Customer Due Diligence Guidance by FinCEN for Certain Financial Institutions

Jack Hayes, Stephen Heifetz, Ed Krauland, and Alexis Early
August 4, 2016
  Simplified Chinese

On July 19, 2016, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued Frequently Asked Questions (FAQs) as guidance to clarify the scope of its rule, “Customer Due Diligence (CDD) Requirements for Financial Institutions.”  Steptoe’s International Compliance Blog covered the rule when FinCEN promulgated it in May; the rule became effective on July 11, 2016, but does not require implementation by covered financial institutions until May 11, 2018.  Important points from the FAQ guidance are as follows.

  • Only certain financial institutions are covered by the CDD rule.  More specifically, this includes federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.  Other types of financial institutions, including those regulated by FinCEN for anti-money laundering (AML) purposes, are not required to have a CDD compliance program.
  • If covered, financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customer accounts, which should be recorded or written as part of the institution’s AML compliance program. 
  • A legal entity customer is any of the following that opens an account at a covered financial institution: (1) any corporation, limited liability company, or other entity created by the filing of a public document with a Secretary of State or similar office; (2) a general partnership; (3) any similar entity formed under the laws of a foreign jurisdiction; (4) limited partnerships; and (5) business or statutory trusts that are created by a filing with a state office and any other entity created in this manner.
  • A legal entity customer does not include sole proprietorships, unincorporated associations, or natural persons opening accounts on their own behalf, or non-statutory trusts.  A number of other federally regulated entities, and certain foreign entities, also are exempted from the CDD rule.
  • Importantly, covered financial institutions must collect information on individuals who are beneficial owners of a legal entity customer (i.e., up the chain), in addition to information collected on the customer entity itself under Customer Identification Program (CIP) requirements.
  • In addition to procedures that may exist under a CIP, covered financial institutions are now required to undertake ongoing CDD, to include: (1) understanding the nature and purpose of the customer relationships; (2) conducting ongoing monitoring to identify and report suspicious transactions; and (3) on a risk basis, to maintain and update customer information.
  • A beneficial owner is each of the following:
    • any individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer (i.e., the ownership prong); and
    • a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or any other individual who regularly performs similar functions (i.e., the control prong).
    • If there is no individual that owns 25% or more of the equity interest of the legal entity, ownership-prong CDD is not required, but a financial institution still must collect control-prong CDD.  The list of positions under the control prong is illustrative, not exclusive.  The control person identified must be a high-level official in the legal entity, who is responsible for how the organization is run and will have access to a range of information concerning daily operations.
  • Identification of a nominee owner is not sufficient for purposes of CDD for the actual beneficial owner.
  • The CDD rule applies to “accounts,” as defined in CIP rules, opened on or after May 11, 2018 (the “Applicability Date”) at a covered financial institution, but is not required for accounts in existence before the Applicability Date even if they continue to be in effect after the Applicability Date.
  • Additionally, certain accounts at covered financial institutions are exempt from the CDD rule, subject to certain limitations, including accounts established: (1) at the point-of-sale to provide credit products, solely for the purchase of retail goods and/or services at retailers, up to a limit of $50,000; (2) to finance the purchase of postage and for which payments are remitted directly by the financial institution to the provider of the postage products; (3) to finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker; and (4) to finance the purchase or lease of equipment and for which payments are remitted directly by the financial institution to the vendor or lessor of this equipment.
  • Use of the Certification Form that is in Appendix A of the final CDD Rule is optional, but financial institutions should use some type of form for verification of customer accounts.

If you have questions about this guidance, please contact Jack Hayes at +1 202 429 6491, Stephen Heifetz at +1 202 429 6227, Ed Krauland at +1 202 429 8083, or Alexis Early at +1 202 429 6742 in our Washington, DC office.  You can also follow us on Twitter (@SteptoeIntlReg).  Further commentary is available on the Steptoe International Compliance blog.