Banking and Finance Law Daily FinCEN final rule subjects all banks to anti-money laundering requirements
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Monday, September 14, 2020

FinCEN final rule subjects all banks to anti-money laundering requirements

By Lisa M. Goolik, J.D.

FinCEN is revising its regulations implementing the USA PATRIOT Act to close the regulatory gap between banks with a federal regulator and those without.

The Financial Crimes Enforcement Network is issuing a final rule removing the anti-money laundering program exemption for banks that lack a federal functional regulator, including, but not limited to, private banks, non-federally insured credit unions, and certain trust companies. The final rule requires minimum standards for anti-money laundering (AML) programs for banks without a federal functional regulator to ensure that all banks, regardless of whether they are subject to federal regulation and oversight, are required to establish and implement anti-money laundering programs, and extends customer identification program requirements and beneficial ownership requirements to those banks not already subject to the requirements. The final rule takes effect on Nov. 16, 2020. Banks must comply with the rule by March 14, 2021.

AML requirements. Section 352 of the USA PATRIOT Act requires financial institutions to establish AML programs that, at a minimum, include: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs. The Act authorizes FinCEN, in consultation with the appropriate federal functional regulator to prescribe minimum standards for AML programs.

In addition, section 326 of the Act requires FinCEN to prescribe regulations that require financial institutions to establish procedures for account opening that, at a minimum, include: (1) verifying the identity of any person seeking to open an account, to the extent reasonable and practicable; (2) maintaining records of the information used to verify the person’s identity, including name, address, and other identifying information; and (3) determining whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency. These programs are referred to as Customer Identification Programs.

Lastly, section 312 of the USA PATRIOT Act requires each U.S. financial institution that establishes, maintains, administers, or manages a correspondent account or a private banking account in the United States for a non-U.S. person to subject such accounts to certain AML measures. In particular, financial institutions must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to enable the financial institution to detect and report instances of money laundering through these accounts. In addition to general due diligence, the Bank Secrecy Act also establishes minimum due diligence requirements for private banking accounts for non-U.S. persons. Specifically, a covered financial institution must take reasonable steps to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, private banking accounts, as necessary to guard against money laundering and to report suspicious transactions.

Closing the gap. While most banks are subject to the requirements, FinCEN used its authority in 2002 to temporarily defer the requirement to establish an AML program for private bankers and other financial institutions not subject to regulation by a federal functional regulator. While FinCEN has incrementally eliminated the temporary exemption and promulgated AML program rules for certain other institutions, including insurance companies, certain loan or finance companies, and dealers in precious metals, precious stones, or jewels, FinCEN determined that the gap in AML coverage between banks with and without a federal functional regulator "presented a vulnerability to the U.S. financial system that could be exploited by bad actors."

As a result, the final rule revises FinCEN’s implementing regulations to remove the exemption for private bankers, the broader exemption for banks that lack a federal functional regulator, and the exemption for persons subject to supervision by a state banking authority. FinCEN said that it expects that uniform regulatory requirements for all banks will reduce the opportunity for criminals to seek out and exploit banks subject to less rigorous AML requirements.

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