FAQs about customer due diligence/beneficial ownership rule

Authored by Chad Gibble and Lauryn Jobb

The Financial Crimes Enforcement Network (FinCEN) issued new frequently asked questions (FAQs) regarding its customer due diligence (CDD) rule. As expressed in the first set of FAQs (FIN-2016-G003):

“The CDD Rule outlines explicit customer due diligence requirements and imposes a new requirement for these financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemption. The CDD Rule requires covered financial institutions (CFI) to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entity customers. These procedures must enable the institution to identify the beneficial owners of each customer at the time a new account is opened, unless the customer is otherwise excluded or the account is exempted.”

The ultimate goal of the CDD rule is for the covered financial institution (CFI) to identify the core owners of their legal entity customers, which FinCEN believes will help institutions better understand the nature and purpose of their customer relationships. These clarifications provides much needed guidance about a number of areas, including beneficial ownership thresholds, new accounts, risk-based monitoring, treatment of non-U.S. listed entities and pre-existing customers.

Beneficial ownership threshold

Under the ownership prong, institutions must obtain and verify the identity of all beneficial owners who possess at least 25 percent equity ownership in their legal entity customers. FinCEN has indicated the 25 percent threshold is a baseline benchmark and the application of a lower threshold may be warranted based on the financial institution’s assessment of customer risk. Institutions may want to consider outlining a process to understand ownership at a lower threshold (e.g., 10 percent) for high-risk customers within the new account opening procedures. In addressing a requirement to impose stricter thresholds for certain customers, FinCEN directs that any additional risk factors may be mitigated by other reasonable means, including enhanced monitoring, collecting additional non-mandatory information and recording information relating to expected account activity.

Legal entity customers with complex ownership structures

The CDD rule requires identification of indirect beneficial owners (i.e., individuals that may hold ownership in the legal entity customer through a series of intermediary legal entities). The FAQs provide a hypothetical organization chart and guidance on how to calculate ownership percentages.

Example:

If Company A owns 70 percent of the legal entity customer, and if an individual, in turn, owns 40 percent of Company A, then that individual, with an indirect ownership of 28 percent, would be a beneficial owner for purposes of the rule.

In addition, a CFI does not need to independently investigate the legal entity’s customer ownership structure and may accept, and reasonably rely on, the information regarding the status of beneficial owners presented to the financial institution by the legal entity customer's representative provided that the institution has no knowledge of facts that would reasonably call into question the reliability of the information.

Methods of verifying beneficial ownership information

FinCEN reiterated that a financial institution may use documentary or non-documentary methods, or a combination of both methods, for identity verification. Although the verification process for beneficial owners must contain the same elements as existing CIP procedures, they are not required to be identical (e.g., a covered institution may accept photocopies of a driver license to verify the identity of beneficial owners if the beneficial owner is not present, which is not permissible under existing CIP rules). FinCEN advises that non-documentary methods of verification may include contacting a beneficial owner, independently verifying the beneficial owner's identity through the comparison of information provided by the legal entity customer (or the beneficial owner, as appropriate) with information obtained from other sources, checking references with other institutions and obtaining a financial statement.

Document retention

The FAQs clarifies that all beneficial ownership certifications must be retained, even if the CFI has updated the beneficial ownership information on the account of a legal entity customer, and subsequently, a new account is opened on behalf of the same legal entity. Identifying information, including the certification form or its equivalent, must be maintained for a period of five years after the legal entity’s account is closed. Additionally, institutions must retain a description of each document relied on for verification, any non-documentary methods and results of measures undertaken for verification, and the resolution of any substantive discrepancies discovered in identifying/verifying the identification information for five years after the record is made.

How to handle existing customers under the rule

If a beneficial owner of a new legal entity account is an existing customer and is already subject to the financial institution's CIP, then the institution may rely on information in its possession to fulfill the rule requirements, provided the existing information is up to date and accurate, and the legal entity customer certifies or confirms (i.e., verbally or in writing) the accuracy of the pre-existing CIP information. If deciding to rely on pre-existing information, the records for the new account should cross-reference the relevant CIP records. As previously stated, all identifying information must be maintained for a period of five years after the legal entity’s account is closed. 

