Customer Due Diligence for Beneficial Owners. Othel Rife Risk Advisory Services Manager RSM US LLP

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1 Customer Due Diligence for Beneficial Owners Othel Rife Risk Advisory Services Manager RSM US LLP

2 Presenter Information Othel Rife Risk Advisory Services Manager Phone: Othel.Rife@rsmus.com Othel Rife has over twelve years of auditing experience, including more than eleven years of Anti-Money Laundering/Bank Secrecy Act (AML/BSA) compliance experience. That experience includes an in-depth understanding of the regulatory requirements set forth in the FFIEC exam manual including program requirements, customer due diligence, enhanced due diligence, monitoring practices, and economic sanctions. Othel has worked with various types of clients in the financial services industry including banks, credit unions, money services businesses, trust companies, and mortgage companies. 2

3 OBJECTIVES OF THIS COURSE

4 Objectives Learn how to apply the rules to your institution Understand the day-to-day implications of the new rules Develop an understanding of expectations as they relate to customer due diligence Discover ideas for improving or streamlining current processes Understand what resources are available when questions arise 4

5 THE RULES, DEFINITIONS, AND WHAT THIS MEANS FOR YOU

6 Who must comply? What types of financial institutions are required to comply with the new rules? Financial institutions as defined by 31 U.S.C. 5312(a)(2) or (c)(1) Definition as outlined in the FFIEC BSA Exam Manual Such institutions include by are not limited to: Inured banks Community banks or trust companies Private bankers Credit unions Thrift institutions Currency exchangers 6

7 What are the requirements? Written procedures for identifying and verifying beneficial owners To be included in your organization s anti-money laundering program documentation Procedures should reasonably ensure: Identification of beneficial owners of legal entity customers, at time of account opening Certification Information contained therein Verification of each beneficial owner as outlined in the organization s risk-based procedures 7

8 Who is a beneficial owner? Individuals (if any) who owns twenty-five percent or more of the equity interests of a legal entity customer The April 3, 2018 FAQs, provided additional clarification for those legal entities that are owned by other legal entities, which we will discuss A single individual with significant control over the legal entity customer: Executive officer or senior manager (CEO, CFO, COO, etc.) Any other individual who routinely performs similar functions If a trust owns 25 percent or more of a legal entity, then the beneficial owner is deemed to be the trustee 8

9 What customers are considered legal entities? Corporation Limited Liability Company Any other entity created by public filing with the Secretary of State or similar office General partnership Similar entities formed under a foreign jurisdictions Exemptions to legal entities are included in the regulation Further clarification of this definition was provided in an April 3, 2018 FAQ, which we will discuss 9

10 What exemptions to the rules are provided? Accounts opened for legal entities that are: Opened at the point-of-sale to provide credit products, solely for the purpose of purchasing retail goods and/or services at those retailers, up to a limit of $50,000 To purchase postage, where the financial institution remits the funds for postage directly to the provider of postage products To finance insurance premiums when the payments are remitted directly to the insurance provider or broker To finance the purchase or lease of equipment when the payments are remitted directly to the vendor or lessor Limitations: The above exemptions related to postage, insurance, and equipment are limited to instances in which the legal entity does not have the ability to make payments to or receive payments from third parties Exemptions for postage, insurance, and equipment also do not apply in instances in which there is the possibility of cash refunds to the legal entity. Beneficial ownership information must be obtained at either the time of initial remittance or when the cash refund occurs. 10

11 What records must be retained? Identity of beneficial owners either using the certification provided as an appendix to the regulation, or other means (so long as the provider of the information certifies that it is accurate to the best of their knowledge) Verification of the beneficial owners, as determined by your institution s customer identification program and beneficial ownership risk-based policy and/or procedures May rely on information supplied from the legal entity customer regarding identity of beneficial owners, so long as there is no reason to question the reliability of the information 11

12 What records must be retained? (Cont.) Documentation must include: The identifying information obtained, including any certifications (if obtained) For verification, description of any document relied upon, noting: Type Identification number Place of issuance Date of issuance and expiration (if any) Identification information must be maintained for five years after the close of the account Verification documentation must be maintained for five years after the record is made 12

13 Can we rely on another financial institution? Reliance on obtaining the required information under the regulation may be placed on another financial institution (including affiliates) if the legal entity customer is opening or has opened an account or established a similar business relationships with the other financial institution so long as: Reliance is reasonable under the circumstances The financial institution is subject to the requirement to maintain an AML program The other financial institution enters into a contract requiring that it certify annually that has an AML program and it will perform (or its agent will perform) the requirements set forth in the financial institution s procedures to comply with these rules 13

14 REGULATORY GUIDANCE PROVIDED

15 FAQ Dated July 15, 2016 Provided additional clarification on the regulation and its applicability to financial institutions AML programs Clarified what information was expected to be gathered for beneficial owners Clarified how this information was to be collected. Speaks to the requirements for covered financial institutions Included additional information about who beneficial owners are Discussed applicability to Section 314a information sharing Detailed expectations related to OFAC 15

16 FAQ Dated April 3, 2018 Provides additional clarifications to the requirements, along with more detailed illustrations Indicates institutions may implement more stringent requirements if they so choose (lower thresholds for beneficial owners) Clarifies requirements for direct and indirect owners of legal entities, and how to handle situations in which legal entities are identified as owners Indicated that beneficial owners identity verification should follow the financial institution s CIP processes, including how the identifying information can be gathered, what is an acceptable address, how to handle beneficial owners that are existing customers, etc. 16

17 FAQ Dated April 3, 2018 (Cont.) Clarified that a new account would include any loans that are renewed, and certificates of deposit that are rolled over A limited exception to this requirement was issued on May 16, 2018, and as of the date of the preparation of this presentation is effective until September 8, 2018 Indicated updates to existing customer relationships would only need to happen if the bank becomes aware of a potential change in beneficial ownership Explained that monitoring practice in place prior to the effective date of the rule may already be sufficient to meet the requirements 17

18 FAQ Dated April 3, 2018 (Cont.) Clarified when certification and verification are required for updates to beneficial information for existing customers Provided clarification for pooled investment vehicles Included information on how to handle situations in which a trust is the beneficial owner Multiple co-trustees Legal entity acting as trustee Explained further the definition of a legal entity customer Non-profits, charities, or similar entities Sole proprietors and similar unincorporated associations Publicly traded entities and those listed on foreign exchanges Foreign financial institutions non-u.s. governmental department, agency or political subdivision that engages only in governmental rather than commercial activities 18

19 FAQ Dated April 3, 2018 (Cont.) Further explained exemptions related to: Private label retail credit accounts opened at the point-of-sale location Equipment financing and leases Clarified how the requirements affect CTR reporting Provided additional guidance on the requirement to understand the nature and purpose of customer relationships to develop a customer risk profile noted in the July 2016 FAQs 19

20 WHO TO CALL

21 Contacts for Additional Questions Name Phone Number FinCEN Resource Center or Othel Rife, Risk Advisory Services Manager, RSM US LLP

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