The U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") issued a new set of FAQs in advance of the upcoming customer due diligence rule ("CDD Rule") that goes into effect on May 11, 2018. Financial institutions subject to the CDD Rule, including banks, broker-dealers, mutual funds, futures commission merchants and introducing brokers, will be required to identify the beneficial owners (applying either a 25 percent ownership standard or an effective control prong) behind legal entity customers that open new accounts. In addition, covered financial institutions will be subject to new anti-money laundering requirements. The CDD Rule, originally published on May 11, 2016, was last amended on September 27, 2017, to incorporate various technical updates.

The new FinCEN guidance, taken collectively with an earlier set of FAQs issued on July 19, 2016, addresses various issues relating to the CDD Rule, including clarification on:

  • the collection of beneficial ownership information for legal entity customers with complex ownership structures;
  • the application of the CDD Rule to existing legal entity customers, customers with multiple accounts and certain foreign entities;
  • risk-related triggering events that require beneficial ownership identification and verification;
  • the identification of beneficial ownership for pooled investment vehicles, trusts and trustees; and
  • Examples of sufficient identity verification procedures and record retention practices.

Commentary / Joseph V. Moreno

Financial institutions that will become subject to the new CDD Rule on May 11, 2018 should immediately familiarize themselves with these long-awaited new FAQs, which address a number of questions and concerns that have been raised by industry insiders. By this point, covered financial institutions should be well on their way to implementing the CDD Rule. They should also expect that Federal banking agencies will be issuing new examination procedures. FinCEN has now provided considerable guidance during a lengthy two-year ramp-up period. Firms should not expect much leeway from FinCEN if they are not ready to implement the new CDD Rule on its go-live date.

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