Beneficial Ownership:

Transcription

1 Your State Association Presents New Accounts in Texas 3 Beneficial Ownership: Developing a Compliance Effort Program Materials Use this document to follow along with the webinar presentation. Please test your system before the broadcast. Be sure to print enough copies for all listeners. Wednesday, September 21, 2016 Presenter: Laura Wilson Technical Support (for faster service please submit inquiries via or online): (Registration & Tech Support): - support@conferenceedge.com, Phone- (877) FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs

2 Procedures for Submitting Additional Questions After the program is over, you have until midnight to submit additional questions to Laura via Send questions to In approximately 3-5 working days (it depends on the number of questions), we will you a copy of all the questions along with Laura s answers This information will also be posted on your Conference Edge account..

3 Beneficial Ownership: Developing a Compliance Effort September 2016 Presented by Laura Wilson Pegasus Educational Services, LLC 1

4 Overview Background. Legal entities in Texas. CDD Regulations. Getting Started. Pegasus Educational Services, LLC 2

5 FATF (Financial Action Task Force) FATF 2006 mutual evaluation of the U.S. concluded the U.S was noncompliant with Recommendations: 24, legal persons & beneficial owners, and 25, legal arrangements & beneficial owners. Pegasus Educational Services, LLC 3

6 Response to FATF Criticisms Concluding a public process that began in 2012, FinCEN published a final due diligence regulation on May 11, It makes identifying an entity s beneficial owners at account inception a legal requirement. Compliance is mandatory on May 11, Pegasus Educational Services, LLC 4

7 Response to FATF Criticisms The new regulation does not remedy the FATF criticism regarding the government s need to force the disclosure of a legal entity s beneficial ownership at the time of formation. Federal legislation that could remedy that FATF criticism has been proposed, unsuccessfully, several times since Pegasus Educational Services, LLC 5

8 FATF FATF is currently conducting a mutual evaluation of the U.S. to be completed in Repeat criticisms on the same points are expected. Pegasus Educational Services, LLC 6

9 The Panama Papers The Panama Papers are 11.5 million leaked documents that detail financial and attorney client information almost 320,000 offshore entities. First stories published April 2016 after over a year of investigation by the ICIJ. Wikipedia has a comprehensive article: Pegasus Educational Services, LLC 7

10 The Panama Papers Most of the individuals mentioned were from Europe, Asia, and South America; only about 200 were from the U.S. The law firm representing them was in Panama. Yet, over 1,100 of the corporations they established were in the U.S., most of them in Nevada. Pegasus Educational Services, LLC 8

11 The Best Countries for Laundering Money (2015) 1. Switzerland 2. Hong Kong 3. U.S. 4. Singapore 5. Cayman Islands 6. Luxembourg 7. Lebanon 8. Germany 9. Bahrain 10. UAE Pegasus Educational Services, LLC 9

12 Tax Evasion is an underlying issue. Tax revenue lost is estimated at over $111 Billion. Pegasus Educational Services, LLC 10

13 Tax Evasion is an underlying issue. This is a problem world-wide. Countries are coordinating efforts to share information. FATCA is part of the U.S. solution. Beneficial ownership requirements are also a part of the equation. Pegasus Educational Services, LLC 11

14 Entities and Anonymity Why was Tomahawk Properties, Inc. a shell Florida corporation buying up scrub land near Orlando in ? Pegasus Educational Services, LLC 12

15 Entities and Anonymity Why did Disney want to conceal its identity when it was buying the land? Pegasus Educational Services, LLC 13

16 Entities and Anonymity Why has society taken a much more intense interest in corporate anonymity today? Pegasus Educational Services, LLC 14

17 Corporate Anonymity and Criminal Activity Bin Ladin moved to Sudan in 1991 and set up a large and complex set of intertwined business and terrorist enterprises. In time, the former would encompass numerous companies and a global network of bank accounts and nongovernmental institutions. 9/11 Commission Report Pegasus Educational Services, LLC 15

18 Corporate Anonymity & Criminal Activity 60 Minutes Anonymous, Inc. story aired on January 31, 2016 ( Global Witness actually did all of the legwork for this broadcast) Pegasus Educational Services, LLC 16

19 Corporate Anonymity & Criminal Activity Earlier that same month, FinCEN issued a GTO on identifying real estate buyers. Pegasus Educational Services, LLC 17

