FinCEN’s Customer Due Diligence Rule for Financial Institutions (the “CDD Rule”) became effective yesterday.  The rule, which was published by FinCEN on May 2016 (and slightly amended on September 29, 2017) is described in this Covington client alert.  It requires covered financial institutions to: (i) adopt due diligence procedures to identify and verify a legal entity customer’s beneficial owners at the time a new account is opened and (ii) establish risk-based procedures for conducting ongoing customer due diligence, including developing customer risk profiles and implementing ongoing monitoring to identify and report suspicious activity and, on a risk basis, updating customer information.

In the months leading up to the CDD Rule’s effective date, FinCEN, the FFIEC and other agencies released a number of documents that provide practical guidance on its implementation.  Those include:

  • Two new sections of the FFIEC’s BSA/AML Examination Manual, which focus on the CDD Rule and were publicly circulated yesterday in the form of an FDIC Financial Institution Letter.  This document will be used by federal bank examiners at the Fed, the OCC, the FDIC and the NCUA to guide their examination and supervision of financial institutions for compliance with the CDD Rule.
  • A FinCEN FAQ document, which was updated last month.  The updated FAQs — which supplement FAQs issued in July 2016 — address questions related to the CDD Rule’s identification and verification requirements and the Rule’s application to legal entity customers with complex ownership structures, among other issues.
  • A Regulatory Notice released by FINRA at the end of last year, which provides guidance on the application of the CDD Rule to broker-dealers.

The newest of these resources — the new sections of the BSA/AML Examination Manual — will be of particular interest to regulated institutions because they detail the steps examiners will take in verifying compliance with the CDD Rule.  According to the new sections of the manual, one important part of the examination process will involve transaction testing of risk-based samples of customer accounts.  Examiners will rely on the results of transaction testing — in addition to their reviews of written policies and procedures — to determine whether a covered institution has an adequate framework in place under the Rule.

Photo of Nikhil Gore Nikhil Gore

A member of the international arbitration and financial institutions practices, Nikhil V. Gore represents sovereign states and U.S. and global firms in international treaty-based and commercial disputes. He also regularly represents U.S. financial institutions, and the U.S. branches and affiliates of foreign financial…

A member of the international arbitration and financial institutions practices, Nikhil V. Gore represents sovereign states and U.S. and global firms in international treaty-based and commercial disputes. He also regularly represents U.S. financial institutions, and the U.S. branches and affiliates of foreign financial institutions, in investigations and inquiries involving the Federal Reserve, OCC, FDIC, CFPB, and state banking regulators.

Mr. Gore has served as counsel in investment and commercial arbitrations spanning several industries and a variety of regions, including Asia, Eastern Europe, North America, and Southern Africa. Additionally, he has expertise in the law of the sea, and was part of the Covington team that secured an order from the International Tribunal for the Law of the Sea, which required Russia to release three Ukrainian naval vessels and twenty-four servicemen detained in the Black Sea in 2018.

In his financial institutions practice, Mr. Gore has experience with enforcement actions and investigations relating to the Bank Secrecy Act, the federal criminal money laundering statutes, the full range of safety and soundness issues (including, in particular, supervisory reviews of bank control functions), and fair lending and consumer compliance. Mr. Gore is a regular contributor to the firm’s financial services blog.

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