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FinCEN’s Plans May Require More Financially Connected Businesses Get To Know Their Clients Better

FinCEN’s Plans May Require More Financially Connected Businesses Get To Know Their Clients Better

AUGUST 28, 2012

FinCEN is considering a wide range of options pertaining to the development of a customer due diligence (CDD) regulation that would “codify, clarify, consolidate and strengthen” existing CDD requirements.  Perhaps most significantly, the new CDD program would require financial institutions to verify “beneficial ownership” of accounts.

Guidepost Solutions is carefully following developments because FinCEN’s final decision on the scope and substance of the rule will impact the way numerous financial institutions will be required to approach due diligence with respect to their customers. This is still a work in progress and it is currently uncertain exactly what will be required and of whom. Initially, FinCEN is considering developing a CDD rule to cover banks, brokers or dealers in securities, mutual funds, futures commission merchants and brokers in commodities. FinCEN believes, however, that the CDD rule may also be appropriate for all financial institutions and will consider extending the rule to them in the future.  In that case, the rule would reach such institutions as insurance companies, casinos and non-bank mortgage lenders.  On July 31, 2012, FinCEN held a hearing on its proposal at which the Justice Department and representatives from the financial industry testified.

FinCEN has sought comment and input on almost every aspect of the proposed rule including on not only which entities the rule will cover but also, “what information should be required in order to identify and verify”¦the identity of beneficial owners.  On that issue, FinCEN stated in an ANPR issued in March 2012 that it was “exploring two possible meanings for verification of beneficial ownership”; those two possible meanings are described as follows:

  • the first meaning would require verifying the identity of the natural person identified by the customer as the natural owner accomplished simply by obtaining “a copy of a government-issued identification document bearing a photograph of the individual identified by the customer as its beneficial owner, to verify that the individual exists”;
  • the second possible meaning would require “verifying that the individual identified by the customer as its beneficial owner is, in fact, the beneficial owner of the legal entity customer”.

FinCEN sought comment on the challenges posed by each of the “possible verification requirements”; the comment period closed on June 11, 2012, and, as noted, the Treasury Department held the first in a series of planned public hearings on July 31, 2012.

At that first hearing, industry representatives predictably voiced concern about the proposed definition of beneficial ownership and the verification of beneficial ownership.  Some participants objected that the definition set forth is vague and confusing.  Others discussed the hurdles and complexities associated with verification of beneficial ownership and the burden and cost implications of the processes that may be required.

While details of the new rules are yet to be filled in, it is clear that change is coming and that more, rather than less, will be required of the financial industry.  Financial institutions should be considering how they will respond to this next initiative.

Guidepost is available for consultation on the challenges that will be presented.

About the authors


Thomas A. McShane is the president of investigations and monitoring at Guidepost Solutions.  He plays a key supervisory role in many of the company’s complex and high-profile cases involving organizations in various industries and sectors.  Mr. McShane spearheaded the development of the company’s Independent Monitoring Program and works with numerous governmental and quasi-governmental authorities. He has served as Counsel to the New York State Commission on Government Integrity and Chief Counsel to a successor commission, the New York State Temporary Commission on Local Government Ethics. Thomas can be reached at


As Chief Compliance Officer and Deputy General Counsel, Joseph Jaffe oversees regulatory compliance issues and assists with legal matters for all of Guidepost Solutions’ offices. In addition, he leads the company’s Europe, Middle East and Africa practice. Joseph can be reached at


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