Opening Donation, Memorial & Other Accounts for Nongovernment Organizations (NGOs)

Transcription

1 Opening Donation, Memorial & Other Accounts for Nongovernment Organizations (NGOs) Deborah L Crawford, President Gettechnical Inc gettechnical@msn.com 1

2 Instructor: Deborah L Crawford Deborah Crawford is the President of Gettechnical Inc., a Virginia based training company. She specializes in the deposit side of the financial institution and is an instructor on IRAs, BSA, Deposit Regulations and opening account procedures. She was formerly with Hibernia National Bank (now Capital One) and has a bachelor s and Masters degrees from Louisiana State University. She has 27 years of combined teaching and banking experience. If you have any questions them to gettechnical@msn.com or call us at The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the material; however, the accuracy of this information is not guaranteed. The laws are often changed without prior notice from the government. The publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company's employees. 2

3 Introduction There are many different types of nonprofit organizations, corporations and entities. They come in all shapes and sizes and have many different civic, social and philanthropic purposes. You may be asked to open accounts for hunting clubs, churches, causes and other different concerns around your area. Unfortunately, terrorists also use nonprofit organizations to finance many of their operations. Because of this, we are careful in the way that we open the accounts. 3

4 Many Americans open personal accounts and just have the checks made payable to them and that is fine. For example, 1975 High School Reunion could open it in a person s name and the checks could be made payable to Cindy Jones and be opened as a personal account. If the checks come into the 1975 High School Reunion then the account must be opened as an entity account. 4

5 Step One: TIN Number TIN: SSN or EIN? Use EIN when checks are made payable to entity and then set up as organization.

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7 FORM W-9 Gettechnical Inc. 7

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9 Gettechnical Inc. 9

10 Step Two: Who are checks going to be made payable to? Checks 10

11 Documentation Charter, Bylaws, Minutes, Letter of Purpose, State Registration Nonprofit Resolution Authorizes the Signature Card All officers must sign Signature Card Signed by those authorized on the resolution Changes New Resolution New Signature Card 11

12 Nonprofit Resolution Names the Organization: Baton Rouge Rotary Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 12

13 Are checks. Payable to High School Reunion or Payable to Person TIN Use SSN when checks are made payable to person and you open a personal account Use EIN when checks are made payable to the entity and you are opening an account for an entity 13

14 Sample: You should not deposit checks made payable to Baton Rouge Rotary to Joe s personal account. 1 OWNERSHIP Nonprofit Is this personal or entity 2 TITLE Joe Smith for Baton Rouge Rotary 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER 4 SIGNATURES (Access) Joe Smith SSN of Joe 14

15 Sample: Nonprofit Deposit checks made payable to Baton Rouge Rotary 1 OWNERSHIP Nonprofit 2 TITLE Baton Rouge Rotary 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of Rotary 4 SIGNATURES (Access) Joe Smith, President Mary Williams, Vice President Betty Jones, Secretary and Treasurer 15

16 NONPROFIT ORGANIZATION ACCOUNTS

17 NONPROFIT ACCOUNTS OVERVIEW Nonprofit Corporations Formal Nonprofit Organizations Informal Nonprofit Organizations Tragedy and Benefit Accounts Public Fund Accounts Formal application with secretary of state Formal organization with their organizing body Informally organized by local community people Usually informally organized by local community people Set up by law and government EIN EIN EIN EIN EIN Articles of Incorporation Certificate of Incorporation By-laws, charters No formal documentation. Must ID the signers No formal organization. Must id the signers May have documents depending on how organized *All accounts require bank resolution and signature cards. Public funds may or may hot have resolution. 17

18 Step Three Run Your Customer Identification Program NONPROFIT CORPORATIONS

19 Description A corporation is a legal entity separate from its owners. The election of officers, usually contained in the minutes, is done at the first board meeting. The opening and closing of an account is authorized by the Board of Directors and carried out by the Corporate Secretary. The only additional documentation from normal corporations is the 501C Tax Determination Letter some institutions require and some do not. A corporation is formed when both domestic and foreign corporations file Articles with the Secretary of State to approve and register the new business. 19

