requirements: final rule - washington bankers cdd final rule.pdf · fincen’s final cdd rule...

FinCEN’s Customer Due Diligence

Requirements: Final Rule

Washington Bankers Association

October 6, 2017

FEDERAL DEPOSIT INSURANCE CORPORATION

Bankers’ Forum Call Objectives:

Discuss four key elements of FinCEN’s Customer Due Diligence

Final Rule.

Identify how the Final Rule applies to an institution’s customer due

diligence process.

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Benefits of the Rule

For Law Enforcement

• Transparency is less attractive to criminals.

• Providing inaccurate information demonstrates unlawful intent.

• Generates leads to identify additional evidence or co-conspirators.

For Financial Institutions (FIs)

• Improves FI’s ability to assess and mitigate risk and comply with existing

requirement, including the BSA and related authorities

For Tax Compliance

• Facilitates tax reporting, investigations and compliance.

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Customer Due Diligence Requirements

Key Elements of Final Regulation

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Four Key Elements of Customer Due

Diligence

There are four key elements of Customer Due Diligence:

I. Customer Identification and Verification

II. Beneficial ownership identification and verification

Appropriate risk-based procedures for conducting ongoing

customer due diligence, to include, but not be limited to:

III. Understanding the nature and purpose of customer

relationships to develop a customer risk profile; and

IV. Conducting ongoing monitoring to identify and report

suspicious transactions and, on a risk-basis, to maintain

and update customer information

NEW!

31 CFR

1010.230

Current CIP

Amends BSA

“5th Pillar”

Viewed as restating

existing expectations

[31 CFR 1020.210]

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I. Customer Identification and Verification

Existing requirement under Customer Identification Program (“CIP”)

requirements [31 CFR 103.121].

• Name

• Date of birth

• Address

• Identification number

(i) For a U.S. person, a taxpayer identification number; or

(ii) For a non-U.S. person, one or more of the following: a taxpayer

identification number; passport number and country of issuance; alien

identification card number; or number and country of issuance of any

other government-issued document evidencing nationality or

residence and bearing a photograph or similar.

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II. Beneficial Ownership

Identification and Verification

Must identify and verify the identity of beneficial owners of all legal entity

customers (other than those excluded) for each new account at the time the

new account is opened (other than accounts that are exempted).

Verification of identity of the beneficial owners should contain the elements

required for verification under CIP, but FIs may rely on copies of IDs

provided by the person opening the account.

FinCEN provided an optional Certification Form in Appendix A of the Final

Rule. FIs may choose to comply by using the sample Certification Form,

using the institution’s own forms, or any other means that complies with the

substantive requirements of this obligation.

May rely on beneficial ownership identification supplied by the customer,

provided FI has no knowledge of facts that would reasonably call into

question the reliability of the information.

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III. Nature and Purpose

In combination with “conducting ongoing monitoring”, forms a new “5th Pillar”

of expectations for an AML Program [31 CFR 1020.210]

Intended to be a baseline understanding of the client.

May include self-evident information about the type of customer or type of

account, service or product. Might also include basic customer information

(annual income, net worth, occupation, etc.)

Customer risk profile may, but need not, include a system of risk ratings or

categories of customers.

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IV. Ongoing Monitoring

Customer information includes beneficial ownership information.

All accounts must be monitored on a risk-based approach (not just those

subject to the final rule).

Updates to beneficial ownership should be event-driven as part of normal

monitoring, not as a categorical requirement on a continuous or periodic

basis. Applies to all legal entity customers, including existing customers.

FinCEN acknowledges: change in beneficial ownership is unlikely to be

identified through transaction monitoring.

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Definition of a Legal Entity

Legal Entity

Entity created by filing of public

document with domestic or

foreign government.

Similar entity created by the

filing of a public document with

a Secretary of State or similar

office, or formed under the

laws of a foreign jurisdiction.

Not A Legal Entity

Natural person

Sole proprietorships

Unincorporated associations

Non-registered statutory

trusts.

Excluded Entities

1011


Who is the Beneficial Owner?

Ownership Prong

• Individual (persons, not entities) that own directly or indirectly 25% or

more of equity interest of a legal entity customer.

• FinCEN “does not expect FIs or customers to undertake analyses to

determine whether an individual is a beneficial owner under the

definition.”

• Not obligated to determine or inquire if ownership has been structured

to avoid tripping the 25% level, but SAR may be appropriate if you

determine the owners did.

• If no one meets the 25% ownership level, no beneficial owner needs to

be identified under the ownership prong.

• Trustee is considered “owner” if trust owns 25% or more of equity

interest.

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Who is the Beneficial Owner?

