LEASING LAW By Judy VanOsdel Know Your Customer: Beneficial Ownership Rule comment on the development of a customer due diligence (CDD) regulation that will require financial institutions to identify and verify beneficial ownership of account holders. The proposed rule represents a departure from current FinCEN regulations under which finan-cial institutions exercise their own judgment in making risk-based assessments whether to require beneficial owner information for legal entity accounts. The proposed rule covers only financial institutions that are subject to a customer identification program (CIP) requirement under FinCEN regulations. At this time, such financial institutions are banks, brokers-dealers, mutual funds, futures commission merchants and introducing brokers in commodities. The proposed rule states that CDD con-sists of at least the following four elements: 1. Identifying and verifying the identity of customers; 2. Identifying and verifying the identity of beneficial owners of legal entity customers; 3. Understanding the nature and purpose of customer relationships; and 4. Conducting on-going monitoring to maintain and update customer informa-tion and to identify and report suspicious transactions. In its proposal, FinCEN notes that the first element listed above is already expressly required by existing CIP requirements and the third and fourth elements listed above are implicit in existing CIP requirements. Therefore the proposed rule adds only the second element. In the proposed rule a “beneficial owner” is defined as a natural person who meets ei-ther of the following two tests: 1. Ownership prong: each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the eq-uity interests of a legal entity customer. 2. Control prong: an individual with signifi-cant responsibility to control, manage or direct a legal entity customer, including: (a) an executive officer or senior manager or (b) any other individual who regularly performs similar functions. Each of these two prongs is intended to be an independent test. An institution would be required to identify no more than four individuals under the first prong (ownership prong). Under the control prong, one individ-ual must be identified. Where a legal entity customer is owned by or controlled through one or more other legal entities, the proposed 38 Under the proposed rule, financial institu-tions would be able to rely upon a certifica-tion form signed by the person opening the account on behalf of the legal entity to verify beneficial owners. Financial institutions must obtain this form at the time a new account is opened. The proposed rule includes a standard certification form to be used for these purpos-es. The information is required to be obtained for up to four beneficial owners who meet the ownership prong and for one individual who meets the control prong. The information includes name, date of birth, address, Social Security number for U.S. persons or passport number and country of issuance or other sim-ilar identification for non-U.S. persons. In its proposal, FinCEN explains that ob-taining beneficial ownership information en-hances efforts to identify and report financial crime, terrorist activity and money launder-ing and the new rule would expand financial institutions’ CDD by including a requirement to obtain and verify natural persons who are beneficial owners of legal entity customers, subject to certain exemptions. The penalties that may be imposed for failure to comply with the proposed rule once it becomes ef-fective range from a civil money penalty to a cease and desist order. The public comment period for the pro-posed rule closed on Oct. 3, 2014, and the rule will become effective one year from the date the final rule is issued. As of the end of the May 2015, the final rule had not been issued. ■ Judy VanOsdel is Executive Vice President/Chief Legal Officer for TCF Equipment Finance, a division of TCF National Bank, and a member of the ELFA Legal Committee. O N JULY 30, 2014, the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury issued its proposed rule for public ELFA Member Writes Book on Equipment Finance Workouts Ken Peters of Dressler & Peters has written a review of the book Workouts and Enforcement for the Secured Creditor and Equipment Lessor , by Frank Peretore of Peretore & Peretore. Read the full review at www.elfaonline. org/news/IndNews/news_report. cfm?id=22008. rule requires customers to look through those other legal entities to determine which natu-ral persons own 25% or more of the equity interests of the legal entity customer. Finan-cial institutions will be able to rely generally on the representations of the customer when answering questions about the individual per-sons behind the legal entity. A “legal entity” customer includes corpo-rations, limited liability companies, partner-ships or other similar business entities that open a new account after the implementing date of the regulation. Entities that are exempt from CIP requirements, such as publicly held companies traded on certain U.S. stock ex-changes and any majority-owned domestic subsidiary; domestic government agencies and instrumentalities; charities or non-profit enti-ties meeting certain conditions; and financial institutions regulated by a federal functional regulator (i.e., federally regulated banks, bro-kers or dealers), would also be exempt from the beneficial ownership requirement. Other exemptions are also proposed, including any majority-owned domestic subsidiary of a U.S. publicly traded company, an entity registered with the SEC, and a charity or nonprofit entity that meets certain requirements. JULY/AUGUST/SEPTEMBER 2015 EQUIPMENT LEASING & FINANCE MAGAZINE