“The rule implementing Section 314(a)…does not authorize the
reporting of Beneficial Ownership information associated with
an account or transaction matching a named subject.” (www.
due-diligence-requirements-for-financial-institutions.) Notice the
distinction in verbal phrases—“does not require” versus “does not
authorize”—when describing the reporting of beneficial ownership
information associated with an account or transaction matching
a named 314(a) subject.
In either case, the rule appears to state that there is no requirement to report the beneficial owners of a matching legal entity
when responding to a 314(a) request. However, the verbiage from
the Federal Register appears to suggest that, not only is there no
requirement to do so, but also there is no authorization to do so.
In effect, a financial institution might find itself at risk by doing
so. (This would not, of course, preclude the reporting of such
information on a SAR that might result from an investigation
prompted by the appearance of the entity on a 314(a) list.)
However, for most financial institutions, that is not the most
relevant question related to 314(a) requests. Rather, most wonder
what to do if a beneficial owner—but not the entity that he/she
owns—is a match to a 314(a) request. Adopting the premise of
the statements from the rule and FAQ referenced above, the assumption would be that beneficial ownership alone is not enough
to justify the reporting of a positive match. Consider the instructions for 314(a) searches: “The financial institutions must query
their records for data matches, including accounts maintained by
the named subject during the preceding 12 months and transactions conducted within the last six months. Financial institutions
have two weeks from the posting date of the request to respond
with any positive matches. If the search does not uncover any
matching of accounts or transactions, the financial institution
is instructed not to reply to the 314(a) request.” ( www.fincen.
gov/sites/default/files/shared/314afactsheet.pdf .) The specific
reference to “accounts maintained by…” suggests that a matched
party must be an owner or signer on an account, which a beneficial
owner may not be.
Thus, if no reporting requirements are added, then what’s the
challenge? As most financial institutions utilize a querying system
that matches all customer records to the 314(a) list once received,
financial institutions must now be cognizant of the fact that there
may be some positive matches that should not be reported. Pro-
cedurally, the identification of such matches could be achieved in
two ways. First, each positive match could be closely scrutinized
and investigated before reporting, allowing the discovery that the
matching individual’s only connection to the financial institution
is as a beneficial owner (most institutions likely do this already).
Second, the ownership code used to identify beneficial owners
within a financial institution’s core system could be added as a
data point on the 314(a) query’s output.
Finally, despite what the letter of the rules and FAQ state, it does
seem somewhat counter-intuitive that law enforcement would not
want to know that an individual on the 314(a) list owns a legal entity
that banks with your financial institution. It is hoped that the upcoming guidance referenced above will provide clarity on this issue.
When identifying your trigger events for updating beneficial ownership information, consider how monitoring will occur. Surveys
and questionnaires circulating throughout the industry over the
last two years have revealed some fairly common trigger events
that most financial institutions plan on adopting, including:
■ ■ ■ The opening of a new account;
■ ■ ■ Re-classification of a customer to a higher level of risk; and
The monitoring of such events will largely rely on associate
notification and/or action, whether that associate is on the front
line or in the BSA department. Thus, training and testing of the
CDD rule’s requirements and the related implementation strate-
gies, are essential.
However, one common trigger event was not mentioned
above—knowledge of a change in ownership. If identifying as a
trigger event, financial institutions need to word this one carefully.
Simply designating “a change in ownership” as a trigger event would
seemingly obligate a financial institution to know of every change
in ownership of a legal entity, on its books. Describing the trigger
event as “knowledge of a change in ownership” is preferable, as
the knowledge must exist before the requirement to update the
information is triggered. Of course we need to remember that if
one person at the institution “knows,” then the institution knows
and that the concept of “should have known” is lurking behind
the “knowledge” label as well.
Cognizant of the fact that many changes in legal entity ownership occur without any notification to the entity’s financial institution and without any public reporting, some financial institutions
have chosen to not focus on trigger events. Instead they simply
update beneficial ownership information for all relevant legal
entity customers on a periodic basis, typically annually. Not only is
this a daunting task, but financial institutions choosing to pursue
this path should consider the risks of inconsistent results. Let us
assume that Awesome Bank has five legal entity customers with
existing beneficial ownership information, none of which has been
changed in the last year. Awesome Bank sends re-certification
requests to each customer; three of the five customers respond,
noting no changes, but two do not. Repeated attempts to get the
two remaining customers to respond, yield no results. Awesome
Bank then attempts to re-verify the information by other means
but is unsuccessful. Thus, they have no way of knowing if the
beneficial ownership information is still accurate.
Similar to the discussion above about lowering the 25% owner-
The second set of FAQs relevant to the
CDD rule (published April 4, 2018) were
certainly beneficial in clarifying some
of the issues discussed above…but
implementation challenges remain.