FinCEN CDD Rule, sometimes called the Fifth Pillar of AML, became effective on May 11, 2018.

The CDD Rule has four core requirements. It requires covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to (1) identify and verify the identity of customers; (2) identify and verify the identity of the beneficial owners of companies opening accounts; (3) understand the nature and purpose of customer relationships to develop customer risk profiles; and (4) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. – FinCEN New Release

To clarify compliance and implementation of the rule, FinCEN provided two sets of FAQs.  The first was in July of 2016.  The second was in April of 2018.

There were two exemptions.  The first was on May 11, 2018, the guts of which is as follows:

The Beneficial Ownership Rule currently exempts covered financial institutions from the requirements to identify and verify the identity of the beneficial owner of legal entity customers at account opening to the extent that the legal entity customer opens the account for the purpose of financing insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker unless there is a possibility of cash refunds. This ruling provides exceptive relief to covered financial institutions from the requirements to collect and verify the beneficial owner of a legal entity customer opening such premium financing account when there is a possibility of a cash refund.

The second was a temporary relief announced on May 16, 2018, the guts of that is as follows:

… up to and including August 9, 2018… exceptive relief to covered financial institutions from the obligations of the Beneficial Ownership Requirements for Legal Entity Customers (31 CFR § 1010.230) (Beneficial Ownership Rule) with respect to certain financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.

At the time of this writing, many large banks went through a review of the rule implementation recently, are in review, or will soon be in review by the Office of the Comptroller of the Currency, but these are not a coordinated horizontal industry-wide review.  Banks are eager to find out how well they have done and how practical the reviews will be.  The second relief is one of great concern for all banks, not just the big banks, because many products have automatic rollover or renewal, for which banks do not normally consider to be a new financial product or even a new account.


GDPR Means General Data Protection Regulation

If you have been seeing Cookie Acceptance Notifications pop up on many global websites lately, it is precisely because this 2016 EU law, which goes into effect on May 25, 2018.  The law is broad in scope, but the notifications require the site user to accept the cookies being used, which is to document the site-user of opting in to the cookie tracking.  The sites are require to be able to evidence this opt-in.

The major requirement is in the title: Data Protection.  The foundational principle is that the website user owns his or her personal data that the site is collecting, so, as long as the site receives acceptance to use the data, the site also is responsible for protecting the data from data breaches.  Considering the ever-growing prowess of Black Hat Hackers, many sites are opting to purge the user data.  Major social networking site are probably coming up with ways to anonymize user data.

This principle that the user owns the data that is being collected has other ramifications.  The user can request erasure of his or her data.  The user will likely be able to request all users of his or her data, however removed from the originating data collector, to provide how the data was used.  All of the rights of ownership are attached to the data.

This is quite contrary to the American legal principle of privacy, which requires sites to keep the data private, but since the site owns the user’s data, it can do what it can do with any other asset it owns.  The defense of the American legal principle is that much of the data collected are actually intellectual property.  Take, for example, demographic information.  One site may analyze my personal data and conclude that I am a social conservative while another a social liberal; the conclusion is the result of the site’s work.

The EU legal principle suggests that such work may indeed be owned by the site, but if it is derived from the user, then user has derivative ownership of those conclusions.  Essentially, it recognizes that the user’s information has economic value and, therefore, the site will have to have a valid contract to use that data.

Since the law protects all EU citizens and residents and their data, it is global in nature.  Also, if an American tourist logs in from the EU jurisdiction, the American is protected as well.  For that matter, the American would be protected if the data is harvested from the United States but it is stored or passes through the EU jurisdiction.

Some questions remain, at least for me.  Would a company legally headquartered in Ireland but its activities are in Menlo Park, California, is the company treated as an EU company, and, therefore, require data protection to all user information going through Menlo Park because the financial results of that information is reported to the Irish tax authorities?

How about counter-terrorism efforts?

Or, does the public figure have an economic right to his or biography published by a traditional publisher of hardcover books?

FinCEN Final CDD Rule… For Now

FinCEN CDD Rule is the shorthand for Customer Due Diligence Requirements for Financial Institutions, which FIs were supposed to have implemented by May 11, 2018.  The requirement is to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity, among others.  At the time of this publication, May 16, 2018, the requirement also includes the collection of beneficial ownership information during product or service renewals, such as loan renewals and certificates of deposit rollovers. FIN-2018-G001 FAQ Regarding CDD Requirement for FIs, pages 9 and 10.  This is the most controversial definition of a new product or service.  Practically speaking, it means a short term 1-month CD will trigger the need to collect a certification of beneficial ownership, which also includes the work of due diligence to support the certification.  There is no provision to apply this on a risk basis, which means the pensioner in Wichita and a Middle Eastern correspondent bank will be treated the same for the purposes of this requirement.  Obviously, FIs as awaiting any guidance on the enforcement strategy from regulators.

