Beginning May 11, 2018, new regulations will be implemented at banks and credit unions regarding their customer due diligence (CDD) policies. Law firms, partnerships and other similar entities will now be required to provide their financial institution with a certification listing the law firm’s “beneficial owners” when opening a new general, escrow or trust (IOLTA) account. A “beneficial owner” of the firm is any individual who, directly or indirectly, owns 25% of more of the equity interest of the firm. Further, the rule also requires identification of a single individual with significant responsibility to control, manage, or direct the law firm.
Financial institutions are now required to collect the name, date of birth, address and social security number of each beneficial owner whenever the firm opens a new account. While the rule only requires this information to be obtained for accounts opened after May 11, 2018, it is anticipated that some banks or credit unions may conduct a retroactive review to obtain beneficial ownership institution.
While the first version of the rule required a law firm to identify similar information on all of its clients who have funds in the firm’s trust account, this requirement was subsequently changed after an objection was raised by the American Bar Association. After a period of public comment, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) included language in the final rule which clarifies that when a law firm opens a pooled trust account on behalf of their clients, the bank or credit union should only inquire as to the beneficial ownership of the law firm itself and not the identity of the law firm’s clients whose funds have been deposited into the account:
One commenter representing the legal profession requested that escrow accounts established by lawyers to keep their clients’ funds in trust be given the same treatment, due to lawyers’ professional obligations to maintain client confidentiality under State law and codes of professional conduct. This commenter proposed that in the case of such accounts, only the lawyers and law firms establishing these accounts would be deemed legal entity customers from which beneficial ownership information would be collected. FinCEN understands that many attorneys maintain client trust or escrow accounts containing funds from multiple clients and other third parties in a single account. Funds flow in and out of these accounts during the normal course of business, and while these movements may not be as frequent as those found in, for example, pooled accounts in the securities and futures industries, they nevertheless create significant operational challenges to collecting this information with reference to the relevant clients and third parties. As in the case of nonexcluded pooled investment vehicles, FinCEN believes that it would be unreasonable to impose such collection obligations for information that would likely be accurate only for a limited period of time. FinCEN also understands that State bar associations impose extensive recordkeeping requirements upon attorneys with respect to such accounts, generally including, among other things, records tracking each deposit and withdrawal, including the source of funds, recipient of funds, and purpose of payment; copies of statements to clients or other persons showing disbursements to them or on their behalf; and bank statements and deposit receipts. For these reasons, FinCEN believes that attorney escrow and client trust accounts should be treated like other intermediated accounts described above, and we accordingly deem such escrow accounts intermediated accounts for purposes of the beneficial ownership requirement. Federal Register, Vol, 81, No. 91, Wednesday, May 11, 2016, p. 29416 (bold added).
Please note that it appears that the exception only applies to “pooled” trust accounts—accounts which use the Lawyers’ Trust Account Commission EIN and send remittances as part of the IOLTA program. It does not appear to cover individual trust accounts which are set up in the name of a specific client using his or her social security number or employer identification number. For those account(s) you will presumably need to provide the identification information for that specific client.
The Nebraska Lawyer Magazine, January/February 2018, Vol, 21, No.1, has an informative article that explains additional aspects of the new regulation which may have an impact on your clients.
Almost all Iowa lawyers in private practice need to have a trust account for the proper handling of client funds. What follows is a list of frequently asked question regarding all aspects of trust accounts.
- What does "IOLTA" stand for?
- Where can I find Trust Account Authority and References?
- Am I Required to Have a Trust Account?
- What Kind of Trust Account is Required?
- What Kind of Institution May Hold My Trust Account?
- What Deposit Insurance is Available for Trust Account Deposits?
- What About Client Deposits Over $250,000?
- What Kind of Bank Account is Required?
- How Should the Account be Titled?
- Am I Required to Give Anyone Notice When I Establish a Trust Account?
- What Instructions Should I Give an IOLTA Depository?
- Can the Institution Where My Trust Account is Located Charge a Service Fee?
- Am I Allowed to Maintain More than One Trust Account?
- May I Give a Trusted Staff Member Signature Authority?
- What About Signature Authority for a Stand-by Lawyer?
- What Funds Must I Deposit in My Trust Account?
- What Funds Must NOT Be Deposited in My Trust Account?
- What Payments Can I Make from the Trust Account?
- When Can I Make Disbursements Based on a Deposit to My Trust Account?
- How Do I Disburse from My Trust Account?
- What Notice Must I Give a Client Regarding Disbursements?
- How Are Flat Fees Handled?
- How Should Advance Fees in Probate be Handled?
- What Books and Records Do I Need to Maintain?
- How Should I Implement the Record-Keeping Duty?
- What is a Monthly 2-Way Trust Account Reconciliation?
- May I Use a Computer Program to Perform Trust Accounting?
- How Do I Handle Retainers Paid by Credit Card?
- How Should Electronic Payment of Court Fees be Handled?
- What Should be Done with Funds of a Client Who No Longer Can be Located?
- What Steps Should Be Taken When I Move My Trust Account to a New Bank?
- What Steps Should Be Taken to Close My Trust Account?
- How Often Will My Account Be Audited? And Who are these Auditors?
- What Materials Do Your Auditors Examine?
- How Prevalent is Trust Account Fraud?
- What Steps Can I Take to Protect My Trust Account From Fraud?
- What Should I Do if I Discover There Has Been Embezzlement from My Trust Account?
- What Irregularities Are Commonly Revealed by Audits?
- What Factors Contribute to Trust Account Irregularities?
- Regarding Federal Deposit Insurance and Large Client Balances in the Trust Account
- Requirement for Trust Account in Iowa
- Monthly Reconciliations Required