Compliance Alert - FinCEN Customer Due Diligence Rule - AML Training
As you may have seen from recent emails from the clearing/custodian firms that your office uses (RBC, Schwab and/or TD), changes are being made to new account forms and applications related to the FinCEN Customer Due Diligence Rule (CDD Rule) that goes into effect on May 11, 2018. Please know that the IPI new account forms will not be changing. Generally, the CDD Rule effects corporate type accounts being opened on a go forward basis. I will provide some additional information below for those of you that have these types of accounts. If you have questions after reading over this information, please let me know. Thanks, Renee
What is the background of the CDD Rule?
The lack of previous financial transparency in corporate accounts in the United States is the reason this rule will be required. If you recall from two years ago, there was a leak by an anonymous source where more than 11 million documents from offshore entities and personal financial information about wealthy individuals and public officials from around the world was released ---- The Panama Papers. A Panamanian law firm was hacked. The hack highlighted the use of various business structures (shell companies) and legal arrangements to circumvent AML rules in not providing the name of the beneficial owner of the accounts. The leaked documents included beneficial owners such as 12 current/former world leaders, 128 other public officials and politicans and hundreds of other members of the elite of over 150 countries. Some of these accounts were legal and represented legitimate and prudent financial practices; however, many others disclosed unethical behavior, such as tax avoidance in very poor nations by people with extreme wealth and activity that was clearly illegal (money laundering, violating trade sanctions, committing fraud, financing political corruption, etc.).
What are the four (4) required AML steps of the CDD Rule?
FinCEN's requirement for an AML check on the beneficial owner/control person of a corporate account is expected to assist law enforcement in conducting investigations of financial crimes by enabling them to identify the individuals who may be hiding behind legal entities and legal entity accounts to disguise the origins and movement of criminal activities and proceeds.
1. Identify and verify the client. We currently do this for all accounts through our AML reviews on new accounts. Operations reviews whether the clients are on the OFAC list and runs a check to verify the information presented on the account matches a national database of information for the client.
2. Identify and verify the account's beneficial ownership. More information will be disclosed below.
3. Understand the nature and purpose of the client's relationships and develop a risk profile for the client. This would include the type of client/account/service requesting, the client's typical personal identifiable information and account objectives and risks. For example, foreign citizen accounts will have a higher risk level as we will need to know the source of funds, expected nature of transactions and countries involved in any transfer to/from the account.
4. Engage in ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating client information. We currently conduct this step through ongoing OFAC reviews of clients and exception reports.
Who is a beneficial owner?
A beneficial owner is (1) each individual who directly or indirectly owns 25% of equity interests of a legal entity and (2) a single individual with significant responsibility to control, manage or direct a legal entity client, including an executive officer or senior manager (applicable titles: CEO, President, COO, CFO, General Partner, Managing Partner/Member/Director, etc.). The control person does not necessarily have to be an owner.
What accounts will require additional information for benefical owners?
ﾂｷCorporate Accounts - LLPs, GPS, LPs, LLCs, S-Corp, C-Corp, Non-Profits and Closely Held
ﾂｷNon-ERISA Self-Trusteed Qualified Plans
What additional documentation is required for beneficial owners/control person of corporate accounts?
Along with any applicable corporate documents for the entity, the beneficial owners will need to provide personally identifiable information (same info as if it was an individual account) for any benefical owners of 25% or more for domestic accounts (up to 4 people) or 10% or more ownership for a foreign account, as well as information for the control person (if applicable). For example, if there are four (4) owners of a dry cleaning company and they each own 25% of the company and they have a Managing Partner (no ownership) who runs the day to day operations, then you would need to obtain information for all four (4) owners and the control person to ensure you are meeting the FinCEN requirement of the CDD Rule.
IPI will apply the CDD Rule to brokerage and advisory accounts.
The documentation of the beneficial owner(s) and/or control person will be placed on FinCen's Certification of Beneficial Owner(s) form which is attached. This fillable form must be received by Operations before a corporate account is opened starting May 1, 2018. The person opening the account is the only owner/control person that is required to sign this form.
You are not required to obtain this form for current corporate accounts, unless, if during the course of normal monitoring of an account, information is needed to assess or reevaluate a corporate account's risk. In other words, you will not need to get this form for current accounts unless we request it from your office.
If you have any questions on the CDD Rule, please let us know. Thanks, Renee