Beneficial Ownership: Complying to CDD Final Rule (Part 1)


By the time FinCEN’s Customer Due Diligence (CDD) Rule came into effect on May 11, 2018, most financial institutions already had long-standing policies and procedures in place with respect to much of the Rule’s requirements.


However, the requirement to identify the beneficial owners of legal entity customers was a dramatic change in policy and procedure with respect to onboarding and ongoing monitoring of legal entity customers and was one of the challenges presented in the implementation.


During Part 1 of our webinar, Laurie Kelly, CAMS explores how to

  • Identifying beneficial ownership, including the legal entity
  • How to collect, store, manage and maintain beneficial ownership information
  • Identity verification for beneficial owners


Want to listen to Part 2 of the webinar? Here is a link to the recording.


Here are the questions and answers from the events.


Q: Should you validate the beneficial ownership information supplied by the customer?


A: Yes, as much as you can:

  • Compare to the organization chart for complex structures and do the math
  • Compare to current company formation documents
  • Check Secretary of State records


Q:What if the information supplied by the customer’s representative appears to be wrong?


A: How you request beneficial ownership information can have a significant impact on accuracy. It may simply be misunderstanding, or deliberate intent to conceal information. At least one follow-up with client rep is recommended, pointing out what the FI believes may be inaccurate and why – and requesting clarification. If customer reiterates the same information, then document findings and consider filing a SAR.


Q:What are some of the more common things you’ve seen in terms of data quality/accuracy issues on how customers complete the beneficial ownership form?


A: Some of the more common errors or issues:

  • Using the business’s address instead of the individual’s actual physical residence. While in some cases these may be the same, in most cases it’s not the same and this is done based on one of two reasons:
    • The person completing the form is afraid to ask the owner(s) for their home address
    • The owner does not want their home address published out of a sense of invasion of privacy
  • Misunderstanding of how beneficial ownership is calculated when there’s a multi-tiered and complex structure of ownership. Good form instructions can help prevent this, but sometimes it’s so complex the customer’s representative may need help understanding it.
  • Inappropriate individual named under the control prong: the company bookkeeper, or independent CPA who does their taxes, or their lawyer, are NOT people with significant decision making authority (but maybe the bookkeeper is – who knows?)


Q:With so many “gray areas” in the CDD Rule still remaining, how do you foresee regulators are going to examine institutions for compliance?


A: That’s a very good question, and I think even the regulators themselves aren’t quite sure. The FFIEC BSA/AML Examination Manual has been updated for the CDD Rule of course, but there can be so much open to interpretation. In my opinion, the best approach for any financial institution is to clearly document WHY they decided upon a particular interpretation. It’s much harder for regulators to argue with a sound and reasonable rationale than when there’s a procedure with no rationale to back it up.


Q: What are the potential FinCEN exam deficiencies common to banks and other financial institutions?


A: FinCEN does not perform examinations; this is the role of the institution’s Federal Functional Regulator. FinCEN’s role is to act as the financial intelligence unit for the United States. It administers the Bank Secrecy Act, and collects and stores data from Suspicious Activity Reports.


Examination deficiencies between different functional regulators vary widely and there’s not a way to broadly sum up any commonalities. With respect to examination deficiencies specific to the CDD Rule, this remains to be seen as regulators have only just started this process since the final implementation date in May 2018.


Q:Are trust companies that provide a Self-Directed IRA service exempt from Beneficial Ownership?


A: If the question is meant to ask, do trust companies that provide self-directed IRAs have to collect beneficial ownership information, technically the answer would be “no” because a self-directed IRA account would never be owned by a legal entity (only an individual), and beneficial ownership information is only required for legal entity customers.


If the question is referring to a trust company that itself is a client of the financial institution, then that financial institution would be required to collect beneficial ownership on that legal entity IF it does not fall into one of the excluded categories listed in CFR 1010.230(e)(2). “Trust company” is a rather generic term which could represent a variety of types of entities. If this is your client, I recommend you have them self-identify their legal entity type from those listed in the regulation and go from there.


Q: How do you verify documentation of accounts like licenses and registrations for out of country customers, as you know some countries in Latin America don’t have the organization we do so it makes it difficult for certain verification.


A: In Latin America, there are several types of legal entity formation that are similar in many respects to the LLC in the U.S. You may see acronyms such as “S.A.” (Sociedad Anonima) or “S.A. de C.V.” (Sociedad Anonima de Capital Variable) – these are the most common. There’s a good reference document explaining all the different types at SAR.


The place to start would be to see if the entity is listed on its country’s Companies Registry. Many countries have such registries published online (some more helpful than others). Do a Google search for “companies registry [country name]” and see what results come up.