20 Insurance Corporations are separately insured for $250,

21 REQUIREMENTS FOR NONPROFIT CORPORATIONS REQUIREMENTS NONPROFIT CORPORATIONS 1. Required Information on Non Profit Corporation: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the corporation. 2. IRS Reporting: Report in EIN of Corporation 3. Documentary Requirements: (Reasonable time after opening) Valid identification on person opening the account My bank does/does not require all signers to complete CIP 21

22 REQUIREMENTS 3. Doc. Requirements (Continued) NONPROFIT CORPORATIONS Document from Secretary of State IRS 501(c) Tax determination letter (optional) Minutes from Board Meeting The customer should provide an excerpt from the minutes of the last board meeting where officers were elected specifically the Secretary of the corporation since this person must sign the resolution. 22

23 REQUIREMENTS 3. Doc. Requirements (Continued) NONPROFIT CORPORATIONS Bank provided resolution Bank provided signature card 23

24 REQUIREMENTS 4. Nondocumentary Requirements NONPROFIT CORPORATIONS A CIP program must also have nondocumentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Contact Secretary of State s Office 5. Account Styling: Boy Scouts of America, Inc. 6. Consult Government Lists: Section 326 List OFAC List 7. Insurance: Each corporation is separately insured for $250, Miscellaneous: No PODs on Corporations. 24

25 Checklist for Nonprofit Corporations Required information on Nonprofit Corporation Report to IRS in EIN of Nonprofit Corporation Valid identification on Corporate Secretary or other signers as required by your CIP. Certificate or Articles depending on state law IRS 501(c) Tax Determination Letter, if any Minutes from Board electing Secretary, if not in resolution Nondocumentary verification Resolution Signature Card Account Styling: Boy Scouts of America, Inc. Account Ownership: Corporation Government lists 25

26 Nonprofit Corporation Resolution Names the Organization: Boy Scouts of America, Inc Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 26

27 Sample: Nonprofit Corporation 1 OWNERSHIP Nonprofit Corporation 2 TITLE Boy Scouts of America, Inc 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of Boy Scouts of America, Inc 4 SIGNATURES (Access) Joe Smith, President Mary Williams, Vice President Betty Jones, Secretary and Treasurer 27

28 FORMAL NONPROFIT OR UNINCORPORATED ASSOCIATION

29 Description Charitable Associations, nonprofit groups, school clubs or other unincorporated organizations are examples of this type of account. This category covers groups who open accounts for civic, community, political reasons and are not organized for profit. These groups such as Rotary, Lions Club, Kiwanis and many others do have organizing bodies and they apply for a Charter and establish By-Laws. Most of these organizations meet monthly and have formal structure and officers. It is easy to pass these accounts from year to year to the next set of officers as documented in the minutes. You will run CIP on the entity. If your bank requires identification on all signatories on accounts, then you will have to CIP the signers also. Insurance Nonprofit organizations are separately insured for $250,

30 REQUIREMENTS FOR FORMAL NONPROFIT OR UNINCORPORATED ASSOCIATIONS REQUIREMENTS FORMAL NONPROFIT OR UNICORPORATED ASSOCIATIONS 1. Required Information: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the organization. 2. IRS Reporting: Report in EIN of Organization 3. Documentary Requirements: (Reasonable time after opening) Valid identification on person opening the account. Sometime banks require identification on all signatories. My bank does/does not require all signers to complete CIP Charter, By-laws provided by customer. Minutes of Meeting authorizing account opening 30

31 REQUIREMENTS 3. Doc. Requirements (Continued) FORMAL NONPROFIT OR UNICORPORATED ASSOCIATIONS Bank Provided Resolution Bank Provided Signature Card 4. Suggested nondocument verification: (Reasonable time after opening) A CIP program must also have nondocumentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Previous financial institution references 5. Account Styling: Name of organization. Examples: Rotary Lions Club Kiwanis 31

32 REQUIREMENTS 6. Consult Government Lists: Section 326 List OFAC List FORMAL NONPROFIT OR UNICORPORATED ASSOCIATIONS 7. Insurance: $250,000 per Organization 8. Miscellaneous: Not for profit organizations may not have POD 32

