The Shell Game and Beneficial Ownership

We've all seen the famous shell game a million times. As an example, a person puts say a marble under one of four shells, moves the shells around, and when asks to guess which shell the marble is under, few, if any, guess it correctly. Without a look at each, that marble is pretty hard to find.

Discussing a shell game is a good preference to discussing Beneficial Ownership, simply because Beneficial Ownership rules tie to efforts to combat criminal abuse of shell companies and other types of legal entities with no significant assets or ongoing business activities. These type entities have a mailing address, no employees, and produce no apparent economic value. They present havens for financial crimes such as money laundering, terrorism financing, tax evasion, etc. There exists an inability to obtain information regarding company identification and their beneficial owners. Without a way to get a look, you simply don't know what lies beneath that shell.

Unlike some of the other regulatory mandated customer information collection rules we face daily, the usefulness of which is often questionable in today's world, after an explanation of shell companies, one can actually understand the purpose of Beneficial Ownership information gathering. It is therefore appropriate these rules fall within the Customer Due Diligence rules as a potential new pillar of the Bank Secrecy Act.

These Customer Due Diligence modifications under Beneficial Ownership apply to legal entity customers for all accounts including checking, savings, certificates and LOANS. OFAC checks are required on the beneficial owners. There is a two prong approach to the rules - an ownership prong (for each individual with 25% or more ownership in the legal entity) and a control prong (for the individual who exercises significant managerial control over the legal entity).

Compliance is mandatory by May 11, 2018, but if you are not well on your way within this process, not only will the mandatory compliance date be difficult to achieve, but a regulatory exam will likely present findings as exams these last few months indicate the agencies are taking the Beneficial Ownership rules very seriously. There is not likely to be transitional allowance time like we have seen under TRID and HMDA.

Training on the loan and deposit side at both account opening and on event-driven updating will be needed. A model (not mandatory) form is provided and likely for reasonable functionality in your institution, modifications to the model form will be needed. Onboarding process and core software changes will need to occur.

Bottom line, this is a big deal!!! Join us in February for our discussion of this very important topic.