Customer due diligence requirements for financial institutions

Customer due diligence requirements

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) today released for publication in the Federal Register final rules under the Bank Secrecy Act. The final rules are intended to clarify and strengthen the customer due diligence requirements for banks, brokers, dealers in securities, mutual funds, and others.

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The final rules [PDF 1.08 MB] provide explicit customer due diligence requirements and also include a new requirement for financial institutions to identify and verify the identity of beneficial owners of their legal entity customers. The preamble to the final rules states there are certain exclusions and exemptions.

Overview

Currently, “covered financial institutions” are not required to know the identity of individuals who own or control their legal entity customers—the “beneficial owners.”  According to the preamble of the final rules, the beneficial ownership requirement will provide information that will assist law enforcement in financial investigations and facilitate tax compliance, as well as help advance U.S. compliance with international standards and commitments.

A related Treasury Department release explains that the final rules explicitly set forth several components of customer due diligence that have been expected under existing regulations, as well as  incorporating a new requirement for covered financial institutions to collect beneficial ownership information. Specifically, the final rules contain three core requirements: 

  • Identifying and verifying the identity of the beneficial owners of companies opening accounts
  • Understanding the nature and purpose of customer relationships to develop customer risk profiles
  • Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25% or more of a legal entity, and an individual who controls the legal entity. 

Based upon comments received in response to the proposed rule that was published in August 2014, the final rules:

  • Extend the proposed implementation period from one year to two years
  • Expand the list of exemptions
  • Make use of a standardized beneficial ownership form optional as long as a financial institution collects the required information

Other releases

In addition to these customer due diligence final rules, Treasury and the IRS today also released proposed regulations [PDF 156 KB] related to foreign-owned disregarded entities (i.e., single-member limited liability companies). These proposed regulations are intended to require information reporting by foreign-owned disregarded entities.

Treasury Secretary Lew highlighted these efforts separately in a letter [PDF 1.92 MB] to Congress, and urged passage of “beneficial ownership legislation” that would allow for full reciprocity with Foreign Account Tax Compliance Act (FATCA) partners among other items. 

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