ATLANTA -- By not putting in place processes that verify the identity of the people who control or derive economic benefit from a business customer prior to onboarding them, and by not staying vigilant to changes in the composition of account holders’ associations, financial institutions diminish their ability to protect themselves and the financial system from money launderers.
As the concept of “beneficial ownership” continues to gain global attention, the Financial Crimes Enforcement Network (FinCEN) is issuing new regulations to define the percentage of ownership that triggers a verification requirement. These requirements include whose identity must be disclosed to and verified by a financial institution to protect against money launderers.
“In their very nature businesses are synthetic. This makes it easy for bad actors to set up shell companies for funneling drug trafficking proceeds or funding terrorism,” said Thomas C. Brown, senior vice president, Commercial Markets, LexisNexis® Risk Solutions. “Currently, there isn’t a single global standard for the level of ‘beneficial ownership’ needed to trigger requirements to gather and verify the right information to spot these bad actors.”
In a LexisNexis Risk Solutions and Association of Certified Anti-Money Laundering Specialists® (ACAMS) study released today, although 100 percent of the financial services compliance professionals who participated said that when they onboard a new business customer they accept business formation documents from them as part of the Customer Due Diligence (CDD) process, the question remains, how can the accuracy of customer-provided information be verified?
When to Obtain Beneficial-Owner Information
In determining when to obtain beneficial-owner information, industry practices suggest that financial institutions use 25 percent as the ownership threshold. Results from the newly released study show that in reality more than a third (37 percent) of responding financial institutions assess owners who have control or ownership starting at 26 percent, with some even going beyond 50 percent. AML experts have cautioned that the larger the threshold percentage the greater the risk to a financial institutions’ customer portfolio.
The varying threshold levels reflect the fact that in the U.S., and many other jurisdictions, there is not an established threshold of the control or ownership percentage to trigger a verification requirement. Instead financial institutions set their own control or ownership percentages. At least for now. U.S. financial institutions await FinCEN’s new Customer Due Diligence (CDD) rule that is expected to give clear instruction on beneficial ownership guidelines for financial institutions operating in the U.S.
“FinCEN’s regulations are expected to ask for the identity of the natural persons who are the owners of the business,” said Carlos Garcia-Pavia, director, AML Compliance, LexisNexis Risk Solutions. “Regulators are asking for at least one person and as many as five owners to be identified. The challenge that all banks have today is that it isn’t mandatory in every jurisdiction to disclose who owns a business. And some businesses have foreign owners, making the situation even more complex.”
The study results show that most organizations currently verify the identity of beneficial owners, and about half currently verify beneficial ownership status. Verifying status means confirming whether the natural persons identified as beneficial owners are indeed the beneficial owners of the legal entity.
The financial intelligence institutions collect in-house and supplement with additional third-party data about their customers as a way to mitigate the risk of a shell company tied to a terrorist financier slipping through the system and being on-boarded as a customer.
The study results show clearly that the big banks supplement their in-house data with information from adverse media, sources of wealth, and new parties being added to the account far more effectively than small and mid-tier banks. An opportunity, then, exists for smaller institutions (under US$50 billion in total assets), especially institutions in metropolitan centers, to improve CDD by the use of third-party data.
“We are fortunate that LexisNexis Risk Solutions made sure we asked the important questions on the global beneficial ownership challenges. It is also noteworthy that respondents bemoaned increased regulatory expectations and the lack of a risk assessment standard as causing confusion and impacting compliance resources,” added John Byrne, ACAMS executive vice president.
Key study highlights include:
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LexisNexis® Risk Solutions includes seven brands that span multiple industries and sectors. We harness the power of data, sophisticated analytics platforms and technology solutions to provide insights that help businesses and governmental entities reduce risk and improve decisions to benefit people around the globe. Headquartered in metro Atlanta, Georgia, we have offices throughout the world and are part of RELX (LSE: REL/NYSE: RELX), a global provider of information-based analytics and decision tools for professional and business customers. For more information, please visit LexisNexis Risk Solutions and RELX.