May 11 marks a watershed moment of sorts for financial institutions (FIs), with new requirements for customer due diligence.
According to new processes mandated by the Financial Crimes Enforcement Network (FinCEN) and the U.S. Treasury Department, additional efforts must be spent identifying legal entity customers’ beneficial ownership stakes.
As defined by FinCEN, a beneficial owner can include individuals who own at least 25 percent of equity of the legal entity or who have significant responsibility when it comes to controlling the legal entity — and it all impacts new account openings.
For one thing, anonymity is stripped away from ownership structures, boosting security efforts and transparency within the financial realm.
But beyond that benefit, the onus is on FIs to spend the time and money and to get the technology in place to set about identifying those beneficial owners.
It’s no simple task, nor inexpensive; FinCEN estimates that the first year of implementation will mean $250 million will be spent on compliance efforts alone.
Yet amid the slew of agencies and regulators that look at various actors up and down the value chain within the financial industry, there are what he termed “blind spots” in knowing just who, and where, beneficial owners are.
“With this new rule, it does change the process [of identification], and any time the process changes, the advent of technology is welcome,” he told PYMNTS. “With this particular rule, a lot of people were spending time trying to understand and decipher it.”
Against that backdrop, GIACT late last month debuted Beneficial ID, which it bills as a platform that addresses digital collection, Know Your Customer (KYC) and Office of Foreign Assets Control (OFAC) processing of beneficial ownership. Amid functions offered by the platform are the collection and processing of beneficial owner information, which is provided by the person in control of the legal entity.
Barnhardt noted that FinCEN’s Customer Due Diligence rules are fluid ones. Just a few weeks ago, the latest iteration of frequently asked questions was released. This implies that the technology used to satisfy those requirements must remain fluid as well.
“You have to have the ability, the capability and the flexibility to modify and communicate the products,” said Barnhardt of offerings such as GIACT’s. “If compliance were to change and they were to come out and change the beneficial ownership from 25 percent down to 5 percent, or say that, ‘I want to know everybody,’ the technology solution has to be adaptable, and it has to be adaptable before the [final deadline].”
Barnhardt also projected that FinCEN’s statement of $250 million initial first-year costs of compliance may prove to be optimistic.
“There are a lot of moving parts in collecting the new data. How do you collect it, when do you collect it?” he said. One hint comes anecdotally, as a single customer of GIACT has estimated that its own first-year compliance costs tied solely to the new Customer Due Diligence rules will top $5 million due to additional employees, processing and postage costs.
“A lot of the solution providers today will effectively build a square peg, and the customers will be the round hole, and the technology does not fit into that very well,” said Barnhardt. “When you think of a holistic approach … we need to take a little bit of ambiguity here to build a solution that is easily integrated into existing solutions,” he added, a goal achieved via web portal features of Beneficial ID.
“You have to assume the companies have some means of collecting and processing these forms. But what we are finding out — and we have had a lot of discussions — is that a lot of folks are not doing it digitally. Or if they are doing it digitally, they haven’t read the second round of FAQs, and they have to get back and retool it,” he noted.
For now, the deadline rushes closer, with May 11 just days away. And yet, just last month, the Independent Community Bankers of America (ICBA) petitioned for a one-year extension of the rule.
That request may be echoed by the industry at large: “A lot of banks have said they are ready, but they are not,” said Barnhardt.