Published By Janet Gershen-Siegel at June 1, 2018
New federal identification requirements will change everything.
by Janet Gershen-Siegel
May 11, 2018 – The Financial Crimes Enforcement Network (FinCEN) and the US Treasury recently announced they were implementing a recent law requiring more identification from individuals within businesses which want loans.
Up until May 11 of this year, banks did not have to know the names and other details about every owner and principal of a company. A principal is someone with “control”, such as a CEO. The definition of these people is:
“A single individual with significant responsibility to control, manage, or direct a legal entity customer, including:
(i) An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member,
General Partner, President, Vice President, or Treasurer); or
(ii) Any other individual who regularly performs similar functions.”
Now banks need to know this information, so long as either a person has control, or that person holds 25% of the business or more. Anyone with control doesn’t have to have a 25% ownership interest. In fact, they can own 0% of the business.
However, that is only for new accounts opening on May 11 or afterwards. Older accounts are fine the way they are.
The people the regulation targets are the owners and principals of corporations and partnerships. This change won’t affect sole proprietorships or individuals who don’t have business accounts. It won’t affect employees who don’t hold ownership stakes, either, unless they are in a control position within the organization.
The reasoning for all of this is for anti-money laundering.
Money laundering is a Federal offense and is essentially using legit businesses as funnels for illegally-gotten cash and other gains. This ‘launders’ the money and makes it harder for the authorities to trace the illicit source(s) of the funds. See:
Under the Patriot Act, banks must keep records on transactions performed by all entities (such as corporations, etc.). The new identification requirements supplement that. They do so by requiring name and Social Security number disclosures for all owners and persons with control.
The idea behind the Patriot Act records is to make it possible to check transaction history and changes over time. The idea is to see if there are new money sources or destinations which could be suspect.
This new regulation is particularly important in light of the existence of shelf and shell corporations, which might seem to have little or no real activity, but could end up as conduits for illegal funds.
One theory behind it is: “legal entities seeking access to financial institutions to disclose identifying information, such as the name, date of birth, and Social Security number of natural persons who own or control them, will make such entities more transparent, and thus less attractive to criminals and those who assist them.”
The changes affect all covered financial institutions. Hence they will affect business loan applications to banks, credit unions, mutual funds and the like.
According to Thompson Coburn, all covered financial institutions means: “banks, federally insured credit unions, savings associations, corporations organized for international or foreign banking or financial operations, trust banks or trust companies that are federally regulated and subject to an anti-money laundering program requirement, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.”
As a result of the changes, lending institutions will be asking business owners and shareholders with significant holdings for identifying data such as Social Security numbers. The federal identification requirements apply even when no one asks for offers a personal guarantee.
Business owners should keep this in mind and ask questions if a lender requests their Social Security number. One thing to ask is whether providing an SSN will result in the addition of a personal guarantee. It should not under these new requirements, but it will pay to check.
It’s our mission to make business credit building easy and intuitive for small business owners. We are dedicated to helping entrepreneurs obtain business credit, loans, and credit lines to start and grow. These new regulations open up a world of transparency in financial dealings. Our job is to help business owners understand when and why a request for their Social Security number comes under these federal identification requirements, and when it’s for a personal guarantee.