Breaking Down Beneficial Ownership:

Transcription

1 Breaking Down Beneficial Ownership: A Former Regulators Perspective Questions and Answers BankersToolbox.com B Riata Trace Parkway Building 4, Suite 200 Austin, TX

2 2 1. Please define beneficial ownership for BSA purposes (because it is VERY different than the legal definition). a. "Here you go - straight from FinCEN: (d) Beneficial owner. For purposes of this section, beneficial owner means each of the following: (1) Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer; and Start Printed Page (2) A single individual with significant responsibility to control, manage, or direct a legal entity customer, including: i. An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or ii. Any other individual who regularly performs similar functions. (3) If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial owner for purposes of paragraph (d)(1) of this section shall mean the trustee. If an entity listed in paragraph (e)(2) of this section owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, no individual need be identified for purposes of paragraph (d)(1) of this section with respect to that entity's interests" 2. A Trust is not a "legal entity customer" and therefore beneficial ownership certification is not required - correct? You keep mentioning Trust accounts, Trustees, and Trust departments. a. Business trusts that are created by a filing with a state office are included in the definition of a legal entity customer, and therefore covered under the rule. Otherwise, the rule does not include trusts. Trusts were mentioned in the presentation because if a trust is a beneficial owner of a business - the trustee is your BO you are conducting CIP/CDD on. I believe the trust department was also mentioned when discussing getting buy in from all departments institution wide versus isolating decisions to operations. 3. Is this reg going to be for new customers or is it retroactive for existing customers? a. It is not technically retroactive in the sense that on May 11th you are required to have this information on all existing customers. However, there is a requirement to obtain this information from existing customers upon certain triggering events including opening a new account. It is also expected that you obtain this information from existing customers using a risk based approach. 4. It would be helpful to learn more about what triggering events other financial institutions are going to be using or what the common triggering events are that would make sense to incorporate in an effort to comply with the BO requirements. a. You must obtain BO information from existing customers if they open a new account. Your policy may also be more conservative and require you to obtain that information regardless of whether they are requesting another account with your institution. You should also have triggering events for ensuring information remains current - these may include, but are not

3 3 limited to, onsite visits, customer services touchpoints such as requests for a new debit card or new checks, or upon the customer entering the branch. 5. Does a new debit card count as a new account? a. No, but it may be a triggering event depending on how your policy is written. 6. Is safe deposits considered a new account? 7. I understand that we need to complete the certification form when an existing member opens a new account. Once we have a certification on file, do we need to continue to complete one each time a new account is opened? Or is that when a risk based approach comes into effect? a. No, there is no expectations to have the form completed at each customer touchpoint or account opening. However, you do need to make a policy decision around triggering events for ensuring the information remains correct as it is written in the 5th pillar that you must keep this information up to date. Opening a new account is a great opportunity to ensure the information on file is current. Higher risk customers may justify more frequent touchpoints/ensuring the information is up to date more frequently. 8. We reside in an area that is supported by agriculture and farmers. Many farmers have organized their operation as corporations, partnerships, or LLC s. It is not uncommon for one farming operation to have ten fifteen loans created during the course of a year. Does this mean that we are required to identify and verify beneficial owners, in this case, fifteen times each year? I understand the spirit of the law but this is ridiculous. How can we comply without making this so burdensome? a. No, you do not need to obtain the form at each new account opening. There is an initial expectation to obtain the form from existing customers when they open a new account. Additionally, you do have to keep this information up to date. However, you do not need to get the form updated ten to fifteen times a year. You will need to include in policy and procedure how you as an agricultural institution will comply and what triggering points will require a new form or a confirmation the information remains correct. 9. We are hearing differing thoughts on renewals of certificates of deposits that are held by legal entities covered under beneficial ownership. One group is saying no you do not have to have a new certification when the CD is renewed another says you have to have a new certification when a CD is renewed. a. This is currently a grey area. I would say that you need to make a policy decision as an institution and stick to it until further guidance comes down. It would make sense to obtain a form from an existing customer from which you have not obtained a form from at renewal - especially for higher risk customers. However, that doesn't mean you have to obtain a new one every time the CD renews going forward. If you don't, you need to have a policy around the appropriate timeframes for ensuring the information you have remains appropriate and up to date. 10. Are Non Profits exempt from Beneficial Ownership? The Non Profits include schools, churches, home owners associations and others. They are incorporated entities.

4 4 a. Non-profits have a partial exemption. You must obtain control prong information from them. 11. Can you repeat the entities that do not need the Ownership Prong? a. Pooled investment vehicles and non-profits 12. Are we required to dig down to the beneficial owner of an LLC or CORP etc. if they have a 25% or more ownership? 13. If a corporation or LLC owns more than 25% of a structured entity, who are we identifying under the control prong? a. The control prong will be just for the entity opening an account with your institution. You need ownership information on the subsequent entities to determine who (a person) owns 25% or more of the entity opening an account. It would be prudent to obtain control information on those entities, as well. Especially for higher risk entities. 14. Do you have to have the control prong on the Hot Cocoa LLC as well? a. Yes, it can be anyone that has significant control - let's say CEO Santa Claus. 15. On the Where do I stop slide, if there is an LLC that owns the legal entity that we are opening the account for at 20% (less than 25%), can we stop there with that LLC owner? a. You wouldn't even need to list that entity on the form. However, if there is an owner of that entity that owns 100% and also has ownership interest directly or indirectly - they may pass the 25% threshold. Therefore, it would be prudent to obtain that information. 16. If trust is a beneficial owner of a legal entity and trust has multiple trustees, are they all listed as beneficial owners of legal entity? 17. How do you suggest a bank document information about a business/s being the main BO? Do you suggest setting up an additional information sheet? a. This depends on your document management system and how you plan on retaining this information. You could have that entity fill out another B.O. form. If you are using a flexible solution - you can just continue to "tree" down from that business to get the B.O. required information on that business that owns more than 25% of the business opening an account with you. That is how Banker's Toolbox's CDD/EDD product, Due Diligence Manager works. 18. If you have done verification and the next time around nothing changes, must it be documented or is our policy and procedure sufficient?

