On April 3, 2018, the Financial Crimes Enforcement Network (FinCEN) issued new frequently asked questions (FAQs) regarding its customer due diligence rule (CDD Rule).
The CDD Rule applies to banks, broker-dealers in securities, mutual funds, futures commission merchants and introducing brokers in commodities (collectively, covered financial institutions or CFIs).
The CDD Rule includes four core elements of customer due diligence, each of which should be included in the anti-money-laundering (AML) program of a CFI: (1) customer identification and verification, (2) beneficial ownership identification and verification, (3) understanding the nature and purpose of customer relationships to develop a customer risk profile and (4) ongoing monitoring for reporting of suspicious transactions and, on a risk basis, maintaining and updating customer information. The second element — the beneficial ownership requirement — is new. FinCEN has described the other elements as preexisting AML program requirements for CFIs, although the third and fourth prongs were, at most, implicit requirements.
FinCEN issued new FAQs on the CDD Rule on July 19, 2016. These FAQs are timely because the May 11, 2018 compliance date for the CDD rule is fast approaching.
We summarize several key takeaways regarding the beneficial owner requirement from the new FAQs below.
Private Label Credit Cards
FinCEN clarifies that the private label retail credit exception is available only for credit that can be used solely to make purchases at the private label retailer. However, the FAQs will likely create significant concern on this topic because FinCEN introduces the notion that the exception is available because of the low risk associated with opening such accounts “at the brick and mortar store.” Nothing in the CDD Rule states that the private label retail exception is unavailable for online merchant private label credit products. In a follow-up communication with the FinCEN Resource Center, FinCEN confirmed that the exemption is available only for physical locations, notwithstanding the lack of an express reference to this effect in the rule itself.
Direct and Indirect Ownership
The CDD Rule’s beneficial ownership identification requirement requires a CFI to collect from each legal entity customer information about “individual(s) that are beneficial owner(s).” This requires CFIs to obtain the identities of each individual who meets this definition directly or indirectly, including through multiple corporate structures. Accordingly, with respect to legal entity customers that are directly owned by other legal entities, CFIs must look upstream through all relevant tiers of ownership to the individual owners of each legal entity customer. The CFI does not have an independent obligation to investigate the ownership structure. Rather, the CFI may rely on the information provided by its legal entity customer’s representative, provided the CFI does not know facts that would reasonably call the reliability of the information into question.
Process and Method of Verification
The CDD Rule requires a CFI to verify each identified individual beneficial owner according to risk-based procedures that contain the elements required for verifying individual account owners under its customer identification program (CIP). The FAQs clarify that although the legal entity beneficial ownership verification procedures must include the same elements as the CIP, the procedures included within the elements need not be identical. The FAQs describe a CFI’s ability to use photocopies of documentary evidence of identity, such as a driver’s license of the beneficial owner, as an example of a permitted difference from CIP verification procedures.
A CFI must collect the same information about the beneficial owners of a legal entity customer as it collects from individual customers under its CIP. Such information includes name, date of birth, address, and Social Security number or other government identification number. The FAQs specify that the address requirements for a legal entity customer’s beneficial owners are the same as the address requirements under the CIP rule.
Beneficial Owner Not Present
The FAQs confirm that a CFI may identify a beneficial owner of a legal entity customer who is not physically present at the time of account opening by obtaining the required information on the Certification Form or equivalent information from the legal entity customer’s representative, provided the CFI does not know facts that would reasonably call the reliability of the information into question. Also, the CFI may verify the identity of a beneficial owner who is not physically present at the time of account opening by reviewing a photocopy of a valid identity document of such person or other valid means.
The CDD Rule requires a CFI to identify and verify the beneficial owners of a legal entity customer each time a new account is opened. The FAQs, however, clarify that if a beneficial owner is an existing customer of the CFI, it may rely on information in its possession, provided the beneficial owner is subject to the CFI’s CIP, the information is up to date and accurate, and the representative of the legal entity customer certifies or confirms (verbally or in writing) the accuracy of the information.
The CDD Rule requires that all information used to identify and verify a beneficial owner of an account must be retained for the required period, which is five years from the date of account closing for identifying information and five years from the date the record was made for verifying information. The FAQs clarify that where a CFI relies on pre-existing information in its possession, the information (including a record of verbal or written confirmation of such information) must be retained in accordance with these requirements with respect to the new account. Further, the FAQs clarify that CFIs must retain for five years from the date the record is made a description of each document it relied on to verify the identify of the beneficial owners of its legal entity customer, any nondocumentary verification methods it used, the results of its verification procedures and any substantive discrepancies it identified during identity and verification.
Multiple Accounts for a Legal Entity Customer
The CDD Rule requires CFIs to satisfy the identity and verification requirements of beneficial owners of a legal entity customer for each account opened by the legal entity customer. However, a CFI may use information previously provided by the legal entity customer for a prior account if the customer certifies or confirms (verbally or in writing) that the information is up to date and accurate at the time each new account is opened and the CFI does not know facts that would reasonably call the reliability of the information into question. A record of such certification or confirmation would need to be made and retained for the required period in connection with the opening of the new account.
Accounts Created by a CFI
FinCEN clarifies that the beneficial ownership requirements apply to accounts opened by a legal entity customer. Generally, but subject to certain limitations, the requirements do not apply to accounts (or subaccounts) created by the CFI for its own administrative or operational purposes and not at the request of the legal entity customer.
The FAQs clarify that each time an account is renewed, such as a loan renewal or a certificate of deposit (CD) rollover, the renewal is considered the opening of a new account for which the CFI is required to satisfy the identification and verification requirements for the account. The FAQs provide that if the legal entity customer is the same before and after renewal, the beneficial owner requirements may be satisfied if the customer certifies or confirms that the beneficial owner information is up to date and accurate at the time each new account is opened and the CFI does not know facts that would reasonably call the reliability of the information into question. A record of such certification or confirmation would need to be made and retained in connection with the opening of the renewal as if the renewed account were a new account. Further, because the risk of money laundering with regard to loans and CDs is low, FinCEN indicates that if the customer agrees to notify the CFI of a change in beneficial ownership information at the time it is provided, this agreement may be considered the customer’s certification or confirmation so long as the loan or CD is outstanding.
Accounts Opened Before May 11, 2018
FinCEN expressly states that CFIs are not required to satisfy the legal entity customer beneficial ownership identity and verification requirements for accounts opened prior to May 11, 2018. However, they are required to obtain or update legal entity customer beneficial owner information if, after May 11, 2018, the CFI becomes aware of changes to such information during the normal course of its monitoring of customer risk.
Clarifications of Specific Exclusions From “Legal Entity Customer”
The FAQs provide clarifications for certain exclusions from the defined term “legal entity customer,” including:
The exclusion for nonprofit corporations and similar entities from the equity prong of the beneficial ownership test does not require the entity to be tax-exempt. Unlike publicly traded U.S. companies, companies listed on foreign exchanges are not excluded from the definition of “legal entity customer.” The exclusion for foreign financial institutions established in a jurisdiction where the applicable regulator maintains beneficial ownership information regarding such institution does not depend on whether the foreign regulator’s beneficial ownership requirements match U.S. requirements. Examples of excluded non-U.S. governmental departments, agencies or political subdivisions include embassies or consulates. Examples of nonexcluded, profit-seeking non-U.S. governmental departments, agencies or political subdivisions include sovereign wealth funds, airlines and oil companies.