Identifying beneficial owners is the most difficult part of the onboarding process. In the seven years Alacra has been providing compliance solutions, we have seen the beneficial ownership requirements increase dramatically. Early on, only owners of 50% or greater needed to be identified. Then for several years most institutions were collecting information on 25% and above owners. Now many firms are interpreting the FATCA requirement to be owners of 10% and above. Financial institutions are revolting against FinCEN’s recently proposed plans to make beneficial ownership verification even more difficult. Once you have established who the beneficial owners are (and in many cases the officers and directors) each individual (often referred to as a related entity) must have a PEP check, sanctions check and adverse news search run on them.

In terms of acquiring beneficial ownership information, we’ve seen a wide range of techniques and databases used. One flaw we’ve seen in some banks is that they conduct entity due diligence separately from their beneficial owner due diligence. Our best practice recommendation is to keep the related entities—officers, directors and beneficial owners—together in the same investigation with the customer or counterparty being vetted.

Beneficial Ownership–Regulatory Highlights

Patriot Act (USA Patriot Act): The final rules similarly provide that, based on a financial institution’s risk assessment of a new account opened by a customer that is not an individual, a financial institution may need to take additional steps to verify the identity of the customer by seeking information about individuals with ownership control over the account, including signatories.10

FinCEN: On Feb. 29, 2012, FinCEN issued an ANPR (Advance Notice of Proposed Rulemaking) seeking comments on a proposed CDD regulation that would explicitly require covered financial institutions to institute defined programs to identify the real or beneficial ownership of accountholders. FinCEN noted in its ANPR that there currently are two limited circumstances (concerning private bank accounts and correspondent accounts) in which financial institutions are expressly required to obtain beneficial ownership information, and that it is considering expanding the explicit requirement to obtain beneficial ownership information to all customers.11

FATCA: The Internal Revenue Service has published a draft of Form W-8BEN-E, which overseas entities must use to certify beneficial ownership status for US withholding tax purposes under the Foreign Account Tax Compliance Act. Depending on which of the 22 different descriptions that they correspond to in Part 1, which deals with the identification of the beneficial owner, entities are directed to different sections of the 25-part document.12

FATF: “Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.”

For more, download Alacra’s Best Practices in KYC for Financial institutions whitepaper.

(This is Part 5 of an ongoing series – Best Practices in KYC for Financial Institutions)