On April 27, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Implementation of FinCEN's Customer Due Diligence Rule—Financial Institution Perspective” to discuss challenges facing financial institutions when complying with FinCEN’s Customer Due Diligence Rule (CDD Rule). As previously covered in InfoBytes, the CDD Rule takes effect May 11, and imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act (BSA) for covered financial institutions, including the identification and verification of the beneficial owners of legal entity customers. The hearing’s four witnesses expressed certain concerns regarding the effects of implementation on financial institutions, as well as the timing of additional guidance released April 3 in the form of frequently asked questions.
In prepared remarks, Executive Director of The Financial Accounting and Corporate Transparency (FACT) Coalition, Gary Kalman, commented that the CDD Rule, which calls for additional AML requirements, is a “positive step forward but falls short of what is needed to protect the integrity of [the] financial system”—particularly in terms of what defines a “beneficial owner.” Greg Baer, President of The Clearing House Association, expressed concerns that the CDD Rule (i) requires financial institutions to verify beneficial owners for each account that is opened, instead of verifying on a per-customer basis; and (ii) does not explicitly state in its preamble that FinCEN possesses sole authority to set CDD standards, which may present opportunities for examiners to make ad hoc interpretations.
Additionally, Executive Vice President of the International Bank of Commerce Dalia Martinez, observed, among other things, that compliance with the CDD Rule is costly and burdensome, and that banks have not been provided with the tools or guidance to determine whether the information provided by legal entity customers is accurate when verifying beneficial owners. The “gray areas” within the CDD Rule, Martinez noted, present challenges for compliance. A fourth witness, Carlton Green, a partner at Crowell & Morning, expressed concerns with the relationship between FinCEN and the federal functional regulators, stating that because FinCEN has delegated examination authority to these regulators, there is a chance regulators will “create and enforce their own interpretations of or additions to BSA rules” that may “diverge from FinCEN’s priorities.”