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Five Reasons to Complete BSA Training for Lenders Webinar

Wednesday, 1:30 - 3:30 CentralAugust 3, 2016

Presented by:Susan Costonis, C.R.C.M.Training & Consulting for Financial [email protected]

The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the material; however, the accuracy of this information is not guaranteed. The laws are often changed without prior notice from the government. The BSA TRAINING FOR LENDERS 2016 is sold with the understanding that the publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company’s employees.

The text is designed to address most teller compliance issues. However, you will wish to consult your attorney when you are unsure of an answer.

Published by:

Susan Costonis, C.R.C.M.Training & Consulting for Financial Institutions

All rights reserved. This material may not be reproduced in whole or in part in any form or by any means without written permission from the publisher.

Printed in the United States of America.

BSA TRAINING FOR LENDERS 2016 2

SPEAKER

Susan Costonis is a compliance consultant and trainer. She specializes in compliance management along with deposit and lending regulatory training.

Susan has successfully managed compliance programs and exams for institutions that ranged from a community bank to large multi-state bank holding companies. She has been a compliance officer for institutions supervised by the OCC, FDIC, and Federal Reserve. Susan has been a Certified Regulatory Compliance Manager since 1998, completed the ABA Graduate

Compliance School, and graduated from the University of Akron and the Graduate Banking School of the University of Colorado. She regularly presents to financial institution audiences in several states and “translates” complex regulations into simple concepts by using humor and real life examples. [email protected] (e-mail)


mailto:[email protected]

TABLE OF CONTENTS

BSA FOR LENDERS – OVERVIEW.....................................................................................................5FINCEN ISSUES ADVISORY FOR BSA “CULTURE OF COMPLIANCE”................................................6EXAMINATION PROCEDURES............................................................................................................7FIVE REASONS TO CONDUCT BSA TRAINING FOR LENDERS............................................................9MISSION OF FINCEN......................................................................................................................10FINCEN: FREQUENTLY ASKED QUESTIONS....................................................................................11WHAT IS THE RISK ASSESSMENT LINK TO BSA/AML PROGRAM?.................................................15HIGH INTENSITY DRUG TRAFFICING AREAS..................................................................................17

SUSPICIOUS ACTIVITY REPORTING ............................................................... 18 SUSPICIOUS ACTIVITY REPORTING BASICS...................................................................................19FIVE SAR SCENARIOS FOR LENDERS..............................................................................................21FIELDS IN THE SAR E-REPORT........................................................................................................22SUSPICIOUS ACTIVITY TYPES TRENDING NOW..............................................................................26MORTGAGE LOAN FRAUD SARS......................................................................................................28CUSTOMER MONITORING AND DUE DILIGENCE............................................................................29STRUCTURING.................................................................................................................................34FREQUENTLY ASKED QUESTIONS ABOUT FILING SUSPICIOUS ACTIVITY REPORTS.....................36

RECORD RETENTION ........................................................................................... 38 RECORD RETENTION REQUIREMENTS...........................................................................................39SUGGESTIONS FOR STATEMENT OF PURPOSE FOR LOAN REQUESTS...........................................40

DUE DILIGENCE & BENEFICIAL OWNERSHIP RULE ................................. 41 WHAT WE NEED TO KNOW !...........................................................................................................42FOUR KEY ELEMENTS OF THE NEW CDD BENEFICIAL OWNERSHIP RULE...................................43BACKGROUND AND KEY ELEMENTS...............................................................................................44BENEFICIAL OWNERSHIP RULE BASICS.........................................................................................46AMENDMENTS TO THE ANTI-MONEY LAUNDERING PROGRAM ARE REQUIRED..........................51STEPS TO PREPARE FOR THE CHANGES.........................................................................................53OVERVIEW OF DUE DILIGENCE......................................................................................................56DUE DILIGENCE FOR LOAN APPLICATIONS...................................................................................57ENHANCED DUE DILIGENCE...........................................................................................................58

CUSTOMER IDENTIFICATION PROGRAM ..................................................... 59 CUSTOMER IDENTIFICATION PROGRAM (CIP): PURPOSE.........................................................60CIP COMPLIANCE - THE BIG PICTURE...........................................................................................61INFORMATION REQUIRED BY CIP.................................................................................................62VERIFICATION—DOCUMENTARY AND NONDOCUMENTARY VERIFICATION................................64CIP RECORDKEEPING.....................................................................................................................65OFFICE OF FOREIGN ASSETS CONTROL (OFAC)............................................................................66CUSTOMER NOTICE FOR CIP..........................................................................................................67FINAL THOUGHTS AND QUESTIONS................................................................................................68

RESOURCES ............................................................................................................. 69 FINCEN ISSUES NEW RULES ON MAY 12, 2016...............................................................................70APPENDIX A – CERTIFICATION FORM...........................................................................................73


BSA FOR LENDERS – OVERVIEW

BSA examiners are digging deeper and beginning to ask more questions about the lending function in recent BSA exams. Could a BSA examiner possibly find loan fraud in your files that had not been detected by your bank or credit union’s due diligence process? Your financial institution should have a system in place for detecting false statements and attempts at identity theft on a loan application. Will lenders know that these activities may require a SAR (Suspicious Activity Report) to be filed? Does your “system” work?QUESTION: What does the FFIEC Exam Manual for BSA say about the training requirement for lenders? ANSWER:” Examples of money laundering activity and suspicious activity monitoring and reporting can and should be tailored to each individual audience. For example, training for tellers should focus on examples involving large currency transactions or other suspicious activities; training for the loan department should provide examples involving money laundering through lending arrangements.” QUESTION: Can your financial institution pass this exam objective? “Assess the adequacy of the financial institution’s systems to manage the risks associated with lending activities, and management’s ability to implement effective due diligence, monitoring, and reporting systems” ANSWER: Register for this short training session and help the lenders and loan staff at your bank or credit union understand their responsibilities and by hearing “real life” examples of situations that could trigger a filing a SAR (Suspicious Activity Report).What will you learn? This webinar includes these topics:

What are five reasons to conduct BSA training for Lenders? What are the three stages of money laundering and can this happen in the lending area? What are some of the BSA “red flags” and risk factors in lending? What types of due diligence questions should you ask a loan applicant for BSA compliance? Steps for BSA due diligence throughout the life of the loan What are the six types of lending-related reasons of attempted or actual suspicious activity

that must be reported on SAR’s? What are some examples that have resulted in prosecution?

Steps for effective CIP loan compliance. NEW!! – Overview of beneficial ownership rule that becomes the 5th pillar for BSA on May 11, 2018; it’s not too early to start an implementation plan.

Examples of Loan Fraud and suggestions for prevention

TARGET AUDIENCE: Loan Officers, Loan Assistants, Loan Administration personnel, Compliance & BSA Officers, Risk Managers


FINCEN ISSUES ADVISORY FOR BSA “CULTURE OF COMPLIANCE”

FinCEN Advisory (FIN-2014-A007) released August 11, 2014 https://www.fincen.gov/statutes_regs/guidance/html/FIN-2014-A007.html

1. Leadership Should Be Engaged2. Compliance Should Not be Compromised by Revenue Interests3. Information Should Be Shared Throughout the Organization4. Leadership Should Provide Adequate Human and Technological Resources5. The Program Should Be Effective and Tested By an Independent and Competent

Party6. Leadership and Staff Should Understand How Their BSA Reports are Used;

specifically the reporting is used to: Serve as tips to initiate investigations: BSA reports contribute critical

information that is routinely analyzed, resulting in the identification of suspected criminal activity and the initiation of investigations.

Expand existing investigations: The reporting aids in expanding the scope of ongoing investigations by pointing to the identities of previously unknown subjects, exposing accounts and hidden financial relationships, or revealing other information such as common addresses or phone numbers that connect seemingly unrelated participants in a criminal or terrorist organization and, in some cases, even confirming the location of suspects.

Promote international information exchange: The Egmont Group has developed mechanisms for the rapid exchange of sensitive information between 146 Financial Intelligence Units (FIUs) around the world.

Identify significant relationships, trends and patterns: BSA reports unmask the relationships between illicit actors and their financing networks, enabling law enforcement to target the underlying conduct of concern, and to use forfeiture and sanctions to disrupt their ability to operate and finance their illicit conduct. BSA reports also reveal trends and patterns on criminal, terrorist and other emerging threats that enable law enforcement to focus limited resources.

Conclusion:

Understanding and communicating the context and the purpose of FinCEN’s BSA/AML regime is as important to a financial institution’s culture as understanding its underlying requirements, and financial institutions should consider including such information as part of their ongoing training requirement. Information on how BSA reports are used can be found

FIVE REASONS FOR BSA LENDER TRAINING 2016 6

https://www.fincen.gov/statutes_regs/guidance/html/FIN-2014-A007.html

on FinCEN’s website and is routinely shared through numerous public-private training events involving FinCEN and its many law enforcement partners.

EXAMINATION PROCEDURES

LENDING ACTIVITIESObjective. Assess the adequacy of the financial institution’s systems to manage the risks associated with lending activities, and management’s ability to implement effective due diligence, monitoring, and reporting systems.1. Review the policies, procedures, and processes related to lending activities. Evaluate the adequacy of the policies, procedures, and processes given the financial institution’s lending activities and the risks they present. Assess whether the controls are adequate to reasonably protect the financial institution from money laundering and terrorist financing.2. From a review of management information systems (MIS) and internal risk rating factors, determine whether the financial institution effectively identifies and monitors high-risk loan accounts.3. Determine whether the financial institution’s system for monitoring loan accounts for suspicious activities and for reporting of suspicious activities, is adequate given the financial institution’s size, complexity, location, and types of customer relationships.4. If appropriate, refer to the core examination procedures, “Office of Foreign Assets Control,” page 146, for guidance.

TRANSACTION TESTING5. On the basis of the financial institution’s risk assessment of its lending activities, as well as prior examination and audit reports, select a sample of high-risk loan accounts. From the sample selected, perform the following examination procedures: Review account opening documentation, including CIP, to ensure that adequate due diligence has been performed and that appropriate records are maintained. Review, as necessary, loan history. Compare expected transactions with actual activity. Determine whether actual activity is consistent with the nature of the customer’s business and the stated purpose of the loan. Identify any unusual or suspicious activity.