Next, request that the legal entity client provide you a copy of its formation documents. Every country has such types of documents, like we do in North America. These may be in the native language however.


Finally, request a copy of any specific license the business may require to operate in its home country. This will vary significantly by industry and may not even be required for certain industries.


Q: I would like to ask about requirement to verify beneficial ownership of less than 25%. Say an entity is controlled by number of entities who own all less than 20%. Basically, how do you verify ownership if an entity is controlled by many entities and they all own less than 25%? How far do you go down in verifying ownership?


A: You need to keep drilling down on each entity until you get to the human(s). If the same small number of people control all the intermediary entities (VERY common, in fact) then even though the intermediary companies all own less than 20%, when all the ownership is aggregated up to a small number of individuals, they are likely holders of significant equity interests and therefore beneficial owners.


I have personally seen organization structures with five or six layers of five to 10 intermediary companies in each layer, but at the very top were one or two individuals who controlled everything. Those are the people you (and law enforcement) want to identify. Or, it may be that ownership is spread across many individuals and when you do the math, no one person has a 25% share.


It will really depend on how many people are actually involved, and you won’t know that until you drill down. Ask for an organization chart with the ownership shares of each entity and then ask who owns the ones at the very top.


Q:If we use a third party vendor to solicit an additional product, say a credit card, at the time of opening a business account, would we have to obtain new forms if that customer decides to get that additional product?


A: I interpret this question to mean that your institution is not opening the credit card account, but rather is referring the client to a third party credit card issuer.


If that’s the case, then it is the responsibility of the credit card issuer to obtain beneficial ownership information on the legal entity if the credit card account is in the entity’s name. (If it’s in an individual’s name, then this is a moot point.)


However, if your institution is the one opening the credit card account, but it was solicited from the customer by a third party vendor – and provided the account holder is the legal entity – then yes, you would need a new form for the new credit card account.


Q:Is it OK to modify the BO form for non-profit to exclude the beneficial owner part? For example, to only have space for controller and person doing the attestation. We have had an issue with non-profits entering BO information that is N/A.


A: If your non-profit customer meets the qualification of CFR 1010.230(3)(ii) stating “Any legal entity that is established as a nonprofit corporation or similar entity and has filed its organizational documents with the appropriate State authority as necessary” then it is exempt from reporting under the ownership prong, but must still report under the control prong.


If you want to create a form just for your nonprofit clients that excludes the ownership prong, that would be OK – but I would include a special attestation from the client representative that it meets the qualification for exemption.


Note that there is a difference between a “nonprofit” and a “not-for-profit” entity, and FinCEN has not clarified whether the regulation refers only to non-profits vs. not-for-profits. The latter are NOT tax exempt in the U.S. and are non-chartered organizations.


Furthermore, not-for-profits commonly bring together a group of people with similar interests without forming a legal entity or governing board. So just be careful which one you are dealing with.


Q:  Do revocable trusts have to register with the Secretary of State in Massachusetts?


A: I don’t know the rules about specific states. In most states that I have come across, typically revocable and private trusts do not register with the Secretary of State. But you will want to go to that Secretary of State’s website and check for details about whether or not trusts are required to register. Business trusts are required to register in Mass.


Q: Can any banking product be considered an account?


A: In the final rule, there is a pretty detailed outline of what constitutes an account and it is typically anything that creates a banking relationship. But there are some unique exceptions as to whether that account requires beneficial ownership information.


There is something called a Premium Finance Loan, where a company borrows money in order to pay the premium on an insurance policy and those funds are remitted directly to the insurance company to pay premiums, so there’s really no relationship there, or control by the clients, so that is not considered an account that requires beneficial ownership certification. But any type of extension of credit, or any type of deposit account are for certain going to be considered accounts.


Q: What if a customer comes in and claim that they are exempt from declaring beneficial ownership in the CDD Rule? Is it the financial institution’s responsibility to verify it again?


A:  The client would have to state why they are exempt and the only reason they would be exempt is if they are commercial and the commercial client is a type of company or legal entity that is one of those that is stated to be exempt.


They’d have to give you a good reason, say they are a publicly traded company, then that is fairly easy for the bank to confirm or fairly easy for the company to provide evidence. That’s the only reason they would be exempt, if they are a legal entity type that is specifically listed in the detailed list that is published in the rule. If they just come in and say they are exempt, you have to ask why?


To view more questions, answers and information, view part 2 of the webinar, or check out our answers to frequently asked questions about FinCEN’s requirements for beneficial ownership.


Alessa is an anti-money laundering tool that allows companies to automate and verify information provided during the onboarding stage. To learn more about Alessa, please contact us.

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