Pub. 7 2017-2018 Issue 6

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S T here have been a lot of questions on the various 2018 rules but one of the two (looking at you, HMDA!) that the Compliance Alliance hotline gets the most questions on is the Beneficial Ownership Rule. And the number one question? “Can some- one please explain this to me in plain English?!” It’s a fair question so it’s time to break down this rule by going step-by-step. Step 1: Who Does This Rule Apply to? The rule applies to “Legal Entities” as defined by the rule. So even if you’re used to thinking about family trusts and estates as a “legal entity” because they are separate from the individuals in- volved with themand they are created by state law, that’s not the defining trait of a “legal entity”. The defining trait is an or - ganization that is created by registering Beneficial Ownership: Step by Step BY SILVIA GARCIA MAGGIO, ASSOCIATE GENERAL COUNSEL, COMPLIANCE ALLIANCE with the Secretary of State (or whatever your state’s registration agency is called) as a business that is separate from the individual(s) running it. So for example, a sole proprietorship wouldn’t meet that definition but a sole member LLC would. Likewise, a family trust would not meet definition but a business trust that is set up by registering with the Secretary of State would. So, you have a legal entity, you continue to step 2, if not, you follow your regular CIP steps. Step 2: What Do I Have to Do? The beneficial owner rule requires that banks identify who the beneficial owners of a legal entity are and then, verify the identity of those owners much like CIP. So first, you need to figure out who is an owner and if anyone owns at least 25% of the business. So, for exam - ple, for sole member LLC, you’re going to have one person who owns 100% of the company and you need to get their verification documents. On the other hand, you might have a company owned by 10 people, all owing at least 10% of the company so none of those owners would meet this ownership requirement. In addition to your owners, you also need one person who has the ability to control or manage the business – for example, your CEOs, your CFOs or COOs. It doesn’t matter who it is along as they can control the company. You can also rely on the information the customer is giving you in regards to this role. The end point being, you could be collecting information on up to five individuals – up to 4 owners who own at least 25% plus 1 controlling owner. If you don’t have someone who owns at least 25% of the entity, you will just collect information on that controlling or managing owner. So this rule will have to collecting on 1 to 5 people, total. That’s simple enough when the di- rect owners are natural people – but what if the beneficial owner is a trust or another company? For a trust that owns at least 25% of a legal entity, you’re simply going to get the CIP-like information from the trustee. For a legal entity that owns a legal entity, you’re looking to see if any natural person individual owns at least 25% of your legal entity customer. For exam- ple, if your legal entity is 100% owned by an LLC and that LLC is owned by