Effective July 11, 2016, the Financial Crimes Enforcement Network (FinCEN) issued a final rule clarifying Customer Due Diligence (CDD) requirements. Covered financial institutions must be in compliance with the final rule by May 11, 2018. However, there is uncertainty as to whether the benefits of greater emphasis on CDD will outweigh the costs of implementing compliance policies and procedures.

New Customer Due Diligence Obligations

The new CDD rule requires covered financial institutions to identify and verify the identity of the beneficial owners of all legal entity customers when an account is opened. When a trust (other than a statutory trust) owns 25 percent or more of the equity interests or a legal entity customer, the institution must collect and verify the identity of the trustee. The financial institution may obtain required information on a standard certification form or through another method that complies with the requirements of the obligation. Identification records must be kept for five years after the date the account is closed. Verification records must be maintained for five years after the record is made.

Financial Institutions and CDD Compliance

Financial institutions must be very cautious when creating and implementing CDD policies and procedures. For example, institutions with foreign branches and offices, especially in high-risk geographic locations, need additional AML policies and procedures in place. Also, electronic banking poses greater risks of money laundering because electronic banking is easily and anonymously done. Therefore, financial institutions must have procedures for detecting unusual activity, authenticating a person’s identity when opening an account online and anticipating the volume and type of business activity for electronic banking so unusual activity may be flagged and investigated before being completed.

Compliance Costs and Risks  

Compliance costs and risks arising from the increased CDD obligations may be greater than the potential benefits and revenues brought in by those customers. For example, financial institutions have to change their policies and procedures for opening business accounts. Those changes require current information systems to be modified and upgraded. Purchasing new IT systems and paying professionals to install, understand and run them will be costly. Also, financial institutions must determine what data to gather and how to evaluate its risk. When an institution receives the names of beneficial owners, it must verify the names. Therefore, an identity verification process must be implemented. After those names are collected, processes such as sanctions screening and risk screening must be performed. Having more information may change the risk profile of a customer and possibly the risk profile of the financial institution. Furthermore, institutions must pay for internal staff to be trained on the upgraded systems and learn how to explain to customers why they must provide certain information that previously wasn’t required.

Work With a Top Financial Compliance Recruiter

It’s unclear whether the benefits of emphasizing CDD will outweigh the costs involved with implementing compliance policies and procedures. What is certain is we can help with your company’s financial compliance needs. Contact CarterWill Search and Flex today.

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