One of the more often asked about quirks related to Beneficial Ownership is the requirements for trusts. We know that the beneficial ownership requirements will be changing in the future, as FinCEN is in the process of publishing rules on proposed changes to the process, but until all of that is issued and becomes effective, weâre still required to follow the existing Beneficial Ownership rules, which are not as straightforward as they may seem.
What is the purpose of beneficial ownership? To identify and verify âbeneficial ownersâ of legal entity customers. Who are beneficial owners? There are two categories of beneficial owners: a) âownershipâ â any individual who owns directly or indirectly 25% or more of a legal entity customer, and b) âcontrolâ â a single individual with managerial authority over a legal entity customer (such as CEO or President of a corporation, Managing Member of an LLC, or General Partner of a Partnership). If there are no individuals who own 25% of the legal entity customer, then you wouldnât collect any information for the âownershipâ category of beneficial ownership, but youâll always have exactly one individual reported for the âcontrolâ category of beneficial ownership.
The beneficial ownership requirements apply to âlegal entity customers,â meaning those entities that are registered with the Secretary of Stateâs office such as a corporation or limited liability company, as well as general partnerships, which are generally not required to register with any state offices to do business. If your customer is a legal entity, such as those just named, theyâll likely be subject to beneficial ownership.
Although the regulation contains sixteen exceptions to the rule for banks, publicly traded companies, governments, and other regulated entities, most non-public companies will be subject to beneficial ownership. Individuals (natural persons) and sole proprietorships are not subject to beneficial ownership, as there is no legal distinction between individuals and sole proprietorships that would necessitate the collection of information. Trusts that are your customers are also not subject to beneficial ownership, unless the trust is registered with the Secretary of Stateâs office, which is not very common for trusts.
However, a much more common scenario is dealing with a legal entity customer that is not a trust itself but is owned by a trust or multiple trusts. Is beneficial ownership required, and if so, who are the beneficial owners? In a situation in which a trust owns 25% or more of a legal entity customer, then the beneficial owner for these purposes will be one trustee of the trust. If there is only one trustee of the trust, then that individual is the beneficial owner in his or her capacity as trustee (31 CFR § 1010.230(d)).
If there are multiple trustees, only one trusteeâs information is required to satisfy the regulatory requirements. Banks may choose to collect beneficial ownership on more than one trustee in accordance with the bankâs own assessment of risk, but only one trustee is required to satisfy the requirements (FinCEN FAQs).
What about a scenario in which a bank, law firm or other entity is the trustee of the trust which is 25% owner of a legal entity customer? In such a case you wouldnât be required to collect information for the âownershipâ category of beneficial ownership, although youâd still collect information for the âcontrolâ category of beneficial ownership. Additionally, banks should collect information on entities as trustees as part of their CIP, in accordance with the bankâs risk assessment and customer risk profile.
There are many other possibilities and scenarios that arise related to beneficial ownership, and I think weâve heard them all on the hotline, so reach out to us on our hotline (chat, e-mail, telephone) with any beneficial ownership-related questions you may have.