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FinCEN Issues Exceptive Relief from Beneficial Ownership Rule to Certain Account Renewals

FinCEN Cites Low Risk of Money Laundering and High Regulatory Burden of Rule

On September 7, 2018, the Financial Crimes Enforcement Network (“FinCEN”) issued permanent exceptive relief (“Relief”) to the Beneficial Ownership rule (“BO Rule”) that further underscores the agency’s continued flexibility and risk-based approach to the BO Rule.

Very generally, the BO Rule — effective as of May 11, 2018, and about which we repeatedly have blogged (see here) — requires covered financial institutions to identify and verify the identities of the beneficial owners of legal entity customers at account opening. FinCEN previously stated in April 3, 2018 FAQs regarding the BO Rule that a “new account” is established – thereby triggering the BO Rule – “each time a loan is renewed or a certificate of deposit is rolled over.” As a result, even if covered financial institutions already have identified and verified beneficial ownership information for a customer at the initial account opening, the institutions still must identify and verify that beneficial ownership information again – and for the same customer – if the customer’s account has been renewed, modified, or extended.

However, the Relief now excepts application of the BO Rule when legal entity customers open “new accounts” through: (1) a rollover of a certificate of deposit (CD); (2) a renewal, modification, or extension of a loan, commercial line of credit, or credit card account that does not require underwriting review and approval; or (3) a renewal of a safe deposit box rental. The Relief does not apply to the initial opening of any of these accounts.

The Relief echoes the exceptive relief from the BO Rule granted by FinCEN on May 11, 2018 to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund. Once again, although the Relief is narrow, FinCEN’s explanation for why the excepted accounts present a low risk for money laundering is potentially instructive in other contexts.

According to FinCEN, financial institutions precipitated the Relief by explaining in reaction to the April 3, 2018 FAQs that “it is industry practice not to treat such rollovers and renewals as the opening of a new account, because, among other factors, there is generally no change to account information.” FinCEN issued a 90-day temporary and limited relief, retroactive to May 11, 2018, which FinCEN extended on August 8, 2018 for an additional 30 days. The Relief replaces and supersedes the temporary exceptive relief.

When issuing the Relief, FinCEN emphasized the fact that automated renewals or modifications of these products pose minimal money laundering risks. As an example, the agency explained that CDs are low-risk because: (1) they cannot be used by customers to pay or receive payments from third parties; (2) funds cannot be transferred into or out of the CD during the term of the account relationship; and (3) beneficial ownership information and other account information for the CDs is already collected at account opening. FinCEN also highlighted the significant regulatory burden that the BO Rule would impose on these renewals. It explained that the current industry practice for renewing or extending these types of account relationships is generally automated and does not require affirmative action from the customer. Applying the BO Rule to these renewals could lead to account closures – and, as a result, illiquidity and financial instability – in instances where the customer is delayed in providing the requisite beneficial ownership information.

Further, FinCEN stated that it had sought feedback from law enforcement and industry and concluded that not applying the BO Rule to the accounts at issue “does not have a significant impact on the information available and useful to law enforcement.” Of course, and consistent with their general AML program requirements, financial institutions still will need to conduct ongoing monitoring of these accounts to identify and report suspicious transactions, and maintain and update customer information according to risk.

Consistent with recent Congressional interest in potentially scaling back some of the regulatory burdens of the Bank Secrecy Act, Congressperson Ted Budd (R – NC) issued the following statement regarding this exceptive relief:

I applaud FinCEN Director Kenneth Blanco for this decision and thank him for his efforts to make this temporary rule permanent and expand upon it. Director Blanco listened to the concerns of Members of Congress like myself as well as industry when making this decision. I’ve spoken with many community banks in North Carolina who have expressed concern that the beneficial ownership reporting requirements on auto-renewable products, under the original Customer Due Diligence (CDD) Rule would cause increased costs of doing business with their customers. Additionally, they worried this new requirement would significantly increase their burdens on maintaining accounts, and potentially result in closed accounts and a loss of information for law enforcement. Since the ownership of these products does not change, I agree with the new rule that exempts these types of automatically-renewed or rolled-over products permanently. Once again, I applaud FinCEN for this decision and thank Director Blanco for his service to this nation.

Copyright © by Ballard Spahr LLP


About this Author

Mary Treanor Lawyer Ballard Spahr

Mary Treanor focuses her practice on representing energy and commodity companies, financial institutions and trade associations in a variety of regulatory, compliance, litigation, and transactional matters. Her work includes representing clients in enforcement matters before the Commodity Futures Trading Commission, Federal Energy Regulatory Commission and Chicago Mercantile Exchange, as well as advising on regulatory matters and assisting with transactions.

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 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He also counsels clients through every stage of a tax controversy – from audit through administrative appeal to litigation and collection.

Before entering private practice, Mr. Hardy spent more than a decade as a federal prosecutor. He served as an Assistant U.S. Attorney in Philadelphia, where he focused on fraud and tax cases. He also served as a trial attorney for the Department of Justice’s Tax Division in Washington, D.C., where he tried cases in a number of federal districts and helped write the Department's Criminal Tax Manual.

A national thought leader on the subject of criminal tax and money laundering law, Mr. Hardy is the author of  Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a well-reviewed and comprehensive legal treatise on the litigation of criminal tax, money laundering, and Bank Secrecy Act cases, published by Bloomberg BNA. He also serves as an adjunct professor at Villanova University School of Law, where he teaches a class on criminal and civil tax penalties in the graduate law program.

Moskow, Delaware, Partner, litigation

Beth Moskow-Schnoll is Managing Partner of the firm's Delaware office and concentrates her practice on white-collar litigation, regulatory enforcement and compliance, and complex civil litigation, with an emphasis on banking and other financial services litigation.

She has tried to verdict dozens of cases in federal district court. She also has successfully briefed and argued multiple cases before the Third Circuit Court of Appeals. Ms. Moskow-Schnoll has convinced the government to decline prosecution of clients in matters involving allegations...