Editor's Note: This article originally appeared on the Bureau Van Dijk blog on July 18, 2017.

Last month I was delighted to join Bill Hauserman as a panellist on Bureau van Dijk's webinar, Beneficial ownership – have you got it right?

Bill and I discussed smarter ways to integrate beneficial ownership information into our viewers' compliance processes, so they could start focusing on higher-level decision-making and spend less time on data discovery, and the webinar is now free to watch on-demand.

During the broadcast we received dozens of open-ended questions from our worldwide audience of compliance professionals. We only had a chance to address a few of them on the day. But we couldn't let the rest go to waste, so I offered to answer some in this guest blog. Bill will tackle some of the others in a follow-up blog.

So, in no particular order – and noting that these are my personal views – here they are. You're welcome to contact me for clarification at info@dataderivatives.com.

Your questions answered

1. "You can't know what you don't know, so if you initially find limited information about an entity, what are the best practices for ensuring that continued monitoring efforts aren't missing vital information about that entity?"

Actively monitoring sanctions, politically exposed persons (PEPs) and negative news lists is a good way to provide coverage even with somewhat limited information. However, the more data that a company has on an entity the better the matching algorithms can perform, so limited identifying information could lead to more false positives alerts.

Hence, getting as much accurate data on the entity upfront will reduce operational costs of screening entities on an ongoing basis.

Beneficial ownership adds another layer of coverage to this framework by revealing more persons or entities to screen against sanctions, PEPs and negative news lists.

Ultimately, it comes down to an institution's regulatory requirements and applying a risk-based approach which could be based on its business model, geographic footprint and risk appetite.

2. "How should a financial institution determine when and for whom to gather information on ownership exceeding 10%?"

In the United States, the Financial Crimes Enforcement Network (FinCEN) has defined the 25% beneficial ownership threshold as the minimum amount in order to meet basic customer due diligence (CDD) standards, but it is not intended to undermine stricter internal CDD practices. 

Financial institutions can take the initiative to go below the 25% threshold, but it is not required is the US currently.

Generally, financial institutions conduct enhanced due diligence (EDD) on customers they perceive to pose greater money laundering and terrorist financing risk, which can include factors such as industries, sectors, products used and associated jurisdictions. EDD procedures are based on the financial institution's policies, but this is one area where the 25% beneficial ownership threshold can potentially be lowered to apply a risk-based approach.

3. "What should a company do if beneficial owners are not disclosable to be screened?"

There are instances where no beneficial owners with 25% or more equity interests will exist. In this case, FinCEN requires financial institutions to collect information on at least one individual with significant responsibility to control, manage, or direct a legal entity customer.

This is another area of risk, because customers have some discretion on how to identify an individual that fits that criteria. At the very least, the individual that the legal entity customer identifies can be screened against sanctions, PEPs and negative news lists.

4. "What about subsidiaries of the large Chinese corporations that are almost all led by CCP appointees, which makes them a PEP? This leads to over-population of high-risk entities."

There are many definitions of a politically exposed person (PEP), but generally a legal entity would not be considered a PEP. However, you may be finding that many Chinese companies have individuals in leadership positions who would meet the definition of a PEP, based on your jurisdiction's requirements, because of their association with the Chinese Communist Party (CCP).

There could be ways to assign risk levels to PEPs based on their influence, status and position held. For example, a PEP who holds a local position may have less influence than one at the national and international level.

Also, a high concentration of PEPs controlling Chinese companies does not automatically imply that all Chinese companies with PEP associations are high-risk, but this would be based on the company's policy. Creating a policy that outlines the company's definition of a PEP based on regulatory requirements, but also defines a methodology to determine criteria for high- and low-risk PEPs is one possible way to apply a more risk based approach.

5. "Since there is now a requirement for the beneficial ownership form, do you know if there is a specific regulation number that is referenced for this and when are all institutions supposed to comply?"

FinCEN's customer due diligence final rule (PDF) requires financial institutions to have a certification form completed by an individual opening the account on behalf of the entity.

