Beneficial Ownership and Court Appointed Receiver

Issue/Inquiry

Would the beneficial ownership and CIP requirements apply in the case of an existing business account that is taken over by a court ordered receivership? In this case, the court has ordered an accounting firm act as receiver. The Bank is requesting identification on the signer and the firm. The Bank would also like the firm to complete a beneficial ownership certification. Are these requirements applicable?

Response Summary

The Customer Due Diligence (“CDD”) and Customer Information Program (“CIP”) rules are applicable when a customer opens a new account with a financial institution. Had the accounting firm opened a new account with the Bank, the requirements of the rules would have applied to the new account. Since the accounting firm is not opening a new account, but has been appointed as the receiver of the legal entity customer which opened the account, the rules would not have been applicable on that basis. However, when a financial institution becomes aware of a possible change in beneficial ownership, the institution is obligated to obtain or update its information concerning the beneficial ownership of the legal entity customer. In this case, its knowledge of the accounting firm having been appointed as receiver of the legal entity customer requires it to determine whether there is an individual with significant responsibility to manage or control the legal entity customer, and to verify the identity of such person in a manner consistent with its CIP procedures.

Response Detail

Under the beneficial ownership requirements of the CDD Rule, a financial institution must identify and verify the identity of the beneficial owners of a legal entity customer at the time each new account is opened. 31 CFR §1010.230(b)(1).

A “beneficial owner” is defined as each of the following:

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
2. A single individual with significant responsibility to control, manage, or direct a legal entity customer, including:
   1. An executive officer or senior manager (g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)
   2. Any other individual who regularly performs similar functions. 31 CFR §1010.230(d).

The designations above are the “ownership” and “control” prongs, respectively.

An “account” is a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, which includes deposit accounts, transaction or asset accounts, credit accounts, or other extensions of credit. A “new account” is each account opened by a legal entity customer on or after the date of May 11, 2018. 31 CFR §1010.230(c)(g).

If an intermediary is the customer, such as a law firm opening an escrow account for clients or an accounting firm opening a receivership account, and the financial institution has no CIP obligation with respect to the intermediary’s underlying clients pursuant to existing guidance, the intermediary would be treated as the institution’s legal entity customer. 81 Federal Register 29397, 29416.

With respect to the CIP requirements of the USA PATRIOT Act, a financial institution must have procedures in place for identifying and verifying the identity of a customer. A “customer” is generally an individual that opens a new account. This means that the customer will be the named owner of the account, rather than an individual who is authorized to sign on the account but who has no ownership interest in it. 31 CFR §103.121(a)(3)(i); FFIEC, FAQs: Final CIP Rule.

In this instance, an accounting firm has been appointed by the court as the receiver of the legal entity customer which opened the existing account with the bank. A receiver is an agent of the court and a fiduciary for the parties of interest. If the accounting firm had opened a receivership account with the bank, the bank would have been required to fulfill the requirements of its CIP procedures. It would also have been required under the CDD Rule to determine whether there was a beneficial owner of the accounting firm and, if so, to verify the identity of such an individual or individuals. Since the accounting firm is not opening a new account; however, the bank is not required to fulfill the requirements of its CIP procedures or the CDD Rule regarding beneficial ownership on that basis.

With respect to existing accounts, financial institutions do not have an obligation to solicit or update beneficial ownership information as a matter of course, absent specific risk-based concerns. However, they are required to develop and implement risk-based procedures for conducting ongoing CDD, including regular monitoring to identify and report suspicious activity and, on a risk basis, to maintain and update customer information. In the course of normal monitoring, if a financial institution becomes aware of information about a customer or customer account, including a possible change in beneficial ownership information, an obligation to obtain or update information is triggered. FinCEN, Frequently Asked Questions Regarding Customer Due Diligence for Financial Institutions, Q. 14, FIN-2018-001.

Thus, in this case the Bank has become aware of a possible change in the beneficial ownership of a customer holding an existing account. While the ownership of the legal entity customer will not have changed, the control of the customer has changed, as the accounting firm has been appointed as its receiver. Therefore, the bank is obligated to identify an individual with significant responsibility to manage or control the legal entity customer and to verify the identity of that individual.

With respect to the control prong, federal guidance indicates the following:

[T]he breadth of the definition [of the control prong] will facilitate, rather than hinder, financial institutions’ ability to collect this information – because legal entity customers are required to provide information on only one control person who satisfies the definition, legal entities should be able to readily identify at least one natural person within their management structure who has significant management responsibility, consistent with the multiple examples of positions provided.

[…]

[T]he control prong provides for a straightforward test: The legal entity customer must provide identifying information for one person with significant managerial control. 81 Federal Register at 29412.

Under the CDD Rule, a financial institution may accomplish the identification of the beneficial owner either by obtaining a certification using the model form (Appendix A: Certification of Beneficial Owner[s]) from the individual opening the account on behalf of the legal entity customer, or by obtaining from the individual the information required by the form by other means, provided the individual certifies, to the best of the individual’s knowledge, the accuracy of the information. 31 CFR §1010.230(b)(1).

A financial institution would satisfy the requirement to verify the identity of the beneficial owner by doing so in a manner consistent with the requirements of its CIP procedures for identifying and verifying the identity of natural persons. 31 CFR §1010.230(b)(2).

This entry was posted on Tuesday, February 19th, 2019 at 6:00 am.