FinCENs Customer Due Diligence Expectations: Some Clarity
On April 3, the Financial Crimes Enforcement Network issued 37 frequently asked questions and responses with the aim of providing covered financial institutions1 with a better understanding of the scope of the agency's new customer due diligence requirements, or CDD rule, which become applicable to new accounts beginning on May 11, 2018.
In short, the much-publicized new CDD rule requires covered financial institutions to identify and verify the individual beneficial owners of most legal entity customers at the time a new account is opened. Specifically, the CDD rule requires the identification and verification of any individual who owns, directly or indirectly, at least 25 percent of the equity interests of a legal entity customer (the ownership prong), and at least one individual with significant management responsibility over such a customer, for example a CEO, managing member or president (the control prong).
The new CDD rule also requires covered financial institutions to implement procedures for conducting ongoing customer due diligence. This "fifth pillar" of an anti-money laundering compliance program formalizes the long-standing expectation for covered financial institutions to have risk-based procedures for (1) understanding the nature and purpose of the customer relationships for the purpose of developing a customer risk profile, and (2) conducting ongoing monitoring to identify and report suspicious activity and, on a risk basis, to maintain and update customer information (including information on the beneficial owners of legal entity customers).
With the applicability date just a month away, many covered financial institutions likely are well on their way to implementing or enhancing procedures to comply with the CDD rule. As some have come to realize, however, certain aspects of the CDD rule are not necessarily as straightforward as initially expected, causing many questions and challenges for institutions. FinCEN's publication of so many and wide-ranging FAQs indicates that uncertainty as to the scope of the new rule is indeed widespread.
Personnel charged with compliance with the CDD rule would be well-served to read all 37 FAQs and responses, as they provide clarity on FinCEN's expectations and may identify some issues that have yet to surface in their own implementation efforts. Prior to May 11, financial institutions should review and incorporate this guidance into their onboarding and due diligence procedures to avoid business disruption and lapses in customer service.
To provide a brief overview of the recent guidance, we highlight below a few of the FAQs that likely address issues common to numerous and different types of covered financial institutions.
Discussion of Selected FAQ Topics
Requirements for Existing Customers
As a general matter, covered financial institutions are not required to seek beneficial ownership information retroactively from existing customers with accounts opened prior to May 11, 2018. (FAQ 13). Of course, as with any general rule, there are exceptions:
- If, through the course of its normal monitoring of an existing customer, a covered financial institution becomes aware of a possible change of beneficial ownership relevant to the assessment of the customer's risk, the institution is obligated to obtain or update such information on accounts opened prior to May 11, 2018. (FAQ 13).
- FAQ 14 reiterates that covered financial institutions are not required to solicit or update existing customer beneficial ownership information as a matter of course during regular reviews. It is only when the new information is learned that indicates a possible change in beneficial ownership that the obligation is triggered. (FAQ 14). Of course, there is nothing in the CDD rule or the FinCEN guidance that prohibits a covered financial institution from collecting beneficial ownership information from customers as often as they deem appropriate.
- FinCEN also clarified that product renewals are considered new "accounts" for purposes of the CDD rule. Accordingly, after May 11, 2018, the renewal of certain financial products, such as loans or certificate of deposit (CD) rollovers, that were originally issued before May 11, 2018, will trigger the beneficial ownership identification and verification requirements of the CDD rule. Although a covered financial institution is required to identify and verify the beneficial ownership information upon the first post-May 11, 2018, renewal, for each subsequent renewal the institution may rely on the customer’s confirmation that the prior beneficial ownership information is accurate and up-to-date, so long as the institution has no reason to question the reliability of such information and the product or service remains the same. Moreover, because loans and CDs present low risk of money laundering, it is sufficient for a customer to agree at the time of certifying beneficial ownership to notify the institution of any change in such information. (FAQ 12).
The good news for covered financial institutions is that they will not be required to obtain new certification forms for each subsequent account opening if the information has not changed. FinCEN FAQ 10 clarifies that financial institutions may rely on previous certification forms so long as the customer confirms such information is up-to-date and accurate at the time of each account opening. Importantly, a covered financial institution must memorialize the legal entity customer's confirmation in the customer file. (FAQ 10) Covered financial institutions should incorporate this concept into their procedures to minimize disruption during the customer onboarding process.
