuously 
fluctuate.\44\ The comments noted that identifying beneficial owners of 
these entities based on a percentage ownership threshold may create 
unreasonable operational challenges for the purpose of obtaining 
information that may only be accurate for a limited period of time.
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    \44\ For purposes of this discussion, a ``non-exempt pooled 
investment vehicle'' means (i) any company that would be an 
investment company as defined in Section 3(a) of the Investment 
Company Act of 1940, but for the exclusion provided by either 
Section 3(c)(1) or Section 3(c)(7) of that Act; or (ii) any 
commodity pool under section 1a(10) of the Commodity Exchange Act 
(CEA) that is operated by a commodity pool operator registered with 
the CFTC under Section 4m of the CEA.
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    FinCEN is considering whether nonexempt pooled investment vehicles 
that are operated or advised by financial institutions that are 
proposed to be exempt, should also be exempt from this requirement. 
Additionally, in the event that such institutions are not exempt, 
FinCEN is considering whether covered financial institutions should 
only be required to identify beneficial owners of such non-exempt 
pooled investment vehicles \45\ under the control prong of the 
``beneficial owner'' definition, as opposed to both the ownership prong 
and control prong, in order to alleviate the operational and logistical 
difficulties that would be associated with complying with the ownership 
prong. FinCEN is also considering whether such an approach, if adopted, 
may best be addressed through inclusion of such vehicles within the 
scope of the rule with subsequent guidance or a specific exemption or 
exception from the application of the ownership prong of the 
requirement. FinCEN believes this

[[Page 45162]]

approach may sufficiently balance benefit with burden given the unique 
ownership structure of pooled investment vehicles.
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    \45\ See, e.g., Securities Industry and Financial Markets 
Association (SIFMA) Anti-Money Laundering and Financial Crimes 
Committee, Anti-Money Laundering Suggested Due Diligence Practices 
for Hedge Funds (2009), available at http://www.sifma.org/uploadedfiles/issues/legal,_compliance_and_administration/anti-money_laundering_compliance/issues_anti-money%20laundering_suggested%20due%20diligence%20practices%20for%20hedge%20funds.pdf; 
Securities Industry Association Anti-Money Laundering Committee, 
Suggested Practices for Customer Identification Programs, Sec.  3.9, 
available at http://www.sifma.org/uploadedfiles/issues/legal,_compliance_and_administration/anti-money_laundering_compliance/issues_anti-money%20laundering_suggested%20practices%20for%20customer%20identification%20programs.pdf.
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6. Verification of Beneficial Owners
a. Standard Certification Form
    At the public hearings, participants discussed the efficacy of 
having a certification form that would standardize collection of 
beneficial ownership information and permit reliance on the information 
provided. FinCEN believes that providing such a form would promote 
consistent practices and regulatory expectations, significantly reduce 
compliance burden, and preserve the benefits of obtaining the 
information. A standard form would also promote a uniform customer 
experience across U.S. financial sectors. This was of particular 
concern to representatives from financial institutions with practices 
that exceed existing regulatory requirements, which noted that they 
often lose customers to institutions with less rigorous standards.
    Accordingly, FinCEN proposes that a financial institution must 
satisfy the requirement to identify beneficial owners by obtaining, at 
the time a new account is opened, the standard certification form 
attached hereto as Appendix A. To promote consistent customer 
expectations and understanding, the form in Appendix A plainly 
describes the beneficial ownership requirement and the information 
sought from the individual opening the account on behalf of the legal 
entity customer. To facilitate reliance by financial institutions, the 
form also requires the individual opening the account on behalf of the 
legal entity customer to certify that the information provided on the 
form is true and accurate to the best of his or her knowledge. This 
certification is also helpful for law enforcement purposes in 
demonstrating unlawful intent in the event the individual completing 
the form knowingly provides false information.
b. Verification of Beneficial Owners
    The ANPRM sought comment on whether and how financial institutions 
could verify beneficial ownership information provided by customers. As 
described in the ANPRM, verification could have two meanings. One 
meaning would require verifying the identity of an individual 
identified as a beneficial owner (i.e., to verify the existence of the 
identified beneficial owner by collecting, for example, a driver's 
license or other similar identification document). The second possible 
meaning would require financial institutions to verify that an 
individual identified as a beneficial owner is in fact a beneficial 
owner (i.e., to verify the status of an individual as a beneficial 
owner).
    Many comments cautioned that a requirement to verify the status of 
a beneficial owner would be prohibitively costly and impracticable in 
many circumstances. They recommended that financial institutions be 
permitted to rely on information provided by the customer. With respect 
to verifying the identity of a beneficial owner, participants at the 
public hearings generally acknowledged that this would be a manageable 
task so long as the verification procedures are comparable to current 
CIP requirements. Many participants further agreed that verification of 
identity would substantially improve the credibility of the beneficial 
ownership information collected. In addition, law enforcement has 
indicated that verification of identity would also facilitate 
investigations, even if the verified individual is not the true 
beneficial owner because of the ability to locate and investigate that 
person.
    In light of these considerations, FinCEN is not proposing to 
require that financial institutions verify the status of a beneficial 
owner. Financial institutions may rely on the beneficial ownership 
information provided by the customer on the standard certification 
form. FinCEN believes this addresses a key concern raised by the 
private sector about the burden and costs associated with a beneficial 
ownership requirement.
    For verifying the identity of a beneficial owner, FinCEN proposes 
that financial institutions verify the identity using existing risk-
based CIP practices. As such, the proposed rule provides that a 
financial institution must implement risk-based procedures to verify 
the identity of each beneficial owner according to procedures that 
comply with the CIP requirements to verify the identity of customers 
that are natural persons. Therefore, a financial institution may verify 
the identity of a beneficial owner using documentary or non-documentary 
methods, as it deems appropriate under its procedures for verifying the 
identity of customers that are natural persons. These procedures should 
enable the financial institution to form a reasonable belief that it 
knows the true identity of the beneficial owner of each legal entity 
customer. A financial institution must also include procedures for 
responding to circumstances in which it cannot form a reasonable belief 
that it knows the true identity of the beneficial owner, as described 
under the CIP rules. Because these practices are already well-
established and understood at covered financial institutions, FinCEN 
expects that these institutions will leverage existing compliance 
procedures.
7. Updating Beneficial Ownership Information
    Many financial institutions sought clarity as to whether they would 
be required to update or refresh periodically the beneficial ownership 
information obtained under this rule. FinCEN is not proposing such a 
requirement but notes that, as a general matter, a financial 
institution should keep CDD information, including beneficial ownership 
information, as current as possible and update as appropriate on a 
risk-basis. For example, a financial institution may determine that 
updating beneficial ownership information is appropriate after a 
customer has been identified as engaging in suspicious activity or 
exhibits other red flags, which FinCEN believes is generally consistent 
with existing practice for updating other customer information.
    Factors that may be relevant in considering whether and when to 
update beneficial ownership information could include the type of 
business engaged in by the legal entity customer, changes in business 
operations or management of which the financial institution becomes 
aware, indications of possible misuse of a shell company in the account 
history, or changes in address or signatories on the account. As some 
financial institutions currently update CIP information at periodic 
intervals based on risk or when updating other customer information as 
part of routine account maintenance, financial institutions may 
consider updating beneficial ownership information on a similar basis. 
Each financial institution's policies and procedures should be based on 
its assessment of risk and tailored to, among other things, its 
customer base and products and services offered. In addition, financial 
institutions should update beneficial ownership information in 
connection with ongoing monitoring, as described below in the Section 
III.d ``Ongoing Monitoring.''
8. Reliance
    Some comments requested that FinCEN extend the reliance provisions 
in the CIP rules to the beneficial ownership requirement. In general, a 
financial institution may rely upon another financial institution to 
conduct

[[Page 45163]]

CIP with respect to shared customers, provided that: (i) Such reliance 
is reasonable; (ii) the other financial institution is subject to an 
AML program rule and is regulated by a federal functional regulator, 
and (iii) the other financial institution enters into a contract and 
provides annual certifications regarding its AML program and CIP 
requirements.\46\ Similarly, FinCEN proposes to permit such reliance 
for purposes of complying with the beneficial ownership requirement, 
including obtaining the certification form required under the proposed 
rule. Existing guidance with respect to whether a financial institution 
can rely on another financial institution to conduct CIP with respect 
to shared customers also would apply for the purposes of complying with 
the beneficial ownership requirement.\47\ As was the case with the CIP 
rules, a covered financial institution will not be held responsible for 
the failure of the relied-upon financial institution to adequately 
fulfill the covered financial institution's beneficial ownership 
responsibilities, provided it can establish that its reliance was 
reasonable and that it has obtained the requisite contracts and 
certifications.
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    \46\ See, e.g., 31 CFR 1020.220(a)(6).
    \47\ See, e.g., CFTC letter No. 05-05 (March 14, 2005) (FCMs and 
IBs are permitted to rely on CTAs to conduct CIP in certain 
circumstances).
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C. Understanding the Nature and Purpose of Customer Relationships

