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FinCEN’s New Customer Due Diligence Requirements

ACAMS Northern California ChapterApril 30, 2015

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Topics• Background• Identification of Beneficial Owners:

– Two-Prong Test– Equity Interests– In/Direct Connections

• Legal Entities: – Not/Included

• Exemptions & Exclusions:– CIP Exempt– Exclusions– Other Exemptions

• Intermediated Account Relationships & Pooled Investment Vehicles

• Beneficial Owner Information:– Standard Certification Form– Verification

• Updating Beneficial Ownership Information

• Reliance on Other Financial Institutions• Nature & Purpose of Customer

Relationships:– Identifying Transactions– Understanding the Relationship– Identifying Suspicious Activity

• Ongoing Monitoring:– Current Requirements– Internal policies & procedures– Ongoing Monitoring Requirement

• BSA/AML Pillars:– The new Fifth Pillar

• Proposed Effective Date• Tools

– Example: RNA Organization CDD Information Sheet

– CDD Rule Checklist• My Contact Information

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Background

FinCEN published the CDD Proposed Rule on 8/04/14*• Will codify the four minimum CDD Elements:

1. Identification & Verification of Customers (CIP)2. Identification & Verification of Beneficial Owners3. Understanding the nature & purpose of customer

relationships4. Conducting ongoing monitoring to maintain and &

update customer information and to identify & report suspicious activity

* http://www.fincen.gov/statutes_regs/files/CDD-NPRM-Final.pdf

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Identification of Beneficial OwnersDetermining Beneficial Ownership• Two-Prong Test:

1. Ownership Prong: Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer

2. Control Prong: An individual with significant responsibility to control, manage, or direct a legal entity customer, including:

A. Executive Officer or Senior Manager (e.g., CEO, CFO, COO, President, VP, Managing Member, General Partner, Treasurer), OR

B. Any other individual who regularly performs similar functions

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Equity Interests

Equity Interests Broadly Defined:Applies to any legal entity structure (except Trusts), for those individuals that have a primary value interest in that legal entity

• Examples:– Shares of Stock in a Corporation– Membership interests in an LLC– Partnership interests in a Partnership– Any other similar ownership interests in any other type of

legal entity

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In/Direct Connections

Applies to Ownership Prong:

Where a Legal Entity customer is owned by (or controlled through) one or more other legal entities, customers are required to “look through” those other legal entities to determine which natural persons (individuals) own 25 percent or more of the equity interests of the legal entity customer

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Entities Not/Included

• INCLUDED:– Corporations– LLCs– Partnerships (e.g., GP, LP, LLP, Joint Venture)– Unincorporated non-profits & associations*

• NOT INCLUDED:– Trusts: Not included unless State Filing required, such as for

statutory business trusts (Massachusetts, Alaska, Delaware)• Note: California doesn’t require business trusts to file, think through impacts

– More Business Trusts Information: http://smallbusiness.chron.com/examples-business-trusts-21282.html

*Some non-profits may be Exempt – see slide 9 for more information

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Beneficial Owner Exemptions & Exclusions

• CIP Exemptions:– Financial institutions regulated by a federal regulator (e.g.,

federally regulated banks, brokers or dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities)

– Publicly held companies traded on U.S. Stock exchanges– Domestic government agencies and instrumentalities – Certain legal entities exercising governmental authority

• Exclusions:– Existing customers, thus only applies to new customers opening

accounts going forward from the final rule’s effective date**Slide 15 becomes crucial here

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Beneficial Owner Additional Proposed Exemptions

• Issuer of Securities Exchange Act of 1934 (SEA) section 12 registered securities; or required report filer under section 15(d)

• Majority-owned Domestic subsidiary of any U.S. Stock Exchange listed entity

• SEC registered Investment Company defined under Section 3 of the Investment Company Act of 1940 (ICA)

• SEC registered Investment Adviser per the ICA, Section 202(a)(11) definition

• SEA Section 6 or 17a registered exchange or clearing agency

• Any other SEC registered entity

• CFTC registered entity, commodity pool operator or trading advisor, retail foreign exchange dealer, swap dealer or major swap participant, per Section 1a of the Commodity Exchange Act (CEA)

• Sarbanes-Oxley Act (SOA) Section 102 registered public accounting firm

• IRS Code Section 501(c), 527 or 4947(a)(1) charity or non-profit entity that has not been denied tax exempt status and is required to and has filed their most recent annual information return (Form 990)

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Intermediated Accounts & Pooled Investment Vehicles

Intermediated Accounts• Your customer is the

Intermediary and NOT their underlying clients

• Beneficial ownership information applies then only to the Intermediary UNLESS they are an exempt entity, eliminating the requirement

