The Uniform Beneficial Ownership Rule- Big Changes

A Three-part Series- Part One-The UBO Comes of Age

 

 

Introduction

There are many things that the United States has done to respond to the war in Ukraine.  Among the responses has been to impose sanctions on many parts of the Russian economy, government offices and high-profile individuals.  Once the sanctions had been imposed, the results have brought to attention many of the “holes” that exist in the AML framework. 

One of the main tools that are being used to avoid sanctions is shell corporations.  A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.

Shell corporations have been the main vehicle that has been used to launder money in contravention of the US sanctions against Russia and its supporters. ^[1]  There is a reason that shell corporations became a favorite tool for money launderers and terrorism financiers that what to avoid sanctions. These corporations make it very difficult to determine the true ownership of the company and are equally opaque when it comes to the sources of funding. 

Although the war in Ukraine has highlighted certain weaknesses in our AML regime, the use of shell corporations to hide the  sources and uses of funds has been a concern of regulators for many years.  The original uniform Beneficial Ownership Rule was passed to start to address the concerns with these companies.

This rule currently requires covered institutions to obtain information about any owner of a corporation that owns more than 25% of the company.  In addition, any person who is considered a controlling person should also give background information.   

The Rule Itself 

The final rule creates a “fifth pillar” in the standard group of expectations for a comprehensive BSA/AML compliance program.  Ongoing and risk based due diligence for customers will now be considered an essential part of the compliance program.   The rule makes due-diligence a dynamic process rather than the traditional process that essentially ended at the time the account was opened.  Financial institutions are expected to stay abreast of who the beneficial owners of a legal entity are and how their ownership might impact ongoing monitoring of the account.   As the beneficial owners change, then the manner in which the account is viewed should change accordingly. 

Beneficial Ownership is a broad definition that includes both ownership and control.  

Ownership – is denied as any person who directly or indirectly owns more than 25 percent of the equity of a legal entity

 

Control 

 Beneficial ownership is determined under both a control prong and an ownership prong. Under the control prong, the beneficial owner is a single individual with significant responsibility to control, manage or direct a legal entity customer.  This includes an executive officer or senior manager (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, President), or any other individual who regularly performs similar functions. One beneficial owner must be identified under the control prong for each legal entity customer.

These two prongs are critical because there are many times when a person or persons could actually have a minimal ownership stake in a firm or even no actual legal ownership, but still have the ability to control the firm.   The rule requires all covered institutions to obtain information on all people who own or control a legal entity.  

Financial institutions are expected to design policies and procedures that detail how staff will use their best efforts to establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of a legal entity customer. The procedures must allow the financial institution to identify all beneficial owners of each legal entity customer at the time of account opening unless an exclusion or exemption applies to the customer or account. 

In part Two- we will discuss the changes to the regulation that have been implemented.  

***James DeFrantz is Principal at Virtual Compliance Management.  For More information please visit our website at www.vcm4you.com ***

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[1] https://www.independent.co.uk/news/world/europe/russia-oligarch-sanctions-suleiman-kerimov-pandora-papers-b2056144.html

 https://jamesdefrantzblog.wordpress.com/2024/04/01/the-uniform-beneficial-ownership-rule-big-changes-a-three-part-series-part-one-the-ubo-comes-of-age/

BSA/AML - Not Even the Same Name!

2020 was an unforgettable year for many reasons; the Covid outbreak, the US national election, civil unrest and just general mayhem.  It was also a significant year in the area of BSA/AML compliance.  In 2020 the US Congress passed the Anti-Money Laundering Act of 2020 (“AMLA”).  Among the significant provisions of this Act were:

·         A statement form FinCEN on the priorities for AML/CFT

·         Expansion of AML rules to dealers in arts and antiquities

·         AML threat patterns will be shared more freely amongst law enforcement

·         SAR sharing

·         Corporate Transparency Act

The last of these provisions, the Corporate Transparency Act, is the basis for new rules that will require almost all businesses to supply Uniform Beneficial Ownership information on a national registry. 

Since 2020, there have been only slight changes in the rules and laws that apply to AML administration, however, that doesn’t mean that changes are not occurring in the administration of an AML compliance program. 

