FinCEN Announces Final Customer Due Diligence Rule

Guest Post by Bates Expert Susan Berger

After several years of public discussion and comment, the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) recently issued its final rule regarding customer due diligence (“CDD”) requirements for covered financial institutions, including banks, broker-dealers and mutual funds under the Bank Secrecy Act (“BSA”). Covered financial institutions have until May 11, 2018 to be in compliance with the CDD rule.

Prior to the issuance of this rule, the BSA required covered financial institution to maintain an AML program with a “four pillar” requirement as follows:

1. Development of internal policies, procedures, and controls;
2. Designation of a compliance officer;
3. Ongoing employee training program; and
4. Creating an independent audit function to test programs.

The new CDD rule now creates a “fifth pillar” for AML program compliance, including explicit CDD requirements that, with certain exclusions and exemptions, contain a brand new requirement with four elements to identify and verify the identity of the beneficial owner(s) of all legal entity customers. The fifth pillar elements include:

1. Customer identification and verification (CIP);
2. Beneficial ownership identification and verification;
3. Understanding the nature and purpose of the customer relationship to develop a risk profile of the customer; and
4. Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.

In the executive summary of the CDD rule, FinCEN notes that many of these elements are familiar to AML compliance professionals, since element one is already an existing BSA/AML program requirement, and elements three and four have been implicitly required in order to comply with the BSA/AML requirement to detect and report suspicious activity. Only element two--the beneficial ownership identification and verification requirement--is new, put in place to help law enforcement conduct investigations of financial crimes by enabling them to identify the individuals who may be hiding behind legal entity accounts to disguise the origins and movement of criminal proceeds.

With some exceptions, the new CDD rule requires covered financial institutions to identify and verify the identity of each of the beneficial owners of all legal entity customers when the account is opened. A beneficial owner is defined as each of the following:

• Each individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer; and
• A single individual with significant responsibility to control, manage or direct a legal entity customer.

The identification and verification procedures for beneficial owners are similar to those for individual customer identification. The financial institution may rely on the beneficial ownership information provided by the customer, as long as it has no knowledge of facts that would reasonably call into question the reliability of the information. The financial institution must maintain records of beneficial ownership and may rely on another financial institution for the performance of these requirements, to the same extent as under the existing CIP rules.

It is important that covered financial institutions assess and, if necessary, enhance their AML programs to be in compliance with the specific requirements of the CDD rule.

Please feel free to contact us at Bates Group if you have concerns about your organization’s vulnerability.

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