Beneficial Ownership and an Incorporated Religious Organization

Issue/Inquiry

One of the Bank’s customers is an incorporated religious organization which is controlled by a board of three trustees. Who would be the beneficial owner of such an organization?

Response Summary

Assuming that the incorporated religious organization is in the nature of a nonprofit corporation, the beneficial owner will be determined under the control prong test rather than the ownership prong test. Accordingly, the customer must identity at least one individual, likely one of the three trustees, as the beneficial owner.

Response Detail

Under the Customer Due Diligence (“CDD”) Rule, a covered financial institution must identify and verify the identity of the beneficial owners of a legal entity at the time each new account is opened. 31 CFR §1010.230(b)(1).

A “beneficial owner” is any of the following:

• 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 (i.e., the ownership/equity prong)
• A single individual with significant responsibility to control, manage, or direct a legal entity customer, including 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); or any other individual who regularly performs similar functions (i.e., the control prong). 31 CFR §1010.230(d).

A legal entity established as a nonprofit organization or similar entity by a filing with the appropriate state authority is subject only to the control prong of the beneficial ownership requirement. 31 CFR §1010.230(e)(3)(ii).

In this case, if we assume that an incorporated religious organization is in the nature of a nonprofit entity, the Bank must identify and verify the identity of a person with significant managerial control of the entity (customer). Since the customer is controlled by a board of three trustees, the Bank should review the organizational documents of the customer to determine whether any of the trustees is given special authority to manage the customer. If not, then federal guidance provides for the following:

[T]he breadth of the definition [of 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.

This means that the customer of the Bank must identify a natural person, likely to be one of the three trustees, as being its beneficial owner. If that person meets the definition of a person with managerial control, the Bank has no information to the contrary, and the information provided identifies and verifies the identity of that person, the Bank will have fulfilled the requirements of the Rule.

As with all questions concerning state law, the Bank should consult with outside legal counsel to determine whether the customer is a nonprofit entity.

Additionally, the Bank, as a matter of policy (e.g., CIP or CDD) may seek to verify the identity of all the trustees regardless of Beneficial Owner status.

This entry was posted on Monday, August 20th, 2018 at 6:00 am.