Document ID: SEC-2010-0366-0001
Agency: sec
Document Type: Notice
Title: Policy Statement on Obtaining and Retaining Beneficial Ownership Information for Anti-Money Laundering Purposes
Posted Date: 2010-03-10T05:00Z

[Federal Register: March 10, 2010 (Volume 75, Number 46)]
[Notices]               
[Page 11207-11210]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr10-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61651]

 
Policy Statement on Obtaining and Retaining Beneficial Ownership 
Information for Anti-Money Laundering Purposes

AGENCY: Securities and Exchange Commission.

ACTION: Policy statement.

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SUMMARY: The Securities and Exchange Commission is issuing a policy 
statement to provide guidance on obtaining and retaining beneficial 
ownership information for anti-money laundering purposes.

DATES: Effective Date: March 5, 2010.

FOR FURTHER INFORMATION CONTACT: Lourdes Gonzalez (202-551-5550), John 
J. Fahey (202-551-5550), or Emily Westerberg Russell (202-551-5550), 
Office of the Chief Counsel, Division of Trading and Markets.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 
issuing a policy statement that provides guidance on obtaining and 
retaining beneficial ownership information for anti-money laundering 
purposes. This guidance is being issued jointly with the Financial 
Crimes Enforcement Network, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency, the Office of Thrift Supervision, 
and the National Credit Union Administration, and in consultation with 
the staff of the Commodity Futures Trading Commission. The guidance 
provided in this policy statement clarifies and consolidates existing 
regulatory expectations for obtaining beneficial ownership information 
for certain accounts and customer relationships.

Regulatory Requirements

    The provisions of the Administrative Procedure Act (``APA'') 
regarding notice of proposed rulemaking, opportunities for public 
comment, and prior publication are not applicable to general statements 
of policy, such as this.\1\ Similarly, the provisions of the Regulatory 
Flexibility Act,\2\ which apply

[[Page 11208]]

only when notice and comment are required by the APA or another 
statute, are not applicable.
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    \1\ 5 U.S.C. 553.
    \2\ 5 U.S.C. 601-602.

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    By the Commission.

    Dated: March 5, 2010
Florence E. Harmon,
Deputy Secretary.

Text of the Guidance

Guidance on Obtaining and Retaining Beneficial Ownership Information

    The Financial Crimes Enforcement Network (FinCEN), along with the 
Board of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, the 
Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, and the Securities and Exchange Commission, are issuing 
this guidance, in consultation with staff of the Commodity Futures 
Trading Commission, to clarify and consolidate existing regulatory 
expectations for obtaining beneficial ownership information for certain 
accounts and customer relationships. Information on beneficial 
ownership in account relationships provides another tool for financial 
institutions to better understand and address money laundering and 
terrorist financing risks, protect themselves from criminal activity, 
and assist law enforcement with investigations and prosecutions.

Background

    The cornerstone of a strong Bank Secrecy Act/Anti-Money Laundering 
(BSA/AML) compliance program is the adoption and implementation of 
internal controls, which include comprehensive customer due diligence 
(CDD) policies, procedures, and processes for all customers, 
particularly those that present a high risk for money laundering or 
terrorist financing.\1\ The requirement that a financial institution 
know its customers, and the risks presented by its customers, is basic 
and fundamental to the development and implementation of an effective 
BSA/AML compliance program. Specifically, conducting appropriate CDD 
assists an institution in identifying, detecting, and evaluating 
unusual or suspicious activity.
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    \1\ This guidance does not alter or supersede previously issued 
regulations, rulings, or guidance related to Customer Identification 
Program (CIP) requirements.
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    In general, a financial institution's CDD processes should be 
commensurate with its BSA/AML risk, with particular focus on high risk 
customers. CDD processes should be developed to identify customers who 
pose heightened money laundering or terrorist financing risks, and 
should be enhanced in accordance with the institution's assessment of 
those risks.
    Heightened risks can arise with respect to beneficial owners of 
accounts because nominal account holders can enable individuals and 
business entities to conceal the identity of the true owner of assets 
or property derived from or associated with criminal activity. 
Moreover, criminals, money launderers, tax evaders, and terrorists may 
exploit the privacy and confidentiality surrounding some business 
entities, including shell companies and other vehicles designed to 
conceal the nature and purpose of illicit transactions and the 
identities of the persons associated with them. Consequently, 
identifying the beneficial owner(s) of some legal entities may be 
challenging, as the characteristics of these entities often effectively 
shield the legal identity of the owner. However, such identification 
may be important in detecting suspicious activity and in providing 
useful information to law enforcement.
    A financial institution may consider implementing these policies 
and procedures on an enterprise-wide basis. This may include sharing or 
obtaining beneficial ownership information across business lines, 
separate legal entities within an enterprise, and affiliated support 
units. To encourage cost effectiveness, enhance efficiency, and 
increase availability of potentially relevant information, AML staff 
may find it useful to cross-check for beneficial ownership information 
in data systems maintained within the financial institution for other 
purposes, such as credit underwriting, marketing, or fraud detection.

