As you are aware, FinCEN’s Customer Due Diligence rules are effective in two days. In a nutshell, these rules require banks to obtain and verify the identity of the beneficial owners of new business customers. The rules are not easy to understand when applied to complicated ownership structures and there has not been any help published by the banking agencies. FinCEN, however, did publish some FAQs about a month ago and these clarify certain aspects of the rules and should be incorporated into bank policies and procedures.

You should be sure that you have reviewed these FAQs for guidance. The discussion below is a simplification of the detailed answers to the questions discussed and the actual FinCEN responses should be studied to include in amendments to procedures.

When does a bank have to do CDD?

The rules indicate that when any "account" is opened then CDD is required. This raises the question about existing customers who open new "accounts." This is also potentially a problem because "accounts" include all kinds of products, such as new loans.

The FAQs provide some relief here:

  • If a bank already has done CDD, the bank may rely on the existing information it possesses if the customer certifies that the existing information is up-to-date.
  • If a bank has done CDD on a customer, then that customer’s subsidiaries or affiliates may also rely on the information held by the bank, so long as the information is current.
  • If a bank has done CDD on a customer, then that customer may renew its existing bank products (i.e., roll over a CD) if the customer advises that its information is current. For loans and deposit products, banks should consider changing its deposit contracts and loan agreements to provide that the customer will advise the bank of any changes in beneficial ownership data.
  • If a bank opens the account (such as a sub-account for accounting or operational purposes), this would generally not be a new account for CDD purposes.

Should banks ever go below the 25% ownership level to do CDD?

While the actual CDD rule states that 25% is the level of ownership where CDD must be taken, FinCEN suggested in its commentary to the rules that a lower level of ownership might justify CDD in the proper case. FinCEN cleared this up by confirming that the 25% level is all that is required under the CDD rules. FinCEN hedged its bets slightly by reminding banks that Customer Identification Programs should be risk-based and if there are many risks presented by a customer, then a bank could consider going below the 25% level and do CDD. But there are other steps that could be taken to mitigate such risks, and perhaps CDD at lower levels of ownership would not be necessary.

How are indirect ownership interests treated?

This can be complicated where there is much indirect ownership involved with a new legal-entity customer. The FAQ has an example of how such indirect ownerships should be treated, but it is by no means exhaustive. A good rule of thumb is that the natural person owners should be disclosed where they directly and indirectly own 25% or more and this could be through multiple companies.

Do the CDD rules change the requirements when filing CTR’s?

Bank CTR procedures will likely need tweaking to account for the new information required under the CDD rules because CTR disclosures require aggregation of transactions. The FAQs state that banks can assume that businesses commonly owned are nonetheless separate and independent and no aggregation is needed unless there are known circumstances that indicate otherwise.