Impacts and benefits of the customer due diligence rule
Why the customer due diligence rules are being implemented
To help the government fight financial crime, the Financial Crimes Enforcement Network (FinCEN) issued a new rule under the Bank Secrecy Act in order to clarify and strengthen customer due diligence requirements. The customer due diligence rule adds a new requirement to identify and verify the beneficial owners of Dwolla’s partners and the beneficial owner of those partner’s users that are not natural persons.
It’s worth noting that this is a federal regulation impacting many organizations and Dwolla's goal is to make this update to the platform as hassle-free and straightforward as possible.
For simplicity, Dwolla will refer to these partners or users as “companies”. Companies can sometimes be abused to disguise involvement in terrorist financing, money laundering, tax evasion, corruption, fraud, and other financial crimes. Requiring the disclosure of key individuals who ultimately own or control a company (i.e., the beneficial owners) will help law enforcement investigate and prosecute these crimes.
Understanding the customer due diligence rule’s impact
It means that there could be additional data collection requirements based on the type of accounts you create to ensure you’re in compliance with the rule. For business accounts, there are additional data collection requirements around the controller. Essentially there needs to be verification of the personal identity of an individual who maintains significant control over an organization. This is very similar to the current process of identifying and verifying the Authorized Representative, with the addition of a couple more data elements.
Beyond that, there is also a requirement to capture the personal information of any owner for a business account created on the platform. Now, there are exceptions. First, if the individual doesn’t own 25% or more of the company, no additional information is required.
It must be an individual person that owns 25% or more, not a company that owns 25% or more.
Understand by example
Let’s look at an example. Say I, along with 2 other individuals, own a holding company. For simplicity let’s call it Holdy McHoldface, LLC. I own 40% Holdy McHoldface, LLC, and my partners each own 30% (40% + 30% + 30% = 100%). Now let’s say Holdy McHoldface, LLC owns 50% of a company that is signing up and will be transacting through the Dwolla Platform.
Will I or any of my partners in Holdy McHoldface, LLC need to be identified as owners? The answer is no. I, with my 40% of Holdy McHoldface, LLC, actually only own 20% (50% x 40%) of the company signing up and using the Dwolla platform. And if I don’t qualify, none of my partners in Holdy McHoldface, LLC would either as they control an even smaller share of the company.
Now, if the other 50% of the company was owned by one individual, then the person would need to be identified.
The other exemptions are as follows:
- Federally regulated banks
- Banks regulated by a state bank regulator
- Governmental entities
- Publicly traded companies
- Sole proprietorships
- Unincorporated associations
For both the controller as well as the owners, Dwolla will run them through a customer identification program to verify their identities.
The bigger picture
The good news is that as a result of the customer due diligence rule and implementation of the new requirements, Dwolla is now allowing a greater breadth of documentation to identify controller information. Specifically, passport information may now be provided for both controllers and owners since they may reside outside of the United States.
Mar. 29, 2022