FinCEN s Customer Due Diligence Requirements: Final Rule Washington Bankers Association October 6, 2017
Bankers Forum Call Objectives: Discuss four key elements of FinCEN s Customer Due Diligence Final Rule. Identify how the Final Rule applies to an institution s customer due diligence process. 2
Benefits of the Rule For Law Enforcement Transparency is less attractive to criminals. Providing inaccurate information demonstrates unlawful intent. Generates leads to identify additional evidence or co-conspirators. For Financial Institutions (FIs) Improves FI s ability to assess and mitigate risk and comply with existing requirement, including the BSA and related authorities For Tax Compliance Facilitates tax reporting, investigations and compliance. 4
Customer Due Diligence Requirements Key Elements of Final Regulation 5
Four Key Elements of Customer Due Diligence There are four key elements of Customer Due Diligence: I. Customer Identification and Verification II. Beneficial ownership identification and verification Appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: Current CIP NEW! 31 CFR 1010.230 III. IV. Understanding the nature and purpose of customer relationships to develop a customer risk profile; and Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk-basis, to maintain and update customer information Amends BSA 5 th Pillar Viewed as restating existing expectations [31 CFR 1020.210] 6
I. Customer Identification and Verification Existing requirement under Customer Identification Program ( CIP ) requirements [31 CFR 103.121]. Name Date of birth Address Identification number (i) For a U.S. person, a taxpayer identification number; or (ii) For a non-u.s. person, one or more of the following: a taxpayer identification number; passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar. 7
II. Beneficial Ownership Identification and Verification Must identify and verify the identity of beneficial owners of all legal entity customers (other than those excluded) for each new account at the time the new account is opened (other than accounts that are exempted). Verification of identity of the beneficial owners should contain the elements required for verification under CIP, but FIs may rely on copies of IDs provided by the person opening the account. FinCEN provided an optional Certification Form in Appendix A of the Final Rule. FIs may choose to comply by using the sample Certification Form, using the institution s own forms, or any other means that complies with the substantive requirements of this obligation. 8 May rely on beneficial ownership identification supplied by the customer, provided FI has no knowledge of facts that would reasonably call into question the reliability of the information.
III. Nature and Purpose In combination with conducting ongoing monitoring, forms a new 5 th Pillar of expectations for an AML Program [31 CFR 1020.210] Intended to be a baseline understanding of the client. May include self-evident information about the type of customer or type of account, service or product. Might also include basic customer information (annual income, net worth, occupation, etc.) Customer risk profile may, but need not, include a system of risk ratings or categories of customers. 9
IV. Ongoing Monitoring Customer information includes beneficial ownership information. All accounts must be monitored on a risk-based approach (not just those subject to the final rule). Updates to beneficial ownership should be event-driven as part of normal monitoring, not as a categorical requirement on a continuous or periodic basis. Applies to all legal entity customers, including existing customers. FinCEN acknowledges: change in beneficial ownership is unlikely to be identified through transaction monitoring. 10
Definition of a Legal Entity Legal Entity Not A Legal Entity Entity created by filing of public document with domestic or foreign government. Similar entity created by the filing of a public document with a Secretary of State or similar office, or formed under the laws of a foreign jurisdiction. Natural person Sole proprietorships Unincorporated associations Non-registered statutory trusts. Excluded Entities 11 10
Who is the Beneficial Owner? Ownership Prong Individual (persons, not entities) that own directly or indirectly 25% or more of equity interest of a legal entity customer. FinCEN does not expect FIs or customers to undertake analyses to determine whether an individual is a beneficial owner under the definition. Not obligated to determine or inquire if ownership has been structured to avoid tripping the 25% level, but SAR may be appropriate if you determine the owners did. If no one meets the 25% ownership level, no beneficial owner needs to be identified under the ownership prong. Trustee is considered owner if trust owns 25% or more of equity interest. 12
