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FinCen Updates Customer Due Diligence Requirements

Modern entertainment, whether it be books or movies,  oftentimes grapple with the issues of “who are you?” As a story line develops the audience is kept guessing as characters turn out to have different motivations or identities than what they were first perceived to have. Political thrillers oftentimes involve agents of shadowy groups behind which the true masterminds operate. How much effort will it take to reach the truth? FinCEN has recently come out with some proposed guidance that addresses this issue in the context of the legal entities that financial institutions do business with.

In a proposed rulemaking published in late July, FinCEN proposed a new regulatory requirement to identify beneficial owners of legal entity customers. Going forward, the essential elements of customer due diligence will include: (i) identifying and verifying the identity of customers; (ii) identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities); (iii) understanding the nature and purpose of customer relationships; and (iv) conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

The first element is already something which financial institutions address as part of their customer identification program (“CIP”). The second element is the subject of the proposed rulemaking. In order to identify the beneficial owner, a covered financial institution must obtain a certification from the individual opening the account on behalf of the legal entity customer (at the time of account opening). The certification form  requires the individual opening the account on behalf of a legal entity customer to identify the beneficial owner(s) of the legal entity customer by providing the beneficial owner’s name, date of birth, address and social security number (for U.S. persons). Significantly, the rule also requires financial institutions to verify the identity of the individuals identified as beneficial owners on the certification form. The procedures for verification are to be identical to the procedures applicable to an individual opening an account under the existing CIP rules.

The proposed definition of “beneficial owner” includes two independent prongs: an ownership prong (clause (1)) and a control prong (clause (2)). A covered financial institution must identify each individual under the ownership prong (i.e., each individual who owns 25 percent or more of the equity interests), in addition to one individual for the control prong (i.e., any individual with significant managerial control). If no individual owns 25 percent or more of the equity interests, then the financial institution may identify a beneficial owner under the control prong only. If appropriate, the same individual(s) may be identified under both criteria.

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Comments on Proposed Rules for Georgia Fairness Hearings

On May 9, 2014, the Georgia Securities Division issued a proposed rule to create a formal process for fairness hearings to be conducted by the Georgia Commissioner of Securities.  The proposed rule would establish procedures for administrative hearings to determine the fairness of certain mergers and other business combinations in which securities are issued.  If the Commissioner determines that the terms of the proposed transaction are fair to the shareholders receiving securities, the issuer would be able to claim an exemption from the registration requirements of the federal Securities Act of 1933 for the securities to be issued.  Specifically, Section 3(a)(10) provides an exemption from the registration requirements of the federal Securities Act for securities issued in a transaction determined to be fair pursuant to a fairness hearing by a governmental authority.  The exemption from registration with the SEC is particularly valuable for companies that are not currently subject to the periodic reporting requirements under the Securities Exchange Act of 1934.

In our view, fairness hearings conducted by the Georgia Commissioner will make it easier for private bank holding companies to use stock to fund the purchase price for acquisitions.  Not only will the hearing process allow companies to avoid filing a Form S-4 registration statement for the acquisition with the SEC, it will also allow the companies to avoid triggering the significant ongoing expense associated with the periodic reporting and disclosure requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act.  We have seen circumstances in which the registration and ongoing reporting requirements have discouraged a company from using stock as a currency for an acquisition.

States such as California and North Carolina have conducted state fairness hearings similar to those described in the proposed rule for some time.  Following the re-write of the Georgia Securities Act in 2008, Georgia has only conducted one fairness hearing, which involved the merger of two financial institutions in late 2013. The proposed rule would provide more clarity and certainty with respect to the fairness hearing process in Georgia.

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Proposed Rule for Georgia Merchant Acquirer Limited Purpose Bank

The Georgia DBF recently published its proposed rules (the “Rule”) for implementing the Georgia Merchant Acquirer Limited Purpose Bank Act. The Act was adopted 2012 to create a special purpose state-chartered bank that would allow companies to enter card networks directly rather than renting a Bank Identification Number (“BIN”) from a financial institution sponsor. Existing networks currently require that members be “eligible” for FDIC deposit insurance coverage in order to obtain a BIN and currently the only institutions that are eligible for such coverage are state and federal owned financial institutions that accept demand deposits. The Act addresses that issue by only authorizing a MALPB to accept deposits from a corporation that owns majority of the shares of the MALPB. It may not operate in any manner that attracts deposits from the general public and no deposit can be withdrawn by check or similar means for payment to third parties or others. Since the MALPB will not actually hold any demand deposits is it will not be subject to examination by the FDIC.  A MALPB will end up only being regulated and examined by the DBF. This creates some unique regulatory challenges for the DBF that it attempts to solve in some creative ways.

The Rule is 43 pages long and is open for comments through September 9, 2013.  Should the DBF receive a large number of substantive comments it reserves the right to withdraw the proposed Rule and submit a revised version at a later date.

Highlights are as follows:

Scope of permitted activities. Unless otherwise limited by the terms of a conditional approval, an MALPB would be authorized to carry out the following functions: obtaining and maintaining membership in one or more payment card networks; signing up and underwriting merchants to accept payment card network branded payment cards; providing the means to authorize valid card transactions at client merchant locations; facilitating the clearing and settlement of the transactions through a payment card network; providing access to one or more payment card networks to the MALPB’s affiliates, customers, or customers of affiliates; sponsoring the participation of the MALPB affiliates, customers, or customers of its affiliates in one or more payment card networks; statement generation and other information reporting for client merchants; training and technical assistance for merchants; terminal support; encryption servicing; and chargeback processing. A MALPB would be able to engage in certain other incidental activities only with the prior consent of the DBF.

