One Month to Legal Entity Customer Due Diligence Requirements Taking Effect

Bank Risk and Compliance Writer is taking a brief break today from its series on the CFPB’s Semi-annual Report to remind banks that there is one month remaining before FinCEN’s Customer Due Diligence Requirements for Financial Institutions takes effect.

On May 11, 2018, financial institutions will be required to complete customer due diligence tasks on any legal entity customer opening a new account. This includes identifying and verifying the identity of any person or entity with 25 percent ownership (ownership prong of the rule), as well as one person in a significant role, such as CEO or CFO (control prong of the rule).

To help financial institutions understand the rule, FinCEN originally published a CDD Frequently Asked Questions (FAQ) bulletin in July 2016 that covered 26 questions. With the deadline looming, FinCEN added a second CDD FAQ last week, this time covering 37 questions.

A Quick Glimpse at Latest FAQ’s First 10 Questions

Here is a quick recap of the topics covered in the first 10 questions in FinCEN’s most recent FAQ, along with a summary of some of its answers:

1. Beneficial Ownership Threshold: FinCEN indicates that financial institutions may use a lower ownership threshold than the rule’s stated 25 percent if it deems that appropriate for its risk profile. In other words, institutions can choose to be more stringent than the rule.
2. Beneficial Ownership and other AML requirements
3. Complex Ownership Structures: According to the FAQ, “Covered financial institutions must obtain from their legal entity customers the identifications of individuals who satisfy the definition, either directly or indirectly through multiple corporate structures.” FinCEN provides a written and graphic example of this that is helpful for explaining the rule to employees who will be responsible for this task.
4. Methods for Identification and Verification: FinCEN notes that, “Covered financial institutions must verify the identity of each beneficial owner according to risk-based procedures that contain, at a minimum, the same elements financial institutions are required to use to verify the identification of individual customers under applicable customer identification program (CIP) requirements.”
5. Beneficial Owner Address: Banks may gather either a residential or business address for beneficial owners.
6. Legal Entity Representative
7. Existing Customer as Beneficial Owner of New Legal Entity Customer Account: Per the rule, financial institutions must identify and verify the beneficial owners at the time the new account is opened. The FAQ provides some additional nuance to this requirement, stating that, “If the individual identified as the beneficial owner is an existing customer of the financial institution and is subject to the financial institution’s CIP, a financial institution may rely on its possession to fulfill the identification and verification requirements, provided the existing information is up-to-date, accurate, and the legal entity customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”
8. Use of Certification Form: FinCEN clarifies in the FAQ that banks are not required to use its Certification Form, which is available in a Word format and a fillable format. If choosing not to use FinCEN’s form, just make sure to capture all the information it does.
9. Multiple Sets of Beneficial Ownership Certification Documents
10. Single Entity Customer Opening Multiple Accounts

As you prepare for next month’s implementation date, make sure to review FinCEN’s most recent FAQ and include it in your employee training on the rule.

Tomorrow, Bank Risk and Compliance Writer will return to discussing the CFPB’s Semi-annual Report, specifically the anticipated Final Rules expected from the Bureau in the near term.