    The third element of CDD requires financial institutions to 
understand the nature and purpose of customer relationships in order to 
develop a customer risk profile.\48\ Many comments questioned whether 
such information is helpful for detecting suspicious activity, and 
expressed concern that financial institutions would be required to 
demonstrate compliance by formalizing this element in their policies 
and procedures. They suggest that it should not become a required 
question that must be asked of each customer during the account opening 
process, so long as it is understood by the financial institution.
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    \48\ The ANPRM characterized this third element as 
``understand[ing] the nature and purpose of the account and expected 
activity associated with the account for the purpose of assessing 
the risk and identifying and reporting suspicious activity.'' 77 FR 
13050.
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    FinCEN understands that it is industry practice to gain an 
understanding of a customer in order to assess the risk associated with 
that customer to help inform when the customer's activity might be 
considered ``suspicious.'' FinCEN does not intend for this element to 
necessarily require modifications to existing practice or customer 
onboarding procedures, and does not expect financial institutions to 
ask each customer for a statement as to the nature and purpose of the 
relationship or to collect information not already collected pursuant 
to existing requirements. Rather, the amendment to the AML program rule 
that incorporates this element is intended to clarify existing 
expectations for financial institutions to understand the relationship 
for purposes of identifying transactions in which the customer would 
not normally be expected to engage. Identifying such transactions is a 
critical and necessary aspect of complying with the existing 
requirement to report suspicious activity and maintain an effective AML 
program.
    FinCEN intends for this amendment to be consistent with existing 
rules and related guidance. For example, the requirement for financial 
institutions to report suspicious activity requires that they file a 
report on a transaction that, among other things, has ``no business or 
apparent lawful purpose or is not the sort in which the particular 
customer would normally be expected to engage.'' \49\ In the context of 
depository institutions, it is well understood that ``a bank should 
obtain information at account opening sufficient to develop an 
understanding of normal and expected activity for the customer's 
occupation or business operations.'' \50\ This is also true in other 
contexts.\51\ FinCEN intends for this proposed CDD element to be 
consistent with these types of expectations.
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    \49\ 31 CFR 1020.320(a)(2)(iii); see also Sec. Sec.  
1023.320(a)(2)(iii), 1024.320(a)(2)(iii), and 1026.320(a)(2)(iii).
    \50\ BSA/AML Manual at *64.
    \51\ See, e.g., CFTC Regulation 1.37(a)(1) and NFA Compliance 
Rule 2-30 which require futures commission merchants and introducing 
brokers to obtain certain information from individuals and other 
unsophisticated customers during the onboarding process and to 
verify annually whether the information continues to be materially 
accurate. Although these requirements are intended to address the 
inherent risks of trading futures and the need for adequate risk 
disclosure, this information could be relevant for understanding the 
nature and purpose of such customer relationships.
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    FinCEN believes that in some circumstances an understanding of the 
nature and purpose of a customer relationship can also be developed by 
inherent or self-evident information about the product or customer 
type, or basic information about the customer. FinCEN recognizes that 
inherent information about a customer relationship, such as the type of 
customer, the type of account opened, or the service or product 
offered, may be sufficient to understand the nature and purpose of the 
relationship. Obtaining basic information about the customer, such as 
annual income, net worth, domicile, or principal occupation or 
business, may similarly be relevant depending on the facts and 
circumstances.\52\ In addition, longstanding customers of a financial 
institution may have a robust history of activity that could also be 
highly relevant in understanding future expected activity for purposes 
of detecting aberrations. At the same time, FinCEN recognizes that 
certain financial institutions, such as securities and futures firms, 
often maintain accounts in which expected activity can vary 
significantly over time based on numerous factors, and that prior 
transaction history or information obtained from the client upon 
account opening may not be a reliable indicator of future conduct. Each 
case depends on the facts and circumstances unique to the financial 
institution and its customers.
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    \52\ The BSA/AML Manual also notes that an understanding of 
normal and expected activity for the customer's occupation or 
business operations may be ``based on account type or customer 
classification.'' BSA/AML Manual at 64.
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    Accordingly, FinCEN believes that financial institutions should 
already be satisfying this element by complying with the requirement to 
report suspicious activity, as this element is an essential step in the 
process of identifying such activity. In addition, because this is a 
necessary step to identifying and reporting suspicious activities, 
which obligation applies to all ``transactions . . . conducted or 
attempted by, at or through'' the covered financial institution, its 
scope should not be limited to ``customers'' for purposes of the CIP 
rules, but rather should extend more broadly to encompass all accounts 
established by the institution.\53\
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    \53\ See, e.g., 31 CFR 1020.100(a) and (c), which note that the 
definitions, and exemptions, for account and customer apply in the 
context of CIP. Within the context of CDD, ``customer relationship'' 
is a broader term, not subject to the exemptions referenced in 
definitions used for CIP.
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D. Ongoing Monitoring

    The fourth element of CDD requires financial institutions to 
conduct ongoing monitoring for the purpose of maintaining and updating 
customer information and identifying and reporting suspicious 
activity.\54\ As with

[[Page 45164]]

the third element, FinCEN intends for this element to be consistent 
with a financial institution's current suspicious activity reporting 
\55\ and AML program requirements. A financial institution required to 
have an AML program must, among other things, develop internal 
policies, procedures and controls to assure compliance with the 
BSA,\56\ including the SAR requirements. As a practical matter, 
compliance with these obligations implicitly requires financial 
institutions to conduct ongoing monitoring. The BSA/AML Manual notes 
that the internal controls of a bank's AML Program should ``provide 
sufficient controls and monitoring systems for timely detection and 
reporting of suspicious activity.'' \57\ Similarly, under rules 
promulgated by the Financial Industry Regulatory Authority (FINRA), a 
broker-dealer's AML program shall include policies and procedures that 
can be reasonably expected to detect and cause the reporting of 
transactions required under 31 U.S.C. 5318(g) and the implementing 
regulations thereunder.\58\ Codifying these supervisory and regulatory 
expectations as explicit requirements within FinCEN's AML program 
requirements is necessary to make clear that the minimum standards of 
CDD include ongoing monitoring of all transactions by, at, or through 
the financial institution.
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    \54\ By comparison, the ANPRM suggested that ``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.'' 77 FR 13053.
    \55\ Under the suspicious activity reporting rules, a financial 
institution must report, among other things, 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. 31 
CFR 1020.320(a)(2)(i)-(iii); 31 CFR 1023.320(a)(2)(i)-(iii); 31 CFR 
1024.320(a)(2)(i)-(iii); 31 CFR 1026.320(a)(2)(i)-(iii).
    \56\ See, e.g., 31 U.S.C. 5318(h)(1); 12 U.S.C. 1818(s)(1); 31 
CFR 1020.210.
    \57\ BSA/AML Manual at 33-34.
    \58\ FINRA Rule 3310.
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    Some commenters expressed confusion as to whether this fourth 
element would impose a categorical requirement to periodically update, 
or ``refresh,'' customer information that was obtained during the 
account opening process, including beneficial ownership information. 
This element does not impose such a categorical requirement. Rather, 
the requirement that the financial institution ``conduct ongoing 
monitoring to maintain and update customer information'' means that, 
when in the course of monitoring the financial institution becomes 
aware of information relevant to assessing the risk posed by a 
customer, it is expected to update the customer's relevant information 
accordingly.\59\ FinCEN understands that industry practice generally 
involves using activity data to inform what types of transactions might 
be considered ``normal'' or ``suspicious.'' Furthermore, FinCEN 
understands that information that might result from monitoring could be 
relevant to the assessment of risk posed by a particular customer. The 
proposed requirement to update a customer's profile as a result of 
ongoing monitoring (including obtaining beneficial ownership 
information for existing customers on a risk basis), is different and 
distinct from a categorical requirement to update or refresh the 
information received from the customer at the outset of the account 
relationship at prescribed periods, as was noted in the discussion of 
existing customers set forth in Section III.b of this proposal.
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    \59\ See, e.g., BSA/AML Manual at 64 (``CDD processes should 
include periodic risk-based monitoring of the customer relationship 
to determine whether there are substantive changes to the original 
CDD information (e.g., change in employment or business 
operations).'').
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    Because financial institutions are already implicitly required to 
engage in ongoing monitoring, FinCEN expects that financial 
institutions would satisfy the fourth element of CDD by continuing 
their current monitoring practices, consistent with existing guidance 
and regulatory expectations.\60\ FinCEN reiterates that all elements of 
CDD discussed in this proposal are minimum standards and should not be 
interpreted or construed as lowering, reducing or limiting the 
expectations established by the appropriate federal functional 
regulator. Finally, as noted above with respect to the obligation to 
understand the nature and purpose of customer relationships, monitoring 
is also a necessary element of detecting and reporting suspicious 
activities, and as such must apply not only to ``customers'' for 
purposes of the CIP rules, but more broadly to all account 
relationships maintained by the covered financial institution.
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    \60\ See, e.g., BSA/AML Manual at 67-85 (``Suspicious Activity 
Reporting--Overview''); NFA's Interpretive Notice accompanying NFA 
Compliance Rule 2-9 (FCMs and IBs must train appropriate staff to 
monitor cash activity and trading activity in order to detect 
unusual transactions).
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E. Rule Timing and Effective Date

