Community Banking Advisor: New Rules on Customer Due Diligence

FinCEN answers frequently asked questions about beneficial ownership

Beginning on May 11, 2018, financial institutions will be required to verify the identities of the beneficial owners of their legal-entity customers when those entities open new accounts. This is the result of an action in May 2016 by the Financial Crimes Enforcement Network (FinCEN), which issued its “Customer Due Diligence Requirements for Financial Institutions” (CDD Rule).

More recently, FinCEN published frequently asked questions (FAQs) to help banks understand the new requirements and incorporate them into their Bank Secrecy Act and anti–money-laundering (BSA/AML) compliance programs.

The Highlights

Here’s a brief look at some of the often-asked questions and responses about the new requirements:

Q: Which institutions are covered?

A: The CDD Rule applies to federally regulated banks and federally insured credit unions, as well as to mutual funds, securities brokers and dealers, and certain other financial services firms. Note that a recent FinCEN proposal would expand its customer identification program (CIP) requirements, including the CDD Rule, to non–federally regulated institutions.

Q: What’s a legal-entity customer?

A: Generally, “legal entity” refers to a corporation, limited liability company or general partnership, or similar entities formed in foreign jurisdictions. It also includes limited partnerships, business trusts and other entities created by filing a public document with the Secretary of State or its equivalent. Exceptions include natural persons, unincorporated associations, government entities, federally regulated financial institutions and U.S. public companies.

Q: Which accounts are covered?

A: The CDD Rule generally uses the same definition of “account” as the CIP rules do, with certain exceptions. Covered institutions are required to obtain beneficial owner information only for new accounts opened on or after May 11, 2018. The rule doesn’t apply to existing accounts.

Q: Who’s a beneficial owner?

A: There are two types of beneficial owners:

  1. Each individual, if any, who owns 25% or more of an entity’s equity interests (directly or indirectly — the “ownership prong”), or
  2. A single individual — such as a CEO, CFO, COO, president, vice president, treasurer, managing member, general partner or other person who performs similar functions — with significant responsibility to control, manage or direct an entity (the “control prong”).

Generally, covered financial institutions are required to collect beneficial ownership information concerning up to five individuals for a given legal-entity customer: one person under the control prong, and zero to four persons under the ownership prong.

Required Procedures

Covered institutions must establish and maintain written procedures that are “reasonably designed to identify and verify the beneficial owners of legal-entity customers” at the time a new account is opened. These procedures should, at a minimum, contain the same elements the CIP rules require for verifying individual customer identities. But the regulator’s FAQs clarify that, for documentary verification, institutions may use photocopies or other reproductions of identification documents.

Institutions needn’t obtain information directly from an entity’s beneficial owners. Rather, they may obtain such information from the individual seeking to open a new account on behalf of the legal entity.

The CDD Rule also amends the BSA/AML requirements to require covered institutions to implement and maintain appropriate risk-based procedures for conducting ongoing customer due diligence.

Get Ready

If your bank is covered by the CDD Rule, you have until May 11, 2018, to comply. Because examiners may ask you about your preparation process if they visit you before the effective date, begin now to review your BSA/AML program and be sure you have a plan to ensure the policies and procedures are in place to collect information about the beneficial owners of legal-entity customers.