beneficial ownership and due diligence for commercial lenders · asaad faquir, mba, mbs director,...

Beneficial Ownership and Due Diligence for Commercial LendersNEW JERSEY BANKERS ASSOCIATION COMMERCIAL REAL ESTATE CONFERENCE

JUNE 29, 2017

• Why does due diligence matter?• The Mechanics of due diligence• A Few Challenges• The significance of due diligence• Summary

Agenda

Why Due Diligence Matters


• Financial Action Task Forceo Took exception to how easy it is in the U.S. to form a

legal business entity− A relatively small fee and a few minutes of time

o Took exception to how easy it is in the U.S. to form a legal business entity without clearly identifying yourself

− Registered agents− Delaware companies− Wyoming companies− Nevada companies

o Begs the question… How can you have a top flight AML regime when businesses and owners have a low barrier to entry and can so easily hide themselves behind the “corporate veil?”


• Banks, bank holding companies, and their subsidiaries are required by federal regulations to file a SAR with respect to:o Transactions conducted or attempted by, at, or through

the bank (or an affiliate) and aggregating $5,000 or more, if the bank or affiliate knows, suspects, or has reason to suspect that the transaction:

− Has no business or apparent lawful purpose or is not the type of transaction that the particular customer would normally be expected to engage in, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction

The Mechanics of Due Diligence• During the underwriting process we are gathering

all sorts of customer risk data… but we call it “credit risk”o Financial healtho Business strategy detailso Banking transactionso Ownership structure(s)

The Mechanics of Due Diligence

• The customer risk is closely tied to credit risko Financial health

− Is it too good to be true based on the business?o Business strategy details

− Who are our customer’s customers?o Banking transactions

− Do bank statements show exotic transactions?o Ownership structures

− Who owns or benefits from the business?


• Beneficial Owner:o A natural person who directly or indirectly owns 25% or

more equity in the entity for which the Bank is establishing an account for

− Indirectly means owned through another business entity LLC 3 is opening an account with the Bank

• LLC 3 is owner by Asaad and his business partner, but his business partner owns LLC 3 though his subsidiary company LLC 2, which incidentally he owns through his holding company LLC 1…

The Mechanics of Due Diligence• New requirements• During the account opening process, banks need to

identify any beneficial owners of any entity seeking to open an account with the banko In the Branch this is accomplished by simply asking:

− “Are you the sole owner of the entity or are there other equity owners?”

− Follow up question – “Are you the sole person in control of the entity or is that someone else”?

o In commercial lending this should all be identified during the underwriting process

• The customer can then sign the certification form used by the Bank including the names and information about the beneficial ownerso And of course provide the Name, Address, D.O.B. and SSN of

those identified on the certificationo Happens at closing if not before closing


• The Bank still needs to verify the identity of the Beneficial Ownerso Documentary verification

− Unlike CIP copies of documents are acceptableo Non-documentary verification

− Exactly the same as CIP

• The Bank should then have a clear policy for how it will complete the documentary and non-documentary verificationso Including what happens if the identity cannot be verified


• The commercial loan questiono Many institutions require the customer to also open a

deposit account at or before loan closing− Won’t they handle this requirement through that mechanism

instead of through commercial lending?

• Commercial loan closing will still require this information be documented based on 31 CFR 1020.31(g):o New account. For the purposes of this section, new

account means each account opened at a covered financial institution by a legal entity customer on or after the applicability date.

The Challenges of the New Requirements• What happens if a $1.5 million community

development qualifying commercial loan with impeccable financials and strong underwriting is about to close, but the borrower has a silent partner in London who is unable or unwilling to provide copies of their ID to the Bank?o Do you not close the loan?o Do you make an exception to your BSA policy?o Do we close the loan but notate that the customer risk

is different?

The Indirect Owner Challenge


• For most “smaller” institutions a complex, multi-tiered indirect ownership structure will be a rarityo Single ownerso Local partnerso Family owned businesses

• For New Jersey banks, a complex, multi-tiered indirect ownership structure will be slightly more commono Real estate development and management companieso Science and technology companieso Proximity to international business center (NYC)


• BSA compliance is driven by “events”o Event is an unofficial term that can be defined by

“When the Bank became aware of something…”• In terms of the new rules and deposit account

opening the Bank can rely on the customers honestyo Branches don’t necessarily have the means to verify

information at account opening• Unfortunately the amount of information we

collect for underwriting means we can’t simply rely on customer honestyo In most cases we have the documentation to verify

what the customer says


• How comfortable should the Bank be with an indirect beneficial owner structure?o Assessing the risk of indirect ownership

− Is indirect ownership a common structure for the type of business our customer is in? By industry Across our customer base

− Is there a legitimate business purpose to the indirect ownership of our customer? Tax benefit

− What is the nature of the business which indirectly owns our customer? Venture capital


• How comfortable should the Bank be with a double, triple, or quadruple indirect ownership structure?o A function of risk

− Multiple layers of indirect ownership is quite normal in a real estate development or management deal

− Less common in a mechanics garageo A matter of policy

− How comfortable does the Bank want to be? Three or more layers of indirect ownership requires BSA Officer

approval? Two or more layers of indirect ownership and we won’t open the

account?

The Significance of Due Diligence

• The Beneficial Ownership rules are clearly tied to the Customer Due Diligence (“CDD”) process

• FinCEN used this correlation to expand and codify their expectations for CDD going forwardo Establish risk-based procedures for conducting ongoing

customer due diligence, including the development of customer risk profiles and implementation of ongoing monitoring to identify and report suspicious activity and, on a risk basis, to update customer information

• CDD is now a pillar of the BSA/AML compliance program

The Significance of Due Diligence

• Due Diligence will now be a “global” concept within our BSA/AML programo Customer data and information will need to be

decompartmentalized and shared throughout the organization (or at least with the BSA Department)

− The more complex the financial institution the bigger this challenge will be

− e.g., commercial lending is a treasure trove of customer risk data not usually obtained or verified by branches when opening an account Financial health Business strategy details Banking transactions Ownership structures

Summary• The new due diligence expectations are likely not that

new to those in commercial lendingo However they require more attention to the customer risk

instead of simply the credit risk• Internal communication is crucial for commercial

lenders and the success of the BSA programo Get involved with your BSA officer and the types of

data/information you routinely collect for underwriting so they can build an effective compliance process

• Remember any “event” that impacts a customer maybe something the BSA officer needs to knowo Don’t just think due diligence stops when the loan closes,

financial updates, new tax returns, etc. will all convey new and important customer risk information

Questions and Contact

Asaad Faquir, MBA, MBSDirector, RSK Compliance [email protected](855) 860-4888

beneficial ownership and due diligence for commercial lenders · asaad faquir, mba, mbs director,...

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