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FinCEN Provides Exceptive Relief from New Beneficial Ownership Rule

On May 11, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling to provide exceptive relief from the application of the new Beneficial Ownership rule(the “BO Rule,” about which we repeatedly have blogged: see here, here and here) to premium finance lending products that allow for cash refunds.

Very generally, the BO Rule — effective as of May 11, 2018 — requires covered financial institutions to identify and verify the identity of the beneficial owner of legal entity customers at account opening. One exemption provided by the BO Rule from its requirements is when a legal entity customer opens a new account for the purpose of financing insurance premiums and the payments are remitted directly by the financial institution to the insurance provider or broker.  However, this exemption does not apply when there is a possibility of cash refunds.

In its May 11th ruling, FinCEN granted exceptive relief from the BO Rule 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.  Although this exception is narrow when compared to the many other financial institutions covered by the broad BO Rule, FinCEN’s explanation for why the excepted entities present a low risk for money laundering is potentially instructive in other contexts, such as risk assessments undertaken by financial institutions for the purposes of their anti-money laundering (“AML”) compliance programs.

As described in FinCEN’s May 11th ruling, premium finance lending is an automated, high-volume industry. Premium finance lenders provide short-term financing — typically to small businesses, but also to individuals and larger commercial entities — to cover annual premiums on a wide range of insurance products. Premium finance lenders generally interact with insurance agents or brokers, rather than directly with borrowers, and borrowers typically make payments directly to the agents or brokers. Importantly, premium finance lenders issue cash refunds on a significant number of their loans, and as such, the exemption noted above to the BO Rule has limited practical value.

Thus, in its May 11th ruling, FinCEN granted exceptive relief from the BO Rule 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. FinCEN has the authority under 31 U.S.C. § 5318(a)(5) and 31 C.F.R. § 1010.970 to make such exceptions to the requirements of the Bank Secrecy Act (“BSA”). Such exceptions may apply to particular persons or to a class of persons, and FinCEN may revoke exceptions at its discretion.

FinCEN observed in its May 11th ruling that, in the normal course of business, a premium finance company might be required to provide a cash refund when (i) unearned interest has accrued (for example, in the case of early repayment); (ii) a borrower has made inadvertent overpayments; or (iii) policies are cancelled.

Although the May 11th ruling focuses on premium finance “lending,” it is worth noting that premium finance contracts are often structured as credit installment sales, rather than true loans. In such cases, insurance agents or brokers typically enter into premium finance contracts with customers, and then assign those contracts to premium finance companies. Nothing in the BO Rule or this recent ruling would seem to indicate that the exemption under the BO Rule would operate any differently with respect to premium finance contracts structured as installment sales as opposed to loans. However, premium financing in the form of a credit sale frequently requires a substantial downpayment, for example, 30% of the amount of the underlying premium, potentially increasing the likelihood that a refund may be required.

While reminding covered financial institutions that they still need to comply with all other requirements under the BSA, including the filing of suspicious activity reports (“SARs”), FinCEN determined that an exception to the BO Rule is appropriate for premium financing lending involving cash refunds because of a limited AML risk:

These types of cash refunds do not pose significant money laundering and terrorist financing risks. The processes for premium finance lending appear to be highly automated, and cash loan refunds are typically generated from an accounting transaction to correct an inadvertent error(s). Moreover, in many cases, state law requires that the refund be returned directly to the customer or their broker or agent. These structural characteristics of premium finance refunds further make them low risk for money laundering and terrorist financing activity. FinCEN has confirmed the low money laundering risk nature of these transactions, notwithstanding the potential for these types of cash refunds, through discussions with law enforcement.

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 reporting requirements. 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.

Accordingly, FinCEN focused on the following factors to determine that a particular sort of transaction involved a limited AML and counter-terrorist financing risk:

  • Line of business conducting the transactions is highly automated;
  • Payment of cash is typically due to the routine correction of inadvertent errors;
  • State law typically requires such transactions;
  • Lender deals directly not with legal entity customer, but with insurance agent or broker, when conducting the transactions;
  • SAR reporting requirements still provide a backstop for detecting potential criminal activity involved in the transactions; and
  • Confirmation from law enforcement sources that the transactions present low money laundering risks.

These factors may provide structural guideposts for future exceptions to the BO Rule, or other BSA regulations.  They generally also might inform portions of a financial institution’s AML/BSA risk assessment regarding its business.  These factors certainly are consistent with the pronouncements of the government in the Federal Financial Institutions Examination Council AML/BSA (FFIEC) Examination Manual and other sources that any AML/BSA program must be “risk based” — language which simultaneously creates both obligations and limitations on those obligations.

Finally, FinCEN noted within its May 11th ruling that, as with any other exceptive relief, FinCEN may withdraw or modify this relief, “particularly if FinCEN receives new or different information involving (1) the manner in which premium financing operates; (2) the risks of money laundering and terrorist financing associated with premium finance lending that incorporates the potential for cash refunds; and, (3) the value of information that would otherwise be collected but for the existence of this exception.”

Copyright © by Ballard Spahr LLP

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About this Author

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

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...

215.864.8838
Jeremy Sairsingh, philadelphia office Ballard Spahr, business, lawyer
Associate

Jeremy C. Sairsingh is an associate in the Business and Finance Department and a member of the firm's Consumer Financial Services Group. His practice focuses on providing regulatory advice to clients on state and federal consumer finance laws.

He regularly assists clients with a wide variety of compliance and transactional matters, and works with clients in a range of industries, including depository institutions, credit card issuers, online lending platforms, student lenders and servicers, solar and home improvement finance companies, and retail merchants.

In addition to advising on state-specific consumer finance laws, he frequently counsels clients regarding compliance with a number of federal statutes and regulations, including the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Electronic Fund Transfer Act (EFTA), Telephone Consumer Protection Act (TCPA), as well as UDAAP statutes prohibiting unfair, deceptive, and abusive acts and practices. One of his particular areas of focus is assisting clients with computational issues arising out of consumer credit transactions.

215-864-8523