On April 3, the Financial Crimes Enforcement Network published Frequently Asked Questions Regarding the Customer Due Diligence Requirements for Financial Institutions. The questions are about Customer Due Diligence Requirements for Financial Institutions, published on May 11, 2016, as amended on September 29, 2017. FinCEN is labeling it the CDD the Rule.
The CDD Rule requires financial institutions to identify and verify a legal entity’s “beneficial owners” when an accounts is opened. The CCD Rule’s mandatory compliance date is May 11, 2018.
I don’t think the CDD Rule applies specifically to the investors in private equity funds or to investment advisers in general. But the SEC has been threatening to impose a know-your-customer, anti-money-laundering, Customer Due Diligence requirement on investment advisers. I think it’s worth looking at the rule to see how the broader industry is addressing this.
The big change is for legal ownership of entities. The CDD requires the identification of anyone who directly or indirectly owns more than 25% of the equity interest in the entity and at individuals who have managerial control of the entity. The new FAQ makes it clear that a financial institution can dig deeper than 25%.
For banks, the CDD process has to be run each time a new account is opened. Each time a loan is renewed or a certificate of deposit is rolled over, the bank is establishing another banking relationship and a new account is established. Covered financial institutions are required to obtain beneficial ownership information of a legal entity that opens a new account or renews a product, even if the legal entity is an existing customer. For financial services or products established before May 11, 2018, Covered financial institutions must obtain certified beneficial ownership information of the legal entity customers of the new or renewed products.
The FAQ goes deep. It’s worth reading to think about how your firm should amend its AML procedures.
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