In May 2016, The United States Department of the Treasury’s Financial Crimes Enforcement Network issued its final rule on Customer Due Diligence Requirements for Financial Institutions. This rule requires institutions to establish and maintain written procedures to identify and verify the identity of the beneficial owners of all legal entity customers. These institutions include depository institutions, securities broker-dealers, mutual funds, and future commission merchants. This adds customer due diligence as the fifth pillar alongside the other four pillars of money laundering 1) development of internal policies, procedures, and related controls 2) designation of a compliance officer 3) thorough and ongoing training and 4) independent review for compliance.
Key Elements of the New CDD Rule
The new rule requires verifying the identity of customers, and beneficial owners, including not only those with a 25% or more equity interest of legal entity customers (the Ownership Prong), but also at least one individual form the “Control Prong,” or those with significant responsibility to control, direct, or manage the entity. These include CEOs, CFOs, COOs, General Partners, Presidents, Managing Members, Treasurers, and Vice Presidents. In addition, the rule also requires understanding the nature and purpose of customer relationships, conducting ongoing monitoring to maintain and update customer information, and to identify and report suspicious transactions. This rule applies to all accounts, including checking, savings, certificates, and loans. Non-governmental organizations, including charities and religious organizations, only need to list one person from the control prong.
What Entities are Covered?
The legal entity customers include the following: business trusts, corporations, general partnerships, limited liability companies, limited partnerships, entities created by a filing with a state office, and similar entities formed under the laws of a non-US jurisdiction.
Why is the Purpose of this Regulatory Action?
The failure to identify beneficial ownership allows criminals and others looking to hide illicit proceeds to gain access to the financial system anonymously. The new rules on customer due diligence will assist law enforcement and investigators to help prevent the evasion of targeted financial sanctions, improve the ability of financial institutions to assess risk, and facilitate taxation compliance.
How can you Prepare?
Financial institutions will be required to have written procedures to identify and verify beneficial owners after May 11, 2018. Identification can be accomplished by gathering personal identify information on forms provided by the Financial Crimes Enforcement Network. Businesses should take the next several months to enhance their due diligence practices and review their risk assessment and anti-money laundering methodologies, including suspicious activity monitoring, and on-boarding processes. Companies such as Vcheck can help conduct verification, identify ownership structures, and detect any red flags and risks involved with certain subjects. Partnering with Vcheck allows financial institutions to assess and mitigate risk, facilitate reporting requirements, including supporting taxation compliance, and to identify the assets and accounts of bad actors, including criminals and national security threats.
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