AML News: FinCEN Issues Exceptions to Beneficial Ownership Rule

Financial Services Law

With FinCEN’s new Beneficial Ownership Rule now in effect, the regulator has quickly provided some important exceptive relief for premium finance lenders. While the exceptions may be narrow, the changes are instructive. We explain below.

What happened

On May 11, the Financial Crimes Enforcement Network (FinCEN) final Beneficial Ownership Rule (the Rule) took effect, requiring covered entities to better verify the “beneficial owner” of an account—the natural person who owns and controls the legal entity.

Covered entities—which include banks, brokers or dealers in securities, mutual funds, futures commission merchants, and brokers in commodities—must now collect and retain information such as name, date of birth, address, and Social Security number or other government identification number of beneficial owners. Once the beneficial ownership information has been collected, financial institutions must then verify that identity within a reasonable time after account opening.

The Rule also established ongoing monitoring for reporting suspicious behavior and, on a risk basis, updating customer information.

With the Rule already in effect, covered entities should have updated their policies to incorporate the new requirements, considering changes to account opening documents (signature cards or applications, for example), modifications to procedures (such as their Customer Identification Program and key functions like account opening and suspicious activity monitoring and reporting), and additional training for employees.

As published, the Rule exempted covered entities from the requirements to identify and verify the identity of the beneficial owner of legal entity customers at account opening to the extent that the legal entity customer opens the account for the purpose of financing insurance premiums and account payments are remitted directly by the financial institution to the insurance provider or broker unless there is a possibility of cash refunds.

However, the same day the Rule took effect, FinCEN issued an administrative ruling to provide exceptive relief to covered entities with respect to premium finance lending products that allow for cash refunds.

FinCEN explained that premium finance lenders provide loans to businesses to cover insurance premiums and process a “significant number” of cash refunds each year in the normal course of business. These transactions do not pose significant money laundering and terrorist financing risks, the regulator noted, as the processes for premium finance lending are highly automated and cash loan refunds are typically generated from an accounting transaction to correct an inadvertent error.

To close the cash refund gap, the regulator issued FIN-2018-R001, providing “exceptive relief to covered financial institutions from the requirements to collect and verify the beneficial owner of a legal entity customer opening such premium financing account when there is a possibility of a cash refund.”

In addition to the low risks presented by the transactions, FinCEN noted that other applicable Bank Secrecy Act and anti-money laundering (BSA/AML) requirements provide another layer of security.

“To the extent premium financing involving cash refunds carries a minimal risk of money laundering and terrorist financing, that risk will be mitigated by the requirement that covered financial institutions are required to comply with other BSA/AML requirements,” according to the ruling. “For example, covered premium finance lenders have a responsibility to report suspicious activity when a refund may not have an economic purpose or has other indicators of suspicious activity.”

Therefore, “provided that such refunds are only remitted directly to the borrower or the borrower’s agent or broker,” FinCEN provided exceptive relief from the beneficial ownership requirements in the context of premium finance arrangements, notwithstanding the potential for cash refunds as part of the arrangement.

A few days later, the regulator released a second ruling with a separate, limited exemption. FIN-2018-R002 addressed certain financial products and services that automatically roll over or renew, such as certificate of deposit (CD) or loan accounts that were established before the Rule’s applicability date of May 11, 2018.

Pursuant to Customer Identification Program rules and interagency guidance, each time a loan is renewed or a CD is rolled over, the bank establishes another formal banking relationship and a new account is created, triggering the data collection and verification requirements with regard to the beneficial owner.

“FinCEN understands that some covered institutions have not treated such rollovers or renewals as new accounts and have established automatic processes to continue the banking relationship with the customer,” according to the ruling. “These covered financial institutions have expressed concern regarding their ability to comply with the Beneficial Ownership Rule with respect to such accounts.”

The regulator granted a 90-day exception, retroactive to May 11 and up to and including Aug. 9, to covered entities with respect to collecting beneficial ownership information on certain CD and loan accounts that automatically roll over or renew and were established before May 11.

So why the change? Testifying before the House Financial Services Committee subcommittee on terrorism and illicit finance, FinCEN Director Kenneth A. Blanco stated that the regulator is looking for a good faith effort at compliance with the Rule and won’t be trying to “ding anybody” with regard to enforcement. “[S]eamless implementation does not happen overnight and, for some areas, we all will need time to benefit from cumulative practical experiences with the new rule as part of the process,” Blanco told lawmakers. “In the meantime, we would encourage financial institutions to alert their examiners to any issues early on, and to share such concerns with FinCEN. We will continue to work with industry and regulators to understand and help address any concerns.”

To read FIN-2018-R001, click here.

To read FIN-2018-R002, click here.

Why it matters

On the face of it, the changes are not that significant. Covered entities received a slight reprieve with the two exceptions for premium finance lending products that allow for cash refunds as well as products and services with automatic rollovers or renewals. In providing these exceptions, FinCEN recognized that financial institutions will require a period of adjustment with regard to the new Rule.

What matters here is the factors used by FinCEN in reaching this result. In deciding that this type of account activity was less worthy of AML concerns, FinCEN focused on the rather attenuated money laundering and terrorism risks of these transactions in that (1) the business operation performing these transactions is highly automated, (2) cash payments arise out of corrections for inadvertent errors, (3) state laws often mandate these forms of transactions, (4) the lenders at issue are mostly dealing with agents or brokers and not the actual customer, (5) suspicious activity reports are a decent backstop for these concerns and (6) law enforcement views these as low-risk transactions. Viewed together, banks may view these as guideposts for future FinCEN exceptions.



pursuant to New York DR 2-101(f)

© 2022 Manatt, Phelps & Phillips, LLP.

All rights reserved