FinCEN and CDD: What Banks Need to Know About the New Rule


In 2016, FinCEN released a new Customer Due Diligence (CDD) rule, with specific rules on Beneficial Owners, and required financial institutions to comply by May 11, 2018. We’ve created the guide below to help you understand the requirements for your organization.

What is FinCEN?

FinCEN stands for the Financial Crimes Enforcement Network. The organization is a bureau of the U.S. Department of Treasury and is tasked with collecting and analyzing information about financial transactions in order to combat illegal activities like money laundering. In 2016, FinCEN released a new Customer Due Diligence (CDD) rule with specific rules on Beneficial Owners.  Financial institutions were required to comply by May 11, 2018.

What Financial Institutions are Subject to this Rule?

Federally regulated banks and federally insured credit unions.

Why is FinCEN Issuing the CDD Rule?

FinCEN released this new rule to strengthen and clarify Customer Due Diligence requirements.   The rule provides explicit CDD requirements and imposes a new requirement for the FIs to identify and verify the identity of Beneficial Owners of legal entity customers (businesses).

What is a Beneficial Owner?

Beneficial owners are:

  1. Any individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer
  2. A single individual with significant responsibility to control, manage, or direct a legal entity customer (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)

Are All Types of Legal Entities Included in this Rule?

No, sole proprietorships and companies publicly traded on the US stock exchange are excluded from this rule.

 What are the Requirements?

The CDD requires institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of business customers. To do this, financial institutions must implement procedures to:

  • Identify the beneficial owners of each customer at the time a new account is opened (unless the customer is otherwise excluded, or the account is exempted)
  • Establish risk-based practices for verifying the identity of each beneficial owner identified to the covered financial institution
  • Include elements required for verifying the identity of customers that are individuals under applicable customer identification program (“CIP”) requirements.

What Information is Needed?

In short, organizations are required to obtain, verify, and record the identities of the beneficial owners of legal entity customers. This includes information like:

  • Name, address (residential or business), DOB, SSN.
  • Institutions may also require driver’s license or other identifying document; they can rely on photo copies of a beneficial owners’ ID to verify identity. BOs do not have to be present.
  • At least 1 Beneficial Owner must be identified.
  • Banks are required to do this for both new businesses and existing businesses opening another account.
  • Beneficial Owners must certify that the identifying information they are providing is accurate by signing and dating a form.
  • Records of the certification must be retained.

What if a Legal Entity Owns 25% or More of the Legal Entity Opening the Account?

The same rules apply.  The bank must collect the same information on individuals who benefit from the business, either directly or indirectly. For example, Customer applies for a bank account.  Allan owns indirectly 30% of Customer’s equity interests through his direct ownership of Company A.  This makes him a Beneficial Owner of Customer.

Betty is also a Beneficial Owner of Customer because she owns indirectly 20% of its equity interests through her direct ownership of Company A plus 16 2/3% through Company B for a total of indirect ownership interest of 36 2/3%.

Neither Carl nor Diane is a Beneficial owner because their ownership is 16 2/3 %.

How Does Avoka Help?

At the 2018 American Banker Digital Banking Conference, we demoed a digital business banking onboarding experience built on the Avoka Transact platform.  In addition to showcasing how to create an optimal customer experience for business customers, we also showed how Avoka can help conduct KYB on businesses and identify Beneficial Owners associated with a business.  Our application experience also included the ability for the applicant to enter the email addresses of the identified Beneficial Owners.  The Owners then receive an email with a link to the application to enter their identifying information at their own convenience.  In the meantime, the applicant can continue with the application and submit it.  The benefits of our solution are:

  • A completely digital and easily process for the customers
  • Reduced research effort to identify Beneficial Owners and collect their information
  • Reduced wait and processing time
  • A digital record of the identifying information used and certification of the information from the owners

Learn more about how Avoka helps organizations comply with CDD by watching our demo video.

 

 

Lisa Adams