By: Natasha Taft, MBA
Over the last decade, the industry continues to witness an evolution of customer due diligence process, which driven by global political and economic changes, is getting more complex and rigorous. In response to increased regulatory requirements, the global financial community is establishing new and enhanced processes, methods and procedures to perform customer identity verification, screening and background checking. The customer due diligence process has also been affected by rapid advances in technology, transaction monitoring, risk assessments and scrutiny of business counterparts. One of the most complex and grey areas of the AML activity is undoubtedly identifying and verifying beneficial owners as part of the customer screening process and incorporating this information into on-going transaction monitoring.
Increased money laundering risks can be linked to beneficial owners of accounts because nominal account holders can conceal the identity of the true owner of assets derived from illegal activity. Confidentiality and lack of transparency surrounding some business entities provide attractive venues for criminals, money launderers, tax evaders, and terrorists. Furthermore, shell companies and other certain corporate vehicles, e.g. trusts and foundations, can be helpful in concealing the nature and purpose of illicit transactions and the identities of the persons associated with them. While identifying the beneficial owners in some instances may be challenging and add additional burden on financial institutions, it can be critical in detecting suspicious activity and in providing useful information to law enforcement.
The 3rd EU Money Laundering Directive, implemented in 2007, incorporated three levels of beneficial owners: individuals who ultimately control the customer, a detailed definition of persons who own or control more than 25% of a corporate entity and a detailed definition of the beneficial owner of a trust or other legal arrangement. While many financial institutions strived to adopt the leading customer due diligence practices, the overall definition and screening requirements surrounding beneficial ownership continue to cause some level of confusion within the compliance community. The Financial Action Task Force (FATF) has repeatedly criticized the United States for failing to comply with a FATF standard requiring beneficial ownership information. The recent financial meltdown and seemingly laxity in financial crimes enforcements highlighted the importance of this subject and the need to further clarify and define the compliance requirements related to establishing beneficial ownership.
On March 5, 2010 FinCEN and six other federal regulatory bodies issued the joint Guidance on obtaining beneficial ownership information for accounts and customer relationships as part of the BSA/AML compliance programs. While the Guidance does not mandate specific procedures, the regulators make it clear that financial institutions must take reasonable steps to identify the beneficial owners of an account, including Customer Due Diligence or Enhanced Due Diligence, depending on the institution's risk assessment of that account.
According to FinCEN, the term “shell company” refers to non-publicly traded corporations, limited liability companies (LLCs), and trusts that typically have no physical presence (other than a mailing address) and generate little to no independent economic value. In the past this was mainly an overseas issue; however, such companies have grown in numbers domestically over the past few years. A 2005 ABN Amro Bank fine of $80 million was also related to U.S. shell companies that shuffled black-market money and engaged in financial scams. Under the USA PATRIOT Act, financial institutions must take appropriate steps to confirm the identity of consumer customers. With corporate customers, financial institutions must confirm the business is legitimate, but not necessarily who owns it. Determining who owns a shell company can be extremely difficult if not impossible; even determining if a corporation is a shell company can be hard. Correspondent banking relationships serve as another complicating factor. Despite the challenges in identifying shell entities, regulators view these types of accounts as high-risk and expect institutions to have proper due diligence and monitoring controls.
The new FinCEN Guidance sheds some light on the issue and states that financial institutions may need to reevaluate and expand their existing Customer Identification Programs ("CIPs"), Customer Due Diligence ("CDD") and Enhanced Due Diligence ("EDD") procedures for determining beneficial ownership. A beneficial owner is defined as the individuals with control over, or entitlement to, the funds or assets in an account that enables them to control that account. The Regulators specifically highlight that this processes should be tailored according to the BSA/AML risk presented by each customer and to this extent should be reasonable and practical.
The Guidance recommends implementation of enterprise-wide risk based CDD and EDD processes and controls related to beneficial owners, including sharing information across entities and cross-checking the information among different business units, for example marketing, credit underwriting, or corporate security. The document further points out that determining the ownership structure is especially important for overseas entities as well as trusts and foundations, or when correspondent relations are involved. It also suggests determining whether the customer is acting as an agent, and if so, obtaining information regarding the capacity in which and on whose behalf the customer is acting. Financial institutions could create and use questionnaires or review transaction history from the foreign bank to collect necessary information.
There is no doubt that challenges facing the financial community with respect to increasing demand to perform customer due diligence are unparalleled. It is now equally important to not just obtain the required information, but to also utilize it in an on-going monitoring process that is manageable and cost effective which provides meaningful results and satisfies regulatory expectations.
Natasha Taft serves as Director of Special Projects for ICS Compliance.
