A “For Benefit Of” (FBO) account is a type of financial account that allows a company or organization to manage funds on behalf of another entity or individual.

In payment processing, FBO accounts are bank accounts that payment processors use to handle money that doesn’t belong to them. When payments are made, the money is gathered into an FBO account to keep it separate from the payment processor’s own money, and then it is paid out to the seller after the necessary checks are performed.

Below, we’ll explain how FBO accounts work, how they’re used, and how to set one up as a business.

What’s in this article?

• How do FBO accounts work?
  
• How FBO accounts differ from traditional bank accounts
  
• Common uses of FBO accounts in financial transactions
  
• Setting up an FBO account: A step-by-step guide
  
• Regulatory compliance for FBO accounts
  

How do FBO accounts work?

FBO accounts are a type of bank account in which the account’s manager is not the beneficiary of the funds. Here’s how it works.

• Account setup: A business such as a payroll processor or an investment platform sets up an FBO account at a bank. During this process, the business specifies who the money in the account is for (i.e., the beneficiary).

• Naming conventions: The account is titled to indicate that the funds are held for the benefit of others, not the business managing the account. This helps clarify the ownership and purpose of the funds.

• Deposits: Funds can be deposited into the FBO account by the business managing it, by the beneficiaries, or by other parties who have a reason to transfer money to these beneficiaries.

• Recordkeeping: Each deposit is carefully recorded to attribute funds to the appropriate beneficiary accounts within the FBO structure.

• Operational control: The business controls the account and is responsible for managing the funds according to the beneficiaries’ needs. This includes handling payments and transfers and sometimes making investments.

• Regulatory compliance: All transactions must comply with specific legal standards that protect the beneficiary’s assets and mandate responsible management.

• Legal ownership: Although the business manages the funds, the beneficiaries retain legal ownership.

• Beneficiary access: Generally, beneficiaries do not have direct access to manage the account. Their interaction with the funds is governed by the terms set out by the business in charge, which acts as a fiduciary.

• Account statements: The business must provide detailed and regular account statements to the beneficiaries showing all activities including deposits, withdrawals, and any earnings or expenses. These statements can be subject to audits to verify that the business is handling the funds appropriately.

How FBO accounts differ from traditional bank accounts

FBO accounts are distinct from traditional bank accounts in several ways.

FBO accounts

• Purpose and use: FBO accounts are designed to hold and manage funds on behalf of beneficiaries. They are typically used by businesses that manage funds for multiple parties, such as payroll companies, financial advisors, or online platforms.

• Ownership of funds: In an FBO account, the funds are legally owned by the beneficiaries, not by the account holder (the business managing the account). Account holders act as a fiduciary, meaning they have a legal responsibility to manage the funds in the best interest of the beneficiaries.

• Access to funds: Beneficiaries generally do not have direct access to the FBO account. Instead, they rely on the fiduciary to manage and disburse funds according to agreed terms or regulatory requirements.

• Regulatory compliance: FBO accounts are heavily regulated to ensure that the fiduciary appropriately manages the funds. There are strict rules about segregation of funds, reporting, and compliance to protect the interests of beneficiaries.

• Account setup: Setting up an FBO account requires specifying the beneficiaries and the nature of the fiduciary relationship. These accounts must be clearly labeled to reflect that the funds are held for the benefit of others.

• Transparency and reporting: FBO accounts must be managed with a high level of transparency. The fiduciary must regularly report to the beneficiaries about the status of the funds, including detailed financial statements.

Traditional bank accounts

• Purpose and use: Regular bank accounts are typically used by individuals or businesses to manage their own funds. These accounts are for personal or business operations, savings, or day-to-day transactions.

• Ownership of funds: The funds in a traditional account are owned by the account holder. Whether it’s a personal or a business account, the owner has full control and legal title to the money in the account.

• Access to funds: The account holder has direct access to funds and can deposit, withdraw, and manage money as they see fit—subject to the terms of the account and banking regulations.