Who is the Beneficial Owner? Control Prong: One person with significant responsibility to control, manage, or direct the company. Managerial control, not administrative control. Not just the first titled individual available. Even if no one meets the 25% ownership prong, you must always identify one beneficial owner under the control prong. Certain legal entity customers are subject only to the control prong of the beneficial ownership requirement: Charities and Nonprofits Non-excluded pooled investment vehicles (i.e. non-us mutual funds, hedge funds, private equity funds) 13
Legal Entity Exclusions In the following circumstances these legal entity customers are excluded from the requirement to identify and verify beneficial ownership: Regulated financial institution, including bank/financial holding companies. Various SEC or CFTC Registered Entities. Public accounting firms registered under Section 102 of the Sarbanes-Oxley Act. Insurance Companies regulated by a State. Foreign FI established in a jurisdiction where the regulator requires beneficial ownership information. Private banking relationships as defined in Section 312 of the USA PATRIOT Act. ERISA-related accounts. 14
Beneficial Ownership Exemptions In the following circumstances these legal entities are exempt from the requirement to identify beneficial ownership: Accounts established at the point-of-sale to provide credit products, solely for the purchase of retail goods and/or services at these retailers, up to a limit of $50,000. Accounts established for the purchase and financing of postage. Accounts established to finance insurance premiums. Accounts to finance the purchase or lease of equipment....as long as certain restrictions hold true, such as no third-party transactions or cash refunds. 15
Beneficial Ownership Examples Scenario 1: Mr. and Mrs. Smith each hold a 50% equity interest in Mom & Pop, LLC. Mrs. Smith is President of Mom and Pop, LLC and Mr. Smith is Vice President.
Beneficial Ownership Examples Answer 1: Mom & Pop, LLC would be required to identify at least two, but up to three distinct individuals both Mr. and Mrs. Smith under the ownership prong, and either Mr. and Mrs. Smith under the control prong, or both Mr. and Mrs. Smith under the ownership prong, and a third person with significant responsibility under the control prong.
Beneficial Ownership Examples Scenario 2: Acme, Inc. is a closely-held private corporation. John Roe holds a 35% equity stake; no other person holds a 25% or higher equity stake. Jane Doe is the President and Chief Executive Officer.
Beneficial Ownership Examples Answer 2: Acme, Inc. would be required to provide John Roe s beneficial ownership information under the ownership prong, as well as, Jane Doe s (or that of another control person) under the control prong.
Beneficial Ownership Examples Scenario 3: Quentin, Inc. is owned by the five Quentin siblings, each of whom holds a 20% equity stake. Quentin Inc. s President is Benton Quentin, the eldest sibling, who is the only individual with significant management responsibility.
Beneficial Ownership Examples Answer 3: Quentin, Inc. would be required to provide Benton Quentin s beneficial ownership information under the control prong, but no other beneficial ownership information under the ownership prong, because no sibling has a 25% stake or higher equity stake.
Screening of Beneficial Owners OFAC Q. Are financial institutions required to comply with the OFAC regulations with respect to beneficial ownership information? A. Yes, requirement to block property and interests owned more than 50% by an SDN so FIs generally should scan. 314(a) Q. Do FIs now have additional obligations under Section 314(a) Information Sharing for beneficial ownership information? A. No, the regulation implementing section 314(a) does not require the reporting of beneficial ownership information associated with an account or transaction matching a named subject in a 314(a) request. As such, FinCEN does not expect this final rule to impose additional requirements under 314(a). 18
Strategies for Implementation Understand the tenets of the new rule and begin to examine how the new rule will affect your institution. Build a coalition of affected stakeholders. Determine what business lines or departments will be impacted within your institution? Determine where new or enhanced processes will be needed within your institution. (i.e. Policies, Procedures, Training, Technology, Vendors, etc.) Develop an implementation plan for business readiness. How will your institution prepare people for the changes? Are the changes minor or significant? Execute your implementation plan and provide just in time training and education to your stakeholders. 19
Regulatory Guidance Resources FinCEN s Final CDD Rule Fed Register Document Number 2016-10567 FIN-2016-G003 7/19/2016 FAQ Regarding Customer Due Diligence Requirements for Financial Institutions FIN-2010-G001 3/5/2010 Interagency Guidance on Beneficial Ownership 2014 FFIEC BSA/AML Examination Manual Appendix K: Customer Risk vs. Due Diligence & Suspicious Activity Monitoring 22
Questions Contact FinCEN Resource Center Phone: 1-800-767-2825 Email: FRC@fincen.gov Contact FDIC San Francisco Region: Edmund Wong: EWong@fdic.gov 23