New rule regulates beneficial ownership and customer due diligence

While lending regulations have been the recent regulatory hot-topic, banks should continue to be concerned about the Bank Secrecy Act (BSA) and the impending changes associated with the new due diligence standards regarding beneficial ownership.

FinCEN officially published their final rule on May 11, 2016. It requires banks to identify the beneficial owners of legal entity customers. Covered financial institutions must comply with these new rules by May 11, 2018.1 BSA/AML and compliance officers have long been aware that beneficial owners associated with business entities can be used to gain access to the financial network by conducting different transactions through their business accounts. The concealment and privacy of registered businesses and their potential for large numbers of transactions presents the opportunity to launder large sums of funds. The increased opportunities afforded by businesses for wrongdoers to layer and place illegal funds through their business accounts and ownership interest is what triggered the seemingly overdue change in the first place. The abuse of these “shell accounts” has enhanced financial schemers’ ability to evade taxes and increased their opportunities to launder money.2

Financial institutions have always needed to place special emphasis on their BSA program and provide adequate resources and training to individuals responsible for compliance. Currently an adequate BSA program MUST provide the following minimum requirements:3

  • a system of internal controls to ensure ongoing compliance
  • independent testing of BSA/AML compliance
  • designation of an individual or individuals responsible for managing BSA compliance (BSA compliance officers)
  • training for appropriate personnel

With the implementation of this new rule, a robust Customer Identification Program/Customer Due Diligence Program (CIP/CDD) is more important than ever, as it incorporates a new fifth pillar. FinCEN further addresses the four key elements for CDD in more detail in a recently published FAQ; summarized below they are:4

  1. customer identification and verification
  2. beneficial ownership identification and verification
  3. understanding the nature and purpose of customer relationships to develop a customer risk profile
  4. ongoing monitoring to report suspicious transactions and maintaining customer information on a risk basis

Customer identification and verification is covered under the current CIP rules. The new CDD rule specifically addresses the second, third and fourth elements. The second element, beneficial ownership identification and verification, is now a regulatory requirement. The third and fourth elements will now fall under the new fifth pillar of BSA/AML program requirements.

A bank’s BSA and Anti-Money Laundering (AML) program should be designed to meet the requirements of the four pillars while also incorporating the new fifth pillar. This new fifth pillar must be addressed in the bank’s risk assessment and treated accordingly based on the bank’s customer profile. Independent review of this area will assist the bank in compliance and fulfillment of the obligations established by the Bank Secrecy Act.

KraftCPAs can help you comply with the independent review requirement. Contact a member of our financial institutions team at (615) 242-7351 for more information.

1 “Customer Due Diligence Requirements for Financial Institutions,” May 11, 2016,
2 “Potential Money Laundering Risks Related to Shell Companies,” Nov. 9, 2006,
3 “Bank Secrecy Act/Anti-Money Laundering Examination Manual 2014,” Nov. 17, 2014,
4 “Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions,” July 19, 2016,

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