In a unique administrative ruling under delegated “exceptive” authority, on May 16, 2018 FinCEN issued relief from its new beneficial ownership requirements through at least August 9, 2018, for “certain financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.”

FinCEN acknowledged in its notice that “some covered institutions have not treated such rollovers or renewals as new accounts and have established automatic processes to continue the banking relationship with the customer.”

The exception is effective retroactively from May 11, 2018 and expires on August 9, 2018.  FinCEN added that it was considering whether additional relief may be appropriate for such products and services established prior to May 11, 2018 and expected to rollover or renew thereafter.

We will explore how we got here, but first, some practical considerations:

  • Institutions that have already set into motion new systems, procedures, and communications to collect this info on renewable loans and CDs established prior to May 11 will need to decide whether to discontinue these measures, or alternatively to conclude there is now greater flexibility for handling customers that do not adhere to them – e.g., by failing to submit a completed ownership certification form.  The prevailing view among our clients seems to be the latter.
  • Institutions that were still rushing to implement such measures will need to decide whether to put these plans on hold or to continue to develop them as to loans and CDs established prior to May 11, 2018.  The preference within the industry in this regard appears to be a function of how far along these plans are into production, and the extent to which they constitute separate solutions specific to these existing account types.
  • Any discussions with examiners and auditors about any changes to implementation plans in light of this release should be direct and documented.  We would encourage institutions to think broadly and generously about the purpose of these rules and the BSA generally, and what risks to the bank (such as sanctions exposure or fraud) might be mitigated by the spirit if not the letter of FinCEN’s new rules.  OFAC’s strict liability framework for doing business with sanctioned parties is unaffected by the relief afforded by FinCEN’s May 16 notice.
  • Institutions should consider ways to continue socializing their views to FinCEN, through trade associations or otherwise, as this interim relief appears directly responsive to industry feedback such as that provided in an April 27 hearing held by the House Financial Services Committee (e.g., “. . . there is no reason to believe that an auto-renewal is evidence that a change in beneficial ownership might have occurred. The FAQ 12 guidance is further complicated by the fact that these products include contractual provisions requiring the financial institution to auto renew them without interruption.”)

Let’s revisit how this unfolded as a regulatory matter.

The supplemental FAQs issued by FinCEN on April 3, 2018 provided certain interpretations of its own final rules, originally published on May 11, 2016, including that it believed a bank established a “new account” each time an autorenewing loan or CD renewed (see FAQ 12).  FinCEN opined at that time on ways a bank could comply with the Beneficial Ownership certification requirements implicated by the opening of a “new account” for a legal entity customer in such cases, namely by (1) providing the required information and certification on FinCEN’s new form or its equivalent once and (2) agreeing at that time to notify the bank of any change in such information going forward.  FinCEN’s view then was that a customer’s agreement to notify a bank of any changes in its beneficial ownership information can be considered a “certification” of this information for purposes of subsequent rollovers of renewable products.

This was a decent result for accounts opened on or after May 11, 2018, but for many institutions FinCEN’s April 3 guidance was a surprising take on autorenewing loans or CDs, especially those established before May 11, 2018.  Specifically, FinCEN indicated:  “For financial services or products established before May 11, 2018, covered financial institutions must obtain certified beneficial ownership information of the legal entity customers of such products and services at the time of the first renewal following that date. At the time of each subsequent renewal, to the extent that the legal entity customer and the financial service or product (e.g., loan or CD) remains the same, the customer certifies or confirms that the beneficial ownership information previously obtained is accurate and up-to-date, and the institution has no knowledge of facts that would reasonably call into question the reliability of the information, the financial institution would not be required to collect the beneficial ownership information again.”

For institutions that had not already been communicating with existing customers about the need for this information on existing products with rollover or renewal features, in many cases the date of FinCEN’s release did not allow for adequate time to do so.  For others, FinCEN’s view confirmed the need to collect this information and raised many questions about how to handle situations where the information is not provided (including restricting or closing accounts).

