In the current regulatory environment we are seeing increased regulatory oversight and enforcement, including:
Severe civil monetary penalties now reaching mid-size and small financial institutions;
- Jurisdictions imposing mandatory certification programs for compliance personnel;
- Compliance violations resulting in civil prosecution and debarment for compliance executives;
- Inadequate supply of qualified AML compliance professionals in the market place;
- Regulatory examiners continuing to have a strong focus on Model Validation; and
- The Financial Crimes Enforcement Network’s (FinCEN) Customer Due Diligence Rule (“CDD Rule”) (ultimate beneficial ownership) continues to be a challenge and significant undertaking in many jurisdictions as information is not broadly available.
The compliance deadline for FinCEN's CDD Rule is May 11, 2018. This rule requires banks and financial institutions to obtain (but not verify) identifying information from individuals controlling 25% or more of a company holding a corporate account. The industry as a whole has undertaken massive (in some cases enterprise-wide) steps to comply in advance of the deadline (i.e., implementation engagements around enhancing systems, strengthening customer risk profiles, and new resource allocations) despite a general lack of guidance from regulatory authorities.
International money laundering is the main concern, yet this is extremely broad. The Ultimate Beneficial Ownership ("UBO") requirements associated with the CDD Rule play a large role in the evolution of sanctions from a “black and white” regime to a more subtle deployment of U.S. foreign economic policy. The impacts from the UBO requirements provide ammunition to the US Treasury, Department of Justice, and Congress to make stricter UBO rules for the United States. There has been talk of requiring beneficial owners to register so the government can identify ownership structure at the state level.
What Should You Know About the CDD Rule and UBO?
- The rule applies to all financial institutions registered with FinCEN (not just banks).
- The impact associated with the CDD Rule and UBO should be addressed and the costs and resources required to do so should be shared with senior management and the board.
- Adding a new population of beneficial owners to a financial institutions periodic customer OFAC scan will lead to improved identification of sanctioned persons.
- Financial institutions will need to incorporate the rules and operations pertaining to them in to their existing AML and sanctions programs (including revision of policies and procedures).
- IT will need to migrate existing CDD data into current platforms containing customer identification data and ensure those platforms contain the appropriate fields for retaining UBO data.
- AML/OFAC Risk Assessments and Customer Risk Rating methodologies should be updated to address the risks associated with the CDD Rule and UBO.
Technical and Operational Challenges Associated with Beneficial Ownership
How does a financial institution incorporate beneficial ownership screening into their customer batch screening process, and what is the institutional risk tolerance for true matches?
Financial Institutions will still need to be mindful of effective “control” versus “ownership” (some programs call this out, while others do not), but operationally the first question upon identifying a match might be: “How much of the company do they own?” Whether to end doing business with the entity, or to maintain and monitor, depends on an institution’s OFAC policy and associated risk tolerance.
Financial Institutions are Under Significant Cost Pressures
- Increasingly complex regulatory requirements around BSA/AML/OFAC-Sanctions/KYC and Anti-Bribery and Corruption.
- Broader watchlist screening scope resulting in an ever increasing number of alerts and an increasing need of manpower.
- Inadequate customer data continues to drive inefficiencies in AML operations.
- Remediation projects to address MRAs are taking priority over revenue generating projects.
- Over 60% of financial institutions expect to increase compliance expenditure in more than 10% within the next 3 years.
- The difficulty and cost of conducting comprehensive due diligence continues to drive financial institutions to perform wholesale de-risking.
For More Information
If you have questions about the Customer Due Diligence Rule or Ultimate Beneficial Ownership, please contact Aaron Kahler or your regular ACA Telavance Consultant.