    Financial institutions have requested sufficient time to implement 
any new CDD requirements. Specifically, to manage costs, financial 
institutions requested sufficient time to incorporate these 
requirements into cyclical updates of their systems and processes. 
FinCEN believes that the two CDD requirements set forth in this 
proposal will not in fact require covered financial institutions to 
perform any additional activities or operations, although it may 
necessitate revisions to written policies and procedures. FinCEN also 
recognizes that financial institutions will be required to modify 
existing customer onboarding processes to incorporate the beneficial 
ownership requirement, and therefore proposes an effective date of one 
year from the date the final rule is issued.

IV. Section-by-Section Analysis

A. Beneficial Ownership Information Collection

Section 1010.230 Beneficial Ownership Requirements for Legal Entity 
Customers
    Section 1010.230(a) General. This section sets forth the general 
requirement for covered financial institutions to identify the 
beneficial owners of each legal entity customer (as defined).
    Section 1010.230(b) Identification and Verification. In order to 
identify the beneficial owner, a covered financial institution must 
obtain a certification from the individual opening the account on 
behalf of the legal entity customer (at the time of account opening) in 
the form of Appendix A. The form requires the individual opening the 
account on behalf of the legal entity customer to identify the 
beneficial owner(s) of the legal entity customer by providing the 
beneficial owner's name, date of birth, address and social security 
number (for U.S. persons).\61\ This information is consistent with the 
information required under the CIP rules for identifying customers that 
are natural persons. The form also requires the individual opening the 
account on behalf of the legal entity customer to certify, to the best 
of his or her knowledge, that the information provided on the form is 
complete and correct. Obtaining a signed and completed form from the 
individual opening the account on behalf of the legal entity customer 
shall satisfy the requirement to identify the

[[Page 45165]]

beneficial owners under Section 1010.230(a).
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    \61\ For foreign persons, the form requires a passport number 
and country of issuance, or other similar identification number.
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    This section also requires financial institutions to verify the 
identity of the individuals identified as beneficial owners on the 
certification form. The procedures for verification are to be identical 
to the procedures applicable to an individual opening an account under 
the existing CIP rules. Accordingly, the financial institution must 
verify a beneficial owner's identity using the information provided on 
the certification form (name, date of birth, address, and social 
security number (for U.S. persons), etc.), according to the same 
documentary and non-documentary methods the financial institution may 
use in connection with its customer identification program (to the 
extent applicable to customers that are individuals), within a 
reasonable time after the account is opened. A financial institution 
must also include procedures for responding to circumstances in which 
it cannot form a reasonable belief that it knows the true identity of 
the beneficial owner, as described under the CIP rules.\62\
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    \62\ See, e.g., 31 CFR 1020.220(a)(2)(iii). Such procedures must 
address (a) when it should not open an account; (b) the terms under 
which the customer may use the account while the institution 
attempts to verify the identity of the beneficial owner; (c) when 
the institution should close the account, after attempts to verify 
the beneficial owner's identity have failed; and (d) when it should 
file a SAR.
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    Section 1010.230(c) Beneficial Owner. As more fully described 
above, the proposed definition of ``beneficial owner'' includes two 
independent prongs: An ownership prong (clause (1)) and a control prong 
(clause (2)). A covered financial institution must identify each 
individual under the ownership prong (i.e., each individual who owns 25 
percent or more of the equity interests), in addition to one individual 
for the control prong (i.e., any individual with significant managerial 
control). If no individual owns 25 percent or more of the equity 
interests, then the financial institution may identify a beneficial 
owner under the control prong only. If appropriate, the same 
individual(s) may be identified under both criteria.
    Section 1010.230(d) Legal Entity Customer. For purposes of the 
beneficial ownership requirement described under this Section, the 
proposed rule defines ``legal entity customer'' to mean a corporation, 
limited liability company, partnership or similar business entity 
(whether formed under the laws of a state or of the United States or a 
foreign jurisdiction), that opens a new account. The reference to ``new 
account'' makes clear that the obligation to identify beneficial owners 
under Section 1010.230 applies to legal entity customers opening new 
accounts after the date of rule's implementation, and not 
retrospectively. Previously issued guidance that clarifies who a 
customer is under certain circumstances shall be instructive to the 
extent applicable to the proposed beneficial ownership requirement.\63\
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    \63\ See, e.g., Interagency Interpretive Guidance on Customer 
Identification Program Requirements under Section 326 of the USA 
PATRIOT Act at Question 9 (April 28, 2005), available at http://www.fincen.gov/statutes_regs/guidance/html/faqsfinalciprule.html; 
Guidance from the Staffs of the Department of the Treasury and the 
U.S. Securities and Exchange Commission, Question and Answer 
Regarding the Broker-Dealer Customer Identification Program Rule (31 
CFR 103.122) (October 1, 2003), available at http://www.fincen.gov/statutes_regs/guidance/html/20031001.html.
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    Section 1010.230(e) Covered financial Institution. This term has 
the meaning set forth in 31 CFR 1010.605(e)(1), which defines the term 
for purposes of the regulations implementing Sect 312 of the PATRIOT 
Act.
    Section 1010.230(f) Retention of Records. A financial institution 
must have procedures for maintaining a record of all information 
obtained in connection with identifying and verifying the beneficial 
owners under 1010.230(b). These procedures must include retaining the 
beneficial ownership certification form, and any other related 
identifying information collected, for a period of five years after the 
date the account is closed. It must also retain in its records, for a 
period of five years after such record is made, a description of (i) 
every document relied on for verification, (ii) any non-documentary 
methods and results of measures undertaken for verification, and (iii) 
the resolution of any substantive discrepancies discovered in verifying 
the identification information. The proposed rule leverages off of 
industry familiarity with the recordkeeping requirements relative to 
identifying and verifying the identity of individual customers under 
the CIP rules, and proposes an identical recordkeeping standard here. 
This is with the understanding that identical standards will help 
relieve implementation burden with respect to the new requirement.
    Section 1010.230(g) Reliance on Another Financial Institution. The 
proposed rule permits reliance on another financial institution under 
the same conditions set forth in the applicable CIP rules.\64\
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    \64\ See, e.g., 31 CFR 1020.220(a)(6).
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B. Amendments to AML Program Requirements

Overview
    FinCEN's existing AML program requirements applicable to each type 
of covered financial institution are being amended to ensure alignment 
between existing AML requirements and CDD minimum standards. As 
described in Section III above, CDD consists of four fundamental 
components. The first component, customer identification, is already 
sufficiently included in the existing Customer Identification Program 
requirements issued jointly by FinCEN and its regulatory colleagues. 
The second component, identification of the beneficial ownership of 
legal entity customers, is proposed as a separate rule in 31 CFR 
1010.230, as outlined above. The third and fourth components of CDD--
understanding the nature and purpose of an account and ongoing 
monitoring--which have been understood as necessary facets of other 
regulatory requirements, are now being explicitly included in 
applicable AML program rules, as described in more detail below. 
Covered financial institutions are expected to apply these procedures 
on a risk-based approach with respect to the breadth of their account 
relationships, consistent with their obligation to identify and report 
suspicious activities.
    FinCEN is incorporating these CDD procedures into the AML program 
requirements to make clear that CDD is a core element of a financial 
institution's policies and procedures to guard against money 
laundering. Furthermore, incorporating these CDD requirements into the 
AML program requirements, which require the AML program to also comply 
with the regulation of its federal functional regulator governing such 
programs, makes clear that a financial institution's procedures with 
respect to these requirements are subject to examination and 
enforcement by the appropriate federal functional regulator or self-
regulatory organization in a manner consistent with current supervisory 
authorities and expectations. As such, this proposed rule is not 
intended to limit the federal functional regulators' supervisory role 
or, where applicable, its ability to oversee an SRO's effective 
examination and enforcement of BSA compliance.
    Nothing in this proposal is intended to lower, reduce, or limit the 
due diligence expectations of the federal functional regulators or in 
any way limit their existing regulatory discretion. To clarify this 
point, this proposal incorporates the CDD elements on

