FinCEN Expands AML, Customer Identification Programs, and Beneficial Ownership Requirements to Banks Lacking a Federal Functional Regulator

Morgan Lewis - All Things FinRegThe Financial Crimes Enforcement Network (FinCEN) issued a final rule that requires minimum standards for anti-money laundering (AML) programs for banks lacking a federal functional regulator (the Federal Reserve Board, OCC, FDIC, OTS, NCAU, and SEC), i.e., banks and similar financial institutions that are subject only to state regulation and supervision, and certain international banking entities (collectively, “covered banking entities”).

The final rule also extends customer identification program (CIP) and beneficial ownership requirements (also known as the Customer Due Diligence or CDD Rule) to covered banking entities. Such banking entities may include private banks, international banking entities, non-federally-insured credit unions, state banks, savings associations, and trust companies.

Currently, banking entities without a federally functional regulator are only required to comply with certain Bank Secrecy Act (BSA) obligations, including filing suspicious activity and currency transaction reports (SARs and CTRs). FinCEN determined that the gap in AML coverage between banking entities with and without a federal functional regulator presented a vulnerability to the US financial system that could be exploited by bad actors, prompting this rulemaking.

FinCEN’s press release states that it anticipates that covered banking entities will be able to leverage existing policies, procedures, and internal controls required by other statutory and regulatory requirements to fulfill the obligations set out in the final rule. FinCEN estimates that these rules will impact approximately 297 state-chartered non-depository trust companies, 228 non-federally-insured credit unions, 12 non-federally-insured state-chartered banks and savings and loan or building and loan associations, one private bank, and 29 international banking entities.

One impact of the final rule is than in requiring covered banking entities to establish an AML program and a CIP, other financial institutions that are required to have a CIP, including federally-regulated banks and broker-dealers, may rely on the CIP performance of a covered banking entity. Conversely, covered banking entities will be able to rely on the performance of CIP activities by other qualified financial institutions.

The rule becomes effective on November 16, 2020, and affected banks have until March 15, 2021 to be in compliance.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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