Final Rule Summary

FinCEN 31 CFR Chapter X 

Customer Due Diligence Requirements for Financial Institutions


Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2016



The Financial Crimes Enforcement Network (FinCEN) issued a final rule under the Bank Secrecy Act (BSA) to clarify Customer Due Diligence (CDD) requirements. The rule contains explicit CDD requirements and adds a new requirement to identify and verify the identity of beneficial owners of legal entity customers. 

The final rule can be accessed here.

The final rule becomes effective July 11, 2016 and covered financial institutions must be in compliance with the final rule by May 11, 2018.

Summary

FinCEN’s final rule applies to “covered financial institutions,” which have been identified as:

  • banks (and credit unions)
  • brokers or dealers in securities
  • mutual funds
  • futures commission merchants and introducing brokers in commodities

Beneficial Ownership

  • The final rule requires covered financial institutions to identify and verify the identity of the beneficial owners of all “legal entity customers” at the time the account is opened.
    • The identification and verification procedures for beneficial owners are very similar to those for individual consumers under a financial institution’s customer identification program (CIP) except that for beneficial owners, institutions may rely on copies of identity documents.
    • “Legal Entity Customer” has been defined as a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.
  • Beneficial owner” has been defined as (i) each individual, if any, who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer (“ownership prong”) or (ii) a single individual with significant responsibility to control, manage, or direct a legal entity customer (“control prong”). 
    • (“Ownership prong”) – The final rule notes that where 25 percent or more of the equity interests or a legal entity customer are owned by a trust (other than a statutory trust), institutions would satisfy the beneficial owner identification/verification requirement by collecting and verifying the identity of the trustee.
  • Institutions may comply with this requirement by either obtaining the required information on a standard certification form (Appendix A, “Certification Form”) or by any other means that complies with the substantive requirements of the obligation. 
  • Institutions may rely on the beneficial ownership information supplied by the legal entity customer, provided the institution has no knowledge of facts that would reasonably call into question the reliability of the information.
  • Institutions are required to maintain records of the beneficial ownership documents they obtain. Identification records are required to be retained for five years after the date the account is closed.  Verification records are to be maintained for five years after the record is made.

Exemptions

The following entities are not considered to be “legal entity customers” and are exempt from the beneficial owner requirements:

  • A financial institution regulated by a Federal functional regulator or a bank regulated by a State bank regulator
  • A person described in § 1020.315(b)(2) through (5) of this chapter
  • An issuer of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or that is required to file report under Section 15(d) of that Act
  • An investment company, as defined in Section 3 of the Investment Company Act of 1940, that is registered with the Securities and Exchange Commission (SEC) under that Act
  • An investment advisor, as defined in Section 202(a)(11) of the Investment Advisors Act of 1940, that is registered with the SEC under that Act
  • An exchange or clearing agency, as defined in Section 3 of the Securities Exchange Act of 1934, that is registered under Section 6 or 17A of that Act
  • Any other entity registered with the SEC under the Securities Exchange Act of 1934
  • A registered entity, commodity pool operator, commodity trading advisor, retail foreign exchange dealer, swap dealer or major swap participant, each as defined in Section 1a of the Commodity Exchange Act, that is registered with the Commodity Futures Trading Commission
  • A public accounting firm under Section 102 of the Sarbanes-Oxley Act
  • A bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956 (12 USC 1841) or savings and loan holding company, as defined in Section 10(n) of the home Owners’ Loan Act (12 USC 1467a(n))
  • A pooled investment vehicle that is operated or advised by a financial institution excluded under paragraph (e)(2) of this section
  • An insurance company that is regulated by a State
  • A financial market utility designated by the Financial Stability Oversight Council under Title VIII of the Dodd-Frank Act
  • A foreign financial institution established in a jurisdiction were the regulator of such institution maintains beneficial ownership information regarding such institution
  • A non-U.S. governmental department, agency or political subdivision that engages only in governmental rather than commercial activities
  • Any legal entity only to the extent that it opens a private banking account subject to § 1010.620 of this chapter

The following “legal entity customers” are subject only to the control prong of the beneficial ownership requirement:

  • A pooled investment vehicle that is operated or advised by a financial institution not excluded under paragraph (e)(2) of this section
  • Any legal entity that is established as a nonprofit corporate or similar entity and has filed its organizational documents with the appropriate State authority as necessary

Covered financial institutions are exempt (with some limitations) from the requirements to identify and verify the identity of beneficial owners set forth in paragraphs (a) and (b)(1) and (2) of § 1010.230 only to the extent the financial institution opens an account for a legal entity customer that is:

  • At the point of sale to provide credit products, including commercial private label credit cards, solely for the purchase of retail goods and/or services at these retailers, up to a limit of $50,000;
  • To finance the purchase of postage and for which payments are remitted directly by the financial institution to the provider of the postage products;
  • To finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker;
  • To finance the purchase or leasing of equipment and for which payments are remitted directly by the financial institution to the vendor or lessor of this equipment.

Four Core Elements of a Customer Due Diligence (CDD)  Program

The final rule makes explicit that the four core elements of a customer due diligence programs (including the new beneficial ownership requirement) should be incorporated into a covered financial institution’s anti-money laundering (AML) program.  Those elements are: 

  • Customer identification and verification
  • Beneficial ownership identification and verification
  • Understanding the nature and purpose of a customer relationship to aid in the development of a customer risk profile
  • Ongoing monitoring for suspicious activity and (on a risk basis) maintaining/updating customer information.