March 1, 2012
Authored by: Bryan Cave
On February 29, 2012, FinCEN released an advance notice of proposed rulemaking on customer due diligence and beneficial owners, proposing to make a customer due diligence obligation explicit for ALL customers (to “clarify, consolidate and harmonize” the federal banking agencies’ expectations) and extending the requirement to collect (and possibly verify) beneficial owner information for most or all customers as well.
FinCen’s advance notice of proposed rulemaking (ANPRM), seeks public comment on a range of questions regarding the development of a customer due diligence (CDD) regulation that would “(i) codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations, and (ii) establish a categorical requirement for financial institutions to identify beneficial ownership of their accountholders, subject to risk-based verification and pursuant to an alternative definition of beneficial ownership.” Comments received in response to the ANPRM will likely be influential in FinCEN’s development of a more formal and detailed proposed rule on the topic.
FinCEN is initially considering a CDD rule to cover banks, broker dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, and thus the ANPRM is focused on those institutions. The scope of the ANPRM, however, includes all industries subject to FinCEN’s anti-money laundering (AML) program requirements. FinCEN believes that a CDD rule may be appropriate for all financial institutions under its purview and will consider extending a CDD rule to other types of institutions in the future. Thus, FinCEN is specifically requesting comments from all other financial institutions covered by FinCEN regulations as well, including providers of prepaid access and other types of money services businesses (MSBs), insurance companies, casinos, non-bank mortgage lenders and originators, and dealers in precious metals, stones and jewels.
FinCEN states that an express CDD rule may be necessary to protect the U.S. financial system from criminal abuses, and to guard against terrorist financing, money laundering and other financial crimes. FinCEN is concerned that there is a lack of uniformity and consistency within and across industries in the way financial institutions address CDD obligations that are implicit in existing AML program and suspicious activity reporting (SAR) rules, and in the way financial institutions collect beneficial ownership information, despite FinCEN’s recent efforts to highlight and clarify its expectations on these matters. Although the federal banking agencies already generally expect appropriate and adequate CDD policies, procedures and processes, FinCEN intends to clarify, consolidate and harmonize the agencies’ minimum expectations in this regard.
Customer Identification Programs (CIP) and CDD
Customer Identification and Verification: FinCEN is considering expressly requiring financial institutions to “identify, and on a risk-basis verify, the identity of each customer, to the extent reasonable, such that the institution can form a reasonable belief that it knows the true identity of each customer.” This provision would not create any new CIP obligations for institutions that are currently subject to a CIP requirement. Customers that are exempt from the current CIP requirement, however, would not be exempt from the CDD requirement to understand the nature and purpose of the account and to conduct ongoing monitoring.
Understanding the Nature and Purpose of the Account: FinCEN is also considering requiring financial institutions to “understand the nature and purpose of the account and expected activity associated with the account for the purpose of assessing the risk and identifying and reporting suspicious activity.” FinCEN does not believe this provision will impose any new or additional requirements, based on existing obligations to detect and report suspicious activity.
Obtaining Beneficial Ownership Information
Current regulations explicitly require financial institutions to obtain beneficial ownership information with respect to private banking accounts; correspondent accounts for certain foreign financial institutions; and, as part of CIP, individuals with authority or control over accounts for customers that are not individuals, based on the institution’s risk assessment.
FinCEN is considering extending this requirement to all customers, by requiring financial institutions to “identify the beneficial owner(s) of all customers, and verify the beneficial owners’ identity pursuant to a risk-based approach.” FinCEN expects to provide additional guidance with respect to customers that may be considered low risk (and thus exempt from this provision), customers where only identification of the beneficial owner(s) may be necessary, and customers for which both identification and verification of the beneficial owner(s) is required.
FinCEN is also considering what the verification requirement should mean in the context of beneficial owners: verifying the existence of an identified beneficial owner (i.e., verifying the identity of the individual identified by the customer as the beneficial owner of an account) or verifying the status of identified beneficial owner (i.e., verifying that the individual identified by the customer as the beneficial owner is in fact the beneficial owner of the customer).
The ANPRM also discusses possible definitions for beneficial owners of legal entities; potential exemptions from the requirement to collect beneficial ownership information; and the distinction between beneficial ownership of a legal entity customer and beneficial ownership of assets in an account that the financial institution, and when identification of the latter may be appropriate.
Conducting CDD on an Ongoing Basis
FinCEN is considering including an explicit ongoing monitoring and due diligence requirement as part of the CDD rule, by requiring financial institutions to “establish and maintain appropriate policies, procedures, and processes for conducting on-going monitoring of all customer relationships, and additional CDD as appropriate based on such monitoring for the purpose of the identification and reporting of suspicious activity.” FinCEN states that such a provision would not impose any new or additional obligations, as ongoing CDD monitoring is already included in the AML program and SAR reporting requirements.
FinCEN is seeking comments on all aspects of the ANPRM, including on 10 specific questions regarding the proposal and current industry practices with respect to CDD and beneficial owners. FinCEN is also requesting comments regarding the implementation of CDD programs generally pursuant to existing rules and guidance, and requesting information to help it better understand what types of CDD information are currently collected, specifically regarding beneficially owners, and under what circumstances the information is collected.
Comments are due 60 days after the ANPRM is published in the Federal Register. The ANPRM is available at http://www.fincen.gov/statutes_regs/frn/pdf/1506-AB15_CDD%20ANPRM.pdf; and FinCEN’s accompanying press release is available at http://www.fincen.gov/news_room/nr/html/20120229.html.