20 Corporate Anonymity & Criminal Activity Effective August 28, 2016 GTO expanded to Bexar County, TX. (Also expanded to include Los Angeles, San Diego, and San Francisco) Pegasus Educational Services, LLC 18

21 Corporate Anonymity & Criminal Activity Who owns or controls the entity you are dealing with? Pegasus Educational Services, LLC 19

22 Corporate Anonymity & Criminal Activity A handful of U.S. states offer company registrations with cloaking features such as minimal information requirements and limited oversight that rival those offered by offshore financial centers. Delaware, Nevada, and Wyoming are often cited as the most accommodating jurisdictions in the United States for the organization of these legal entities. U.S. Money Laundering Threat Assessment (2005) Pegasus Educational Services, LLC 20

23 Corporate Anonymity & Criminal Activity While the investigative powers are generally sound and widely used, there are no measures in place to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. Executive Summary, FATF Mutual Evaluation of the U.S. (2006) Pegasus Educational Services, LLC 21

24 Documentation Previously, banks focused on mitigating risk by requiring: evidence of the entity s existence gleaned from public filings, and evidence of the individual s authority to act on the entity s behalf via a resolution provided by the entity. Pegasus Educational Services, LLC 22

25 Documentation Today, they also need to establish that the business is a going Enterprise with clients, facilities, revenues, employees and expenses, not a vacant lot. Pegasus Educational Services, LLC 23

26 Documentation Going forward, banks need to be concerned about the names of the individuals who own the entity and those who are making decisions on behalf of the entity. Pegasus Educational Services, LLC 24

27 Texas Creatures of Statute For profit corporation Professional corporation Limited liability company Professional limited liability company Limited partnership Professional association Pegasus Educational Services, LLC 25

28 Texas Creatures of Statute Non profit corporation Uniform unincorporated non profit association Pegasus Educational Services, LLC 26

29 Documentation In Texas formation documentation is prescribed in the Texas Business Organizations Code. A certificate of formation is filed to form an entity. The filed/stamped copy is called the certificate of filing. Pegasus Educational Services, LLC 27

30 Registration Establishes Existence If a Texas creature of statute does not: register with the Secretary of State (SOS), it does not exist, and observe ongoing regulatory formalities; e.g. file annual reports with the Comptroller of Public Accounts (Comptroller), it will cease to exist. Pegasus Educational Services, LLC 28

31 Registration Establishes Existence A foreign or out of state creature of statute that is transacting business in Texas must register with SOS. If it does not register, it does not exist in Texas. Pegasus Educational Services, LLC 29

32 Does registration establish owners? The certificate of formation for a: corporation required 1 director, 1 organizer, and a registered agent. LLC requires 1 organizer, at least 1 manager or if no manager then at least one or more initial members, and a registered agent. No owners required in most instances. Pegasus Educational Services, LLC 30

33 Does registration establish owners? Where can you search in Texas? Texas Comptroller of the Currency. Texas SOS Direct. Pegasus Educational Services, LLC 31

34 Texas Comptroller of the Currency Available for limited partnerships, limited liability partnerships, general partnerships with at least one legal entity partner, LLCs and corporations. Pegasus Educational Services, LLC 32

35 Texas Comptroller of the Currency Officer and directors info is no longer available from the Comptroller. SOS direct is now the primary resource for verification. Pegasus Educational Services, LLC 33

36 SOS Direct Searches cost $1. Pegasus Educational Services, LLC 34

37 SOS Direct General information and officers are available. Pegasus Educational Services, LLC 35

38 Questions? Pegasus Educational Services, LLC 36

39 New Due Diligence Regulation Pegasus Educational Services, LLC 37

40 Due Diligence Regulation Some things take time to build. Pegasus Educational Services, LLC 38

41 Due Diligence Regulation This regulation took four years. (Actually, it was longer than that ) Pegasus Educational Services, LLC 39

42 Due Diligence Regulations An advance copy of the final regulation was made available at: Excerpts and page numbers included here come from that copy. (See page 41) Pegasus Educational Services, LLC 40

43 Due Diligence Regulation The advance copy is 227 pages, but the regulation for banks is only 17 pages. The rest of it is called the preamble. Pegasus Educational Services, LLC 41