NOTE: More information is available for different Intermediary scenarios in the proposed rule

Non-Exempt Pooled Investment Vehicles

Applies to:• Investment Companies as defined

under Section 3(a) of the ICA (or as excluded under Section 3(c)1 or 3(c)7)

• Any Commodity Pool as defined under Section 1a(10) of the CEA

Likely to require:• Identification of the Control Prong

individual(s) only (but the final rule will outline whether the Ownership Prong will apply – see slide 4 for more information)

Rabobank, N.A. 11

Organigram ExampleLLC

Entity Customer

LP Owner100%

Grantor A75%

Revocable Trust Owner

50%

Grantor B25%

Owner 150%

Owners List:1. Owner 1:

2. Grantor A:

3. Grantor B:

50%

37.5%

12.5%

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Verification of Beneficial Owners

• TGII !!!!!– Thank Goodness It’s Identity!

• Identification Verification (IDV):– Documentary– Non-documentary– CERTIFICATION

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BENEFICIAL OWNER INFORMATIONCERTIFICATION OF BENEFICIAL OWNERSHIP:– Name of person opening account– Legal Entity Name of Customer– Obtain from each individual who

directly or indirectly owns ≥25% equity interests of the legal entity; AND obtain same from one individual with significant responsibility to manage the legal entity, with Opener’s signature certification regarding accuracy of the information:• (Legal) Name• Date of Birth• (Physical Residential) Address• Social Security No. (as applies), OR• Foreign Passport No. and Name of

Issuing Country (as applies)

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Updating Beneficial Ownership Information

• What It Ain’t:– NOT every time a new account is opened

• What It Is:– Risk-Based for CDD and Beneficial Ownership:• Higher Risk Business Types• When aware of: Changes in business operations,

management or ownership• Possible Shell Company misuse in account history• Changes in Address or Account Signatories

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Reliance On Other FI’s

• Shared customers reliance is allowed, if:– The other FI is regulated by a Federal functional

regulator; and– The other FI is subject to an AML Program requirement;

and– The reliance is reasonable under the circumstances;

and– A mutual contract requires the other FI to provide

annual certifications relative to an implemented AML Program and will perform the specified requirements under the rules

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Nature & Purpose of Customer Relationships

• Identifying Transactions:

COMPARISON: Anticipated Activity Historical Activity Actual Current Activity Individual or Business Occupation or

Business Type Geographic Impacts Products and Services

used or offered Peer Analysis

Etcetera Etcetera Etcetera

• Understanding the Relationship:

MAYBE Enough is Enough: Type of Customer Type of Account Type of Product or

ServiceWhen Enough is not Enough:

Annual Income Net Worth Domicile

(Geography) Principal Occupation

or Business Etcetera Etcetera Etcetera

• Identifying Suspicious Activity:

“…if you don’t know me by now…

….you will never, never, never know me…

……oooooooooo…….”

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Ongoing Monitoring

• …means I have to constantly “refresh” CDD and UBO information ...now…and…forever???

• Nope • (well…sort of…)• “in the course of monitoring, if you become

AWARE of information relevant to assessing the RISK posed by a customer, it is expected you update the customer’s relevant information accordingly…”

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The 4 Pillars The Fifth Pillar

5. Appropriate RISK-BASED procedures for conducting ongoing Customer Due Diligence:

A. Identification & Verification of Customers

B. Identification & Verification of Beneficial Owners

C. Understanding the nature & purpose of customer relationships

D. Conducting ongoing monitoring to maintain and & update customer information and to identify & report suspicious activity

1.Policies, Procedures and Controls

2.Independent Testing

3.Designation of a BSA Officer

4.Ongoing Training

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Proposed Effective Date

• One year from the Final Rule’s Issue Date

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TOOLS: Required CDD Info

CIP and Basic CDD Elements• CIP (Name, Add., TIN, DOB)• Identification (Ind. / Bus.)• Residency / Citizenship• Tax & Exemption Status (FATCA)• Occupation / Business Type• Account Purpose• Source of Funds (Wealth &

Accounts) • Products & Services• Anticipated Trans. Activities• Beneficial Owners and Controlling

Party Info. including Opener Cert.

Deeper CDD Elements

• PEP Status• Higher Risk Business Types:

– Private Banking/Wealth Management– International/Trade/ExIm– MSB/NBFI– POATM– TPPP– RDC/RCC– Correspondents & FFIs – Embassy/Consulate

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TOOLS

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TOOLS

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Steve Byron, CAMSVice President

BSA Program Managerand BSA Operations Manager

RABOBANK, N.A. (RNA)

Steve.Byron@Rabobank.com916-878-4683