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Financial Services Law Insights and Observations


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  • FinCEN issues statement on independent ATM customer due diligence

    Financial Crimes

    On June 22, FinCEN issued a statement providing clarity to banks on the application of a risk-based approach to conducting customer due diligence (CDD) on independent Automated Teller Machine (ATM) owners or operators, consistent with FinCEN’s 2016 CDD Rule. As previously covered by InfoBytes, FinCEN issued a final rule imposing standardized CDD requirements for banks, broker-dealers, mutual funds, futures commission’s merchants, and brokers in commodities in May 2016. The rule established that covered institutions must identify any natural person that owns, directly or indirectly, 25 percent or more of a legal entity customer or that exercises control over the entity. The rule also established ongoing monitoring for reporting suspicious transactions and, on a risk basis, updating customer information. The recently released statement explained that the level of money laundering and terrorism financing risk varies with these customers, and that they do not automatically present a higher level of risk. FinCEN pointed to certain customer information that may be useful for banks in making determinations on the risk profile of independent ATM owner or operator customers, including, among other things: (i) organizational structure and management; (ii) operating policies, procedures, and internal controls; (iii) currency servicing arrangements; (iv) source of funds if a bank account is not used to replenish the ATM; and (v) description of expected and actual ATM activity levels.

    Financial Crimes Agency Rule-Making & Guidance FinCEN Customer Due Diligence ATM Terrorist Financing

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  • Agencies clarify BSA/AML due diligence requirements for “politically exposed persons”

    Financial Crimes

    On August 21, the FDIC, Federal Reserve Board, FinCEN, NCUA, and OCC issued a joint statement clarifying that banks should ensure customers who may be considered “politically exposed persons” (PEPs) be subject to customer due diligence matching the risk levels posed by the relationships. In general, while PEPs are not defined within the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulations, they commonly refer to “foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.” U.S. public officials are not included. Specifically, the agencies emphasized that not all individuals who might qualify as PEPs “are high risk solely by virtue of their status.” While FinCEN’s customer due diligence rule (CDD rule), requires banks to identify and verify the identities of new account holders, assess the riskiness of these customer relationships, and conduct ongoing monitoring (see InfoBytes coverage of the CDD Rule here), the agencies note that “the CDD rule does not create a regulatory requirement, and there is no supervisory expectation, for banks to have unique, additional due diligence steps for customers who are considered PEPs. Instead, the level and type of CDD should be appropriate for the customer risk.”

    The joint statement also outlines a number of considerations for banks to take into account when evaluating a PEP’s risk level, including the type of products and services used, the volume and nature of transactions, the nature of the customer’s authority or influence over government activities or officials, and the customer’s access to significant government assets or funds. Among other impacts, the agencies note that the customer risk profile may effect “how the bank complies with other regulatory requirements, such as suspicious activity monitoring, since the bank structures its BSA/AML compliance program to address its risk profile, based on the bank’s assessment of risks.” The joint statement also rescinds the 2001 Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign Corruption related to foreign PEPs.

    The agencies emphasized, however, that the joint statement does not change existing BSA/AML legal or regulatory requirements, nor does it “require banks to cease existing risk management practices if the bank considers them necessary to effectively manage risk.”

    Financial Crimes OFAC Department of Treasury Sanctions Iran DOJ Of Interest to Non-US Persons

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  • FinCEN clarifies customer due diligence FAQs

    Agency Rule-Making & Guidance

    On August 3, the Financial Crimes Enforcement Network (FinCEN), in consultation with the federal functional regulators, issued responses to three frequently asked questions (FAQs) concerning customer due diligence (CDD) requirements under the Bank Secrecy Act for covered financial institutions. As previously covered by InfoBytes, the 2016 CDD Rule imposed standardized requirements for financial institutions to identify and verify beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The FAQs follow those issued by FinCEN in July 2016 and April 2018 (covered by InfoBytes here and here), and address procedures to collect customer information, methods to establish a customer risk profile, and obligations to update customer information.

