The use of shell companies and other legal vehicles for illicit purposes is receiving growing international attention, with the importance of beneficial ownership transparency becoming ever more key, claimed RegTech firm Alessa.
While a number of countries have now introduced corporate transparency laws, compliance with these measures presented significant challenges for financial institutions due to regulations and guidance remaining inconsistent across jurisdictions.
To help companies better comply with the evolving requirements, Alessa recently detailed some of the most frequently asked questions linked to FinCEN’s beneficial ownership obligations in the US.
First of all, what is beneficial ownership and why is it important? A beneficial owner is the natural person who owns and/or controls a legal entity – such as a shell company for example. Historically, there has been no categorical requirement to disclose the beneficial owner of such entities, thus enabling them to operate anonymously.
Due to this, individuals with bad intent have been able to use shell firms and other vehicles to further their financial crimes.
Alessa said, “Beneficial ownerships is an important concept in the fight against money laundering, terrorist financing, tax evasion, and other financial crimes. The identification and disclosure of beneficial owners prevents criminals from hiding behind corporate entities and assists law enforcement in the investigation and prosecution of crimes.”
The question of what shell companies are also arose – shell firms are legal entities that typically have no physical presence other than potentially a mailing address, and in short generate little to no economic value independently.
Alessa detailed, “Shell companies are legal to form and operate, and because they can hold bank accounts and intangible assets, own real estate, and engage in financial transactions, they are used for a variety of legitimate business purposes.”
Another question of what the CDD Rule is was raised. The Customer Due Diligence Final Rule was issued by FinCEN as an amendment to existing BSA regulations and became effective in May 2018. The Rule clarifies and strengthens customer due diligence requirements with the aim of improving financial transparency and prevent the misuse of corporate entities for illicit purposes.
The CDD Rule imposes requirements that financial institutions must establish and maintain written policies and procedures that are designed to meet key requirements including identifying and verifying the identity of new customers, identifying and verifying the identity of the beneficial owners of companies opening accounts, conducting ongoing monitoring to identify and report suspicious transactions and understanding the nature and purpose of customer relationships to develop customer risk profiles.
What is the beneficial ownership requirement? This, Alessa underlines, imposes the obligation to identify, verify and record the identity of beneficial owners of legal entity customers who open accounts at the financial institution.
What kinds of financial institutions does the CDD Rule apply to? The CDD Rule applies to ‘covered financial institutions’ including mutual funds, securities broker-dealers, depository institutions, future commission merchants and introducing brokers in commodities.
What kinds of accounts does the beneficial ownership requirement apply? Alessa remarked, “The beneficial ownership requirement applies to new accounts of legal entity customers.
A “new account” is defined as each account opened at a covered financial institution by a legal entity customer on or after the applicability date of May 11, 2018.”
Another question raised was what a legal entity customer is. A LEC could be defined as a corporation, a partnership, a limited liability company, business trusts and an entity that is created by the filing of a public document with a Secretary of State.
What is the minimum identification that must be collected from each beneficial owner? For this, name, date of birth and identification number are vital.
Could a legal entity customer have multiple beneficial owners? Alessa claims this true, as a legal entity customer must have at least one beneficial owner and may have up to five beneficial owners.
How soon after obtaining client information must an institution verify the identity of each beneficial owner?
Alessa remarked, “The CDD Rule doesn’t specify a specific time frame during which the identity of beneficial owners must be verified. Rather, an institution must verify the identity of each beneficial owner of its legal entity customers within a reasonable period of time after the account is opened.”
How is an institution able to verify the identities of beneficial owners? FinCEN previously stated an institution may use documentary or non-documentary verification methods, or a combination of both methods, to verify the identities of the beneficial owners of its legal entity customers.
Documentary verification methods include unexpired government-issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver’s license or passport. Non-documentary verification methods may include contacting a beneficial owner, independently verifying the beneficial owner’s identity by comparing the information provided by the legal entity customer with information obtained from other sources, checking references with other institutions, and obtaining a financial statement.
A financial institution’s Customer Identification Program (CIP) must contain procedures for verifying customer identification, including describing when the institution will use documentary, non-documentary, or a combination of both methods for identity verification.
Another question was how can an institution know it has verified the true identity of each beneficial owner? To this, Alessa detailed that a bank need not establish the accuracy of every element of identifying information obtained. However, the CDD Rule requires institutions to verify enough information to form a reasonable belief that it knows the true identity of the beneficial owners of the legal entity customer.
How often should beneficial ownership information be updated? Alessa said there is no prescribed time frame under the rule for updating beneficial ownership information, but covered financial institutions must have procedures to maintain and update beneficial ownership information for legal entity customers on a risk basis.
Additionally, if changes to beneficial ownership information are discovered during the course of normal monitoring, or if a legal entity customer notifies the institution of a change in their information, the institution would be required to make the appropriate updates in the customer profile.
Lastly, how long must institutions retain records of beneficial ownership information collected for legal entity customers and why? At a minimum, covered financial institutions must maintain any identifying information obtained, for a period of five years after the date the account is closed.
Alessa concluded, “ The requirement that financial institutions know their customers and the corresponding risks presented by their customers, is fundamental to the development and implementation of an effective BSA/AML compliance program. Specifically, conducting appropriate CDD, including the identification of beneficial owners, assists an institution in identifying, detecting, and evaluating unusual or suspicious activity.
“However, performing customer due diligence can be both costly and time consuming, often involving manual processes, numerous alerts, and backlogs of false positives. Moreover, the imposition of new requirements and additional compliance obligations can further expose institutions to increased regulatory risk as well as fines and penalties for violations.”
Alessa recently offered a detailed explanation of Title 31 casinos regulations, penalties that are incurred for compliance failures and ways to ensure compliance.
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