Banks, Broker-Dealers and Other Financial Institutions Face May 11 Deadline To Comply With FinCEN's Customer Due Diligence Rule

Six years after the Financial Crimes Enforcement Network (FinCEN) originally proposed its Customer Due Diligence (CDD) Rule, the deadline for financial institutions to comply draws near. Banks, broker-dealers, mutual funds and futures commission merchants and introducing brokers in commodities ("covered financial institutions")1 will have to start complying with the CDD Rule by May 11, 2018.2 To comply with the primary change under the CDD Rule, covered financial institutions will now have to identify and verify the identity of beneficial owners of "legal entity customers" such as corporations, limited liability corporations, limited partnerships and general partnerships.3

Background: FinCEN initially proposed the CDD Rule in 2012,4 arguing that requiring financial institutions to identify beneficial owners of accounts would help protect the U.S. financial system from criminal abuse and guard against terrorist financing, money laundering and other financial crimes. The proposal sparked significant response from the industry, with FinCEN receiving a total of 231 comments, many raising concerns about the costs and challenges of obtaining and verifying beneficial ownership information, and of implementing necessary system changes and training within FinCEN's initially proposed one-year deadline. In response, FinCEN modified its original proposal somewhat. For instance, while FinCEN had proposed requiring firms to use a standard certification form to obtain beneficial ownership information, the revised rule permits, but does not require, use of the standard form. FinCEN also extended the original one-year compliance deadline to two years. FinCEN issued the revised rule as final in May 2016.5

Identification of Beneficial Owners: The CDD Rule requires firms to identify beneficial owner(s) of each legal entity customer at the time a new account is opened (unless the customer or account is covered by certain enumerated exclusions or exemptions), with beneficial ownership determined by ownership or control. Specifically, firms must identify (i) every individual (if any) who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer (i.e., from zero to four people) ("the ownership prong"); and (ii) at least one individual with "significant responsibility to control, manage or direct" the legal entity customer, such as an executive officer, senior manager or other individual who regularly performs similar...