33 Checklist for Formal Nonprofit Association Required information on nonprofit association Valid identification on signers as required in your CIP Charter, By-laws Minutes Report to IRS in EIN of Association Account Styling: Rotary Account Ownership: Nonprofit Nondocumentary verification Resolution Signature Card Government lists 33

34 Nonprofit Resolution Names the Organization: Chamber of Commerce of San Diego Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 34

35 Sample: Formal Nonprofit 1 OWNERSHIP Nonprofit 2 TITLE Chamber of Commerce of San Diego 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of Chamber of Commerce 4 SIGNATURES (Access) Joe Smith, President Mary Williams, Vice President Betty Jones, Secretary and Treasurer 35

36 INFORMAL NONPROFIT OR UNINCORPORATED ASSOCIATION

37 Description Charitable Associations, nonprofit groups, school clubs or other unincorporated organizations may be quite small. This category covers groups who open accounts for civic, community, political reasons and are not organized for profit. These can be the local softball, kickball, soccer, flower funds, coffee clutches and many other types of accounts. Insurance Nonprofit organizations are separately insured for $250,

38 REQUIREMENTS FOR INFORMAL NON PROFIT OR UNINCORPORATED ASSOCIATIONS REQUIREMENTS INFORMAL NONPROFIT CORPORATIONS OR UNICORPORATED ASSOCIATIONS 1. Required Information: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the organization. 2. IRS Reporting: Report in EIN of Organization 3. Documentary Requirements: (Reasonable time after opening) Valid identification on all persons opening the account, since there will be no outside documents, such as charters or by by-laws My bank does/does not require all signers to complete CIP Bank Provided Resolution Bank Provided Signature Card 38

39 REQUIREMENTS 4. Suggested nondocument verification: (Reasonable time after opening) INFORMAL NONPROFIT CORPORATIONS OR UNICORPORATED ASSOCIATIONS A CIP program must also have non documentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Previous financial institution references 5. Account Styling: Name of organization. Examples: Beaumont Little League Flower Fund Hunting Club 1975 Class reunion 39

40 REQUIREMENTS 6. Consult Government Lists: Section 326 List OFAC List INFORMAL NONPROFIT CORPORATIONS OR UNICORPORATED ASSOCIATIONS 7. Insurance: $250,000 per Organization 8. Miscellaneous: Some small organizations will not have outside documents. You will have to identify all signatories if your bank decides to open these accounts. Do not set up as a personal account unless the SSN or the person on the account is signing and checks will be coming in made out personally to that person. 40

41 Checklist for Informal Nonprofit Association Required information on nonprofit association Valid identification on all signatories Some banks have customer write a Letter of Purpose Report to IRS in EIN of Association Account Styling: Amarillo Little League Account Ownership: Nonprofit Nondocumentary verification Resolution Signature Card Government lists 41

42 Nonprofit Resolution Names the Organization: Salina Bowling League Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 42

43 Sample: Informal Nonprofit 1 OWNERSHIP Nonprofit 2 TITLE Salina Bowling League 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of Salina Bowling League 4 SIGNATURES (Access) Joe Smith Mary Williams Betty Jones 43

44 BENEFIT, TRAGEDY ACCOUNTS OR MEMORIAL ACCOUNTS

45 Description Benefit or tragedy accounts are usually the result of an event in the community that leaves people without resources. Hurricanes, fires, death and other events usually trigger this type of financial response from individuals trying to help. These are a type of non profit account and are not formally organized so should be treated like the informal nonprofit organizations. Insurance Nonprofit organizations are separately insured for $250,

46 REQUIREMENTS FOR BENEFIT, TRAGEDY ACCOUNTS OR MEMORIAL ACCOUNTS REQUIREMENTS BENEFIT OR TRAGEDY ACCOUNTS 1. Required Information: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the organization. 2. IRS Reporting: Report in EIN of Organization 3. Documentary Requirements: (Reasonable time after opening) Valid identification on all persons opening the account. In CIP if you cannot identify the entity, identify the signers. Bank Provided Resolution Bank Provided Signature Card 46

