LAS VEGAS — It has been almost six months since the Financial Crimes Enforcement Network (FINCEN) implemented the Customer Due Diligence (CDD) Rule. So, what do we know? What don’t we know? And where are we headed?
Given that this week is the ACAMS 17th Annual AML & Financial Crime Conference in Las Vegas, perhaps now is an optimal time to regroup and reflect upon the compliance challenges faced by financial institutions. And where better to discuss beneficial ownership rules than in a metropolis built in the 1940s on money from drugs, racketeering and other ill-gotten gains.
Word on the street at ACAMS is that financial institutions are continuing to grapple with the CDD rule, both in interpretation and implementation. To that end, the conference included a panel, The CDD Final Rule: What We’ve Learned So Far, that was moderated by Dan Stipano, a partner at Buckley Sandler. Panel participants included: Elena Hughes, executive director and deputy head of anti-money laundering (AML) for the Institutional Securities Group at Morgan Stanley; Michelle Neufeld, executive vice president and head of Compliance and Operational Risk FIG at Wells Fargo; Frederick Reynolds, managing director and global head of Financial Crime Legal at Barclays Bank; and Rebecca Schauer Robertson, executive vice president and director of AML Compliance at South State Bank.
Beneficial Ownership Rule Challenges
The CDD rule is not really that hard to understand on a superficial level. The purpose of the rule is to “improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains,” according to FinCEN.
“On its face, it is deceptively easy,” Stipano said. “The challenges come in when implementing the rule and operationalizing it, and also when the examiners come in and examine for compliance.”
We know that beneficial ownership is defined in dual parts — i) someone who has an 25% or greater equity interest; and ii) a person who controls that legal entity. As FinCEN later clarified in their “Frequently Asked Questions,” that 25% threshold is a floor, not a ceiling, meaning financial institutions can lower the threshold to even a 10% controlling interest.
The panelists uniformly agreed that they are currently using 25% as the entry point but will use a lower threshold in certain circumstances. “How do you convey that lower threshold to a client?” Morgan Stanley’s Hughes asked. “You may want to consider building in some flexibility on your threshold, particularly when we are talking about syndicated loans.”
There are also times where certain events may trigger going lower than 25%. “We generally stick to 25% but will go deeper if necessary if there are indicators out there such as negative news,” Reynolds of Barclays Bank said. Interestingly, this question was also posed to the audience. Among audience members completing the polling question, 69% said they were sticking to the 25% floor as a guiding principle.
Complex Levels of Ownership Continue to be a Challenge
The beneficial ownership rule allows a bank to rely on their customers’ representations regarding levels of ownership. Yet, the veracity of such information looms over the process. Can you trust your customers to provide accurate information? “You have to trust your customer, even if it is hard sometimes,” explained Robertson of South Street Bank. “That is unless there is something that causes you to pause.”
The other side of that coin, Reynolds stressed, is that if you do see something unusual, you have the ability to investigate further.
More on Implementation Issues
Jim Richards, Founder of RegTech Consulting, and former Bank Secrecy Act (BSA) Officer and Global Head of Financial Crimes at Well Fargo & Co., agreed there are still several challenges related to the CDD Rule.
“There are two implementation issues: One, what to do when the customer won’t provide complete beneficial ownership information (usually the social security number of one of the owners); and two, how to use that info for monitoring and surveillance purposes,” Richards said.
Despite the challenges, Richards remains optimistic. “It’s early days,” he said. “It will take some months or even years for audits and exams to flesh out these issues.”
Institutions continue to evolve and grow as they outline practical methods to address unique CDD Rule challenges, such as specialized staff training and managing triggering events.
A few other takeaways from the panel included:
- There are still lots of gray areas that institutions are working through. If your financial institution is working through these issues, you are not alone.
- Staff training continues to be an on-going process.
- Be proactive in documenting your processes.
- When in doubt, consult with the examiners about both compliance process and procedure.
- Financial institutions should continue to update, onboard, and training of staff at all lines of defense.
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