The House Financial Services Committee considered several challenges associated with implementation of the Financial Crimes Enforcement Network ("FinCEN") Customer Due Diligence Rule ("CDD Rule"). The rule becomes effective on May 11, 2018.

At the hearing, representatives from financial institutions expressed certain reservations concerning implementation efforts and the practical effects on firms:

  • Greg Baer, president of The Clearing House Association, expressed concern that the CDD Rule (i) requires institutions to verify beneficial owners for each account that is opened, as opposed to verifying on a per-customer basis, and (ii) does not clearly set out in its preamble that FinCEN possesses sole authority to set CDD standards;
  • Carlton Greene, partner at Crowell & Morning LLP, urged FinCEN to work closely with institutions in order to clarify CDD expectations, especially in light of guidance being released so close to the implementation date of the CDD Rule;
  • Dalia Martinez, executive vice president of the International Bank of Commerce, observed that the CDD Rule (i) may be costly and burdensome, (ii) has several "gray areas" that make compliance difficult, and (iii) has not been appropriately clarified through FinCEN FAQs and other guidance; and
  • Gary Kalman, executive director of The FACT Coalition, called for additional anti-money laundering requirements. He characterized the CDD Rule as a "necessary but not sufficient" step.

Commentary /Joseph V. Moreno

Despite a nearly two-year ramp-up period, there remain significant industry concerns about the upcoming CDD Rule. One issue raised was that requiring CDD every time a new account is opened – rather than simply for a new customer – will be duplicative and onerous by requiring financial institutions to re-confirm the same information every time an existing customer opens a new account. Another issued raised was that allowing bank examiners to impose stricter requirements on an ad hoc basis, such as directing institutions to collect beneficial ownership at a 10% equity threshold rather than the 25% called for in the CDD Rule, undermines all the systems development and employee training undertaken by financial institutions over the past two years and will lead to confusion and inconsistency. Several of those testifying advocated for further guidance from FinCEN on various intricacies of the CDD Rule and asked that FinCEN build in some degree of understanding that financial institutions will struggle with implementation for the first several years. Nearly every speaker supported legislative efforts to collect information about the ownership of legal entities on a national level, such as what is called for in the draft "Counter Terrorism and Illicit Finance Act." Perhaps this is indicative of industry acceptance that the U.S. is moving toward greater transparency regarding the ownership and use of shell companies and that the question regarding increased oversight is not if, but when.

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