Customer Due Diligence and DESAs

Issue/Inquiry

When a landlord sets up a deposit escrow sub-account (“DESA”) for tenants, who is considered the customer of the Bank for the purpose of the Customer Due Diligence (“CDD”) beneficial ownership rules?

Response Summary

Under the Customer Identification Program (“CIP”) requirements of the USA PATRIOT Act, the “customer” of a bank is the person opening a new account. The customer opening a DESA is the landlord, who acts as an intermediary. As such, if the landlord is an entity, the beneficial ownership requirements of the CDD Rule would pertain to the landlord.

Response Detail

Under the CIP requirements of the USA PATRIOT Act, the identity of a customer must be verified. A “customer” is generally the person who opens a new account, which means that the customer will be the named owner of the account, rather than an individual who is authorized to sign on the account but who has no ownership interest in it. 31 CFR §103.121(a)(3)(i); FFIEC, FAQs: Final CIP Rule.

When the CDD Rule was published, FinCEN indicated that if a bank customer is an intermediary and the financial institution has no CIP obligation with respect to the intermediary’s underlying clients, then the institution should treat the intermediary as the legal entity customer for CDD purposes, rather than the intermediary’s underlying clients.  81 Federal Register 29416.

A DESA is an escrow account that is opened by a landlord for holding tenant deposits. As an intermediary, the landlord is considered the customer for CIP purposes. If the landlord is a legal entity as the customer, then the CDD beneficial ownership rules will be applied to the landlord.

While FinCEN does not require the beneficial ownership information of all legal entity customers to be periodically updated at specified intervals, it does consider the opening of a new account as a relatively convenient and otherwise appropriate occasion to obtain current information regarding a customer’s beneficial owner.  81 Federal Register 29406.

This means that FinCEN expects financial institutions to collect beneficial ownership information whenever an existing legal entity member does something that modifies the account relationship or triggers a review of the account. Since there is no guidance indicating that sub-accounts are exempt from the definition of a new account, when a landlord adds a tenant to a DESA and is subject to beneficial ownership requirements, the Bank should use that occasion as an opportunity to update the beneficial ownership information.

This entry was posted on Monday, August 26th, 2019 at 6:00 am.