The Financial Crimes Enforcement Network issued its latest collection of Frequently Asked Questions on the requirements for Customer Due Diligence requirements for Covered Financial Institutions. For anyone looking for decisive answers and bright-line tests, you’ll have to look elsewhere. The answers will leave you wondering why FinCEN even bothered to publish this answers.
Private fund managers and Registered Investment Advisers are not Covered Financial Institutions under the Customer Due Diligence Rule. I believe most adhere to the guidance to make sure they don’t run afoul of FinCEN.
The 2017 Customer Due Diligence Rule did create some bright-line tests on due diligence, particularly for potential investors in private funds that are not individuals. The uncertainty before the rule was how much diligence did you need to conduct on the entity. The 2017 Rule made it clear. You have to collect information on individuals who, directly or indirectly own 25% or more of the equity interests and one individual who has managerial control of the entity.
The new FAQ answers questions in three broad general areas about whether you must conduct additional diligence at opening, risk ratings for customers, and ongoing diligence requirements.
The answers all are squishy answers. It’s up the financial institution to develop policies based on risk. One example:
“There is no categorical requirement that financial institutions update customer information on a continuous or periodic schedule. The requirement to update customer information is risk based and occurs as a result of normal monitoring.”
I’m going to guess that the answers to the questions are not going make compliance officers feel any better. It might just confirm that what they are doing is okay, or at least, not wrong.
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