FinCEN Delays UBO Requirements for Automatic Renewals

On May 16, 2018 - just five days after the new customer due diligence (CDD) rules requiring the identification and verification of ultimate beneficial owners (UBOs) went into effect - FinCEN issued a temporary ruling that delays parts of the new requirements for financial institutions.  FinCEN’s ruling, known as FIN-2018-R002, provides a 90-day limited exception for financial institutions in regards to products and services that automatically rollover or renew, such as loan accounts and certificates of deposit (CDs), that were established before the May 11, 2018 deadline for the new rules.  This temporary exception does not apply to automatic renewals on accounts that are established after the May 11, 2018 applicability date.

Understanding the Challenge with Automatic Renewals

For years, financial institutions have established automated procedures for certain accounts with automatic renewals (such as CDs) in order to continue the banking relationship with their customers.  As accounts that were automatically renewing were for existing customers, financial institutions have not traditionally had a reason to review these accounts from a BSA perspective, as the account customer was considered an existing customer, meaning they were exempt from customer identification program (CIP) requirements.

On April 3, 2018, FinCEN release a second set of Customer Due Diligence Frequently Asked Questions which explained their expectations for obtaining UBO information for each loan and CD renewal after the implementation date of May 11, 2018.  Specifically, the last minute guidance explains that FinCEN was going to require updated UBO information due to the fact that the account was considered a new formal banking relationship. This guidance can be found in FAQ 12 as follows:

Question 12: Collection of beneficial ownership information: Product or service renewals

Q. Are financial institutions required to have their legal entity customers certify the beneficial owners for existing customers during the course of a financial product renewal (e.g., a loan renewal or certificate of deposit)?

A. Yes. Consistent with the definition of “account” in the CIP rules and subsequent interagency guidance, 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. Covered financial institutions are required to obtain information on the beneficial owners of a legal entity that opens a new account, meaning (in the case of a bank) for each new formal banking relationship established, even if the legal entity is an existing customer. 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. In the case of a loan renewal or CD rollover, because we understand that these products are not generally treated as new accounts by the industry and the risk of money laundering is very low, if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or CD is outstanding.

This last minute guidance left many banks and credit unions scrambling to create new policies and procedures to comply with this eleventh hour ruling which was a significant change in existing practices for most financial institutions.  Therefore, FIN-2018-R002 now provides a “90-day limited exceptive relief to covered financial institutions from the obligations of the Beneficial Ownership Requirements for Legal Entity Customers...with respect to certain financial products and services that automatically rollover or renew...and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.

Applicability to Financial Institutions

The problem with this ruling is that it comes after the implementation date of May 11, 2018 as financial institutions have already created processes and procedures to comply with the new rules.  In addition, FinCEN stated in FIN-2018-R002 that “further consideration of this issue is appropriate,” implying that an additional ruling on this topic may be provided in the near future.

Therefore, financial institutions must determine how they plan to utilize this guidance.  At this point, some financial institutions may decide to not make any changes to their recently implemented procedures for loan and CD renewals as another last minute change could cause logistical and organizational challenges, especially if FinCEN is considering yet another ruling on this topic in the near future.

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