With CDD and Beneficial Ownership Rule in Effect, FinCEN Continues to Clarify and Refine Rules for Financial Institutions

Long awaited rules for “Customer Due Diligence Requirements for Financial Institutions” (the CDD Rules) went into effect on May 11, 2018. FinCEN has taken steps to clarify and refine implementation of the CDD Rules, issuing (1) FAQs on April 3, 2018 and (2) a ruling on May 16, 2018 providing covered financial institutions with a limited 90-day exceptive relief from the obligations for financial products and services that are subject to automatic renewals, provided such products were established before May 11, 2018.

Covered financial institutions include banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The CDD Rules require financial institutions to identify and verify the identity of natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts. Covered financial institutions are now required to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and at least one individual who controls the legal entity. As part of the identification and verification requirement covered financial institutions are required to adopt risk-based procedures that contain, at a minimum, the same elements financial institutions are required to use to verify the identity of individual customers under applicable Customer Identification Program (CIP) requirements. These requirements are applicable every time a legal entity opens a new account. There also are certain ongoing monitoring responsibilities. For an expanded discussion of the CDD Rule, please see our previously published client alert.

FinCEN issued extensive FAQs on April 3, 2018 to offer clarifications on the CDD Rule. Among the FAQ guidance points, FinCEN clarified that covered financial institutions are required to collect information on a legal entity’s beneficial owners even in situations where the financial product in question was one that was subject to renewals, such as a loan or a certificate of deposit. FinCEN clarified that, consistent with the definition of “account” in the CIP rules and subsequent interagency guidance, loan renewals or roll-overs of certificates of deposit essentially lead to the establishment of a new account. Therefore, for financial products established before May 11, 2018, covered financial institutions are required to obtain certified beneficial ownership information at the time of the first renewal following that date. For subsequent renewals, financial institutions would not be required to collect beneficial ownership information so long as the legal entity customer and the financial product remained the same, and the customer certified as to the accuracy and current status of information pertaining to the beneficial owner. The FAQs further stated that if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or certificate of deposit is outstanding.

On May 16, 2018, FinCEN offered a period of limited relief as noted above. Financial institutions had expressed concern regarding their ability to comply with the CDD Rules, particularly in the context of financial products that automatically renew. Financial institutions often do not treat such products as new accounts. By virtue of FinCEN’s 90-day limited relief, which is being applied retroactively from May 11, 2018 and expires on August 9, 2018, financial institutions will not be obligated to collect beneficial ownership information on loans and certificates of deposit which are subject to automatic renewals. During this time, FinCEN is expected to review these rules and provide additional guidance.

Financial institutions should continue to monitor FinCEN guidance as the industry implements the CDD Rule. Even with the long delay between the final rule and effective date, industry and regulators will likely continue to be in a feedback and adjustment period for the near future.