47 REQUIREMENTS 4. Suggested nondocument verification: (Reasonable time after opening) BENEFIT /TRAGEDY/MEMORIAL A CIP program must also have non documentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Previous financial institution references 5. Account Styling: Name of organization. Examples: Little Johnny Hospital Fund Hurricane Ike Relief Fund Betty Jones Burn Fund Little Betty Benefit Fund Bob Jones Memorial Fund Scholarship Fund 47

48 REQUIREMENTS BENEFIT /TRAGEDY/MEMORIAL 6. Consult Government Lists: Section 326 List OFAC List 7. Insurance: $250,000 per Organization 8. Miscellaneous: Some small organizations will not have outside documents. You will have to identify all signatories if your bank decides to open these accounts. Do not set up as a personal account unless the SSN or the person on the account is signing and checks will be coming in made out personally to that person. 48

49 Checklist for Benefit, Tragedy or Memorial Accounts Required information on nonprofit association Valid identification Some banks have customers write a Letter of Purpose Report to IRS in EIN of Association Account Styling: Little Johnny Hospital Fund; Hurricane Ike Fund; Betty Jones Burn Fund; Little Betty Benefit Fund Account Ownership: Nonprofit Nondocumentary verification Resolution Signature Card Government lists 49

50 Nonprofit Resolution Names the Organization: Smith Family Donation Fund Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 50

51 Sample: Donation, Tragedies, Memorial 1 OWNERSHIP Nonprofit 2 TITLE Smith Family Donation Fund 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of Smith Family Donation Fund 4 SIGNATURES (Access) Joe Smith Mary Williams Betty Jones 51

52 CAMPAIGN ACCOUNTS

53 Description Campaign accounts are accounts designated for individuals to run for office. Insurance Nonprofit organizations are separately insured for $250,

54 REQUIREMENTS FOR CAMPAIGN ACCOUNTS REQUIREMENTS CAMPAIGN ACCOUNTS 1. Required Information: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the organization. 2. IRS Reporting: Report in EIN of Campaign 3. Documentary Requirements: (Reasonable time after opening) Valid identification on all persons opening the account. My bank does/does not require all signers to complete CIP Bank Provided Resolution Bank Provided Signature Card 54

55 REQUIREMENTS 4. Suggested nondocument verification: (Reasonable time after opening) CAMPAIGN ACCOUNTS A CIP program must also have nondocumentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Previous financial institution references 5. Account Styling: Name of campaign 6. Consult Government Lists: Section 326 List OFAC List 55

56 REQUIREMENTS CAMPAIGN ACCOUNTS 7. Insurance: Campaigns as entities are insured separately for $250,

57 Checklist for Campaign Accounts Required information on campaign Valid identification on all signatories Report to IRS in EIN of Campaign Account Styling: Friends of Tom Smith Campaign; Campaign Fund for Senator Jones; Ben Gonzalez Campaign Fund Account Ownership: Nonprofit Nondocumentary verification Resolution Signature Card Government lists 57

58 Nonprofit Resolution Names the Organization: The Campaign to Elect Bob Jones Lists who can sign Joe Smith Mary Williams Betty Jones What their job is President Vice President Secretary/Treasurer Usually a list of what they can and cannot do Make deposits and Withdrawals Make loans Other Betty Jones Signed by secretary 58

59 Sample: Campaign 1 OWNERSHIP Nonprofit 2 TITLE The Campaign to Elect Bob Jones 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of The Campaign to Elect Bob Jones 4 SIGNATURES (Access) Joe Smith Mary Williams Betty Jones 59

60 PUBLIC FUND ACCOUNTS

61 Description A public fund account is a business account set up for a public or governmental unit. If incorporated, see corporations for documentation and set up. If not incorporated there is no standard document authorizing the opening of an account. It usually consists of a letter from the public unit. Insurance Public funds are insured for each unit of government up to $250,000. There are special rules governing public funds, please call the FDIC with particular concerns. 61

62 REQUIREMENTS FOR PUBLIC FUNDS ACCOUNTS REQUIREMENTS PUBLIC FUNDS ACCOUNTS 1. Required Information: (Before opening account) Name Address Taxpayer identification The account will use the employer identification number of the public fund. 2. IRS Reporting: Report in EIN of Public Fund 3. Documentary Requirements: (Reasonable time after opening) Valid identification on person opening the account. Authorization You will need some authorization provided by the public fund for the person to sign. Resolution There is typically no bank provided resolution. If you do have one for public funds use it. Signature Card 62

