In an appearance before the House Financial Services Committee’s Terrorism and Illicit Finance Subcommittee, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco told members the agency would issue exceptive relief to part of its Consumer Due Diligence rule.
Later that afternoon, the move became official when FinCEN issued an administrative ruling providing 90 days of limited exceptive relief from with respect to financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the rule took effect May 11.
“This exception begins, retroactively, on May 11, 2018, and will expire on Aug. 9, 2018,” the ruling stated. “During this time, FinCEN will determine whether and to what extent additional exceptive relief may be appropriate for such financial products and services that were established before May 11, 2018, but are expected to rollover or renew after such date.”
The CDD rule defines “account” in the Customer Identification Program, saying each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is created.
“As clarified in the Customer Due Diligence Frequently Asked Questions (CDD FAQs) published on April 3, 2018, covered financial institutions are required to obtain information on the beneficial owners of a legal entity that opens a new account for each new formal banking relationship established, even if the legal entity is an existing customer,” the administrative ruling stated. “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.
“These covered financial institutions have expressed concern regarding their ability to comply with the Beneficial Ownership Rule with respect to such accounts. FinCEN believes that further consideration of this issue is appropriate and is, therefore, granting this temporary exception with respect to collecting beneficial ownership on certain financial products and services (i.e., CD and loan accounts) that automatically rollover or renew and were established before the Beneficial Ownership Rule’s applicability date.”
On the day the rule took effect, FinCEN issued exceptive relief to premium finance lending products that allow for cash refunds.
“Premium finance lenders provide loans to businesses to cover insurance premiums. In the normal course of business, premium finance lenders process a significant number of cash refunds each year,” the ruling stated. “The Beneficial Ownership Rule currently exempts 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 and for which payments are remitted directly by the financial institution to the insurance provider or broker unless there is a possibility of cash refunds.
“This ruling provides 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. This ruling also reminds covered financial institutions of their obligation to comply with all other applicable BSA requirements, including the filing of suspicious activity reports.”
At the subcommittee hearing, Chairman Steve Pearce (R-N.M.) said the six-year process of creating the CDD rule brought some compliance concerns as the effective date arrived.
“There are legitimate concerns about the application of this rule and the impact it could have on banks already struggling with BSA compliance. Adding additional requirements will likely lead to the de-risking of legitimate business accounts because of increased regulatory burdens,” Pearce stated. “It is important for our federal regulators to strike the appropriate balance between ensuring safety as well as access to the financial system.”
In prepared testimony, Blanco said FinCEN would work with stakeholders in the process, as evidenced by the administrative rulings issued.
“Although we expect covered institutions to be ready on May 11, 2018, to begin timely and effective implementation of the policies, procedures, and controls required under the CDD Rule — and we are pleased to have heard from many in industry that they were ready — we also understand that institutions, regulators and other stakeholders may need a little extra time to smooth out any wrinkles,” Blanco stated. “This is the case whenever we issue a new rule, the purpose of which is always to enhance our AML regime and not to serve as a vehicle for punishing financial institutions. There is always an understandable expectation that industry’s fine-tuning of its implementation, and the government’s fine-tuning of the examination process itself, takes time and that new questions often emerge after implementation begins.
“We have spoken with our counterparts, including the Federal Banking Agencies, the U.S. Securities and Exchange Commission, and the Commodity Futures Trading Commission, to discuss these issues. We are all committed to ensuring that covered financial institutions are able to implement the rule effectively, and in a way that makes practical sense.”