FinCEN's Customer Due Diligence Final Rule What You Need To Know June 2, 2016 Moderator Alan S. Kaplinsky Practice Leader Consumer Financial Services 215.864.8544 kaplinsky@ballardspahr.com Panelists Peter D. Hardy Partner White Collar Defense/ Internal Investigations Consumer Financial Services 215.864.8838 hardyp@ballardspahr.com Beth Moskow-Schnoll Partner White Collar Defense/ Internal Investigations Consumer Financial Services 302.252.4447 moskowb@ballardspahr.com Kevin D. Leitão Of Counsel Consumer Financial Services Mortgage Banking 646.346.8011 leitaok@ballardspahr.com Copyright 2016 Ballard Spahr LLP. All rights reserved.
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Your Presenters Alan S. Kaplinsky Peter D. Hardy Beth Moskow-Schnoll Kevin D. Leitão 4
Overview On May 11, 2016, FinCEN issued a Final Rule that: - clarifies and enhances Customer Due Diligence (CDD) requirements - adds new requirement for covered financial institutions to identify, and verify the identity of, the beneficial owners of certain of their legal entity customers Reaffirms the four core elements, or pillars, of an AML program Adds a fifth pillar: a requirement that covered financial institutions implement and maintain risk-based procedures for conducting ongoing CDD 5
History of the Rulemaking FinCEN and the federal functional regulators issued joint guidance on enhanced CDD requirements in 2010 Rule first proposed in March 2012 ANPRM NPRM issued in August 2014 Final rule published May 11, 2016 6
Purpose of the Rule Assisting financial investigations by law enforcement Advancing national security interests (e.g., sanctions) Improving FI s ability to assess and mitigate risk Facilitating tax compliance Enhancing US compliance with international standards (e.g., G-8, FATF) 7
Applicability Rule covers only financial institutions subject to a CIP requirement under FinCEN ( covered institutions ) - Banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities Primary means of access to the financial system FinCEN is starting with the entities that have been covered by the CIP rules and are most familiar with CIP requirements 8
Four Pillars + One Pillar = 5 Pillars AML Program Requirements 1. Development of written internal policies, procedures and controls 2. Designation of AML compliance officer 3. Training 4. Independent testing/auditing + 5. Customer due diligence 9
Four Key Elements of CDD 1. Establishing and verifying the identity of customers 2. Establishing and verifying the identity of beneficial owners of legal entity customers 3. Understanding the nature and purpose of customer relationships 4. Ongoing monitoring to: a. maintain and update customer information b. identify and report suspicious transactions 10
Implementation Deadline CDD Rule becomes effective on July 11, 2016 Covered FIs must comply by May 11, 2018 11
What is Beneficial Ownership Under the Rule? The look-through requirement applicable to legal entity customers 12
Who is a Beneficial Owner? (1) Rule defines as a natural person only Two prongs of definition ownership and control Ownership prong: any individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer FinCEN posits this to mean no more than 4 people Control prong: one individual with significant responsibility for controlling, managing, or directing a legal entity Round up the usual suspects - executive officers, senior managers, or anyone regularly performing similar functions 13
Who is a Beneficial Owner? (2) Each prong operates independently, such that a covered financial institution would be required to identify (and verify the identity of) any natural person satisfying either prong. - FinCEN acknowledges this may result in overlap Example: Legal entity is owned by four 25% equity holders. Each meets the definition under the ownership prong. A separate individual managing the entity would be identified under the control prong. If one of the equity holders is a manager, that person is identified under both prongs. 14
What is a Legal Entity under the Rule? A legal entity customer is defined as: - Corporation - Limited liability company - Other entity that is created by the filing of a public document with a Secretary of State or similar office - General partnership - Any similar entity formed under the laws of a foreign jurisdiction A legal entity customer does not include: - Sole proprietorship - Unincorporated association - Trusts (other than statutory trusts created by a filing with the Secretary of State) There is also an enumerated list of excluded entities 15
Requirements as to Beneficial Owners Identify beneficial owners by obtaining, at account opening, a standard certification form or the same information by other means The Form s requirements include: - Name and title of the individual opening the account - For each beneficial owner of 25% or more and one person with management responsibility: Name (and title for management person) DOB Address Identification number (SSN, passport number/country of issuance, etc.) The individual opening the account must certify the accuracy of the information to the best of his/her knowledge 16
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Requirements as to Beneficial Owners Verify information within a reasonable time after account opening - May use documentary or non-documentary verification methods - May generally rely on customer s representations - Keep record of description of ID docs relied upon, any nondocumentary methods, results of measures taken and resolution of each substantive discrepancy 18
Requirements as to Beneficial Owners May rely on another FI, including an affiliate, to comply with B/O requirement if 1. Reliance is reasonable under the circumstances 2. Other FI is subject to a similar AML rule and is regulated by a Federal functional regulator AND 3. Other FI is required, by contract, to certify annually that it has implemented its AML program and that it, or its agent, will perform the procedures necessary to comply with this rule 19
