Prioritizing Risk for Beneficial Ownership, Sanctions, and Compliance
Financial institutions have been pushing back hard on FinCEN’s (the Financial Crimes Enforcement Network’s) proposal to require banks, investment banks and other financial institutions to identify beneficial owners of account holders. As time goes on the impact of FinCEN’s proposal is diminishing. Why?
In general, businesses have other reasons to secure beneficial ownership information. One key concern is sanctions compliance. To the extent an account holder engages in international transactions, financial institutions need to know the beneficial owners of the account holder in order to comply with OFAC (Office of Foreign Assets Control) sanctions requirements or to conduct meaningful due diligence of the account.
In the sanctions realm, OFAC has clarified its 50 percent rule to prohibit transactions with entities 50 percent or more owned by a single prohibited person but to include a combination of prohibited persons equal to 50 percent or more. As a result, companies should identify the beneficial owners of a company to ensure that none of the beneficial owners are prohibited persons under OFAC regulations.
From an FCPA (Foreign Corrupt Practices Act) perspective, a company has to identify the beneficial owners of its third party intermediaries. A company cannot satisfy its compliance programs by simply checking the name of a private company in its database without checking the beneficial owners, officers and directors of the same company.
Financial institutions have to identify PEPs (political exposed persons) and other risky individuals for AML (anti-money laundering) compliance as well. The list of risks from individual owners of companies can be mind-boggling. As usual, Chief Compliance Officers are required to prioritize risks and allocate resources in a way to address the more significant risks.
FinCEN’s proposal to require financial institutions to collect beneficial ownership information reaches down to every owner of 25 percent or more of an account holder. FinCEN’s proposal includes a certification requirement.
OFAC and FCPA risks are significant but so are reputational risks. Dealing with a controversial individual who owns a company can create real and significant harm to a company’s reputation.
Reputational risks can be real and significant, eclipsing FCPA and OFAC risks, when they strike at the core of the company’s reputational capital. Public perception of a company’s reputation is important to maintain and promote.
In the end, the FinCEN proposal is quickly becoming outdated or even beside the point. Companies, as a practice, are developing systems so that they “know” who they are dealing with when selling products or services. In practice, this means that companies are fast developing systems to identify beneficial owners of every supplier and vendor, all third party intermediaries, customers and other parties.
This sounds like a Herculean task and for some companies can never be accomplished given the numbers of intermediaries and customers. For those companies, chief compliance officers have to prioritize their efforts to focus on those riskier interactions that raise legal and reputational risks. In this process, knowing your customers may fall down in the risk priority list.
Chief compliance officers are used to juggling risks and allocating resources to address risks on a priority basis. Beneficial ownership information is critical to addressing basic risks like OFAC and FCPA that can result in serious enforcement actions for failing to address these risks.
Michael Volkov, CEO and owner of The Volkov Law Group, LLC, has over 30 years of experience in practicing law. A former federal prosecutor and veteran white collar defense attorney, he has expertise in areas of compliance, internal investigations and enforcement matters.
Mr. Volkov maintains a highly popular FCPA blog – Corruption, Crime & Compliance. He is a regular speaker at events around the globe, and is frequently cited in the media for his knowledge on criminal issues, enforcement matters, compliance & corporate governance.