We have an account for a corporation that has been on our records for many years. We recently learned that this corporation (Customer, Inc.) was merged and consolidated into another corporation years ago, and the acquiring corporation subsequently opened a limited liability company (LLC) with a similar name (Customer, LLC). We have maintained the original account and have been accepting checks made payable to the name of the original corporation, the new LLC, and the acquiring corporation. Obviously, some of these checks are wrongly endorsed. Could we request that someone with authority provide us with a statement that would allow this practice to continue without recourse? Additionally, do we need to go through the process of closing and reopening a new account for this customer and conduct Bank Secrecy Act due diligence again? And, could this practice potentially present an issue with filing future Suspicious Activity Reports (SARs)? Finally, is it possible for a tax identification number to remain the same after a merger? We currently only have an Employer Identification Number (EIN) on file from the original corporation and are not sure whether this would be the same for the LLC.

Yes, we believe it is possible to enter into a written agreement with the new LLC that would protect you from liability for the incorrectly endorsed checks (that have been endorsed in the name of the original corporation, presumably by an individual identified by the original corporation as its authorized signer). However, an agreement between you and the new LLC would not resolve the potential violations of federal Customer Identification Program (CIP) regulations and potential SAR filing issues. To resolve those issues, we recommend closing the account in the original corporation’s name and opening a new account in the LLC’s name.

Under the UCC, your bank could be held liable for accepting checks for deposit that are not properly endorsed. However, the UCC also generally allows for the variation of its terms by agreement. For purposes of liability under the UCC, we believe your bank could enter into an agreement in which the LLC would assume all liability for any disputes related to its deposited checks (such as a dispute by the payor for an unauthorized or missing endorsement).

However, we believe that maintaining an account for the LLC under the name of a nonexistent corporation without performing appropriate customer due diligence would likely constitute a violation of federal CIP regulations. The CIP regulations require you to conduct customer due diligence for each “customer,” with the exception of a “person that has an existing account” for which your bank has a “reasonable belief that it knows the true identity of the person.” Here, the LLC is a new business entity with a separate existence from the original corporation, so we do not recommend treating the LLC as an existing customer of your bank.

Additionally, it appears that your bank does not have a reasonable belief that it knows the true identity of the LLC, as you do not have its employer identification number (EIN). Although you may have the original corporation’s EIN, the IRS generally requires new LLCs to obtain EINs if they will have employees or tax liabilities, and in any event, we do not believe that a new LLC could use the EIN of a corporation that has ceased to exist after a merger.

Consequently, we recommend treating the new LLC as a new customer and conducting customer due diligence for the LLC as you would for any new customer, following your bank’s CIP requirements (which should include obtaining the LLC’s EIN). As part of your customer due diligence process, we recommend obtaining assumed name certificates from your customer so that you may continue accepting checks made payable to the LLC’s assumed names, such as the acquiring corporation’s name. Establishing a new account for the LLC also would resolve any potential SAR filing issues, since you would be able to complete a SAR with the LLC’s precise name and EIN after completing your customer due diligence process.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/4-205 (“If a customer delivers an item to a depositary bank for collection:

(1) the depositary bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item, and, if the bank satisfies the other requirements of Section 3-302, it may be a holder in due course; and

(2) the depositary bank warrants to collecting banks, the payor bank or other payor, and the drawer that the amount of the item was paid to the customer or deposited to the customer’s account.”)

Illinois UCC, 810 ILCS 5/3-417(a) and 810 ILCS 5/4-208(a), Presentment Warranties (“If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:

(1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

(2) the draft has not been altered; and

(3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.”)

Illinois UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements. . . .”)

Illinois UCC § 3-417 cmt. 3 (“Subsection (a)(1) retains the rule that the drawee does not admit the authenticity of indorsements. . . .”)

Illinois UCC, 810 ILCS 5/4-208(b) (“A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft (i) breach of warranty is a defense to the obligation of the acceptor, and (ii) if the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.”)

Illinois UCC, 810 ILCS 5/4-103(a) (“The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.”)

31 CFR 1020.220(a)(2) (“The CIP must include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. The procedures must enable the bank to form a reasonable belief that it knows the true identity of each customer. These procedures must be based on the bank’s assessment of the relevant risks, including those presented by the various types of accounts maintained by the bank, the various methods of opening accounts provided by the bank, the various types of identifying information available, and the bank’s size, location, and customer base. At a minimum, these procedures must contain the elements described in this paragraph (a)(2).”)

31 CFR 1020.100(b) (“For the purposes of § 1020.220:

(1) Customer means: (i) A person that opens a new account; . . .

(2) Customer does not include. . . (iii) A person that has an existing account with the bank, provided that the bank has a reasonable belief that it knows the true identity of the person.”)

31 CFR 1010.100(mm) (“Person. An individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, an Indian Tribe (as that term is defined in the Indian Gaming Regulatory Act), and all entities cognizable as legal personalities.”)

IRS, Do You Need a New EIN? (April 21, 2021) (“Corporations. You will be required to obtain a new EIN if any of the following statements are true.

A corporation receives a new charter from the secretary of state.

You are a subsidiary of a corporation using the parent’s EIN or you become a subsidiary of a corporation.

You change to a partnership or a sole proprietorship.

A new corporation is created after a statutory merger.”)

IRS, Do You Need a New EIN? (April 21, 2021) (“Limited Liability Company (LLC) . . . You will be required to obtain a new EIN if any of the following statements are true.

A new LLC with more than one owner (Multi-member LLC) is formed under state law.

A new LLC with one owner (Single Member LLC) is formed under state law and chooses to be taxed as a corporation or an S corporation.

A new LLC with one owner (Single Member LLC) is formed under state law, and has an excise tax filing requirement for tax periods beginning on or after January 1, 2008 or an employment tax filing requirement for wages paid on or after January 1, 2009.

You will not be required to obtain a new EIN if any of the following statements are true.

You report income tax as a branch or division of a corporation or other entity, and the LLC has no employees or excise tax liability.

An existing partnership converts to an LLC classified as a partnership.

The LLC name or location changes.

An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation.

A new LLC with one owner (single member LLC) is formed under state law, does not choose to be taxed as a corporation or S corporation, and has no employees or excise tax liability. NOTE: You may request an EIN for banking or state tax purposes, but an EIN is not required for federal tax purposes.”)