InfoBytes Blog

Agency officials urge Congress to create central repository to combat money laundering

On May 21, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Combating Illicit Financing By Anonymous Shell Companies Through the Collection of Beneficial Ownership Information.” The Committee heard from the same panel of witnesses who testified in November on the need for modernization of the Bank Secrecy Act/Anti-Money Laundering regime. (Covered by InfoBytes here.) Committee Chairman Mike Crapo opened the hearing by stressing the need to discuss ways in which beneficial ownership information collected in an effort to deter money laundering and terrorist financing through anonymous shell companies can be made more useful.

Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco emphasized that while the collection of beneficial ownership information occurs when an account is opened at a financial institution, as required under FinCEN’s Customer Due Diligence Final Rule (CDD Rule), “it is but one critical step toward closing this national security gap.” Blanco stressed that “[t]he second critical step in closing this national security gap is collecting beneficial ownership information at the corporate formation stage,” and stated Congress should develop a streamlined solution.

FBI Financial Crimes Section Chief Steven D’Antuono agreed with Blanco and said that, from a law enforcement perspective, a central repository would be “extremely helpful.” D’Antuono emphasized his support for the creation of a regime to collect and consolidate beneficial ownership information, which would enable law enforcement agencies to easily identify the beneficial owners of shell companies and help the agencies address illicit financing activity in a timely fashion. He encouraged Congress to consider other countries’ beneficial ownership disclosure requirements when developing legislation.

OCC Senior Deputy Comptroller for Bank Supervision Policy Grovetta Gardineer also agreed that a standardized approach for beneficial ownership data verification should be established. She highlighted the compliance burden on banks caused by the implementation of the CDD Rule, and suggested that Congress could establish a nationwide requirement, or a centralized database, for legal entities to provide, update and verify beneficial ownership information. In addition, because cross-border transaction activity can present higher risks for money laundering and terrorist financing, she recommended that “foreign legal entities be required to report ownership information either at the time of state registration or upon establishing an account relationship with a U.S. financial institution.”

Federal Issues Senate Banking Committee FinCEN Beneficial Ownership Financial Crimes Department of Treasury OCC FBI Of Interest to Non-US Persons Anti-Money Laundering Combating the Financing of Terrorism CDD Rule Hearing

FinCEN grants permanent relief from Beneficial Ownership Rule for CDs and certain automatic renewal products

On September 7, the Financial Crimes Enforcement Network (FinCEN) issued a notice granting permanent relief for financial institutions from the Beneficial Ownership Rule’s requirements to obtain and verify the identity of beneficial owners of legal entity customers, with respect to certificate of deposit rollovers (CDs) and loans that renew automatically. The exception applies only to the rollover, renewal, modification, or extension of the following types of accounts occurring on or after May 11, 2018: CDs; existing loans, commercial lines of credit, and credit card accounts that do not require underwriting reviews; and safe deposit box rental renewals. The exception does not apply to the initial opening of these types of new accounts. FinCEN noted that it will not provide any other exception from a financial institution's anti-money laundering compliance obligations under the Bank Secrecy Act.

Visit here for continuing InfoBytes coverage on beneficial ownership and customer due diligence requirements here.

Financial Crimes FinCEN CDD Rule Beneficial Ownership

FinCEN issues extension to continue suspension of beneficial ownership requirements for automatic renewal products

On August 8, the Financial Crimes Enforcement Network (FinCEN) issued a notice to provide an additional 30 days of limited exceptive relief for covered financial institutions that are required to obtain and verify the identity of beneficial owners of legal entity customers with respect to certificate of deposit rollovers and loans that renew automatically. As previously covered in InfoBytes, the extension—which was set to expire August 9 and applies to qualified products and services that were established before the Beneficial Ownership Rule’s May 11 compliance date—will now continue until September 8. FinCEN noted it will continue to evaluate the requirement to determine whether additional relief is needed.

Find continuing InfoBytes coverage on beneficial ownership and customer due diligence requirements here.

Financial Crimes FinCEN Beneficial Ownership Customer Due Diligence CDD Rule

Bipartisan group of state Attorneys General seek legislative enhancements to combat anonymous shell companies

On August 2, a bipartisan group of 24 state Attorneys General sent a letter to ranking leaders of the House Financial Services Committee expressing support for legislation that requires disclosure of the owners of companies at the time of incorporation—in order to prevent “individuals from using anonymous shell companies to evade accountability”—but encouraged the adoption of additional components. The letter emphasizes that the use of anonymous shell companies allows criminals to launder and spend money attained through activities such as human trafficking and drug dealing, and legislative change could assist states in their investigation and enforcement against these crimes. Specifically, the letter requests that legislation addressing anonymous shell companies include the following components: (i) availability of information to state and local law enforcement to assist in civil and criminal investigations and provide states authority to enact relevant state laws; (ii) continued access to information throughout the investigation; and (iii) the definition of “beneficial ownership” does not allow loopholes that can be exploited by criminals.

