Exercising “exceptive” relief authority, FinCEN has extended permanent relief from the beneficial ownership requirements of its new Customer Due Diligence (CDD) rule to existing autorenewing CDs and safe deposit boxes, as well as existing autorenewing commercial lines of credit and credit cards that do not require underwriting review and approval. FinCEN reasoned that these products pose such a low risk for money laundering and terrorist financing activity that the benefits of requiring the collection of this information does not outweigh the impacts of compliance on financial institutions and their customers. Specifically, institutions need not treat rollovers or renewals of such products as “new accounts” requiring the collection of the beneficial ownership elements of the CDD rule, whether or not the initial accounts were established prior to the rule’s May 11, 2018 effective date.
FinCEN previously issued temporary relief to autorenewing CDs and loan products established prior to May 11, 2018, and in a second release extended this relief through September 9, 2018. The new release both extends this treatment indefinitely and expands it to include certain safe deposit box rentals, such that the exception applies now to any of the following occurring on or after May 11, 2018:
- A rollover of a CD, defined as a deposit account that has a specified maturity date, prior to which funds cannot be withdrawn without the imposition of a penalty, and which does not permit the customer to add funds;
- A renewal, modification, or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval;
- A renewal, modification, or extension of a commercial line of credit or credit card account (e.g., setting a later payoff date) that does not require underwriting review and approval; and
- A renewal of a safe deposit box rental (e.g., upon the automatic deduction of the rental fee as agreed-upon between a bank and its customer).
FinCEN is careful in this September 7, 2018, release to explain that it does not relieve institutions of the obligation to collect and verify the identity of beneficial owners of legal entity customers where the initial account opening of such accounts occurs on or after May 11, 2018. It does mean, however, that institutions need not collect beneficial ownership information for certain older accounts of the types described above (those opened prior to May 11, 2018) solely because they are rolled over or renewed.
Some common scenarios to consider in the wake of this relief:
- Autorenewing CDs commonly feature “grace periods” (e.g., 10 days after maturity) during which depositors may withdraw funds without penalty. This period is expressly permitted by Regulation D for a deposit which still may be classified as a “time deposit.” If a customer established such a CD prior to May 11, 2018 and attempts to exercise a withdrawal during a grace period thereafter, can the institution permit this without the collection of beneficial ownership information? The technical answer to this question depends on what the purpose of the withdrawal is – if the funds are transferred outside the institution because the customer has instructed the institution to close the account, there is probably no obligation to collect beneficial ownership information since no “new account” has been established there. If, however, the customer wants to transfer funds into a money market account or CD of a different nature at the original institution, then new account obligations apply.
- Many commercial depositors that maintain safe deposit boxes with an institution will maintain other accounts with that institution. In light of this new authority, if all of these accounts were established prior to May 11, 2018, then an institution would not necessarily have beneficial ownership information on file for that customer for some time, even if a safe deposit rental is autorenewing. If such a customer were to add a new account, the institution will be required to collect this information. It would appear that FinCEN and the banking regulators do not expect institutions to associate this information with all of the customer’s other accounts there, even if the legacy accounts do not implicate the rule directly, but it seems inconsistent with the CDD rule not to do so.
- Revolving lines of credit are often extended past a stated maturity date on the same basic terms conditional upon the addition of a guarantor, or the pledge of additional security. Is this kind of renewal covered by FinCEN’s exception? Probably not. FinCEN describes loans that are subject to “automatic” renewal or extension, or where only modification is the extended maturity date, require no underwriting by the lender and no action on the part of the customer in order for that renewal, modification, or extension to occur.
FinCEN previously opined in its April 3, 2018, Frequently Asked Questions guidance that institutions could comply with the new rule’s beneficial ownership requirement as applied to such products by including language in account opening documents by which customers represent that they would notify the institution in the event of any change in beneficial ownership. This language is seemingly still of value for other purposes, but it would appear to be moot for purposes of rollover or renewal events, and we would expect FinCEN to amend Q12 of these FAQs in light of this newest determination.
As a reminder, ongoing risk-based CDD and sanctions screening obligations continue to apply, even if an account’s rollover or renewal qualifies for this exception. The addition of a new signer around this same time, for example, may warrant the collection of beneficial ownership information independent of whether or not the rollover or renewal is treated as a “new account.”