63 REQUIREMENTS 4. Suggested nondocument verification: (Reasonable time after opening) PUBLIC FUNDS ACCOUNTS A CIP program must also have nondocumentary verification. Suggestions include: Welcome letter Call to customer to thank for business Delivery of checks to location by account officer Third party verification Previous financial institution references 5. Account Styling: Name of public fund 63

64 REQUIREMENTS 6. Consult Government Lists: Section 326 List OFAC List PUBLIC FUNDS ACCOUNTS 7. Insurance: $250,000 per custodian per fund 64

65 Sample: Public Fund 1 OWNERSHIP Nonprofit 2 TITLE The New Orleans Sewage and Water Board 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER EIN of the New Orleans Sewage and Water Board 4 SIGNATURES (Access) Joe Smith, President Mary Williams, Vice President Betty Jones, Secretary and Treasurer 65

66 Avon, Mary Kay other tiered marketing These are for profit accounts. Can be set up as personal accounts. Or set up as sole proprietorships. Also family reunions, high school reunions where the checks are made payable to a person can be set up as a personal account. The key thing will be who are those checks payable to. 66

67 REQUIREMENTS 1. Required Information on Person or Entity (Before opening account): INDIVIDUAL OR SINGLE PARTY ACCOUNTS Name Address For individuals, Date of Birth Taxpayer identification number U.S. Person will be Social Security number Non U.S. Person will use passport number, ITIN number or other acceptable document number 2. IRS Reporting: Report in SSN of owner 3. Documentary Requirements: (Reasonable time after opening) Valid identification on owner Signature Card signed by owner and if have an agent the agent must sign. 67

68 REQUIREMENTS 4. Suggested nondocument verification: (Reasonable time after opening) 5. Account Styling: Jane Smith Special Account 6. Consult Government Lists: Section 326 List OFAC List INDIVIDUAL OR SINGLE PARTY ACCOUNTS A CIP program must also have nondocumentary verification. Suggestions include: Welcome letter Call to customer to thank for business Third party verification Previous financial institution references 7. Insurance: $250,000 for the individual who owns 68

69 Sample: Individual or Single Party 1 OWNERSHIP Individual or Single Party 2 TITLE Jane Smith Special Account 3 FEDERAL REGULATIONS 5 TAXPAYER IDENTIFICATION NUMBER SSN 4 SIGNATURES (Access) Jane Smith 69

70 CHECKLIST FOR INDIVIDUAL OR SINGLE PARTY ACCOUNTS Required information on owner Report to IRS in SSN of owner Valid identification on owner Nondocumentary verification Signature Card Account Styling: Jane Smith, Special Account Account Ownership: Individual or Single Party Government lists 70

71 Others Political Action Committees (PACs) Neighborhood Association Homeowner s Associations 71

72 Step Four: Customer Due Diligence Customer Due Diligence on NGOs-FFIEC BSA Exam Manual

73 Objective. Assess the adequacy of the bank s systems to manage the risks associated with accounts of non-governmental organizations (NGOs) and charities, and management s ability to implement effective due diligence, monitoring, and reporting systems. NGOs are private nonprofit organizations that pursue activities intended to serve the public good. NGOs may provide basic social services, work to relieve suffering, promote the interests of the poor, bring citizen concerns to governments, encourage political participation, protect the environment, or undertake community development to serve the needs of citizens, organizations, or groups in one or more of the communities that the NGO operates. An NGO can be any nonprofit organization that is independent from government. NGOs can range from large regional, national, or international charities to community-based self-help groups. NGOs also include research institutes, churches, professional associations, and lobby groups. NGOs typically depend, in whole or in part, on charitable donations and voluntary service for support. 73

74 Risk Factors Because NGOs can be used to obtain funds for charitable organizations, the flow of funds both into and out of the NGO can be complex, making them susceptible to abuse by money launderers and terrorists. The U.S. Treasury issued guidelines to assist charities in adopting practices to reduce the risk of terrorist financing or abuse. Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities, September 2006, is available at 74