Control Prong:

• One person with significant responsibility to control, manage, or direct

the company.

• Managerial control, not administrative control. Not just the first ‘titled’

individual available.

• Even if no one meets the 25% ownership prong, you must always

identify one beneficial owner under the control prong.

Certain legal entity customers are subject only to the control prong of

the beneficial ownership requirement:

• Charities and Nonprofits

• Non-excluded pooled investment vehicles (i.e. non-US mutual funds,

hedge funds, private equity funds)

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Legal Entity Exclusions

In the following circumstances these legal entity customers are excluded from the requirement to identify and verify beneficial ownership:

Regulated financial institution, including bank/financial holding companies.

Various SEC or CFTC Registered Entities.

Public accounting firms registered under Section 102 of the Sarbanes-Oxley Act.

Insurance Companies regulated by a State.

Foreign FI established in a jurisdiction where the regulator requires beneficial ownership information.

Private banking relationships as defined in Section 312 of the USA PATRIOT Act.

ERISA-related accounts.

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Beneficial Ownership Exemptions

In the following circumstances these legal entities are exempt from the

requirement to identify beneficial ownership:

Accounts established at the point-of-sale to provide credit products, solely

for the purchase of retail goods and/or services at these retailers, up to a

limit of $50,000.

Accounts established for the purchase and financing of postage.

Accounts established to finance insurance premiums.

Accounts to finance the purchase or lease of equipment.

...as long as certain restrictions hold true, such as no third-party

transactions or cash refunds.

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Beneficial Ownership Examples

Scenario 1: Mr. and Mrs. Smith each

hold a 50% equity interest in Mom &

Pop, LLC. Mrs. Smith is President of

Mom and Pop, LLC and Mr. Smith is

Vice President.



Answer 1: Mom & Pop, LLC would be

required to identify at least two, but up to

three distinct individuals – both Mr. and Mrs.

Smith under the ownership prong, and either

Mr. and Mrs. Smith under the control prong,

or both Mr. and Mrs. Smith under the

ownership prong, and a third person with

significant responsibility under the control

prong.



Scenario 2: Acme, Inc. is a closely-held

private corporation. John Roe holds a

35% equity stake; no other person

holds a 25% or higher equity stake.

Jane Doe is the President and Chief

Executive Officer.



Answer 2: Acme, Inc. would be

required to provide John Roe’s

beneficial ownership information under

the ownership prong, as well as, Jane

Doe’s (or that of another control

person) under the control prong.



Scenario 3: Quentin, Inc. is owned by

the five Quentin siblings, each of whom

holds a 20% equity stake. Quentin

Inc.’s President is Benton Quentin, the

eldest sibling, who is the only

individual with significant management

responsibility.



Answer 3: Quentin, Inc. would be

required to provide Benton Quentin’s


the control prong, but no other


the ownership prong, because no

sibling has a 25% stake or higher

equity stake.


Screening of Beneficial Owners

OFAC

Q. Are financial institutions required to comply with the OFAC regulations with

respect to beneficial ownership information?

A. Yes, requirement to block property and interests owned more than 50% by

an SDN so FIs generally should scan.

314(a)

Q. Do FIs now have additional obligations under Section 314(a) Information

Sharing for beneficial ownership information?

A. No, the regulation implementing section 314(a) does not require the reporting

of beneficial ownership information associated with an account or transaction

matching a named subject in a 314(a) request. As such, FinCEN does not

expect this final rule to impose additional requirements under 314(a).

18


Strategies for Implementation

Understand the tenets of the new rule and begin to examine how the new rule will affect your institution.

Build a coalition of affected stakeholders.

Determine what business lines or departments will be impacted within your institution?

Determine where new or enhanced processes will be needed within your institution. (i.e. Policies, Procedures, Training, Technology, Vendors, etc.)

Develop an implementation plan for business readiness. How will your institution prepare people for the changes? Are the changes minor or significant?

Execute your implementation plan and provide just in time training and education to your stakeholders.

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Regulatory Guidance Resources

FinCEN’s Final CDD Rule

• Fed Register Document Number 2016-10567

FIN-2016-G003 7/19/2016

• FAQ Regarding Customer Due Diligence Requirements for Financial

Institutions

FIN-2010-G001 3/5/2010

• Interagency Guidance on Beneficial Ownership

2014 FFIEC BSA/AML Examination Manual

• Appendix K: Customer Risk vs. Due Diligence & Suspicious Activity

Monitoring

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Questions

Contact FinCEN Resource Center

• Phone: 1-800-767-2825

• Email: [email protected]

Contact FDIC San Francisco Region:

• Edmund Wong: [email protected]

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mailto:[email protected]

mailto:[email protected]

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