5 PILLARS UEI CLASS BUSINESS MOD 130 FRANK EZENEKWE, GARDENA CA NICOLE HUNTER
NEW FIFTH PILLAR CUSTOMER DUE DILIGENCE {BENEFICIAL OWNERSHIP} 11/07/18
THE ROLE OF THE THIRD LINE OF DEFENSE
• AFTER LINGERING IN REGULATORY LIMBO FOR THE LAST FOUR YEARS, THE FINANCIAL CRIMES ENFORCEMENT NETWORK {FINCEN} PUBLISHED THE NEW CUSTOMER DUE DILIGENCE {CDD} BENEFICAL OWNERSHIP FINAL RULING IN 2016, CREATING THE “FIFTH PILLAR” OF THE BANK SECRECY ACT {BSA}. 1 REGULATORS WERE ALWAYS CLEAR THAT FORMALIZING PRIOR GUIDANCE AND ENHANCING REQUIREMENTS RELATED TO CDD EXPECTATIONS WAS NOT A MATTER OF IF , BUT WHEN.
THE ROLE OF THIRD DEFENSE..2
• THE FEDERAL REGISTER STATES THAT “FINCEN”. THE FIFTH PILLAR AS NOTHING MORE THAN AN EXPLICIT CODIFICATION OF EXISTING EXPECTATIONS, AS THESE EXPECTATIONS SHOULD ALREADY BE TAKEN INTO ACCOUNT IN A BANK’S INTERNAL CONTROL’S. A BANKS BANK SECRECY ACT/ANTI-MONEY LAUNDERING {BSA/AML} PROGRAM SHOULD BE DESIGNED TO MEET THE REQUIREMENTS OF THE FOUR PILLARS, WHILE ALSO INCORPORATING THE NEW EXPANDED FIFTH PILLAR.
THE ROLE OF THE THIRD LINE OF DEFENSE. 3 • WITH THE IMPLEMENTATION OF THIS NEW RULE, A ROBUST CUSTOMER • IDENTIFICATION/CUSTOMER DUE DILIGENCE {CIP/CDD} PROGRAM IS MORE IMPORTANT THAN EVER. ACCOUNTING TO FINCEN, THE FOLLOWING ARE THE FOUR ELEMENTS OF CDD: 1. CUSTOMER IDENTIFICATION AND VERIFICATION 2. BENEFICIAL OWNERSHIP INDENTIFICATION AND VERIFICATION 3. UNDERSTANDING THE NATURE AND PURPOSE OF CUSTOMER RELATIONSHIPS TO DEVELOP A CUSTOMER RISK PROFILE 4. ONGOING MONITORING TO REPORT SUSPICIOUS TRANSATIONS AND EMPHASIS ADDED FOR “MAINTAINING” CUSTOMER INFORMATION ON A RISK BASIS
NEW FIFTH PILLAR: CUSTOMER DUE DILIGENCE
• ALTHOUGH THE RULE WENT INTO EFFECT IN 2016,”COVERED INSTITUTIONS” WERE GIVEN A MANDATORY DATE OF MAY 11, 2018 TO ATTAIN COMPLETE COMPLIANCE. THE BENIFICIAL OWNERSHIP ASPECT OF THE RULE IDENTIFIES TWO TYPES OF BENEFICIAL OWNERS-THOSE WHO MEET THE 25 PERCENT OR MORE OF A LEGAL ENTITY’S EQUITY INTEREST{ WHETHER DIRECT OR INDIRECT}
AUDIT’S ROLE PRE-IMPLEMENTATION
• AS INSTITUTION ARE IMPLEMENTING CDD, AUDIT SHOULD BE ENGAGED AND HAVE A SEAT AT THE TABLE OF THE ENTERPRISE PROJECT. INTERNAL AUDIT CONTRIBUTES TO THE SUCCESS OF IMPLEMENTATION BY PROVIDING STAKEHOLDERS WITH RELEVANT, INDEPENDENT AND OBJECTIVE ENTERPRISELEVEL PERSPECTIVES REGARDING GOVERNANCE, RISK AND INTERNAL CONTROLS AS IMPLEMENTATION UNFOLDS FOR EACH BUSINESS UNIT.
