As U.S. beneficial ownership rule arrives regulators detail expectations, banks expect customer backlash

As the compliance deadline for the U.S. Treasury Department’s customer due diligence and beneficial ownership rule arrived on Friday federal banking regulators clarified their expectations by releasing long-awaited examination guidelines. Meanwhile, bankers are bracing for run-ins with examiners as well as potential backlash from customers hesitant to share newly-required information.

The rule requires banks and other covered firms to establish procedures designed to identify and verify beneficial owners of legal entity customers and to include the procedures in their anti-money laundering compliance programs. The Federal Financial Institutions Examination Council (FFIEC) has issued an updated section on customer due diligence and one on beneficial ownership that will eventually be incorporated into the body’s so-called FFIEC Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual.

The FFIEC comprises the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration. Bankers had been awaiting the release of these documents for months as they worked to craft their compliance strategies. The fact the FFIEC waited until the compliance deadline to issue the documents was a significant source of frustration, industry sources said.

Concerns about aggressive examinations Some bankers expect examiners to aggressively question compliance units about their beneficial ownership compliance regimes, with the issuance of non-public regulatory sanctions called “matters requiring attention” (MRAs) being a distinct possibility, even in the short term, at institutions deemed to not have done enough, quickly enough, to comply, the sources said. At a recent AML conference, regulatory officials said they were working long hours to craft the FFIEC manual documents and suggested they had to align their expectations to an Frequently Asked Questions document from Treasury’s Financial Crimes Enforcement Network (FinCEN), the bureau that issued the rule.

The FinCEN FAQ was made public on April 3. The FinCEN FAQ and the FFIEC documents were vital because some institutions have struggled to interpret certain elements of the rule, which was issued in May 2016. It primarily aims to increase the transparency of corporate accounts to limit such entities’ value to criminals hiding behind a corporate veil, but questions about certain details and regulatory expectations lingered. On April 20, the Independent Community Bankers of America, a trade group, submitted a letter to FinCEN requesting a one-year delay of the implementation deadline.

“Given that FinCEN took nearly two years to address some of the questions and ambiguities in the rule, it is clear this rule is complex and requires ample time, not only for developing adequate policies and procedures, but developing changes in the systems and testing the changes to ensure compliance as well as training employees on the updated procedures and systems,” the ICBA said. Nevertheless, the rule is now in full force and examiners are expected to begin immediately probing institutions’ compliance. Customer challenges Bankers already have encountered customers who are concerned about their privacy as well as the security of their sensitive personal information, industry sources said.

However, the FFIEC said in its beneficial ownership document: “Requiring legal entity customers seeking access to banks to disclose identifying information, such as the name, date of birth, and Social Security number of natural persons who own or control them will make such entities more transparent, and thus less attractive to criminals and those who assist them.” It said the concealment of true ownership can facilitate money laundering and other crimes. “The collection of beneficial ownership information by banks about legal entity customers can provide law enforcement with key details about suspected criminals who use legal entity structures to conceal their illicit activity and assets.” The American Bankers Association (ABA), a trade group, has tried to ease the potential for angry customers by providing “a few samples to help members communicate with customers,” Rob Rowe, a lawyer with the ABA, told Regulatory Intelligence.

“(Explaining the new requirements to customers) will be a challenge since it’s a change from how they’ve been doing business for many years,” Rowe said. He added that “there are questions about how to handle the situation when a customer doesn’t respond” and there remain “uncertainties that need to be clarified further.” (By Brett Wolf, Regulatory Intelligence, St. Louis) Produced by Thomson Reuters Accelus Regulatory Intelligence

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