It can be hard for regulatory agencies to admit when they’ve made a mistake. But that’s exactly what FinCEN did last week when it announced that certain loan renewals and modifications would not trigger its beneficial ownership due diligence rule (the “Rule”), reversing its earlier guidance on the subject. FinCEN’s change of heart is welcome relief for the industry, which decried FinCEN’s earlier position as failing to meaningfully advance any law enforcement goals while imposing unnecessarily costly new requirements to conduct due diligence in connection with already established loans with known business customers.
The Rule requires financial institutions to take various steps to verify the identity of beneficial owners of corporations, LLCs, and other legal entity customers who open a “new account” (such as a loan, deposit account, line of credit, etc.). In particular, the Rule requires financial institutions to “look through” certain types of entities and gather information about the individuals that own and/or control them. The overall purpose of the Rule is to improve financial transparency and prevent criminals and terrorists from hiding behind the opaque curtain of corporate ownership to disguise their illegal activities. And since bankers are already accustomed to Know-Your-Customer obligations, much of what was contained in the Rule wasn’t all that controversial (aside from adding yet another layer of compliance and cost). Continue Reading