Financial institutions: Anticipating challenges from beneficial ownership reporting
By: Matthew Hovis
The Anti-Money Laundering Act of 2020 (AMLA) became law on January 1, 2021. This sweeping bill included landmark legislation known as the Corporate Transparency Act (CTA).
The CTA tasked the Financial Crimes Enforcement Network (FinCEN) with implementing a national corporate beneficial ownership registry that would benefit law enforcement, regulators and financial institutions while protecting the confidentiality of the information. To achieve that objective, the CTA outlined several assignments, which FinCEN distilled into a plan with three milestone rulemakings:
1. A rule requiring all applicable entities to report their beneficial ownership information to be housed in a database (Reporting Rule).
2. A rule establishing the protocols for authorized users to request, retrieve and protect the data (Access Rule).
3. A rule to align the Customer Due Diligence (CDD) regulations in place for financial institutions with the processes established by the Reporting Rule and the Access Rule (CDD Revision Rule).
State of the rules
FinCEN finalized the Reporting Rule on September 30, 2022, with an effective date of January 1, 2024, and finalized the Access Rule with an effective date of February 20, 2024. Also of note, FinCEN published an additional rule mandated under the CTA, the FinCEN Identifier Rule, on November 8, 2023, with an effective date of January 1, 2024.
The CDD Rule has not yet been proposed by FinCEN, and FinCEN along with the federal and state bank and credit union regulators, published on December 21, 2023, the Interagency Statement for Banks on the Issuance of the Beneficial Ownership Information Access Rule, in part, to reiterate that the Access Rule did not create a regulatory requirement or regulatory agency expectation to use FinCEN’s new beneficial ownership system with the caveat that any early usage of the system will need to comply.
While the third and final CTA rule is still pending, since the CTA requires a proposal within one year of the effective date of the later of the Reporting Rule and FinCEN Identifier Rule (both went into effect January 1, 2024), institutions can expect FinCEN to publish a proposed rulemaking by the end of 2024. And if FinCEN follows suit with other beneficial ownership proposals, Institutions can anticipate a finalized proposal sometime in 2025, with an effective date any time between one or two years thereafter.
Potential problems
Until FinCEN finalizes the CDD Revision Rule, complying with the requirements of the current beneficial ownership requirements may be more difficult than ever. Notwithstanding FinCEN’s efforts to educate the public about the reporting rule, institutions should be prepared to overcome objections and resolve misunderstandings from their customers when it comes to beneficial ownership.
For starters, financial institutions should expect complaints from customers who consider the reporting to be redundant. More concerning will be the possible effect from businesses that are exempt from the reporting rule but not the CDD Rule: money service businesses, venture capital fund advisers, public utility companies, entities assisting tax-exempt entities, large operating companies, inactive entities and subsidiaries of certain exempt entities.
Representatives from these companies may object to providing the information or cordially conflate the two rules and certify a blank form. Overall, the confusion and frustration caused by these scenarios may increase the chances of non-compliance which could result in regulatory violations.
Possible solutions
Financial institutions should take proactive measures to ensure they can mitigate the potential issues created by the differing rule sets while maintaining good customer relationships. BSA/AML management teams should focus on ensuring their controls for obtaining beneficial ownership information are sound and that key employees are well-trained. Narrowing in on these areas during the “parallel rule” period will help minimize the increased compliance risk.
When it comes to controls, institutions should revisit their processes for how they document and track their determination that a given non-personal entity customer does not require any or some beneficial ownership information. Because customers and members may be more likely to claim they are exempt from needing to provide beneficial ownership data, frontline staff will benefit from a prescriptive approach to evidencing the exact exemption for which the customer qualifies.
Financial institutions using free text fields or lacking an explanatory field altogether should consider expanding their forms to include a detailed checklist section comprised of all the current CDD rule’s exemptions. Another practice to consider is the use of a checkbox form field to check when the customer or member has no individuals with ownership over 25%, to eliminate questions when people leave the ownership section blank.
Lastly, institutions should examine their oversight procedures to make sure the employees responsible for tracking the collection of beneficial ownership data are not just looking for the presence of a certification but also looking for complete and accurate information.
Training will also be key in maintaining an effective CDD Program. BSA Officers should look beyond cookie-cutter approaches like standard annual training and opt for webinars or in-person sessions supported by reminders on a periodic basis or when troubles arise. The content of the training should provide a background on the rules, how to manage complaints due to the perceived redundancy and the issues which may arise from specific types of entities that are exempt under the Reporting Rule but not exempt under the CDD Rule.
Institutions should consider efforts to educate their customers and members proactively with communications such as website notices or emails and be sure they have knowledgeable staff, detailed forms and pamphlets that employees can hand out when a customer questions the need to provide information or argues they are exempt. These training efforts will promote the type of understanding, both internally and externally, that will keep confusion at a minimum during this transitional phase of the CTA.
How Wipfli can help
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