United States: Fincen Proposes Fifth BSA Pillar

On July 30, 2014, The Financial Crimes Enforcement Network (Fincen) Issued A Notice Of Proposed Rulemaking (The Proposed Rule) To Clarify And Strengthen Customer Due Diligence (CDD) Requirements As A Fifth Pillar Under The Bank Secrecy Act (BSA) For Banks And Other Covered Financial Institutions. Under The Proposed Rule, Covered Financial Institutions Would Be Required For The First Time To Identify And Collect Information On The Beneficial Owners Of Their Legal Entity Customers.

U.S. Policymakers, Including Treasury,1. Seeking To Balance Privacy2 Concerns With Transparency And Alignment With The Financial Action Task Force (FATF) Recommendations,3 United States G-8 Action Plan For Transparency Of Company Ownership And Control4 And Pending Rulemaking At The European Union,5 Have Proposed A Risk-Based Approach, To Be Adopted By A Covered Financial Institution's Board Of Directors. The Four Elements Of The CDD In The Proposed Rule Align With The Approach Set Out In The FATF Recommendations.

The Proposed Rule Follows The March 5, 2012 Issuance Of An Advance Notice Of Proposed Rulemaking By Fincen Regarding CDD, And Included Input From The Financial Services Industry, Lawmakers And Policymakers. The Proposed Rule, And Related Guidance That Followed, Make It Clear That The Financial Industry Must Cooperate In Illuminating The Less-Than-Transparent World Of Corporate Ownership. The Proposed Rule And Subsequent Guidance Make It Clear That The Board Of Directors And Senior Executive Officers Of A Covered Financial Institution Are Responsible For Adopting CDD Procedures That Are Efficacious With Respect To The Institution's Current Mix Of Products, Services And Customers, And That Those Procedures Must Be Tested By An Independent And Competent Party. Before A Board Approves The Distribution Of A New Line Of Products And Services, Or The Acquisition Of An Entity That Has A Mix Of Products, Services, And Customers That Represent A New Level Of Risk, It Must Independently Test The Current AML System And Controls To Confirm That The Existing Control Environment Is Sufficiently Robust To Handle The New Risks.

The Key Thrust Of The Proposed Rule Is That, For The First Time, U.S. Banks, Brokers, Dealers, Mutual Funds, Commodity Futures Merchants And Introducing Brokers Must Have Systems In Place To: (I) Collect Information And (Ii) Maintain Records Of The Information On Individuals Who Hold 25 Percent Or More Of An Interest In A Customer Or Who Otherwise Control The Customer. Bank Customers Should Be Prepared To Cooperate Regarding Information Requests That Are Or Will Be Made By Covered Financial Institutions.

In Promulgating The Proposed Rule, Fincen Designates Four Core Elements As Being Critical To CDD Within An Effective BSA/AML Program:

  1. Identifying And Verifying The Identity Of Customers
  2. Identifying And Verifying The Beneficial Owners Of Legal Entity Customers
  3. Understanding The Nature And Purpose Of Customer Relationships, And
  4. Conducting Ongoing Monitoring To Maintain And Update Customer Information And Identify And Report Suspicious Transactions.

Fincen Acknowledges That The First, Third And Fourth Elements Are Already Addressed By The Customer Identification Program (CIP) And Other Regulatory Requirements Imposed Under Current BSA/AML Regulations, And It Makes A Pointed Effort To Reinforce Their Importance. The Second Element Commands More Of Fincen's Attention Because It Would Be Established Under A New Section Of The BSA/AML Regulations. For Compliance With The Second Element, The Proposed Rule Would Require Covered Financial Institutions To Revise Onboarding Procedures Covering Legal Entity Customers To Identify Their Beneficial Owners And, To The Extent Practicable, Verify The Identities Of Those Owners By The Same Risk-Based Methodology Employed For Verifying Customers Who Are Individuals.