    Agency Rule-Making & Guidance FinCEN CDD Rule Bank Secrecy Act

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  • FinCEN Director warns of account takeovers via fintech data aggregators

    Financial Crimes

    On September 24, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco spoke at the Federal Identity (FedID) Forum and Exposition, discussing the role of FinCEN in combatting fraud and cybercrime and highlighting concerns regarding identity crimes. Blanco noted that FinCEN sees approximately 5,000 account takeover reports each month, a crime that “involves the targeting of financial institution customer accounts to gain unauthorized access to funds.” Moreover, FinCEN sees a high amount of fraud through account takeovers via fintech platforms, where cybercriminals use fintech data aggregators to facilitate account takeovers and fraudulent wires. Blanco stated that cybercriminals create fraudulent accounts and are able to “exploit the platforms’ integration with various financial services to initiate seemingly legitimate financial activity while creating a degree of separation from traditional fraud detection efforts.”

    Additionally, Blanco discussed how cybercriminals use business email compromise (BEC) fraud schemes to target financial institutions and relayed FinCEN’s efforts to combat these schemes. As previously covered by InfoBytes, in July, FinCEN issued an updated advisory, describing general trends in BEC schemes, information concerning the targeting of non-business entities, and risks associated with the targeting of vulnerable business processes. Blanco also discussed (i) FinCEN’s final rule titled the “Customer Due Diligence Requirements for Financial Institutions,” (the CDD Rule) (prior coverage by InfoBytes here); and (ii) FinCEN’s December 2018 joint statement with federal banking agencies encouraging innovative approaches to combatting money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system (previously covered by InfoBytes here).



    Financial Crimes Fintech Bank Secrecy Act Anti-Money Laundering CDD Rule Fraud Of Interest to Non-US Persons

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  • FFIEC releases customer due diligence and beneficial ownership examination procedures

    Financial Crimes

    On May 11, the Federal Financial Institutions Examination Council released updated examination procedures for the Financial Crimes Enforcement Network's (FinCEN) final rule, “Customer Due Diligence Requirements for Financial Institutions” (CDD rule). Compliance with the CDD rule became mandatory on  May 11. The updated customer due diligence exam procedures were developed in close collaboration with FinCEN and replace those in the current Bank Secrecy Act/Anti-Money Laundering Examination Manual. Additionally, a new set of exam procedures address the CDD rule’s beneficial ownership requirements.

    According to an OCC bulletin released the same day, the examination procedures reflect federal and state banking agencies’ “ongoing commitment to examine financial institutions for compliance with the Bank Secrecy Act . . . in accordance with uniform standards and principles.”

    See here for continuing InfoBytes coverage of the CDD rule.

    Financial Crimes FFIEC CDD Rule OCC FinCEN Beneficial Ownership

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  • FINRA amends anti-money laundering rule to comply with FinCEN’s CDD rule

    Financial Crimes

    On May 3, FINRA issued a Regulatory Notice 18-19 amending Rule 3310—Anti-Money Laundering (AML) Compliance Program rule—to reflect the Financial Crimes Enforcement Network’s final rule concerning customer due diligence requirements for covered financial institutions (CDD rule), which becomes applicable on May 11. According to Regulatory Notice 18-19, member firms should ensure that their AML programs are updated to include, among other things, appropriate risk-based procedures for conducting ongoing customer due diligence including (i) “understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile,” and (ii) “conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.” The announcement also makes reference to FINRA’s Regulatory Notice 17-40, issued last November, which provides additional guidance for member firms complying with the CDD rule. (See previous InfoBytes coverage here.). The notice further states that the “provisions are not new and merely codify existing expectations for firms.”

    Financial Crimes FINRA CDD Rule Anti-Money Laundering FinCEN Department of Treasury Customer Due Diligence

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  • House Financial Services Committee holds hearing on FinCEN’s CDD rule

    Federal Issues

    On April 27, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Implementation of FinCEN's Customer Due Diligence Rule—Financial Institution Perspective” to discuss challenges facing financial institutions when complying with FinCEN’s Customer Due Diligence Rule (CDD Rule). As previously covered in InfoBytes, the CDD Rule takes effect May 11, and imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act (BSA) for covered financial institutions, including the identification and verification of the beneficial owners of legal entity customers. The hearing’s four witnesses expressed certain concerns regarding the effects of implementation on financial institutions, as well as the timing of additional guidance released April 3 in the form of frequently asked questions.