75 Risk Mitigation To assess the risk of NGO customers, a bank should conduct adequate due diligence on the organization. In addition to required CIP information, due diligence for NGOs should focus on other aspects of the organization, such as the following: Purpose and objectives of their stated activities. Geographic locations served (including headquarters and operational areas). Organizational structure. Donor and volunteer base. Funding and disbursement criteria (including basic beneficiary information). Recordkeeping requirements. Its affiliation with other NGOs, governments, or groups. Internal controls and audits. 75

76 For accounts that bank management considers to be higher risk, stringent documentation, verification, and transaction monitoring procedures should be established. NGO accounts that are at higher risk for BSA/AML concerns include those operating or providing services internationally, conducting unusual or suspicious activities, or lacking proper documentation. EDD for these accounts should include: Evaluating the principals. Obtaining and reviewing the financial statements and audits. Verifying the source and use of funds. Evaluating large contributors or grantors of the NGO. Conducting reference checks. 76

77 What is the purpose of the organization? Civic Benefit or Tragedy Political Campaign Public Fund Other What geographic locations are served? County/Parish State United States International How is your organization structured? Officers with regular meetings Board Steering Committee Other Who is the volunteer base? Local individuals in county Statewide volunteers National volunteers International volunteers Where does the funding come from? Local donations Statewide donations National donations International donations 77

78 Beneficial Ownership The second element of CDD requires financial institutions to identify and verify the beneficial owners of legal entity customers. In this NPRM, FinCEN proposes a new requirement that financial institutions identify the natural persons who are beneficial owners of legal entity customers, subject to certain exemptions. The definition of beneficial owner proposed requires that the person identified as a beneficial owner be a natural person (as opposed to another legal entity). A financial institution must satisfy this requirement by obtaining at the time a new account is opened a standard certification form (attached hereto as Appendix A) directly from the individual opening the new account on behalf of the legal entity customer. 78

79 Financial institutions would be required to verify the identity of beneficial owners consistent with their existing CIP practices. However, FinCEN is not proposing to require that financial institutions verify that the natural persons identified on the form are in fact the beneficial owners. In other words, the requirement focuses on verifying the identity of the beneficial owners, but does not require the verification of their status as beneficial owners. This proposed requirement states minimum standards. 79

80 Ownership Prong: 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; and 80

81 Control Prong: An individual with significant responsibility to control, manage, or direct a legal entity customer, including (A) An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (B) Any other individual who regularly performs similar functions. 81

82 FinCEN s expectation is that a financial institution will identify the natural person or persons who exercise control of a legal entity customer through a 25% or greater ownership interest, regardless of how many corporate parents or holding companies removed the natural person is from the legal entity customer. 82

83 Each prong is intended to be an independent test. Under the ownership prong (i.e., clause (1)), a financial institution must identify each individual who owns 25 percent or more of the equity interests. Accordingly, a financial institution would be required to identify no more than four individuals under this prong, and, if no one individual owns 25 percent or more of the equity interests, then the financial institution may identify no individuals under the ownership prong. Under the control prong (clause (2)), a financial institution must identify one individual. In cases where an individual is both a 25 percent owner and meets the definition for control, that same individual could be identified as a beneficial owner under both prongs. 83

84 Equity Interests Consequently, the term equity interests should be interpreted broadly to apply to a variety of different legal structures and ownership situations. In short, equity interests refers to an ownership interest in a business entity. Examples of equity interests include shares or stock in a corporation, membership interests in a limited liability company, and other similar ownership interests in a legal entity. 84

85 directly or indirectly Moreover, the phrase directly or indirectly in the ownership prong of the definition is intended to make clear that where a legal entity customer is owned by (or controlled through) one or more other legal entities, the proposed rule requires customers to look through those other legal entities to determine which natural persons own 25 percent or more of the equity interests of the legal entity customer. FinCEN expects financial institutions to be able to rely generally on the representations of the customer when answering the financial institution s questions about the individual persons behind the legal entity, including whether someone identified as a beneficial owner is in fact a beneficial owner under this definition. 85

