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FinCen Proposes Expanded CDD Requirements for Financial Institutions

on Monday, 24 November 2014 in Banking Update

On August 4, 2014, the Financial Crimes Enforcement Network (“FinCen”) issued a notice of proposed rulemaking (“NPRM”) regarding the expansion of certain customer due diligence (“CDD”) requirements for, among other entities, financial institutions. Specifically, in its NPRM, FinCen proposed a requirement for financial institutions to identify and verify the identity of beneficial owners of a financial institutions “legal entity customers.” The basic parameters for the requirement FinCen is proposing are set forth below.

The NPRM defined “legal entity customers” as those formed through a filing with a secretary of state or other applicable government agency. Under the new requirements outlined in the NPRM, financial institutions determination of the “beneficial ownership” of a “legal entity customer” will be conducted through a two-prong test consisting of both an ownership and control prong. The ownership prong will be met by an individual who has a 25 percent or more equity interest in the legal entity. The control prong will be met by individuals exercising significant responsibility to control, manage, or direct the legal entity. If either prong is satisfied, financial institutions will be required to identify and verify the identity of that individual. Financial institutions should note that NPRM and FinCen make clear that that they are seeking the identity of natural persons, as opposed to other legal entities who own or control “legal entity customers.”

On a positive side for financial institutions, under the proposed rule, the requirement to identify and verify “beneficial owners” would apply prospectively, so financial institutions will not have to look back through all of their current customer accounts. Rather, the requirement will only apply to accounts opened starting one year after adoption of the final rule. In order to verify the identity of “beneficial owners,” FinCen proposes the use of a standard form. The standard form will ask individuals opening an account on behalf of a legal entity to provide certain information and certify as to the veracity of that information. While there is no specific requirement to update this information, FinCen expects financial institutions to keep the information “as current as possible.” Additionally, financial institutions should be aware that under the proposed requirements, they will be entitled to rely on the information provided by individuals in the standard form and, under certain conditions, may utilize other financial institutions to comply with the proposed requirements.

Finally, it should be noted that the NPRM excludes numerous entities from the “beneficial ownership” requirement including: (i) customers already exempt from CIP under FinCen rules; (ii) certain publicly traded companies; (iii) certain government agencies; (iv) U.S. investment companies registered with the SEC; (v) certain non-profits; (vi) registered entities; and (vii) public accounting firms registered under Sarbanes Oxley.

Eli A. Rosenberg


1 Department of the Treasury: Financial Crimes Enforcement Network, Notice of Proposed Rulemaking: Customer Due Diligence Requirement for Financial Institutions, July 23, 2014, available here. The NPRM also proposed codifying what FinCen believs are already existing requirements for financial institutions to understand the nature and purpose of customer relationships and conduct ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

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