[[Page 45166]]

nature and purpose and ongoing monitoring into FinCEN's existing AML 
program requirements, which generally provide that an AML program is 
adequate if, among other things, the program complies with the 
regulation of its federal functional regulator (or, where applicable, 
self-regulatory organization) governing such programs.\65\ In addition, 
the Treasury Department intends for the requirements contained in this 
customer due diligence and beneficial ownership proposal to be 
consistent with, and not to supersede, any regulations, guidance or 
authority of any federal banking agency, the SEC, the CFTC, or of any 
SRO relating to customer identification, including with respect to the 
verification of the identities of legal entity customers.
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    \65\ See, e.g., 31 CFR 1020.210, which currently provides: ``A 
financial institution regulated by a Federal functional regulator 
that is not subject to the regulations of a self-regulatory 
organization shall be deemed to satisfy the requirements of 31 
U.S.C. 5318(h)(1) if it implements and maintains an anti-money 
laundering program that complies with . . . the regulation of its 
Federal functional regulator governing such programs.'' (emphasis 
added).
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    The FinCEN AML Program rules (for banks, securities broker-dealers, 
mutual funds, and futures commission merchants and introducing brokers 
in commodities) are also being amended to ensure that FinCEN's 
regulations explicitly include the existing core requirements that are 
currently included within the AML program rules issued by the federal 
functional regulators or their appointed self-regulatory organizations 
(SROs). These existing core pillars, referenced in 31 U.S.C. 5318(h) as 
``minimum'' requirements, include: (i) The development of internal 
policies, procedures and controls; (ii) the designation of a compliance 
officer; (iii) an ongoing employee training program; and (iv) an 
independent audit program to test functions. While there are slight 
differences in the wording of the regulatory requirements across the 
rules applicable to each industry, FinCEN considers them to all be the 
same in practice at their core. FinCEN sees utility for industry in 
having these rules clearly spelled out in FinCEN's own regulations and 
believes that there is further utility in making these rules more 
uniform, particularly given the number of industry actors that have 
constituent components subject to multiple rules. FinCEN also 
acknowledges, however, that the core requirements set forth by SROs, as 
approved by the federal functional regulator supervising them, 
sometimes include details deemed warranted with respect to the SROs' 
oversight of those industries. While such detail may not be included in 
FinCEN's rules, FinCEN and the supervising regulator have coordinated 
in the past to ensure that such rules are consistent with the purposes 
of the BSA. There is no intent in this rulemaking to undermine the 
nuances that currently exist with respect to those rules, and they can 
be followed in tandem with rules set forth here.
Section 1020.210 Anti-Money Laundering Program Requirements for 
Financial Institutions Regulated by a Federal Functional Regulator, 
Including Banks, Savings Associations and Credit Unions
    FinCEN is rewriting its existing AML program rule to include the 
existing core provisions already included in regulations issued by the 
relevant banking agencies and adding to these core provisions a fifth 
pillar that includes the components of CDD pertaining to understanding 
the nature and purpose of customer relationships and ongoing 
monitoring, as discussed above.
Section 1023.210 Anti-Money Laundering Program Requirements for Brokers 
or Dealers in Securities
    FinCEN is rewriting its AML program rule for brokers or dealers in 
securities to the include the existing core requirements already 
applicable to the industry and adding to these core provisions a new 
pillar that includes the components of CDD pertaining to understanding 
the nature and purpose of customer relationships and ongoing 
monitoring, as discussed above.
    FinCEN notes that its proposed AML program rule for brokers or 
dealers differs from the current program rule issued by FINRA. This is 
chiefly because FINRA has included as a pillar within its AML program 
rule a requirement with respect to suspicious activity reporting. This 
is different from the rules issued with respect to other sectors where 
the SAR requirement has been treated separately. FinCEN is not 
proposing to incorporate, as FINRA has done, a SAR reporting 
requirement as a separate pillar, as the existing stand-alone SAR rule 
within FinCEN's regulations is sufficient. However, the decision to not 
include this within the pillars of the FinCEN rule is not meant to 
affect its treatment within the FINRA rule. FinCEN sees no practical 
difference in effect as a result of this difference and is proposing 
its amendments to the FinCEN AML program rule for brokers or dealers in 
securities in a manner that is consistent with its other AML program 
rules. FinCEN will continue to engage with the SEC and FINRA to 
determine whether there is a need for, and how, the FinCEN and FINRA 
provisions might be made more consistent with respect to this 
particular structural difference in the regulations.
Section 1024.210 Anti-Money Laundering Program Requirements for Mutual 
Funds
    FinCEN is maintaining its existing AML program rule for mutual 
funds with the addition to the core requirements of a fifth pillar that 
includes the components of CDD pertaining to understanding the nature 
and purpose of customer relationships and ongoing monitoring, as 
discussed above.
Section 1026.210 Anti-Money Laundering Program Requirements for Futures 
Commission Merchants and Introducing Brokers in Commodities
    FinCEN is rewriting its AML program rule for futures commission 
merchants and introducing brokers to include the existing core 
requirements already applicable to the industry and adding to these 
core provisions a fifth pillar that includes the components of CDD 
pertaining to understanding the nature and purpose of customer 
relationships and ongoing monitoring, as discussed above.

V. Request for Comments

    FinCEN invites comments on all aspects of the NPRM, and 
specifically seeks comments on the following issues:

Definition of Beneficial Owner

    FinCEN seeks general comments on the proposed definition of 
beneficial owner, including the inclusion of two prongs, and whether 
each prong is sufficiently clear.
    FinCEN seeks comment specifically on whether the term ``equity 
interests'' in the ownership prong of the proposed beneficial ownership 
definition will be sufficiently understood and clear to financial 
institutions and customers.

Definition of Legal Entity Customer

    FinCEN seeks comment on the proposed definition of legal entity 
customer, and in particular whether it provides adequate clarity.

Existing Accounts

    FinCEN seeks comment as to whether FinCEN should extend the 
proposed requirement on covered financial insitutions to collect 
beneficial ownership information so that it would apply retroactively 
with respect to legal

[[Page 45167]]

entity accounts established before the implementation date of a final 
rule as well as comment on the potential costs of such an expansion of 
the rule.

Proposed Exemptions From the Beneficial Ownership Rule

    FinCEN seeks comment on the proposed exemptions from the definition 
of ``legal entity customer,'' including whether the exemptions are 
appropriate, whether other exemptions should be included, and if so, 
what exemptions.

Intermediated Accounts

    FinCEN seeks comment on whether the proposed treatment of 
intermediated accounts in general is sufficiently clear to address any 
issues that may be expected to arise.

Pooled Investment Vehicles

    FinCEN seeks comment specifically on whether pooled investment 
vehicles that are not proposed to be exempt from the beneficial 
ownership requirement but are operated or advised by financial 
institutions that are proposed to be exempt, should also be exempt from 
the beneficial ownership requirement, and if not, whether covered 
financial institutions should be required to identify beneficial owners 
of such non-exempt pooled investment vehicles under only the control 
prong of the ``beneficial owner'' definition, as opposed to both the 
ownership prong and control prong.

Trusts

    FinCEN seeks comment on procedures used by financial institutions 
to collect and record information on trusts during their CDD process 
and whether that information is readily searchable and retrievable and 
accessible to law enforcement. FinCEN seeks comment from law 
enforcement regarding the accessibility of information regarding trusts 
when sought from financial institutions and the value of such 
information.