86 The proposed requirement would apply to all legal entity customers, including legal entities that open a foreign private banking account that meets the definition in (m). However, the new requirements would not apply to the beneficial owner of funds or assets in a payable-through account of the type described in (b)(1)(iii), since the owner of such funds or assets does not have an account relationship with the covered financial institution. In such instances, compliance with the information requirements included in (b)(1)(iii) will suffice, and the particulars of this new requirement, such as use of a certification form with respect to the beneficial owner of funds or assets in a payable-through account, would not apply. 86

87 The definition of legal entity customer, which is also relevant to the notion of the exemptions. FinCEN proposes to define legal entity customers to include corporations, limited liability companies, partnerships or other similar business entities (whether formed under the laws of a state or of the United States or a foreign jurisdiction), that open a new account after the implementing date of the regulation 87

88 FinCEN would interpret this to include all entities that are formed by a filing with the Secretary of State (or similar office), as well as general partnerships and unincorporated nonprofit associations. It does not include trusts other than those that might be created through a filing with a state (e.g., statutory business trusts). 88

89 Exemptions from beneficial ownership requirement Customers Exempt from CIP Same as CIP except existing customers (financial institutions regulated by a federal functional regulator, publicly held companies traded on certain US stock exchanges, domestic government agencies and instrumentalities and certain legal entities that exercise governmental authority) Plus some new exemptions Existing and New Customers Applies to legal entity customer that open a new account after the implementation date 89

90 Plus these new exemptions FinCEN proposes that the following entities also be exempt from the beneficial ownership requirement when opening a new account because their beneficial ownership information is generally available from other credible sources: An issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or that is required to file reports under Section 15(d) of that Act; Any majority-owned domestic subsidiary of any entity whose securities are listed on a U.S. stock exchange; An investment company, as defined in Section 3 of the Investment Company Act of 1940, that is registered with the SEC under that Act; 90

91 Continued exemptions An investment adviser, as defined in Section 202(a)(11) of the Investment Advisers Act of 1940, that is registered with the SEC under that Act; An exchange or clearing agency, as defined in Section 3 of the Securities Exchange Act of 1934, that is registered under Section 6 or 17A of that Act; Any other entity registered with the Securities and Exchange Commission under the Securities and Exchange Act of A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer, or major swap participant, each as defined in section 1a of the Commodity Exchange Act, that is registered with the CFTC; A public accounting firm registered under section 102 of the Sarbanes-Oxley Act; and A charity or nonprofit entity that is described in Sections 501(c), 527, or 4947(a)(1) of the Internal Revenue Code of 1986, that has not been denied tax exempt status, and that is required to and has filed the most recently required annual information return with the Internal Revenue Service. 91

92 APPENDIX A CERTIFICATION REGARDING BENEFICIAL OWNERS OF LEGAL ENTITY CUSTOMERS I. GENERAL INSTRUCTIONS What is this form? To help the government fight financial crime, federal regulation requires certain financial institutions to obtain, verify, and record information about the beneficial owners of legal entity customers. Legal entities can be abused to disguise involvement in terrorist financing, money laundering, tax evasion, corruption, fraud, and other financial crimes. Requiring the disclosure of key individuals who ultimately own or control a legal entity (i.e., the beneficial owners) helps law enforcement investigate and prosecute these crimes. 92

93 Who has to complete this form? This form must be completed by the person opening a new account on behalf of a legal entity with any of the following U.S. financial institutions: (i) a bank or credit union; (ii) a broker or dealer in securities; (iii) a mutual fund; (iv) a futures commission merchant; or (v) an introducing broker in commodities. For the purposes of this form, a legal entity includes a corporation, limited liability company, partnership, and any other similar business entity formed in the United States or a foreign country. 93

94 What information do I have to provide? This form requires you to provide the name, address, date of birth and social security number (or passport number or other similar information, in the case of foreign persons) for the following individuals (i.e., the beneficial owners): Each individual, if any, who owns, directly or indirectly, 25 percent or more of the equity interests of the legal entity customer (e.g., each natural person that owns 25 percent or more of the shares of a corporation); and An individual with significant responsibility for managing the legal entity customer (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President or Treasurer). The financial institution may also ask to see a copy of a driver's license or other identifying document for each beneficial owner listed on this form. 94

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98 Thanks! Deborah L Crawford Gettechnical Inc gettechnical@msn.com 98