IBA Compliance Connection

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We have a business customer that operates a farm management limited liability company. The company receives lots of checks payable to its clients that it would like to deposit, so the company wants to open a “for the benefit of” (FBO) account for each client. The clients would have no authority on the accounts, and would sign a limited power of attorney giving the company permission to deposit checks made out to them. Is this compliant with Illinois laws? Also, does the designation “FBO” have any bearing on the account itself?

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We are not aware of any Illinois law that expressly relates to the “FBO” designation for deposit accounts. However, this designation is relatively common, and in similar situations, some banks do choose to add the FBO designation to the account title for various reasons.

The FBO designation is relevant in determining whether an account is a “fiduciary account” that receives pass-through deposit insurance coverage. Whether an account constitutes a “fiduciary account” depends on who is deemed to be the true owner of the account. For purposes of pass-through insurance, the account ownership is determined on the basis of how your bank creates and maintains the account’s records. 

The LLC will be considered an agent of its clients (and not the account owner) if the account's records indicate the agency nature of the account — such as by having an FBO designation in the account title — along with identifying the principals who have funds in the account. (When examining fiduciary accounts, the FDIC may ask to review the agreements between the agent maintaining the account and the principals whose funds are held in the account. Your bank also may want to obtain these agreements for the account's records, although in our view maintaining copies of the principals’ powers of attorney likely would be sufficient.)

Keep in mind that this extra recordkeeping is not necessary if the LLC is not seeking pass-through deposit insurance for its clients (although you still should keep copies of the powers of attorney). If this is the case, you still may want to use the FBO designation in the account title for other purposes, such as for alerting your employees that the bank has powers of attorney on file, since it will be taking deposits made payable to the LLC clients rather than to the LLC.

We also note generally that the identities of the LLC clients may be relevant to your CIP and CTR procedures and ongoing OFAC scrubs, in order to meet your bank's BSA/AML obligations.

For resources related to our guidance, please see:

  • Financial Institution Employee’s Guide to Deposit Insurance (Fiduciary Accounts) (“1. Funds must be in fact owned by the principal and not by the third party who set up the account (i.e., the fiduciary or custodian who is placing the funds). To confirm the actual ownership of the deposit funds, the FDIC may review: a. The agreement between the third party establishing the account and the principal. b. The applicable state law. 2. The IDI’s account records must indicate the agency nature of the account (e.g., XYZ Company as Custodian, XYZ For the benefit of (FBO), Jane Doe UTMA John Smith, Jr.).  3. The records of the IDI, the fiduciary or a third party must indicate both the identities of the principals as well as the ownership interest in the deposit.”)