    In prepared remarks, Executive Director of The Financial Accounting and Corporate Transparency (FACT) Coalition, Gary Kalman, commented that the CDD Rule, which calls for additional AML requirements, is a “positive step forward but falls short of what is needed to protect the integrity of [the] financial system”—particularly in terms of what defines a “beneficial owner.” Greg Baer, President of The Clearing House Association, expressed concerns that the CDD Rule (i) requires financial institutions to verify beneficial owners for each account that is opened, instead of verifying on a per-customer basis; and (ii) does not explicitly state in its preamble that FinCEN possesses sole authority to set CDD standards, which may present opportunities for examiners to make ad hoc interpretations.

    Additionally, Executive Vice President of the International Bank of Commerce Dalia Martinez, observed, among other things, that compliance with the CDD Rule is costly and burdensome, and that banks have not been provided with the tools or guidance to determine whether the information provided by legal entity customers is accurate when verifying beneficial owners. The “gray areas” within the CDD Rule, Martinez noted, present challenges for compliance. A fourth witness, Carlton Green, a partner at Crowell & Morning, expressed concerns with the relationship between FinCEN and the federal functional regulators, stating that because FinCEN has delegated examination authority to these regulators, there is a chance regulators will “create and enforce their own interpretations of or additions to BSA rules” that may “diverge from FinCEN’s priorities.”

    Federal Issues House Financial Services Committee FinCEN Customer Due Diligence Financial Crimes CDD Rule

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  • FINRA revises anti-money laundering template for small firms

    Agency Rule-Making & Guidance

    On April 4, the Financial Industry Regulatory Authority (FINRA) released a revised template to assist FINRA-registered small firms in developing and implementing risk-based anti-money laundering (AML) programs as required by the Bank Secrecy Act and FINRA Rule 3310. Changes to the template reflect FinCEN’s final rule concerning customer due diligence requirements for covered financial institutions (CDD rule), which goes into effect May 11. (See previous InfoBytes coverage on the CDD rule here.) The CDD rule requires covered financial institutions, including FINRA-registered firms, to identify the beneficial owners of legal entity customers who open new accounts.

    Agency Rule-Making & Guidance FINRA FinCEN Anti-Money Laundering Customer Due Diligence Department of Treasury Bank Secrecy Act Financial Crimes CDD Rule

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  • Buckley Sandler Insights: FinCEN updates FAQs regarding customer due diligence requirements for financial institutions

    Agency Rule-Making & Guidance

    On April 3, the Financial Crimes Enforcement Network released an update to its FAQs in advance of the upcoming Customer Due Diligence Requirements for Financial Institutions final rule (issued in 2016 and amended last September for various technical corrections) that goes into effect May 11. As previously covered in InfoBytes, the final rule imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act for covered financial institutions and requires financial institutions to identify and verify beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The supplemental FAQs (see InfoBytes coverage on an earlier set of FAQs issued in 2016) assist covered financial institutions in understanding the scope of their CDD requirements, as well as the CDD rule’s impact on broader anti-money laundering (AML) program obligations, and cover a broad range of interpretations including the following:

