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The long-awaited customer/member due diligence rule is now final

By Jennifer Morrison, VP, Senior Risk Manager

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June 20, 2016 -- Thank you to those of you who participated in the live BSA/AML/OFAC webinars on May 4 and 5. Our presenter, Mark Dever, talked about what was then the proposed rules to strengthen customer/member due diligence.

Ironically, the very next day, the long-awaited final rule was released, and on May 11 it was published to the Federal Register as 31 CFP Parts 1010, 1020, 1023, 1024 and 1026.

About customer due diligence requirements for financial institutions

The Financial Crimes Enforcement Network (FinCEN) issued the final rule under the Bank Secrecy Act. In the summary of the final rule, the stated purpose is to clarify and strengthen customer (member) due diligence requirements for banks, brokers or dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities.

Do not be thrown off by the use of the term “banks.” FinCEN uses the term “banks” to encompass financial institutions, including state banks, national banks, commercial banks and trust companies, private banks, savings banks, industrial banks, thrifts, foreign banks, and state and federally chartered credit unions. In other words, us.

The good news in the final rule is that there is a two-year implementation period. The applicability date of the final rule is May 11, 2018.

The final rule implements what is known as “beneficial ownership.” I have written here previously on the topic, but the following is a quick refresher.

Defining beneficial ownership

The term “beneficial ownership” refers to the due diligence required in order to know the identity of the individuals who own and control their legal entity customers (members).

Beneficial ownership is an international standard that heretofore has not been a requirement of U.S.-regulated financial institutions. However, many financial institutions operating internationally have implemented a framework for determining the beneficial owners of accounts. Many of you have experienced the expanded due diligence efforts by the larger national banks. I know that Corporate One has experienced this not-so-pleasant process!

Also, you may recall from my previous articles on the subject that there are two prongs to beneficial ownership. These two prongs are ownership and control.

A beneficial owner means each of the following:

  • Each individual who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests in a legal entity customer/member, and a single individual with significant responsibility to control, manage, or direct a legal entity customer/member (CEO, CFO, COO, managing member, general partner, president, or anyone performing such functions);
  • And if a trust owns directly or indirectly, through any contract or arrangement, understanding, relationship or otherwise, 25% or more of the equity interests of a legal entity customer/member. In such cases, the beneficial owner is the trustee.
  • In the case of the identification of the owner(s) of an account, up to four individuals may need to be identified, as each may own 25%. In the identification of the controller(s) of an account, only one individual must be identified. And it is clear that the owner(s) and controller(s) may, and most likely will be, the same persons in many cases.

The final rule will require, beginning on the applicability date, that all covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers/members at the time a new account is opened unless the entity is covered by exclusions in paragraph (e) or exempted by paragraph (h). The process of verification is to be risk-based and otherwise follow the process of verifying the identity of individuals as per § 1020.220(a)(2). There is a standard certification form or, with the final rule, the use of any other means to comply with the substantive requirements of the obligation is also permitted.

Financial institutions may rely on the information provided by the customer on the aforementioned form (or other means by which the financial institution collects the information from the member), provided the financial institution has no knowledge of facts that would reasonably call the information into question. The identification and verification procedures for beneficial owners are similar to those in your Member Identification Program (MIP), except that for beneficial owners the financial institution may rely on copies of identity documents.

Finally, financial institutions must retain records of the beneficial ownership information they obtain.

Defining new terms

A new term for many in the final rule is “legal entity customer” or “legal entity member,” in the case of credit unions. Generally, a legal entity customer or member is a business member and not a natural person.

The final rule applies to your business members that are corporations, limited liability companies, partnerships or other business entities that are or were created by the filing of a public document with a secretary of state or similar office. The final rule also applies to general partnerships and any similar entities formed under the laws of a foreign jurisdiction that open a new account/membership. Certain business trusts are included.

There are a number of exceptions and explanations too numerous to include in this short article. I recommend that you visit Section 1010.230(e) of the final rule for the definition and perhaps, just as important, the exclusions from the definition.

Four core elements of member due diligence

In the supplementary information provided in the final rule, FinCEN clarified its expectations for the core elements of a member due diligence (MDD) program, stating that there should be four explicit requirements in an anti-money laundering program. These include:

  • Customer (member) identification and verification
  • Beneficial ownership identification and verification
  • Understanding the nature and purpose of customer (member) relationships to develop a customer (member) risk profile
  • Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer (member) information

Therefore, within the next two years, we will all be working to ensure that our MDD program incorporates all four core elements.

Training reminder

Our respective BSA/AML programs require training (among other things). This means training not only all members of our respective teams but also specific training for those entrusted with BSA/AML responsibilities. It is with this in mind that Corporate One continues to provide annual, webinar-based training designed for your BSA/AML officer, compliance officer, front-line branch staff and managers, senior management and volunteers.

As I noted in the opening, we just completed offering the live webinar for 2016; however, recorded and print versions of the material remain available on our website.

Please look for additional information on beneficial ownership over the course of its implementation period, and do not hesitate to contact Corporate One with any questions.