September 2018 Compliance Journal: FinCEN Provides Exceptive Relief from Beneficial Ownership Requirements

The below article is the Special Focus section of the September 2018 Compliance Journal. The full issue may be viewed by clicking here.

On September 7, 2018, the Financial Crimes Enforcement Network (FinCEN) issued a ruling (relief ruling) granting exceptive relief to covered financial institutions from the beneficial ownership requirements for legal entity customers (beneficial owner rule). Generally speaking, the beneficial owner rule requires financial institutions to identify and verify beneficial owners of legal entity customers upon opening a new account. FinCEN issued guidance to the beneficial owner rule in the form of an FAQ on April 3, 2018. The FAQ provides, in part, that for purposes of the rule, “new account” includes financial product renewals. The relief ruling overrides that portion of the FAQ. Pursuant to the relief ruling, a new certification of beneficial owner need not be obtained for certain rollovers, renewals, modifications, and extensions.

Accounts Eligible for Relief

The relief ruling exempts financial institutions from the rule’s requirement to identify and verify the identity of beneficial owners when opening new accounts as a result of:

  • A rollover of a certificate of deposit (CD);
  • A renewal, modification, or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval;
  • A renewal, modification, or extension of a commercial line of credit or credit card account (e.g., a later payoff date is set) that does not require underwriting review and approval; and
  • A renewal of a safe deposit box rental.

For purposes of the relief ruling a CD is defined as a deposit account with a specified maturity date that cannot be withdrawn before that date without incurring a penalty. The term of the account may vary, but a customer cannot add additional funds during that term. The relief ruling further defines CDs as an account that will automatically renew absent affirmative action by the customer to close the account.

In addition to CDs as defined within the rule, the relief ruling applies to certain loans. The renewal, modification, or extension of a loan, commercial line of credit, and credit card is exempt from new certification as to beneficial owner requirements. However, as indicated above, this exemption hinges on whether the loan or line of credit requires the financial institution’s underwriting review and approval. If the loan is not subject to such requirements, then the exception applies. If it is, then the beneficial ownership rule requirements do apply, even in the case of a renewal, modification, or extension. 

Compliance Considerations

As of publication of this article FinCEN has not released additional guidance on the relief ruling. As such, there is no additional context to the exception other than what is contained within the relief ruling itself. Financial institutions will need to review the relief ruling and contact FinCEN and regulators to determine whether specific accounts or types of renewals meet the criteria for the exemption.

For example, if a financial institution offers a CD to which a customer may add funds, it is unclear whether such an account is covered by the relief ruling. As discussed above, FinCEN defines a CD as one to which the depositor cannot add additional funds to the CD during its term. Whether the ruling covers CDs not meeting that definition is a matter that each financial institution must decide based upon the terms of each of its products and its interpretation of the relief ruling.

Similarly, the relief ruling defines CDs as “automatically renewing absent affirmative action by the customer.” FinCEN offers no additional guidance on this aspect of its definition of CD. Financial institutions will need to review their renewal procedures to determine whether affirmative action is taken by customers. For example, a financial institution may require a customer to sign at time of renewal. A question exists as to whether such signature is “affirmative action” and would prevent such a renewal from receiving the exceptive relief. Such questions must be answered based on each financial institution’s renewal policy and its interpretation of the relief ruling.

The relief ruling provides no clarity to the concept of “underwriting review and approval.” As discussed above, in order to receive the benefit of the relief ruling, a loan renewal must not be subject to a financial institutions underwriting review and approval. Similar to the considerations that must be made for CDs, WBA recommends financial institutions review their loan policies in the context of the relief ruling to determine whether renewals are made based upon underwriting review and approval.

Conclusion

The relief ruling eases some of the burden of the beneficial ownership rule by exempting certain renewals from identification and verification requirements that had previously been imposed upon them. However, it lacks clarity in its definitions as to what is covered. Because of the lack of clarity in the ruling, WBA recommends each financial institution fully review the relief ruling alongside potentially covered accounts.

The relief ruling can be found here: https://www.fincen.gov/sites/default/files/administrative_ruling/2018-09-07/Permanent%20Exceptive%20Relief%20Extension%20of%20Compliance%20Date%20CDs_final%20508.pdf

By, Ally Bates