(Customer Due Diligence Final Rule)
š¹ Definition
The Customer Due Diligence (CDD) Final Rule is a regulation issued by the U.S. Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act (BSA). Effective from May 11, 2018, the rule mandates that certain financial institutions implement standardized procedures to identify and verify the identities of their customers, including the beneficial owners of legal entity customers.
The primary objective of the CDD Final Rule is to enhance financial transparency and combat the misuse of companies for illicit activities such as money laundering and terrorist financing.
š¹ Key Requirements
The CDD Final Rule outlines four core requirements for covered financial institutions:
- Identify and verify the identity of customers.
- Identify and verify the identity of beneficial owners of legal entity customers.
- Understand the nature and purpose of customer relationships to develop customer risk profiles.
- Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information.
š¹ Beneficial Ownership
Under the rule, a beneficial owner is defined as:
- Ownership Prong: Each individual who owns 25% or more of the equity interests of a legal entity customer.
- Control Prong: A single individual with significant responsibility to control, manage, or direct a legal entity customer, such as an executive officer or senior manager.
Financial institutions must collect and verify this information at the time a new account is opened for a legal entity customer.
š¹ Applicability
The CDD Final Rule applies to the following “covered financial institutions”:
- Banks
- Mutual funds
- Brokers or dealers in securities
- Futures commission merchants
- Introducing brokers in commodities
š¹ Compliance Considerations
Financial institutions are required to:
- Implement written policies and procedures that are reasonably designed to achieve compliance with the CDD requirements.
- Use a risk-based approach to customer due diligence, tailoring procedures to the specific risks associated with different customer types.
- Maintain records of the information obtained and the methods used to verify identities.
- Update customer information as necessary based on risk assessments and ongoing monitoring.
š¹ Impact on AML Programs
The CDD Final Rule integrates with existing Anti-Money Laundering (AML) programs by:
- Enhancing the ability of financial institutions to assess and mitigate risks associated with customer relationships.
- Providing greater transparency into the ownership structures of legal entities.
- Facilitating the detection and reporting of suspicious activities.
