Beneficial Ownership NEW JERSEY BANKERS ASSOCIATION COMPLIANCE CONFERENCE JUNE 2017

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1 Beneficial Ownership NEW JERSEY BANKERS ASSOCIATION COMPLIANCE CONFERENCE JUNE 2017

2 Your Presenters Asaad Faquir, MBA, MBS Director, RSK Compliance Solutions David Lutz, MBA, CAMS Senior Manager, BSA/AML Audit Group

3 Agenda Why does beneficial ownership matter? The Mechanics of Beneficial Ownership A Few Challenges Rising Expectations

4 Why Beneficial Ownership Matters Financial Action Task Force o Took exception to how easy it is in the U.S. to form a legal business entity A relatively small fee and a few minutes of time o Took exception to how easy it is in the U.S. to form a legal business entity without clearly identifying yourself Registered agents Delaware companies Wyoming companies Nevada companies o Begs the question How can you have a top flight AML regime when businesses and owners have a low barrier to entry and can so easily hide themselves behind the corporate veil?

5 Why Beneficial Ownership Matters Banks, bank holding companies, and their subsidiaries are required by federal regulations to file a SAR with respect to: o Transactions conducted or attempted by, at, or through the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction: Has no business or apparent lawful purpose or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction

6 The Mechanics of Obtaining Beneficial Ownership During the account opening process, banks need to identify any beneficial owners of any entity seeking to open an account with the bank o This is accomplished by simply asking: Are you the sole owner of the entity or are there other equity owners? The rules establish that we may take the word of the natural person opening the account and create no explicit requirement to verify the accuracy of their statement Follow up question Are you the sole person in control of the entity or is that someone else? o The customer can then simply sign the certification including the names and information about the beneficial owners And of course provide the Name, Address, D.O.B. and SSN of those identified on the certification.

7 The Mechanics of Obtaining Beneficial Ownership

8 The Mechanics of Obtaining Beneficial Ownership The account opening conundrum o Most organizations utilize a narrow definition of account opening Begins: When the customer is present Ends: When the account is funded (or the loan is closed)

9 The Mechanics of Obtaining Beneficial Ownership However FinCEN believes: o The Beneficial Ownership process will only add 15 to 40 minutes to the actual account opening process. Assuming the customer has all the information on hand FinCEN also believes: o It is already the case [emphasis FinCEN] that prospective business customers who seek to open accounts at financial institutions often do not have on hand all the documentation required (including CIP information), and that financial institutions have practices in place to inform these prospective customers of the documentation they need to provide in order to open an account.

10 The Mechanics of Obtaining Beneficial Ownership Therefore, the new rules open up institutions to the potential for extended timeframes as to what constitutes account opening o Technical challenges Soft opening of accounts Account open subject to documentation being provided o Audit and Examination challenges How well do you define account opening in your policy and procedures? Is an extended account opening documented in your risk assessment? How do you ensure that you don t exceed any extended timeframes?

11 The Mechanics of Obtaining Beneficial Ownership The Bank still needs to verify the identity of the Beneficial Owners o Documentary verification Unlike CIP copies are acceptable o Non-documentary verification Exactly the same as CIP The Bank should then have a clear policy for how it will complete the documentary and non-documentary verifications o Including what happens if the identity cannot be verified

12 The Mechanics of Obtaining Beneficial Ownership

13 The Mechanics of Obtaining Beneficial Ownership What happens if a $1.5 million community development qualifying commercial loan with impeccable financials and strong underwriting is about to close, but the borrower has a silent partner in London who is unable or unwilling to provide copies of their ID to the Bank? o Do you not close the loan? o Do you make an exception to your BSA policy? o Do we close the loan but notate that the customer risk is different?

14 The Indirect Owner Challenge

15 The Indirect Owner Challenge As the rules are written, the ability to identify an indirect owner is based on one big assumption o That a bank s customers will name names when completing the certification form The FinCEN provided form currently has no space to list the name of a company that may own a customers business Which means if Asaad works with David and they get a 30% investment from David s neighbor s investment business, when we open a checking account are we going to list David s neighbor Sean by name on the form OR not name him at all because we don t know if Sean even needs to be listed on the form because we just flat out don t know if he owns enough of his company so that he owns 25% of our company o The Bank is under no obligation to confirm the ownership listed, or not listed, on the certification Also there is no place to list the amount of ownership

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17 The Indirect Owner Challenge Indirect ownership creates a number of challenges for institutions relative to complying with the Beneficial Ownership rules o A classic case: Asaad and David are part owners of a bank training company called the Best Training Ever Company, B-TEC for short Asaad owns 35% David owns 35% David s next door neighbor Sean Carter, who goes by Jay, gave us seed money for a 30% ownership stake David knows Sean gave the company money through his other business Roc-a-fella Investments Asaad only knows Sean gave the company the money

18 The Indirect Owner Challenge One day David shows up to your bank to open a checking account for the Best Training Ever Company (B-TEC) o He fills out the certification form and lists the owners as Asaad Faquir 35%, David Lutz 35%, Sean Carter indirectly through his other business Roc-a-Fella Investments 30% He lists himself as the controlling owner o Sean Carter is not automatically a beneficial owner of the Best Training Ever Company The Bank now has information though which creates an obligation to determine if he is or is not a beneficial owner How does the Bank accomplish this? How does the Bank accomplish this at account opening? How much ownership of Roc-a-fella Investments does Sean have to directly own to be a beneficial owner of B-TEC? What will the Bank need to do if Roc-a-fella Investments isn t owned directly by Sean, but by another company?

