FI exams for compliance with ‘customer due diligence’ start as early as July 1

Federal financial institution regulator examinations for compliance with “customer due diligence” (CDD) requirements are set to get underway beginning July 1 by at least one regulator – with another planning to follow – for most provisions of a new rule that went into effect May 11.

The National Credit Union Administration (NCUA) has said it plans to begin examining federally insured credit unions for CDD compliance in the second half of the year. The Office of the Comptroller of the Currency (OCC) has included CDD compliance in its 2018 supervisory plan.

Under the rule, published two years ago by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and effective last month, FinCEN listed four core elements of CDD that it said should be “explicit requirements in the anti-money laundering (AML) program for all covered financial institutions, in order to ensure clarity and consistency across sectors.”

These four elements are:

  1. customer identification and verification;
  2. beneficial ownership identification and verification;
  3. understanding the nature and purpose of customer relationships to develop a customer risk profile; and
  4. ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.

The first of these elements was already an AML program requirement, the agency said when it issued the rule, and the 2016 rule addressed the second. “The third and fourth elements are already implicitly required for covered financial institutions to comply with their suspicious activity reporting requirements,” FinCEN said.

However, also last month, FinCEN announced 90-day “exceptive relief” for the second core element on “beneficial ownership.”

In its May 16 administrative ruling, FinCEN provided the three-month delay in the beneficial ownership requirements (which expires Aug. 9) for accounts of “legal entity customers” that automatically rollover or renew, such as certificates of deposit or loan accounts.

“During this time, FinCEN will determine whether and to what extent additional exceptive relief may be appropriate for such financial products and services that were established before May 11, 2018, but are expected to rollover or renew after such date,” FinCEN said last month when it issued the ruling.

Meanwhile, Congress has been taking a close look at the CDD rule requirements, with some lawmakers seeking an 18-month “safe harbor” from compliance. However, those efforts have stalled for now.

On June 12, Reps. Pearce (R-N.M.) and Blaine Luetkemeyer (R-Mo.) introduced the “Counter Terrorism and Illicit Finance Act” (H.R. 6068), in time for a June 14 mark-up by the House Financial Services Committee. The legislation, as drafted, would provide financial institutions an 18-month safe harbor for good faith compliance with CDD rule (in particular, the “beneficial ownership” element). The bill also increased thresholds for certain currency transaction reports (CTRs) and suspicious activity reports (SARs), among other things.

The 18-month CDD “safe harbor” provision stated that “no person shall be liable for any violation” of the rule as long as that person has made a good faith effort to comply. The safe harbor period would date from the May 11 effective date of the final rule.

However, the bill was abruptly pulled for consideration prior to the markup and has not yet resurfaced for consideration. It is, however, expected to be modified before proceeding to mark-up again.

FinCEN Administrative Ruling – Beneficial Ownership Requirements for Legal Entity Customers of Certain Financial Products and Services with Automatic Rollovers or Renewals

H.R. 6068, Counter Terrorism and Illicit Finance Act