Beneficial Ownership: Is the U.S. Doing Enough to Pierce the Corporate Veil?

Terri Luttrell, CAMS-Audit
February 3, 2020
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Anonymous shell companies are one of the most widely used methods for money laundering and hiding the proceeds of corruption around the globe. By now, most financial institutions understand that they must identify, verify, and collect beneficial ownership information on accounts opened by legal entities to deter illicit funds from flowing through the U.S. financial system. Therefore, there must be at least one true “person” with ownership responsibility documented for each business account to pierce the corporate veil. The importance of FinCEN’s Customer Due Diligence (CDD) Rule, effective May of 2018, is evident, and regulator expectations are high. The most common exam findings for BSA in 2019 included customer due diligence and enhanced due diligence violations, and insufficient or lack of thorough information on customers, including beneficial owners. Many refer to the CDD rule as the fifth pillar of BSA, which makes any exam finding more serious. Let’s take a brief step back to review the CDD Rule.

The CDD Rule amended the Bank Secrecy Act regulations to strengthen customer due diligence requirements for financial institutions. Although CDD regulatory expectations are not new, the CDD Rule codified existing expectations and the FFIEC Exam Manual enhanced its CDD section to clarify these expectations and add beneficial ownership requirements.

Why was FinCEN compelled to clarify and enhance their current CDD expectations? The global AML community has long seen the United States as behind in knowing their true customers (think Delaware incorporations). Shell companies, particularly in tax haven countries, can be used for legitimate business purposes, but they are also known to be vehicles for money laundering. The United States was criticized when the Panama Papers and the Paradise Papers were leaked in 2016 and 2017, respectively. In fact, the U.S. was at risk of becoming a grey listed country by the Financial Action Task Force (FATF) based on its lack of transparency in CDD regulations and allowing shell companies to be created and go undetected. Can you imagine what would happen to the U.S. economy if the U.S. became a sanctioned country for having insufficient AML and terror financing protections?

The CDD Rule has strengthened U.S. CDD expectations both at onboarding and with ongoing monitoring. The rule has four core requirements which require financial institutions to establish and maintain written policies and procedures that are risk-focused and reasonably designed to:  

  1. Identify and verify the identity of customers;
  2. Identify and verify the identity of the beneficial owners of companies opening accounts;
  3. Understand the nature and purpose of customer relationships to develop customer risk profiles;
  4. Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

The FFIEC Exam Manual went further to add a complete section on Beneficial Ownership Requirements for Legal Entity Customers. The rule requires a two-pronged approach to determining beneficial owners:

  • Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer
  • A single individual with significant responsibility to control, manage, or direct a legal entity customer

A certification form must be obtained for each entity documenting the beneficial owners of each legal entity. A financial institution is not obligated to verify the beneficial owners under current regulation further. The certification form can be relied upon as sufficient documentation. However, if something doesn’t feel right at onboarding or during ongoing monitoring, further research and inquiry are prudent, and a SAR is filed if anything suspicious is found.

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Many legislators, law enforcement bodies, and our global peers believe the U.S. may not be doing enough to fight money laundering and terror financing through shell companies, and the pressure continues for increased transparency and verification. The U.S. House of Representatives recently passed H.R. 2513, The Corporate Transparency Act of 2019 (the CTA), which is currently in the Senate Banking Committee. If signed into law, the CTA would require certain U.S. entities to report beneficial owner identifying information to FinCEN, such as name, date of birth, current address, and non-expired identification number. FinCEN would house this information in an internal database. Although there has not been any recent movement of the bill in the Senate, the issue of an internal database will not be going away anytime soon.The American Bankers Association and other financial trade associations continue to address their endorsement of such legislation.

In the meantime, without an internal database for beneficial owners, each financial institution should use risk-focused policies and procedures to document and verify beneficial owners. The FATF issued Best Practices on Beneficial Ownership for Legal Persons in October 2019. This global guidance could be a useful source in developing and enhancing your CDD and EDD programs.

There are many more intricacies involved in the beneficial ownership requirements. FinCEN released FAQs and further guidance to answer some of the more specific questions regarding the rule. Keeping up to date with legislation surrounding beneficial ownership will keep your BSA program in compliance and your regulatory exams in check.

About the Author

Terri Luttrell, CAMS-Audit

Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size. She has successfully worked with institutions in developing BSA/OFAC programs, optimizing various automated solutions, and streamlining processes while ensuring all regulatory requirements are met. As the Compliance and Engagement Director at Abrigo, Terri provides insights that contribute and support long-term banking strategies based on analysis of market and industry trends, competitor developments, and financial and regulatory technology changes. She is an audit-certified anti-money laundering specialist and a board member of the Central Texas chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS). Terri earned her bachelor’s degree in business administration, specializing in business and finance, from the University of North Texas.

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