Customer Due Diligence

    As part of an institution's BSA/AML compliance program, a financial 
institution should establish and maintain CDD procedures that are 
reasonably designed to identify and verify the identity of beneficial 
owners \2\ of an account, as appropriate, based on the institution's 
evaluation of risk pertaining to an account.\3\
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    \2\ The definition of a ``beneficial owner'' under FinCEN's 
regulations specific to due diligence programs for private banking 
accounts and for correspondent accounts for foreign financial 
institutions is the individual(s) who have a level of control over, 
or entitlement to, the funds or assets in the account that, as a 
practical matter, enables the individual(s), directly or indirectly, 
to control, manage, or direct the account. The ability to fund the 
account or the entitlement to the funds of the account alone, 
however, without any corresponding authority to control, manage, or 
direct the account (such as in the case of a minor child 
beneficiary), does not cause the individual to be a beneficial 
owner. This definition may be useful for purposes of this guidance. 
See, e.g., 31 CFR 103.175(b).
    \3\ The final rules implementing Section 326 of the USA PATRIOT 
Act similarly provide that, based on a financial institution's risk 
assessment of a new account opened by a customer that is not an 
individual, a financial institution may need to take additional 
steps to verify the identity of the customer by seeking information 
about individuals with ownership or control over the account, 
including signatories. See, e.g., 31 CFR 103.121(b)(2)(ii)(C). In 
addition, a financial institution may need to look through the 
account in connection with customer due diligence procedures 
required under other provisions of its BSA compliance program.
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    For example, CDD procedures may include the following:
     Determining whether the customer is acting as an agent for 
or on behalf of another, and if so, obtaining information regarding the 
capacity in which and on whose behalf the customer is acting.
     Where the customer is a legal entity that is not publicly 
traded in the United States, such as an unincorporated association, a 
private investment company (PIC), trust or foundation, obtaining 
information about the structure or ownership of the entity so as to 
allow the institution to determine whether the account poses heightened 
risk.
     Where the customer is a trustee, obtaining information 
about the trust structure to allow the institution to establish a 
reasonable understanding of the trust structure and to determine the 
provider of funds and any persons or entities that have control over 
the funds or have the power to remove the trustees.
    With respect to accounts that have been identified by an 
institution's CDD procedures as posing a heightened risk, these 
accounts should be subjected to enhanced due diligence (EDD) that is 
reasonably designed to enable compliance with the requirements of the 
BSA. This may include steps, in accordance with the level of risk 
presented, to identify and verify beneficial owners, to reasonably 
understand the sources and uses of funds in the account, and to 
reasonably understand the relationship between the customer and the 
beneficial owner.
    Certain trusts, corporate entities, shell entities,\4\ and PICs are 
examples of customers that may pose heightened risk. In addition, 
FinCEN rules establish particular due diligence requirements concerning 
beneficial owners in the areas of private banking and foreign 
correspondent accounts.
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    \4\ http://www.fincen.gov/statutes_regs/guidance/pdf/
AdvisoryOnShells_FINAL.pdf.
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    In addition, CDD and EDD information should be used for monitoring 
purposes and to determine whether there are discrepancies

[[Page 11209]]

between information obtained regarding the account's intended purpose 
and expected account activity and the actual sources of funds and uses 
of the account.