6. On the basis of examination procedures completed, including transaction testing, form a conclusion about the adequacy of policies, procedures, and processes associated with lending relationships.


APPENDIX F – PAGE F-4

Lending Activity Red Flags

• Loans secured by pledged assets held by third parties unrelated to the borrower.• Loan secured by deposits or other readily marketable assets, such as securities, particularly when owned by apparently unrelated third parties.• Borrower defaults on a cash-secured loan or any loan that is secured by assets which are readily convertible into currency.• Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.• To secure a loan, the customer purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments.• Loans that lack a legitimate business purpose, provide the financial institution with significant fees for assuming little or no risk, or tend to obscure the movement of funds (e.g., loans made to a borrower and immediately sold to an entity related to the borrower).

Privately Owned Automated Teller Machines

• Automated teller machine (ATM) activity levels are high in comparison with other privately owned or bank-owned ATMs in comparable geographic and demographic locations. •Sources of currency for the ATM cannot be identified or confirmed through withdrawals from account, armored car contracts, lending arrangements, or other appropriate documentation.

Appendix H – Request letter, H-14Lending Activities

Make available copies of BSA/AML policies and procedures specific to lending. Provide a risk assessment relating to the lending function, including a list of any high-risk lending relationships identified by the financial institution. For loans secured by cash collateral, marketable securities, or cash surrender value oflife insurance products:

Provide a list of all loans that have defaulted since the previous BSA/AML examination, including those that were charged off.

Provide a list of all loans that have been extended since the previous BSA/AML examination.


FIVE REASONS TO CONDUCT BSA TRAINING FOR LENDERS

1. The Bank Secrecy Act is a law enforcement statute; this law is a tool used by many government agencies and law enforcement agencies. Money laundering can occur in the lending area. Substantial civil money penalties can be assessed for non-compliance. (See JP Morgan $2 Billion Penalty for Madoff Scandal)These are some of the “red flags” in the press release:

BSA violations can result in the LOSS of a bank’s charter. Here’s an example of an FDIC enforcement action:The FDIC and other regulators have been using AML statutes to pursue other goals, such as stricter oversight of third-party payment processors. In November 2012, First Bank of Delaware reached a $15.5 million settlement with the Justice Department, and was stripped of its state charter. The FDIC, its primary regulator, and FinCEN concluded that the $222 million-asset company hadn't implemented effective processes for monitoring its profitable relationships with third-party payment processors, allowing financial predators to victimize its customers

2. BSA Compliance is reviewed in the Safety & Soundness exam. The examiner’s conclusions and the results of the BSA exam affect the CAMELS rating. It impacts the “management” rating. BSA requires the appropriate CIP (Customer Information Program) information is collected and that due diligence or enhanced due diligence is exercised for all covered accounts, including loans.

3. BSA requires the appropriate CIP (Customer Information Program) information is collected and that due diligence or enhanced due diligence is exercised for all covered accounts, including loans

4. The “New Beneficial Ownership Rule” will add a FIFTH pillar for Customer Due Diligence (CDD) to BSA compliance with mandatory compliance beginning on May 11, 2018.

5. Accurate and timely reporting of Suspicious Activity is required. SAR’s are required for “insider abuse” of any amount. Loan fraud has increased as a


reason for SAR reporting. False statements on loan applications are a potential SAR filing reason. Identity theft is a potential reporting reason.


MISSION OF FINCEN

The mission of the Financial Crimes Enforcement Network (FinCEN) is to support law enforcement investigative efforts and foster interagency and global cooperation against domestic and international financial crimes; and to provide U.S. policy makers with strategic analyses of domestic and worldwide trends and patterns. FinCEN works toward those ends through information collection, analysis and sharing, as well as technological assistance and innovative, cost-effective implementation of the Bank Secrecy Act and other Treasury authorities.

FinCEN provides case support to more than 165 federal, state, and local agencies, issuing approximately 6,500 intelligence reports each year. HOW is FinCEN like Google?

Over 15 million BSA reports are filed each year by more than 25,000 U.S. financial institutions, providing a wealth of potentially useful information to agencies whose mission is to detect and prevent money laundering, other financial crimes and terrorism.

How do they do it”The basic concept underlying FinCEN's core activities is "follow the money." The primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN partners with law enforcement at all levels of government and supports the nation's foreign policy and national security objectives. Law enforcement agencies successfully use similar techniques, including searching information collected by FinCEN from the financial industry, to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers.


FINCEN: FREQUENTLY ASKED QUESTIONS

Frequently Asked Questions

What is money laundering ? How big is the problem and why is it important ? Why do we need financial investigations ? How has FinCEN addressed the problem ? Who are FinCEN's Customers ? How is FinCEN organized ? What is the FOIA process ?

What is money laundering?

With few exceptions, criminals are motivated by one thing-profit. Greed drives the criminal, and the end result is that illegally-gained money must be introduced into the nation's legitimate financial systems. Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. Through money laundering, the criminal transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.

This process has devastating social consequences. For one thing, money laundering provides the fuel for drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises. We know that criminals manipulate financial systems in the United States and abroad to further a wide range of illicit activities. Left unchecked, money laundering can erode the integrity of our nation's financial institutions.

Although money laundering is a diverse and often complex process, it basically involves three independent steps that can occur simultaneously:

Placement: The first and most vulnerable stage of laundering money is placement. The goal is to introduce the unlawful proceeds into the financial system without attracting the attention of financial institutions or law enforcement. Placement techniques include structuring currency deposits in amounts to evade reporting requirements or commingling currency deposits of legal and illegal enterprises. An example may include: dividing large amounts of currency into less-conspicuous smaller sums that are deposited directly into a bank account, depositing a refund check from a canceled vacation package or insurance policy, or purchasing a series of monetary instruments (e.g., cashier’s checks or money orders) that are


http://www.fincen.gov/af_faqs.html#foia%23foia

http://www.fincen.gov/af_faqs.html#org%23org

http://www.fincen.gov/af_faqs.html#cust%23cust

http://www.fincen.gov/af_faqs.html#addressed%23addressed

http://www.fincen.gov/af_faqs.html#need%23need

http://www.fincen.gov/af_faqs.html#problem%23problem

http://www.fincen.gov/af_faqs.html#money%23money

then collected and deposited into accounts at another location or financial institution. (Refer to Appendix G “Structuring” for additional guidance.)

Layering: The second stage of the money laundering process is layering, which involves moving funds around the financial system, often in a complex series of transactions to create confusion and complicate the paper trail. Examples of layering include exchanging monetary instruments for larger or smaller amounts, or wiring or transferring funds to and through numerous accounts in one or more financial institutions.

Integration: The ultimate goal of the money laundering process is integration. Once the funds are in the financial system and insulated through the layering stage, the integration stage is used to create the appearance of legality through additional transactions. These transactions further shield the criminal from a recorded connection to the funds by providing a plausible explanation for the source of the funds. Examples include the purchase and resale of real estate, investment securities, foreign trusts, or other assets.

FinCEN is a network, a link between the law enforcement, financial, and regulatory communities. Because the changing financial world creates vast opportunities for criminals, FinCEN strives to work with its domestic and international partners to maximize the information sharing network and find new ways to prevent and detect financial crime.

How big is the problem and why is it important?

The profits of crime that creep into the United States' financial system each year are staggering and detrimental by any calculation. Drug trafficking alone generates tens of billions of dollars a year. Many believe that it is simply not possible to pinpoint the amount.

It is clear, however, that the problem is enormous. It is also clear that money laundering extends far beyond hiding narcotics profits. The dimension of the problem increases rapidly when one considers, for example, trade fraud and tax evasion subject to the money laundering statutes, as well as organized crime and arms smuggling. Bank, medical, and insurance fraud-which can also entail significant laundering of funds-add many additional billions of dollars to the criminals' profits.

Why do we need financial investigations?

Intense financial investigations are essential if we are to beat criminals at their trade-whether it's narcotics trafficking, organized crime, money laundering, or bank fraud. Following the money leads to the top of the criminal organization. But financial investigations are extremely complex and difficult to conduct. First, it takes many years of working in the financial industry to understand all its intricacies. Second, no single agency possesses a sufficiently broad or cross-jurisdictional focus and information base


to track financial movements. Finally, the sheer size, variety, and pace of change of the financial sector make financial investigations even more difficult. The tools of the money launderer range from complex financial transactions, carried out through webs of wire transfers and networks of shell companies, to old-fashioned, if increasingly inventive, currency smuggling. As soon as law enforcement learns the intricacies of a new laundering technique and takes action to disrupt the activity, the launderers replace the scheme with yet another, more sophisticated method.

How has FinCEN addressed the problem?

The Financial Crimes Enforcement Network (FinCEN) was established in April 1990 by Treasury Order Number 105-08. Its original mission was to provide a government-wide, multi-source intelligence and analytical network to support the detection, investigation, and prosecution of domestic and international money laundering and other financial crimes. In May 1994, its mission was broadened to include regulatory responsibilities.

Today, FinCEN is one of Treasury’s primary agencies to oversee and implement policies to prevent and detect money laundering. This is accomplished in two ways. First, FinCEN uses counter-money laundering laws (such as the Bank Secrecy Act--"BSA") to require reporting and recordkeeping by banks and other financial institutions. This recordkeeping preserves a financial trail for investigators to follow as they track criminals and their assets. The BSA also requires reporting suspicious currency transactions which could trigger investigations. FinCEN establishes these policies and regulations to deter and detect money laundering in partnership with the financial community.

Second, FinCEN provides intelligence and analytical support to law enforcement. FinCEN's work is concentrated on combining information reported under the BSA with other government and public information. This information is then disclosed to FinCEN's customers in the law enforcement community in the form of intelligence reports. These reports help them build investigations and plan new strategies to combat money laundering.

Who are FinCEN's Customers?

FinCEN serves the interests of the financial, law enforcement, and regulatory communities. FinCEN's analysts provide case support to more than 165 federal, state, and local agencies, issuing approximately 6,500 intelligence reports each year. Using advanced technology and a variety of data sources, FinCEN links together various financial elements of the crime, helping federal, state and local law enforcement find the missing pieces to the criminal puzzle.