19 The Indirect Owner Challenge For most smaller institutions a complex, multitiered indirect ownership structure will be a rarity o Single owners o Local partners o Family owned businesses For New Jersey banks, a complex, multi-tiered indirect ownership structure will be slightly more common o Real estate development and management companies o Science and technology companies o Proximity to international business center (NYC)

20 The Indirect Owner Challenge How comfortable should the Bank be with an indirect beneficial owner structure? o Assessing the risk of indirect ownership Is indirect ownership a common structure for the type of business our customer is in? By industry Across our customer base Is there a legitimate business purpose to the indirect ownership of our customer? Tax benefit What is the nature of the business which indirectly owns our customer? Venture capital

21 The Indirect Owner Challenge How comfortable should the Bank be with a double, triple, or quadruple indirect ownership structure? o A function of risk Multiple layers of indirect ownership is quite normal in a real estate development or management deal Less common in a mechanics garage o A matter of policy How comfortable does the Bank want to be? Three or more layers of indirect ownership requires BSA Officer approval? Two or more layers of indirect ownership and we won t open the account?

22 The Incorrect Information Challenge The Beneficial Ownership rules explicitly state that a Bank does not have to verify the beneficial ownership status information reported by the customer opening the account... But what if we know they are wrong? o The B-TEC case returns: This time Asaad comes in to open the savings account for the company He completes the form as follows: Asaad Faquir 35%, David Lutz 35%, Sean Carter 30% Remember he doesn t know Sean is an indirect owner He lists himself as the controlling owner New challenges We know Sean owns the company indirectly, but he is now listed as a beneficial owner, so what do we do? We have another form that shows David as the controlling owner, so what do we do?

23 The Incorrect Information Challenge What if the person filling out the certification form is flat out lying? o Let s say Asaad comes back to open another account for B-TEC and he thought it was inconvenient to have to track down David and get his ID information so he completes the certification and shows no beneficial owners and only himself as the controlling owner Is this a SAR worthy issue? Questionable or false documentation? What is the impact on customer risk? Do we place all the company s accounts on a watch list?

24 The Knowledge is Power Challenge FinCEN has provided no indications of how a person s status as a Beneficial Owner relates to filing a SAR o For CTRs, the FIN guidance is clear No requirement to aggregate unrelated businesses with a common owner o For SARs, no such guidance exists Will your monitoring process even aggregate by beneficial ownership data for analysis? Should they? What about negative news searches and results related to a beneficial owner?

25 The Knowledge is Power Challenge Asaad, David and Cris all own and operate unrelated cash intensive businesses o Asaad owns a coin operated laundry business o David owns a self-cleaning car wash (coin operated cleaning bays) business o Cris owns a convenience store with a proprietary ATM Asaad, David and Cris all report Sean Carter as a beneficial owner under the equity ownership prong o Sean does not have any personal accounts with the Bank and is not a customer of the Bank in any way Is it material that Sean is a common link relative to the 3 cash intensive business accounts? What happens if we notice suspicious trends across the various businesses? Should Sean be named as a suspect?

26 Rising Expectations of Knowledge The Beneficial Ownership rules are clearly tied to the Customer Due Diligence ( CDD ) process FinCEN used this correlation to expand and codify their expectations for CDD going forward o Establish risk-based procedures for conducting ongoing customer due diligence, including the development of customer risk profiles and implementation of ongoing monitoring to identify and report suspicious activity and, on a risk basis, to update customer information CDD is now a pillar of the BSA/AML compliance program

27 Rising Expectations of Knowledge Due Diligence should now be a global concept within our BSA/AML program o Customer data and information will need to be decompartmentalized and shared throughout the organization (or at least with the BSA Department) The more complex the financial institution the bigger this challenge will be e.g., commercial lending is a treasure trove of customer risk data not usually obtained or verified by branches when opening an account Revenues (should shed light on deposit volumes and source of funds) Ownership structures (should help with the indirect ownership challenge)

28 Rising Expectations of Knowledge Due diligence should be ongoing and integrated into our programs in real time o Most institutions conduct due diligence at account opening and then never again Except for maybe high risk customers or If monitoring detects something anomalous o Rarely is this information shared (compartmentalization) or integrated with other relevant customer data to improve our understanding of the customer s behavior (anticipated or actual) Which begs the question: Aside from the obvious things like structuring, how are we consistently and effectively identifying suspicious activity?

29 Rising Expectations of Knowledge Customer Risk Profile CIP - Basic legitimizing data CDD - Know your customer data EDD - Validate your customer data

30 Rising Expectations of Knowledge Customer Risk Profile Transactional Monitoring Better SARs More Better Crimes SAR Reporting Prevented

31 Beneficial Ownership Summary The goal of the new rules is to improve the fundamentals of the AML regime in the U.S. o Pushing banks to conduct expanded and ongoing due diligence on commercial account holders The compliance process is generally straightforward but does have some significant challenges o Requires banks to think through the issues associated with obtaining more information about our customers and make sound risk and policy driven decisions We are expected to use this information to better identify truly suspicious activity o Requires banks to break down silos and open pathways for sharing and communicating pertinent customer data

32 Questions?

33 Contact David Lutz, MBA, CAMS Senior Manager, BSA/AML Audit Group (732) Asaad Faquir, MBA, MBS Director, RSK Compliance Solutions (855)