Putting Together the Puzzle Pieces of Beneficial Ownership
The Beneficial Ownership rule (“Rule”) is oftentimes considered a component of Know Your Customer (“KYC”) procedures. Most financial institutions (“FIs”) have focused primarily on developing the policies, procedures, processes, and technology infrastructure required to collect beneficial ownership information, but financial institutions (“FIs”) must understand how the Rule interacts with other elements of their BSA / AML program. In addition to the KYC procedures, the Beneficial Ownership rule has far-reaching effects through four additional areas of the program: risk management, manual monitoring processes, transaction monitoring, and sanctions. These areas should be updated to reflect and address the information obtained about beneficial owners.
The composition of beneficial owners has the potential to change an FI’s risk profile. The risks associated with beneficial owners are similar to the risks posed by the actual customer who opens the account. One of the primary risk factors beneficial owners pose to the institution is their geography. A large number of beneficial owners located in tax secrecy havens may raise the institution’s risk profile and should be addressed in their risk assessment. In addition, the institution may want to consider the number of complex legal structures, which are entities with multiple layers of ownership, in the risk assessment. Moreover, FIs may identify additional Politically Exposed Persons (“PEPs”) as a result of the information obtained.
The Rule also has implications for the institution’s red flags monitoring program. FIs should train their front-line staff and BSA Department personnel to identify red flags associated with beneficial owners. Red flags related to beneficial ownership include a refusal to provide the information, a reluctance to provide the information, or unusual identification documents. Since FIs may rely on photocopies of the beneficial owners’ information, special care should be taken to ensure that the photocopies are legitimate. Other patterns of activity such as frequent changes in corporate ownership may also warrant further investigation. Complex ownership structures involving multiple tiers of ownership may also be considered a red flag, since the ownership structure may represent a deliberate attempt to disguise the true owner. The institution’s internal referral process should include steps for referring these red flags to the BSA Department for further investigation.
From a transaction monitoring perspective, FIs will need to develop procedures that describe when a review of beneficial ownership information is necessary. As a best practice, beneficial ownership information should be reviewed during case investigations and Enhanced Due Diligence reviews (“EDDs”). Investigators may use this information to provide additional context for the activity observed. Internet searches on the beneficial owners may help the investigator understand the source of funds and the nature of the transactions. Likewise, negative news searches may reveal unusual business dealings or relationships that should be reported. In the event, the investigator files a Suspicious Activity Report (“SAR”), the investigator should identify the beneficial owners in the SAR narrative. In general, the beneficial owners, like authorized signers and joint owners, would not need to be included as subjects in the SAR, unless they were the ones directly involved in the suspicious activity being reported.
The fourth key area the Rule is sanctions. Under the 50 Percent Rule, FIs must freeze accounts held by entities that are owned by individuals on the Specially Designated Nationals list (“SDN”), having greater than 50% ownership interest. The Rule specifically states that FIs must develop policies and procedures to ensure screening of those individuals against the SDN list. As a best practice, it may be most efficient to incorporate beneficial owners into the screening processes the FI already uses for its customers and signers. FIs may see an increase in the number of blocked accounts due to OFAC as a result of the Rule.
Our Financial Crimes Advisory practice at AML RightSource has helped multiple institutions incorporate the beneficial ownership rule into their BSA / AML program. Let us help you enhance your policies, procedures, and processes for transaction monitoring and measuring BSA / AML risks.
Ms. Mucha is an Associate in the Financial Crimes Advisory Practice. She has experience with transaction monitoring, alert resolution, case investigation, EDD reviews, SAR, and other AML/BSA projects. Ms. Mucha has also been an integral part of developing AML/BSA transaction monitoring procedures, enterprise-wide BSA/AML risk assessments, and tuning/optimization exercises for BSA/AML software.
Ms. Mucha holds a Bachelor of Arts in International Studies, Spanish, and Political Science from Baldwin Wallace University and obtained her Juris Doctor from Cleveland-Marshall College of Law at Cleveland State University. Ms. Mucha is a licensed attorney in the state of Ohio, is a Certified Anti-Money Laundering Specialist (CAMS), Certified Fraud Examiner (CFE), and a Certified Financial Crime Specialist (CFCS).