The individual will be required to sign the form and certify that the information is complete and correct.

The CDD final rule issued became effective 11th July 2016 and financial institutions covered by the rule must comply with these rules by 11th May 2018.

6. "Regarding the 314(a) list, does the bank also need to include the beneficial owners information in the database list?"

As per FinCEN guidance (page 9 [PDF]), "[t]he regulation implementing section 314(a) does not require the reporting of beneficial ownership information associated with an account or transaction matching a named subject in a 314(a) request."

There has been some debate over the limits of using the 314(b) request between financial institutions. Section 314(b) allows financial institutions to share information with one another under the 'safe harbor' that offers protection from liability to help better identify and report potential money laundering and terrorist financing. However, some financial institutions appear to be applying a broad interpretation of what potential money laundering and terrorist financing can encompass and use the 314(b) to try and validate beneficial ownership.

7. "Most of the databases with beneficial ownership information only contain information on listed companies. How do you identify beneficial owners of privately held companies?"

In the United States, some states may or may not require entities to disclose beneficial ownership. Also, even if states do require beneficial ownership today, that might not have been the case historically and companies formed many years ago may still be missing beneficial ownership information.

Ultimately, the responsibility of providing beneficial ownership information in the United States is not on the state registries or financial institutions, but on the clients themselves.

This highlights the need for an automated approach, because leveraging databases such as Orbis, which Bureau Van Dijk has built, could reveal beneficial owners of complex corporate structures from jurisdictions which require its disclosure. In other words, by monitoring all jurisdictions in an automated way you have the best chance of identifying the ultimate beneficial owners without having to rely on a representative from the entity of a customer or third party, who may have limited knowledge of the organisation’s actual corporate structure and ownership.

8. "Can enhanced due diligence (EDD) be used as a procedure to conduct beneficial ownership investigation?"

For financial institutions, collecting beneficial ownership information is now required as part of the CDD final rule in the United States. Enhanced due diligence (EDD) is generally conducted on high-risk customers that pose additional money laundering and terrorist financing risks.

For organisations that may collect beneficial ownership, but are not considered regulated institutions under the CDD final rule, the EDD process may be a place where beneficial ownership can be collected. This would depend on the organisation's policy and regulatory requirements.

9. "In terms of identifying the individual in the 'control prong', what specific officers should be identified? One that is a set list for all customers?"

According to FinCEN the control prong is defined as "a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or any other individual who regularly performs similar functions (i.e., the control prong)."

FinCEN goes on to state that the list is not all inclusive and there could be significant differences in how legal entities are structured.

10. "Identifying beneficial owners is very important but various agencies have a threshold level of ownership that triggers a rule (e.g. the OFAC '50% Rule'). Is there a 'rule of thumb' for level of control that should be of concern, e.g., a sanctioned individual who owns only 20-30% verses 5-10%?"

The FinCEN CDD final requires covered financial institutions to collect beneficial ownership information for individuals, if any, that directly or indirectly own 25% or more of a legal entity customer.

There is no rule of thumb, but financial institutions have been known to lower the beneficial ownership threshold for high-risk customers, which is generally triggered by an EDD process.

11. "Why is there no agreed standard on translation of, e.g., Cyrillic?"

Leonard Shaefer, PhD, principal of Onomastic Resources LLC, opined on why there is not an agreed upon standard on the romanisation of Cyrillic, i.e., converting the Russian alphabet into the alphabet used in English.

Dr Shaefer stated: "Same reason as the one behind differing standards for TV signals, data encoding, weights and measures, temperature measurement, etc. Standards are not like the speed of sound, but more like peace or trade treaties which are best-guess arrangements that depend on fastidious human commitment and co-operation, both of which tend to erode over time. And then a new standard/treaty is devised, to fix everything that was wrong with the last one. And, as with the old one, some people play by the rules and some don't."

12. "How can we validate what our member is putting on the business account form as far as who the beneficial owner is?"

Third-party data sources can be used to corroborate the beneficial ownership information provided by the account opener. For legal entities with complex global corporate structures this can become a very labour-intensive and time-consuming validation exercise.

