FinCEN Provides Exceptive Relief from New Beneficial Ownership Rule

by Ballard Spahr LLP

Relief is Narrow, but FinCEN’s Explanation of Low Money Laundering Risk Posed by Lending Products is Instructive

On May 11, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling to provide exceptive relief from the application of the new Beneficial Ownership rule (the “BO Rule,” about which we repeatedly have blogged: see here, here and here) to premium finance lending products that allow for cash refunds.

Very generally, the BO Rule — effective as of May 11, 2018 — requires covered financial institutions to identify and verify the identity of the beneficial owner of legal entity customers at account opening. One exemption provided by the BO Rule from its requirements is when a legal entity customer opens a new account for the purpose of financing insurance premiums and the payments are remitted directly by the financial institution to the insurance provider or broker.  However, this exemption does not apply when there is a possibility of cash refunds.

In its May 11th ruling, FinCEN granted exceptive relief from the BO Rule to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund.  Although this exception is narrow when compared to the many other financial institutions covered by the broad BO Rule, FinCEN’s explanation for why the excepted entities present a low risk for money laundering is potentially instructive in other contexts, such as risk assessments undertaken by financial institutions for the purposes of their anti-money laundering (“AML”) compliance programs.

As described in FinCEN’s May 11th ruling, premium finance lending is an automated, high-volume industry. Premium finance lenders provide short-term financing — typically to small businesses, but also to individuals and larger commercial entities — to cover annual premiums on a wide range of insurance products. Premium finance lenders generally interact with insurance agents or brokers, rather than directly with borrowers, and borrowers typically make payments directly to the agents or brokers. Importantly, premium finance lenders issue cash refunds on a significant number of their loans, and as such, the exemption noted above to the BO Rule has limited practical value.

Thus, in its May 11th ruling, FinCEN granted exceptive relief from the BO Rule to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund. FinCEN has the authority under 31 U.S.C. § 5318(a)(5) and 31 C.F.R. § 1010.970 to make such exceptions to the requirements of the Bank Secrecy Act (“BSA”). Such exceptions may apply to particular persons or to a class of persons, and FinCEN may revoke exceptions at its discretion.

FinCEN observed in its May 11th ruling that, in the normal course of business, a premium finance company might be required to provide a cash refund when (i) unearned interest has accrued (for example, in the case of early repayment); (ii) a borrower has made inadvertent overpayments; or (iii) policies are cancelled.

Although the May 11th ruling focuses on premium finance “lending,” it is worth noting that premium finance contracts are often structured as credit installment sales, rather than true loans. In such cases, insurance agents or brokers typically enter into premium finance contracts with customers, and then assign those contracts to premium finance companies. Nothing in the BO Rule or this recent ruling would seem to indicate that the exemption under the BO Rule would operate any differently with respect to premium finance contracts structured as installment sales as opposed to loans. However, premium financing in the form of a credit sale frequently requires a substantial downpayment, for example, 30% of the amount of the underlying premium, potentially increasing the likelihood that a refund may be required.

While reminding covered financial institutions that they still need to comply with all other requirements under the BSA, including the filing of suspicious activity reports (“SARs”), FinCEN determined that an exception to the BO Rule is appropriate for premium financing lending involving cash refunds because of a limited AML risk:

These types of cash refunds do not pose significant money laundering and terrorist financing risks. The processes for premium finance lending appear to be highly automated, and cash loan refunds are typically generated from an accounting transaction to correct an inadvertent error(s). Moreover, in many cases, state law requires that the refund be returned directly to the customer or their broker or agent. These structural characteristics of premium finance refunds further make them low risk for money laundering and terrorist financing activity. FinCEN has confirmed the low money laundering risk nature of these transactions, notwithstanding the potential for these types of cash refunds, through discussions with law enforcement.

To the extent premium financing involving cash refunds carries a minimal risk of money laundering and terrorist financing, that risk will be mitigated by the requirement that covered financial institutions are required to comply with other BSA/AML reporting requirements. For example, covered premium finance lenders have a responsibility to report suspicious activity when a refund may not have an economic purpose or has other indicators of suspicious activity.

Accordingly, FinCEN focused on the following factors to determine that a particular sort of transaction involved a limited AML and counter-terrorist financing risk:

  • Line of business conducting the transactions is highly automated;
  • Payment of cash is typically due to the routine correction of inadvertent errors;
  • State law typically requires such transactions;
  • Lender deals directly not with legal entity customer, but with insurance agent or broker, when conducting the transactions;
  • SAR reporting requirements still provide a backstop for detecting potential criminal activity involved in the transactions; and
  • Confirmation from law enforcement sources that the transactions present low money laundering risks.

These factors may provide structural guideposts for future exceptions to the BO Rule, or other BSA regulations.  They generally also might inform portions of a financial institution’s AML/BSA risk assessment regarding its business.  These factors certainly are consistent with the pronouncements of the government in the Federal Financial Institutions Examination Council AML/BSA (FFIEC) Examination Manual and other sources that any AML/BSA program must be “risk based” — language which simultaneously creates both obligations and limitations on those obligations.

Finally, FinCEN noted within its May 11th ruling that, as with any other exceptive relief, FinCEN may withdraw or modify this relief, “particularly if FinCEN receives new or different information involving (1) the manner in which premium financing operates; (2) the risks of money laundering and terrorist financing associated with premium finance lending that incorporates the potential for cash refunds; and, (3) the value of information that would otherwise be collected but for the existence of this exception.”

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.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.