Certification Form

    FinCEN seeks comment on the proposed certification form and the 
practical ability of financial institutions to incorporate the form 
into their account opening processes. Further, while FinCEN believes 
that requiring all legal entity customers to complete the same form is 
useful in promoting clarity and consistency across the financial 
industry, FinCEN seeks comment on whether financial institutions should 
be permitted to obtain the same information that the form requires 
(including the certification from the individual opening the account on 
behalf of the legal entity customer) through other means, such as an 
automated electronic account opening process.

Verification of Beneficial Owners

    FinCEN seeks comment on whether requiring financial institutions to 
utilize existing CIP procedures for verification of the identity of 
beneficial owners is sufficiently clear and is an appropriate and 
efficient means for achieving this objective.

Updating of Beneficial Ownership Information

    FinCEN seeks comment as to whether setting a mandated timeframe for 
the updating of beneficial ownership information would result in better 
information being available on beneficial ownership than relying on 
financial institutions to update the information in due course, 
consistent with the risk-based approach.

Recordkeeping Requirements

    FinCEN seeks comment as to whether requiring recordkeeping 
procedures identical to those required with respect to CIP 
recordkeeping requirements is a sufficiently clear and efficient 
standard in the context of beneficial ownership verification 
information collection.

Understanding the Nature and Purpose of Customer Relationships and 
Ongoing Monitoring

    FinCEN seeks comment on whether the proposed requirements regarding 
understanding the nature and purpose of customer relationships and 
ongoing monitoring are sufficiently clear. In this regard, should 
FinCEN define any of the terms used in those proposed requirements to 
clarify that such requirements apply broadly to all account 
relationships maintained by covered financial institutions? Should 
FinCEN define the term ``customer risk profile,'' or is this term 
sufficiently understood by covered financial institutions? FinCEN also 
seeks comment from industry as to whether there are any covered 
financial institutions that have been able to meet the existing AML 
program requirements and SAR requirements without understanding the 
nature and purpose of customer relationships and conducting ongoing 
monitoring.

Proposed Amendments to the AML Program Rules

    FinCEN seeks industry comment as to whether industry feels that it 
is necessary for the language of each AML program pillar requirement to 
be identical across FinCEN's rules; and, whether there is a need for 
FinCEN's rules and those of its sister organizations to be identical, 
notwithstanding FinCEN's belief that the core pillars are essentially 
the same across various industries despite any differences in legacy 
regulatory text. Based on industry feedback, FinCEN will weigh the 
benefits of possibly finalizing the program rules so that currently 
existing wording differences with respect to each pillar may be 
reduced.

Effective Date of the Rule

    FinCEN seeks comment on whether the proposed effective date of one 
year from the date of the issuance of the final rule is sufficient to 
enable financial institutions to work any necessary changes into their 
systems or procedures in tandem with other cyclical updates, and 
thereby enable financial institutions to reduce implementation costs.

VI. Regulatory Analysis

A. Executive Orders 13563 and 12866

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. 
This rule has been designated a ``significant regulatory action'' 
although not economically significant, under section 3(f) of Executive 
Order 12866. Accordingly, the rule has been reviewed by the Office of 
Management and Budget.
    FinCEN has determined that the primary cost for covered financial 
institutions associated with the proposed rule results from the 
requirement that they obtain from their non-exempt legal entity 
customers a certification identifying their beneficial owners. FinCEN 
has not been able to obtain from any source an estimate of the total 
number of accounts opened annually for legal entities by covered 
financial institutions. Based on outreach and discussions with major 
financial service companies, FinCEN believes that there are 
approximately eight million such accounts opened annually by covered 
financial institutions. Based on the total number of covered financial

[[Page 45168]]

institutions,\66\ this would result in each covered financial 
institution opening approximately 368 such accounts per year, or 1.5 
per day.\67\ Estimating an average time for a covered financial 
institution to receive the certification and verify the information of 
20 minutes and an average cost of $20 per hour, this results in a cost 
of approximately $54 million.\68\
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    \66\ See ``Paperwork Reduction Act (PRA),'' ``Estimated Number 
of Respondents,'' infra note 81.
    \67\ FinCEN also believes that the largest covered financial 
institutions likely open far more such accounts per day than the 
smaller institutions.
    \68\ See PRA, ``Estimated Reporting Burden,'' infra. This 
includes the cost of one hour per covered financial institution to 
develop new beneficial ownership procedures.
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    Estimating the amount of illicit funds flow facilitated through 
legal entities used to mask beneficial ownership would be 
difficult.\69\ However, the benefit of the rule will be greater clarity 
with respect to a regulatory definition of beneficial ownership and a 
greater percentage of situations in which this information will be 
collected, as appropriate, by the covered financial institutions, and, 
therefore, available to law enforcement. Based on a survey conducted in 
2008, FinCEN determined that perhaps as little as one third of its 
private sector constituents felt that they had a clear understanding of 
the term beneficial ownership and that significant percentages varying 
across industries did not collect information on beneficial ownership 
consistently. Since the issuance of that survey, further engagement 
with industry via the issuance of interagency guidance \70\ and 
FinCEN's ANPRM provided opportunities for greater common understanding 
of the issues, but questions remain.
---------------------------------------------------------------------------

    \69\ For one general discussion of the difficulty of deriving 
estimates of money laundering activity in narcotrafficking and other 
transactional criminal activity, see ``Estimating Illicit Financial 
Flows Resulting from Drug Trafficking and Other Transnational 
Organized Crimes,'' United Nations Office on Drugs and Crime 
(October 2011).
    \70\ See footnote 15.
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    FinCEN believes that with the clarity of a regulatory definition 
and a clear requirement to collect beneficial ownership in specific 
situations, industry understanding of beneficial ownership and the 
collection of beneficial ownership information will increase, and that 
the increased availability of such information to law enforcement will 
enhance government efforts to identify and address illicit actors 
operating in the financial system through legal entities. FinCEN 
requests comment on the benefits, and any estimates of costs savings, 
associated with a requirement to collect beneficial ownership 
information, including any economic or statistical data or third-party/
independent research.
Regulatory Flexibility Act
    When an agency issues a rule proposal, the Regulatory Flexibility 
Act (RFA) requires the agency to either provide an Initial Regulatory 
Flexibility Analysis or, in lieu of preparing an analysis, to certify 
that the proposed rule is not expected to have a significant economic 
impact on a substantial number of small entities.\71\
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

    Estimate of the number of small entities to which the proposed rule 
will apply:
    This proposed rulemaking will apply to all federally regulated 
depository institutions and trust companies, and all brokers or dealers 
in securities, mutual funds, and futures commission merchants and 
introducing brokers, as each is defined in the BSA. Based upon current 
data, for the purposes of the RFA, there are approximately 5470 small 
federally regulated banks (comprising 80% of the total number of 
banks); \72\ 47 small federally regulated trust companies (comprising 
72% of the total); \73\ 4,325 small federally regulated credit unions 
(comprising 66% of the total),\74\ 871 small brokers or dealers in 
securities (comprising 17% of the total); \75\ 116 small mutual funds 
(comprising 7% of the total); \76\ no small futures commission 
merchants; \77\ and 1,186 small introducing brokers (comprising 95% of 
the total). Because the proposed rule would apply to all of these 
financial institutions, FinCEN concludes that the proposed rule will 
apply to a substantial number of small entities.
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    \72\ The Small Business Administration (``SBA'') defines a 
depository institution other than a credit union as a small business 
if it has assets of $500 million or less. Based on publicly 
available information as of December 31, 2013 there are 6,821 
federally regulated depository institutions (other than credit 
unions) of which approximately 5,470, or 80% are categorized as 
small businesses.
    \73\ The SBA defines a trust company as a small business if it 
has assets of $35.5 million or less. Based on publicly available 
information as of September 30, 2013, there are 65 federally 
regulated trust companies, of which 47, or 72%, are categorized as 
small businesses.
    \74\ The NCUA defines small credit unions as those having under 
$50 million in assets. As of December 31, 2013, there were 6,554 
federally regulated credit unions.
    \75\ With regard to the definition of small entity as it applies 
to broker dealers in securities and mutual funds, FinCEN is using 
the SEC's definitions found at 17 CFR 240.0-10(c), and 17 CFR 270.0-
10, respectively. Of the 5,100 brokers or dealers in securities, 871 
or 17% are categorized as a small business.
    \76\ Of the 1,660 open-end mutual funds, 116 or 7% are 
categorized as a small business.
    \77\ The CFTC has determined that futures commission merchants 
are not small entities for purposes of the RFA, and, thus, the 
requirements of the RFA do not apply to them. The CFTC's 
determination was based, in part, upon the obligation of futures 
commission merchants to meet the minimum financial requirements 
established by the CFTC to enhance the protection of customers' 
segregated funds and protect the financial condition of futures 
commission merchants generally. Small introducing brokers in 
commodities are defined by the SBA as those having less than $7 
million in gross receipts annually. Of the 1,249 introducing brokers 
in commodities, 1,186 or 95% are categorized as a small business.
---------------------------------------------------------------------------

