There has been much discussion, interpretation and preparation within the financial sector regarding the impending formal implementation of the Customer Due Diligence (CDD) rule, effective May 11, 2018. The new requirement, referred to as a new fifth pillar of the Bank Secrecy Act (BSA), mandates that banks expand their policies, programs and processes for identifying customers, to include beneficial owners of legal entity ownerships, such as limited liability corporations and partnerships. Going forward, banks must identify a legal entity's ownership and control for new accounts, including for those opened by the existing customer base. In advance of the new rule, financial institutions report that efforts to prepare for the requirements ahead of the effective date have been met with resistance to change from a segment of existing customers, with the required additional submission of information seen as more burdensome.

Due diligence and beneficial ownership standards have continually evolved since the Money Laundering Control Act of 1986. As such standards have evolved, many questions have arisen regarding their implementation and their effect on everyday operations. On April 3, 2018, the Financial Crimes Enforcement Network (FinCEN) issued additional frequently asked questions (FAQs) to the Beneficial Ownership Rule. FinCEN published these FAQs to provide additional guidance on the requirements under the proposed rule and the prior FAQs published July 19, 2016.

Alvarez & Marsal (A&M) has taken this opportunity to highlight some of the more common issues facing financial institutions as these standards have now evolved into the Beneficial Ownership Rule.

Collection of Beneficial Ownership Information for Direct and Indirect Owners (Question 3)

This illustrates the requirements for legal entity customers with complex ownership structures and clarifies that both direct and indirect ownership must be considered regarding the ownership prong of the new rule. The illustration provides a legal entity customer comprised of two companies (Company A and Company B), each owning 50 percent of the legal entity. This example indicates the overall percentage of the legal entity customer must be considered. For example, an individual who owns 60 percent of Company A meets the definition of a beneficial owner because this person would own 30 percent of the legal entity (60 percent multiplied by 50 percent), which is greater than the 25 percent threshold as defined in the regulation.

Methods of Verifying Beneficial Ownership Information (Question 4)

This issue further clarifies that although beneficial ownership verification must contain the same elements as the financial institution’s Customer Identification Program (CIP) procedures, these procedures need not be identical. For example, a financial institution may accept photocopies of a driver’s license or a state identification card, which would not meet current CIP regulatory requirements.

Existing Customers as Beneficial Owners of New Legal Entity Customer Accounts (Question 7)

This covers a situation where the financial institution has become aware of a beneficial owner who has been previously identified through the financial institution’s CIP procedures. In this case, the financial institution may rely on the pre-existing CIP information obtained for the individual, provided the information maintained is up-to-date and accurate and that the legal entity’s representative certifies or confirms, verbally or in writing, the accuracy of the pre-existing CIP information.

Loan or Certificate of Deposit (CD) Renewals (Question 12)

This item clarifies that for low-risk product or service renewals, such as loans or CDs, a financial institution would not be required to collect beneficial ownership information again if the following requirements are met:

• The beneficial ownership information was previously obtained;
• The legal entity customer and the financial service or product remains the same;
• The legal entity customer confirms the beneficial ownership information previously obtained is accurate and up-to-date; and
• The financial institution has no knowledge of facts that would reasonably call into question the reliability of the beneficial ownership information.

Requirements to Collect or Update Beneficial Ownership Information for Customers Opening Accounts Prior to May 11, 2018 (Question 13)

This makes clear that financial institutions are not required to perform retroactive reviews of existing customers. However, a financial institution must obtain or update this information if, during the normal course of customer risk monitoring, the financial institution becomes aware of information indicating a possible change of beneficial ownership.

Trusts with Multiple Trustees (Question 19)

This deals with situations where 25 percent or more of the equity interests of a legal entity are overseen my multiple trustees (co-trustees). In these instances, the financial institution is required to obtain the beneficial ownership information for at least one of the co-trustees.

Sole Proprietorships (Question 22)

A sole proprietorship does not meet the definition of a legal entity customer, even though such businesses may file with a Secretary of State. Because a sole proprietorship is not a separate legal entity from an individual, the Beneficial Ownership Rule will not apply to such accounts.

Listing Beneficiaries on Currency Transaction Reports (CTRs) and Aggregation of Cash Transactions (Questions 32 and 33)

These FAQs address questions of whether the Beneficial Ownership Rule creates new requirements regarding listing beneficiaries on CTRs or the aggregation of cash transactions for beneficial owners when filing CTRs. The response is that the Beneficial Ownership Rule has not created new requirements regarding the filing of CTRs. Existing CTR filing requirements remain in place, indicating that the financial institution must list such beneficiaries and aggregate cash transactions only when the financial institution has knowledge that the cash transactions are by, or on behalf of, such persons. The fact that beneficial owners have been identified for a particular legal entity customer does not automatically create an obligation to list such persons on the CTR or aggregate cash transactions for them.

Conclusion

The FinCEN-issued publication contains a total of 37 FAQs. Our article highlights only a portion of the more salient questions and responses. We recommend careful review of each FAQ to ensure your institution has implemented the new rule in a manner that is consistent with the guidance provided by FinCEN.

As with any new rule, guidance and FAQs do not cover every situation where questions may arise. There are also instances where FAQs generate more questions in applying the new rule to a financial institution’s products, services and processes. As an example, beneficial ownership standards, with some variation, are commonplace in most covered financial institutions. In certain cases, those standards are higher than the levels mandated in the new rule, raising the specter of a possible reduction in thresh-holds. 

While the rule allows for such a change, U.S. Regulators have cautioned institutions in this regard. Concurrent with Federal Regulators, we emphasize the importance of active risk considerations as part of the decision-making process. An institution’s risk parameters must be calibrated to the accepted risk profile, and should conform to the enterprise-wide risk approach.

The key to any new rule implementation lies in the preparation prior to the new requirements becoming effective. Thereafter, and just as important, an independent and effective monitoring process is vital to ensure correct interpretation and ongoing functional compliance with the standards.

The A&M team is highly skilled, and includes both former regulators and financial sector professionals, all of whom understand the implications of regulatory change. Our professionals can deliver guidance through multiple channels including program reviews, file reviews, due diligence reports, special investigations, as well as provide on-the-ground intelligence experts to assist in ownership determination and tracing of assets.

We are here to help your institution navigate the ever-changing regulatory environment. Please do not hesitate to contact one of our professionals for additional information.