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Gain Transparency Beyond FinCEN Final Rule Minimum to Manage Risk

With 3 months to go until the US Dept. of the Treasury Financial Crimes Enforcement Network’s (FinCEN) CDD Final Rule implementation deadline, covered financial institutions (CFIs) need to be confident they are meeting the beneficial ownership and anti-money laundering (AML) requirements. The beneficial ownership rule compels CFIs to collect beneficial ownership information using a self-certification form at a minimum 25 percent threshold, while AML requirements demand they adopt risk-based procedures for conducting ongoing customer due diligence (CDD) to develop a customer risk profile.

While some banks have lowered the beneficial ownership threshold to 10 percent or less, other compliance leaders oppose lowering it more than 25 percent; many say it’s impractical and costly. Still others assert that a risk-based procedure requires further due diligence on beneficial owners for higher-risk scenarios. Dun & Bradstreet suggests this third route to compliance is the best way to manage risk.

The best available, accessible, and effective measures should be adopted for beneficial ownership due diligence.
 

As the FinCEN rule explains, threshold requirements represent a floor, not a ceiling. Consistent with a risk-based approach, financial institutions may do more in circumstances of heightened risk. During the 2017 American Bankers Association/American Bar Association Financial Crimes Enforcement Conference, FinCEN’s policy director, Andrea Sharrin, explained that financial institutions can adhere to the 25% threshold, but they may choose to impose stricter disclosure demands on some clients.

 

“As far as when you [need] to or should go below 25 percent, that’s going to be based on a particular customer and whether that really gets to the risk that you are trying to address,” Sharrin said.

CFIs should use their judgment to tailor customer due diligence procedures to their firm’s risk appetite. That applies to the AML amendments as well, which FinCEN says should include understanding the nature and purpose of customer relationships to develop a customer risk profile.

FinCEN Acting Director Jamal El-Hindi noted in his comments at the ABA/ABA Conference that FinCEN is finalizing a new set of frequently-asked questions that will be posted before the May 11th deadline, and regulatory agencies are currently working together to update the Federal Financial Institutions Examination Council manual to incorporate new provisions.

It’s my belief that risk-based due diligence is readily achievable, despite challenges. With integrated data governance strategy, broad beneficial ownership data coverage and technology, CFIs can overcome the roadblocks. To help them meet goals, we’ve addressed some of the most common questions banks have:

Q: Is meeting the minimum requirement with a 25 percent threshold enough for higher risk customers/cases?

A: No. Illicit business owners create complex entity structures across multiple jurisdictions to hide their real ownership. They can easily work around a simple self-certified form with a 25 percent threshold measure to avoid exposure. The central goal of compliance is to prevent business from significant risks; it’s not just about pleasing regulators. When banks classify an account as high risk, enhanced due diligence on a lower threshold of beneficial ownership is an effective measure to know with whom you are truly doing business. 

Q: When do I classify an account as high risk?

A: Here are a few examples when a lower threshold might apply:

  • When no beneficial owner is identified using the 25% threshold. According to Koko Ives, manager of AML and Bank Secrecy Act compliance with the Federal Reserve, in her remarks at the ABA/ABA Conference, “If with 25 percent across the board you don’t get to an individual, you may want to look a little deeper.” 
  • When negative news is published concerning a legal entity account holder, or they are a politically exposed person.
  • When a new account is segmented as high risk because the owner hails from a high-risk country, industry, or account type, a close look at the ownership structure is important.
  • When abnormal activity or a SAR investigation occurs, drilling deeper is advisable.

Q: What threshold satisfies the risk-based provision?

A: The threshold should be tailored toward a CFI’s risk portfolio and appetite. It should also be considered along with other applicable regulatory or operational requirements. For example, the Foreign Account Tax Compliance Act (FATCA) would require a 10 percent ownership disclosure, and some of the regulatory reporting may require as low as 1 percent ownership data to facilitate the risk aggregation and reporting. CFIs may want to take a streamlined approach to better set their beneficial ownership data strategy and kill two birds with one stone. 

Q: How can a CFI drill down to a more granular level of beneficial ownership? 

A: The answer depends on the resource CFIs have. The best available, accessible and effective measures should be adopted for beneficial ownership due diligence. In many countries, including the US, available legal entity and beneficial ownership data can be very limited, other than customers’ self-certification. In these cases, it can be extremely challenging for in-house analysts to drill down for a lower threshold. Compliance analysts typically require hours or days to manually figure out ownership structure and allocate the names of small owners. When in-house data or resource can’t support effective due diligence processes, it’s important to consider an outside data provider to source the information needed.

Q: What is the best way for banks to continually monitor beneficial ownership changes?

A: Performing ongoing monitoring on the account, including the beneficial ownership changes, is required per the Final Rule. It is meant to capture any material ownership changes that occur between account review points. Certain terms in the self-certification forms may require entities to update their ownership information whenever there is a change impacting the beneficial ownership identification. CFIs that use a data provider can leverage a beneficial ownership data monitoring service to keep abreast of such changes automatically.

Click here to discover how Dun & Bradstreet’s beneficial ownership data has evolved.

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