Changes Are Coming-What’s in a Name?

Among the changes that have been and are being implemented is a change in nomenclature.  The FDIC and other prudential regulators have announced that going forward:

For purposes of consistency with the AML Act, the FDIC now uses the term “AML/CFT rather than “BSA/AML[1]

The change in name is designed to emphasize an emphasis on countering the financing of terrorism.   There is also a clear indication that the emphasis will be on detecting potential suspicious activity  and managing it through strong internal controls.  

Consistent with previous regulatory efforts, much of the focus of the AMLA 2020 is on facilitating information sharing between the public and private sectors in order to strengthen the AML system and better protect the financial system from abuse.[2]

It is clear that there will be an emphasis on the ability of your AML/CFT program to identify the areas of risk in your product portfolio and to tie the risks that are identified to the monitoring program that is implemented.   There will be an emphasis on not just know who your customers are; but also, the characteristics of a typical transaction for your customer base.   

Priorities

Another impact of the passage of the AMLA is that FinCEN was required to publish its priorities each year.  FinCEN announced its priorities for the first time in June of 2021 and these priorities have been re-iterated since then.  Fincen’s pronouncement is that the priorities are not listed in order of importance:

1.  Corruption.

2.  Cybercrime, including relevant cybersecurity and virtual currency considerations

3. Foreign and domestic terrorist financing.

4. Fraud.

5. Transnational criminal organization activity.

6. Drug trafficking organization activity.

7. Human trafficking and human smuggling;

8. Proliferation financing.

 

Despite the fact that the agency says that there isn’t a priority the following areas have received the most attention from regulators:

 

1.       Beneficial ownership reporting:  a final rule has been issued that will require all business that have registered with a Secretary of State in any state in the United States to be registered.   There is a proposed final rule about who will have access to the registry that is being considered and will be finalized in 2023.

2.       Anti-Corruption/Real estate: FinCEN has issued orders that target high value real estate markets and has expanded the requirements for a full AML compliance program to dealers in antiquities and luxury items.

3.       Priorities:  FinCEN is working on a rule that will make the above priorities part of the regulatory framework

4.       Virtual Currency: - There is no questions that regulations that deal specifically with Virtual currency are coming

5.       Fraud:  Although fraud has been pervasive for many years, this area has grown and become an area of focus for regulatory attention.

 

Change in Focus is the Same as Change in Regulation

 

Even for institutions that are not directly impacted by these rules, remember that a change in focus can have the same effect as a change in regulation.  Areas of examination that in the past may have received little attention will now be a focal point of an examination.  Pay particular attention to the following areas: 

 

1.       Transaction Monitoring:  Make sure that your compliance team has the ability to identify typical and unusual patterns of activity based upon your customer portfolio.

2.        Risk rating and Risk Assessments:  Identifying the overall risks o the business as well as the risks associated with individual customers and the tying the results of risk assessments to the overall monitoring program.

3.       Fraud Detection:  Ensuring that systems are  in place to detect fraud.

4.       IT Security:  Be aware of the systems are in place to protect private non-public information

5.       SAR documentation:   Make sure that when suspicious activity is suspected, that your compliance teams documents the research that was performed, even if it does not result in a SAR.  Make sure that the reasons for not filing as SAR are documented in the same manner as the decision to file.

 

Expanding the reach of AML regulations

 

On February 16, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking, which would require certain real estate professionals to report certain transaction information to FinCEN in connection with non-financed transfers of residential real estate to legal entities or trusts 

 

On February 13, 2024 FinCen also issued a notice of proposed rulemaking.  The proposed rule would subject advisers to suspicious activity reporting obligations similar to those required of broker-dealers. An adviser must report suspicious transactions that are conducted or attempted by, at, or through an adviser and involve or aggregate at least $5,000 in funds or other assets

 

We will discuss several of the changes caused by the new priorities in our blogs this month.

 

 

 

***James DeFrantz is the Principal at Virtual Compliance Management services.  He can be reached at JDeFrantz@VCM4YOU.com***

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[1] https://www.fdic.gov/resources/bankers/aml-cft/

[2] https://legal.thomsonreuters.com