44 Due Diligence Regulation We will skip the regulation s genealogy. If you want the details, they are capsulized in the first 25 pages of the preamble. Pegasus Educational Services, LLC 42

45 The Regulation Read the regulation and Appendix A. They are attached to this handout. Not included here, but still required reading, is section III beginning on page 26; i.e. the Section by Section analysis. Rely on the specific wording in the regulation, not the more casual wording in these slides, for your guidance. Pegasus Educational Services, LLC 43

46 Due Diligence Regulation Published in Federal Register, May 11, 2016, page (62 pages). Effective, July 11, Applicability date (compliance is mandatory) May 11, FAQs published July 19, Pegasus Educational Services, LLC 44

47 Applicability Date Banks choosing to comply or comply in part prior to July 11, 2016 will only be responsible for adhering to their adopted policies and procedures. After that date, their efforts will be judged against the regulation. Pegasus Educational Services, LLC 45

48 Applicability Date One drawback of early compliance is that a bank can only cite bank policy, not a legal requirement, as the reason for requiring the new information. New or existing bank customers who object to the disclosures may choose to go elsewhere. Pegasus Educational Services, LLC 46

49 Applicability Date It is likely your bank will have an examination prior to the applicability date. Examiners and auditors cannot mandate compliance prior to May 11, 2018, but they can (at any time) evaluate and comment on a bank s knowledge of the new requirements and evidence of its readiness for timely implementation. Pegasus Educational Services, LLC 47

50 FinCEN s Elements of Due Diligence Customer identification and verification. Beneficial ownership identification and verification. Understanding the nature and purpose of customer relationships to develop a customer risk profile. Ongoing monitoring for reporting suspicious transactions and maintaining/updating customer information on a risk basis. Pegasus Educational Services, LLC 48

51 New Due Diligence Regulation First, It requires a bank to: identify a legal entity customer s beneficial owners at account inception, and subject them to a customer identification program (CIP) effort. Pegasus Educational Services, LLC 49

52 New Due Diligence Regulation Second, It creates a fifth pillar for BSA compliance that requires: understanding the nature and purpose of a customer relationship based on a risk profile, and ongoing monitoring and maintaining and updating information for SAR purposes. Pegasus Educational Services, LLC 50

53 New Due Diligence Regulation Like the Customer Identification Program (CIP) regulation, this regulation sets out an explicit legal requirement, not a recommendation or a best practice. Failure to comply after the mandatory compliance date (May 11, 2018) will be a BSA violation. Pegasus Educational Services, LLC 51

54 Task Tell management what s coming and why using a handout. Pick a target date on or before May 11, 2018 for when your bank will have its compliance program in place. Involve all stakeholders in developing a plan. Pegasus Educational Services, LLC 52

55 Task Review a list of your entity customers and see how much you really know about them and their operations. Business entities are customers subject to expanded examination overview in the Manual (2014) you really should be able to produce a list on demand. Pegasus Educational Services, LLC 53

56 Task For future reference, how many of your legal entity customers are classified as higher risk? Pegasus Educational Services, LLC 54

57 Task Begin writing and rewriting policies and procedures that will implement your plan. Have the board of directors approve necessary policy changes. Train on new policies and procedures. Pegasus Educational Services, LLC 55

58 Choices The Bank can: put together a program that complies with the letter of the law, i.e. the basics, or develop an advanced version to improve the value or reliability of the information; i.e. doing more than the regulation requires. Pegasus Educational Services, LLC 56

59 Who is covered? All covered financial institutions are subject to the regulation. Commercial banks, federally insured credit unions, savings associations, and federally regulated trust companies are among those listed in 31 CFR (e)(1). Pegasus Educational Services, LLC 57

60 BO requirements in a nutshell Compliance requires banks to: revise their BSA/AML policy, and develop written procedures designed to: identify and verify the identity of beneficial owners of legal entity customers, and incorporate new requirements for gathering information and monitoring activity. Pegasus Educational Services, LLC 58

61 Legal Entity defined (1) Legal entity customer means a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that open an account. Pegasus Educational Services, LLC 59

62 Sole proprietorships A sole proprietorship is not a legal entity, it s just an individual, maybe one with a nickname (DBA name). A sole proprietorship does not provide a cloaking device for the owner; she is the customer for CIP purposes. Pegasus Educational Services, LLC 60

