As the new CDD FAQs on the ultimate beneficial ownership (UBO) rules were released last week, there have been quite a few questions relating to the rules that require compliance by May 11, 2018. One of those questions relates to non-profit organizations that are not incorporated or registered with the secretary of state. This article will explore how to complete the UBO information for both incorporated nonprofits as well as nonprofits which are unincorporated associations.
Different Types of Nonprofit Organizations
The first thing we need to understand when discussion UBO rules for nonprofits is that some non-profits (like churches) are incorporated while others (like baseball leagues) may not be. While I am not an attorney and do not offer legal advice, it is my understanding that non-profits which are not formally incorporated are legally recognized as an unincorporated organization. In some states, they don’t even have to register with the state to operated as an unincorporated organization. The bottom line is that some non-profits are incorporated while others are unincorporated organizations.
Nonprofits and Ultimate Beneficial Ownership Identification and Verification
This difference in organizational structures for non-profits creates a difference on how to handle accounts for these organizations in regards to the new beneficial ownership rules. Specifically, the beneficial ownership rules provide a partial exemption for nonprofits where a financial institution does not need to verify the ownership prong, but must only verify the control prong.
From the 2016 final rule:
(3) The following legal entity customers are subject only to the control prong of the beneficial ownership requirement:
(i) A pooled investment vehicle that is operated or advised by a financial institution not excluded under paragraph (e)(2) of this section; and
(ii) 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.
In addition, the preamble to the 2016 final rule states the following:
"Accordingly, the final rule eliminates this proposed exclusion and instead includes as a type of legal entity customer, subject only to the control prong of the beneficial owner definition, 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."
Upon first glance, it would appear that the control prong applies to all nonprofit organizations. However, as we discussed in the beginning of this article, there are two types of nonprofits: those that are incorporated and unincorporated associations.
UBO Rules for Unincorporated Nonprofits
The only way a nonprofit can be subject to the control prong requirements of the ultimate beneficial ownership rules is if the nonprofit is also a legal entity customer. The rule specifically states that a nonprofit is only considered a legal entity customer if it is incorporated or registered with the secretary of state.
From the preamble to the final rule:
“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. This is because neither a sole proprietorship nor an unincorporated association is an entity with legal existence separate from the associated individual or individuals that in effect creates a shield permitting an individual to obscure his or her identity.[54] The definition of “legal entity customer” also does not include natural persons opening accounts on their own behalf.”
Also, from the 4/3/18 FAQs:
Question 22: Definition of legal entity customer: Sole proprietorship and unincorporated associations
Are sole proprietorships formed by spouses or other unincorporated associations considered legal entity customers under the Rule?
A. No. Sole proprietorships—individual or spousal—and unincorporated associations are not legal entity customers as defined by the Rule, even though such businesses may file with the Secretary of State in order to register a trade name or establish a tax account. This is because neither a sole proprietorship nor an unincorporated association is a separate legal entity from the associated individual(s), and therefore beneficial ownership is not inherently obscured.
The bottom line is that a nonprofit must be a legal entity customer in order for the partial beneficial ownership requirement (control prong) to apply. If a nonprofit is an unincorporated organization, it is not considered a legal entity customer and the beneficial ownership rules do not apply.
Thanks for reading this article. If you haven't done so already, make sure you check out our Compliance Clips - free 3-5 minute training videos on all topics of regulatory compliance.
