May is going to be a rough month for compliance officers — on May 11, 2018, FinCEN’s new Customer Due Diligence(“CDD”) Rule for beneficial ownership becomes effective.  The CDD rule will have a significant impact on the collection of information from customers and AML enforcement.  See here for FinCEN guidance.

Many have welcomed these rules as a step in the right direction in combating a significant problem – the ease of hiding and disguising illicit funds in the United States.  In terms of beneficial ownership regulations, the US is relatively far behind the EU – especially the UK which has enacted a corporate ownership registry.  After the Panama Papers broke several years ago, it was clear that something needed to be done and gave government regulators the political cover to take action.

It is encouraging to see FinCEN and financial institutions addressing this issue.  Without beneficial ownership information, entities take significant risks when it comes to sanctions, FCPA, and money laundering – this CDD Rule helps to address a large portion of that risk.  The challenge for compliance professionals is to make sure their companies are ready to comply.

The new regulations require certain financial institutions (“covered institutions”) to identify and verify the beneficial owners of legal entity customers.  The intent is to get at the true owners of legal entities, not nominee or straw owners.  It applies to all federally regulated banks, federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants and brokers in commodities.

Covered institutions are required to establish and maintain written procedures reasonably designed to identify and verify the beneficial owners of legal entity owners.  Banks are required to implement procedures to identify natural person owners of bank accounts when the account is opened (subject to certain exceptions).

A beneficial owner is defined to include each individual who, directly or indirectly, owns 25 percent or more of the equity interests of a legal entity customer, and a single individual with significant responsibility to control, manage or direct a legal entity customer.

So now the question becomes – how do you comply?  Beneficial ownership is notoriously difficult to collect.  Covered institutions are not going to be able to do this on their own. This is where third party business partners who specialize in beneficial ownership can be a life saver.  While the CDD Rule does allow covered institutions to set up their own procedures that rely on certification from the individual regarding their status as a beneficial owner, using these software tools can be less resource intensive than human-led processes.

Collecting and maintaining beneficial ownership information is no easy task.  In working with my clients, I’m often asked about different vendor options.  One vendor with which I have worked closely with over the past several months is Trulioo, which also sponsors my blog.

Trulioo’s Business Verification Service is a great example of why a third party business partner is critical to ensure compliance with the CDD Rule – covered institutions do not have the time, experience, or resources to develop a global solution the size and scope of what Trulioo accesses to instantly verify business entities and beneficial owners.

With services like Trulioo’s, covered institutions are able to automate the retrieval of vital company information from government registrars worldwide, streamlining compliance with the CDD Rule.  As you would expect from a company fully focused on beneficial ownership verification, they have integrated best practices in beneficial ownership verification, including optical character recognition, artificial intelligence, and natural language processing.

If you work for a covered financial institution, I recommend you take a look at Trulioo’s Global Business Verification, Electronic Identity Verification (eIDV) and ID Document Verification as possible solutions to your CDD compliance challenges.

As May 11^thquickly approaches, there is no time to waste in ensuring that your CDD procedures are functioning smoothly.