Fulfilling fifth pillar obligations online: The 2018 CDD Rule and online identity data

For many years, anti-money laundering (AML) compliance programs in the US were built on the four internationally known pillars: development of internal policies, procedures and controls, the designation of an AML officer, relevant training of employees and independent testing.

And while these pillars may seem comprehensive, they were always far more about the management of AML procedures than actually identifying and preventing illicit activities.  That is why, in May 2016 a fifth pillar – due diligence – was added. This required financial institutions to identify and verify individual customers to ensure that they were not engaged in, or likely to become engaged in financial crime such as money laundering or the financing of terrorism. Under the fifth pillar, financial institutions were required to:

·         establish and verify the identities of their customers

·         understand the nature and purpose of customer relationships

·         conduct risk assessments to build customer risk profiles

·         conduct ongoing monitoring in order to detect and report suspicious activity and ensure customer risk profiles remain accurate.

Then, in 2018 - in response to the numerous instances of money laundering through offshore accounts, shell companies and multilayer corporate structures which was exposed by the release of the Panama Papers- US AML rules were taken on a step further with The CCD Final Rule.

This included a new set of CDD requirements for US financial institutions with a major update to the rules around ‘beneficial ownership’ in an attempt to mitigate money launderers ability to hide their true identities and activities behind seemingly ‘legitimate’ businesses.

Specifically, the CDD final Rule states that, when starting a business relationship with a corporate customer, financial institutions must find out who the beneficial owner of that entity is, i.e., who controls it. The definition of beneficial ownership is any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity. Under the rules, financial institutions must verify beneficial ownership with a “reasonable belief”. That means they must believe that the information they have received reflects the true identity of the owners of the legal entity customer.

Once established, financial institutions must run the same level of checks on the beneficial owners of their corporate customers as they do with individuals.

While the aim of the CDD Final Rule was to limit money laundering practices and halt tax evasion using shell corporations, until access to information keeps pace it will be hard for the legislation to achieve its goals, as John Dobson, CEO at SmartSearch explains:

“At the end of 2020, FinCen attempted to address these issues, and in January 2021 brought in AMLA 2020 which required ‘reporting companies’ to disclose beneficial ownership information which would then be hosted on a central database. In theory, this was a huge step forward in transparency, making it easier for financial institutions to comply with the CDD Final Rule.

“However, in practice, it has not been so straightforward. Because, unlike in the UK, where information on the beneficial ownership of companies is publicly available, the AMLA beneficial ownership database is maintained and used by FinCEN. And while the information can be shared with financial institutions to enable them to comply with CDD requirements, it is not publicly available, making it much more difficult to quickly and easily run the required checks.”

The easiest way for financial institutions in the US to meet the CDD Final Rule requirements is to use an online business checks solution.

With SmartSearch you can verify your corporate clients quickly, easily and securely. Just enter the institution name and zip code and SmartSearch’s instant Business Reports service will confirm the existence of the business, list the executives and owners, validate the corporate structure, screen the business and its executives against global watchlists and host all search data and monitor daily for new or increased risks.