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A: At an enterprise level, one risk is understanding how this business activity will impact your balance sheet and ultimately your income statement. These businesses have a lot of activity, but only a portion of that will stay as balances within the credit union. How will that money movement and the work you’re doing benefit the credit union financially? And what expenses come with this line of business?
On the member level, you also need to ensure the funds being deposited into these accounts, come from the legal market. CRBs must be appropriately licensed by the state, and that the deposits they’re making must correlate to the sales they’ve reported.
A: The FinCEN guidance from 2014 requires financial institutions to understand the licensing the member has obtained from the state and the business they’re allowed to conduct. That’s part of the initial review of the member.
But throughout the life of the relationship, you must make sure those licenses remain in good standing and are properly renewed. You’re really managing the member’s authority to be in this line of business.
You also need to dive deeper into the underlying beneficial owners. Most credit unions have a policy that says they need to know about the owners who have an ownership stake greater than 20% or 25%.
Because there’s a risk of potentially undesirable parties being connected to these legal business operations, most credit unions we work with will interrogate the ownership at a degree of 10% or greater.
You’re looking at more owners, potentially, with every new business you bring in. And you’re generally looking deeper into the background of these owners.
This requires understanding the business and the owners, and then tracking whether conditions have changed since you originally underwrote the member that could increase the risk of the relationship. This could include negative news or adverse media, so you need to have a process in place to stay on top of this type of information.
Lastly, you’re obligated to file suspicious activity reports (SARs) on each of these members every 90 days. This is time consuming. SARs require a written narrative and a lot of calculations of the activity that occurred within the reportable period.
The tooling we provide streamline that activity for credit unions. We have a credit union client that serves nearly 1,700 CRBs, which means they’re filing 1,700 SARs every quarter.
That’s a lot! Some credit unions that aren’t in this space may file a handful of SARs all year. It’s a big change.
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