Customer Due Diligence (CDD) Flashcards

Under FinCEN's Customer Due Diligence Rule (31 CFR 1010.230), what are the four core elements of CDD?

Answer: Customer identification, beneficial ownership identification, understanding the customer's business, and ongoing monitoring

FinCEN's 2016 CDD Rule established four core elements: (1) identifying and verifying the customer's identity; (2) identifying and verifying beneficial owners of legal entity customers; (3) understanding the nature and purpose of the relationship; and (4) conducting ongoing monitoring and updating customer information.

Under the FinCEN CDD Rule, who qualifies as a 'beneficial owner' of a legal entity customer?

Answer: Each individual who owns, directly or indirectly, 25% or more of the equity interests of a legal entity, plus one individual who controls or manages the entity

The FinCEN CDD Rule defines beneficial owners using a two-prong test: the ownership prong (anyone owning 25% or more) and the control prong (one individual who controls or manages the entity, typically the CEO, COO, or equivalent).

What is 'simplified due diligence' (SDD) and when may it be applied?

Answer: A reduced level of CDD measures that may be applied to lower-risk customers where the risk of money laundering is demonstrably low

Simplified due diligence allows institutions to apply reduced CDD measures to clearly lower-risk customers — such as government entities, publicly listed companies, or low-value retail accounts — where the inherent ML/TF risk does not justify standard CDD requirements.

What is a 'trigger event' in the context of CDD ongoing monitoring, and can you provide three examples?

Answer: An event requiring a financial institution to review and potentially update a customer's CDD information; examples: significant changes in transaction patterns, adverse media, or customer-initiated changes to account information

Trigger events are circumstances that prompt a review and potential update of a customer's CDD file. Examples include significant changes in transaction activity, adverse media hits, changes to beneficial ownership, or requests for new high-risk products.

What is 'reliance on third parties' for CDD, and what conditions must be met for this reliance to be permissible?

Answer: Allowing another regulated financial institution to conduct CDD on a customer and relying on those results, subject to specific conditions including written agreement, immediate access to records, and satisfaction that the third party is regulated and supervised

Financial institutions may rely on third parties (other regulated institutions) to conduct elements of CDD, provided specific conditions are met: a written agreement, the ability to obtain CDD records upon request, and satisfaction that the third party is subject to AML regulation and supervision.

What is the difference between Customer Identification Program (CIP) and Customer Due Diligence (CDD)?

Answer: CIP is the minimum identity verification process at account opening (name, address, DOB, ID number), while CDD is the broader ongoing program that includes risk profiling, beneficial ownership, and transaction monitoring

CIP is the foundational identity verification requirement at account opening (collecting and verifying name, date of birth, address, and identification number). CDD is the broader, ongoing program that encompasses CIP plus risk profiling, beneficial ownership identification, understanding the business relationship, and ongoing monitoring.