Addressing money laundering is a nationwide problem and FinCEN treats it that way. Through Project Gateway, FinCEN works with law enforcement officials in each state so that they have on-line access to FinCEN's databases. Gateway's cutting edge


technology gives each state electronic access directly to financial information which they use with great success.

FinCEN is becoming an international leader in the fight against financial crimes and the corresponding corruption of international economies. FinCEN supports the G-7 Financial Action Task Force (FATF), which came under the presidency of the United States for the seventh round (1995-96). In addition, FinCEN coordinates with financial intelligence units (FIUs) in scores of countries, including Britain, France, Belgium and Australia. FinCEN is also using its expertise to help establish FIUs worldwide.

How is FinCEN organized?

The unique staffing of the Financial Crimes Enforcement Network both reflects and sustains its mission to safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity. The bureau consists of approximately 300 full-time employees, a third of whom are analysts, another third are administrative and managerial professionals, with the remaining third including regulatory specialists, technology experts and Federal agents. In addition, there are approximately 40 long-term detailees from 20 different law enforcement and regulatory agencies.


WHAT IS THE RISK ASSESSMENT LINK TO BSA/AML PROGRAM?

FIVE REASONS FOR BSA LENDER TRAINING 2016

RISK ASSESSMENT

IDENTIFY & MEASURE RISKProducts, Services, Customers and

Geographies

INTERNAL CONTROLSDevelop applicable:

Policies, Procedures, Systems and Controls

Risk based compliance program

Internal Controls Audit Type BSA Compliance

Officer Training

16

HIGH INTENSITY DRUG TRAFFICING AREAS


ANTI MONEY LAUNDERING PROGRAM

Customer Identification Program & Training

Customer Due Diligence, Customer Monitoring Programs & Training

Suspicious Activity Awareness and Reporting by Staff and Management

17

Eight parishes in Louisiana: Caddo, Bossier, Ouachita, Calcasieu, Lafayette, East Baton Rouge, Orleans, Jefferson

HIDTA Headquarters

Southwest Border Regions


http://www.whitehousedrugpolicy.gov/hidta/index.html

Suspicious Activity Reporting


http://www.whitehousedrugpolicy.gov/hidta/index.html

SUSPICIOUS ACTIVITY REPORTING BASICS

Financial institutions are required to file Suspicious Activity Reports (SARs…or “something ain’t right” reports) under the Bank Secrecy Act. SAR information is reviewed by the law enforcement staff at FinCEN. The data is used to initiate or enhance criminal investigations and prosecutions. Appendix S in the Exam Manual include: Key Suspicious Activity to Monitoring Components. The process should work like this:

Filing is required if the bank detects any known or suspected federal criminal violation, or pattern of

violations, committed or attempted against the bank, or involving one or more transactions conducted through the bank and the bank believes it was an actual or potential victim of a crime or was used to facilitate a crime

When is a SAR required?FILE WHAT & HOW MUCH?Filing a Suspicious Activity Report is required if……

the amount involved is $5000 or more in the aggregate and involves money laundering or violations of BSA. or

there is insider abuse involving any amount, orthe amount involved is $5000 or more and a suspect can be identified, orthe amount involved is $25000 or more regardless of whether a suspect can be


identified.

Suspicious Activity Monitoring

Monitoring, identifying, and reporting unusual or suspicious activity are regulatory requirements are form the foundation of BSA reporting

SAR’s are filed for unusual or suspicious activity, including, but not limited to terrorist financing, tax evasion, fraud, and structuring

Banks are not investigating, or “verifying or confirming” a particular crime. Board of Directors should regularly review overall SAR activity One financial institution’s SAR activity may be linked to SAR’s filed by others. Policies should outline how the bank will address recurring SAR filings,

escalation procedures, and when an account will be closed When the activity needs immediate attention because of the nature of the activity,

contact law enforcement before filing the SAR

When do you need to inform the BSA Officer of potential suspicious activity during the lending process?

CIP issues that violate policy (identity theft, forged documents) Loan requests for questionable purposes or sources of repayment False statements on loan applications Income appears to be from questionable sources Payments appear to be from questionable sources; sudden pay-down without

a reasonable source of funds Collateral offered appears to be questionable Loan proceeds are being sent to a high risk geography without a legitimate

reason NEW! – CDD review shows that information provided for beneficial

ownership was untrue or suspicious (effective May 11, 2018, but your institution may implement procedures prior to this date)


FIVE SAR SCENARIOS FOR LENDERS

Scenario 1 When the lender asks, “What is your annual income”? Applicant laughs and says, “How much to I really need to make, or how much do I tell the IRS that I make?

Scenario 2Application shows annual income of $120,000 from 2015. Form 4506 (certified tax return) is obtained and shows a tax return of $82,000. The loan is denied. The applicant has made a false statement. SAR filing is required.

Scenario 3Lender makes an onsite visit to audit the floor plan inventory. Only 40% of the assets are on the premises. The borrower says they were sold recently and payment is pending. However, this transaction is not reflected in the accounts receivable. (Think about the movie, “Fargo”)

Scenario 4Joe Borrower declares bankruptcy and lists a loan from your bank. The schedule is different than the application received by the bank. First, it lists a $1,800 monthly alimony payment to a former spouse and this wasn’t on your application. Second, the amount it shows for rental income is $1,500 less than shown on your application. (When you received the application the rental income was verified by reviewing cash deposits to the applicant’s checking account).

Scenario 5The bank obtains an appraisal for an OREO property; it is 21% less than the one received when the loan was originally made. Further investigation reveals that the original appraiser was a beneficial owner of a corporation that was the original seller.Can you spell Appraisal F R A U D?


FIELDS IN THE SAR E-REPORT

STRUCTURING

If a lender becomes aware that a loan customer is asking about the CTR reporting limits and then changes the amount of the deposit to avoid a CTR being reported this is structuring. See reason C.

TERRORIST FINANCING


FRAUD ITEMS

Lenders must be aware of potential money laundering activity for a business loan, consumer loan, credit/debit card fraud, or wire that involves fraud.

MONEY LAUNDERING

Lenders may become aware of suspicion concerning the source of funds for loan payments, designation of beneficiaries, wire transfers, third-party transactors, or an out of pattern transaction.


OTHER SUSPICIOUS ACTIVITIES

Lenders should be alert to counterfeit instruments, forgeries, identity theft, misuse of rescission, no apparent business purpose.

MORTGAGE FRAUD

Lenders should be alert to fraud involving appraisals, foreclosure, loan modification, & reverse mortgages.


SAR Reporting can involve these types of products:

Lenders should be alert to fraud involving credit & debit cards, home equity loans, home equity lines of credit, and residential mortgages,


SUSPICIOUS ACTIVITY TYPES TRENDING NOW

This information is from “SAR Stats – October 2015, page 16. Note the emerging trends

SUSPICIOUS ACTIVITY CATEGORY

TRENDING NOW

FRAUD 1. Online Banking2. Due Diligence

MONEY LAUNDERING 1. Funnel Account Activity2. Cash between two parties, multiple

locations

MORTGAGE FRAUD 1. Occupancy Misrepresentation/Fraud


2. False Identity/Theft Claim

The table continued with these two categories and some new emerging trends.

Tax –fraud related items were the most pervasively referenced type of activity in all categories.

SUSPICIOUS ACTIVITY CATEGORY

TRENDING NOW

OTHER SUSPICIOUS ACTIVITIES 1. False Statement2. Bust Out Scheme3. Suspicious Financial Activity

STRUCTURING 1. Circumventing Chinese Currency Regulations


MORTGAGE LOAN FRAUD SARS

Source: SAR Activity Review, May 2013


CUSTOMER MONITORING AND DUE DILIGENCE

Money Laundering and Terrorist Financing “Red Flags”

The following are examples of potentially suspicious activities, or “red flags” for both money laundering and terrorist financing. Although these lists are not all-inclusive, they may help banks and examiners recognize possible money laundering and terrorist financing schemes. Management’s primary focus should be on reporting suspicious activities, rather than on determining whether the transactions are in fact linked to money laundering, terrorist financing, or a particular crime.

The following examples are red flags that, when encountered, may warrant additional scrutiny. The mere presence of a red flag is not by itself evidence of criminal activity. Closer scrutiny should help to determine whether the activity is suspicious or one for which there does not appear to be a reasonable business or legal purpose.

Potentially Suspicious Activity that May Indicate Money Laundering

Customers Who Provide Insufficient or Suspicious Information

A customer uses unusual or suspicious identification documents that cannot be readily verified.

A customer provides an individual tax identification number after having previously used a Social Security number.

A customer uses different tax identification numbers with variations of his or her name.

A business is reluctant, when establishing a new account, to provide complete information about the nature and purpose of its business, anticipated account activity, prior banking relationships, the names of its officers and directors, or information on its business location.

A customer’s home or business telephone is disconnected.

The customer’s background differs from that which would be expected on the basis of his or her business activities.

A customer makes frequent or large transactions and has no record of past or present employment experience.

A customer is a trust, shell company, or Private Investment Company that is reluctant to provide information on controlling parties and underlying beneficiaries. Beneficial owners may hire nominee incorporation services to establish shell companies and open bank accounts for those shell companies while shielding the owner’s identity.


Funds Transfers

Many funds transfers are sent in large, round dollar, hundred dollar, or thousand dollar amounts.

Funds transfer activity occurs to or from a financial secrecy haven, or to or from a high-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.

Many small, incoming transfers of funds are received, or deposits are made using checks and money orders. Almost immediately, all or most of the transfers or deposits are wired to another city or country in a manner inconsistent with the customer’s business or history.

Large, incoming funds transfers are received on behalf of a foreign client, with little or no explicit reason.

Funds transfer activity is unexplained, repetitive, or shows unusual patterns.

Payments or receipts with no apparent links to legitimate contracts, goods, or services are received. Funds transfers are sent or received from the same person to or from different accounts. Funds transfers contain limited content and lack related party information.

Automated Clearing House Transactions

Large-value, automated clearing house (ACH) transactions are frequently initiated through third-party service providers (TPSP) by originators that are not bank customers and for which the bank has no or insufficient due diligence.

Unusually high level of transactions initiated over the Internet or by telephone.

Activity Inconsistent with the Customer’s Business

The currency transaction patterns of a business show a sudden change inconsistent with normal activities.

