In May 2016, the Financial Crimes Enforcement Network (FinCEN), the U.S. agency tasked with issuing anti-money laundering (AML) regulations, issued a final rule requiring that certain categories of financial institutions identify the beneficial owners of their legal entity customers and incorporate customer due diligence procedures into their required AML compliance programs. The regulation was effective July 2016, but only applicable to accounts opened on or after May 11, 2018. On May 11, 2018, the effective date, FinCEN issued more guidance to the industry.

The regulation is limited to certain categories of financial institutions: banking organizations, securities broker-dealers, mutual funds, futures commission merchants and introducing brokers in commodities (“covered financial institutions”). Subject to certain exemptions, the covered financial institution must identify the beneficial owner(s) of each legal entity customer at the time a new account is opened, and obtain an executed form from the individual opening the account certifying to such beneficial ownership information, or obtain the information through other means so long as the individual certifies, to the best of his or her knowledge, that the information is accurate.

Our blog posts describing the rule’s requirements and previously issued guidance can be accessed here and here.

On May 11, new examination procedures were issued regarding the new rule, and FinCEN issued an administrative ruling with an additional exception to the rule.

Examination Procedures

The Bank Secrecy Act/Anti-Money Laundering Examination Manual issued by federal regulators is a critical resource for any financial institution that is subject to AML laws.

The regulators have issued new examination procedures to be included in the manual addressing both aspects of the new rule, customer due diligence and beneficial ownership requirements. The procedures include a detailed discussion of what is required under the new rule and how examiners will be assessing compliance with the rule by covered financial institutions.

Additional Exception

One of the exceptions to the requirement to obtain beneficial ownership on a legal entity customer is for accounts established by premium finance lenders at a covered financial institution to “finance insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker;” but if there is a possibility of a cash refund, the covered financial institution must obtain beneficial ownership information on its legal entity customer, the premium finance lender.

FinCEN now has reviewed the money laundering risks associated with premium lender accounts where there is indeed the possibility of a cash refund. According to FinCEN, premium finance lending is “an automated high-volume industry, with companies routinely processing a significant number of cash refunds each year in the normal course of business.” Refunds may be issued if unearned interest has accrued, if a borrower makes inadvertent overpayments or if policies are cancelled. After consulting with law enforcement, FinCEN found that these “types of refunds don’t pose significant money laundering and terrorist financing risks.”

As a result, under the May 11 administrative ruling, covered financial institutions do not have to identify the beneficial owners of legal entity customers that are premium finance lenders where payments are remitted by the premium finance lender directly to the insurance provider or broker even if there is a potential for cash refunds.

FinCEN reminded covered financial institutions that this exception does not relieve them from complying with all other AML requirements regarding premium finance lenders, such as monitoring the accounts for suspicious transactions.