AUDIT ENGAGEMENT • AUDIT SHOULD BE ENGAGED REGULARLY WITH AML COMPLIANCE AND THE INSTITUTION’S LEGAL TEAM WHEN DISCUSSING THE INCLUSION OF NEW REGULATORY REQUIREMENTS IN THE AML PROGRAM. ALTHOUGH THE ELEMENTS OF THE RULE ARE CLEAR, THERE ARE RISK-BASED DECISIONS THAT INSTITUIONS WILL NEED TO MAKE FOR THE EXECUTION OF THE NEW RULE. 1. WHAT CONSTITUES AN ACCOUNT FOR EACH LOB IN CONSIDERING PRODUCTS AND SERVICES? 2. THE BENEFICAL OWNERSHIP THRESHOLD IS 25%, AS REQUIRED BY THE CDD RULE IS THAT THRESHOLD ADEQUATE FOR THE INSTITUTION’S RISK MODEL OR ARE THERE CIRUMISTANCES OR CERTAIN CUSTOMERS WHO WOULD LOWER THE THRESHOLD FOR APPLING CDD REQUIREMENTS?
KNOWLEDGE IS POWER
• AS A GENERAL PRACTICE, FINANCIAL INSTITUTIONS’ INTERNAL AUDIT PROGRAMS WILL INCLUDE AN INDEPENDENT AML RISK ASSESSMENT IN ORDER TO UNDERSTAND AML RISK WITHIN THEIR INSTITUTION. LIKE THE WISE SAYING OF SOCRATES, “ TO KNOW THYSELF IS THE BEGINNING OF WISDOM.”MANY INSTITUTIONS MOST LIKELY BEGAN BY CONDUCTING AN ENTERPRISE BUSINESS IMPACT ANALYSIS {BIA} INCLUDING THE CUSTOMER TYPES, PRODUCTS/SERVICES, SOURCE SYSTEMS, IT CAPABILITIES, POLICY AND PROCEDURES, TRAINING AND BUDGET. SEVERAL IMPORTANT ITEMS MAY COME OUT OF BIAS, SUCH AS COMPLIANCE LEARNED.
RISK-BASED TRIGGER EVENTS
• DURING THE LAST 18 MONTHS, YOU MAY HAVE EXPERIENCE THAT THERE ARE AS MANY DIFFERING OPINIONS ON WHAT IS A “TRIGGER EVENT” TO COLLECT BENEFICIAL OWNERSHIP INFORMATION AS THERE ARE ON “WHAT MAKES AN ACCOUNT.” WHILE SOME INSTITUTIONS MAY APPEAR TO BE “TRIGGER HAPPY” AT THIS PHASE, THERE HAS TO BE A REASONABLE ASSESSMENT ABOUT RISK AND, FINANCIAL INSITUTIONS SHOULD MANAGE THE PROCESS ACCORDING TO THAT EXPOSURE OF RISK.
4 KEY ELEMENTS OF CUSTOMER DUE DILIGENCE
• 1. IDENTIFING & VERIFYING THE IDENTITY OF YOUR CUSTOMERS. • 2. IDENTIFING & VERIFYING THE IDENTITY OF BENEFICAL OWNERS WITH 25% OR MORE EQUITY INTEREST OF YOUR LEGAL ENTITY CUSTOMERS. • 3. UNDERSTANDING NATURE & PURPOSE OF COSTOMER RELATIONSHIPS.* • 4. CONDUCTING ONGOING MONITORING TO MAINTAIN AND UPDATE CUSTOMER INFORMATION & TO IDENTIFY & REPORT SUSPICIOUS TRANSACTIONS.*
BENEFICAL OWNERSHIP
• BENEFICAL OWNER IS A LEGAL TERM WHERE SPECIFIC PROPERTY RIGHT {“USE THE TITLE”} IN EQUITY BEING TO PERSON EVEN THOUGH LEGAL TITLE OF PROPERTY BELONGS TO ANOTHER PERSON.
SCOPE: WHAT IS A “LEGAL ENTITY CUSTOMER”
WHAT IS “LEGAL ENTITY CUSTOMER”
• FOR PURPOSE OF THE NEW REGULATIONS, “LEGAL ENTITY CUSTOMER” IS DEFINED AS A CORPORATION, LIMITED LIABILITY COMPANY, GENERAL PARTNERSHIP, AND ANY OTHER ENTITY CREATED BY FILING A PUBLIC DOCUMENT WITH THE SECRETARY OF STATE OR SIMILAR OFFICE, SUCH AS A BUSINESS OR STATUTORY TRUST, AS WELL AS A SIMILAR BUSINESS ENTITY FORMED IN A FOREIGN COUNTRY.