Private Banking \5\

    Under FinCEN's regulations, a ``covered financial institution'' \6\ 
must establish and maintain a due diligence program that includes 
policies, procedures, and controls reasonably designed to detect and 
report known or suspected money laundering or suspicious activity 
conducted through or involving private banking accounts. This 
requirement applies to private banking accounts established, 
maintained, administered, or managed in the United States.\7\ The 
regulation currently covers private banking accounts at depository 
institutions, securities broker-dealers, futures commission merchants 
and introducing brokers in commodities, and mutual funds.
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    \5\ A ``private banking account'' is defined in 31 CFR 
103.175(o), as an account (or any combination of accounts) 
maintained at a covered financial institution that: (1) Requires a 
minimum aggregate deposit of funds or other assets of not less than 
$1,000,000; (2) is established on behalf of or for the benefit of 
one or more non-U.S. persons who are direct or beneficial owners of 
the account; and (3) is assigned to, or is administered or managed 
by, in whole or in part, an officer, employee, or agent of a covered 
financial institution acting as a liaison between the covered 
financial institution and the direct or beneficial owner of the 
account. Private banking accounts that do not fit within this 
definition should be subject to the general CDD procedures, 
including, as appropriate, EDD procedures discussed above.
    \6\ 31 CFR 103.175(f)(1).
    \7\ See, generally, 31 CFR 103.178.
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    Among other actions, as part of their due diligence program, 
institutions that offer private banking services must take reasonable 
steps to ascertain the source(s) of the customer's wealth and the 
anticipated activity of the account, as well as potentially take into 
account the geographic location, the customer's corporate structure, 
and public information.\8\ Moreover, reasonable steps must be taken to 
identify nominal and beneficial owners of private banking accounts.\9\ 
Obtaining beneficial ownership information concerning the types of 
accounts listed above may require the application of EDD procedures.
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    \8\ See, 31 CFR 103.178 (b)(3) and (b)(4). See also, Federal 
Financial Institutions Examination Council (FFIEC) Exam Manual, 
Private Banking--Overview. Although the FFIEC Exam Manual is issued 
by the federal banking regulators regarding AML requirements 
applicable to banks, it contains guidance that may be of interest to 
securities and futures firms.
    \9\ 31 CFR 103.178(b)(1).
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    Special rules apply for senior foreign political figures.\10\ A 
review of private banking account relationships is required in part to 
determine whether the nominal or beneficial owners are senior foreign 
political figures. Covered financial institutions should establish 
policies, procedures, and controls that include reasonable steps to 
ascertain the status of a nominal or beneficial owner as a senior 
foreign political figure. This may include obtaining information on 
employment status and sources of income, as well as consulting news 
sources and checking references where appropriate.\11\ Accounts for 
senior foreign political figures require, in all instances, EDD that is 
reasonably designed to detect and report transactions that may involve 
the proceeds of foreign corruption.\12\
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    \10\ A senior foreign political figure is a current or former 
senior official in the executive, legislative, administrative, 
military, or judicial branches of a foreign government (whether 
elected or not), senior official of a major foreign political party 
or a senior executive of a foreign government-owned commercial 
enterprise, a corporation or other entity formed by or for the 
benefit of such individuals, or any immediate family member or 
widely and publically known close associate to such individuals. 31 
CFR 103.175(r).
    \11\ See, e.g., FFIEC Exam Manual, Private Banking Due Diligence 
Program (Non-U.S. Persons).
    \12\ 31 CFR 103.178 (b)(2) and (c).
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    With regard to private banking accounts, a covered financial 
institution's failure to take reasonable steps to identify the nominal 
and beneficial owners of an account generally would be viewed as a 
violation of the requirements of 31 CFR 103.178.

