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From Banking and Finance Law Daily, July 20, 2016

FinCEN clarifies new customer due diligence requirements

By Lisa M. Goolik, J.D.

The Financial Crimes Enforcement Network is providing answers to frequently asked questions to assist covered financial institutions in understanding the scope of FinCEN’s customer due diligence requirements—the CDD rule—which took effect July 11, 2016. The FAQ clarifies which financial institutions are subject to the requirements, defines "beneficial owner" and "account," explains the requirements for determining the beneficial owners of customers, and outlines the amended requirements for anti-money laundering (AML) programs. Covered financial institutions have until May 11, 2018, to implement and comply with the rule.

Covered financial institutions. According to the FAQ, for purposes of the CDD rule, covered financial institutions are federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.

Identifying beneficial owners. Summing up the new requirements, the FAQ states, "In short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers."

To accomplish this goal, the rule requires covered financial institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entity customers. These procedures must:

  • enable the institution to identify the beneficial owners of each customer at the time a new account is opened, unless the customer is otherwise excluded or the account is exempted;
  • establish risk-based practices for verifying the identity of each beneficial owner identified to the covered financial institution, to the extent reasonable and practicable; and
  • contain the elements required for verifying the identity of customers that are individuals under applicable customer identification program requirements

AML program amendments. To account for the new customer due diligence requirements, the CDD rule also amends AML program requirements for each covered financial institution to explicitly require covered institutions to implement and maintain appropriate risk-based procedures for conducting ongoing customer due diligence, to include:

  • understanding the nature and purpose of the customer relationships; and
  • conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

The customer due diligence procedures must be included in the covered financial institution’s AML compliance program.

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