The Financial Crimes Enforcement Network (FinCEN) implemented a “rule,” effective May 11, 2018, that is intended to crack down on and combat illegal financial activities, such as money laundering, tax evasion, fraud, and other crimes. Known as the Beneficial Ownership Rule (sometimes referred to as the Customer Due Diligence Rule), it BFO requires banking and financial institutions to collect pertinent information from their customers.
While the rule is already in effect, many organizations have questions surrounding the rule and how it must be followed. The following is an overview that will serve as a guide for financial institutions looking for clarity on the Beneficial Ownership Rule.
Beneficial Ownership Rule 101
According to the FinCEN legislation, the Beneficial Ownership Rule states “a bank must establish and maintain written procedures that are reasonably designed to identify and verify beneficial owner(s) of legal entity customers and to include such procedures in its anti-money laundering compliance program.” Translation: All covered financial institutions must collect and verify information from all significant owners of legal entities and their accounts. They must collect all of this information when the new account is opened.
The terminology used in the legislation is a bit ambiguous, so let’s start by breaking down the key players the new rule applies to.
Legal entity: A corporation, LLC, partnership, general partnership, other entity created by filing a public document with a Secretary of State or similar office, or any similar entity formed under the laws of a foreign jurisdiction that opens an account.
Beneficial Owner: Each individual with 25% or more equity interest in the legal entity, whether directly or indirectly.
A legal entity will have a minimum of one and a maximum of five beneficial owners. That is the according the lowest equity interest threshold that FinCEN has established. Banks can have a stricter equity threshold that defines a “beneficial owner,” but that is up to the discretion of individual institutions.
The Beneficial Ownership Rule goes further and describes the organizational structure of the beneficial owners of the legal entity – there is a control prong and subsequent ownership prongs. The control prong, of which there must be one, is the person with the most control and responsibility over the account, like a CEO, COO, or company president. Ownership prongs are any person who owns 25% or more of the equity interests in the account.
As with every government regulation, there are exclusions and exemptions. If you fall under one of these categories, you do not need to supply the same level of personal information that a beneficial owner would.
Note: These excluded parties do not require the collection of evidence supporting their exclusion.
Note: Parties in this group are required to complete a form detailing exemption reasons that is signed by the NAP and will be required when the first account is opened after May 11, 2018.
What are the Steps for Compliance?
At the most basic level of compliance with the Beneficial Ownership Rule, financial institutions must identify, verify, and maintain the following information of all beneficial owners:
- Date of Birth
- ID Number (Social Security and tax ID number)
Those don’t seem to be the most stringent security requirements, so most banks are requiring extra information. Other information many banks are asking for includes license/ID information, percentage of ownership, residency status, and more. According to FinCEN, banks and financial institutions will need to establish procedures for maintaining these records, including:
- Standard certification forms
- Descriptions of all documents or other methods relied upon for identity verification
- Descriptions of resolution discrepancies
The Beneficial Ownership/Customer Due Diligence rule impacted all accounts opened after the May 11 deadline. But what about previous customers. Banks do not have to retroactively verify existing customers. However, according the law firm Ballard Spahr and the FinCEN FAQ publication, “the obligation to obtain or update information is triggered when, in the course of normal monitoring, a financial institution becomes aware of information, including a change in beneficial ownership information, relevant to assessing or reassessing a customer’s overall risk profile. Thus, as part of your implementation of the Beneficial Ownership Rule, you must determine, on a risk-based basis, what events will trigger a need to collect or update beneficial ownership information. Although a simple change in a beneficial owner’s address may require only an update, a change in beneficial owners will trigger a need to collect a new certificate and verify the new owner’s identity.”
If an account has expired, the requirement for maintaining their beneficial ownership records is five years. The banks must also maintain the forms used for verification as well as descriptions of any non-documentary methods that were used to confirm the beneficial owners’ status.
Tips for Beneficial Ownership Compliance
Collecting, updating, and monitoring all of the verified information for every beneficial owner of every account is a large-scale effort. Multiple people will be responsible for monitoring of accounts to flag any alarming banking behavior and the activities of high-risk clients.
FinCEN further recommends that customer risk profiles be developed through understanding the nature and purpose of customer relationships, with ongoing monitoring to:
- Identify and report suspicious activities
- Maintain and update customer info on a risk-based basis
These duties place additional burden on banks which may also potentially impact small businesses, as some have suggested.
“Every hour a bank employee spends on regulatory compliance is an hour that the employee is not able to spend on what we value most – helping our customers achieve financial success” – Dalia Martinez, Executive Vice President, IBC Bank (Full Article)
But banks and financial institutions can also take advantage of these challenges and achieve compliance by implementing effective digital applications, organized internal procedures, and continuous, scrupulous monitoring.
To minimize inefficiencies, organizations should consider modern technology approaches that support not only consolidation of traditional data silos, but methods that also incorporate analytical information management, data quality management, and predictive technologies.
Successful approaches include programs that address a range of impact areas, ultimately seeking to reduce overall (manual) due diligence efforts and drive more automation and intelligence to front line end users and executives. Core focus areas should include
- Master Data Management (MDM), single reference record definition and verification processes
- Ownership structures definition and automation for individual and businesses (household and super household)
- Customer Onboarding, data collection and form automation
- Entity verification and compliance screening
- Ongoing monitoring, alerts and notifications
- Audit and change data control supporting regulatory requirements
Combined with training, education and intelligent technologies, organizations can better absorb these challenges and reduce end user effort with traditional processes and operate more efficiently across departments and line of businesses. This is good for decision making, however even better for customers.
Interested in learning more about how Hitachi Solutions can help your financial institution can stay compliant with the Beneficial Ownership Rule? Our experts are here to help . At Hitachi Solutions, we specialize in delivering success with business applications based on the Microsoft Cloud. We help clients across multiple industries take on ever-changing industry regulations with world-class business solutions. Start a conversation with us today to get started.
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