    Description of the projected reporting, recordkeeping, and other 
requirements of the proposed rule: This proposed rulemaking imposes on 
all covered financial institutions (including those that are small 
entities) a new requirement to identify and to verify the identity of 
the beneficial owners of their legal entity customers. The proposed 
rule would require that this be accomplished by obtaining and 
maintaining a certification from each legal entity customer that opens 
a new account. The certification will contain identifying information 
regarding each listed beneficial owner. The financial institution will 
also be required to verify such identity by documentary or non-
documentary methods and to maintain in its records for five years a 
description of (i) any document relied on for verification, (ii) any 
non-documentary methods and results of measures undertaken, and (iii) 
the resolution of any substantive discrepancies discovered in verifying 
the identification information.
    Although FinCEN has only limited available information to assess 
the average number of beneficial owners of legal entity customers for 
which accounts may be established after the effective date of the rule, 
FinCEN notes that the maximum number is five, and believes that it is 
reasonable to assume that the great majority of such customers who 
establish accounts at small institutions are more likely to have 
simpler ownership structures that will result in one or two beneficial 
owners. In addition, since all covered financial institutions have been 
subject to CIP rules for more than ten years, and the proposal utilizes 
CIP rule procedures, small institutions will be able to leverage these 
procedures in complying with this requirement. As a result, FinCEN 
believes that it is reasonable to estimate that it will require, on 
average, 20 minutes to perform the beneficial ownership identification, 
verification and recordkeeping requirements in the proposal. 
Furthermore, FinCEN has anecdotal evidence that in general, the 
customers of small institutions are primarily individuals and that they 
do not frequently establish accounts for

[[Page 45169]]

legal entities, which would also reduce the impact of the proposed 
requirement on small entities.\78\ However, because statistical data 
does not exist regarding either the average number of beneficial owners 
of legal entity customers of small institutions or how many such 
accounts they establish in any time period, FinCEN is seeking comment 
on these questions.
---------------------------------------------------------------------------

    \78\ FinCEN notes that, while its estimate of the aggregate 
burden on industry resulting from the beneficial ownership 
requirement is based on an average of 1.5 legal entity accounts per 
day for each institution (see ``Executive Orders 13563 and 12866'' 
supra), it understands from its outreach that large institutions 
likely open hundreds or even thousands such accounts per day, while 
small institutions likely open, on average, far fewer than 1.5 such 
accounts per day.
---------------------------------------------------------------------------

    The proposed rule would also require that covered financial 
institutions include in their AML programs, customer due diligence 
procedures, including understanding the nature and purpose of customer 
relationships and conducting ongoing monitoring of these relationships. 
Because these requirements are already a part of existing AML and SAR 
practices, they will not impose any new obligations, and therefore will 
have no economic impact, on any small entities.
    Finally, the proposed rule would require each covered financial 
institution to amend its AML program to include the new requirement 
contained in the proposal, to train its employees regarding the new 
requirement, and to update its data systems to include the beneficial 
ownership information. FinCEN understands from its outreach that in 
general, most covered financial institutions, including those that are 
small entities, periodically update their AML programs, conduct AML 
training, and upgrade their IT systems. FinCEN also understands that 
most small institutions outsource their IT requirements and so would 
acquire the required updated program from a vendor. FinCEN intends to 
extend the implementation date for the proposed rule for one year from 
issuance for the purpose of enabling financial institutions to 
integrate these new program, training and data collection requirements 
into their cyclical updates with minimal additional cost.
    Consideration of Significant Alternatives: The proposed rule would 
apply to all covered financial institutions. FinCEN has determined that 
identifying the beneficial owner of a financial institution's legal 
entity customers and verifying that identity is a necessary part of an 
effective AML program. FinCEN has not identified any alternative means 
for obtaining this information, other than imposing this as a 
requirement for opening new legal entity accounts for all covered 
financial institutions. Were FinCEN to exempt small entities from this 
requirement, those entities would be potentially more subject to abuse 
by money launderers and other financial criminals.
    Certification: The additional burden proposed by the rule would be 
a requirement to maintain an AML program that includes collection and 
verification of beneficial owner information. It would also require 
financial institutions, large and small, to update their AML programs, 
train relevant employees, and modify data collection systems. As 
discussed above, FinCEN estimates that the impact from this requirement 
would not be significant. Accordingly, FinCEN certifies that the 
proposed rule would not have a significant economic impact on a 
substantial number of small entities.
    Questions for comment: Please provide comment on any or all of the 
provisions of the proposed rule with regard to their economic impact on 
small entities (including costs and benefits), and what less burdensome 
alternatives, if any, FinCEN should consider. In particular, FinCEN is 
seeking comment on the economic burden associated with the proposed 
beneficial ownership requirement, including the number of new accounts 
opened for legal entities by small covered financial institutions and 
the estimated time that would be required to comply with the proposed 
requirements for the identification and verification of the beneficial 
owners of such new legal entity customers, as well as the costs 
associated with the program updates and necessary training and IT 
system modifications.

B. Paperwork Reduction Act

    The new recordkeeping requirement contained in this proposed rule 
(31 CFR 1010.230) is being submitted to the Office of Management and 
Budget (OMB) for review in accordance with the Paperwork Reduction Act 
of 1995 (PRA), 44 U.S.C. 3501 et seq., which imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Under 
the PRA, an agency may not conduct or sponsor, and an individual is not 
required to respond to, a collection of information unless it displays 
a valid OMB control number. Comments concerning the estimated burden 
and other questions should be sent to the Desk Officer for the 
Department of Treasury, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Paperwork Reduction Project (1506), 
Washington, DC 20503 with a copy to FinCEN by mail. Comments may also 
be submitted by email to [email protected]. Please submit 
comments by one method only. Comments are welcome and must be received 
by October 3, 2014.
    In summary, the proposed rule would require covered financial 
institutions to maintain records of the information used to identify 
and verify the identity of the names of the beneficial owners of legal 
entity customers.\79\
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    \79\ This requirement applies to accounts established for legal 
entities. A legal entity generally includes a corporation, limited 
liability company, partnership, or any other similar business entity 
formed in the United States or a foreign country.
---------------------------------------------------------------------------

    Type of Review: Initial review of the proposed information 
collection elements of the ``Certification of Beneficial Owner(s)'' in 
support of the beneficial ownership requirements for financial 
institutions.\80\
---------------------------------------------------------------------------

    \80\ A copy of the proposed certification, which would be 
required by 31 CFR 1010.230, appears at the end of this notice.
---------------------------------------------------------------------------

    Affected Public: Businesses or other for-profit and not-for-profit 
entities, and certain financial institutions.
    OMB Control Number: 1506-00XX.
    Frequency: As required.
    Estimated Reporting Burden:
    a. Develop and maintain beneficial ownership identification 
procedures: 1 hour.\81\
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    \81\ A burden of one hour to develop the initial procedures is 
recognized. Once developed, an annual burden of twenty minutes is 
recognized for maintenance.
---------------------------------------------------------------------------

    b. Customer identification, verification, and review and 
recordkeeping of the ``Certification of Beneficial Owner(s)'': 20 
minutes per financial institution.
    Estimated Number of Respondents: 21,550.\82\
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    \82\ This includes depository institutions (13,375), trust 
companies (65), broker-dealers in securities (5,100), future 
commission merchants (101), introducing brokers in commodities 
(1,249), and open-end mutual funds (1,660), each as defined under 
the BSA. These figures represent the total number of entities that 
would be subject to the proposed requirements in this notice.
---------------------------------------------------------------------------

    Estimated Total Annual Responses: 8,081,250.\83\
---------------------------------------------------------------------------

    \83\ Based on initial research, each covered financial 
institution will open, on average, 1.5 new legal entity accounts per 
business day. There are 250 business days per year.
---------------------------------------------------------------------------

    Estimated Recordkeeping and Reporting Burden: 2,715,300 hours.\84\
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    \84\ 8,081,250 x 20 minutes per account established / 60 minutes 
per hour = 2,693,750 hours plus development time of 21,550 hours for 
a total of 2,715,300 hours the first year.
---------------------------------------------------------------------------

    The numbers presented assume that the number of account openings in 
2013 is representative for an average yearly

[[Page 45170]]

establishment of accounts for new legal entities. Records are required 
to be retained pursuant to the beneficial ownership requirement for 
five years.
    Request for Comments:
    Comments submitted in response to this notice will be summarized 
and/or included in the request for OMB approval. All comments will 
become a matter of public record.
    Comments are invited on: (i) Whether the collection of information 
is necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility; (ii) 
the accuracy of the agency's estimate of the burden of the collection 
of information; (iii) ways to enhance the quality, utility, and clarity 
of the information to be collected; (iv) ways to minimize the burden of 
the collection of information on respondents, including through the use 
of automated collection techniques or other forms of information 
technology; (v) the reasonableness of the estimated number of new 
annual account openings for legal entities; and (vi) estimates of 
capital or start-up costs and costs of operation, maintenance, and 
purchase of services to provide information.