A large volume of cashier’s checks, money orders, or funds transfers is deposited into, or purchased through, an account when the nature of the accountholder’s business would not appear to justify such activity.

A retail business has dramatically different patterns of currency deposits from similar businesses in the same general location.

Unusual transfers of funds occur among related accounts or among accounts that involve the same or related principals.

The owner of both a retail business and a check-cashing service does not ask for currency when depositing checks, possibly indicating the availability of another source of currency.

Goods or services purchased by the business do not match the customer’s stated line of business.


LENDING ACTIVITY - SIX RED FLAGS

Loans secured by pledged assets held by third parties unrelated to the borrower.

Loan secured by deposits or other readily marketable assets, such as securities, particularly when owned by apparently unrelated third parties.

Borrower defaults on a cash-secured loan or any loan that is secured by assets which are readily convertible into currency.

Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.

To secure a loan, the customer purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments.

Loans that lack a legitimate business purpose, provide the bank with significant fees for assuming little or no risk, or tend to obscure the movement of funds (e.g., loans made to a borrower and immediately sold to an entity related to the borrower).

Privately Owned Automated Teller Machines

Automated teller machine (ATM) activity levels are high in comparison with other privately owned or bank-owned ATMs in comparable geographic and demographic locations.

Sources of currency for the ATM cannot be identified or confirmed through withdrawals from account, armored car contracts, lending arrangements, or other appropriate documentation.

Purpose of the shell company is unknown or unclear.

Employees

Employee exhibits a lavish lifestyle that cannot be supported by his or her salary.

Employee fails to conform to recognized policies, procedures, and processes, particularly in private banking.

Employee is reluctant to take a vacation.

Unusual Customer Activity

Customer rents multiple safe deposit boxes to store large amounts of currency, monetary instruments, or high-value assets awaiting conversion to currency, for placement into the banking system. Similarly, a customer establishes multiple safe custody accounts to park large amounts of securities awaiting sale and conversion into currency, monetary instruments, outgoing funds transfers, or a combination thereof, for placement into the banking system.


Unusual use of trust funds in business transactions or other financial activity.

Customer uses a personal account for business purposes.

Customer has established multiple accounts in various corporate or individual names that lack sufficient business purpose for the account complexities or appear to be an effort to hide the beneficial ownership from the bank.

Customer makes multiple and frequent currency deposits to various accounts that are purportedly unrelated.

Customer conducts large deposits and withdrawals during a short time period after opening and then subsequently closes the account or the account becomes dormant. Conversely, an account with little activity may suddenly experience large deposit and withdrawal activity.

Customer makes high-value transactions not commensurate with the customer’s known incomes.

Potentially Suspicious Activity that May Indicate Terrorist Financing

The following examples of potentially suspicious activity that may indicate terrorist financing are primarily based on guidance “Guidance for Financial Institutions in Detecting Terrorist Financing” provided by the FATF.1 FATF is an intergovernmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.

Activity Inconsistent with the Customer’s Business

Funds are generated by a business owned by persons of the same origin or by a business that involves persons of the same origin from high-risk countries (e.g., countries designated by national authorities and FATF as non-cooperative countries and territories).

The stated occupation of the customer is not commensurate with the type or level of activity.

Persons involved in currency transactions share an address or phone number, particularly when the address is also a business location or does not seem to correspond to the stated occupation (e.g., student, unemployed, or self-employed).

Regarding nonprofit or charitable organizations, financial transactions occur for which there appears to be no logical economic purpose or in which there appears to be no link between the stated activity of the organization and the other parties in the transaction.

A safe deposit box opened on behalf of a commercial entity when the business activity of the customer is unknown or such activity does not appear to justify the use of a safe deposit box.

1


Other Transactions That Appear Unusual or Suspicious

Transactions involving foreign currency exchanges are followed within a short time by funds transfers to high-risk locations.

Multiple accounts are used to collect and funnel funds to a small number of foreign beneficiaries, both persons and businesses, particularly in high-risk locations.

A customer obtains a credit instrument or engages in commercial financial transactions involving the movement of funds to or from high-risk locations when there appear to be no logical business reasons for dealing with those locations.

Banks from high-risk locations open accounts.

Funds are sent or received via international transfers from or to high-risk locations.

Insurance policy loans or policy surrender values that are subject to a substantial surrender charge.


STRUCTURING

Structuring transactions to evade BSA reporting and certain recordkeeping requirements can result in civil and criminal penalties under the BSA. Under the BSA (31 USC 5324), no person shall, for the purpose of evading the Currency Transaction Report (CTR) or a geographic targeting order reporting requirement, or certain BSA recordkeeping requirements:

Cause or attempt to cause a bank to fail to file a CTR or a report required under a geographic targeting order or to maintain a record required under BSA regulations.

Cause or attempt to cause a bank to file a CTR or report required under a geographic targeting order, or to maintain a BSA record that contain a material omission or misstatement of fact.

Structure, as defined above, or attempt to structure or assist in structuring, any transaction with one or more banks.

The definition of structuring, as set forth in 31 CFR 103.11(gg) (which was implemented before a Patriot Act provision extended the prohibition on structuring to geographic targeting orders and BSA recordkeeping requirements) states, “a person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the [CTR filing requirements].” “In any manner” includes, but is not limited to, breaking down a single currency sum exceeding $10,000 into smaller amounts that may be conducted as a series of transactions at or less than $10,000. The transactions need not exceed the $10,000 CTR filing threshold at any one bank on any single day in order to constitute structuring.

Money launderers and criminals have developed many ways to structure large amounts of currency to evade the CTR filing requirements. Unless currency is smuggled out of the United States or commingled with the deposits of an otherwise legitimate business, any money laundering scheme that begins with a need to convert the currency proceeds of criminal activity into more legitimate-looking forms of financial instruments, accounts, or investments, will likely involve some form of structuring. Structuring remains one of the most commonly reported suspected crimes on Suspicious Activity Reports (SARs).

Bank employees should be aware of and alert to structuring schemes. For example, a customer may structure currency deposit or withdrawal transactions, so that each is less than the $10,000 CTR filing threshold; use currency to purchase official bank checks, money orders, or traveler’s checks with currency in amounts less than $10,000 (and possibly in amounts less than the $3,000 recordkeeping threshold for the currency purchase of monetary instruments to avoid having to produce identification in the process); or exchange small bank notes for large ones in amounts less than $10,000.


However, two transactions slightly under the $10,000 threshold conducted days or weeks apart may not necessarily be structuring. For example, if a customer deposits $9,900 in currency on Monday and deposits $9,900 in currency on Wednesday, it should not be assumed that structuring has occurred. Instead, further review and research may be necessary to determine the nature of the transactions, prior account history, and other relevant customer information to assess whether the activity is suspicious. Even if structuring has not occurred, the bank should review the transactions for suspicious activity.

In addition, structuring may occur before a customer brings the funds to a bank. In these instances, a bank may be able to identify the aftermath of structuring. Deposits of monetary instruments that may have been purchased elsewhere might be structured to evade the CTR filing requirements or the recordkeeping requirements for the currency purchase of monetary instruments. These instruments are often numbered sequentially in groups totaling less than $10,000 or $3,000; bear the same handwriting (for the most part) and often the same small mark, stamp, or initials; or appear to have been purchased at numerous places on the same or different days.


FREQUENTLY ASKED QUESTIONS ABOUT FILING SUSPICIOUS ACTIVITY REPORTS

1. How should banks handle repeated or continuing suspicious activity on one account or by one person/customer?

One of the purposes of filing SARs is to identify violations or potential violations of law to the appropriate law enforcement authorities for criminal investigation. This is accomplished by the filing of a SAR that identifies the activity of concern. Should this activity continue over a period of time, it is useful for such information to be made known to law enforcement (and the bank supervisors). As a general rule of thumb, organizations should report continuing suspicious activity with a report being filed at least every 90 days. This will serve the purposes of notifying law enforcement of the continuing nature of the activity, as well as provide a reminder to the organization that it must continue to review the suspicious activity to determine if other actions may be appropriate, such as terminating its relationship with the customer or employee that is the subject of the filing.

2. Should our bank close an account with continuing suspicious activity?

The closure of a customer account as the result of the identification of suspicious activity is a determination for an organization to make in light of the information available to the organization. A filing of a SAR, on its own, should not be the basis for terminating a customer relationship. Rather, a determination should be made with the knowledge of the facts and circumstances giving rise to the SAR filing, as well as other available information that could tend to impact on such a decision. It may be advisable to include the organization’s counsel, as well as other senior staff, in such determinations.

3. Under what circumstances can the filing deadline for SARs be extended?

The SAR rules require that a SAR be filed no later than 30 days from the date of the initial detection of the suspicious activity, unless no suspect can be identified, in which case, the time period for filing a SAR is extended to 60 days.

It may be appropriate for organizations to conduct a review of the activity to determine whether a need exists to file a SAR. The fact that a review of customer activity or transactions is determined to be necessary is not necessarily indicative of the need to file a SAR, even if a reasonable review of the activity or transactions might take an extended period of time. The time to file a SAR starts when the organization, in the course of its review or on account of other factors, reaches the position in which it knows, or has reason to suspect, that the activity or transactions under review meets one or more of the definitions of suspicious activity.


4. To whom may we disclose information contained in SAR?

Federal law (31 USC 5318(g)(2)) prohibits the notification of any person that is involved in the activity being reported on a SAR that the activity has been reported. This prohibition effectively precludes the disclosure of a SAR or the fact that a SAR has been filed. However, this prohibition does not preclude, under federal law, a disclosure in an appropriate manner of the facts that are the basis of the SAR, so long as the disclosure is not made in a way that indicates or implies that a SAR has been filed or that the information is included on a filed SAR.

The Board of Directors of a bank is informed about SAR filings at their meetings. It is usually the practice of the bank not to include the names as to protect confidentiality.

SARs cannot be subpoenaed and if they are you should immediately let your Bank Secrecy officer know and she or he will deal directly with FinCEN


Record Retention


RECORD RETENTION REQUIREMENTS

1. Requirements- Regulations implementing BSA literally contain a list of records banks are required to keep. The list is varied and includes customer checks, deposit slips, signature cards, and a wide variety of information including some that relates specifically to loans.

