The newest of the 5 pillars of a good BSA/AML program is Customer Due Diligence (CDD). While this pillar was always implied, it had been part of the Internal Controls. FinCEN wanted to clarify and strengthen the current Customer Due Diligence (CDD) guidelines, so they made it a separate pillar of its own. One of the main reasons for this pillar was that FinCEN wanted financial institutions to verify the identity of beneficial owners of legal entity customers. The definition of a legal entity customer, as defined by the FFIEC, is a Corporation, Limited Liability Company, or other entity that is created by the filing of a public document with a Secretary of State or other similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. Like all rules, there are many exemptions/exclusions as to what is considered a legal entity customer.
Following are the 4 key elements of the Customer Due Diligence(CDD) pillar:
1) Verifying the identity of your customer using reliable documents.
2) Verifying the identity of beneficial owners of any legal entities using reliable documents,
3) Understanding the intended nature and purpose of customer relationship so that a risk profile could be created.
4) Conduct monitoring to identify suspicious activity and update customer information when necessary.
The beneficial ownership rule is made up of 2 prongs:
1) The Control prong- one individual with significant responsibility such as a Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, or President.
2) Ownership Prong- any individual who owns 25% or more of the legal entity customer. If no one person owns 25%, your institution may wish to require at least one person for this section. The 25% is the standard, but your institution can make that percentage whatever it chooses.
FinCEN has provided a Certification of Beneficial Owner(s) form on their website that can be used to collect this information. However, FinCEN does not require that you use their form. When verifying beneficial owner(s), you have to drill down to a physical person. If a business is owned by another business, then you have to know who owns that other business.
In the example, per the Beneficial Ownership rule, Allan would be considered a beneficial owner because he owns indirectly 30 percent of its equity interests through his direct ownership of Company A. Betty is also considered a beneficial owner because she owns indirectly 20 percent of its equity interests through her direct ownership of Company A plus 16 2/3 percent through Company B for a total of indirect ownership interest of 36 2/3 percent. Neither Carl nor Diane are considered beneficial owners because each owns indirectly only 16 2/3 percent of Customer’s equity interests through their direct ownership of Company B.
You must collect everything for a beneficial owner that your Customer Identification Program (CIP) would collect for any other individual. The only difference is that the beneficial ownership rule does allow for photocopies of documentary verification if your financial institution so chooses to. All beneficial owners must be checked against the Office of Foreign Asset Control (OFAC) list also. Financial institutions are allowed to rely on the information provided by the person authorized to open the account, as long as that person certifies that the information provided is complete and correct to the best of their knowledge.
The Beneficial Ownership rule went into effect in May of 2018. Financial institutions were not required to go back to accounts already opened by that date to collect beneficial ownership information. But if during the normal course of business/monitoring, it comes to the attention of the financial institution that something has changed, the financial institution should reach out to the legal entity customer and obtain the current beneficial ownership information.
All beneficial ownership must be maintained for a period of 5 years after the account has been closed.
As of the first of this year, Congress passed the Anti-Money Laundering Act of 2020. Part of this act requires FinCEN to create a federal registry for beneficial ownership. This will require certain domestic and international entities to register with FinCEN information about their beneficial owners. A violation of this registration could result in a civil penalty of $500.00 a day until registered and criminal penalties of up to $10,000 and 2 years in prison for individuals who provide false information or fail to provide updated information.
For more information, click here to contact your local Dayton CAMS specialist at LeBrun Management Solutions (LMS) today!