Recordkeeping Requirement Must retain certification form and any related identifying information collected for 5 years after account closing 20
Some Things Worth Noting Requirements are not retroactive but - If normal monitoring detects information relevant to assessing or reevaluating the risk of such customer, the financial institution should perform the CDD to identify the beneficial owner - If the financial institution learns as part of normal monitoring that beneficial ownership may have changed, it should identify the beneficial owner FinCEN expects beneficial ownership information to be used in other processes: - Suspicious activity monitoring - Cash transaction reporting - OFAC and sanctions screening FinCEN views the final rule as represent[ing] a floor, not a ceiling. 21
Next Steps and Key Takeaways Covered FIs should review policies, procedures and training materials to ensure current practices meet the requirements of the CDD Rule Non-covered FIs subject to SAR requirements should consider establishing some form of risk-based, customer due diligence processes Assess information flow between groups responsible for different compliance requirements 22
Thank you for joining us! Moderator Alan S. Kaplinsky Practice Leader Consumer Financial Services 215.864.8544 kaplinsky@ballardspahr.com Panelists Peter D. Hardy Partner White Collar Defense/ Internal Investigations Consumer Financial Services 215.864.8838 hardyp@ballardspahr.com Beth Moskow-Schnoll Partner White Collar Defense/ Internal Investigations Consumer Financial Services 302.252.4447 moskowb@ballardspahr.com Kevin D. Leitão Of Counsel Consumer Financial Services Mortgage Banking 646.346.8011 leitaok@ballardspahr.com 23
Moderator Alan S. Kaplinsky Practice Leader of the Consumer Financial Services Group at Ballard Spahr Devotes his practice to counseling financial institutions with respect to bank regulatory and transactional matters and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters) First President of the American College of Consumer Financial Services Lawyers Former Chair of the American Bar Association Committee on Consumer Financial Services of the Business Law Section Co-Chair of the Practising Law Institute's Annual Consumer Financial Services Institute, now on its 21 st year Has been named as a tier one banking and consumer financial services lawyer in the 2006 through 2015 editions of Chambers USA Has been named in The Best Lawyers in America under financial services regulation law and banking and finance litigation from 2007 to 2015 Member of the Bloomberg BNA Banking Report Advisory Board Recipient of the National Law Journal's 2015 Litigation Trailblazers Award for pioneering the use of class action waivers in consumer arbitration provisions 24
Panelist Peter D. Hardy Partner at Ballard Spahr and a member of the firm s White Collar Defense/Internal Investigations, Consumer Financial Services, Privacy and Data Security, Litigation and Tax Groups Advises corporations and individuals in a range of industries against allegations of misconduct including Bank Secrecy Act violations, money laundering, mortgage fraud and lending law violations, embargo violations, tax fraud, securities fraud, health care fraud, public corruption, identity theft and data breach Oversees internal investigations, advises in potential disclosures to the government, and has litigated complex criminal and civil matters at the trial and appellate levels Previously served as a federal prosecutor at the Department of Justice in Washington, D.C. and the U.S. Attorney s Office for the Eastern District of Pennsylvania Author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a wellreviewed and comprehensive legal treatise on the litigation of criminal tax, money laundering, and Bank Secrecy Act cases, published by Bloomberg BNA 25
Panelist Beth Moskow-Schnoll Partner at Ballard Spahr and a member of the firm s Consumer Financial Services, Mortgage Banking and White Collar Defense/Investigations Group Concentrates her practice on white-collar litigation, regulatory enforcement and compliance, and complex civil litigation, with an emphasis on banking and other financial services litigation Advises on and develops risk-based anti-money laundering compliance programs for financial institutions, RMLOs and non-bank lenders Represents clients targeted in investigative and enforcement actions brought by regulators, including the Department of Justice, Attorneys General, the CFPB and OFAC Prior to joining Ballard Spahr, she served for more than a decade as a federal prosecutor with the U.S. Attorney s Office for the District of Delaware where she concentrated on the investigation and prosecution of financial fraud, including bank fraud and money laundering 26
Panelist Kevin D. Leitão Of Counsel at Ballard Spahr and a member of the firm s Consumer Financial Services, Mortgage Banking and Privacy and Data Security practice groups Regularly advises clients in diverse industries on BSA/AML/OFAC matters, including bank and non-bank lending, mortgage banking, gaming, money services businesses, prepaid and precious metals Counsels clients on data security and privacy program development and incident response planning Advises clients on the development of mobile and e-commerce products, digital accessibility and social media compliance Provides transactional and regulatory support to card issuers and FinTech companies During 15 years working in-house as a lawyer and compliance executive, developed and led risk-based compliance, Bank Secrecy Act/Anti-Money Laundering, security and vendor management programs at diversified financial institutions and technology companies 27