CIP: When to Know What About a Customer

Ever since its implementation, the efforts to develop and implement a Customer Identification Program have been fraught with questions. It may sound simplistic to question who is really the customer, but experience with CIP has generated many situations where the answer is neither easy nor clear. The agencies, including FinCEN, have come to our aid.

Who - or What - is a Customer?
It all comes down to who is or is not the customer. When a sole, individual human being opens an account, the answer is simple. That human being is the customer you must identify. And the techniques for identifying that human being seem fairly obvious. We look to things like government-issued identification documents and other stuff that has the ring of familiarity.

And when there are two owners of the account, we identify both of them, using the same techniques. This principle also applies when a second person is added to an account. For example, the account owner may decide to add her daughter to the account. When that happens, the new account owner, the daughter, must be identified.

Things are not so easy when the customer presents a more complex situation, such as a power-of-attorney, a trust, a partnership, a charity or a corporation. In these cases the entity or the ownership of the account may not be the same as the persons present and opening the account.

When there is a power-of- attorney situation, the identification issue turns not only on ownership but also on competence. When a person of competence provides a power of attorney to a third person as a convenience or for a specific purpose, the account owner must be identified. They are the true and active owner while the holder of the power-of- attorney is merely their agent.

Things are different when the owner of the account is not competent or otherwise lacks legal capacity. In that situation, the holder of the power-of-attorney is the party to identify. In short, CIP applies to the person of legal competence who owns or has control of the account.

Minors
And what about minors? When legal capacity to own an account is an issue, is it the minor or someone else who is the customer that must be identified? The analysis for this is similar to the power-of-attorney analysis. When a minor's account is held in trust for the minor by an adult, the adult is subject to CIP rather than the minor. The minor's identification would be established when the minor reached majority and took ownership of the account.

However, if the minor is the sole owner of the account, the minor is the person who should be identified. The agencies give the example of school accounts opened by students as sole owners of accounts. The agencies suggest using a student identification card or having the teacher confirm the student's identity. Of course, there must also be a taxpayer identification number.

Trust Accounts
Who is the customer when the account is in the name of a trust? The trust is the customer, even if the bank is the trustee. The bank is not required to look through trust, escrow or similar accounts to find and identify the beneficiaries. Instead, it must only verify the identity of the named accountholder. This, however, is not quite as easy as it sounds. Risk assessment enters into the picture and may dictate that the financial institution obtain identifying information about persons involved with managing or distributing the trust. This may be the grantor, the trust administrators, or a person or persons having authority over the trustee. In short, when it comes to risk, you be the judge. We recommend that financial institutions follow a minimum standard of establishing the legal status and ownership of the trust and identifying anyone with authority to distribute or invest the trust assets. It seems reasonable to follow the money.

The Escrow Customer
When there is an escrow account, who is the customer? As usual, it depends. It depends on how the account is structured and who manages it. For a real estate escrow account managed by a real estate agent, the agent is the customer and the individual you should identify. However, if the financial institution acts as escrow agent, then the customer for whom the institution is acting is the customer subject to CIP. For escrow accounts, as for trust accounts and powers-of-attorney, the institution identifies the person or persons who has control of the funds and the ability to direct the financial institution to maintain or disburse them.

The Loan Question
When is a loan an account? While the existence of a deposit account is fairly easy to determine, it is more difficult to determine when CIP rules apply to a loan transaction. For one thing, the application process can take some time. And then, the application may be denied, voiding the need to have the customer identified. So, when does a loan become an account subject to the CIP rules?

The answer is that a loan becomes an account when the institution enters into an enforceable agreement to provide a loan to the customer. Clearly, settlement is an enforceable agreement, but, under state law, the agreement may be enforceable sooner. For example, the commitment letter to make a loan may be enforceable by the applicant. This means that at that point, the lender must take steps to identify the customer. One way to do this would be to require the customer to provide certain information together with his or her acceptance of the commitment letter. This also means that the lender, as a best practice, should collect some identifying information during the application phase of the transaction. For example, when meeting with the applicant, the lender could review the applicant's drivers license and/or passport.

Returns and Renewals
When loans are rolled over or renewed, the same question comes up - especially if the original loan was made prior to the CIP rule. The agency guidance concludes that when a loan is renewed, a new account relationship is established and that relationship triggers CIP. If you have already verified the identity of the customer for the first loan, that may be sufficient. However, if the loan predates CIP rules, the customer must be formally identified before renewing the loan.

As to how often a customer must be identified or re-identified, the answer is more often than you'd think. For example, if a customer renews a time deposit, the institution must verify the identity of the customer.

Similarly, if the customer returns after a period of time - even if only a few months - and opens a new account, the CIP rules are in full force. The customer's identity must be verified.

Third Party Transactions
Questions have also been asked about the liability of the lender or the third party - such as a car dealer - to identify loan applicants. The rule contains an exception for loan purchases, but this exception does not reach to loans made. For example, if a bank simply purchases a group of loans from a car dealer and plays no role in the original making of those loans, the purchase of the loans is exempt from CIP rules.

The exception does not apply if the financial institution is actually making the loan through the car dealer. In this case, the act of lending involves both the financial institution and the car dealer. The financial institution therefore has a responsibility to establish the identity of the borrower. The lender may do this directly or agree with the car dealer that the car dealer will perform the identification work. In the latter approach, the lender must take steps to be sure that the dealer is performing its identification duties to the satisfaction of the lender.

Been There, Done That
Many institutions have questioned the necessity for re-identifying customers that they already know - or think they do. The agencies have taken a tough line on this. Identification of a customer prior to CIP may be used only if the institution had comparable identification procedures when it first opened that customer's account. If you were in compliance with CIP before there was a CIP, you are home free. If not, customers with long-standing relationships must be subjected to CIP. Of course, if you went to kindergarten with them, that's a different matter.

Each institution must perform its own identification of each customer. Identification cannot be transferred between affiliates. If a customer obtains a loan with a mortgage affiliate, having been properly identified, and the file is referred at the customers request into the bank for a home equity loan, the bank must perform its own identification of the customer. It cannot be moved with the loan file.

ACTION STEPS

Review your CIP procedures in light of this guidance to be sure that they meet all tests.
Review CIP training materials. If there are any inconsistencies with this guidance, correct the instructions or training given to staff.
Develop and share some practical examples of how to identify customers in complex account situations.
If you originate loans through third parties such as car dealers, review agreements with the dealers to be sure CIP is covered. If you don't have written agreements, this is a good time to develop some. Include provisions for CIP and fair lending.