PaymentsJournal
SUBSCRIBE
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
No Result
View All Result

FinCEN’s New Rule on CDD Will Mean Increased Cost and Complexity of Compliance

Rick Aragon by Rick Aragon
June 17, 2016
in Industry Opinions
0

593578

0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

Financial transparency is the ultimate directive for institutions throughout the financial sector, and the May 5th White House briefing on money laundering, tax evasion and corruption—spurred on by the disclosure of the “Panama Papers”—heralded the most recent high-level initiative on these issues. One direct outcome of this program, the final rule of Treasury bureau FinCEN on beneficial ownership, requires financial institutions to know and keep records on who actually owns the companies with whom they do business. The Treasury is also going to introduce legislation to require declaration of beneficial ownership to the Treasury at the time of company formation.

There are two different aspects of the final FinCEN rule: one is a new obligation to identify and verify the beneficial owners of legal entities; the other is a formalization of due diligence requirements that until now were implicit—making them explicit. What will this mean for banks and other covered institutions? While there are some questions about how effective the rule will be in achieving its aims, it’s clear that one impact of the new customer due diligence rule will be an increase in the cost and complexity of compliance.

The policies and procedures financial institutions follow to open business accounts will have to change, and those changes will require modifications and upgrades to existing information systems. Costs of new IT capabilities as well as the human power needed to install, understand and run the upgraded systems will increase.

Complexity is introduced simply by gathering these new names. What data are banks going to gather, and how are they going to evaluate its risk? The gathering of new names at account opening implies that downstream processes will also be impacted. Once the bank gets the names of the beneficial owners, there is a requirement to verify those names, so an identity verification process will have to be implemented. Banks may also want to consider non-documentary verification, given that in many cases the people who are opening business accounts are not the actual people who gain economic benefit from a going concern.

It’s important to make a distinction between verification of status and verification of identity requirements. According to a recent survey conducted by LexisNexis Risk Solutions, currently only about 53 percent of banks are verifying the status of beneficial owners. Status verification shows that you are actually the beneficial owner of a legal entity. This is hard to determine from an authoritative source, because the information isn’t currently gathered at the time companies are formed. So if you’re a bank and want to actually verify that Jennifer Smith is the beneficial owner of Jennifer Smith Advisors, you can’t just go to the Secretary of State website and verify that information—that item of information is not required for company formation. To verify that status, a bank will have to get documentation from their customer, like a share registry or partnership agreement. This introduces a level of friction into the account opening process, as many people are sensitive to being asked for yet more information on top of what they are already supplying.

Meanwhile, according to the same study, about 80 percent of banks say that they are already verifying the identity of beneficial owners. Identity can be verified more easily, because in many cases there are data sources that can be more easily tapped into. However, as mentioned above, there aren’t the same kinds of data sources to verify beneficial ownership status.

With identity verification, the new regulatory changes will still have an effect. Once those names are gathered, other processes—for example, sanctions screening and risk screening, such as for adverse media or other law enforcement or regulatory enforcement actions—have to be performed. Knowing more information might change the risk profile on an account, bringing to light something that was previously not known about that person. Potentially it could change not only the risk profile of a person, but of the bank itself.

The recent global data leak put a spotlight on transnational corruption and offshore accounts. Banks will probably be reevaluating whether they want to take on this kind of business, given the negative connotations and the notoriety it has caused. Offshore accounts have been considered high risk for some time, so many due diligence processes designed to uncover beneficial ownership are already in place for banks that are following best practices. So in that sense, it’s not clear to what extent banks will feel the effects of this offshore issue. There are, however, many jurisdictions in the U.S. that don’t currently require beneficial ownership, so the ruling of instituting a uniform requirement will definitely have an impact Stateside. For example, may incorporations take place in Nevada and Delaware, so more information will need to be collected about who is behind those legal entities.

In summary, the impacts that the new FinCEN ruling will have on banks and transparency are:

–

Tags: Compliance and Regulation
0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

    Analyst Coverage, Payments Data, and News Delivered Daily

    Sign up for the PaymentsJournal Newsletter to get exclusive insight and data from Mercator Advisory Group analysts and industry professionals.

    Must Reads

    eCommerce On Social Media, social commerce

    The Rise of Social Commerce and Social Payments

    February 3, 2023
    Electroneum AnyTask; ETN Crypto, sales enablement

    Ethical Financial Selling: The Role of Compliance Technology and Sales Enablement

    February 2, 2023
    direct deposit

    Nacha Launches Campaign to Reach Millennials on the Benefits of Direct Deposit

    February 1, 2023
    Equinix Helps UK-Based Payments Provider Enable Faster, More Reliable Payments Processing

    Equinix Helps UK-Based Payments Provider Enable Faster, More Reliable Payments Processing

    January 31, 2023
    credit card tumbling

    How to Detect, and Prevent, Credit Card Tumbling

    January 30, 2023
    Why Businesses Need to Adopt Real-Time Payments as a Competitive Differentiator

    Why Businesses Need to Adopt Real-Time Payments as a Competitive Differentiator

    January 27, 2023
    faster payments

    Faster Payments Are Set to Revolutionize Modern Digital Payments

    January 26, 2023
    How AI can Help Manage Payments Risk in 2023

    How AI can Help Manage Payments Risk in 2023

    January 25, 2023

    • Advertise With Us
    • About Us
    • Terms of Use
    • Privacy Policy
    • Subscribe
    ADVERTISEMENT
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    • Industry Opinions
    • News
    • Resources

    © 2022 PaymentsJournal.com

    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Industry Opinions
    • Faster Payments
    • News
    • Jobs
    • Events
    No Result
    View All Result

      Register to download the Equinix report - Dojo Delivers Fast, Reliable and Secure Card Payments to Businesses on Platform Equinix