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Business customer due diligence: Is your bank ready?

There exists a world of criminals who hide behind thousands of shadowy companies. But for money launderers, fraudsters and sanctions evaders, FinCEN’s Final Rule on Customer Due Diligence (CDD) is about to make U.S. businesses more transparent.

Banks will need to identify and verify the beneficial owners of those businesses who bank with them. This means they will need to know the names, addresses, date of birth and Social Security numbers for anyone who owns more than 25 percent of or has significant responsibility to control, manage or direct a U.S. small businesses. The reading of the CDD rule is nuanced, and there are many specific requirements and exemptions

Despite the impending deadline, many banks remain unprepared for this regulation shift.  According to a LexisNexis Risk Solutions survey in February 2018, less than 15 percent of financial institutions have completed the implementation of processes to ensure compliance with the new CDD rule. What’s more, about 10 percent of financial institutions surveyed have not even started. That’s alarming, considering that banks unprepared for the new CDD rule could face enforcement actions and fines.

On the other hand, banks that comply with the rule will have greater financial transparency—and thus a competitive advantage. With more insights into their customers, banks can alleviate the risks posed by financial crimes that include money laundering, sanctions evasions and fraud. But to avoid additional roadblocks in the customer experience, banks must automate the process to identify and verify beneficial owners.

Many financial institutions receive thousands of small business loan applications a month. Verifying the identities of beneficial owners for each is almost impossible to do manually. But in the digital age, banks have the capability to integrate technology-based solutions into the customer identification process (CIP) to verify name, address, date of birth and Social Security numbers by statistically linking individuals and businesses public records. The result: faster credit approvals and improved small business customer retention.

Beneficial owners of businesses also need continuous monitoring, so that banks can update on-record information in case of changes. This should be considered part of a bank’s account monitoring program, which looks for any kind of suspicious activity. Further, there must be a review process to flag suspicious owners; an automated one smooths the process.

Many large banks already identify and verify beneficial owners at or below the threshold of the new FinCEN rule, and so adopting the new changes will be straightforward. These banks might even have some processes in place to identify beneficial ownership through existing CIP, Know Your Customer (KYC) rules and credit underwriting processes. Banks can build processes for complying with the CDD rule into these existing procedures. The good news is that this makes a bank’s compliance efforts more efficient and cost effective.

Many small banks, though, are less likely to have existing procedures to identify and verify beneficial owners as the base-level cost makes it less efficient. These banks will need to quickly implement new procedures to accomplish this. Automation reduces the cost of manual labor required to conduct these processes—meaning compliance officers can focus on important decision-making tasks instead.  

The distortion between banks’ levels of readiness affects small businesses the most. Here’s why: 46 percent of small businesses apply for credit at a small bank. Typically, small banks will more likely approve a small business loan than large banks, according to the Federal Reserve. If small banks fail to get up to speed or find themselves priced out of the market by rising compliance costs, small businesses will suffer a stranglehold on a critical credit source.

This should raise alarm bells. The lack of urgency displayed among some banks toward compliance with the new FinCEN rule is worrying. Banks must put efficient processes in place or face the risk of fines and enforcement actions. Think of it this way: With government watchdogs, ruthless criminals and ambitious small businesses watching, this is no regular regulation.

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Jennifer McEntire is manager, financial crime compliance strategy, at LexisNexis Risk Solutions.

For more articles like this one, check out our recent podcast: Small business lending that makes a big difference.