Although there was at least some consideration for the widespread and ongoing nature of renewing product types in FinCEN’s April 3 guidance, the planning and programming necessary to implement it as to accounts established prior to May 11 appears be overshadowing the long-term relief that was probably intended.  Meanwhile, the regulators published updated BSA/AML exam manual sections tying to the May 11, 2018 compliance date, setting the course for supervision and enforcement.

FinCEN maintains that this entire outcome is consistent with the definition of “account” in the Customer Identification Program (CIP) rules “and subsequent interagency guidance,” which is a reference to a set of April 28, 2005 regulatory interpretations.  Let’s review that guidance (CFR references pre-date migration of these rules to Chapter X of Title 31):

31 C.F.R. § 103.121(a)(3)(ii)(C) – Person with an existing account

(1) A loan and a time deposit are each an “account” for purposes of the CIP rule. How do the requirements of the CIP rule apply to a loan that is renewed, or a certificate of deposit that is rolled over?

The CIP rule applies to a “customer,” generally, “a person that opens a new account.” 31 C.F.R. § 103.121(a)(3)(i). (Emphasis added.) “Account” means a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. 31 C.F.R. § 103.121(a)(1)(i). For purposes of the CIP rule, each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is established. However, the rule provides that the term “customer” does not include a person that has an existing account with the bank, provided that the bank has a reasonable belief that it knows the true identity of the person. 31 C.F.R. § 103.121(a)(3)(ii)(C). In each of these cases, the customer has an existing account. Therefore, as long as the bank has a reasonable belief that it knows the person’s true identity, the bank need not perform its CIP when a loan is renewed or certificate of deposit is rolled over. However, if a new customer is added to the loan or deposit account, the bank would need to satisfy the CIP rule with respect to that new account relationship. (January 2004) (emphasis added)

We know that a “new account” triggering the application of the beneficial ownership rules is “each account opened at a covered financial institution by a legal entity customer on or after the [May 11, 2018] applicability date” and that FinCEN incorporated the definition of “account” set forth above for these purposes.

In context, the impacts of the 2005 conclusion that a loan renewal or CD rollover creates a new “account” have been tempered by the rest of that guidance:  such a new account nonetheless typically does not result in a new “customer” for CIP purposes, which is the trigger for CIP information collection and identity verification.  The beneficial ownership rules, on the other hand, are triggered by the opening of a “new account” by a “legal entity customer,” which is (setting aside exclusions) defined as any corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.

This suggests a fix that FinCEN may arrive at, which is to tie the obligation to collect certified beneficial ownership information under the new rules to the establishment of a new legal entity customer, similar to the CIP rules, rather than the establishment of a new account.  In finalizing these rules, FinCEN characterized the opening of a “new account” as the one categorical triggering event for the application of the new rules to existing customers:

“Several commenters sought clarification as to whether a financial institution must identify and verify a legal entity customer’s beneficial owners each time it opens a new account at the institution after the rule’s compliance deadline, or whether the requirement applies only the first time it opens a new account at such institution. FinCEN has concluded that, while it is not requiring periodic updating of the beneficial ownership information of all legal entity customers at specified intervals, the opening of a new account is a relatively convenient and otherwise appropriate occasion to obtain current information regarding a customer’s beneficial owners.  Accordingly, FinCEN has added to the final rule as § 1010.230(g) a definition for “new account.'”

We recognize that FinCEN’s goal has been to strike a balance between information that has a high value to law enforcement and that protects institutions from criminal actors and fraud on the one hand, and the corresponding burdens imposed on institutions and their customers on the other.  Like the administrative relief ruling and the April 3 FAQs, the 2005 guidance does not have the force of law or regulation, and was not the product of formal administrative notice and comment process.  There was no discussion of renewing CDs or loans in FinCEN’s 2016 final rule release