Introduction

From time to time we find that our clients are confounded by the rules regarding the documentation necessary for beneficial owners of accounts ta their banks.  The fact of the matter is that this will be a point of emphasis in BSA/AML examinations over the next few cycles.  As always, it is our advice to be prepared for this question even if, at the moment, it may not apply to your bank.  The FFIEC has issued guidance in this area that may be helpful

Beneficial Ownership

The first question that has to be addressed is “when we say beneficial ownership, what exactly are we talking about?’   The FFIEC guidance discusses the FINCEN definition which states that the "beneficial owner" is the individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account.

According to this definition, what the regulators are looking for is information on anyone who can use the funds in an account for their own benefit.   For any person or entity that might benefit from the funds in an account, there should be significant information to determine what that person or entity does and will do with the funds. 

It is worth noting that this definition does NOT include a person or entity that has the right to transfer funds into the account solely or only the right to receive funds is not considered a beneficial owner for purposes of these regulations.  It is the ability of the person or entity to control, manage or direct the account that is controlling.  

The need to fully document the beneficial owners of an account presents itself in several circumstances.  Included in these are:

·         When the customer is acting as an agency for another entity

·         Where the customer is a legal entity that Is not publicly traded

·         When the customer is the trustee

·         Private Banking accounts

·         Foreign Correspondent Accounts

·         An account rated high risk at its inception

For each of these types of accounts, customer identification process should include an element of enhanced due diligence that includes information about beneficial owners and their relationship to the client.  At a minimum, there should be information about how funds may be transferred and used by the beneficial owner of the account.  

What’s the Big Deal? 

If we know our customer, why should we care so much about the beneficial owner?   We can monitor activity on the account and will research any activity that we deem to be suspicious; this is the argument that we hear from our clients.  The answer is context.  What may be totally normal for the bank’s client may be totally out of context for the beneficial owner.  For example, supposed ABC Corporation owns and operates a coin operated laundry.  It is entirely reasonable that the laundry will have regular deposits of cash.   After a reasonable time, cash deposits from this entity would not raise even the slightest suspicion.  However, if ABC Corporation is a medical supplies firm, the context changes.  Now it is important to know the relationship between the beneficial owner and the client.  It is important to actually observe the coin laundry to determine that the number of clients using the laundry matches the deposits.  While it is entirely possible and plausible that the Medical Supplies company keeps itself separate from the laundry, there must be documentation of the relationship and the manner in which the two entities remain separate.  

The FFIEC guidance points out that money launderers and criminal often use the privacy and confidentiality of banks laws covering accounts as a shield for criminal activity.   While it is impossible to know everything that a client may be doing, it is critically important to have an outline of the business model of the client and to be able to match the activity of that client with its banking activity. 

The Basics

There are some basic guidelines to follow to determine whether your CIP and CDD programs are meeting the standard for beneficial ownership.  

     Step One:   The basic CIP program must be sufficiently sophisticated to determine when a customer should require CDD.  For example, all of the customers on the list mentioned above should draw immediate EDD.   If, at the end of documenting a new account, a  private corporation does not trigger the search for information on the beneficial owners of the account, the CIP process should be enhanced.  

     Step Two:  When an account triggers EDD, there should be policies and procedures in place for each type of account.    For example, 

·      There should be minimal procedures for documenting the source of wealth of a private banking customer;

·       In the case of a privately held corporation there should be a background check that includes an internet search;

·        For a trustee, information about the relationship between the trustee and he beneficiary should be collected;

·         In the case of an agency, the agreement between the customer and the agency should be obtained;

·         For foreign correspondent accounts there are minimum policies and procedures that are fully described in the BSA/AML examination manual

      Step Three:  Once the EDD information is collected, it should be used as a regular part of monitoring accounts for suspicious activity.  This is an area where we see a great deal of concern.  Many times, once the EDD information is collected, it is placed in a file and stored for posterity.  However, it is his information that adds the proper context to the activity that is being reviewed.   As a best practice EDD which includes information from loan and relationship managers is critical for a complete and proper review for suspicious activity. 

     Step Four:  Develop systematic sharing across all business lines.  Too often information about loan customers and other commercial customers does not get shared with the BSA department and vice versa.  In many cases, this information could be used to significantly reduce the risk of loss or alternatively the risk of a BSA/AML violation.  The sharing of information on an enterprise wide basis will significantly reduce risk at a bank.  

Conclusion

The more you know about beneficial owners of accounts, the lower the risk.  Remember, the hand that controls the funds, rules the result!