C. Unfunded Mandates Act of 1995 Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. FinCEN has determined that 
this proposed rule will not result in expenditures by state, local, and 
tribal governments, or by the private sector, of $100 million or more. 
Accordingly, FinCEN has not prepared a budgetary impact statement or 
specifically addressed the regulatory alternatives considered.

List of Subjects in 31 CFR Parts 1010, 1020, 1023, 1024, and 1026

    Administrative practice and procedure, Banks, Banking, Brokers, 
Currency, Federal home loan banks, Foreign banking, Foreign currencies, 
Gambling, Investigations, Mortgages, Penalties, Reporting and 
recordkeeping requirements, Securities, Terrorism.

Authority and Issuance

    For the reasons set forth in the preamble, Chapter X of Title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 1010--GENERAL PROVISIONS

0
1. The authority citation for part 1010 continues to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

0
2. Add Sec.  1010.230 in subpart B to read as follows:


Sec.  1010.230  Beneficial ownership requirements for legal entity 
customers.

    (a) In general. Covered financial institutions are required to 
establish and maintain written procedures that are reasonably designed 
to identify and verify beneficial owners of legal entity customers.
    (b) Identification and verification. With respect to legal entity 
customers, the covered financial institution's customer due diligence 
procedures should enable the institution to:
    (1) Identify the beneficial owner(s) of each legal entity customer, 
unless otherwise exempt pursuant to paragraph (d) of this section. To 
identify the beneficial owner(s), a covered financial institution must 
obtain at the time a new account is opened a certification in the form 
of Appendix A of this section from the individual opening the account 
on behalf of the legal entity customer; and
    (2) Verify the identity of each beneficial owner identified to the 
covered financial institution, according to risk-based procedures to 
the extent reasonable and practicable. At a minimum, these procedures 
must be identical to the covered financial institution's Customer 
Identification Program procedures required for verifying the identity 
of customers that are individuals under Sec.  1020.220(a)(2) of this 
chapter (for banks); Sec.  1023.220(a)(2) of this chapter (for brokers 
or dealers in securities); Sec.  1024.220(a)(2) of this chapter (for 
mutual funds); or Sec.  1026.220(a)(2) of this chapter (for futures 
commission merchants or introducing brokers in commodities).
    (c) Beneficial owner. For purposes of this section, Beneficial 
Owner means each of the following:
    (1) Each individual, if any, who, directly or indirectly, through 
any contract, arrangement, understanding, relationship or otherwise, 
owns 25% or more of the equity interests of a legal entity customer;
    (2) A single individual with significant responsibility to control, 
manage, or direct a legal entity customer, including
    (i) An executive officer or senior manager (e.g., a Chief Executive 
Officer, Chief Financial Officer, Chief Operating Officer, Managing 
Member, General Partner, President, Vice President, or Treasurer); or
    (ii) Any other individual who regularly performs similar functions.

    Note to paragraph (c): The number of individuals that satisfy 
the definition of ``beneficial owner,'' and therefore must be 
identified and verified pursuant to this section, may vary. Under 
paragraph (c)(1) of this section, depending on the factual 
circumstances, up to four individuals may need to be identified. 
Under paragraph (c)(2) of this section, only one individual must be 
identified. It is possible that in some circumstances the same 
person or persons might be identified pursuant to paragraphs (c)(1) 
and (2) of this section. A covered financial institution may also 
identify additional individuals as part of its customer due 
diligence if it deems appropriate on the basis of risk.

    (d) Legal entity customer. For the purposes of this section,
    (1) Legal entity customer means: A corporation, limited liability 
company, partnership or other similar business entity (whether formed 
under the laws of a state or of the United States or a foreign 
jurisdiction) that opens a new account.
    (2) Legal entity customer does not include:
    (i) A financial institution regulated by a Federal functional 
regulator or a bank regulated by a State bank regulator;
    (ii) A person described in Sec.  1020.315(b)(2) through (5) of this 
chapter;
    (iii) An issuer of a class of securities registered under section 
12 of the Securities Exchange Act of 1934 or that is required to file 
reports under section 15(d) of that Act;
    (iv) An investment company, as defined in section 3 of the 
Investment Company Act of 1940, that is registered with the Securities 
and Exchange Commission under that Act;
    (v) An investment adviser, as defined in section 202(a)(11) of the 
Investment Advisers Act of 1940, that is registered with the Securities 
and Exchange Commission under that Act;
    (vi) An exchange or clearing agency, as defined in section 3 of the 
Securities Exchange Act of 1934, that is registered under section 6 or 
17A of the Securities Exchange Act of that Act;
    (vii) Any other entity registered with the Securities and Exchange

[[Page 45171]]

Commission under the Securities Exchange Act of 1934;
    (viii) A registered entity, commodity pool operator, commodity 
trading advisor, retail foreign exchange dealer, swap dealer, or major 
swap participant, each as defined in section 1a of the Commodity 
Exchange Act, that is registered with the Commodity Futures Trading 
Commission;
    (ix) A public accounting firm registered under section 102 of the 
Sarbanes-Oxley Act; and
    (x) A charity or nonprofit entity that is described in sections 
501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 1986, has 
not been denied tax exempt status, and is required to and has filed the 
most recently due annual information return with the Internal Revenue 
Service.
    (e) Covered financial institution. For the purposes of this 
section, covered financial institution has the meaning set forth in 
Sec.  1010.605(e)(1).
    (f) Recordkeeping. A covered financial institution must establish 
procedures for making and maintaining a record of all information 
obtained under the procedures implementing paragraph (b) of this 
section.
    (1) Required records. At a minimum the record must include:
    (i) For identification, the certification form described in 
paragraph (b) of this section, and any other identifying information 
obtained by the covered financial institution; and
    (ii) For verification, a description of any document relied on 
(noting the type, any identification number, place of issuance and; if 
any, date of issuance and expiration), of any non-documentary methods 
and the results of any measures undertaken, and of the resolution of 
each substantive discrepancy.
    (2) Retention of records. A covered financial institution must 
retain the records made under paragraph (f)(1)(i) of this section for 
five years after the date the account is closed, and the records made 
under paragraph (f)(1)(ii) of this section for five years after the 
record is made.
    (g) Reliance on another financial institution. A covered financial 
institution may rely on the performance by another financial 
institution (including an affiliate) of the requirements of this 
section with respect to any legal entity customer of the covered 
financial institution that is opening, or has opened, an account or has 
established a similar business relationship with the other financial 
institution to provide or engage in services, dealings, or other 
financial transactions, provided that:
    (1) Such reliance is reasonable under the circumstances;
    (2) The other financial institution is subject to a rule 
implementing 31 U.S.C. 5318(h) and is regulated by a Federal functional 
regulator; and
    (3) The other financial institution enters into a contract 
requiring it to certify annually to the covered financial institution 
that it has implemented its anti-money laundering program, and that it 
will perform (or its agent will perform) the specified requirements of 
the covered financial institution's procedures to comply with the 
requirements of this section.

APPENDIX A--CERTIFICATION REGARDING BENEFICIAL OWNERS OF LEGAL ENTITY 
CUSTOMERS

I. GENERAL INSTRUCTIONS

What is this form?

    To help the government fight financial crime, federal regulation 
requires certain financial institutions to obtain, verify, and record 
information about the beneficial owners of legal entity customers. 
Legal entities can be abused to disguise involvement in terrorist 
financing, money laundering, tax evasion, corruption, fraud, and other 
financial crimes. Requiring the disclosure of key individuals who 
ultimately own or control a legal entity (i.e., the beneficial owners) 
helps law enforcement investigate and prosecute these crimes.

