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FinCEN: Beneficial Ownership Compliance Changes

15 years down the line, after the passing of the 'USA PATRIOT Act' for financial institutions; organised criminals, terrorists, and other criminal groups have adapted and become more sophisticated to keep their enterprises afloat.

FinCEN: Beneficial Ownership Compliance Changes

Ever since the passing of the USA PATRIOT Act in 2001, financial institutions have had to meet four basic requirements. They must: appoint a compliance officer; develop appropriate processes, procedures and reporting mechanisms; continue to train their staff; and submit to independent testing. All of these things – and diligent policing of them – have helped tackle fraud, money laundering and sanctions-busting.
 
Now, we’re 15 years down the line. The opposition – organized criminals, terrorists and others – haven’t sat still. They’ve adapted and in the process become ever-more sophisticated.
 
The ability to launder ill-gotten gains through respectable, law abiding, financial institutions is a key capability for all terrorist and criminal groups, so they’ve had to continually adapt to keep their enterprises afloat.
 

FinCEN Changes

Given the rapidly changing global financial crime landscape, government agencies must adapt as well, and the U.S. government has taken action to stay ahead of the game. On May 11, 2016 the Financial Crimes Enforcement Network (FinCEN) responded by implementing changes to current compliance regulations for beneficial ownership and risk-based customer due diligence (CDD) programs.
 
Looking for ways to strengthen the fight against illicit activity, FinCEN wants to enhance financial transparency into account ownership. It wants to do this by requiring stronger new account onboarding, monitoring and CDD practices beyond those currently required as a result of the inability to correctly identify account owners.
 
Changes went into effect July 11, 2016 according to the Federal Register and covered financial institutions must be in compliance by May 11, 2018. While two years may sound like a long time; designing, testing, training employees and deploying new “Know Your Customer” (KYC) and CDD changes to risk mitigation and anti-fraud programs can’t happen overnight.
 

What it Means

A core element of KYC and CDD, involving beneficial account ownership, has now been added. Covered financial institutions must now gather additional information, and verify the identity of beneficial owners as part of their risk mitigation programs.
 
According to FinCEN, financial institutions may comply either with “the completion of a beneficial ownership certification form (FINCEN’s or their own) or by any other means that comply with the substantive requirements of this obligation.” 
 
Financial institutions can rely on the beneficial ownership information provided by the customer, unless it has knowledge that the information provided is questionable and that’s a key consideration in complying with the regulations and preventing fraud. 
Aside from potential sanctions and fines, getting it wrong has consequences in the form of increased OFAC, FCPA and reputational risks.
 

The Bottom Line 

Financial institutions not only have to comply with the new regulation, but also anticipate how its revised programs will be viewed by the Office of the Controller of the Currency (OCC) when they’re under the examination microscope.
 
Historically, OCC examinations have shown that aiming to meet the status quo, or doing the minimum, is not enough to satisfy the regulators. Program deficiencies generally result in regulators pointing out that the financial institution had a duty to know, which ultimately translates to the regulator believing the institution should have done more.
 
With that in mind, financial institutions should think about the implementation of these beneficial ownership requirements, and subsequently how they can then take the program further than the initial checklist. The goal, after all, is to create more robust AML, due diligence and analytics environments that identify customers more completely as well as prevent terrorist financing and money laundering. Today, the term know your customer has taken on a whole new meaning.
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Dan Draz, Senior Business Solutions Consultant 13 September 2016