United States

New customer due diligence requirements


On May 5, 2016 the Department of Treasury announced several actions to improve financial transparency. This action was likely elicited by the Panama Papers leak in April 2016. The most significant portion of this announcement is the finalization of the customer due diligence (CDD) final rule for financial institutions. CDD adds one new requirement while complementing and clarifying anti-money laundering due diligence requirements that are already in place.

What is the new requirement?
Financial institutions will now be required to collect and verify the personal information on the beneficial owners who own, control and profit from companies when those companies open accounts. Specifically, the rule contains three core requirements. Financial institutions will be required to:

  • Identify and verify the identity of the beneficial owners of companies opening accounts

  • Understand the nature and purpose of customer relationships in order to develop customer risk profiles

  • Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

How is beneficial owner defined?
Beneficial owner is defined as any individual who owns 25 percent or more of the equity interest in a legal entity, as well as an individual with significant responsibility to control or manage the legal entity. Persons that have significant responsibility are defined as an executive officer or senior manager (e.g., chief executive officer, chief financial officer, chief operating officer, managing member, general partner, president, vice president or treasurer), or any other individual who regularly performs similar functions.

If no individual maintains a 25 percent or more interest in a company, financial institutions will be required to identify only the executive officer, senior manager or functional equivalent.

When does this new requirement go into effect?
Financial institutions must comply with the new requirement by May 11, 2018.

Who does this rule affect?
Financial institutions, including banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities.

Other considerations
This rule only applies to new accounts being opened by financial institutions. There will be no retroactive application of this rule to existing accounts, as it was deemed unduly burdensome.