Update:  On May 16, 2018, at around 6pm, FinCEN delayed the enforcement of this rule. Due to the unexpected interpretation by FinCEN, FIs were not ready to consider rollovers as purchase of a new financial product.  Realizing that they provided guide far too late for FIs to comply, FinCEN is providing a 90-day limited exceptive relief.  Also, as, what seems to be, a jab at FIs sounding the alarm, FinCEN added:

Consistent with the definition of “account” in the Customer Identification Program
(CIP) rules and subsequent interagency guidance, each time a loan is renewed or
a certificate of deposit is rolled over, the bank establishes another formal banking
relationship and a new account is created…

FinCEN understands that some covered institutions have not treated such rollovers or renewals as new accounts and have established automatic processes to continue the banking relationship with the customer.


CECL Means Current Expected Credit Loss 

On June 16, 2016, the US financial regulators, who refer to themselves as the Agencies, finalized an industry-wide implementation plan for a new accounting method for Credit Losses. The implementation is in stages and the first set of institution are to have implemented it by January 1, 2018. The first set is made up of the largest financial institutions with a presence in the United States.

More on CECL Implementation.

Ethics Does Not Have To Be Serious
credit Digital Transcendence

Ethics has to be real. Ethics has to be appropriate. However, ethics does not have to be serious. Seriousness is a style. And there shouldn’t be a prohibition on taking pleasure in doing the right thing.

I was asked to distinguish between ethics and morality. Morality is what is considered right or wrong by a person or society. Ethics is morality in action. So, if you believe that Jesus Christ was the son of God, then it would be unethical for you to desecrate his image. For that matter, if you don’t believe that Jesus Christ was the son of God but you do believe in respecting other people’s beliefs, you would avoid desecrating images of God worshipped by others.

Notice, I framed morality based on an individual’s belief and, in my second example, I changed the belief but applied the decision to act the same way. There are subtle difference that I won’t get into in this post.

Obviously, desecration of holy objects is a very grave matter. But the non-desecration should not be. It should simply be the norm that people are respectful of each other’s beliefs.

This can be applied to corporations. There is one difficulty with corporations, though: they aren’t democracies. The president or CEO gets to prescribe the appropriate behaviors and one must keep morality to the self. This is an HR issue.

I want to talk about ethics and sales. Financial advisors may have their own personal beliefs, but they take an oath to act in accordance with a set of codified conducts. The industry set these up specifically because FAs are knowledge workers and what they provide is not just financial products but advice. For this reason, an inappropriate product for a certain type of client is forbidden. This hurts the investor and it makes the industry look like cheaters. So, if you want to join the industry, you much follow the ethical guidelines prescribed to you.

This prescription even goes as far as breaking the code of coduct of the financial institution the FA is working for. Against, this no-exemption exists so that firms cannot create an environment where financial advisors are permitted to dismiss their oath.

This is all serious stuff. Why? Because we are talking about harming investors.

But for an FA who loves providing value advice and access to products to his or her clients and the guidelines make him feel secure that his competitors cannot cheat, then why shouldn’t they have a smile on their faces?

So, smile.

Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. 

33 banks lost to create 4

from Exposing Truth
from Exposing Truth

Risk is always two sides. Get rid of one risk and it comes with another. Insurance plans, for example, supposedly reduce risk, but if you pay the insurance premium, you are essentially getting rid of the substantive risk for a financial one. One of the ways we have thought about reducing risk is by making each financial institution insure itself through sheer size. The local pizzeria simple isn’t much of a loan risk to a bank with trillions of dollars. We have offset that risk with the risk of less personal interaction. We have made banking more and more transactional and less and less transformational.

The day-to-day business of a bank is really transactional. But the purpose of all of those transactions are supposed to be both transactional and transformational. Transactional in that the money gets wired, or deposit is recorded, or loan is approved. Transformational in that the money wired could provide someone the funds to get to work that day, or the deposit recorded provides the documentation for a mortgage loan, or loan approved so that the borrower can start a new business.

The question for Americans in regards to the size of financial institutions is whether the transactional efficiency now hinders the economic transformation that it is supposed to foster. More efficient transactions free up funds for other economic activity. But have we gotten to a point where the freed up capital is primarily helping wealthier people who then are equipped to more resources to make them wealthier while leaving the less-wealthy behind?

This is not a new question, of course. And I certainly don’t have the solution for what is the right amount of competition in banking that will foster more economic transformation while keeping risk relatively low. One test that I place to begin my inquiry is this: What percentage of transformational projects have been funded by bank loans versus investment from wealthy people? As a follow up, I would ask, When did these transformational projects get funded? I don’t know the answers to these questions but my feeling is that greater transformational projects have been funded by wealthy people over time. While I don’t know what proportion is the right proportion for the American economy, we are probably in a period where bank loans do not transform much of the economy anymore. If my feelings were on the mark, it would probably also mean that banks play a less important role in transforming the economy than before, and, therefore, might need a shake up of some sort. That shake up could come in the form of bank breakups, which increases the number of leaders in the industry with smaller pockets, forcing them to rely on ideas to have bank loans compete better with equity investments. But then again we are not in the mood to taken on more risk these days, and competing with equity investors to fund projects is a riskier activity.

So, I guess what I’m saying is: We are thinking about risk to the financial system all wrong. Size itself is just one variable but it isn’t big enough of a variable to change the economy in any meaningful way. Our mentality now is that banks simply move money around and store it and lend it to known risks. People used to start business with loans. Now, less people start businesses with loans. We have given debt a bad name. And that won’t change with having smaller banks… after all, banks, regardless of size, are enablers of debt.

Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.