Beneficial Ownership Rule and Nonprofit Organizations

Issue/Inquiry

How is the Beneficial Ownership Rule applied to charitable organizations, such as a local Girl Scouts troop?

Response Summary

Nonprofit organizations are only subject to the control prong of the beneficial owner definition. Local charitable organizations tend to be unincorporated, and are not subject to the Beneficial Ownership Rule.

Response Detail

Under the Beneficial Ownership Rule, when a new account is opened for a customer that is a legal entity, a financial institution is required to verify the identity of each beneficial owner identified to it utilizing risk-based CIP procedures. A “beneficial owner” is each of the following:

• Each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the legal entity customer
• A single individual with significant responsibility to control, manage, or direct a legal entity customer. 31 CFR §1010.230(d).

These aspects of beneficial ownership are the “ownership prong” and the “control prong”, respectively.

If the legal entity customer is a nonprofit corporation or similar entity, however, and has filed its organizational documents with the appropriate state authority, it is subject only to the control prong. 31 CFR §1010.230(e)(3)(ii).

When the Final Rule establishing the Beneficial Ownership Rule was published, FinCEN noted that it initially limited the exemption regarding nonprofit organizations to those that are exempt from federal tax and required proof of the exemption. In response to comments, FinCEN determined that it would be simpler, as well as more efficient and logical, to exclude all nonprofit entities from the ownership prong of the requirement, considering that nonprofit entities do not have ownership interests, and only require that an individual be identified who has significant responsibility to control, manage, or direct the customer.

For the purposes of this provision, a nonprofit corporation or similar entity would include, among others, charitable, nonprofit, not-for-profit, nonstock, public benefit, or similar corporations. Such an organization could establish that it is a qualifying entity by providing a certified copy of its certificate of incorporation or a certificate of good standing from the appropriate state authority, which may already be required for a legal entity to open an account with a financial institution under its CIP.

FinCEN also believes that identifying and verifying an individual under the control prong is not an onerous requirement, as it understands that in the cases of many nonprofits, such an individual is already identified to the financial institution as a signatory.  81 Federal Register 29397, 29416.

We acknowledge that some commentators have suggested that, for a local nonprofit organization such as the Girl Scouts, the head of the national Girl Scouts of America organization would be the beneficial owner under the control prong.  FinCEN addressed this question in its commentary to the Final Rule, noting that, as a general matter, small local community organizations, such as Scout Troops and youth sports leagues, are unincorporated associations, rather than legal entities, and therefore not subject to the beneficial ownership requirement. 81 Federal Register 29397, op cit.

This entry was posted on Monday, May 14th, 2018 at 6:00 am.