63 Frontline considerations Frontline personnel will need to be able to identify legal entity customers at account inception. Will they need lists of what legal entities can be organized in all other states? Will you open accounts for legal entities established in foreign countries? Pegasus Educational Services, LLC 61

64 Frontline considerations Employees must be trained on the fundamental differences between the various types of entities and who their owners are: Corporation = shareholders LLC = members Partnership = partners Pegasus Educational Services, LLC 62

65 Frontline considerations Do they know how to verify their existence? Identify their officers, members, or partners? Pegasus Educational Services, LLC 63

66 Exceptions Some entities are specifically excluded from the definition of a legal entity customer in the regulation. (Why each is excluded is reviewed in the preamble s Section by Section analysis mentioned earlier.) Some, non profits in particular, are technically not excluded, but they are only required to disclose an individual with significant management responsibilities (non profits have no owners). Pegasus Educational Services, LLC 64

67 Frontline considerations Some excluded entities are Phase I exempt persons under the CTR exemption process and can be easily verified. Will your new accounts personnel attempt to verify that specific legal entity customers are excluded from the definition? Pegasus Educational Services, LLC 65

68 Frontline considerations Will your new accounts personnel require some form of documentation from all excluded entities? Some excluded entities? Will you require documentation of non profit status? Pegasus Educational Services, LLC 66

69 Frontline considerations FinCEN does not expect front-line employees of covered financial institutions to engage in any type of legal analysis to determine the applicability of this exclusion. Rather, FinCEN expects covered financial institutions to rely upon the representations of such customers, absent knowledge to the contrary. Page 70 Pegasus Educational Services, LLC 67

70 Beneficial owners defined Beneficial owners: Each individual with 25% equity interest, and one individual with significant managerial responsibility. Appendix A illustrates it best. (see page 39) Pegasus Educational Services, LLC 68

71 Frontline considerations Naming the individual with significant management responsibility is done by the natural person opening the account. To be credible, it should be the name that person has chosen to offer based on his or her knowledge. A bank should not direct the person opening the account to only provide a name that can be identified as an officer or owner listed in public filings. Pegasus Educational Services, LLC 69

72 Use Appendix A? Option 1: Use Appendix A (or a modified version) as a paper form to gather the required information with the person opening the account certifying that, to the best of his or her knowledge, the information is accurate. Pegasus Educational Services, LLC 70

73 Enhance Appendix A? Option 2: Do not use Appendix A in paper form; obtain the information from the individual opening the account by any other means. However, the person opening the account must certify that, to the best of his or her knowledge, the information is accurate. Pegasus Educational Services, LLC 71

74 Enhance Appendix A? You can modify Appendix A, but you must retain the certification portion. Any modification of what amounts to a model form must be done cautiously. For example, the modification absolutely cannot reduce the amount of information required. Increasing it should not be a problem. Pegasus Educational Services, LLC 72

75 Examples of possible revisions: 1. Use the Appendix A to document why the customer was excluded from the definition of a legal entity. 2. Note the type of entity. Pegasus Educational Services, LLC 73

76 Examples of possible revisions: 3. Note whether each individual listed is an existing customer previously subjected to CIP; i.e. Yes or No. 4. Describe how identity was verified on Appendix A, describing both documents and non documentary methods used. Pegasus Educational Services, LLC 74

77 Examples of possible revisions: 5. Require and verify the person opening the account s connection to the legal entity. 6. Require the person opening the account be: an officer, or a member, or a partner of the legal entity. Pegasus Educational Services, LLC 75

78 Examples of possible revisions: 7. Require the person opening the account to be a CIP ed customer of the bank. 8. Obtain and verify CIP information on the person opening the account (written permission required to pull a CRA). Pegasus Educational Services, LLC 76

79 Examples of possible revisions: 9. Require the beneficial owner s percentage of ownership. 10.Require the phone number of each individual named on the form. 11.Other? Pegasus Educational Services, LLC 77

80 Questions? Pegasus Educational Services, LLC 78

81 No lookback required Banks are not required to do an automatic lookback and obtain beneficial ownership information for existing legal entities, however: unlike the CIP regulation, there is no grandfather provision for existing customers; and application of the certification and verification requirements is triggered every time a legal entity customer, new or old, opens an account. Pegasus Educational Services, LLC 79