Who has to complete this form?

    This form must be completed by the person opening a new account on 
behalf of a legal entity with any of the following U.S. financial 
institutions: (i) A bank or credit union; (ii) a broker or dealer in 
securities; (iii) a mutual fund; (iv) a futures commission merchant; or 
(v) an introducing broker in commodities.
    For the purposes of this form, a legal entity includes a 
corporation, limited liability company, partnership, and any other 
similar business entity formed in the United States or a foreign 
country.

What information do I have to provide?

    This form requires you to provide the name, address, date of birth 
and social security number (or passport number or other similar 
information, in the case of foreign persons) for the following 
individuals (i.e., the beneficial owners):
    (i) Each individual, if any, who owns, directly or indirectly, 25 
percent or more of the equity interests of the legal entity customer 
(e.g., each natural person that owns 25 percent or more of the shares 
of a corporation); and
    (ii) An individual with significant responsibility for managing the 
legal entity customer (e.g., a Chief Executive Officer, Chief Financial 
Officer, Chief Operating Officer, Managing Member, General Partner, 
President, Vice President or Treasurer).
    The financial institution may also ask to see a copy of a driver's 
license or other identifying document for each beneficial owner listed 
on this form.
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[[Page 45173]]

PART 1020--RULES FOR BANKS

0
3. The authority citation for part 1020 continues to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

0
4. Revise Sec.  1020.210 in subpart B to read as follows:


Sec.  1020.210  Anti-money laundering program requirements for 
financial institutions regulated only by a Federal functional 
regulator, including banks, savings associations, and credit unions.

    A financial institution regulated by a Federal functional regulator 
that is not subject to the regulations of a self-regulatory 
organization shall be deemed to satisfy the requirements of 31 U.S.C. 
5318(h)(1) if the financial institution implements and maintains an 
anti-money laundering program that:
    (a) Complies with the requirements of Sec. Sec.  1010.610 and 
1010.620 of this chapter;
    (b) Includes, at a minimum:
    (1) A system of internal controls to assure ongoing compliance;
    (2) Independent testing for compliance to be conducted by bank 
personnel or by an outside party;
    (3) Designation of an individual or individuals responsible for 
coordinating and monitoring day-to-day compliance;
    (4) Training for appropriate personnel; and
    (5) Appropriate risk-based procedures for conducting ongoing 
customer due diligence, to include, but not be limited to:
    (i) Understanding the nature and purpose of customer relationships 
for the purpose of developing a customer risk profile; and
    (ii) Conducting ongoing monitoring to maintain and update customer 
information and to identify and report suspicious transactions; and
    (c) Complies with the regulation of its Federal functional 
regulator governing such programs.

PART 1023--RULES FOR BROKERS OR DEALERS IN SECURITIES

0
5. The authority citation for part 1023 continues to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

0
6. Revise Sec.  1023.210 in subpart B to read as follows:


Sec.  1023.210  Anti-money laundering program requirements for brokers 
or dealers in securities.

    A broker or dealer in securities shall be deemed to satisfy the 
requirements of 31 U.S.C. 5318(h)(1) if the broker-dealer implements 
and maintains a written anti-money laundering program approved by 
senior management that:
    (a) Complies with the requirements of Sec. Sec.  1010.610 and 
1010.620 of this chapter and any applicable regulation of its Federal 
functional regulator governing the establishment and implementation of 
anti-money laundering programs;
    (b) Includes, at a minimum:
    (1) The establishment and implementation of policies, procedures, 
and internal controls reasonably designed to achieve compliance with 
the applicable provisions of the Bank Secrecy Act and the implementing 
regulations thereunder;
    (2) Independent testing for compliance to be conducted by the 
broker-dealer's personnel or by a qualified outside party;
    (3) Designation of an individual or individuals responsible for 
implementing and monitoring the operations and internal controls of the 
program;
    (4) Ongoing training for appropriate persons; and
    (5) Appropriate risk-based procedures for conducting ongoing 
customer due diligence, to include, but not be limited to:
    (i) Understanding the nature and purpose of customer relationships 
for the purpose of developing a customer risk profile; and
    (ii) Conducting ongoing monitoring to maintain and update customer 
information and to identify and report suspicious transactions; and
    (c) Complies with the rules, regulations, or requirements of its 
self-regulatory organization governing such programs; provided that the 
rules, regulations, or requirements of the self-regulatory organization 
governing such programs have been made effective under the Securities 
Exchange Act of 1934 by the appropriate Federal functional regulator in 
consultation with FinCEN.

PART 1024--RULES FOR MUTUAL FUNDS

0
7. The authority citation for part 1024 continues to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

0
8. Revise Sec.  1024.210 in subpart B to read as follows:


Sec.  1024.210  Anti-money laundering program requirements for mutual 
funds.

    (a) Effective July 24, 2002, each mutual fund shall develop and 
implement a written anti-money laundering program reasonably designed 
to prevent the mutual fund from being used for money laundering or the 
financing of terrorist activities and to achieve and monitor compliance 
with the applicable requirements of the Bank Secrecy Act (31 U.S.C. 
5311, et seq.), and the implementing regulations promulgated thereunder 
by the Department of the Treasury. Each mutual fund's anti-money 
laundering program must be approved in writing by its board of 
directors or trustees. A mutual fund shall make its anti-money 
laundering program available for inspection by the U.S. Securities and 
Exchange Commission.
    (b) The anti-money laundering program shall at a minimum:
    (1) Establish and implement policies, procedures, and internal 
controls reasonably designed to prevent the mutual fund from being used 
for money laundering or the financing of terrorist activities and to 
achieve compliance with the applicable provisions of the Bank Secrecy 
Act and implementing regulations thereunder;
    (2) Provide for independent testing for compliance to be conducted 
by the mutual fund's personnel or by a qualified outside party;
    (3) Designate a person or persons responsible for implementing and 
monitoring the operations and internal controls of the program;
    (4) Provide ongoing training for appropriate personnel; and
    (5) Implement appropriate risk-based procedures for conducting 
ongoing customer due diligence, to include, but not be limited to:
    (i) Understanding the nature and purpose of customer relationships 
for the purpose of developing a customer risk profile; and
    (ii) conducting ongoing monitoring to maintain and update customer 
information and to identify and report suspicious transactions.

PART 1026--RULES FOR FUTURES COMMISSION MERCHANTS AND INTRODUCING 
BROKERS IN COMMODITIES

0
9. The authority citation for part 1026 continues to read as follows:

    Authority:  12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.

0
10. Revise Sec.  1026.210 in subpart B to read as follows:

[[Page 45174]]

Sec.  1026.210  Anti-money laundering program requirements for futures 
commission merchants and introducing brokers in commodities.

    A futures commission merchant and an introducing broker in 
commodities shall be deemed to satisfy the requirements of 31 U.S.C. 
5318(h)(1) if the futures commission merchant or introducing broker in 
commodities implements and maintains a written anti-money laundering 
program approved by senior management that:
    (a) Complies with the requirements of Sec. Sec.  1010.610 and 
1010.620 of this chapter and any applicable regulation of its Federal 
functional regulator governing the establishment and implementation of 
anti-money laundering programs;
    (b) Includes, at a minimum:
    (1) The establishment and implementation of policies, procedures, 
and internal controls reasonably designed to prevent the financial 
institution from being used for money laundering or the financing of 
terrorist activities and to achieve compliance with the applicable 
provisions of the Bank Secrecy Act and the implementing regulations 
thereunder;
    (2) Independent testing for compliance to be conducted by the 
futures commission merchant or introducing broker in commodities' 
personnel or by a qualified outside party;
    (3) Designation of an individual or individuals responsible for 
implementing and monitoring the operations and internal controls of the 
program;
    (4) Ongoing training for appropriate persons;
    (5) Appropriate risk-based procedures for conducting ongoing 
customer due diligence, to include, but not be limited to:
    (i) Understanding the nature and purpose of customer relationships 
for the purpose of developing a customer risk profile; and
    (ii) Conducting ongoing monitoring to maintain and update customer 
information and to identify and report suspicious transactions; and
    (c) Complies with the rules, regulations, or requirements of its 
self-regulatory organization governing such programs; provided that the 
rules, regulations, or requirements of the self-regulatory organization 
governing such programs have been made effective under the Commodity 
Exchange Act by the appropriate Federal functional regulator in 
consultation with FinCEN.

    Dated: July 23, 2014.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2014-18036 Filed 7-31-14; 11:15 am]
BILLING CODE 4810-02-P