CDD/ Beneficiary Ownership – CD (Renewal) Dilemma
CDD/ Beneficiary Ownership – CD (Renewal) Dilemma
Until April 3rd, institutions were allowed to risk-rate “triggering events” that would stimulate the new beneficial ownership certification. At the 11th hour, FinCEN published its beneficial ownership FAQ and sent the banking world into a tizzy! Why? Many institutions were discounting events such as certificate of deposit and line of credit renewals as having an existing relationship with the customer and being low-risk triggering events. But FinCEN changed that with FAQ #12:
Question 12: Are financial institutions required to have their legal entity customers certify the beneficial owners for existing customers during the course of a financial product renewal (e.g., a loan renewal or certificate of deposit)?
A condensed version of their answer: Yes on the premise that each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is established. Institutions are required to obtain information on the beneficial owners of a legal entity that opens a new account.
What’s a bank to do?
- Assess your risk. Query your system to determine the maturity dates for certificates of deposit to “legal entities.” The rule does not apply to individuals so that should greatly narrow the scope. And maturities will occur over the next 5 years, so the risk is not all immediate.
- Determine who will “own” compliance. Will it the be the responsibility of the retail manager of the office where the account was opened, or will it be centralized – in Deposit Operations or Compliance. The choice will depend on your compliance culture.
- Define your compliance process. A best practice would be to send a data collection form and your certification form along with the maturity notice of the certificate. A cover letter of explanation that this is a government requirement will help to add credibility to the requirement. Ask that it be completed and returned (to a designated address?) before the maturity date.
- FAQ #8 allows an institution to use its own version of the certification form. Language could be modified to the part of the response in FAQ #12 that the customer agrees to notify you of any change in information. If you use this clause, you would only need to acquire the beneficial ownership certification at the first rollover (until the account holder notifies you of any change or you become aware of any changes).
- The biggest question is what will you do with non-compliance? What if the customer doesn’t respond or the response is incomplete? One option could potentially be to discontinue paying interest until proper documentation is obtained. Probably under your certificate of deposit terms, you disclose that interest is set at your discretion; however, you would need to verify the terms of your agreement and potentially consult with legal counsel on this plan of attack. So, again, you need to establish procedures – Will you allow the certificate to rollover with no interest? Does that have a larger reputational risk in the community? Will you need to consider it matured and classify it as a demand deposit account? What happens when certification is received? There may be more questions than answers on this option, so consider it wisely with all parties of your Bank (compliance, risk, legal, senior management, etc.).
These are just a few things to consider as you develop your process. But not addressing CD renewals is not an option!
For additional information contact Evelyn at edehmey@fosaudit.com.
CDD/ Beneficiary Ownership – CD (Renewal) Dilemma | Evelyn I. Dehmey