Consider an Automated Approach to Achieve Compliance
Banks and certain other financial organizations must comply with FinCEN’s new rules for customer due diligence (CDD) beginning May 11, 2018. Implementing an automated approach to CDD can help meet multiple compliance goals – from reliable client and risk identification to developing comprehensive customer and risk profiles – while also reducing the time and cost of compliance.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has adopted new anti-money laundering (AML) regulations under the Bank Secrecy Act to clarify and strengthen customer due diligence (CDD) for banks, brokers or dealers in securities and certain other financial organizations. Covered financial institutions must comply with these new rules by May 11, 2018.
A primary focus of the rules is a new CDD requirement to identify and verify the identity of “beneficial owners” of legal entity customers, with certain exceptions. There are two types of beneficial owners under the final rule: those who satisfy the “ownership prong” and those who satisfy the “control prong.” For the ownership prong, the term “beneficial owner” includes each individual who, directly or indirectly, owns 25 percent or more of the equity interests of the legal entity customer. For the control prong, the term “beneficial owner” means a single individual with significant responsibility to control, manage or direct the legal entity customer (e.g., a CEO, vice president, or treasurer).
Overall, FinCEN identifies four key goals of an effective CDD program:
- Customer identification and verification,
- Identifying and verifying the identity of beneficial owners of legal entity customers,
- Understanding the nature and purpose of customer relationships to develop a customer risk profile and
- Conducting ongoing monitoring.
If performed manually, achieving these goals can be a costly, time-consuming and potentially error-prone process. It involves continually checking whether the institution might be doing business with individuals or organizations on a national or international sanctions list. Accomplishing that task successfully also depends upon the quality of the customer data with which the financial institution is working.
The benefits of an automated approach to CDD compliance
One strategy for achieving compliance with the new FinCEN rules is to implement an automated CDD approach that can deliver high-precision matching, a technology that uses automatic checks based on phonetic and semantic characteristics and other techniques to evaluate how likely it is that a customer record relates to a sanctioned person or organization. The combination of multiple comparison methods ultimately ensures a high degree of reliability in the results, which are also quickly generated and do not require significant revision work, saving time and money.
High-precision matching delivers numerous benefits to a financial institution, including:
- Automatic sanctions list checks
- Fast results
- A high degree of reliability
- Time and cost savings through a reduced need for manual verification
- Fewer false positives (incorrectly matching a customer record with a sanction list)
- Fewer false negatives (an undetected match with a sanction list)
Another important benefit of an automated CDD approach is that it can support robust reporting capabilities. To achieve full transparency and accountability, it is advisable for financial organizations to not only conduct ongoing record checks, but also document them. For this reason, automated CDD should be integrated into a bank’s data management system, providing an activity log and audit trail that can be reviewed when necessary.
Creating a comprehensive customer view
Integrating automated CDD as part of a bank’s data management system also makes it possible to create a unique and comprehensive customer view and risk profile. Typically, many departments within a financial organization use multiple unconnected legacy systems that store qualitatively disparate data about customers. Using high-precision matching with a CDD approach, a unique customer profile can be created in a central data hub that is synchronized in batch mode or real-time with the customer data in the original source systems. In this way, a comprehensive record can be created for each customer, with a unique and complete view that describes who the contact is, what interactions the organization has with that person, what risks that person may represent and the results of sanction list checks.
Employing automated CDD to comply with the new FinCEN rules can go a long way toward helping compliance departments effectively achieve their objectives. A CDD approach of this kind can reduce costs as well as the risks of reputation damage and penalties for the financial organization. It can also provide a comprehensive, ongoing record of customer relationships and risk profiles that help meet FinCEN’s goals for an effective CDD program.
