April 2, 2015
Authored by: Bryan Cave Leighton Paisner
On August 4, 2014, FinCEN released proposed rules that would require banks and certain other financial institutions to identify the “beneficial owners” of their business entity customers and to verify the identity of each such beneficial owner (the “Proposal”). If the Proposal results in final rules that are substantially identical to the proposed rules, financial institutions might be unable to comply without violating the federal Fair Credit Reporting Act (“FCRA”).
Under the Proposal, “beneficial owners” would generally include at least one manager of the entity and each individual owning 25% or more of the entity. This could mean up to five individuals if no manager also owns 25% or more of the entity.
The Proposal would require a financial institution first to identify the customer’s beneficial owners. This should be reasonably manageable because institutions would be able to provide a certification form to its customer and require that the customer name its beneficial owners. Financial institution’s would not be required to take independent steps to verify the status of such persons as beneficial owners.
The potential legal conflict arises under the second prong of the Proposal, under which the financial institution would be required to verify the identity of those persons whom it has been told are the customer’s beneficial owners. The Proposal would require a financial institution to verify the identity of each beneficial owner using risk-based procedures that are “identical to the covered financial institution’s Customer Identification Program procedures required for verifying the identity of customers that are individuals.”
Whether in a deposit or loan context, banks often will obtain a single credit report or other consumer report for the combined purposes of an initial OFAC screen, to confirm the customer’s creditworthiness, and to verify the customer’s identity under the institution’s Customer Identification Program (“CIP”). Such reports are “consumer reports” under the FCRA and therefore subject to the FCRA’s rules, including with respect to when such reports may be obtained.