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COMPLIANCE CORNER - NEW CDD RULE TO BECOME EFFECTIVE MAY 11, 2018

COMPLIANCE CORNER - NEW CDD RULE TO BECOME EFFECTIVE MAY 11, 2018
Posted: Apr 11, 2018
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ThePaymentsReview continues a new feature that occasionally highlights regulatory topics important to credit unions.

Back on July 11, 2016 the Financial Crimes Enforcement Network (FinCEN) issued a rule requiring covered financial institutions to identify and verify the identity of any beneficial owner. The new Customer Due Diligence (CDD) rule takes effect May 11, 2018 at which time the financial institution must be compliant. For purposes of the CDD Rule, covered financial institutions are federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.

 

FinCEN is issuing these final rules under the Bank Secrecy Act to clarify and strengthen the existing customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. Prior to this rule, covered financial institutions were not required to know the identity of the individuals who own or control their legal entity customers (also known as beneficial owners). This enabled criminals and others looking to hide illicit proceeds to access financial systems anonymously. The intent of the beneficial ownership requirement will be to address this weakness, provide information that will assist law enforcement in financial investigations, help prevent evasion of targeted financial sanctions, improve the ability of financial institutions to assess risk, facilitate tax compliance, and advance U.S. compliance with international standards and commitments.

 

The final rules define beneficial owners as:

  • An individual who, directly or indirectly, through any contact, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer; OR

  • A single individual with significant responsibility to control, manage, or direct a legal entity customer; including an executive officer or senior manager (e.g. a CEO, CFO, COO, Managing Member, General Partner, President, Vice President or Treasurer) or any other individual who regularly performs similar functions.

 

Per FinCEN the key elements include:

  • Identifying and verifying the identity of customers;

  • Identifying and verifying the identity of beneficial owners with 25% or more equity interest of legal entity customers;

  • Understanding the nature and purpose of customer relationships; and

  • Conducting ongoing monitoring to maintain and update customer information, and identify and report suspicious transactions

 

This new rule is not retroactive, as the financial institution will only need to obtain this information moving forward. However, if a legal entity opens a new account, CDD must be completed even for legal entities with existing relationships.

 

Subjected to certain limitations, covered financial institutions are also not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens any of the following four categories of accounts:

  • Accounts established at the point-of-sale to provide credit products, solely for the purchase of retail goods and/or services at these retailers, up to a limit of $50,000;

  • Accounts established to finance the purchase of postage and for which payments are remitted directly by the financial institution to the provider of the postage products;

  • Accounts established to finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker; and

  • Accounts established to finance the purchase or lease of equipment and for which payments are remitted directly by the financial institution to the vendor or lessor of this equipment.

     

These exemptions will not apply under either of the following two circumstances; if the accounts are transaction accounts through which a legal entity customer can make payments to, or receive payments from, third parties. Or, if there is the possibility of a cash refund for accounts opened to finance purchase of postage, insurance premium, or equipment leasing. If there’s the possibility of a cash refund, the financial institution must identify and verify the identity of the beneficial owner(s) either at the initial remittance, or at the time such refund occurs. Final rules and additional exemptions can be viewed at Government Publishing House.

 

Given that the rule will be effective May 11, 2018, it is highly recommended that you continue monitoring to ensure compliance with the new requirements as part of the account onboarding process.  

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Dave Chojnacki

Dave ChojnackiDave Chojnacki

Dave has more than 10 years of relationship management experience and holds a Credit Union Compliance Expert (CUCE) Designation from CUNA. He currently serves as Director of Consulting Services at Trellance.

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