Legal entity customer which opens multiple accounts

This has been an area of concern for many institutions. In its response to FAQ 10, FinCEN advises that it is not necessary to repeatedly obtain a new certification form. Rather, a CFI may rely on the information already obtained to fulfill the beneficial ownership requirement for subsequent accounts, “provided the customer certifies or confirms (i.e., verbally or in writing) that such information is up-to-date and accurate at the time each subsequent account is opened and the financial institution has no knowledge of facts that would reasonably call into question the reliability of such information.”

How might institutions accomplish this? They could include, as part of their onboarding procedures, a question (i.e., either verbal or written) asking if the beneficial ownership information changed since completing the certification form. For verbal confirmations, include somewhere in the account notes the name of the person who confirmed the information. Of course, the CFI would need to keep records of the confirmations they receive so it is important that the CFI create policies, procedures and controls requiring the documentation and retention of written or verbal customer confirmations. While the usage of a re-certification statement to confirm previously provided information would satisfy the requirements of the rule, a CFI must consider the effects on its workflow and processes. In some situations, it may just be simpler to collect beneficial ownership information with each account opening.

Accounts for internal recordkeeping or operational purposes (sub accounts)

In the FAQs, FinCEN clarifies that accounts or subaccounts opened by financial institutions (a) for its own administrative or operational purposes and not at the customer’s request, and (b) for which the CFI has already collected beneficial ownership, will not be considered a new account and therefore not subject to the CDD rule’s requirements. According to FinCEN, “The distinction between such accounts opened by customers and those opened solely by the CFI is consistent with the rule's purpose to mitigate the risks related to the confusion of beneficial ownership when a legal entity tries to access the financial system through the opening of a new account.”

Product or service renewals

This is an issue that has been causing concern for institutions as the previous guidance from FinCEN stated that a new account is established each time a loan is renewed or a CD is rolled over. However, having to collect beneficial ownership each time a renewal or rollover occurs seems unduly burdensome on financial institutions. The FAQs explain that covered financial institutions are required to have their legal entity customers certify the beneficial owners for existing customers during the course of a financial product renewal (e.g., a loan renewal or certificate of deposit), because each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is established.

However, FinCEN did shed some light on the topic of future renewals and rollovers. Quoting from FAQ 12 pertaining to product or service renewals, “In the case of a loan renewal or CD rollover, because we understand that these products are not generally treated as new accounts by the industry and the risk of money laundering is very low, if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or CD is outstanding.” This information is certainly helpful, but the CFI will need to consider how best to document that agreement from the customer onto the beneficial ownership certification form and discuss with their relevant service providers, possibly adding a statement specific to CD and loan products.

Monitoring and reviews of pre-existing accounts

As previously confirmed, no formal look-back is required for pre-existing accounts, however, the obligation to update existing records is triggered when a financial institution becomes aware of information about the customer during the course of normal monitoring relevant to assessing or re-assessing the risk posed by the customer, and where such information indicates a possible change of beneficial ownership. If no specific risk events are identified during the normal monitoring process, there is no obligation on the financial institution to request or update beneficial ownership information for existing accounts. Thus, as part of the implementation of the CDD rule, a CFI 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.

The rules impact on currency transaction reports

With respect to legal entity customers that may share a common owner, unless there is an affirmative reason to believe otherwise, the CFI should presume that different businesses that share a common owner are operating separately and independently from each other and from the common owner. Thus, absent indications that the businesses are not operating independently (e.g., the businesses are staffed by the same employees and are located at the same address, the accounts of one business are repeatedly used to pay the expenses of another business or of the common owner, etc.), the CFI should not aggregate transactions involving those businesses with those of each other or with those of the common owner for CTR filing.

Conclusion

The second set of FAQs relevant to the CDD rule were certainly beneficial in clarifying some of the issues discussed above, but implementation challenges remain. FinCEN has acknowledged that they may issue additional FAQs/guidance or grant exceptive relief as appropriate. Additionally, regulators have hinted they intend to give CFIs some time to get up to speed, perhaps a couple months, before finding non-compliance.

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