US Beneficial Ownership Rules — FinCEN CDD Final Rule

When a deadline is two years away, you might focus on other priorities that are more time-sensitive. Believe it or not, the time for FinCEN CDD Final Rule has finally come. The Customer Due Diligence Requirements for Financial Institutions (CDD Rule) came into effect on May 11, 2016 with full FinCEN compliance to be implemented two years later on May 11, 2018. Are you ready for the new beneficial ownership rules?

The CDD Rule, also referred to as the “Final Rule”, is the extension of compliance requirements in the Bank Secrecy Act (BSA) to strengthen Anti-Money Laundering (AML) procedures to include the collection of beneficial ownership information. Along with having internal controls, appointing a compliance officer, and having training and testing processes, the CDD Rule is there to ensure that proper due diligence, monitoring and other risk mitigation strategies are in place.

CDD Rule Requirements

From May 11 onward, covered financial institutions (FIs) must identify and verify the identity of the beneficial owners of all legal entity customers signing up for new accounts. This applies to banks and brokers or dealers who deal in securities, mutual funds, futures or commodities. It also applies to when “trigger events”’ occur on customer accounts – such as a substantial change to the nature of their account.

The process is similar to the Customer Identification Program (CIP) that FIs run on individual customers, but applies to the people who run or own legal entities. This covers each any person that owns 25 percent or more of the shares of a corporation or has significant responsibility for managing that corporation. The FI must collect the name, date of birth, address, and social security number or other government identification number. Passport number or other similar information must be collected in the case of foreign persons.

The procedures for collecting and verifying identity must be explicitly described in the FIs CIP and can include documentary, non-documentary, or a combination of both methods. This includes methods such as:

• Government-issued photo ID with proof of nationality or residence
• Contacting a beneficial owner
• Independently verifying the beneficial owner’s identity through the comparison of information provided by the legal entity customer (or the beneficial owner, as appropriate) with information obtained from other sources
• Checking references with other financial institutions
• Obtaining a financial statement
• Photocopy or other reproduction of a valid identity document

Note, both eIDV and Document Verification processes are on the list of legitimate techniques. Each FI must determine what risk mitigation strategy is appropriate to their needs, as long as when they collect the information they have “no knowledge of facts that would reasonably call into question the reliability of such information.”

CDD Rule Issues

While that might sound simple enough, as collecting CIP information is standard practice, identifying ultimate beneficial ownership (UBO) information is substantially more difficult. Typically, the process is manually-intensive, slow, expensive and prone to fraud and errors. The process may involve staff conducting complex searches and then importing, analyzing and reviewing the information across multiple databases.

Added complexity is further introduced with the increasing number of small businesses and micro-merchants that naturally have a less defined history. Not only can manual CDD processes be arduous and time-consuming, but the inconsistent procedures and preference for online account creation instead of face-to-face can also be heavily impacted by human-error. Ensuring appropriate CDD becomes a monumental task.

The cost of onboarding new business customers through these inefficient systems is onerous. On top of the resource investment is the risk of non-compliance, as mistakes can create the possibility of missed checks, overlooked data or sloppy records. Besides human error, there’s the all-too-real threat of fraud or forged documents. Processes that rely on attestation as opposed to effective verification open an institution to the potential of fraud at the account level. A risk mitigation strategy that is based on trusting the user without any checks, opens the entire compliance workflow to potential pitfalls.

For the business trying to get an account, the process can take weeks, require multiple document resubmissions and generally be an unpleasant experience.

CDD Rule Solutions

Fortunately, there are automated solutions that can streamline workflows to assist in meeting compliance requirements, as well as improving the onboarding experience. Trulioo’s Global Business Verification provides businesses and organizations with a scalable solution to onboard customers quickly, cost-effectively and efficiently. Verifying business entities and beneficial owners in real-time helps automate workflows, increase revenue, decrease fraud, and protect the bottom line.

Watch how Global Business Verification can help you meet the new beneficial ownership rules: