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Customer Due Diligence (CDD)

Customer Due Diligence (CDD)

What is it?

The Financial Crimes Enforcement Network (“FinCEN”) issued the Customer Due Diligence (CDD) rule to amend existing regulations in order to clarify and strengthen CDD requirements for certain financial institutions. The CDD rule outlines explicit customer due diligence requirements and imposes a new requirement to identify and verify the identity of beneficial owners of “legal entity” customers. Beneficial owners are individuals who fit within at least one of the following “prongs”:

(1) Any individual who, directly or indirectly, owns 25% or more of the legal entity customer (the “Ownership Prong”); and

(2) One individual who has “significant responsibility to control, manage, or direct the legal entity” (the “Control Prong”). For example:

  • CEO
  • CFO
  • COO
  • Managing Member
  • General Partner
  • President
  • Vice President
  • Treasurer
  • Any other person who “regularly performs similar functions”

For CDD the “legal entity customer” includes:

  • Corporations
  • Limited Liability Companies
  • Limited Partnerships
  • General Partnerships
  • Business Trusts
  • Any other entity created by a filing with a state office
  • Any similar entities formed under the laws of a non-US jurisdiction

    The definition of “legal entity customer” does not include:

  • Natural Persons
  • Sole Proprietorships
  • Unincorporated Associations
  • Trusts (other than statutory trusts created by a filing with a state office)
  • Certain legal entities, including the following, are excluded from the Final Rule:
    • Federal or state regulated financial institutions (e.g., federally regulated banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities)
    • Bank and Savings and Loan holding companies
    • State-regulated insurance companies
    • Publicly held companies listed on the New York, American, or NASDAQ Stock Exchanges
    • Registered investment advisers and investment companies
    • SEC-registered exchanges or clearing agencies
    • Entities registered with the SEC
    •  
  • ECU may still need to identify an individual that has significant control of an entity in certain situations. This includes religious organizations, charities, and non-governmental organizations.

Will I need to provide the required information on accounts that I already have?

The CDD rule is not retroactive so it will primarily involve new accounts opened with ECU but we will have to obtain the required information on existing accounts when changes are made to the accounts.

Who does the rule impact?

Covered financial institutions. Specifically, the rule covers federally regulated banks, federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.

Why do we have to do it?

Since we are a covered financial intuition, ECU is required to comply with the rule.

Additional Resources

For more information about the CDD rule, please review the FAQ regarding Customer Due Diligence Requirements.