Revisiting the CDD final rule

18 Mar Revisiting the CDD final rule

CDD

On May 11, 2016, The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced a final rule for customer due diligence and all the covered institutions were given two years design their frameworks to be in full compliance with the new rule.

The rule came in light after the Panama papers scandal, where a lot of offshore accounts, nominees, trusts, shell companies, were using legal obfuscation methods to hide funds, evade taxes and launder money.

Thus, the need to determine beneficial ownership was established by FinCEN.

This rule amended the existing regulatory obligations with regards customer due diligence and imposed a new obligation on covered financial institutions to identify and verify the natural persons behind institutions’ legal entity clients.

The new rule would apply to all “legal entity client” and a legal entity client could be a corporation, limited liability company, partnership firm, trust, or foundation etc. For each of these legal entity clients, the covered institution must identify the beneficial owners under either of the following criteria:

• Each individual, if any, who directly or indirectly, owns 25% or more of the equity interests of the legal entity
• A single individual with a significant capacity to control, supervise, or direct a legal entity

Once a covered institution identifies the ownership structure of a legal entity client, it must verify the ownership data using reliable data sources. All covered institutions must have well-written procedures in place outlining the elements required for verifying the identity of customers that are individuals under CIP requirements.

Just like the identification and verification details like name, date of birth, address, and Social Security number or other government identification number of an individual client are obtained by the institution, all such

details for any individuals owning 25% or more of the capital of the legal entity must be obtained. Moreover, it must collect the same information for an individual with significant responsibility to control and/or manage the legal entity at the time of on-boarding the entity.

Collecting beneficial ownership information is not enough. At the minimum, institutions are required to run those names through sanctions/PEP and adverse media screening. Just as required to screen an individual customer to ensure that they are not on various money laundering or terrorist financing watch lists, institutions need to screen any and all beneficial owners.

In addition to beneficial ownership requirements, the Final Rule adds a fifth pillar to AML programs. It explicitly requires institutions to understand the nature and purpose of all customer relationships: consumer and commercial, including legal entity client s.

The most important point to note here is, as opposed to being rigid and affirming exact requirements, these new requirements summon for best practices, and let the institution figure out the procedures that are working best for them and are effective.