On August 25, FinCEN published draft regulations to require certain private trust companies to establish or improve anti-money laundering (AML) programs that include Customer Identification Programs (CIPs) and that comply with Customer Due Diligence (CDD) requirements. Moreover, a private trust company would have to identify the beneficial owner of any legal entity with an account, create and maintain adequate records, and possibly identify beneficial owners of legal entities to FinCEN.
Present Financial Crime Law
FinCEN is authorized pursuant to the Bank Secrecy Act to issue regulations requiring financial institutions to develop and maintain AML programs and to keep records and file reports that “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.” Currently, FinCEN exempts non-federally regulated banks, e.g., a private trust company, from the requirement to establish an AML program, although they must comply with other Bank Secrecy Act requirements such as filing suspicious activity reports and currency transaction reports. Similarly, most financial institutions, including private trust companies, are required to establish and maintain CIPs as part of their AML program.
Summary of FinCEN's Proposed Regulations
FinCEN stated it is recommending the new rules “to ensure consistent Bank Secrecy Act coverage across the banking industry.” The proposed regulations generally apply the CDD rules requiring customer and beneficial owner identification to non-federally regulated banks, such as private trust companies which may be regulated by state law. The proposed regulations require all financial institutions to establish an AML program.
Further, FinCEN’s proposed regulations require that these AML programs include CIPs and CDD procedures to identify and verify beneficial ownership of legal entity customers. The proposed regulation would define beneficial ownership to include any individual who owns at least 25 percent of the equity interests in a legal entity customer, and a single individual with significant responsibility to control, manage, or direct a legal entity customer.
Effect of FinCEN's Proposed Regulations on High Net Worth Individuals
Family offices and high net worth individuals regularly create private trust companies in states that encourage such structures, e.g., Nevada, Wyoming, or South Dakota. For families who hold family businesses, maintain active investment-oriented family offices, or who may be simply frustrated by traditional institutional fiduciaries, the private trust company offers a special opportunity to promote both the family governance as well as the estate planning elements of their wealth management plans. The degree of regulation, taxation, and asset protection offered under state law varies, but the structures typically enable wealthy individuals or families to exert greater control over investment decisions involving family investment assets or businesses held in trust, while continuing to offer liability protection for trust fiduciaries and avoiding registration with the U.S. Securities and Exchange Commission.
FinCEN’s proposed regulations would require, for the first time, private trust companies to install or improve AML and CIP programs. The AML programs of private trust companies would have to include:
- risk-based assessments of the customers to determine the company’s risk profile;
- written policies, procedures, and internal controls to ensure a compliant program;
- independent testing to monitor and maintain program compliance;
- designation of a compliance officer;
- ongoing employee training programs;
- procedures to verify the identity of individuals opening an account;
- procedures for ongoing CDD, including understanding the nature and purpose of customer relationships, ongoing monitoring to identify and report suspicious transactions, and maintaining andupdating customer information, such as the beneficial owners of legal entities; and
- due diligence programs for correspondent accounts for foreign financial institutions and private banking accounts. While the proposed regulations do not automatically disclose the identity of beneficial owners to the public or any government agencies, the private trust company will have to create and maintain the records of such identities, and would be required to be disclosed if appropriately requested by FinCEN pursuant to an investigation or reasonable inter-agency or inter-governmental request.
Prepare and Act Now
Existing private trust companies and family offices and/or individuals contemplating establishing them must consider the increased regulatory burden and cost imposed by FinCEN resulting from the proposed regulations. FinCEN will allow private trust companies a period of time to ramp up and implement the new rules, but the management of private trust companies should determine sooner rather than later if it will conduct due diligence and other compliance functions internally or simply contract with a third party to provide these services. Similarly, private trust companies will face a new era of transparency into their operations. The identification of beneficial ownership of legal entities proposed in FinCEN’s regulations for such private trust companies is consistent with the Treasury’s treatment of beneficial ownership for purposes of other international tax reporting and disclosure regimes (e.g., ownership of foreign accounts under the Foreign Account Tax Compliance Act).
FinCEN is reviewing comments to the proposed rule and will issue a final rule shortly thereafter.