82 Lookback on higher-risk customers From page 28 of the preamble: the absence of a categorical mandate to apply the requirement retroactively would not preclude financial institutions from deciding that collecting beneficial ownership information on some customers on a risk basis FinCEN guidance from prior years, FIN-2010-G001, also suggests it is appropriate to identify beneficial owners on higher risk customers. Pegasus Educational Services, LLC 80

83 Verification of Beneficial owners The bank: must verify the identity of each beneficial owner in a manner consistent with the requirements of the CIP regulations. (A bank is not required to use its existing CIP.), may generally rely on the information provided by the individual opening the account unless it has knowledge to the contrary, and may require a photocopy of each individual s ID. Pegasus Educational Services, LLC 81

84 Verification of Beneficial owners A photocopy of a drivers license may readily verify: name, address, and date of birth. But not the name/tin combination. Pegasus Educational Services, LLC 82

85 Verification of Beneficial owners Per the preamble from the final CIP regulation issued several years ago Thus, a bank need not establish the accuracy of every element of identifying information obtained, but it must do so for enough information to form a reasonable belief that it knows the true identity of the customer. FR 25099, May 9, 2003 Pegasus Educational Services, LLC 83

86 Timeframe for verification The policy should establish a time frame related to account opening in which verification must take place; e.g. prior to opening the account? within a reasonable time after opening the account? Pegasus Educational Services, LLC 84

87 SOS limitations on verification Usually, there is no way to verify ownership status based on a legal entity s public filings with the state of formation. Pegasus Educational Services, LLC 85

88 No verification of ownership required Banks are only verifying the individual s existence, not his or her ownership status. They are entitled to rely on the information provided by the person opening the account unless they have reason to believe it is incorrect. Pegasus Educational Services, LLC 86

89 Record retention Like the CIP regulation, there are specific record retention requirements: any identifying information obtained including the certification, and a description of any document relied on plus a description of any non documentary methods used to verify identity. Pegasus Educational Services, LLC 87

90 Record retention Like the CIP regulation, the time frame for record retention is 5 years. The beginning date varies based on the information. The information on identity - five years after the account is closed. The information from the verification process - five years after the information is obtained. Pegasus Educational Services, LLC 88

91 Reliance on third-party Like the CIP regulation, one financial institution can rely on another financial institution. The regulation spells out specific requirements for this practice. Pegasus Educational Services, LLC 89

92 What We Do With the Information? Put it in a file and wait until an examiner asks for it! Naaaah. Ideas? Pegasus Educational Services, LLC 90

93 Use it! Your data processing capabilities will play a pivotal role in your ability to multi-purpose the information. OFAC checks (ongoing) PEP checks (ongoing) Special measures/section 311 checks (ongoing) Pegasus Educational Services, LLC 91

94 Use it! CTR aggregation on entities with common ownership Rule (do not aggregate on common ownership alone): FIN-2012-G001 Exception to the rule: FIN List owners as additional subjects on SARs where entity is the subject. Pegasus Educational Services, LLC 92

95 Updating profiles Based on the language in the regulation, the intent is not to create a new categorical requirement to continuously update customer information. It suggests that such information should be updated as a part of a risk based analysis. It offers a change in beneficial ownership as an example of an event that might prompt an update. Pegasus Educational Services, LLC 93

96 Policies and Procedures as with all BSA rulemakings, FinCEN determines the appropriate minimum regulatory standards that should apply across an industry. From that baseline, the Federal functional regulators have authority to establish AML program requirements in addition to those established by FinCEN that they determine are necessary and appropriate to address risk or vulnerabilities specific to the financial institutions they regulate. Under the heading of Regulatory Deference, page 25 Pegasus Educational Services, LLC 94

97 Policies and Procedures Anticipate regulatory input or comment no matter how well intentioned your efforts might be. Pegasus Educational Services, LLC 95

98 FinCEN s BIG Plan Per the preamble at page 16, FinCEN plans to work with Congress in requiring entities to disclose beneficial ownership at the time of formation. You might wonder if that should have come first Pegasus Educational Services, LLC 96

99 Questions? Pegasus Educational Services, LLC 97