The FinCEN Customer Due Diligence Requirements for Financial Institutions, known as the CDD Rule or the “Fifth Pillar,” becomes effective today for certain covered U.S. Financial Institutions. This CDD Rule, which amends U.S. Bank Secrecy Act regulations, seeks to improve financial transparency and prevent money laundering/terrorist financing. The CDD Rule applies to covered U.S. financial institutions that are banks, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.
Most notably, these covered financial institutions must identify and verify the identity the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts. The CDD Rule requires verification and identification of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.
The CDD Rule’s core requirements for covered financial institutions include establishment and maintenance of written policies and procedures reasonably designed to: (1) identify and verify the identity of customers; (2) identify and verify the identity of the beneficial owners of a legal entity opening an account; (3) understand the nature and purpose of customer relationships to develop customer risk profiles; and (4) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.