On April 3, 2018, the Financial Crimes Enforcement Network (“FinCEN”) published Frequently Asked Questions (“FAQs”) to help “covered financial institutions,” including broker-dealers and dually registered SEC investment advisers, better understand its new Customer Due Diligence Requirements (“CDD Rule”), which will become effective on May 11, 2018. Other “covered financial institutions” include insured banks, commercial banks, federally insured credit unions, savings associations, trust banks or trust companies that are federally registered, and mutual funds.
The CDD Rule will require covered financial institutions to adopt written policies and procedures that are sufficiently tailored to “identify and verify beneficial owners of legal entity customers and to include such procedures in their anti-money laundering compliance program.” A beneficial owner is defined as an individual who directly or indirectly owns 25 percent or more of a legal entity customer’s equity and a person who exercises significant control over a legal entity customer. However, according to the FAQs, should covered financial institutions desire to gather information on individuals owning less than 25 percent of a legal entity customer, they are welcome to do so. The FAQs also provide that covered financial institutions are required to verify beneficial owners’ identities using risk-based procedures that feature the same factors financial institutions are required to use to verify customer identities under the Customer Identification Program rules.
The CDD Rule defines a “legal entity customer” as an entity such as a corporation or limited liability company that is formed by filing a document with a Secretary of State, a general partnership, or a similar entity formed pursuant to the laws of a foreign jurisdiction. There are a number of exemptions to the definition of “legal entity customer,” such as an issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 and an SEC-registered investment adviser. The FAQs further provide that sole proprietorships and unincorporated associations do not qualify as legal entity customers. The FAQs also provide that publicly traded companies do not qualify as legal entity customers either.
The CDD Rule generally provides that covered financial institutions are required to identify a legal entity customer’s beneficial owners and verify their identities each time a legal entity customer establishes a new account. However, in the case of multiple accounts certification for one account is enough, provided that the legal entity customer certifies that the information given is current and accurate. The CDD Rule also requires that covered financial institutions must update this information when necessary. Whether the covered financial institution would need to recertify the updated information depends on the nature of the updated information. For example, if the update merely involves a change of address for an existing beneficial owner, the information likely does not need to be recertified in its entirety. If the updated information involves a change in beneficial ownership, however, the new information would need to be recertified.
Covered financial institutions must also implement policies and procedures for keeping and safeguarding records of all information obtained in identifying and verifying the identities of beneficial owners. The records must be maintained for five years following the date the account is closed.
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