CDD Final Rule

In basic terms, the CDD Rule requires “covered institutions”, such as banks, brokers, and mutual funds, to determine who actually controls the companies they engage with. That means these obligated entities must confirm that both these companies and their beneficial owners are not involved in criminal activities like money laundering or funding terrorism.

A beneficial owner in the context of customer due diligence is a person who either owns 25% or more of a company’s equity directly or indirectly or has significant responsibility in controlling, managing, or deriving profits from the companies when they open accounts.

Based on the CDD Final Rule, when a financial institution holds assets for another legal entity, it must check who really owns those assets or, in other words, identify and verify beneficial owners. That said, beneficial ownership differs from legal ownership. However, in many cases, the legal and beneficial owners are identical.

The CDD Rule applies to “reporting companies,” which include many types of legal entities. For example, banks, futures commission merchants, mutual funds, brokers, or dealers in securities are all part of this category. Depending on the jurisdiction, there are a few exceptions, such as specifically exempted entities like public companies.

The CDD Final Rule mandates that these entities must:

• Verify and establish the identities of their customers
• Verify the beneficial ownership and establish who really owns the companies. 
• Assess and determine the purpose and nature of the customer relationship by conducting proper risk assessments.
• Implementing ongoing monitoring measures to ensure that customer risk profiles are accurate and up-to-date throughout the whole business relationship. 

Know Your Customer, or KYC is only the primary step that revolves around verifying the identity of customers. In the meantime, CDD is an ongoing procedure that is designed to continuously monitor business relationships, client behavior, and changes linked to certain red flags or risks. Both KYC and CDD are components of a bigger anti-money laundering (AML) compliance program. 

Companies must confirm beneficial ownership with a “reasonable belief” in the accuracy of the information received regarding the owners of a legal entity customer. That means to comply with the CDD Final Rule, regulated companies should establish beneficial ownership and detect AML red fags, which should be treated as indicators of potential money laundering. 

Some examples of such red flags include:

• Expired company documents. There are instances when businesses fail to update documents or leave unassigned documents when ownership changes. 
• Avoiding providing documents. If a company can’t provide required company documents, it should be treated with higher AML scrutiny. 
• Providing incorrect information. If companies receive incomplete documents or incorrect identity information, they should conduct further investigation.