In The Interest Of Reducing Compliance Burden, The Proposed Rule Includes In An Appendix A Standard Certification Form For Verifying The Identity Of Beneficial Owners. This Certification Regarding Beneficial Owners Of Legal Entity Customers Would Standardize Collection Of Beneficial Ownership Information And Permit Reliance On The Information Obtained From An Individual When The Financial Institution Opens A New Account For A Legal Entity Customer.

The Proposed Rule Is Open For A 60-Day Comment Period, Beginning August 4, 2014, And Fincen Particularly Seeks Comment From The Financial Services Industry Concerning:

  • Whether Financial Institutions Should Be Subject To A Mandated Timeframe For Updating Beneficial Ownership Information, And
     
  • If A Definition Of A "Customer-Risk Profile" Is Needed.

The Effective Date Of The Proposed Rule, Once Adopted, Is Expected To Be One Year From The Publication Of The Final Rule.

Pepper Points

  • Bank Customers Should Anticipate That A Covered Institution's Due Diligence Process Will Become More Rigorous Even Before The Rule Becomes Final. State And Federal Prosecutors Have Recently Been Critical Of Opaque Corporate Structures That Have Obscured The True Ownership Of Corporate Entities, Particularly In Business Lines That Regulators Consider As High Risk. Prosecutors Have Complained That Such Structures Have Hindered Their Ability To Track Down And Prosecute The Individuals That Control Corporate Entities In High-Risk Businesses. As A Result, Some Covered Financial Institutions Have Begun Increasing Their Due Diligence.
  • Independent And Competent Testing Of A Covered Financial Institution's BSA/AML Compliance Program Is Mandatory. When Embarking On Distribution Of New Products And Services Or Acquisition Of An Entity That Distributes Products And Services With A Riskier Profile, It Is Mandatory To Conduct Independent Testing Of The Control Environment To Confirm That Controls Are In Place Before The Covered Entity Assumes Responsibility For Distributing Products With A Riskier Profile.
  • CDD, Along With Collection Of Customer Information And Monitoring Of Accounts And Relationships, Has Always Been Part Of An AML Program. We Suspect The Elevation Of CDD To A Fifth Pillar Is Meant To Suggest To Senior Executives And Board Members That CDD Is Now An Explicit Requirement Subject To Enforcement If CDD Program Failure Occurs.
  • Fincen's Proposed Rule Will Require Changes To Legal Entity Customer Onboarding Procedures At Financial Institutions At A Time When Other Regulatory Agencies Are Also Taking Actions Affecting The Onboarding Of Certain Customers. For Example, The OCC Recently Revised Certain Of Its Guidance To Clarify Financial Institutions' Onboarding Procedures For Third-Party Payment Processor Customers.
  • A CIP-Exempt Customer Must Be Monitored, As The Customer's Activity And Risk Level Can Change Over Time.
  • One Major Concern Expressed By Many Financial Institutions In Hearings And Comments Leading Up To The Issuance Of The Proposed Rule Was That Verifying The Status Of A Person As A Beneficial Owner Of An Entity Would Often Be Prohibitively Costly And Impracticable. Fincen Has Accommodated This Concern By Requiring Financial Institutions Solely To Verify The Identity Of Beneficial Owners Consistent With Existing CIP Practices.
  • Just As A Financial Institution May Rely On Another Financial Institution To Conduct CIP Procedures For A Shared Customer, So The Proposed Rule Allows Similar Reliance For Identification And Verification Of Beneficial Owners, Including Completion Of The Standard Certification Form.
  • The Proposed Rule Would Apply Only To Legal Entity Customers That Open New Accounts After The Effective Date (I.E., One Year After The Final Regulation Is Published) And Would Not Require Financial Institutions To Look Back At Pre-Existing Accounts. However, If The Risk Profile Of An Existing Customer Changes And Requires Enhanced Due Diligence (EDD), It Would Be Prudent To Go Back And Complete The New Form And Then Move On To Perform EDD On The Customer.
  • Tracking Existing CIP Guidance, Fincen Has Decided To Exempt From The Beneficial Owner Requirements Accounts Maintained By Trusts, As Well As Accounts Maintained By Intermediaries For The Primary Benefit Of Others. However, Fincen Appears To Be Inclined To Apply Those Requirements, At Least In Some Modified Form, To Pooled Investment Vehicles, Such As Hedge Funds.
  • Pepper Lawyers Have Been Very Active In Counseling And Defending Clients With Respect To The Bank Secrecy Act.
  • Freeh Group International Solutions, LLC Has Significant Experience Designing AML Systems As Well As Performing Independent Review And Monitoring Of AML Systems Including AML System "Look Back" Reviews Required By Prudential Regulators.

