June 14, 2018
On May 11, 2018, the federal bank regulators and the Financial Crimes Enforcement Network (“FinCEN”) published two new chapters of the Federal Financial Institution Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (“BSA/AML Manual”) to reflect changes made by FinCEN to the CDD regulation. One of the chapters replaces the current chapter “Customer Due Diligence – Overview and Examination Procedures” (“CDD Chapter”), and the other chapter is entirely new and contains an overview of and examination procedures for “Beneficial Ownership for Legal Entity Customers” to reflect the beneficial ownership requirements of the CDD regulation (“Beneficial Ownership Chapter”).
The new CDD Chapter builds upon the previous chapter, adds the requirements of the CDD regulation, and otherwise updates the chapter, which had not been revised since 2007. The Beneficial Ownership Chapter largely repeats what is in the CDD Rule. Both new chapters reference the regulatory guidance and clarifications from the Frequently Asked Questions issued by FinCEN on April 3, 2018 (the “FAQs”).
Implementation of the CDD regulation is a dynamic process and may require further refinement of these chapters as FinCEN issues further guidance. For instance, in response to concerns of the banking industry, on May 16, 2018, FinCEN issued an administrative ruling imposing a 90-day moratorium on the requirement to recertify CDD information when certificates of deposit (“CDs”) are rolled over or loans renewed (if the CDs or loans were opened before May 11, 2018). FinCEN will have further discussions with the banking industry and will make a decision whether to make this temporary exception permanent within this 90-day period (before August 9, 2018).
In his May 16, 2018, testimony at a House Financial Services Committee hearing on “Implementation of FinCEN’s Customer Due Diligence Rule,” FinCEN Director Kenneth Blanco suggested that FinCEN may be receptive to refinements as compliance experience is gained with the regulation. Director Blanco also indicated that there will be a period of adjustment for compliance with the regulation and that FinCEN and the regulators will not engage in “gotcha” enforcement, but are seeking “good faith compliance.”
Despite the CDD regulation, at its core CDD compliance is still risk based and regulatory risk remains a concern. Every bank must carefully and continually review its CDD program against the regulatory requirements and expectations articulated in the BSA/AML Manual, as well as recent regulatory enforcement actions, the institution’s past examination and independent and compliance testing issues, and best practices of peer institutions. This review will help anticipate whether there are aspects of its CDD/EDD program that could be subject to criticism in the examination process. As the U.S. Court of Appeals for the Ninth Circuit recently recognized, detailed manuals issued by agencies with enforcement authority like the BSA/AML Manual “can put regulated banks on notice of expected conduct.” California Pacific Bank v. Federal Deposit Insurance Corporation, 885 F.3d 560, 572 (9th Cir. 2018). The BSA/AML Manual is an important and welcome roadmap although not always as up to date, clear or detailed as banks would like it to be.
These were the first revisions to the BSA/AML Manual since 2014. We understand that additional revisions to other chapters are under consideration.
 May 11, 2018 also was the compliance date for the CDD regulations. The Notice of Final Rulemaking for the CDD regulation, which was published on May 11, 2016, provided a two-year implementation period. 81 Fed. Reg. 29,398 (May 11, 2016). https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.
For banks, the new regulation is set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements) and 31 C.F.R. § 1020.210(a)(5).
 The new chapters can be found at: https://www.ffiec.gov/press/pdf/Customer%20Due%20Diligence%20-%20Overview%20and%20Exam%20Procedures-FINAL.pdfw (CDD Chapter) and https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for %20Legal%20Entity%20CustomersOverview-FINAL.pdf (Beneficial Ownership Chapter).
 Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001. https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0. On April 23, 2018, Gibson Dunn published a client alert on these FAQs. FinCEN Issues FAQs on Customer Due Diligence Regulation. https://www.gibsondunn.com/fincen-issues-faqs-on-customer-due-diligence-regulation/. FinCEN also issued FAQs on the regulation on September 29, 2017. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.
 Beneficial Ownership Requirements for Legal Entity Customers of Certain Financial Products and Services with Automatic Rollovers or Renewals, FIN-2018-R002. https://www.fincen.gov/sites/default/files/2018-05/FinCEN%20Ruling%20CD%20and%20Loan%20Rollover%20Relief_FINAL%20508-revised.pdf
 The BSA/AML Manual previously stated at p. 57: “CDD processes should include periodic risk-based monitoring of the customer relationship to determine if there are substantive changes to the original CDD information. . . .”
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or the authors:
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, firstname.lastname@example.org)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, email@example.com)
Arthur S. Long – New York (+1 212-351-2426, firstname.lastname@example.org)
Linda Noonan – Washington, D.C. (+1 202-887-3595, email@example.com)
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