The Beneficial Ownership Rule and Trust Accounts

Issue/Inquiry

The Bank is preparing to comply with the new Beneficial Ownership Rules and is receiving mixed messages regarding family trust accounts. Do the Beneficial Ownership Rules apply to family trust accounts that do not register with the state?

Response Summary

The Beneficial Ownership Rule does not apply to trusts, except for the small number of trusts that would qualify as a legal entity (e.g., statutory trusts). For that reason, it will not be necessary to comply with the Beneficial Ownership rules with respect to family trust accounts. Nevertheless, FinCEN will expect financial institutions to take a risk-based approach in gathering information regarding the persons associated with a trust.

Response Detail

Under FinCEN’s Beneficial Ownership Rule, financial institutions must establish procedures to:

• Identify each natural person who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer
• Identify one natural person with significant responsibility to control, manage, or direct a legal entity customer
• Verify the identities of those persons according to risk-based procedures, which at a minimum must include the elements currently required under the Customer Identification Procedure (“CIP”) rules

Legal entity customers include corporations, limited liability companies, partnerships, or similar business entities. FinCEN interprets this to include all entities that are formed by a filing with the Secretary of State (or similar office), but also general partnerships, for which no such filing is necessary. There are exemptions for legal entity customers such as federally-regulated financial institutions, publicly held companies traded on certain U.S. stock exchanges, domestic government agencies, SEC-registered investment companies, and a charity or non-profit entity that has not been denied tax exempt status. 79 Federal Register 45159.

When the final Beneficial Ownership Rule was published, FinCEN noted that there are many types of trusts, and that while some would fit within the definition of a legal entity (e.g., statutory trusts), most would not. Unlike the legal entity customers that are subject to the beneficial ownership requirement, 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. 79 Federal Register 45160.

FinCEN concluded that identifying a “beneficial owner” among the parties to such an arrangement, for anti-money laundering purposes, would not be practical, based on the definition of beneficial owner. Thus, it declined to impose the Beneficial Ownership Rule on non-statutory trusts. 79 Federal Register 45160.

Consequently, the Bank will not be required to comply with the Beneficial Ownership Rule in regard to family trust accounts.

The decision not to propose specific requirements for trusts, however, does not mean that FinCEN considered trusts to pose a reduced money laundering or terrorist-financing risk relative to business entities within the definition of “legal entity customer.” Apart from the Beneficial Ownership Rule, FinCEN expects financial institutions to take a risk-based approach to collecting information with respect to the various persons associated with a trust arrangement.  79 Federal Register 45160.

Therefore, while the Bank will not be required to identify anyone as a beneficial owner with respect to a family trust account or to obtain a Certification of Beneficial Owner, the Bank will be expected to perform CIP due diligence as appropriate regarding such a trust.

It should be noted that when the trust is a beneficial owner, the rules change slightly and the Bank would want to identify the owners of the trust.

The following is an example:

Smith & Jones Fishing Guides, LLC is owned by Smith (45%), Jones (30%), and the Jones Family trust (25%). Since Smith and Jones are natural persons, the Bank will have appropriately identified them under CIP. The family trust is not a natural person but will be comprised of natural persons, so the Bank would have to identify whether there are multiple beneficiaries of the trust. If there are, then no one person is a beneficial owner. If there is just one such person, however, that person would be a known natural person and the beneficial owner of the Smith & Jones Fishing Guides, LLC.

 

This entry was posted on Monday, March 26th, 2018 at 6:00 am.