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Beneficial Ownership & Due Diligence: Stepping Up Your Institution’s Information Collection Practices

Kevin Gulledge, CAMS
February 10, 2022
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AMLA will see changes in 2022

Now is an optimal time to evaluate the effectiveness of your beneficial ownership and due diligence program.           

You might also like this webinar on the changes related to the AMLA.

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Need to Know
Significant changes for Customer Due Diligence (CDD) and beneficial ownership (BO) rules

The AMLA set the stage for establishing a national reporting system for beneficial ownership and for potentially changing current CDD/BO requirements in an effort to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise illicit activity. With the still-unfolding fallout from the Pandora Papers leak, now is an optimal time to evaluate the effectiveness of your beneficial ownership and due diligence program. This overview will examine how international concern about beneficial ownership has impacted new requirements, describe the current requirements, and provide input on potential changes.

Since 2016, three serious document leaks have made international news and exposed the activity of powerful political elites or wealthy individuals who used shell companies to disguise the source of funds and avoid taxes. Most recently, the Pandora Papers leak in October 2021 revealed millions of documents from 14 law firms linked to hundreds of offshore accounts. More than 330 politicians from 90 countries, 35 current or former heads of state, 133 Forbes billionaires, and 46 Russian oligarchs were implicated. The Organization for Economic Co-operation estimates that the transferred funds uncovered in the Pandora Papers leak totaled $11 trillion.

Document leaks like the Pandora Papers and earlier ones impact the credibility of institutions worldwide and illustrate how crucial it is that banks know their customers. They also have highlighted the difficulty U.S. financial institutions can encounter in piercing the corporate veil through efforts to determine beneficial ownership.  

In response to the leaks, the AMLA heightened measures that align the U.S. beneficial ownership requirements more closely with foreign countries. It also increased penalties for AMLA violations and enhanced whistleblower protections. The Financial Crimes Enforcement Network (FinCEN) recently announced a Notice of Proposed Rulemaking to implement the AMLA’s requirements. The proposed rule makes new distinctions regarding who must file a BOI report, what information must be reported, and when a report is due. Among the changes:

  • Covered entities, not financial institutions, would be required to report beneficial ownership information to FinCEN directly at the time the business is created.
  • The definition of who is considered a beneficial owner is expanded.

The notice is open for public comment until February 7, 2022.

Who is a Beneficial Owner?
Current beneficial ownership requirements

Financial institutions are now required to identify and verify the beneficial owners of a new account to improve financial transparency and prevent the formation of shell companies used to disguise illicit financial activities.

As of 2018, financial institutions must determine beneficial ownership as determined by two prongs: ownership and control. A beneficial owner is at least one individual who owns or controls more than 25% of a company’s shares and an individual who has managerial control of the business. Sometimes, the owner and controller are the same person. This information must be documented in a signed Beneficial Ownership Certification Form that the financial institution must keep on file.

Financial institutions are required to capture this information on "covered entities.” One exclusion would be for an owner of a trust opening an account for the trust. However, if the trust is owns 25% or more of the entity that the account is being opened for (for example, the trust owns an LLC), then financial institutions must gather the beneficial owners of the trust, which usually includes only the trustees. 

Remember that your institution bears the burden of determining and documenting ownership, and be thorough even when you believe you are working with an exception to the rule.

Is your AML department properly staffed? Use this AML Staffing Calculator to find out.

Proposed changes to beneficial ownership reporting

Included in the AMLA is the Corporate Transparency Act (CTA), which includes provisions to further define what control of a business might mean. Under FinCEN’s Notice of Proposed Rulemaking, trust beneficiaries are added to the list of entities covered by beneficial ownership reporting requirements. A beneficiary is defined as either the sole permissible recipient of the trust’s income and principal, someone with the right to demand a distribution of or withdraw substantially all of the trust’s assets, or a grantor or settler with the right to revoke the trust or withdraw the assets. Explaining its decision to expand the definition related to trusts, FinCEN said it “believes that requiring the reporting only of the trustee under the ownership interests component would promote the misuse of trusts to hide beneficial ownership interests and complicate the ability of reporting companies to comply with the CTA and the proposed rule.” 

Future Changes
What’s next for CDD/BO?

FinCEN said it expects to issue another rule outlining access to and disclosure of beneficial ownership information to financial institutions, law enforcement and other parties, as well a third rule revising the existing CDD Rule. In the meantime, financial institutions should get organized and prepare for changes to customer due diligence rules.

As financial institutions adapt to changing reporting standards, they may find they need help to develop or improve procedures, optimize risk rating systems, or find efficiencies in account opening procedures. Having CDD software that can help collect account opening information, gather beneficial ownership information, outline expected activity, and conduct and document ongoing enhanced due diligence reviews will make the transition easier. As FinCEN rolls out the new requirements, partnering with experts and automation that assist with the new processes will also allow staff to continue to handle day-to-day workloads.

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About the Author

Kevin Gulledge, CAMS

Senior Risk Management Consultant
Kevin Gulledge brings over a decade of retail banking experience to Abrigo, having worked with mid-sized and large international institutions in a variety of roles, including retail, operations, compliance, and BSA/AML. Since 2014, Kevin has served Abrigo customers as a Senior Risk Management Consultant, working with domestic and international institutions

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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