    • Question 1 specifies covered financial institutions will satisfy the requirements to identify and verify beneficial owners of legal entity customers by collecting and verifying the identity of individuals who directly or indirectly own 25 percent or more of the equity interests in a legal entity customer, as well as “one individual who has managerial control of a legal entity customer.” However, they may choose to implement stricter written internal policies and procedures and expand their information collection to include more than one individual with managerial control or persons owning a lower percentage of equity interests.
    • Question 3 clarifies that covered financial institutions may reasonably rely on a legal entity customer to provide the identities of individuals who satisfy the definition of beneficial ownership, whether indirectly or directly, and “need not independently investigate the legal entity customer’s ownership structure.”
    • Question 7 states that for existing customers, a covered financial institution may rely on information in its possession subject to its Customer Identification Program (CIP) to fulfill the beneficial ownership identification and verification requirements, “provided the existing information is up-to-date, accurate, and the legal entity customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”
    • Question 10 states that if a legal entity customer opens multiple accounts, the covered financial institution may rely on information obtained from a previously issued certification form (or equivalent), provided the legal entity customer certifies or confirms—verbally or in writing—that such information is up-to-date and accurate at the time each subsequent account is opened. Records of such certification or confirmation must also be maintained.
    • Question 12 confirms that covered financial institutions seeking to renew a loan or roll over a certificate of deposit must treat these as new accounts and require their legal entities customers to certify or confirm beneficial owners, “even if the legal entity is an existing customer.”
    • Question 18 stipulates that covered financial institutions are not required to identify and verify the identity of beneficial owners that own 25 percent or more of the equity interests of a pooled investment vehicle, whether or not such vehicle is managed by a “financial institution,” due to the typical fluctuation of ownership. However, Question 18 notes that covered financial entities must collect beneficial ownership information for an individual who has significant control or management over the vehicle as required under the control prong to comply with the CDD rule.
    • Question 19 concerns trusts overseen by multiple trustees and states that in circumstances where a trust owns 25 percent or more of the equity interests of a legal entity customer, covered financial institutions are required, at a minimum, to collect beneficial ownership information on a single trustee but may choose to identify additional co-trustees based on risk assessment or a risk profile.
    • Question 21 specifies that a covered financial institution may rely on information provided by a legal entity customer to determine eligibility for exclusion from the definition of a legal entity customer, provided the financial institution has no knowledge of facts that would reasonably call into question the reliability of such information. Covered financial institutions should also ensure that their risk-based written policies and procedures address and specify the type of information to be used when reasonably determining exclusion eligibility. 
    • Question 28 stipulates which non-U.S. governmental entities qualify for exclusion from the definition of a legal entity customer. It specifies that state-owned enterprises that engage in profit-seeking activities, such as sovereign wealth funds, airlines, and oil companies, are not excluded from the definition of a legal entity.
    • Questions 29-31 provide guidance on account level beneficial owner exceptions related to (i) point of sale products for certain low-risk retail credit accounts; and (ii) certain equipment finance and lease accounts with low money laundering risks. Question 31 also stipulates that an equipment lease and purchase exemption would apply in circumstances where a customer leases necessary equipment directly from a covered financial institution.
    • Questions 32-33 provide guidance on circumstances where beneficial ownership information should be aggregated for purposes of complying with Currency Transaction Report (CTR) requirements, and state that “absent indications that the businesses are not operating independently . . . , financial institutions should not aggregate transactions involving those businesses with those of each other or with those of the common owner for CTR filing.” Furthermore, covered financial institutions are generally not required to list beneficial owners on a CTR.
    • Question 35 specifies what information covered financial institutions should collect and consider as part of on-going CDD when developing customer risk profiles. Specifically, covered financial institutions should develop an understanding of the “nature and purpose of a customer relationship,” and review information obtained at the opening of an account such as type of customer, account, service, or product.

    Agency Rule-Making & Guidance FinCEN Bank Secrecy Act Anti-Money Laundering Customer Due Diligence Department of Treasury CDD Rule Beneficial Ownership

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  • FinCEN Launches New Exchange to Enhance Information Sharing

    Financial Crimes

    On December 4, the Financial Crimes Enforcement Network (FinCEN) announced the release of the “FinCEN Exchange” program, which establishes regular briefings between FinCEN, law enforcement, and financial institutions to share high-priority information regarding potential national security threats and illicit financial transactions. Although private sector participation in the program is voluntary, FinCEN encourages involvement because the briefings may help financial institutions better identify risks and incorporate appropriate information into Suspicious Activity Reports (SARs). In addition, FinCen’s receipt of information will support its efforts to combat financial crimes, including money laundering.

    The CDD Rule became effective on July 11, 2016, and member firms must comply by May 11, 2018. FINRA advises members firms to consult the CDD Rule, along with FinCEN's related FAQs, to ensure AML program compliance.

    Financial Crimes FinCEN SARs Anti-Money Laundering Customer Due Diligence CDD Rule

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