Beneficial Ownership Requirements for Legal Entity Accounts
In May, 2016, the Federal government passed a new banking regulation regarding the beneficial ownership of legal entity customers. This new rule requires financial institutions to identify the ultimate beneficial owner(s) and a controlling person of a legal entity customer on all new accounts.
When Does this Rule Go into Effect?
Financial institutions are required to comply with the beneficial ownership requirements beginning May 11, 2018.
What is the Purpose of this Rule?
The purpose of this rule is to help the government fight the funding of terrorism and money laundering activities. Its intention is to assist law enforcement in financial investigations and to help prevent the evasion of targeted financial sanctions by identifying a legal entity’s ultimate beneficial owner(s) and not nominees or straw men. The rule is also intended to advance U.S. compliance with international standards and commitments.
Who is a Beneficial Owner of a Legal Entity?
For purposes of this rule, there are two categories to the definition of a beneficial owner: Ownership and Control.
Ownership – Each natural person who directly or indirectly owns at least 25% of the equity interests of a legal entity. If a beneficial owner of a legal entity customer is another legal entity, the owners of the other legal entity must be identified. This rule requires only natural persons to be identified. There may be zero to four natural persons identified in this category.
Control – A single individual who has significant responsibility to control, manage, or direct a legal entity customer. This could be an executive officer, senior manager, or any other individual who regularly performs similar control functions. There will always be one natural person identified in this category.
Non-governmental organizations (NGOs), charities, and religious organizations such as churches are excluded from the ownership prong, so only one person who has significant control over the entity for the control prong must be identified.
What Information is Required?
For each new deposit or loan account, we must obtain each identified individual’s name, date of birth, physical address, and Social Security Number. We will also require a copy of each identified individual’s government-issued identification, such as a driver’s license or passport.
When Must this Information be Provided?
This information must be provided at account opening for each new account that is opened for a legal entity. You will be required to provide this documentation and certify that the information is true and accurate to the best of your knowledge. Without this information, we will be unable to open any new account.
To ensure an efficient account opening experience, we recommend that you obtain the required information and documentation listed above before requesting to open a new account. If you will frequently need to open new deposit or loan accounts on behalf of a legal entity, please keep this information current and available to present each time you establish a new account.
A legal entity customer is a:
LLC or other entity created by filing a public document with the Secretary of State
Similar entity formed under the laws of a foreign jurisdiction
Business trust created by a filing with a state office
Any other entity created in this manner
The following organizations are excluded from the definition of legal entity:
Trusts that are not created through a state filing
Natural Persons opening accounts on their own behalf
Certain legal entities that are subject to federal or state regulation are excluded from the BO requirements. These entities include:
Federally-regulated financial institutions
Entities with common stock listed on the New York, American, or NASDAQ stock exchanges
Entities registered with the Commodity Futures Trading Commission
A public account firm registered under section 102 of the Sarbanes-Oxley Act
A bank holding company
A pooled investment vehicle operated or advised by a financial institution that is excluded from the LE definition
A state-regulated insurance company
A financial market utility designated by the Financial Stability Oversight Council under Title VIII of the Dodd Frank Act.
Bob’s Burger Barn, Inc. is owned by Bob and Mary. Bob and Mary each hold 50% equity interest. Bob is the President, and Mary is the Vice President.
Ownership Prong – Bob and Mary
Control Prong – Either Bob or Mary
XYZ, LP is owned by Joe, Sally, and John. Joe owns 60%, Sally owns 20%, and John owns 20%. Susan has no ownership interest in the company, but she is the CFO.
Ownership Prong – Joe
Control Prong – Susan
Smith, LLC is owned by five Smith siblings, each of whom holds a 20% equity stake in the company. The President of the company is Bill, who is the only sibling with significant management responsibility.
Ownership Prong – No one
Control Prong – Bill
Jefferson Cleaners, LLC is owned by Jefferson Holding Company. Jefferson Holding Company is owned by George (50%), Louise (30%), Tom (10%), and Helen (10%). Tom is the manager of the dry cleaning store.
Ownership Prong – George and Louise
Control Prong – Tom