The Treasury Department, Old Time Hockey and the Beneficial Owner Rule

View post titled The Treasury Department, Old Time Hockey and the Beneficial Owner Rule

Posted on 06/04/2019 at 08:30 AM by David Gonzales

Many hockey fans, like myself, love the Paul Newman classic Slap Shot. The movie is typically known for either the brutal Hanson brothers or the unorthodox manner the Charlestown Chiefs use to win the championship of the fictional Federal League. One of the central plotlines in the movie, however, isn’t the game of hockey but the business of hockey. Paul Newman searches long and hard to answer the most important question in his world, “Who owns the Chiefs?”

The United States Department of the Treasury has presented financial institutions with the same quest. Find out who owns the entity customer in order to comply with federal regulations. On its face the regulation requiring institutions to gather information regarding the beneficial owner of entity customers appears simple. Gather the name, date of birth, address, and a social security or passport number from all beneficial owners that meet one of the two qualifications. In the details, however determining which people (if any) meet the requirements of a beneficial owner requires some attentive math skills.

There are two ways a person can be considered a beneficial owner under the regulation. First, the entity must name at least one individual with “significant responsibility to control, manage, or direct” the legal entity. The most obvious choice for this prong is a President or Chief Executive Officer. More than one person may be named, but the regulations only require listing one person for the “control prong” of the analysis.

Second, a beneficial owner is any individual who, either directly or indirectly, owns twenty-five percent (25%) or more of the entity customer. Since the ownership may be indirect, it’s important for a financial institution to drill down in the ownership of an entity to ensure that the threshold is not met by a combination of direct and indirect ownership. For example, the entity customer may be owned by four individuals and one other entity each with twenty percent (20%). If none of the individual owners own a portion of the owning entity, no owner would meet the “ownership prong’ threshold. However, if one of the four individual owners was also the sole owner of the owning entity they would now meet the threshold by having forty (40%) ownership in the bank’s entity customer (20% directly, 20% indirectly through the entity). It doesn’t take long before these calculations can get confusing.

The analysis becomes even more complex when a trust owns greater than twenty-five percent (25%) of the entity customer. The rule states that in this case the trustee is the beneficial owner for the purposes of the regulation regardless of the composition of beneficiaries of the trust. While this is much more convenient for the financial institution it fails to truly inquire into the beneficial owner, instead focusing strictly on the legal owner (a distinction only a lawyer could love).

The complexities of this single rule illustrate the difficulties of continued compliance with a web of federal regulation. Fortunately, there is no need for financial institutions to handle the complexities on their own. The banking compliance attorneys at Dickinson, Mackaman, Tyler & Hagen P.C. are happy to assist small and large financial institutions manage their compliance risk.

Paul Newman was successful in finding the owner of the Chiefs, but couldn’t convince the owner to save the team. The Department of Treasury’s regulation will start financial institutions down the path of finding the owners of their entity customers, but in its current state the burden of the additional due diligence on financial institutions seems unlikely to reach the ultimate goal of identifying individuals benefiting from the entity.


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