CDD Final Rule

CDD Final Rule

The Financial Crimes Enforcement Network (FinCEN) issued its Final Rule on May 11, 2018, establishing several new customer due diligence (CDD) obligations for financial institutions in the United States. The CDD Final Rule requires banks, brokers, and other obliged institutions to prove beneficial ownership of legal entity clients when opening new accounts and throughout the commercial relationship. In reality, financial institutions must determine who owns the firms with whom they do business and ensure that those persons are not involved in illicit activities such as money laundering or terrorism funding.

Firms should understand their duties when developing their compliance processes since the CDD Final Rule is an essential AML/CFT factor.

What does CDD’s final rule Require?

The CDD Final Rule is an update to the Bank Secrecy Act, the central piece of AML/CFT law in the United States. While the Bank Secrecy Act already has provisions for imposing CDD duties on individual customers, the Final Rule expands those provisions to prevent criminals and terrorists from concealing the source of their unlawful payments through businesses. The revelation of the Panama Papers (and the following Paradise Papers) triggered the establishment of the Final Rule, which uncovered several money laundering tactics employing offshore accounts, shell corporations, and other obfuscation strategies.

The CDD Final Rule is applicable to “covered financial institutions,” which are classified as banks, brokers or securities dealers, mutual funds, futures commission merchants, and commodity-introducing brokers. The Final Rule requires these institutions to achieve the following key requirements:

  • Customers’ identities must be established and verified.
  • Establish and confirm beneficial ownership of corporations.
  • Understanding the nature and purpose of customer connections and conducting risk assessments to create customer risk profiles are essential.
  • Continuous monitoring is required to discover and report suspicious behavior and to verify that client risk profiles are correct.

While most of those requirements applied to financial institutions previous to its implementation, the CDD Final Rule added the duty to demonstrate ultimate beneficial ownership to the CDD process.

What is CDD Process?

Client Due Diligence (CDD) is the process of gathering and validating customer information during the onboarding process. This information contains the customer’s name, address, and other personal information.

When creating a commercial partnership, companies must do CDD. For example, a bank or trading platform may need to examine a customer’s passport before enabling them to open an account and deposit funds into it.

What is the objective of CDD?

The goal of CDD is to help the bank understand the nature and purpose of customer interactions, which may include knowing the sorts of transactions a client is likely to engage in. These procedures aid the bank in recognizing whether transactions may be suspect.

Effective CDD policies, procedures, and processes offer the fundamental foundation that allows the bank to meet regulatory requirements, such as monitoring and reporting suspicious behavior. CDD policies, procedures, and processes are vital to the bank because they may assist in the following areas:

  • Detecting and reporting unusual or suspicious conduct that might expose the bank to financial loss, higher expenditures, or other hazards.
  • Avoiding criminal liability for individuals who use or seek to utilize the bank’s goods and services for illegal purposes.
  • Following safe and healthy banking procedures.