The Countdown to May 11: FinCEN’s Customer Due Diligence Rule

Carol Beaumier, Senior Managing Director Risk and Compliance

With the effective date of FinCEN’s Customer Due Diligence Rule, often referred to as the Beneficial Ownership Rule, just two months away, covered financial institutions (federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities) are – one hopes – putting the final touches on their compliance policies and procedures.

On the face of it, the FinCEN rule is pretty straightforward:

  • Covered financial institutions need to collect beneficial ownership information for any natural person who owns 25 percent or more of a legal entity.
  • Covered financial institutions are expected to develop a customer risk profile at account opening and update it as needed so that it provides a baseline for reviewing the customer’s transaction activity.

But, the sixty-two page Federal Register publication of the final rule raised a number of practical implementation questions. On April 3, 2018, FinCEN issued its second set of Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions. The first set of FAQs on this topic were issued in July 2016, shortly after the rule was finalized. FinCEN has also signaled that it may issue additional FAQs and/or guidance and may grant exceptive relief, as appropriate.

The April 3 FAQs confirm several points that FinCEN and other agencies have made. For example:

  • Covered financial institutions may, at their own discretion, opt to collect beneficial ownership information at a threshold lower than 25 percent
  • For legal entities with complex ownership structures (illustration provided in the FAQ), covered financial institutions need to look through the ownership structure to identify any beneficial owners who directly or indirectly own more than 25 percent
  • Verification procedures for beneficial owners should be modeled after CIP requirements, but need not be identical – e.g., a financial institution may accept a photocopy of an identification document for a beneficial owner who does not appear in person
  • Use of the Certification Form (Appendix A to the rule) is optional, but financial institutions that opt not to use the form must ensure compliance with the requirements of the rule by another means, such as an institution’s own form

Also addressed in the April 3 FAQs are a series of questions dealing with the collection and retention of beneficial ownership information, including:

  • Confirmation that beneficial ownership information does not need to be obtained for existing legal entity customers
  • Confirmation that financial institutions are not obligated to update beneficial ownership information, absent risk-based concerns
  • The circumstances which would require a financial institution to obtain and re-certify information vs. merely updating its records based on information it has learned
  • The extent to which a covered financial institution may rely on information it has on an existing beneficial owner who is associated with a new legal entity account
  • The treatment of accounts or subaccounts opened by a covered financial institution (particularly in the securities or futures business) when such account or subaccount is established by the financial institution for its own purposes and not at the request of the legal entity customer

In addition, the April 3 FAQ responds to questions specific to certain types of legal entities and the extent to which they are or are not covered by the rule. These include:

  • Pooled investment vehicles
  • Trusts
  • Charities and other nonprofit organizations
  • Equipment finance
  • Private label credit cards
  • Non-U.S. governmental departments or agencies

Specifically with respect to other types of foreign entities, the April 3 FAQs:

  • State that covered financial institutions may not take a risk-based approach to the collection of beneficial ownership information for legal entities listed on foreign exchanges, but may rely on public disclosures absent any reason to believe the information is incorrect or outdated
  • Indicate that it is the responsibility of covered financial institutions to determine whether a foreign regulator maintains beneficial ownership information regarding the financial institutions it regulates or supervises

Financial institutions would be well-advised to benchmark their CDD policies and procedures against the information included in both sets of FAQs and to consider whether they have taken appropriate steps to ensure that their employees – and their customers – are prepared to deal with the new requirements.

For more information on FinCEN requirements and anti-money laundering compliance visit Protiviti.com/AML or Protiviti.com/Compliance-Insights.

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