There is an industry-wide requirement for banks and payment providers to know the individuals they do business with.
The Financial Crimes Enforcement Network (FinCEN.gov) has issued a Customer Due Diligence (CDD) rule to amend existing BSA regulations in order to clarify and strengthen customer due diligence requirements for financial institutions. It outlines explicit customer due diligence requirements and imposes a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. FinCEN intends that the legal entity customer identify its ultimate beneficial owner(s).
That means Straddle is legally obligated to follow a specific set of steps before we’re able to open a Straddle payments account. We don’t like it either! But here’s the deets:
TL;DR
The CDD Rule, which amends Bank Secrecy Act regulations, aims to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains. The CDD Rule requires covered financial institutions and service providers like Straddle to identify and verify the identity of the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts.
The CDD Rule has four core requirements. It requires covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to:
identify and verify the identity of customers
identify and verify the identity of the beneficial owners of companies opening accounts
understand the nature and purpose of customer relationships to develop customer risk profiles
conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information
With respect to the requirement to obtain beneficial ownership information, financial service providers will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and/or an individual who controls the legal entity.
What is a Beneficial Owner or Controlling Person and why do I need to provide this information?
A beneficial owner is an individual, if any, who holds 25% or more equity ownership of your business and/or at least 1 individual who has “significant control.”
Who has significant control?
There will always be an individual with significant responsibility for managing the legal entity such as (Chief Executive Officer, CFO, Chief Operating Officer, Managing Member, Vice President, Treasurer, etc.) or any other individual who regularly performs similar functions.
To help the government fight financial crime, Federal regulation requires covered financial institutions to obtain, verify, and record information about the beneficial owners of legal entity customers. Legal entities can be abused to disguise involvement in terrorist financing, money laundering, tax evasion, corruption, fraud, and other financial crimes.
Requiring the disclosure of key individuals who own or control a legal entity (i.e., the beneficial owners) helps law enforcement investigate and prosecute these crimes.
What is a Legal Entity?
A legal entity is a corporation, limited liability company, partnership, and any other similar business entity formed in the United States or a foreign country.
Who needs to provide this information?
We'll request this information from the person who opens a new Straddle account on behalf of a legal entity or the primary account user for an existing account. Users must provide the ultimate beneficial owner who must be a natural person.
What information do we need to collect?
The name, address, date of birth, and Social Security Number (or passport number or other similar information in case of foreign persons) for at least 1, and a maximum of 5 beneficial owners (each of whom must be a natural person, not a legal entity) who satisfy the following criteria:
Each individual, if any, who directly or indirectly owns 25% or more of the equity interests of your legal entity company and,
An individual with significant responsibility for managing your legal entity company (e.g., Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner President, Vice President, or Treasurer).
Must provide information for individuals who satisfy the above ownership criteria, either directly or indirectly, through multiple legal entities.
Will credit scores be affected?
Straddle will never use personal information to generate a hard credit inquiry. The information provided will be used strictly for ID verification purposes.
Is the information safe?
We follow industry best practices for data security and are subject to annual security audits. All Straddle application data in-transit is protected with TLS 1.2 Asymmetric Encryption and data at-rest is protected by Transparent data encryption (TDE) in Microsoft Azure.
What information should be provided when a business is owned by another company?
Under the Rule's beneficial ownership identification requirement, Straddle must collect from its legal entity customers information about individual(s) who are the beneficial owner(s). Legal entity customers are required, by regulations that apply to the financial institution(s) Straddle partners with to process your payments, to provide the identities of individuals who satisfy the definition, either directly or indirectly through multiple corporate structures, as illustrated below.
Multi-level ownership
Allan is a beneficial owner of Customer B because he owns indirectly 30% of its equity interests through his direct ownership of Company A.
Betty is also a beneficial owner of Customer because she owns indirectly 20% of its equity interests through her direct ownership of Company A plus 16 2/3% through Company B for a total of indirect ownership interest of 36 2/3%.
Neither Carl nor Diane is a beneficial owner because each owns indirectly only 16 2/3% of Customer's equity interests through their direct ownership of Company B.
Who is exempt from the CDD rule?
The Final Rule provides a specific list of entities that are excluded from the definition of “legal entity customer” since beneficial ownership information for these entities is generally available from other credible sources:
A financial institution regulated by a Federal functional regulator or a bank regulated by a State bank regulator;
A department or agency of the United States, of any State, or of any political subdivision of any State;
Any entity established under the laws of the United States, of any State, or of any political subdivision of any State, or under an interstate compact between two or more States, that exercises governmental authority on behalf of the United States or any such State or political subdivision;
Any entity (other than a bank) whose common stock or analogous equity interests are listed on the New York, American or NASDAQ stock exchange (each, a Listed Entity);
Any entity organized under the laws of the United States or of any State and at least 51 percent of whose common stock or analogous equity interest is owned by a Listed Entity;
An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of that Act;
An investment company, as defined in section 3 of the Investment Company Act of 1940, that is registered with the Securities and Exchange Commission (SEC) under that Act;
An investment adviser, as defined in section 202(a)(11) of the Investment Advisers Act of 1940, that is registered with the SEC under that Act;
An exchange or clearing agency, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 6 or 17A of that Act;
Any other entity registered with the SEC under the Securities Exchange Act of 1934;
A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer or major swap participant, each as defined in section 1a of the Commodity Exchange Act, that is registered with the Commodity Futures Trading Commission;
A public accounting firm registered under section 102 of the Sarbanes-Oxley Act;
A bank holding company, as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841) or savings and loan holding company, as defined in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n));
A pooled investment vehicle that is operated or advised by a financial institution that is an Excluded Legal Entity;
An insurance company that is regulated by a State;
A financial market utility designated by the Financial Stability Oversight Council under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;
A foreign financial institution established in a jurisdiction where the regulator of such institution maintains beneficial ownership information regarding such institution;
A non-U.S. governmental department, agency or political subdivision that engages only in governmental rather than commercial activities; and
Any legal entity only to the extent that it opens a private banking account subject to 31 C.F.R §1010.620.
The following Legal Entity customers are subject only to the “controlling person” portion of the beneficial ownership requirement:
A pooled investment vehicle that is operated or advised by a financial institution not excluded under paragraph (e)(2) of section 31 C.F.R §1010.230; and
Any legal entity that is established as a nonprofit corporation or similar entity and has filed its organizational documents with the appropriate State authority as necessary.
Where can we learn more about this?
To find more information, check out The Customer Due Diligence (CDD) Requirements for Financial Institutions
or