2. Retention Period. -All records which banks are required to keep under BSA must be kept for five years.

3. Retention Method- BSA allows banks to keep records in any fashion, using any medium, e.g., originals, photocopies, microfilm, electronic storage, etc. Regulations require banks to be able to produce required records within a reasonable period of time.

4. Lending Related Records- Some record retention requirements specifically relate to loans:

1010.410(a) Records to be made and retained by financial institutions Each financial institution shall retain either the original or a microfilm or other copy or reproduction of each of the following:1010.410(a)A record of each extension of credit in an amount in excess of $10,000, except an extension of credit secured by an interest in real property, which record shall contain the name and address of the person to whom the extension of credit is made, the amount thereof, the nature or purpose thereof, and the date thereof;

Note: Bank loan policies oftentimes indicate that a statement of purpose is required on every loan, thus broadening the legal requirement and making it an underwriting requirement as well. If the requirement is cited in the bank’s written BSA policies or procedures, the failure to adhere to it could be criticized in a BSA examination.


SUGGESTIONS FOR STATEMENT OF PURPOSE FOR LOAN REQUESTS

Statement of Purpose- There is no official guidance on this issue, but it is a “best practice” for the “statement of purpose” of the loan request to be specific enough to help an auditor or examiner to reconcile the borrower’s use of the loan proceeds with the reason the applicant requested the funds.

Examples of loan purposes that might be inadequate include: business consumer or “personal” use

Examples of an adequate statement of purpose might be: purchase (commercial or consumer) real estate, refinance (commercial or consumer) real estate, debt consolidation, farming expenses, purchase livestock, buy crops purchase personal property (describe personal property – auto, for example), operating/working capital (describe specifically – finance equipment purchase or

inventory) miscellaneous lines of credit (describe specifically as a home equity line of credit or a

specific purpose).


Due Diligence & Beneficial Ownership Rule


WHAT WE NEED TO KNOW !

Is this loan request being made for a legal purpose?

Are there any false statements on the loan application? Can you verify their source of income or business cash flows?

Is this applicant really who they claim to be? Is this a case of identity theft takeover?

Are the payments being made with legal funds? Are the payments being made in a consistent manner from a reasonable source of funds?

Are early pay-offs being made that are not reasonable or is not reasonable for that customer? What is the source of the pay-off?

Is the customer in a “high risk” geography or dealing in a “high risk” type of business, such as a Money Service Business or other cash-intensive business? Are the customers of the business located in a “high risk” geography?

NOT YET EFFECTIVE, but will become mandatory on May 11, 2018 – the four elements of the beneficial ownership rule! (See NEXT section)


FOUR KEY ELEMENTS OF THE NEW CDD BENEFICIAL OWNERSHIP RULE

Four Key Elements of the NEW CDD Beneficial Ownership Rule:o Identify and verify the identity of loan customers, including ‘LEGAL

ENTITIES”o Identify and verify the identity of beneficial owners with 25% or more equity

interest of a legal entity loan customer. Identify who “controls” the entity.o Understand the nature & PURPOSE of customer loan relationships*o Conduct ongoing monitoring to maintain & update customer information &

to identify and REPORT suspicious transactions.*

*Elements 3 & 4 contain language from the FFIEC BSA/AML exam manual and many examiners have been expecting these rules for years. Some institutions have either anticipated the changes, and/or based on risk assessment factors, have already begun collecting these additional elements as part of their monitoring efforts. The downside may have been a negative impact to remain competitive with other financial institutions that have more lenient standards. These new rules will remove the competitive issue as this will become federal requirements and active law enforcement tool.


Legal Entities

CIP

CIP 25% Beneficial

owners and Controlling

person

Ask transactional questions and risk rate the

customer

Monitor Account Activity

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BACKGROUND AND KEY ELEMENTS

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has finalized its long-awaited beneficial ownership rule, which it proposed in 2014. The regulation does two things. First, it extends Customer Due Diligence (CDD) requirements under Bank Secrecy Act (BSA) rules to the natural persons behind a legal entity. Second, the regulation adds a fifth pillar to the traditional “four pillars” of an effective anti-money laundering (AML) program by requiring covered financial institutions to establish risk-based procedures for conducting ongoing customer due diligence. As of May 11, 2018, entities subject to BSA will be required to identify and verify the identity of beneficial owners of legal entity customers at the time the customer opens a new account (which includes LOANS), subject to certain exclusions and exemptions, as well as develop risk profiles and conduct ongoing monitoring of customers.

The 2015 National Money Laundering Risk Assessment estimated that the annual volume of money laundering in the United States from financial crimes was $300 billion and FinCEN applied a “breakeven” analysis to evaluate the cost benefits of the 2014 proposal.

The Final Rule completes a multi-year effort by FinCEN to establish beneficial ownership requirements for covered financial institutions. Although the USA PATRIOT Act amendments to the BSA in 2001 always contemplated that beneficial ownership information may be required as part of the Customer Due Diligence (CDD) performed by regulated financial institutions, a variety of issues complicated implementation of a broad beneficial ownership reporting requirement. Over the years, the U.S. has faced mounting pressure from its international peers to bring its AML regulations into compliance with international norms established by the Financial Action Task Force (FATF), of which the U.S. is a member, especially with respect to requiring beneficial ownership information. The U.S. is currently undergoing its fourth “mutual evaluation” by FATF, which increased the urgency for U.S. action at this time. The release of a trove of documents on the use of offshore shell companies known as the Panama Papers has provided further fuel for this effort and provided detailed information about how wealthy individuals around the world, including public officials, hide their money from government regulation and public scrutiny—and possibly commit illegal activities—using shell companies.

Among other things, the requirement to collect beneficial ownership information is intended to allow law enforcement to better track illicit use of financial services, in addition to aiding covered financial institutions in complying with sanctions programs administered by the Office of Foreign Assets Control (OFAC). The Final Rule

1. Creates a new section in the BSA regulations at 31 C.F.R. § 1010.230 setting forth the beneficial ownership identification requirements for covered financial institutions, as well as a number of exclusions for specific types of customers and accounts.

2. It also amends the respective AML program requirements for these institutions to formally identify customer due diligence as a fifth essential “pillar” of an AML program.


Current “Four Pillars” for BSA/AML “Five Pillars under Beneficial Ownership (1) internal controls; (1) internal controls; (2) independent testing; (2) independent testing; (3) designation of an individual responsible for day-to-day compliance;

(3) designation of an individual responsible for day-to-day compliance;

(4) training (4) training (5) Obtain beneficial ownership information and:(1) understand the nature and purpose of customer relationships for the purpose of developing a customer profile, and (2) ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to update customer information—including beneficial ownership.

.

The final rule was issued quietly on May 5, 2016, in an advance version, with the official version published in the Federal Register on May 11, 2016. Although the rule will technically become effective July 11, 2016, compliance will not become mandatory until May 11, 2018.

FinCEN’s stated impetus for this rulemaking was its determination, after consultation with the federal financial regulators and the Department of Justice, that more explicit rules for covered financial institutions with respect to CDD were necessary to enhance financial transparency and safeguard the financial system against illicit use. The BSA authorizes FinCEN to impose AML program requirements on all covered financial institutions and to require such institutions to maintain procedures to ensure compliance with the BSA and its implementing regulations or to guard against money laundering.

In conjunction with this final rule, the Treasury Department sent Congress draft legislation that would require legal entities to know and report information on beneficial ownership to federal and state government at the time the company is formed. As described, the draft legislation would not supplant the FinCEN beneficial ownership rule, but rather provide additional data that would be used to comply with the rule, as well as for other purposes.


BENEFICIAL OWNERSHIP RULE BASICS

Beginning on May 11, 2018, covered financial institutions must do two things for all legal entity customers who open new accounts at the financial institution, unless an exception applies: 1) identify and 2) verify the identity of the beneficial owners of the legal entity.

Who is covered by the new rules?

The final rule applies to “covered financial institutions,” which are those already subject to BSA Customer Identification Program (CIP) requirements. These generally include depository institutions, securities broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities.

The rule does not exclude smaller institutions. FinCEN recognized the increased burden on smaller institutions, but noted that “even though some smaller institutions might be lower risk, size alone should not be a determinative factor for a risk assessment, making it an inappropriate basis for a categorical exclusion." FinCEN also reiterated that it expects financial institutions to implement procedures for collecting beneficial ownership information that are appropriate for the institution’s size and type of business.

What is an “Account?”

Consistent with the proposed rule, the final rule does not apply retroactively; it applies only to legal entity customers who open new accounts on or after the May 11, 2018, compliance date. The term “new account” is defined to include each account opened at a covered financial institution by that customer. In other words, a covered financial institution will be required to identify and verify a legal entity customer’s beneficial owners each time the customer opens a new account at the institution after the compliance date, even if the institution has already identified and verified the customer’s beneficial owners at the time the customer opened a previous account.

What is a “Legal Entity Customer”?

The proposed rule applies to “legal entity customers,” which are generally defined as:

a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office,

a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.


What (who) is exempted from the definition of a “Legal Entity Customer”?

A long list of entities are excluded from the definition of “legal entity customer,” including but not limited to:

Regulated financial institutions; Certain governmental agencies; Entities whose common stock or equity interest are listed on the New York Stock

Exchange or the American Stock Exchange or have been designated as a NASDAQ National Market Security listed on the NASDAQ Stock Market;

Issuers of classes of securities registered under Section 12 of the Securities Exchange Act;

Registered investment companies and investment advisers; Exchange or clearing agencies; Other entities registered with the Securities and Exchange Commission; Public accounting firms registered under Sarbanes-Oxley Act; Bank holding companies; Savings and loan hold companies; and State-regulated insurance companies.

Certain exemptions to the requirements to identify and verify the identity of each beneficial owner also apply to certain activities. For instance, private label credit card accounts established at the point-of-sale solely for the purchase of retail goods or services at the issuing retailer are not subject to the beneficial owner identification and verification requirements if those accounts have a credit limit of no more than $50,000. Credit cards accepted at any outlet or at an ATM, however, are not exempt. Pooled investment vehicles operated by an excluded entity and certain nonprofit entities are partially exempt in that they are generally subject only to the control prong of the beneficial ownership definition.

