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With less than six weeks until the customer due diligence requirements (CDD Rule) becomes effective, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has released guidance by issuing frequently asked questions (FAQs). FinCEN has also announced there may be additional FAQs, guidance, or grant exceptive relief as appropriate issued prior to it going into effect on May 11, 2018.
The CDD Rule amends the regulator’s AML requirements and adds new duties for firms. This new rule identifies four components of customer due diligence:
- customer identification and verification
- beneficial ownership identification and verification
- understanding the nature and purpose of customer relationships
- ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.
FINRA signalled in its priorities letter that it may discuss with some broker-dealers the steps they are taking to implement the varied obligations under the new rules.
Some of the key takeaways from the clarification and guidance from FinCEN in the FAQs are as follows:
Beneficial Ownership Obligations
The Rule requires covered financial institutions to collect and verify the identity of beneficial owners who own 25 percent or more of the equity interests of a legal entity customer. There are certain exceptions. For example firms are not required to look through a pooled investment vehicle to identify and verify the identity of any individuals who own 25 percent or more of its equity interests.
There may be circumstances where a financial institution may determine that collection and verification of beneficial ownership information at a lower threshold may be warranted, based on the financial institution’s own assessment of its risk relating to its customer. Additionally, an obligation to obtain or update information could be triggered when a financial institution becomes aware of information about a customer or an account, including a possible change of beneficial ownership information, relevant to assessing or reassessing the customer’s overall risk profile.
Policies and Procedures
FinCEN highlighted the importance of covered financial institutions establishing and maintaining written procedures that are reasonably designed to identify and verify the identity of beneficial owners of legal entity customers and to include such procedures in their AML compliance program. Risk-based procedures at a minimum should include the same elements financial institutions are required to use to verify the identity of individual customers under applicable Customer Identification Program (CIP) requirements. However, the Customer Due Diligence Rule expressly authorizes covered financial institutions to use photocopies or other reproduction documents for documentary verification, which includes unexpired government-issued identification evidencing nationality or residence and bearing a photograph or similar safeguard, such as a driver’s license or passport.
Financial institutions are also required to develop and implement risk-based procedures for conducting ongoing customer due diligence, including regular monitoring to identify and report suspicious activity and develop internal controls with respect to collecting, maintaining, and updating a legal entity’s beneficial ownership information.
Record Retention
Covered financial institutions are required to retain all beneficial ownership information collected about a legal entity customer. Identifying information must be maintained for a period of five years after the legal entity’s account is closed, and all verification records must be retained for a period of five years after the record is made.
Accounts in Scope
FinCEN also clarified that the beneficial ownership requirement applies to a ‘new account’, which is defined to mean ‘each account opened … by a legal entity customer’. Any accounts opened for operational or record keeping purposes by the financial institution that were not requested by the client are not in scope. However, during the course of a financial product renewal (e.g. a loan is renewed or a certificate of deposit is rolled over), the financial institution establishes another formal banking relationship and a new account is established. Covered financial institutions are the required to obtain information on the beneficial owners of a legal entity that opens a new account, even if the legal entity is an existing customer. For financial services or products established before May 11, 2018, covered financial institutions must obtain certified beneficial ownership information of the legal entity customers of such products and services at the time of the first renewal following that date.
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We understand the rules and can translate into plain English. We are here to help with the practical application of this rule to help make certain current policies and procedures are aligned to these drastic changes.