5 5 a. You can make a note as part of your periodic monitoring of the customer. It would be good to find a way to note that you certified that nothing had changed on the customer with a date stamp for audit trail purposes. 19. Can the retention on verification be kept until the account is closed? 20. Regarding purchasing deposits, etc from other banks and relying on them for BO compliance, does this apply to Qwickrate CDs? a. If you have an agreement with another FI where you purchase deposits or loans of any kind, you can rely on their compliance with BO should the agreement include that the other FI is responsible and you are reviewing their audit or somehow evaluating their program periodically. 21. Do we have to file a CTR? If the Business account receives for example $5,100 in cash. One of the beneficial owners on this account does deposit$ in his personal account. But is not a signer on the business account. Do we still file a CTR? a. This is more complex than the question suggests. You will file a CTR if you do not feel the entities are operating independently. This is nothing new. You should already have policies in place around this. I highly encourage you all read the rule as it applies to CTR aggregation as this is a huge piece of compliance. With respect to aggregation of transactions for Currency Transaction Reporting (CTR) purposes, FinCEN expects covered financial institutions to apply existing procedures consistent with CTR regulations and applicable FinCEN guidance from 2001 and 2012.[50] Thus, while financial institutions should generally recognize the distinctness of the corporate form and not categorically impute the activities or transactions of a legal entity customer to a beneficial owner, they must aggregate multiple currency transactions if the financial institution has knowledge that these transactions are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.[51] While the requirement to identify the beneficial owners of legal entity customers does not modify this existing CTR aggregation requirement, the beneficial ownership identification may provide financial institutions with information they did not previously have, in order to determine when transactions are by or on behalf of the same person. Thus, if a financial institution determines that a legal entity customer or customers are not being operated independently from each other or from their primary owner e.g., the institution determines that legal entities under common ownership have common employees and are repeatedly used to pay each other's expenses or the personal expenses of their primary owner then the financial institution may determine that aggregating the transactions of a legal entity or entities and their primary owner would be appropriate.[52] Under such circumstances, if a financial institution were aware that a beneficial owner made a $5,000 cash deposit into his personal account, and later the same business day, he made a $6,000 cash deposit into the account of a legal entity not being operated as an independent entity, the institution would be required to aggregate those transactions and file a CTR.[53] And to the extent that the financial institution determined that such transactions had no other apparent purpose than to avoid triggering a CTR filing, the financial institution would need to consider whether filing a SAR about the transactions would be appropriate.

6 6 22. Please clarify whether it is necessary to aggregate cash deposited to a business account where an owner with over 25% ownership also has a personal account where cash was deposited also. Aggregated, more than $10,000 was deposited. We thought that FINCEN came out saying that this type aggregation would not be necessary. Please clarify for us. a. There are no changes to CTR aggregation regulations. However, now you have more insight into the ownership structure and who may be directly benefiting from a transaction. FinCEN has not come out with any additional guidance on this, and it isn't included in the FAQs. However, they are clear on how they see it applied in the rule as noted in an answer above. 23. Are we required to do negative news checks? Is a ChexSystems/Credit Report sufficient (if they sign off)? a. Negative news is not a written requirement. However, it does lend to a strong risk management program. 24. Where do you verify or get "negative news"? a. Negative News is incorporated in Banker's Toolbox BSA/AML software, BAM+. You can also just simply run an internet search on the entity. However, engines like negative news will give you that information on an ongoing basis should something happen. 25. Our bank has been tossing around the idea to provide education for our customers. Do you have any recommendations on how to go about educating our customers and potential customers? a. A flyer on your website would likely see the most traffic. In branch notifications or pamphlets and even statement stuffers may also be a good way to get your customer's attention. 26. Please comment if BO is at 20%? a. A lot of institutions have a more conservative policy to obtain BO information on those with 20%, or even 10% ownership. That is a policy decision up to the individual institution. 27. Is there a requirement to update the US Patriot Act Notice with BO requirements? Haven't heard anything about that. a. There is no written requirement. However, it would be a great customer education opportunity. 28. Will Banker's hold a follow up session to cover issues raised by regulators after examinations start? a. Yes, Banker's Toolbox will be conducting CDD workshops throughout the country to discuss these important issues. If you are interested in hosting a CDD workshop at your institution, please contact experts@bankerstoolbox.com. We will also host additional Beneficial Ownership webinars in You can view all of our webinars on demand on our website: