due diligence

CDD and Auto-Renewing Products: Are you BSA Compliant

In eight days, the new 5th pillar – that includes Beneficial Ownership – takes effect. Starting May 11, 2018, Customer Due Diligence (CDD) will be added to the other four Bank Secrecy Act pillars. Right now, one of the most frequently discussed questions continues to be CD and loan renewals. TCA’s BSA Action Team (BAT) receives constant questions about CD and loan renewals and what should a bank do. Your BAT pros are here to help you through this regulatory nightmare and answer some frequently asked questions.

Question 1: Do beneficial ownership requirements apply to CD and loan renewals?

Answer: Yes! FinCEN defines CD renewals and loan renewals as new accounts because a bank is establishing additional formal banking relationships. This means that a bank needs to obtain beneficial ownership certification at the time there is a renewal.

Question 2: If you obtain a customer certification once on a CD and loan renewal, do you need to get a certification each time there is a renewal?

Answer: It depends. The FinCEN April 2018 FAQs offer a caveat for these accounts in question 12. FinCEN specifically states:

In the case of a loan renewal or CD rollover, because we understand that these products are not generally treated as new accounts by the industry and the risk of money laundering is very low, if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or CD is outstanding.

Quite simply, at the time a bank collects that initial certification, it can update the certification to include language requiring the bank to receive notification. We typically see this added to the closing attestation in the model certification form, such as below:

I, __ (name of the natural person opening account), hereby certify, to the best of my knowledge, that the information provided above is complete and correct. I further agree to notify the financial institution in the event that the ownership structure of the legal entity changes in the future.

If a bank updates the initial certification to require bank notification, you do not need to collect a new certification each time there is a renewal, unless there is a triggering event. If you do not include language requiring notification, then you need to get a certification at the time of every renewal.

Question 3: How can a bank comply with obtaining these initial certifications?

Answer: Bankers told TCA they are using one of two approaches. The first step is identification. Review loans and CDs to determine who is a customer that meets the definition of a legal entity. Next, pull all your accounts and – depending on whether you want to take a proactive or a reactive approach – pick one of the following options.

  • Option 1 – Contact all clients with auto‐renewing accounts – The regulation requires you to get a certification prior to the bank opening a new account. Since Question 12 allows us to obtain the certification once and include language that the legal entity agrees to notify us if ownership changes, we do not have to wait until maturity to begin collecting beneficial ownership certifications on our existing renewable accounts. For example, a customer who opened a five‐year auto‐renewable CD in April of 2017 will not mature until April of 2022. Although certification is not required until the first maturity date after May 11, 2018, instead of waiting five years, you can call customers or start a mailing campaign now to obtain either a verbal certification over the phone (as permitted by Question 10) or request that customers complete the certification form with the notification language and return it to the bank. Verbal certifications must still be documented with the name and title of the person providing the certification and the date the bank obtained the certification. This condenses the five‐year project to a couple of months and avoids the risk of a CD renewing without the bank obtaining beneficial ownership information.
  • Option 2 – Mailing with maturity notice or near maturity – If you choose to implement a mechanism that allows you to track renewals and requests certifications closer to maturity, this satisfies the regulation as well.

No matter which option you choose (or another option), ensure your staff receives training so they can answer customer questions about these forms.

Question 4: What if a customer does not respond with the completed certification?

Answer: The regulation requires beneficial ownership information be obtained prior to the account being opened and FinCEN considers this loan or CD a new account. TCA recommends taking the following into consideration:

  • Implement a tracking process to know which customers have an outstanding certification.
  • Implement a follow‐up process, such a calling program, for customers who have accounts that have a short timeframe for renewal.
  • Make bank Management and the ALCO Committee aware of this challenge and change in regulation. If you have to close a CD because you do not receive a beneficial ownership certification, this could have strategic implications for a bank beyond the compliance concerns.

Bottom Line: It is a whole new world for accounts with an auto‐renewable feature because a bank needs the beneficial ownership certification prior or at the time of first renewal.

Do you need TCA’s BAT expertise to review CDD policy and procedures? Contact [email protected].

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