Best Practices: The United States Department of Treasury Wants You – To Help Fight Financial Crimes by Obtaining Beneficial Ownership Information

In response to concerns regarding the use of legal entities to disguise involvement in terrorist financing, money laundering, tax evasion, corruption, fraud, and other financial crimes, The United States Department of Treasury (“USDT”) has issued a new rule under the Bank Secrecy Act (“BSA”) to clarify and strengthen customer due diligence (“CDD”) requirements. This CDD regulation requires “financial institutions”¹ to obtain, verify, and record information about the “beneficial owners” of “legal entity customers”² opening “new accounts.

Effective May 11, 2018, if you are a Small Business Administration (“SBA”) lender, chances are the rule will apply to you and each SBA loan that you finance to a new borrower. Every lender should make sure it is prepared and in compliance with the CDD rule.

Overview of Requirements

Under the new rule, generally, at least one beneficial owner must be identified for each legal entity customer. Like under the current SBA rules, a beneficial owner is any individual who (i) directly or indirectly, owns 25 percent or more of the legal entity customer or (ii) has “significant responsibility to control, manage, or direct the legal entity.”

In order to comply with this rule, financial institutions are required to obtain a certification from the beneficial owner at the time a new account – or “a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit” – is opened. This rule does not apply to customers with an existing account with the bank, provided that the bank has a reasonable belief that it knows the true identity of the person.

The financing of a new SBA loan to a new borrower would be deemed an account for purposes under the CDD rule. Similarly, each time an SBA loan is renewed or a new customer is added to a loan or deposit account, the lender would need to satisfy the CDD rule with respect to that new entity. Ultimately, the most prudent procedure is to obtain a completed beneficial owners form each time a lender originates or modifies an SBA Loan.

Arguably, the information provided on SBA Forms 1919 and 1920 collected by all SBA lenders could be sufficient to meet this requirement; for compliance with both the SBA and the CDD, (i) lenders must verify with entity documents that all owners are listed in the ownership chart on each form, and (ii) the borrowing entities must be owned by at least one individual.

However, Forms 1919 and 1920 do not provide for – or allow – lenders to request for ownership beyond that of the borrower. If the entity is owned by a holding company, these SBA Forms will only list the holding company as the owner, which would be insufficient to meet the new CDD requirements.

Lenders must always consider whether additional documentation is needed to comply not only with the SBA rules but also other state and federal regulations. It is prudent for lenders to review internal processes and documentation prior to the rule becoming effective on May 11, 2018.

For more information on the new CDD rule, contact Katherine at ktohanczyn@starfieldsmith.com or at 267-470-1187.

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1 For purposes of this rule, a “financial institution” includes (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.

2 Subject to certain exceptions, a “legal entity customers” includes (i) corporations, (ii) limited liability companies, (iii) partnerships, (iv) trusts, (v) any entity created by a filing with a state office and (vi) any similar entity formed under the laws of a non-US jurisdictions.