QUESTION 26: FOREIGN FL • QUESTION 26: FOREIGN FINANCIAL INSTITUTIONS. DOES THE EXCLUSION FOR FOREIGN FINANCIAL INSTITUTIONS FROM THE RULE’S DEFINITION OF “LEGAL ENTITY CUSTOMER” DEPEND ON WHETHER THE BENEFICAL OWNERSHIP REQUIREMENTS APPLIED BY SUCH INSTITUTION”S FOREIGN REGULATOR MATCH U.S REQUIREMENTS? A. NO. FOR PURPOSES OF BENEFICIAL OWNERSHIP IDENTIFICATION, THE RULE EXCLUDES FROM THE DEFINITON OF “LEGAL ENTITY CUSTOMER” A FOREIGN INSTITUTION CREATED IN A NON-U.S. JURISDICTION WHEN THE FOREIGN FOR THAT FINANCIAL INSTITUTION COLLECTS AND MAINTAINS INFORMATION ON THE BENEFICIAL OWNER{S} OF THE REGULATOR INSTITUTION.
BENEFICAL OWNERSHIP INFO: POOLED INVESTMENT VEHICLES….. •
OUESTION 18: COLLECTION OF BENEFICAL OWNERSHIP INFORMATION: POOLED INVESTMENT VEHICLES WHOSE OPERATORS OR ADVISERS ARE NOT EXCLUDED FROM THE DEFINITION OF LEGAL ENTITY CUSTOMER
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Q. ARE COVERED FINANCIAL INSTITUTIONS REQUIRED TO IDENTIFY AND VERIFY THE IDENTITY OF THE BENEFICAL OWNERS THAT OWNERS THAT OWN 25 PERCENT OR MORE OF THE OWNERSHIP INTERESTS OF A POOLED INVESTMENT VEHICLE WHOSE OPERATORS OR ADVISERS ARE NOT EXCLUDED FROM THE DEFINITION OF LEGAL ENTITY CUSTOMER?
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A. NO ALTOUGH THE RULE REQUIRES COVERED FINANCIAL INSTITUTION TO COLLECT AND VERIFY THE IDENTITY OF BENEIFCIAL OWNERS WHO OWN 25 PERCENT OR MORE OF THE EQUITY INTERESTS OF A LEGAL ENTITY CUSTOMER, IN GENERAL, INSTITUTIONS ARE NOT REQUIRED TO LOOK THROUGH A POOLED INVESTMENT VEHICLE TO IDENTIFY AND VERIFY THE IDENTITY OF ANY INDIVIDUALS WHO OWN 25 PERCENT OR MORE OF ITS EQUITY INTERESTS. BECAUSE OF THE WAY IN WHICH OWNERSHIP OF A POOLED INVESTMENT VIHICLE FLUCTUATES, IT WOULD BE IMPRACTICAL FOR COVERED FINANCIAL INTITUTIONS TO COLLECT AND VERIFY OWNERSHIP IDENTITY FOR THIS TYPE OF ENTITY. THERE IS NO REQUIREMENT THAT THE FINANCIAL INSTITUTION SHOULD REQUEST THE CUSTOMER TO LOOK THROUGH THE POOLED TNVESTMENT VEHICLE TO DETERMINE AND REPORT ANY REQUEST THE CUSTOMER TO LOOK THROUGH THE POOLED INVESTMENT VEHICLE TO DETERMINE AND REPORT ANY INDIVIDUAL’S EQUITY INTEREST. HOW EVER, COVERED FINANCIAL INSTITUTIONS MUST COLLECT BENEFCIAL OWNERSHIP INFORMATION FOR THE POOLED INVESTMENT VEHICLE UNDER THE CONTROL, PRONG TO COMPLY WITH THE RULE{I.E}, AN INDUIVIDUAL WITH SIGNIFICANT RESPONSIBILITY TO CONTROL, MANAGE, OR DIRECT THE VEHICLE, TRADING ADVIISER, OR GENERAL PARTNER OF THE VEHICLE}
“LEGAL ENTITY CUSTOMER”
• Q. WHAT METHOD SHOULD COVERED FINANCIAL INSTITUTIONS USE TO VERIFY ELIGIBILITY FOR EXCLUSION FROM THE DEFINITION OF A “LEGAL ENTITY CUSTOMER”? • A. SEVERAL TYPES OF LEGAL ENTITY CUSTOMER ARE EXCLUDED FROM THE COLLECTION AND VERIFICATION REQUIREMENTS OF THE RULE, UNDER SECTION 1010.23{E}{2}, BECAUSE, FOR EXAMPLE, THEIR REGULARS