FinCEN Issues Guidance Regarding New Customer Due Diligence Requirements For Covered Financial Institutions

On April 3, the Financial Crimes Enforcement Network (FinCEN) issued 37 frequently asked questions (FAQs) and responses with the aim of providing Covered Financial Institutions 1 with a better understanding of the scope of the agency's new Customer Due Diligence Requirements (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 CDD. This "fifth pillar" of an AML compliance program formalizes the longstanding 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, Covered Financial Institutions should review and incorporate this guidance into its 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...

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