The need for discovering the beneficial ownership of business customers, partners, suppliers and other business relationships is growing. More legal regulations, such as the 4th AML Directive in Europe and the Final Rule for Customer Due Diligence (CDD) in the US, are coming into effect. As these regulations are new, there are many questions that compliance staff and senior executives have about CDD and KYC requirements for AML rules, so we’ve rounded them up for your consideration.
What is Beneficial Ownership?
According to the FATF, “beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.” That is to say, you need to know who you are doing business with, the real person (or group of people) who owns or controls that business.
The beneficial owner is often referred to as the UBO, an acronym for ultimate beneficial owner.
What is Customer Due Diligence (CDD)?
Customer due diligence (CDD) is a critical element of effectively managing your organizations risks and protecting it against potential financial crimes and nefarious activities. There are two steps in CDD, understanding the customer activities and assessing the money laundering risk.
When onboarding a new customer or if the customer activities substantially change, an analysis of the source of funds and risk associated with those funds is prudent and, in most countries, a legal requirement.
What is KYC?
KYC is an acronym for Know Your Customer, a legal requirement to perform identity checks and do customer due diligence. While KYC laws differ from country to country, the general principle involves collecting enough information to properly identify an individual and ensure that their activities are legitimate.
What is AML?
AML is an acronym for Anti-Money Laundering. AML laws are designed to prevent illegal funds (such as funds obtained from crime, corruption, and tax evasion) from entering the financial system. Financial institutions are required to have procedures in place (such as KYC) to discover high-risk clients, monitor transactions and report suspicious activities.
Who do these laws apply to?
As UBO/CDD/KYC/AML refer to financial transactions, financial institutions (FIs) are the primary target for these laws. FIs include commercial banks, investment banks, insurance companies, brokerages and investment companies. Other companies that deal with money are also generally covered, such as credit unions, money transfer firms, payment services, marketplaces, gambling and gaming companies
However, as money launderers have exploited various loopholes, the scope of the laws has expanded to include other types of companies. Retailers will have to be aware of threshold limits, wherein any transaction above a certain amount triggers the requirements.
Each jurisdiction will have its specific requirements, so it’s necessary to check local regulations to get the full scope of the rules.
When do these rules come into effect?
While AML/KYC laws have been in effect for years, the beneficial ownership laws are more recent. In Europe, the 4th AML Directive came into effect June 26, 2017 and contains provisions regarding beneficial ownership.
In the US, the FinCEN CDD Final Rule, which also covers beneficial ownership, takes effect May 11, 2018.
What does our company need to do?
Your organization needs procedures and processes to collect information about the beneficial owner. When opening business accounts, in addition to collecting the usual business information (name of business, place of business, type of business, business registration number), you will need to obtain the identity of all individuals who have a significant ownership or control position. Also, if there is a significant change on the account, collect the beneficial ownership information.
The beneficial ownership information includes:
- With respect to the natural person opening the account: name and title;
- With respect to the legal entity customer: name and address;
- With respect to the beneficial owners:
- Name (and title for the controlling individual(s));
- Date of birth;
- Address; and
- Social security number, or passport number and country of issuance or similar ID number.
What are the consequences if we don’t take the proper steps?
You can be in trouble, big trouble, up-the-creek without a paddle type of trouble. According to Compliance Lawyer Michael Volkov, in the US, “prosecutors and regulatory attorneys will vigorously enforce the new regulations as a means to promote careful compliance.”
Specifically, penalties in the US can range up to thirty years in jail and fines of $1 million per case:
18 USC 1014—
Whoever knowingly makes any false statement or report…to any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, a branch or agency of a foreign bank…or a mortgage lending business, …upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, loan, or insurance agreement or application for insurance or a guarantee, or any change or extension of any of the same, by renewal, deferment of action or otherwise,….shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
In Europe, the maximum sanctions are €5M or 10 percent of the total annual turnover.
What other upcoming regulations should we be prepared for?
In Europe, MiFID II, PSD2 and GDPR are all coming into effect in 2018. There’s an estimated 45 new regulatory documents coming every week so, in effect, there’s always something new in global compliance.
How can we contain costs, while maintaining compliance for these rules?
The key is to use automated, digital processes as much as possible. Handling these complex compliance procedures via slow, manual processes add up to inefficient use of valuable resources, duplication of efforts and increase of errors.
Automated workflows strengthen and add value to your AML/KYC processes, improve day-to-day risk operations, and reduce costs, while simultaneously maintaining compliance.
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