Customer Due Diligence for IRAs

  • Source: fincen.gov

Takeaway

The Financial Crimes Enforcement Network (FinCEN) has provided guidance on the Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements relating to broker-dealers and their approach to customer due diligence of clients with Individual Retirement Accounts (IRAs). This clarification highlights the importance of keeping CIP and CDD information up to date, especially for IRA accounts where the beneficiary is a legal entity, such as a Trust.

Treliant offers expert guidance on navigating these mandates, providing customized compliance strategies to maintain effective customer due diligence programs and streamline the onboarding/refresh process.

Highlights

FinCEN issued a ruling on March 15, 2024, in response to an inquiry from a Foundation who sought clarification if its broker-dealer should open a new IRA account for it to redeem its existing funds. In a footnote, FinCEN said that they express no view on the rationale and note only that the Bank Secrecy Act (BSA) and its implementing regulations do not require institutions to open new accounts.

FinCEN then emphasized that, to the extent a broker-dealer requires the opening of an account, it is required to comply with existing CIP and CDD requirements. Legal entity clients, such as Foundations, would be required to collect, at a minimum, identifying information about the beneficial owners (BOs).

Although IRA accounts are considered low risk and are generally exempt from certain anti-money laundering (AML) requirements under the Employee Retirement Income Security Act (ERISA), CDD is still applied. FinCEN’s main message is that if a financial institution (FI) opens a new account for an existing client’s fund redemption, the FI must still collect the mandated CDD information. This could mean clients, such as Trusts trying to exit an IRA, may face the burden of undergoing CDD procedures again.

The impact is twofold:

  • Clients being required to open new accounts when redeeming funds may face the burden of having to provide CIP and CDD information again, including identifying information.
  • FIs which require their clients to open new accounts should ensure that their existing processes are streamlined to limit damage to the client experience.

What This Means for Financial Institutions

For FIs, the takeaway is the need to collect and maintain accurate, up-to-date, and complete data then leverage that data for new account openings. Keeping CDD/CIP information current will improve and streamline the client experience as the FI will avoid having to re-engage clients for additional or existing information. Effective data retention and sharing, as well as timely Know Your Client (KYC) refreshes, including BO information, will help to enhance and streamline the KYC experience.

For FIs with significant institutional clientele, the FinCEN correspondence highlights the importance of client friendly and streamlined KYC processes. Overly burdensome, non-risk-based KYC processes can lead to increased client churn. FIs should look for ways to enhance their KYC procedures through data aggregation, automation, and four-eye checks.

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Author

Richard Lee

Richard Lee is an Analyst at Treliant. At Treliant, Richard brings his expertise in transaction monitoring and client due diligence to bear in helping financial institutions comply with regulatory requirements and prevent financial crime.