The BSA Fifth Pillar: Helping You Prepare for Beneficial Ownership by Asking These Simple Questions

RISK MANAGEMENT The BSA Fifth Pillar: Helping You Prepare for Beneficial Ownership

by Asking These Simple Questions By Bruce Zaret, CPA, and Rachel Mondragon, CRCM, CAMS www.weaver.com The Financial Crimes Enforcement Network (FinCEN) issued its final rule for Customer Due Diligence (CDD) under the Bank Secrecy Act (BSA) on July 11, 2016. It takes effect Zaret May 11, 2018.

The CDD requirement serves as the fifth pillar in the BSA’s efforts to combat money laundering involving financial institutions (FIs), adding to the existing four pillars which include: (1) written policies and procedures, (2) independent testing of the antimoney laundering (AML) program, (3) designation of the BSA officer, Mondragon and (4) employee training.

The newest pillar focuses on beneficial ownership both in identification and verification.

Identification Requirements for Legal Entity Customer: This requirement applies when a new or existing “legal entity customer” opens an account.

The legal entity customer may be a corporation, partnership, or entity established under the laws of a foreign government. Beneficial ownership is intended to target the “true owner” of the legal entity account, which must be a natural person. The identification aspect of the beneficial owner is broken into two prongs: • Ask - Who Owns the Account? An

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individual who directly or indirectly owns 25 percent or more of the account is considered a beneficial owner. For example, a trust that owns 25 percent or more of the legal entity customer is likewise considered a beneficial owner, but remember the “natural person” aspect. In this scenario, it would be expected to also identify who owns the trust.

• Ask – Who Controls the Account?

An individual with significant responsibility for controlling, managing, or directing the legal entity customer is

considered a beneficial owner for this prong test. Examples would be an executive officer, president, or other senior person serving in a similar role.

[Information about] beneficial ownership may be obtained from the individual opening the account on behalf of your legal entity customer. [To facilitate this requirement], FinCEN has designated a “certification form” which must be retained as part of recordkeeping.

For those registered with the Se(continued on Page 11)

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curities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), including financial institutions, investment advisors, exchange or clearing agencies, the identification and verification requirements would not apply.

Verification of Legal Entity Customer A legal entity customer’s identification information may be verified using reasonable risk-based practices which must include elements under the financial institution’s customer identification program (CIP). Verification may be based upon information supplied by the legal entity customer as long as the financial institution does not have reasonable doubt regarding the reliability of that information.

Consistent with current rules, a financial institution may rely upon CIP information supplied by another financial institution or its affiliates, provided the other financial institution adheres to AML program requirements. Financial institutions may also use public data services for verification as well as industry-related services such as ChexSystems or eFunds.

Once the account is established, covered financial institutions are expected to monitor and update customer profiles based on certain events such as changes in beneficial ownership, changes in customer transaction activity and suspected suspicious activity.

Plan Now for Compliance In many respects, the BSA CDD requirements reflect or complement current compliance provisions financial institutions face when opening new accounts for customers. Now is the time to ensure appropriate processes and training are developed, along with an implementation plan, for 2018 compliance Q About the authors: Bruce Zaret, CPA is a partner in risk advisory services and leads financial institutions consulting. His contact information is Bruce.

Zaret@Weaver.com or 972-448-9232.

Rachel Mondragon, CRCM, CAMS, is a senior manager in financial institutions consulting. Her contact information is Rachel.Mondragon@Weaver. com or 972-448-6908.

Weaver is the largest independent accounting firm in the Southwest, with offices throughout TX and across the US.

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