Author Topic: U.S. banking "know your customer" law, part of FinCEN  (Read 1094 times)

Offline Lee2

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U.S. banking "know your customer" law, part of FinCEN
« on: July 17, 2017, 10:20:05 PM »
I am posting this for those Americans who rely on just one bank in the U.S. as a warning. After doing some research due to another topic posted, I think Americans need to be aware of this portion of the law as it could be applied to many of us by an overzealous bank employee, maybe best to try to have a few ways to get money.

In recent years, authorities in the US and abroad have increased their focus on modernizing and enforcing anti-money laundering and terrorism financing (AML) regulations. As part of these efforts, the USís Financial Crimes Enforcement Network (FinCEN) proposed Know Your Customer (KYC) requirements in 2014, which we expect to be finalized this year. [1]

FinCENís KYC requirements were proposed as part of a broader regulation setting out the core elements of a customer due diligence program. [2] Taken together, these elements are intended to help financial institutions avoid illicit transactions by improving their view of their clientsí identities and business relationships.

Importantly, the proposed requirements establish only a baseline for performing customer due diligence, which should be supplemented by the institutionís own assessment of each clientís risk profile. [3] While the proposal clearly outlines its baseline requirements, criteria for internal customer risk assessments are largely left open to interpretation. This lack of clarity has caused some confusion within the industry, especially with respect to identifying ďbeneficial ownersĒ of customers that are legal entities (i.e., identifying people who own a large portion of the legal entity customer) because the ownership threshold that triggers the proposed KYC requirements is determined in part based on the institutionís internal customer risk assessment.

Performing internal AML risk assessments and collecting the required customer information will no doubt be operationally challenging. While institutions can rely on third parties to provide needed information in certain cases, the ultimate compliance responsibility rests with the financial institutions themselves.

Given the consequences of non-compliance (evidenced by unprecedented AML-related penalties levied against the industry in the past few years), institutions should begin their implementation efforts as soon as possible, based on the proposed requirements and industry best practices. This is particularly important for global institutions that are subject to similar requirements in other jurisdictions (e.g., the EUís AML Directive IV) [4] that will need to reconcile regulatory differences across jurisdictions, and for institutions that are currently undertaking remediation in response to regulatory scrutiny.

This post provides our view of (a) the risk-based approach to establishing beneficial ownership thresholds, (b) factors to consider when relying on customer information provided by third parties, and (c) what institutions should be doing now.

Risk-based approach for establishing ownership

As part of an effective customer due diligence program, FinCENís proposal requires that financial institutions verify the identity of the beneficial owner of a customer that is a legal entity. The proposalís baseline definition of beneficial owner is a person who has at least a 25% equity interest in the legal entity. [5] However, financial institutions should lower this threshold for customers with high levels of AML risk. Although the proposal does not prescribe a specific ownership threshold for these customers, our observations of industry best practices and regulatory expectations indicate that a 10% threshold is generally appropriate. [6]

While FinCENís proposal does not specify risk factors that must be considered in assessing a customer-entityís AML risk, we believe financial institutions should at a minimum consider the following questions:

How complex is the customerís ownership structure?
Is the customer operating in a heavily regulated industry?
Is the customerís home jurisdiction (or any of its neighboring jurisdictions) subject to sanctions, or home to terrorist organizations?
Does the customerís home jurisdiction lack effective AML regulations or have high levels of corruption?

To what extent is the customerís business cash-based?
Has the customer taken any measures to mask the identity of its shareholders (e.g., via nominee shareholders or bearer shares)? [7]
Is the institutionís relationship with the customer face-to-face?
This risk-based process to establish an institutionís thresholds will be resource intensive and challenging, especially for institutions that need to build the required policies and procedures from the ground up. Furthermore, implementing this process will inevitably lead to lowered ownership thresholds for some customers, necessitating the collection and verification of additional ownership information.

Therefore, institutions must plan ahead to redirect sufficient resources to functions that are most impacted by these efforts. These include the compliance function that devises and governs the needed policies and procedures, the first line of defense functions that carry out the assessments, and business lines that collect additional customer ownership information.

:) Happily married since 1994 & live part of the year in Cebu and the rest in S. Florida.


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