THE RECENT CODIFICATION of explicit requirements for customer due diligence (CDD) have prompted many banks to adjust certain components of their existing programs—but most banks would benefit greatly from re-evaluating their overall CDD programs.
The Financial Crimes Enforcement
Network’s (FinCEN) final rule, “
Customer Due Diligence Requirements for
Financial Institutions,” took effect on July
11, 2016, with an effective compliance
date of May 11, 2018. While much attention has been directed to how banks have
to comply with the new “beneficial ownership” requirement, financial institutions also should consider how they can
fine-tune their entire CDD programs.
With evolving regulatory expectations, a
program that might have passed muster
in previous years might not now.
The Final Rule
The Federal Financial Institutions Examination Council (FFIEC) describes
risk-based CDD policies, procedures, and
processes as the cornerstone of a strong
Bank Secrecy Act/anti-money laundering (BSA/AML) compliance program.
A bank that understands the nature and
purpose of its customer relationships—
including the types of transactions in
which a customer is likely to engage—
can better determine when transactions
are potentially suspicious and comply
with the related regulatory requirements.
The FinCEN final rule, which amends
BSA/AML regulations, clarifies and
strengthens CDD requirements for U.S.
banks. The primary change that came
with the rule requires those covered to
identify and verify the identity of the
natural persons of legal entity customers who own, control, and profit from
companies (known as beneficial owners)
when those companies open accounts.
Specifically, banks must identify and
verify the identity of any individual who
owns 25 percent or more of a legal entity,
as well as an individual who controls the
legal entity. (For a more in-depth discus-
sion of the beneficial ownership require-
ment, see the article entitled “What You
May Not Know About the Beneficial
Ownership Rule” by Chris Simpkins,
on page 4 of the May/June 2018 issue of
ABA Bank Compliance magazine.)
In addition to the new beneficial
ownership requirement, the CDD rule
formalizes long-standing supervisory
expectations and practices related to
regulatory requirements. In particular,
it expressly requires banks to implement
and maintain written policies and procedures that are reasonably designed to
help banks:
■ ■ ■ Understand the nature and purpose
of customer relationships to develop
customer risk profiles based on customers’ money laundering and terrorist financing risks; and
■ ■ ■ Conduct ongoing monitoring to identify and report suspicious transactions
and, on a risk basis, to maintain and
update customer information.
These requirements establish CDD as
a “fifth pillar” of BSA/AML programs.
Nonetheless, to the extent covered banks
have implemented changes to their CDD
programs in the response to the final
rule, they primarily have focused on
beneficial ownership.
A Broader Focus
The new examination procedures FinCEN released for the final rule make clear
why it is worthwhile for banks to take another look at their overall CDD program:
In those instances where the bank has
an established and effective customer
risk decision-making process, and has
followed existing policies, procedures,
and processes, the bank should not be
criticized for individual customer risk
decisions unless it impacts the effectiveness of the overall CDD program,
or is accompanied by evidence of bad
faith or other aggravating factors. 1
In other words, keeping a program
up-to-date can head off examiner
criticism.
Areas especially worthy of closer consideration include the following:
Staff Training
Regardless of the information that an
institution chooses to collect as part of
its CDD program, it must provide adequate training to the staff responsible
for collecting the information. While
the functional aspects of collecting
and documenting the required CDD
information is a necessary aspect of the
training, one component that often is
overlooked is explaining to the staff why
the information is being collected—so
the staff can better understand customers and their risks. Employees with a
full understanding of their roles in BSA/
AML and compliance generally are
Troubleshooting Your CDD Program
to Maximize Effectiveness
