Beneficial Ownership Rule and Owner of Collateral

Issue/Inquiry

Under the Beneficial Ownership Rule, what is the Bank’s responsibility when the borrower is an individual, but the owner of the collateral is a limited liability company, trust, or an estate?

Response Summary

The Beneficial Ownership Rule requires financial institutions to establish procedures to identity the natural persons who own or control legal entities that open accounts. As such, it would not pertain to the legal entity owners of collateral securing an account opened by an individual.

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 of the USA PATRIOT Act. 12 CFR 1010.230(d).

Among other things, a financial institution must obtain at the time a new account is opened a standard Certification of Beneficial Ownership directly from the individual opening the new account on behalf of the legal entity customer. 12 CFR 1010.230(b)(1).

According to the Beneficial Ownership Rule, a “legal entity customer” is “a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.” The term “new account” refers to “each account opened at a covered financial institution by a legal entity customer on or after the applicability date.” 31 CFR 1010.230(e),(g).

The Beneficial Ownership Rule uses the term “account” as it is used in the CIP rules. Frequently Asked Questions Regarding Customer Due Diligence for Financial Institutions, FIN-2016-GOO3, Q. 14. Under the CIP rules, an “account” is “a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit.” When the account is a loan, it is opened when the bank enters into an enforceable agreement to provide a loan to the customer. FFIEC, FAQs: Final CIP Rule, 31 C.F.R. 103.121(a)(1) — Definition of “account.”

In this scenario, the account being opened is a loan to an individual. Since the Beneficial Ownership Rule only concerns legal entity customers opening new accounts, it would not apply to a loan account opened by an individual. The collateral securing the loan to an individual may be secured by collateral pledged by a legal entity, but this does not make the legal entity an accountholder, since it did not open the account. Thus, the Bank would not be required to identify the beneficial owners of the legal entity.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Tuesday, January 21st, 2020 at 6:00 am.