• Regulatory compliance: The compliance requirements for personal and most business accounts are generally less stringent compared to FBO accounts. The focus is more on the security of the funds and less on the management duties of the account holder.

• Account setup: Setting up a traditional bank account is straightforward. The account holder must provide identification and possibly additional documentation if the account is for business use.

• Transparency and reporting: Traditional bank accounts provide regular bank statements, but reporting requirements are less rigorous than for FBOs—unless otherwise specified by the account type or requested by the account holder.

Common uses of FBO accounts in financial transactions

FBO accounts are used in several industries for a variety of reasons. Here’s a rundown of how they’re commonly used.

Escrow and payments

• Real estate: FBO accounts are used in real estate transactions to hold earnest money deposits and manage rental payments, both collecting them from tenants and disbursing them to property owners. FBO accounts can also handle property tax payments by holding funds until they’re due and making payments on behalf of the property owner.

• Ecommerce and marketplaces: FBO accounts hold payments from buyers in online marketplaces until they confirm receipt of goods or services. This protects buyers from fraudulent sellers and ensures sellers get paid after fulfilling their obligations. These accounts also handle refunds and disputes.

• Crowdfunding platforms: Crowdfunding platforms use FBO accounts to collect funds from backers and hold them in escrow until a project reaches its funding goals or milestones. This ensures backers’ funds are used as intended and released only when the project progresses as planned.

Investment and wealth management

• Trusts and estates: FBO accounts are used to manage assets held in trusts and estates. They provide a structured framework for holding and managing funds, and they ensure proper distribution to beneficiaries according to the trust or will. They also facilitate tax compliance and reporting, and they simplify financial management for trustees and executors.

• Investment funds: Investment funds such as mutual funds or hedge funds use FBO accounts to pool investments from multiple investors. This centralized structure allows investors to participate in diversified portfolios.

• Custodial accounts: Custodial accounts, such as those used for minors or individuals with limited capacity, use FBO accounts to hold and manage assets on behalf of the beneficiary. This safeguards funds and facilitates transactions while providing transparency and accountability to the account owner or guardian.

Fintech and banking

• Payment processors: Payment processors use FBO accounts to handle transactions between businesses and customers. These accounts hold funds temporarily while transactions are processed and verified.

• Neobanks and digital wallets: Neobanks and digital wallets use FBO accounts to manage user funds. They enable financial services such as payments, transfers, and savings while maintaining separation of ownership and control.

• Lending platforms: Lending platforms use FBO accounts to collect and disburse loan funds. They hold borrower repayments, disburse funds to lenders, and handle interest payments.

Other applications

• Gaming and gambling: Online gaming and gambling platforms use FBO accounts to manage player deposits, winnings, and payouts. These accounts safeguard player funds and provide a secure environment for online gaming activities.

• Nonprofit organizations: Nonprofit organizations use FBO accounts to collect and manage donations. This ensures that funds are used for their intended charitable purposes and provides transparency to donors about how their contributions are used.

• Legal and professional services: Law firms and other professional service providers use FBO accounts to hold client funds in trust. This maintains a clear separation of client funds from the firm’s own finances.

Setting up an FBO account: A step-by-step guide

Because the funds in FBO accounts aren’t legally owned by the account holder, they require a more thorough process to set up. Here’s how it typically works.

Choose a financial institution

Compare offerings from different banks and financial institutions. Focus on those with experience in your industry or business type. Assess account fees, transaction costs, minimum balance requirements, and available services such as online banking and dedicated account management. Choose an institution with a strong reputation for security, compliance, and customer service.

