5 Myths About the New CDD Regulation
Friday, March 23, 2018 8:50 AM

1. The New CDD rule going into effect May 11, 2018 triggers the need for a new lobby sign.

False.  The new CDD rule does not include any new notice requirements.  Many credit unions have been contacted by vendors notifying them that an updated U.S. Patriot’s Act notice is available for purchase.  The only member notice that is required by the U.S. Patriot Act regulations is the Customer (Member) Identification Program (CIP) notice that you have been complying with for several years:

Excerpt from the FFIEC BSA Examination Manual:

Adequate Customer Notice

The CIP must include procedures for providing customers with adequate notice that the bank is requesting information to verify their identities. The notice must generally describe the bank’s identification requirements and be provided in a manner that is reasonably designed to allow a customer to view it or otherwise receive the notice before the account is opened. Examples include posting the notice in the lobby, on a Web site, or within loan application documents. Sample language is provided in the regulation:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT — To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.     

2. Credit unions must now collect identifying information about account beneficiaries.

False.  Not surprisingly, there has been some confusion between the term “beneficial owner” and “beneficiaries”. 

Beneficial owners own at least 25% equity interest in, and/or have significant responsibility to control, a legal entity that opens an account at the credit union.

Beneficiaries are designated by an account holder to receive the balance of the funds in the account after the account holder’s death. 

The new rule does not require credit unions to obtain additional information about account beneficiaries.

3. The Girl Scouts of America, Inc is exempt from the new CDD beneficial ownership requirements.

False.  There has been a lot of confusion surrounding FinCEN’s “scout troop” example in the final rule:

“FinCEN also notes that as a general matter, small local community organizations, such as Scout Troops and youth sports leagues, are unincorporated associations rather than legal entities and therefore not subject to the beneficial ownership requirement.”  (Federal Register/ Vol.81, No. 91 / Wednesday, May 11, 2016 / page 29416)    

If a scout troop opening an account at your credit union meets the definition of “legal entity,” then the beneficial ownership requirements will apply:

“Legal entity customer. For the purposes of this section: (1) Legal entity customer means a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.”   (31 CFR 1010.230(e)(1))

Since the Girl Scouts of America, Inc is an incorporated organization, beneficial ownership information will be required. 

4. The new CDD rule requires credit unions to obtain beneficial ownership information from a legal entity account every time a new account is opened.

True.  The new CDD rule does require beneficial ownership information be obtained each time a new account (i.e., loan, checking, CD) is opened.  During the rulemaking process, several groups expressed concern with this requirement and requested that the beneficial ownership information only be collected when the initial account is opened.  This is how FinCEN responded:

“FinCEN has concluded that, while it is not requiring periodic updating of the beneficial ownership information of all legal entity customers at specified intervals, the opening of a new account is a relatively convenient and otherwise appropriate occasion to obtain current information regarding a customer’s beneficial owners. Accordingly, FinCEN has added to the final rule as § 1010.230(g) a definition for ‘‘new account’’.”

“New account. For the purposes of this section, new account means each account opened at a covered financial institution by a legal entity customer on or after the applicability date.”  (31 CFR 1010.230(g))

When assessing your risk to determine how you will implement the new CDD requirements, keep in mind that it is FinCEN’s goal to obtain reasonably updated beneficial ownership information for every legal entity account in every financial institution across the country. Until we receive more guidance from FinCEN, at the very least whenever a new account is opened by a legal entity within a reasonably short time from when you obtained the beneficial ownership information, to reduce compliance burden you might consider asking the member if any changes have occurred and if the response is "no", document and date that response. If your member indicates that changes have occurred to the beneficial owners of the legal entity, a new Beneficial Owner Certification must be processed.

In the meantime, CUNA will continue to work with FinCEN to issue reasonable guidelines and clarification for this new rule.

5. Credit unions will be required to verify that the individual named on the Beneficial Owners Certification form are actually “beneficial owners”.

False.  Although FinCEN stopped short of allowing the use of the model Beneficial Owner Certification Form to provide a safe harbor for financial institutions choosing to use the form, the agency did clarify in the rule:

“A covered financial institution may rely on the information supplied by the legal entity customer regarding the identity of its beneficial owner or owners, provided that it has no knowledge of facts that would reasonably call into question the reliability of such information.”   (31 CFR 1010.230(b)(2)) 

For more information:  Financial Crimes Enforcement Network:  Customer Due Diligence Requirements for Financial Institutions; Final Rule

Source:  CUNA Compliance Blog