Footnotes

1.See: Fincen Advisory To United States Financial Institutions On Promoting A Culture Of Compliance. On August 11, 2014, Fincen Further Sharpened Its Focus On Eradicating Shortcomings In BSA/AML Compliance Programs By Issuing Advisory FIN-2014-A007, Which Encourages Financial Institutions To Strengthen Their BSA/AML Compliance Culture Through Promotion Of Active Leadership, Elevation Of Deficiency Mitigation Over Revenue Interests, Sharing Of Relevant Departmental Information With Compliance Staff, Adequate Funding Of The Compliance Function, Independent And Competent Testing Of The Compliance Program, And Thorough Training Of All Personnel.Http://Www.Fincen.Gov/Statutes_Regs/Guidance/Pdf/FIN-2014-A007.Pdf.

Also See: August 12, 2014 Remarks Of Jennifer Shasky Calvery, Director, Fincen To 2014 Mid-Atlantic AML Conference, Washington, DC (Http://Www.Fincen.Gov/News_Room/Speech/Pdf/20140812.Pdf).

Also See: Comment By FDIC's Associate Director Of AML, Lisa Arquette (August 12, 2014): "Searching For Revenue, Banks Are Taking On Products And Services, Even Acquisitions That They Don't Have AML Controls In Place To Handle."

Also See: Pepper Hamilton Financial Services Client Alert: "One Big Misunderstanding: FDIC Clarifies That Caution On Higher-Risk Activity Is Not A Prohibition On Third-Party Payment Processor Relationships" (August 5, 2014).

2.Fincen Has Decided To Exempt From The Beneficial Owner Requirements Accounts Maintained By Trusts, As Well As Accounts Maintained By Intermediaries For The Primary Benefit Of Others. However, Fincen Appears To Be Inclined To Apply Those Requirements, At Least In Some Modified Form, To Pooled Investment Vehicles, Such As Hedge Funds. The Debate Over The Degree Of Transparency That Should Be Accorded Beneficial Ownership Is Not New. Its Roots Reach Back At Least As Far As The Evolution Of The Privacy Provisions Of The Gramm-Leach-Bliley Act, Which Witnessed A Concerted Effort To Balance The Need To Have Financial Institutions Inform Trust Beneficiaries Of Their Right To Privacy As "Customers" Of A Bank, Therefore Requiring A Bank To Issue Privacy Notices And "Opt Out Rights," Against The Recognition That Such An Approach Might Violate The Good And Legal Purpose The Trust Settlor Had In Mind In Concealing From The Beneficiaries The Existence Of The Trust.

3. FATF Is An Independent Inter-Governmental Body That Includes The United States As A Member. FATF Is Due To Evaluate The United States In Late 2015 Or 2016, Respecting United States Standards Of Anti-Money Laundering And Counter-Terrorist Financing. In 2006, FATF Found That The United States Did Not Have Appropriate Requirements In Place To Require Covered Financial Institutions To Assess The Risk Of The Business Relationships Of Customers Or Beneficial Owners Of Customers To Prevent The Misuse Of The Financial System And That The United States Should Strengthen Its Customer Identification Requirements, Particularly In The Identification Of Beneficial Owners.

4. United States G-8 Action Plan For Transparency Of Company Ownership And Control (White House Press Release, June 18, 2013).

5. The European Parliament On March 11, 2014 Adopted The EU's Proposed Fourth Anti-Money Laundering Directive, Which Will Require The Ultimate Owners Of Companies And Trusts To Be Listed In Public Registers In EU Countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Richard P. Eckman
Frank A. Mayer, III
Walter Donaldson, II
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions