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NICSA Webinar | AML Enhanced Customer Due Diligence - "Beneficial Owner Rule"


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The wait is finally over, after years of waiting we now have the final Customer Due Diligence Rule. This new rule will require financial institutions to enhance their AML programs to further scrutinize entity accounts and their beneficial owners. The panel will detail key requirements and dates while comparing the CDD rule to the EU 3rd directive.

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NICSA Webinar | AML Enhanced Customer Due Diligence - "Beneficial Owner Rule"

  1. 1. AML Enhanced Customer Due Diligence - “Beneficial Owner Rule” September 14, 2016
  2. 2. Agenda • Purpose • Introductions • Background of the Rule – Parallels to European Union / Panama Papers • The Rule and effective Dates • Operational Implications & Action • What is coming next? • Q & A
  3. 3. Crissie Wisdom AML Compliance Officer Fraud prevention Manager Invesco, Inc. Crissie Wisdom is the Anti-Money Laundering Compliance Officer for Invesco’s U.S. operations and serves as Fraud Prevention Manager for Invesco’s U.S. transfer agency. In her role, Crissie coordinates and oversees AML programs for Invesco’s two broker/dealers, the Invesco Funds, Invesco Trust Company and a series of Registered Investment Advisers including Invesco Advisers, Invesco PowerShares and WL Ross & Co. A graduate of Texas Tech University, Crissie holds FINRA Series 6 and 26 licenses and is a certified Anti Money Laundering Specialist (CAMS) and certified Fraud Examiner (CFE). Crissie currently serves as a member of the Administrative Committee of the Invesco Trust Company Board of Trustees.
  4. 4. Penny Whiting-Stewart AVP/Sr. Operations Analyst Wells Fargo Asset Management Penny Whiting-Stewart, Assistant Vice President of Wells Fargo Funds Management, has been with the company for over 16 years and brings over 35 years’ experience in mutual funds, banking, back-office operations, operational risk and compliance and regulatory support to the Transfer Agency Operations group (TA Operations). Penny serves as an escalation point on behalf of TA Operations for the Risk and Compliance, Legal, and Client Service teams. Her primary areas of focus include operational risk and control, fraud mitigation, policies and procedures, audit engagements, regulatory initiatives and prospectus review. Penny currently represents Wells Fargo Funds Management on the DST Regulatory & Compliance Advisory Steering Committee. She has also served as a member of the ICI Transfer Agent Advisory Committee and ICI International Operations Advisory Committee on behalf of TA Operations.
  5. 5. Jeff Clevenger AML Compliance Officer Waddell & Reed Jeff Clevenger has been with Waddell & Reed since 2010 and is the AML Compliance Officer and Assistant Vice President of Compliance Support. He is responsible for the firm’s AML Program, excessive trade monitoring, prospectus compliance and third party intermediary oversight. Prior to his current position, Jeff worked for more than 15 years at Boston Financial Data Services as a Compliance Officer and was responsible for the compliance operations of the Kansas City office. Jeff earned an M.B.A. from University of Missouri in Kansas City.
  6. 6. Greg Barner Compliance Solutions Manager DST Systems, Inc. Greg is DST’s Compliance Solutions Manager where he is focused on generating strategic compliance solutions across DST’s various business lines. Throughout Greg’s career he has been responsible for the Asset Management Regulatory department where he defined the product vision and strategy while leading the System and Customer Support Center, Full Service AML Compliance and Risk, Tax Reporting and Withholding, and Escheatment operational teams. Greg serves as the Leader of the Regulatory Compliance Advisory Group Steering Committee, which determines direction for our regulatory products with high ranking individuals from 20 of DST’s largest clients. He also represents client interests through his participation in seminars and webinars for industry hot topics. Greg earned a Bachelor of Business Administration in Computer Information Systems from Central Missouri State University.
  7. 7. Background of the Rule Crissie Wisdom
  8. 8. Make Room for the Fifth Pillar
  9. 9. How Did We Get Here? • In 2010, the U.S. issued guidance cautioning financial institutions to evaluate the risk of beneficial owners but stopped short of actually requiring that beneficial owners be identified. • In 2012, FinCEN issued a notice of proposed rulemaking for beneficial owner identification. • In May 2016 FinCEN finalized the Customer Due Diligence/Beneficial Owner rule with very few changes from the proposal.
  10. 10. Panama Papers Intermediaries Hidden Owners Tax Havens
  11. 11. Can’t get to Panama? Just go to Delaware “The United States has been considered a laggard in the global push to shine light on the murky world of shell companies.” The New York Times April 2016 “It takes less than an hour to incorporate a company in Delaware, and the state is so eager to attract businesses that the office of its secretary of state stays open until midnight Monday through Thursday — and until 10:30 p.m. on Friday. Nearly half of all public corporations in the United States are incorporated in Delaware.” The New York Times June 2012
  12. 12. The 4th AML Directive “4MLD” Customer Due Diligence • Firms must determine extent of CDD required - Simplified, Standard or Enhanced. Beneficial Ownership • Introduces a requirement for member states to establish a central register to store beneficial ownership details Politically Exposed Persons • Expands definition of politically exposed to consider domestic PEPs as well as foreign
  13. 13. The Rule and effective Dates Penny Whiting-Stewart
  14. 14. Four core elements • Customer identification and verification (CIP programs currently satisfy this element); • Beneficial ownership identification and verification; • Understanding the nature and purpose of customer relationships to develop a customer risk profile; and • Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information
  15. 15. So, if my CIP obligations are met, I’m good – right? • Not so fast – The final rule defines “beneficial owner” using a two-pronged test of ownership and control: – Ownership Prong • Identify each individual who owns 25% or more of the equity interests • If no individual owns 25% or more, then no identification is noted under this prong • A financial institution may, based on its own risk assessment, lower the percentage threshold for all customers or its high risk customers, or • It may require identification of other individuals who are not covered by the beneficial ownership definition – Control Prong • Must identify one individual who exercises significant control – NOTE: If an individual is both a 25% owner and meets the definition for control, the same individual could be identified as a beneficial owner under both prongs.
  16. 16. Verification of beneficial owners • May collect beneficial owner information on standard certification form (see Appendix A of the final rule), or by any other means that comply • Must verify identity of beneficial owners by using existing risk-based CIP practices. – AML procedures must document approach to verify and procedures for response when identity cannot be verified – May rely on documentary or non-documentary methods as with CIP • Obligation to update beneficial owner is triggered when the FI becomes aware of information relevant to assessing or reevaluating the risk posed by the customer/shareholder. • Not required to validate the status of a beneficial owner.
  17. 17. Understand the nature and purpose • Expected to identify transactions that are not normal for the customer/shareholder – unusual activity • Per FinCEN - should be consistent with existing rules and guidance for unusual or suspicious activity
  18. 18. Ongoing monitoring • Conduct ongoing monitoring on a risk basis – Maintain and update customer information when event triggered – Identify and report suspicious transactions/activity – “Customer” for this purpose also includes beneficial owners of legal entity customers/shareholders
  19. 19. Who’s in – Who’s out? • Fully included entities: – Corporations – Limited Partnerships – Limited Liability Companies • Partially included entities (Control Prong only): – Certain Charities and Non-profits – Pooled investment vehicles managed by non-excluded FI’s • Excluded entities: – Most trusts – Sole proprietorships or unincorporated associations – Omnibus/Financial Intermediary underlying customers – Entities already excluded by CIP rules • ERISA Plans, Banks, Investment Advisers, Publicly Traded Companies
  20. 20. Dates and other stuff! • Effective date of the final rule: – July 11, 2016, which is 60 days from the publication of the rule in the Federal Register • Implementation date: – Implement and comply by May 11, 2018, two years from the date the final rule was published in the Federal Register • Record retention: – Identification, certification form, any other ID info obtained = 5 yrs. after account closure – Description of documents relied on, non-documentary methods, results of measures taken, resolution of discrepancies = 5 yrs. after the record is made
  21. 21. Operational Implications & Action Jeff Clevenger with panelists
  22. 22. Bottom Line for Operations I’m a fund operations professional. What should I be doing right now?
  23. 23. What is Next? • Fully define “beneficial owner” within your firm and develop a risk based approach to verification – Ownership and control prongs – Clearly define when an owner is verified and what is necessary when verification fails or is incomplete • Update policy and procedures – Risk based approach based on firm’s business model – Customer identification and suspicious activity procedures – Prospectuses and selling agreements • Update forms and self service products – Define beneficial owner on applicable forms – At a minimum, must gather four data elements of any beneficial owners • Communicate policy to business partners – Financial advisors and third party intermediaries
  24. 24. Question & Answer
  25. 25. AML Enhanced Customer Due Diligence - “Beneficial Owner Rule” Crissie Wisdom AML Compliance Officer Fraud prevention Manager Invesco, Inc. Penny Whiting-Stewart AVP/Sr. Operations Analyst Wells Fargo Asset Management Jeff Clevenger AML Compliance Officer Waddell & Reed Greg Barner Compliance Solutions Manager DST Systems, Inc.