Foreign Correspondent Accounts

    FinCEN's regulations also require covered financial institutions 
\13\ to establish a due diligence program that includes appropriate, 
specific, risk-based, and, where necessary, enhanced policies, 
procedures and controls that are reasonably designed to detect and 
report, on an ongoing basis, any known or suspected money laundering 
activity conducted through or involving any correspondent account \14\ 
established, maintained, administered, or managed in the United States 
for a foreign financial institution.\15\ Under these regulations, 
enhanced due diligence is required for correspondent accounts \16\ 
established, maintained, administered, or managed in the United States, 
for foreign banks that operate under: (1) An offshore banking license; 
(2) a banking license issued by a country that has been designated as 
non-cooperative with international anti-money laundering principles or 
procedures; or (3) a banking license issued by a country designated by 
the Secretary of the Treasury (under delegation to the Director of 
FinCEN, and in consultation with the Federal banking agencies, the 
Securities and Exchange Commission, and the Commodity Futures Trading 
Commission) as warranting special measures due to money laundering 
concerns.\17\ Enhanced due diligence is designed to be risk-based, with 
flexibility in its implementation to allow covered financial 
institutions to obtain and retain this information based on risk.
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    \13\ 31 CFR 103.175(f)(1). The definition of covered financial 
institution discussed above applies to both the private banking and 
correspondent account regulations.
    \14\ 31 CFR 103.175(d). Generally, a ``correspondent account'' 
is defined as an account established for a foreign financial 
institution to receive deposits from, or to make payments or other 
disbursements on behalf of, the foreign financial institution, or to 
handle other financial transactions related to such foreign 
financial institution. 31 CFR 103.175(d)(1).
    \15\ 31 CFR 103.176(a).
    \16\ For purposes of the enhanced due diligence requirements for 
certain foreign banks and the foreign shell bank prohibitions 
discussed herein, a ``correspondent account'' is defined as an 
account established for a foreign bank to receive deposits from, or 
to make payments or other disbursements on behalf of, the foreign 
bank, or to handle other financial transactions related to such 
foreign bank. 31 CFR 103.175(d)(1)(ii).
    \17\ See 31 CFR 103.176(b) and(c) for the full text of this 
provision. Special Due Diligence Programs for Certain Foreign 
Accounts, 72 FR 44768-44775 (August 9, 2007).
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    With respect to correspondent accounts for such foreign banks, a 
covered financial institution's risk-based EDD should obtain 
information, as appropriate, from the foreign bank about the identity 
of any person with authority to direct transactions through any 
correspondent account that is a payable-through account, as well as the 
source and beneficial owner of funds or other assets in a payable-
through account. A payable-through account is a correspondent account 
maintained by a covered financial institution for a foreign bank by 
means of which the foreign bank permits its customers to engage, either 
directly or through a subaccount, in banking activities usual in 
connection with the business of banking in the United States.\18\ 
Covered financial institutions may elect to use a questionnaire or 
conduct a review of the transaction history for the respondent bank in 
collecting the information required.\19\
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    \18\ See, 31 CFR 103.176(b)(1)(iii)(B).
    \19\ ``An Assessment of the Final Rule Implementing Enhanced Due 
Diligence Provisions for Accounts for Certain Foreign Banks, p. 4. 
(March 2009). http://www.fincen.gov/news_room/rp/files/Special_
Due_Diligence_Program.pdf.

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    Additionally, covered financial institutions \20\ are prohibited 
from opening and maintaining correspondent accounts \21\ for foreign 
shell banks.\22\ Covered financial institutions that offer foreign 
correspondent accounts must take reasonable steps to ensure the account 
is not being used to indirectly provide banking services to foreign 
shell banks.\23\ The covered financial institution must identify the 
owners \24\ of foreign banks whose shares are not publicly traded and 
record the name and address of a person in the United States that is 
authorized to be an agent to accept service of legal process.\25\
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    \20\ For purposes of the shell bank prohibitions, a covered 
institution generally includes: U.S. banks, savings associations, 
credit unions, private bankers, and trust companies; branches and 
agencies of foreign banks; Edge Act corporations; and securities 
broker-dealers. 31 CFR 103.175(f)(2).
    \21\ For purposes of the foreign shell bank prohibitions, a 
``correspondent account'' is defined as an account established for a 
foreign bank to receive deposits from, or to make payments or other 
disbursements on behalf of, the foreign bank, or to handle other 
financial transactions related to such foreign bank. 31 CFR 
103.175(d)(1)(ii).
    \22\ See, 31 CFR 103.177.
    \23\ 31 CFR 103.177(a)(1)(ii).
    \24\ For purposes of 31 CFR 103.177, ``owner'' is defined at 31 
CFR 103.175(l). Similarly, under the enhanced due diligence 
provisions of the correspondent account rule, the covered financial 
institution may need to identify the owners of foreign banks whose 
shares are not publicly-traded. See, 31 CFR 103.176(b)(3). An 
``owner'' is defined for this purpose to include any person who 
directly or indirectly owns, controls, or has the power to vote 10 
percent or more of any class of securities. See, 31 CFR 
103.176(b)(3)(ii).
    \25\ See 31 CFR 103.177(a)(2).
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    With regard to foreign correspondent accounts, a covered financial 
institution's failure to maintain records identifying the owners of 
non-publicly traded foreign banks could be viewed as a violation of the 
requirements of 31 CFR 103.177.
    For questions about this guidance, please contact FinCEN's 
Regulatory Helpline at (800) 949-2732 or your appropriate regulatory 
agency.

[FR Doc. 2010-5075 Filed 3-9-10; 8:45 am]
BILLING CODE 8011-01-P