Financial Institution and Publicly Traded Company Customers
The CDD rule excludes certain types of entities from the requirement to collect beneficial ownership on the basis that information regarding their beneficial ownership and management is available through other means. For example, FinCEN clarifies that a financial institution regulated by a federal functional regulator or a bank regulated by a state bank regulator is excluded from the definition of "legal entity customer." The preamble to the adopting release of the CDD rule states that this exception exists because the information is available from the relevant federal or state agencies. For similar reasons, with respect to foreign financial institutions, only those whose home country regulators maintain beneficial ownership information on such institutions are excluded from the definition of "legal entity customer." If the home country regulator does not maintain beneficial ownership information on such institutions, then beneficial ownership and control information must be collected on any accounts opened by the foreign financial institution.2 (FAQ 26).
Companies that are publicly traded in the U.S. are excluded from the CDD rule because they are subject to public disclosure and reporting requirements. As might be expected given the exemption for certain foreign financial institutions, there is no exception for publicly traded companies listed on foreign exchanges. Covered financial institutions must obtain beneficial ownership information for all such legal entity customers. (FAQ 24).
Pooled Investment Vehicles and Trusts
Covered financial institutions are not required to look through a pooled investment vehicle to identify and verify the identity of any individuals who own 25 percent or more of its equity interests. This is due to the fluctuation in ownership in such vehicles. However, covered financial institutions must collect control prong information for pooled investment vehicles whose operators or advisers are not otherwise excluded from the definition of "legal entity customer." The guidance provides that a control person for purposes of a pooled investment vehicle may be "a portfolio manager, commodity pool operator, commodity trading advisor, or general partner of the vehicle." (FAQ 18).
If a trust owns 25 percent or more of the equity interests of a legal entity customer, the beneficial owner under the ownership prong is the trustee, regardless of whether the trustee is a natural person or a legal entity. (FAQ 19, 20). If a natural-person trustee does not exist for purposes of the ownership prong, a natural person would not be identified (though the institution should collect identification information on the legal entity trustee consistent with its customer identification program, or CIP, procedures).3 That said, covered financial institutions still must satisfy the control prong and therefore must identify and verify a natural person who controls the legal entity customer. (FAQ 20).
Identification and Verification Requirements; Reliance on Customer Representations
FinCEN also provides guidance on methods for determining whether collection of beneficial ownership is necessary. Specifically, FAQ 21 states that, to determine whether a customer is eligible for exclusion from the definition of a "legal entity customer," it may rely on information provided by the legal entity customer, provided that the covered financial institution has no knowledge of facts that would reasonably call into question the reliability of such information. Covered financial institutions should incorporate such reliance into their procedures.
In addition, FinCEN's guidance identifies circumstances where requirements are less stringent than the CIP requirements. FAQ 6 clarifies that the CDD rule expressly authorizes the collection of photocopies of documents for documentary verification, which is not permissible under the CIP rules. (FAQ 4).
In advance of the applicability date, covered financial institutions should review the complete set of FAQs against their new beneficial ownership policies and procedures to assure their operations are aligned with FinCEN's expectations and to minimize disruptions to new account openings.
For purposes of the CDD rule, "covered financial institution" includes the entities set forth in 31 C.F.R. 1010.605(e)(1): (i) insured banks; (ii) commercial banks; (iii) agencies or branches of a foreign bank in the U.S.; (iv) federally insured credit unions; (v) savings associations; (vi) corporations acting under Section 25A of the Federal Reserve Act (Edge Act corporations); (vii) trust banks or trust companies that are federally regulated and are subject to an AML program requirement; (viii) broker-dealers in securities registered, or required to be registered, with the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934; (ix) futures commission merchants or introducing brokers registered, or required to be registered, with the U.S. Commodity Futures Trading Commission under the Commodity Exchange Act; and (x) mutual funds. While not technically covered by the CDD rule, institutions affiliated with or having control over such covered financial institutions should consider efforts to ensure compliance with the new rule as well. For example, the Federal Reserve will hold bank holding companies responsible for implementing firmwide compliance risk management programs designed to ensure its subsidiaries are in compliance with AML laws, including rules issued by FinCEN. Moreover, covered financial institutions with existing risk-based due diligence procedures that exceed the requirements of the CDD rule should continue to apply such enhanced procedures.
New correspondent accounts continue to be subject to existing due diligence requirements (including identifying the beneficial owners for certain high-risk foreign banks) rather than requirements set forth in the new CDD rule. (FAQ 26).
If there are multiple or co-trustees of trust that owns 25 percent or more of a legal entity customer that is not subject to an exclusion, covered financial institutions must collect and verify the identity of at least one co-trustee or multitrustee. (FAQ 19).