A new anti-money laundering (AML) rule being considered by the Department of the Treasury, through the Financial Crimes Enforcement Network, known as FinCEN, could impose more extensive compliance obligations on banks and other financial institutions subject to AML requirements.

Federal regulators recently expanded the list of entities subject to AML requirements to include non-bank mortgage lenders and brokers. In its advance notice of proposed rulemaking (ANPR) published on March 5, 2012, in the Federal Register, FinCEN states that the new customer due diligence (CDD) program rule under consideration would initially apply only to banks, securities brokers or dealers, mutual funds, futures commission merchants, and introducing commodities brokers.

However, FinCEN also states that it will consider expanding the rule’s coverage to include other institutions such as money service businesses (including providers of prepaid access), insurance companies, and non-bank mortgage lenders and brokers.

Ballard Spahr’s Consumer Financial Services Group regularly advises clients on the steps they must take to ensure that their AML policies and procedures will withstand the scrutiny of regulators.

The proposal stems from FinCEN’s view that, despite the CDD obligation implicit in Bank Secrecy Act (BSA) requirements, “an express CDD rule that requires financial institutions to perform CDD, including an obligation to categorically obtain beneficial ownership information,” may be necessary for the protection of the United States financial system. More specially, FinCEN is concerned about “a lack of uniformity and consistency” in how financial institutions address their CDD obligations and collect beneficial ownership information “within and across industries.”

In the ANPR, FinCEN describes the following components that it is considering for inclusion in a CDD program rule:

  • A customer identification and risk-based verification requirement. FinCEN notes that this requirement would not impose any new obligations on financial institutions that are subject to, and compliant with, BSA customer identification program (CIP) rules.
  • A requirement to understand the nature and purpose of an account and the expected account activity to assess risk and satisfy suspicious activity reporting (SAR) requirements. FinCEN notes that the requirement to understand the nature and purpose of an account would also apply to accounts of customers that are exempt from CIP requirements.
  • A requirement to maintain appropriate policies, procedures, and processes for conducting ongoing monitoring of customer relationships and additional CDD as appropriate based on such monitoring for the purpose of identifying and reporting suspicious activity. FinCEN notes that this component would not impose any new or additional requirements because it is already part of AML program and SAR rules.

Another proposed requirement would mandate identification of the beneficial owners of all customers, and verification of the identity of beneficial owners using a risk-based approach. FinCEN notes that this component would represent a new obligation because of the limited circumstances in which financial institutions are now expressly required to obtain beneficial ownership information.

The ANPR includes a possible new definition of beneficial ownership of a legal entity for purposes of a CDD program requirement as well as a discussion of possible exemptions from the requirement. Also included in the ANPR is a discussion of the need in certain instances to obtain information about the beneficial owners of assets in an account, such as where a legal entity (e.g. a foreign or regulated or unregulated domestic financial institution) opens an account for the benefit of its customers (as opposed to for its own benefit).

FinCEN seeks comment on whether there should be an alternative definition of "beneficial owner" for such instances. It also seeks comment on whether verification of beneficial ownership should require verification of the identified beneficial owner’s existence or verification that the person identified as the beneficial owner is indeed the beneficial owner.

The ANPR also includes a series of questions intended to elicit information about various issues, including existing practices regarding the collection of beneficial ownership information, the changes that an express CDD program rule would require financial institutions to make to their existing CDD processes, and possible exemptions to the requirement to obtain beneficial ownership information or to a CDD program rule generally. Comments must be received by May 4, 2012.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The group advises bank and non-bank financial institutions on regulatory compliance and administrative enforcement actions and investigations and has represented financial institutions targeted by the government for alleged BSA violations.

The group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right. For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; or Beth Moskow-Schnoll, 302.252.4447 or moskowb@ballardspahr.com.


Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)


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