Where do trusts fit in?An important point to note is that the “legal entity customer” definition does not apply to most trusts since most trust do not need to file public documents to be created. FinCEN has noted that “identifying a ‘beneficial owner’ from among” trust grantors, trustees, and beneficiaries “would not be possible.”

However, possible or not, FinCEN still believes that some information beneficial ownership information about trust accounts should be obtained in some instances: Many financial institutions are already taking a risk-based approach to collecting information with respect to various persons associated with trusts in order to know their customer, and industry observers expect financial institutions to continue these practices as part of their overall efforts to safeguard against money laundering and terrorist financing.

When a trust is a “beneficial owner” of a legal entity customer, the beneficial owner is to be considered the trustee of the trust. (See the section about “land trusts” definition and applicability to TRID – Truth in Lending Integrated Disclosures)


What is the two-prong approach to beneficial ownership?The new rule takes a “two-prong approach for the identification of beneficial owners. BOTH must be considered.

1. Ownership2. Control

Ownership Prong – For the ownership prong, identify any natural persons with a 25% or more ownership of the legal entity. Financial institutions are not required to calculate or determine this and may rely on the certification provided by the customer. NOTE: If something alerts a financial institution that the information is fraudulent or untrue this should be reported to the BSA Officer and may require that a SAR be filed.

There is no requirement for the financial institution to determine beneficial ownership or analyze calculations – they may rely on the information that the customer attests is correct on the certification form

There may be NO beneficial owner with 25% or more. If that’s the case, there are no beneficial owners listed in the ownership prong.

There is no requirement to determine if the entity is structured to avoid the 25% threshold.

If an entity is an owner the financial institution is not required to identify/verify natural persons behind the entity

A trustee will be classified as the beneficial owner if a trust owns 25% or more of a legal entity

Control Prong – Financial institutions must collect at least one individual on the control prong. This should be the natural person in the management structure who has “significant responsibility to control, manage or direct” the legal entity.

Who is a “Beneficial Owner”?

Under the new rule, a “beneficial owner” includes two types of individuals:1. Any individual who, directly or indirectly, owns 25 percent or more of equity interest in

the legal entity customer; and2. A single individual who has “significant responsibility to control, manage, or direct a

legal entity.”

It is not entirely clear what would constitute “significant responsibility” under the second prong, but the rule indicates that such individuals could be an executive officer, senior manager, or any other person who “regularly performs similar functions.”

Under the ownership prong, a legal entity customer could have between zero and four beneficial owners—zero if no individual owns 25 percent or more of an entity or four if each individual owns exactly 25 percent of the entity. For the second, control prong, all legal entities will be required to name at least one individual. Accordingly, each legal entity customer will have between one and five beneficial owners.

Some industry observers have commented that this definition could allow real owners to hide behind an executive serving as a figurehead. Or, there may be multiple people controlling a legal


entity and the rule does not take into account the fact that a controlling person may be following instructions provided by someone above if though that person actually has no real ownership of the company.

What Will Be Required?

The financial institution may comply either by obtaining the required information on a standard Certification Form (See sample APPENDIX A form) provided by the rule or by any other means that comply with the substantive requirements of the provision. The rule does not list specific individuals who would be appropriate to certify an entity’s beneficial owners, but FinCEN does state that the form does not need to be notarized or approved by the customer’s board of directors or any other governing body.

TO DO :

WATCH FOR FinCEN TO PUBLISH A LIST OF “FREQUENTLY ASKED QUESTIONS IN THE COMING MONTHS

While use of the standard Certification form would provide institutions certain protections, FinCEN has stopped short of providing a blanket safe harbor by use of the Certification Form. Instead, the final rule allows covered financial institution to rely on information that the legal entity customer supplies about the identity of its beneficial owners, so long as the institution does not have “knowledge of any facts that would reasonably call into question the reliability of such information.”

TO DO :Lenders have been required to resolve CIP discrepancy issues since October 10, 2003. Lenders are required to resolve address discrepancy issues under the FCRA when pulling credit reports and check for identity theft alerts.ADD A PROCEDURE AND MONITORING PROCESS FOR THIS NEW “KNOWLEDGE OF ANY FACTS THAT WOULD REASONABLY CALL INTO QUESTION RELIABILITY OF SUCH INFORMATION” REQUIREMENT THAT BECOMES EFFECTIVE MAY 11, 2018.TRAIN STAFF, THEN TRAIN AGAIN AND AGAIN.

The financial institution may rely on the beneficial ownership information supplied by the customer, provided that it has no knowledge of facts that would reasonably call into question the reliability of the information. The identification and verification procedures for beneficial owners are very similar to those for individual customers under a financial institution’s customer identification program (CIP), except that for beneficial owners, the institution may rely on copies of identity documents. Financial institutions are required to maintain records of the beneficial ownership information they obtain, and may rely on another financial institution for the performance of these requirements, in each case to the same extent as under their CIP rule.


Collection of beneficial owners’ sensitive personal information (e.g., name, date of birth, Social Security number, and passport number, if the beneficial owner is not a U.S. person) may raise privacy concerns and increase fears of identity theft. Nevertheless, FinCEN has said these concerns are insufficient to justify limiting the collection of this information and pointed out that financial institutions are required to protect this information under the Gramm-Leach-Bliley Act and Right to Financial Privacy Act..FinCEN states that financial institutions should use beneficial ownership information as they use other information they gather regarding customers (e.g., through compliance with CIP requirements), including for compliance with the Office of Foreign Assets Control (OFAC) regulations, and the currency transaction reporting (CTR) aggregation requirements under the BSA.

What Records are required? What is the retention period?

Consistent with CIP rules, records of information collected in connection with identifying and verifying beneficial owners must be retained for five years after the account is closed, for identification records, and five years after the record is made, for verification records. For identification, the records must include, at a minimum, any identifying information the institution obtained, including the Certification Form, if it was obtained. For verification, a covered institution must maintain a description of any document the institution reviewed to verify the beneficial owner’s identity, noting the type, any identification number, any place of issuance, any date issuance, and any expiration date.


AMENDMENTS TO THE ANTI-MONEY LAUNDERING PROGRAM ARE REQUIRED

The final rule also amends AML program requirements for each type of covered financial institution by adding the requirement that institutions implement risk-based procedures to conduct ongoing customer due diligence, including understanding the nature and purpose of customer relationships to develop a customer risk profile.

According to FinCEN, an institution must develop a using the information the institution gathers about the customer at account opening and use that customer risk profile as a baseline against which the institution will assess future customer activity for potential suspicious activity reporting. For instance, the profile may include the type of customer or type of account, service, or product type.

When a financial institution detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Think of these updates as “triggering events”, much like a change in the flood zone designation with FEMA remaps an area the financial institution is notified by the life of loan monitoring company.

Such information could include a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason or a significant change in the volume of activity without explanation. It could also include information indicating a possible change in the customer’s beneficial ownership, because such information could also be relevant to assessing the risk posed by the customer.

What are some examples of “triggering events” in the lending process? Reviews of internal reports for loans with an early payoff might cause communication

with the borrower and the financial institution learns of a change in beneficial ownership A borrower passes away and the financial institution is notified by an attorney or family

member about ownership changes The loan becomes delinquent and a collector learns about an ownership change in

response to the past due notice or phone call. The financial institution is notified of a lapse in flood insurance payments and learns of

an ownership change when the borrower of record is contacted. An existing loan customer wants to extend the term of the loan and a change in

ownership of a legal entity is discovered during this process

FinCEN notes, however, that this provision does not impose a categorical requirement that financial institutions must update customer information, including beneficial ownership information, on a continuous or periodic basis. Rather, the requirement to update such information is event-driven and occurs as a result of normal monitoring.


FinCEN also noted that the requirements of the rule “represent a floor, not a ceiling, and, consistent with the risk-based approach, financial institutions may do more in circumstances of heightened risk, as well as to mitigate risks generally.” In addition, the banking regulators may themselves impose their own supervisory requirements on the institutions they examine.

These AML program amendments will apply to all legal entity customers, including existing ones, as of May 11, 2018.

IMPORTANT DIFFERENCE FROM CURRENT CIP RULES:

Financial institutions were allowed to “grandfather” existing customers for the CIP rules that become effective October 11, 2003 if there was a reasonable belief that the true identity of the customer was known. If the CIP policy and procedure for your financial institution allowed this provision the new rules will require a revision to the policy and procedures.

The new rule does not require financial institution to do an automatic or comprehensive “look back” to obtain beneficial ownership for existing legal entities. However there will be a “line in the sand” beginning May 11, 2018 and unlike the CIP provisions there is NO “grandfather provision for existing customers!

The requirements to certify and verify is triggered each time a legal entity customer (new or existing) opens a covered account, including loans.

EXAMPLEGood Gumbo, Inc. has been a corporation in your state and long-time bank customer for 35 years. The second generation is now running the business and has several loan and deposit accounts. The private banker, Billy Bob Breaux, handles the relationship went to grade school, high school, and college with the Bubba Breaux, the CEO of the company. CIP was done for Good Gumbo in 2003 and for Bubba Breaux.

On May 30, 2018 Good Gumbo applies for a new loan to finance a franchise location in Alabama. Billy Bob Breaux must obtain the beneficial ownership information on Appendix A (or a similar form) and complete CIP on each of the individuals listed as beneficial owners, including Bubba Breaux.


STEPS TO PREPARE FOR THE CHANGES

BSA training for lenders has probably taken a “back seat” to other compliance demands like the 2015 implementation for TRID and more active examinations by regulators of the long list of changes in 2014, such as “ability to repay”. It’s not too early to consider budget line items and training schedules for 2017 to handle the January 1, 2018 changes to HMDA (Home Mortgage Disclosure Act) and the Customer Due Diligence rules on May 11, 2018.

In preparation for the mandatory compliance date of May 11, 2018, financial institutions should evaluate their current identification, verification and monitoring processes to determine whether changes may be warranted and what employee training is needed. Covered institutions may also need to amend their BSA programs to include the new fifth pillar if the institution does not already conduct ongoing CDD as contemplated by the rule and document the appropriate procedures.

TO DO :WATCH FOR UPDATES TO BSA EXAM PROCEDURES!USE THE PROCEDURES AS A “TEMPLATE” FOR INTERNAL MONITORING AND AUDIT

These actions will be critical to complying with the final rule upon its compliance date. It is also important to keep in mind that federal functional regulators may set their own, additional supervisory expectations, as with any other aspect of BSA/AML.