Gather required information

You’ll need to provide the following information for account setup:

• The full legal name and address of your business

• Employer Identification Number (EIN) or Social Security number (SSN)

• The beneficial owners of your business, along with their identification documents and percentage of ownership

• Copies of your articles of incorporation, partnership agreement, or other relevant documents establishing your business entity

• The full names, addresses, dates of birth, and Social Security numbers for each individual beneficiary

• The legal business name, address, tax ID, and business formation documents for each business beneficiary

• A comprehensive explanation of how the account will be used, including the types of transactions it will be used for and the role of each beneficiary

You’ll also need the following documentation:

• Copies of industry-specific licenses or permits

• Any contracts or agreements you have with beneficiaries outlining the terms of the FBO arrangement

• Documentation verifying your business’s identity and compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations

Complete the application

Request the FBO account application form from your chosen institution. This might be available online or in person. Fill out the application carefully and double-check for any errors or omissions. Obtain required signatures from authorized representatives of your business.

Review and sign the agreement

Read the account agreement carefully, understanding all terms, fees, and restrictions. Pay special attention to:

• Who has legal ownership of the funds and who has control over transactions

• The responsibilities and liabilities of both the account holder and the beneficiaries

• The procedures for resolving any disputes or disagreements

If you have any questions or concerns, seek advice from a qualified legal professional before signing. Sign the agreement electronically or in person, as required by the institution.

Fund the account

Make the initial deposit into the FBO account, meeting any minimum deposit requirements. Establish procedures for ongoing funding of the account, whether through direct deposits, transfers, or other methods.

Establish account management procedures

Clearly define who within your organization has the authority to access and manage the FBO account. Implement internal controls to prevent unauthorized access, fraud, or misuse of funds. This might include segregation of duties, dual authorization for transactions, and regular account reconciliations. Establish consistent communication channels with beneficiaries for regular updates on account activity and balances.

Maintain transparency and reporting

Provide beneficiaries with regular statements detailing account activity, including deposits, withdrawals, and any fees or interest earned. If available, offer beneficiaries secure online access to view their account balances and transaction history. Respond promptly to any inquiries or requests for information from beneficiaries.

Comply with regulations

Understand and comply with any regulations specific to your industry that govern the use of FBO accounts. This might involve additional reporting requirements or restrictions on certain types of transactions. Implement AML and KYC procedures to verify the identities of beneficiaries, monitor for suspicious activity, and safeguard the personal and financial information of beneficiaries in accordance with applicable data privacy laws.

Regulatory compliance for FBO accounts

Regulatory compliance is an important part of managing FBO accounts. The specific requirements can vary depending on the industry, location, and purpose of the account, but typically they include the following:

• Anti-Money Laundering (AML) and Know Your Customer (KYC): FBO account holders are typically required to have comprehensive AML and KYC procedures to prevent money laundering, terrorist financing, and other illicit activities. This involves verifying the identities of beneficiaries, monitoring transactions for suspicious activity, and reporting any concerns to relevant authorities.

• Data privacy: FBO account holders must safeguard the personal and financial information of beneficiaries in compliance with data privacy laws such as the Gramm-Leach-Bliley Act (GLBA) in the US or the General Data Protection Regulation (GDPR) in the EU. This involves implementing appropriate security measures, obtaining consent for data collection and use, and providing beneficiaries with access to their information.

• Industry-specific regulations: Certain industries such as real estate, investment management, and legal services have specific regulations governing the use of FBO accounts. Account holders must be familiar with and comply with these regulations, which might involve additional reporting requirements, restrictions on certain transactions, or specific fiduciary duties.

• Securities regulations: FBO accounts that hold securities or other investment assets can be subject to securities regulations such as those enforced by the Securities and Exchange Commission (SEC) in the US. Account holders must comply with these regulations, which might involve registration, disclosure, and reporting requirements.

• Tax compliance: FBO accounts can have tax implications for both the account holder and the beneficiaries. Account holders must report and withhold taxes appropriately.

• Fiduciary duties: FBO account holders have a fiduciary duty to act in the best interests of the beneficiaries. They must prudently manage funds, avoid conflicts of interest, and provide transparent and accurate reporting.