CIP Requirements for Trusts
Written by Alma Calcano, Regulatory Compliance Specialist, NAFCU
Greetings compliance friends!
A couple of weeks ago I blogged about trusts and field of membership. Today, I will cover Customer Identification Procedures (CIP), specifically in the context of trusts. Before we dive in, it is important to look at the scope of the CIP rule.
The CIP Rule
According to the FFIEC BSA/AML examination manual CIP applies to all customers, including trusts.
The CIP is intended to enable a credit union to form a reasonable belief that it knows the true identity of each customer. For a trust, credit unions may obtain documents establishing the trust exists. This is commonly referred to as the “trust instrument”. For example, a trust could be created by a Will, Deed of Trust, Declaration of Trust, Trust Agreement or some other document. State law may determine the requirements to create a trust. If it is unclear what documentation is appropriate in your jurisdiction, you may want to consider consulting with your credit union’s attorney.
CIP and Trust Accounts
The preamble to each of the CIP rules notes that while credit unions are not required to look through a trust to its beneficiaries, “they may need to take additional steps to verify the identity of a customer that is not an individual, which include obtaining information about persons with control over the account. Where trusts are direct customers of credit unions, credit unions generally also identify and verify the identity of trustees, because trustees will necessarily be signatories on trust accounts. Under the rule, in certain circumstances involving revocable trusts, the credit union may need to gather information about the settlor, grantor, trustee, or other persons with the authority to direct the trustee, and who thus have authority or control over the account, in order to establish the true identity of the customer.” See, 68 FR 25090
The CIP rule also provides that, based on the credit union’s risk assessment of a new account opened by a customer that is not an individual, the credit union may need "to obtain information about individuals with authority or control over such an account, including signatories, in order to verify the customer’s identity.” See, 12 CFR 1020.220 (a)(2)(ii)(c). A credit union as part of its CIP procedures is able to request additional information in connection with an account for a trust, in order to identify the persons with control over the account.
Obtaining Documentation from a Trust and Beneficial Ownership Implications
A legal entity customer is a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. See,31 CFR § 1010.230 (e). Trusts are “not included in the definition of legal entity customer, other than statutory trusts created by a filing with a Secretary of State or similar office.” See, FIN-2016-G003, Q. 22. Most trusts do not meet the definition of a legal entity customer and are not subject to the beneficial ownership rule. See, Appendix 1-Beneficial Ownership to the FFIEC BSA/AML Examination Manual.
Whether a trust is exempt from the rule generally depends on whether the trust was created by a filing with the Secretary of State. However, simply filing documents does not always create a separate legal entity. When the document(s) filed with the state do not actually create a separate legal entity, then that trust is not a legal entity customer. The preamble to the final rule explains the following:
“A legal entity customer means a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction, that opens an account. This means that “legal entity customer” would include, in addition to corporations and limited liability companies, limited partnerships, business trusts that are created by a filing with a state office, any other entity created in this manner, and general partnerships. (It would also include similar entities formed under the laws of other countries.) It would not include, for example, sole proprietorships or unincorporated associations even though such businesses may file with the Secretary of State in order to, for example, register a trade name or establish a tax account.” (Emphasis added.)
If a trust wants to open an account at a credit union, the credit union may need to review its state law and the documents filed with the state to determine whether any trusts are actually separate legal entities. It is also possible there will be a few different ways trusts can be set up under state law, so a credit union may need to determine whether it is a legal entity customer on a case-by-case basis.
Keep in mind, the beneficial ownership rule does not supersede existing obligations and practices regarding trusts generally. Even if a credit union determines the beneficial ownership rule does not apply in a particular case, trusts are still subject to CIP.
NAFCU Seeks Member-CU's Input for Report to Fed
In other news, NAFCU is asking members to complete a survey on a range of issues, including the impact of CFPB's qualified mortgage rule, the Durbin Amendment and NCUA's proposed risk based capital rule, in preparation for this year's meeting between its board and Federal Reserve Board Gov. Jerome Powell. The deadline for survey submission is Sept. 11.