LENDING CHALLENGES:

Borrowers are very frequently reluctant (or refuse) to cooperate with a lender in a manner that is outside of the scope of their specific loan agreement. Long term customers may expect a lender to “make an exception” and not request new documentation when a new loan is made on or after May 11, 2018 or some ownership change is detected.

Financial institutions will need to consider amending its application and loan documentation as soon as is practical to incorporate appropriate covenants addressing the obligation of a legal entity to fully cooperate with a the new CDD Rules.

In that regard, bank lending obligations should state that the initial loan application and underwriting process now includes cooperation in regard to identifying and verifying beneficial ownership of a legal entity. In regard to ongoing CDD by a lending bank, similar covenants should be drafted that places an affirmative obligation on a legal entity to respond to a request by a bank to update or recertify beneficial ownership information.Lending Due Diligence. One of the difficult challenges to be faced by a bank when conducting CDD with a legal entity will be to establish standards that will comply with the CDD inquiry


obligations. Similarly, a lending financial institution may also need to consider whether the degree of beneficial ownership required to be disclosed should be more rigorous than the minimal levels set by the Final Rules.

Each financial institution will be held to completing an initial CDD for each legal entity that opens a loan and should consider whether the verification procedures authorized by the Final Rules will be adequate in the particular lending circumstances. Even though it appears that a beneficial owner’s ownership status can be confirmed by a management official of a legal entity, it is possible that prudent underwriting (that is subject to after-the-fact reviews by the prudential regulators of banks and credit unions) will require more than the execution of a one-page form document.

Education and Training of Legal EntitiesClearly the beneficial ownership obligations will come as a shock to many borrowers—who traditionally have used legal entities to shield investors from scrutiny and disclosure. In that regard, financial institutions may consider the possibility of educating the borrower community regarding these new disclosure obligations—including the borrower’s legal counsel— who may play an important role when counseling a newly formed legal entity that transparency in ownership should now be expected.

Unanswered Questions and ChallengesThe adoption of the Final Rules brings AML, OFAC and similar laws into greater symmetry, which is a declared goal by FinCEN and federal and law enforcement officials. While the new rules are intended to “follow the money” and improve option to detect criminal and terrorist activity through a “new and improved” AML compliance program, the new rules also create many additional ambiguities that will eventually have to be considered financial institutions.

Several issues that have already been identified are as follows:First, it is very possible that the minimum beneficial ownership standards for CDD contained in the Final Rules will be adjusted to a higher, more robust level by the banking regulators. Care must be exercised by financial institutions to anticipate any such determination so that the contractual obligations of a legal entity conform to current legal requirements for CDD (as adjusted from time to time). Many financial institutions have experienced negative BSA exam results because they didn’t take issues like MSB registration seriously when the requirements were first introduced.

Second, even though the Final Rules are applicable to accounts opened on and after May 11, 2018, it is also very possible that the banking regulators will require that the beneficial ownership CDD be implemented by lending banks earlier than that date. Particularly in light of the detailed changes that must be made to a bank’s underwriting and documentation policies and procedures, prudence may dictate implementing the new CDD requirements sooner rather than later. Industry experts suggest that the policy and procedures for the new rules be in place not later than May of 2017.

Third, in regard to reliance on another financial institution to certify and identify a bank’s legal entity customer, that third party institution’s attestation is conditioned on the execution of a


contract with the third party institution certifying the effectiveness of its own AML program. At the moment, what will be sufficient in regard to a “contract” is completely unclear; further, many financial institutions will be leery about making a certification to another bank in light of the possible criminal liability created by 12 U.S.C. § 1014. If your financial institution has a significant activity with loan participations this should be a due diligence priority.

Finally, banks should be aware that the Final Rules create disclosure issues with other legal requirements that will have to be addressed (and hopefully, homogenized). For example, tax attorneys have identified possible differing requirements when identifying beneficial ownership interests under the Final Rules versus the identification of beneficial ownership for IRS, state and foreign reporting purposes. Similarly, what constitutes beneficial ownership could become a complex analysis based upon control on investments that fall below the 25% threshold—and place legal entities in the unenviable position of determining whether further inquiry as to ownership is required.


OVERVIEW OF DUE DILIGENCE


Due Diligence should be done at account opening and during the LIFE of the account or loan.CIP is a critical step in due diligence

Customer due diligence (CDD) consists of routine questions which help predict account activity, but specifically identify persons and entities that may warrant enhanced due diligence.NEW RULES for Beneficial Ownership mandatory 5/11/18

Enhanced due diligence (EDD) includes extra questions and verification. If there is a “higher risk” potential for money laundering then more information is required to predict account activity and increase the bank’s comfort level with the customer. “Higher risk” may be designated because of business activity, ownership structure, the anticipated or actual volume and types of transactions, including those located in high-risk jurisdictions.

Customer identification program (CIP) describes routine requirements for specific information which identifies the person or entity. Verification by documentary or non documentary methods is required by law. NOTE – There will be NO exceptions to the Beneficial Rules on 5/11/18

59

DUE DILIGENCE FOR LOAN APPLICATIONS

As a condition of opening an account, lenders generally extract more customer information than most other areas of the bank. That information often includes:

financial statements, verification of assets, income statements, verification of income, consumer reports on individuals, business credit reports on entities and a business plan and cash flow projections, any additional information required by loan policy for that type of request

Many financial institutions use a CIP/CDD worksheet. If the loan request can be approved sometimes another review of the information may be necessary for BSA/AML purposes.

That second review may or may not involve a “checklist.” The lender will simply be looking for things that don’t make sense, or present additional risk factors for money laundering.

Here are some examples:

Example A : A loan application from a gas station owner indicates that the store cashes and sells checks. Does the store meet the definition of a money service business? If it does money transmissions it may need to be registered and monitored closely. There is also an ATM located in the business which raises another “red flag” for due diligence.

Example B: A corporation with all of its operations in your state is incorporated in another state, such as Delaware, or Nevada. Why was this done?

Example C: While the legal existence of the business can be verified, there is no established place of business, phone listing, web site, or other proof that establishes its existence.

Example D: A loan application from a restaurant shows income that is far greater than what is expected with the restaurant’s location, menu, and clientele. What is the real source of the income?

Example E: A corporate loan application shows a net worth that is not supported by the business’ current income or the length of time in business. What is the true source of the net worth?

Example F: A consumer loan application shows a net worth and types of assets that is not consistent with the individual’s age or past income. What is the true source of the net worth?


ENHANCED DUE DILIGENCE

Enhanced due diligence typically requires additional verification at account opening and during the life of the deposit account or loan. Here are some steps that may be considered (from the FFIEC BSA Exam Manual)


Customer Identification Program


CUSTOMER IDENTIFICATION PROGRAM (CIP): PURPOSE

1. Overview

The regulations are added to the Bank Secrecy Act in an attempt to deter terrorism and money laundering. These regulations require all financial institutions to implement a Customer Identification Program.

2. Purpose

The regulations must contain certain requirements. At a minimum the regulations must require financial institutions to implement reasonable procedures for

Verifying the identify of any person who opens an account to the extent reasonable and practicable;

Maintaining records of the information used to verify the person’s identify, including name, address, and other identifying information; and

Determining whether the person appears on any lists of known or suspected terrorists of terrorist organizations provided to the financial institution by any government agency.


CIP COMPLIANCE - THE BIG PICTURE

Information Required(Prior to opening an account)

+Verification through documents

(Reasonable time after opening account) +

Nondocumentary verification(Reasonable time after opening account)

+326 Government List Check

+Recordkeeping

+ Customer Notice

=

CIP COMPLIANCE


INFORMATION REQUIRED BY CIP

Section 103.121 (b)(2) (i) Customer information required

(A) In general. The CIP must contain procedures for opening an account that specify the identifying information that will be obtained from each customer. Except as permitted by paragraphs (b)(2)(i)(B) and (C) of this section, the bank must obtain, at a minimum, the following information from the customer prior to opening an account:

1. Name;2. Date of birth, for an individual;3. Address, which shall be:

i) For an individual, a residential or business street address;ii). For an individual who does not have a residential or

business street address, an Army Post Office (APO) or Fleet Post Office (FPO) box number, or the residential or business street address of next of kin or of another contact individual; or

iii) For a person other than an individual (such as a corporation, partnership, or trust), a principal place of business, local office, or other physical location; and

4. Identification number, which shall be:i) For a U.S. person, a taxpayer identification number; orii) For a non-U.S. person, one or more of the following: a

taxpayer identification number; passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard.

Note to paragraph (b)(2)(i)(A)(4)(ii): When opening an account for a foreign business or enterprise that does not have an identification number, the bank must request alternative government-issued documentation certifying the existence of the business or enterprise.

(B) Exception for persons applying for a taxpayer identification number. Instead of obtaining a taxpayer identification number from a customer prior to opening the account, the CIP may include procedures for opening an account for a customer that has applied for, but has not received, a taxpayer identification number. In the case, the CIP must include procedures to confirm that the application was filed before the customer opens the account and to obtain the


taxpayer identification number within a reasonable period of time after the account is opened.


(C) Credit card accounts. In connection with a customer who opens a credit card account, a bank may obtain the identifying information about a customer required under paragraph (b)(2)(i)(A) by acquiring it from a third-party source prior to extending credit to the customer.


VERIFICATION—DOCUMENTARY AND NONDOCUMENTARY VERIFICATION

Section 103.121 (b) (ii) Customer Verification. The CIP must contain procedures for verifying the identity of the customer, using information obtained in accordance with paragraph (b)(2)(i) of this section, within a reasonable time after the account is opened. The procedures must describe when the bank will use documents, non-documentary methods, or a combination of both methods as described in this paragraph (b)(2)(ii).

(A) Verification through documents. For a bank relying on documents, the CIP must contain procedures that set forth the documents that the bank will use. These documents may include:

(1) For an individual, unexpired government- issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver’s license or passport; and

(2) For a person other than an individual (such as a corporation, partnership, or trust), documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or trust instrument.

(B) Verification through non-documentary methods . For a bank relying on non-documentary methods, the CIP must contain procedures that describe the non-documentary methods the bank will use.