Also, the more you start to look at the complexities of identifying beneficial ownership, the more it becomes apparent that a holistic, automated and risk-based approach is needed. Some of you may have read headlines from major publications that proclaim that 'data is the new oil'. There is some validity to this claim, but let's focus on beneficial ownership for a moment.

One way to think about Bureau Van Dijk's Orbis database, which contains beneficial ownership data among other things, is to think about the infrastructure and effort needed to extract oil. Bureau Van Dijk has built up the global infrastructure and network of relationships to collect, mine and refine corporate information which can be used for a number of purposes, but clearly this has tremendous value to the compliance industry.

Verifying beneficial ownership information provided on an account form is one of many use cases for Orbis data because it can be leveraged to help validate the information on a form is accurate.

13. "I would like to know whether we must perform a drill-down into the beneficial ownership of a listed company whose CEO is a PEP. Or does it depend only on our RBA?"

Generally, from a financial institution's perspective a publicly traded company's anti-money laundering (AML) risk would be lower than a private company. However, there could be two scenarios where the CEO of a listed company could be identified as a PEP. In the first scenario, the CEO may also be a beneficial owner with 25% or greater equity interests in the legal entity customer or identified as an individual with significant responsibility to control, manage, or direct the legal entity customer. If the institution screens all of the beneficial owners, including ownership and control prongs, against sanctions, PEPs and negative news lists, the CEO's current or former PEP status could be identified.

In the second scenario, the CEO may not meet the criteria of a beneficial owner, but the financial institution may become aware, during its normal CDD process, that the CEO is a PEP. Rita Gemayel, CAMS, a financial crimes specialist, stated that 'if a financial institution becomes aware that beneficial owners below the 25% ownership threshold are PEPs or associated with negative news then it's industry practice to include this in the documentation and act accordingly.'

Analysts can come across this information by following their standard procedures and using various database tools including Google searches or during the EDD process, which may lower the ownership threshold requirement based on the institution's internal policy.

14. "Do you know if the US rule contradicts any European beneficial ownership requirements or regulations?"

At a high level the US and EU beneficial ownership requirements are very similar. There is a push in the EU to move towards central registries that report beneficial owners and share that data, but the US has not made any commitments regarding a central registry. This could be due to the legislative framework and the division of federal and state laws. There are proposals by the EU to lower the threshold to 10% for high-risk entities as well. It would be beyond the scope of this article to give an in-depth comparative analysis of the two regulatory frameworks.

15. "Do the following 'entity' types count as an entity under the new CDD rule: Formal Club accounts (e.g. Girl Scouts), memorial/benefit accounts, UTMA, conservatorship/guardianship accounts, estate accounts and/or informal club accounts (e.g. volley ball league account? What are some triggering events? How do you as a financial institution define what is a triggering event?"

Formal and informal club accounts do not fall under the legal entity definition. As per FinCEN, the CDD final rule (PDF) "defines a legal entity customer as a corporation, limited liability company, other entity created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. The definition also includes limited partnerships, business trusts that are created by a filing with a state office, and any other entity created in this manner. A legal entity customer does not include sole proprietorships, unincorporated associations, or natural persons opening accounts on their own behalf. Similarly, trusts do not fall under the legal entity definition."

FinCEN also explains that "the definition of legal entity customers only includes statutory trusts created by a filing with the Secretary of State or similar office. Otherwise, it does not include trusts. This is because a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor/settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries). Formation of a trust does not generally require any action by the state."

Triggering events may include filing of a suspicious activity report (SAR), currency transaction report (CTR), a 314(a) request, unusual account activity, an increase in wire transactions, a change in customer's account information, such as a change to a foreign address, a change in signers, and changes in beneficial owners.

That's it... for now

Look out for Bill's follow-up and do let me know if I can answer any more of your questions on beneficial ownership specifically or fin- and reg-tech more generally. Here are my contact details again.

Recording of last month's webinar

This is available for free to view for the next 12 months.