Duhaime's Financial Crime & Anti-Money Laundering Law in Canada

New Beneficial Ownership Rules

FinCEN has released draft rules under the Bank Secrecy Act to identify the legal and beneficial shareholders (the natural persons) of private corporate entities (also known as legal persons). In other words – the disclosure of natural persons involved in all legal persons. The rule will take effect within a year after coming into force to allow for systems changes and training of compliance personnel on what corporate beneficial ownership means.

Purposes of Rules

The purposes of the proposed rules are to facilitate reporting by foreign banks and institutions pursuant to FATCA; promote consistency and enforcement of CDD requirements across financial sectors; facilitate investigations and prosecutions, particularly for tax evasion involving offshore bank accounts; to monitor sanctions compliance; and to implement the financial transparency commitments of the US to the G8 and G20 in respect of requiring the disclosure of beneficial ownership information.

Applicability 

The proposed rules apply to all the customers of:

1. Banks.
2. Brokers and dealers of securities.
3. Mutual funds.
4. Futures commission merchants and introducing brokers in commodities.

Private companies, LLPs, partnerships, funds, entities, foundations, etc. wherever incorporated or formed, including Canada, that open a new account are caught, except funds and assets in a payable-through account.

Also exempted are entities, inter alia, that are exempt from the customer identification requirements under the US CIP rules; issuers who issue securities under §12 of the Securities Exchange Act; majority owned US subsidiaries of US listed entities; investment companies that are registered; certain investment advisors; exchange clearing houses; and public accounting firms.

No Look Backs

Entities will not be required to look back for compliance, in other words, retroactively undertake reviews of accounts to determine beneficial ownership.

Requirements

1. Identification of Beneficial Ownership

The proposed rules will require the identification and verification of all natural persons (shareholders) of all legal entities, subject to certain exemptions at the time an account is opened. The verification will be in respect of identification, not beneficial status. Obviously, the latter would be too onerous.

Beneficial ownership has a two prong meaning in this context and in some ways is reflective of both AML law and securities law. In order to comply, financial institutions will be required to undertake identification and verification pursuant to one of the prongs, as follows:

(a) Ownership – natural persons who own 25% or more of the shares of every private legal entity whether held directly or indirectly or by way of contract, arrangement, understanding, or other arrangement, or

(b) Control – natural persons with significant responsibility to control, manage or direct the entity including the CEO, CFO, COO, Managing Partner, General Partner, President, Vice-President or Treasurer and anyone who performs those functions however titled.

De Jure and De Facto Determinations Required

Several comments provided to FinCEN noted that with complex legal structures, especially with private or hedge fund financings or pledges of shares, for example, determining the control person may be challenging. FinCEN’s expectation pursuant to the rulemaking guidance is that financial institutions will have to undertake more analytical steps to make those determinations. The proposed rule does not make determining beneficial ownership any less or more complex – it will remain a legally complex issue and in particular because the guidance notes that FinCEN expects that financial institutions will determine de jure and de facto nominees that give a natural person ownership of 25% of the shares of a private entity.

2. Nature and Purpose of Relationship

The financial institution must also understand the nature and purpose of the client’s business in order to develop a risk profile. This requirement is not intended to change onboarding practices, or to require that customers be asked questions about the nature and purpose of their business but rather it is intended to make sure financial institutions understand the relationship to be able to catch transactions that are out of pattern.

3. Ongoing Monitoring

Finally, it is expected that there will be ongoing monitoring of accounts for suspicious activity. Nothing is necessarily new in this aspect and in fact, it is merely intended to introduce consistency. Notably, it is intended to codify the rules promulgated by the FINRA’s broker-dealer program in any event that are meant to detect suspicious transactions and the reporting thereof pursuant to 31 USC §5318(g).