State Issues State Attorney General Beneficial Ownership House Financial Services Committee

FinCEN issues ruling temporarily suspending beneficial ownership requirements for automatic renewal products for 90 days

On May 16, the Financial Crimes Enforcement Network (FinCEN) issued a ruling to provide a 90-day limited exceptive relief from the requirements for covered financial institutions to obtain and verify the identity of beneficial owners of legal entity customers with respect to certificate of deposit rollovers and loans that renew automatically. As previously covered in InfoBytes, FinCEN clarified 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.” FinCEN acknowledged, however, that certain covered financial institutions with automatic processes that do not treat these types of rollovers or renewals as new accounts, have expressed concerns regarding their ability to comply with the rule’s requirements. As a result, FinCEN’s ruling will apply to qualified products and services that were established before the May 11 compliance date and will continue until August 9, during which time FinCEN will re-evaluate the requirement to determine whether more permanent relief is needed.

Financial Crimes FinCEN Beneficial Ownership

FinCEN issues ruling to clarify beneficial ownership requirements for premium finance cash refunds

On May 11, the Financial Crimes Enforcement Network (FinCEN) issued a ruling to provide exceptive relief to covered financial institutions from the requirements to obtain and verify the identity of beneficial owners of legal entity customers at account opening to insurance premium finance lending products that allow for cash refunds. Although FinCEN’s regulations already exempted covered financial institutions 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, the exemption does not apply if there is a possibility of cash refunds. However, because premium finance lenders typically process a significant number of cash refunds, and premium finance loans present a low risk for money laundering, FinCEN issued the ruling to provide for additional relief for premium finance loans offering cash refunds. A condition of the relief is that the cash “refunds are only remitted directly to the borrower or the borrower’s agent or broker.”

Financial Crimes FinCEN Beneficial Ownership Bank Secrecy Act Anti-Money Laundering

FFIEC releases customer due diligence and beneficial ownership examination procedures

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

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

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

Senate Banking Committee: Sharpen the focus of AML/BSA enforcement and oversight

On January 9, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement” to discuss anti-money laundering and Bank Secrecy Act (AML/BSA) enforcement and compliance. Committee Chairman Mike Crapo (R-Idaho) opened the hearing by stating that Congress and financial regulators must examine and address “decades-old” Bank Secrecy Act and anti-money laundering requirements in order “to sharpen the focus, sustainability and enforcement of a modernized, more efficient U.S. counter-threat-finance architecture.” During the hearing, the Committee stressed the need to move towards a more targeted, strengthened AML framework so that banks, law enforcement, and regulators can focus on specific threats such as the financing of terrorism and sanctions evasions.

The three witnesses offered numerous insights related to reforming AML/BSA enforcement and regulatory structures, including: (i) establishing an approach that would utilize and track intelligence and analysis rather than focusing primarily on quantifiable metrics; (ii) increasing inter-agency coordination and improving information sharing between financial institutions and regulators, and among financial institutions themselves; (iii) recognizing the importance of law enforcement participation, specifically related to the sharing of suspicious activity reports; (iv) encouraging the participation of entities outside of the banking sector, such as persons involved in real estate or those acting as proxies for financial system access; (v) supporting beneficial ownership legislation for companies formed in the United States; and (v) understanding the ways in which financial institutions are addressing the anonymity of cryptocurrencies and blockchain technology. The witnesses were:

• Mr. Dennis Lormel, President and CEO, DML Associates and former Chief, FBI Financial Crimes Program (testimony);
• Mr. Greg Baer, President, The Clearing House Association (testimony); and
• Ms. Heather Lowe, Legal Counsel and Director of Government Affairs, Global Financial Integrity (testimony).

Financial Crimes Senate Banking Committee Anti-Money Laundering Bank Secrecy Act SARs Cryptocurrency Virtual Currency Blockchain Beneficial Ownership

FinCEN Issues FAQs Regarding Customer Due Diligence Requirements

On July 19, FinCEN issued FAQs to clarify the scope of the May 2016 Customer Due Diligence (CDD) final rule. As previously covered in InfoBytes, and as outlined in Question 2 of the recently-released FAQs, the final rule imposes standardized CDD requirements for federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities (collectively, covered financial institutions). While the FAQs provide a detailed description of the CDD requirements, they state that, “[i]n short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers.” Notably, Question 5 of the FAQs clarifies that the CDD rule amends the AML program requirements to explicitly require covered financial institutions to implement and maintain risk-based procedures for conducting ongoing customer due diligence, including, but not limited to, (i) understanding the nature and purpose of the customer relationship; and (ii) conducting ongoing monitoring to identify and report suspicious transactions, as well as maintain and update customer information on a risk basis. The FAQs also note that covered financial institutions must include CDD procedures in their AML compliance program. In addition to discussing definitions for certain terms within the CDD rule, such as “account” and “beneficial owner,” the FAQs outline, among other things, the type of beneficial ownership information that covered financial institutions must collect for legal entity customers. Finally, as reiterated in the FAQs, the CDD rule has an effective date of July 11, 2016 and an applicability date of May 11, 2018.

Anti-Money Laundering FinCEN Customer Due Diligence CDD Rule Beneficial Ownership