(1) These methods may include contacting a customer; independently verifying the customer’s identity through the comparison of information provided by the customer with information obtained from a consumer reporting agency, public database, or other source; checking references with other financial institutions; and obtaining a financial statement.

(2) The bank’s non-documentary procedures must address situations where an individual is unable to present an unexpired government-issued identification document that bears a photograph or similar safeguard; the bank is not familiar with the documents presented; the account is opened without obtaining documents; the customer opens the account without appearing in person at the bank; and where the bank is otherwise presented with circumstances that increase the risk that the bank will be unable to verify the true identity of a customer through documents.

(C) Additional verification for certain customers. The CIP must address situations where, based on the bank's risk assessment of a new account opened by a customer that is not an individual, the bank will obtain information about individuals with authority or control over such account, including signatories, in order to verify the customer's identity. This verification method applies only when the bank cannot verify the customer’s true identity using the verification methods described in paragraphs (b)(2)(ii)(A) and (B) of this section.


CIP RECORDKEEPING

Section 103.121(b)(3) RecordkeepingThe CIP must include procedures for making and maintaining a record of all information obtained under the procedures implementing paragraph (b) of this section.

(i) Required records. At a minimum, the record must include: A) All identifying information about a customer obtained under paragraphs (b)(2)

(i) of this section:B) A description of any document that was relied on under paragraph (b)(2)(ii)

(A) of this section noting the type of document, any identification number contained in the document, the place of issuance and, if any, the date of issuance and expiration date;

C) A description of the methods and the results of any measures undertaken to verify the identity of the customer under paragraph (b)(2)(ii)(B) or (C) of this section; and

D) A description of the resolution of any substantive discrepancy discovered when verifying the identifying information obtained.

(ii) Retention of records. The bank must retain all the information in paragraph (b)(3)(i)(A) of this section for five years after the date the account is closed or, in the case of credit card accounts, five years after the account is closed or becomes dormant. The bank must retain the information in paragraphs (b)(3)(i)(B), (C) or (D) of this section for five years after the record is made.


OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

1. Overview

The Office of Foreign Assets Control (OFAC) is a division of the U.S. Treasury. OFAC’s purpose is to enforce sanctions against foreign countries, their agents, terrorists or other threats against the United States national security. It is not just the countries but also individuals called “Specially Designated Nationals” also called a “Blocked Person”. We are required to block or freeze any accounts for these individuals or countries within 10 days from the occurrence of the activity. Your institution can be fined and penalized for failure to comply with OFAC.

1. The List

The OFAC list is updated frequently and should be kept up to date at your financial institution. Before we open an account, it is a good idea to check the list to make sure that the person or entity opening the account is not on the list. That way we can prevent subsequent action of blocking and freezing assets. Your financial institution should have established procedures to continually audit and check for compliance with OFAC guidelines. Since the list is updated often, an account that you opened up last year may now be on this list. This is not something that you can prevent at the new accounts desk.

Website for OFAC list:www.treasury.gov/offices/enforcement/ofac/sdn

OFAC Compliance Web Sitewww.ofaccompliance.com

Fax on Demand 202-622-0077

Compliance Hotline 202-622-2490


http://www.ofaccompliance.com/

http://www.treasury.gov/offices/enforcement/ofac/sdn

CUSTOMER NOTICE FOR CIP

Section 103.121(b)(5)(i) Customer noticeThe CIP must include procedures for providing bank customers with adequate notice that the bank is requesting information to verify their identities.(ii) Adequate notice. Notice is adequate if the bank generally describes the identification requirements of this section and provides the notice in a manner reasonably designed to ensure that a customer is able to view the notice, or is otherwise given notice, before opening an account. For example, depending upon the manner in which the account is opened, a bank may post a notice in the lobby or on its website, include the notice on its account applications, or use any other form of written or oral notice.(iii) Sample notice. If appropriate, a bank may use the following sample language to provide notice to its customers:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW

ACCOUNT

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.


FINAL THOUGHTS AND QUESTIONS

• Complete CIP documentation – KNOW YOUR CUSTOMER!• Complete CDD documentation for beneficial ownership rule. REMEMBER THAT

THERE IS NO “GRANDFATHER” EXCEPTION FOR THE NEW BENEFICIAL OWNERSHIP RULES. Look for “triggering events for existing customers prior to May 11, 2018

• Look for FAQ’s from FinCEN and pay attention to any loan related questions• Exercise due diligence for account activity• Look for false statements on loan applications• Look for loan fraud activity and identity theft• Report POTENTIAL Suspicious Activity to the BSA Officer• Participate in periodic training and make sure that new employees receive training• Remember that suspicious activity can come from many sources – does a subpoena

contain suspicious activity or a bankruptcy petition?• GOOD LUCK!


Resources


FINCEN ISSUES NEW RULES ON MAY 12, 2016

This is a link to the FinCEN announcement of the new rule, look at the Customer Due Diligence Requirements for Financial Institutions (05/12/2016):

https://www.fincen.gov/whatsnew.html

The pdf from the Federal Register is 62 pages.

This link has the entire rule from the Federal Register

https://federalregister.gov/a/2016-10567

This is the Table of Contents:

DATES:FOR FURTHER INFORMATION CONTACT:SUPPLEMENTARY INFORMATION:I. Executive SummaryA. Purpose of This Regulatory ActionB. Summary of the Major Provisions of the Rulemaking1. Beneficial Ownership2. Anti-Money Laundering Program Rule AmendmentsC. Costs and BenefitsII. BackgroundA. The Bank Secrecy ActB. The Importance of Customer Due Diligence1. Assisting Financial Investigations by Law Enforcement2. Advancing Counterterrorism and Broader National Security Interests3. Improving a Financial Institution's Ability To Assess and Mitigate Risk4. Facilitating Tax Compliance5. Promoting Clear and Consistent Expectations and Practices6. Advancing Treasury's Broad Strategy To Enhance Financial Transparency of Legal Entities

C. The Advance Notice and Notice of Proposed RulemakingD. Summary of CommentsE. General CommentsIII. Section-by-Section AnalysisSection 1010.230 Beneficial Ownership Requirements for Legal Entity Customers

Trusts“Account” DefinitionAdditional Regulated EntitiesExcluded Foreign Entities


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https://federalregister.gov/a/2016-10567

https://www.fincen.gov/whatsnew.html

Nonexcluded Pooled Investment VehiclesIntermediated Account RelationshipsCharities and Nonprofit EntitiesOther Proposed ExclusionsPrivate Label Retail Credit Accounts Established at the Point-of-SaleAdditional ExemptionsAccounts Established for the Purchase and Financing of PostageCommercial Accounts To Finance Insurance PremiumsAccounts To Finance the Purchase or Lease of EquipmentIV. Regulatory AnalysisA. Executive Orders 13563 and 128661. Discussion of Comments to the RIAGeneral CommentsCost-Related CommentsBenefit-Related CommentsOther IssuesB. Final Regulatory Impact Assessment1. Executive Summary2. Introduction and Summarya. Overview of the RIAb. Rationale for the CDD Rulec. Discussion of Regulatory Alternatives to the Final CDD Ruled. Summary of Findingsi. Costs(1) Quantitative Assessment(2) Qualitative Assessmentii. Benefits3. Quantitative Estimates of Costsa. Costs to Covered Institutionsi. Employee Trainingii. Incremental Onboardingb. Additional Client Time in New Account Opening Process4. Qualitative Discussion of Costsa. Incremental Costs to U.S. Criminal Investigations and the Justice Systemi. Suspicious Activity Report Processingii. Investigationsiii. Prosecutionsiv. Incarcerationsb. Costs to Covered Institutionsi. Information Technology Upgradesii. Suspicious Activity Report Generation and Transmittaliii. Internal Control/Complianceiv. Potential Capital Loss (Accounts Moving Abroad) and Forgone Capital (Accounts Not Opened)

c. Increased Costs Associated With Non-Criminal Activities [131] i. Reduced Privacyii. Potential Impact on Clients, Including Access to Banking for the Unbanked5. Qualitative Discussion of the Benefits





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a. Reduced Crimes and Terrorist Activityb. Law Enforcement Benefitsi. Reduced Cost of Beneficial Ownership Searches6. Transfersa. Lost Tax Revenue Due to Capital Loss (Accounts Moving Abroad)b. Increased Asset Recoveryc. Potential Increased Tax Revenue Through Improved Tax Compliance7. Reputational Effectsa. Reputational Effects of Meeting International Policy Standardsb. Reputational Effects on Financial Institutions8. Breakeven Analysis and ConclusionC. Final Regulatory Flexibility Act Analysis1. Statement of the Reasons For, and Objectives of, the Rule2. A Summary of the Significant Issues Raised by the Public Comments in Response to the IRFA, a Summary of the Assessment of the Agency of Such Issues, and a Statement of Any Changes Made in the Proposed Rule as a Result of Such Comments

3. Description and Estimate of the Number of Small Entities to Which the Proposed Rule Would Apply

4. Description of the Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule, Including an Estimate of the Classes of Small Entities Which Will Be Subject to the Requirement and the Type of Professional Skills Necessary for the Preparation of the Report or Record

a. Beneficial Ownership Requirementb. Customer Due Diligence Requirement5. A Description of the Steps the Agency Has Taken To Minimize the Significant Economic Impact on Small Entities Consistent With the Stated Objectives of Applicable Statutes, Including a Statement of the Factual, Policy, and Legal Reasons for Selecting the Alternative Adopted in the Final Rule and Why Each One of the Other Significant Alternatives to the Rule Considered by the Agency Which Affect the Impact on the Small Entities Was Rejected

D. Paperwork Reduction Act AnalysisE. Unfunded Mandates Act of 1995 StatementList of Subjects in 31 CFR Parts 1010, 1020, 1023, 1024, and 1026Authority and IssuancePART 1010—GENERAL PROVISIONSPART 1020—RULES FOR BANKSPART 1023—RULES FOR BROKERS OR DEALERS IN SECURITIESPART 1024—RULES FOR MUTUAL FUNDSPART 1026—RULES FOR FUTURES COMMISSION MERCHANTS AND INTRODUCING BROKERS IN COMMODITIES

Footnotes


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APPENDIX A – CERTIFICATION FORM


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