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CFPB to Amend Remittance Transfer Rules

December 5, 2012


On November 27, 2012, the CFPB announced that it intends to propose adjustments to its rules on international remittances, as well as briefly extend the effective date of the rule. A notice of proposed rulemaking is expected in December, and the bureau stated it intends to “fast track” the rule changes so that the new implementation date will be sometime in the spring of 2013. The rules are currently slated to become effective on February 7, 2013.

In its blog post regarding these plans, the CFPB acknowledged that some entities covered by the rules have identified issues that pose “practical challenges” in implementation. The bureau’s proposed changes will address:

  • Errors resulting from incorrect account numbers provided by consumers sending remittance transfers. The bureau intends to propose that where the remittance transfer provider can demonstrate that the consumer provided incorrect information, the provider must attempt to recover the funds but will not be liable for the funds if it is unable to do so.
  • Disclosure of certain third party fees and foreign taxes. The bureau’s proposal will provide additional flexibility for these disclosure requirements, including allowing remittance transfer providers to base fee disclosures on published bank fee schedules. The bureau also will provide further guidance on foreign tax disclosures where tax rates may be affected by certain variables.
  • Disclosure of sub-national foreign taxes. The bureau plans to propose that the obligation for remittance transfer providers to disclose foreign taxes imposed on remittance transfers is limited to taxes imposed at the national level, and does not include taxes imposed by foreign sub-national jurisdictions.

The CFPB’s bulletin regarding its plans available here, and the bureau’s related blog post is available here.

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CFPB Focusing on General Purpose Reloadable Prepaid Cards

As a precursor to further regulation of general purpose reloadable (GPR) cards, the Consumer Financial Protection Bureau (CFPB) is seeking responses to 10 questions before July 23, 2012.

The CFPB recently released an advance notice of proposed rulemaking (ANPR) seeking comments, data and information regarding GPR cards, including questions regarding costs, benefits and risks to consumers. The ANPR is the first step in the long-anticipated process of regulation by the CFPB over “open loop” or “general use” prepaid cards.

While the ANPR specifically discusses “cards,” other mechanisms that access a prepaid financial account are also encompassed, including key fobs and cell phone apps. The ANPR is focused on GPR cards which the CFPB defines loosely as a general use prepaid card “issued for a set amount in exchange for payment made by a consumer” that is reloadable by the consumer, “meaning the consumer can add funds to the card.”  The ANPR is not seeking information about corporate-funded cards, closed-loop prepaid cards, traditional debit cards, non-reloadable cards, payroll cards, EBT cards or gift cards.

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FinCEN Seeks Comments on Potential New Customer Due Diligence and Beneficial Ownership Regulations

On February 29, 2012, FinCEN released an advance notice of proposed rulemaking on customer due diligence and beneficial owners, proposing to make a customer due diligence obligation explicit for ALL customers (to “clarify, consolidate and harmonize” the federal banking agencies’ expectations) and extending the requirement to collect (and possibly verify) beneficial owner information for most or all customers as well.

FinCen’s advance notice of proposed rulemaking (ANPRM), seeks public comment on a range of questions regarding the development of a customer due diligence (CDD) regulation that would “(i) codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations, and (ii) establish a categorical requirement for financial institutions to identify beneficial ownership of their accountholders, subject to risk-based verification and pursuant to an alternative definition of beneficial ownership.” Comments received in response to the ANPRM will likely be influential in FinCEN’s development of a more formal and detailed proposed rule on the topic.

FinCEN is initially considering a CDD rule to cover banks, broker dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, and thus the ANPRM is focused on those institutions. The scope of the ANPRM, however, includes all industries subject to FinCEN’s anti-money laundering (AML) program requirements. FinCEN believes that a CDD rule may be appropriate for all financial institutions under its purview and will consider extending a CDD rule to other types of institutions in the future. Thus, FinCEN is specifically requesting comments from all other financial institutions covered by FinCEN regulations as well, including providers of prepaid access and other types of money services businesses (MSBs), insurance companies, casinos, non-bank mortgage lenders and originators, and dealers in precious metals, stones and jewels.

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FinCEN issues Proposed Rulemaking Regarding Cross-Border Reporting of Prepaid Cards

FinCEN has released a proposed rulemaking that would require consumers holding prepaid cards that aggregate to more than $10,000 in value, to report such prepaid cards when crossing into or out of the U.S., in the same way they currently report cash, travelers checks and other monetary instruments. The notice of proposed rulemaking (NPRM) would add “tangible prepaid access devices” to the list of currency and monetary instruments that must be reported when transported, mailed or shipped into or out of the United States in aggregate amounts over $10,000.

Currently persons crossing into or out of the US must report cash and monetary instruments exceeding $10,000, using FinCEN Form 105, the Report of International Transportation of Currency or Monetary Instruments known as the “CMIR” form. The NPRM’s inclusion of tangible prepaid access devices as a type of monetary instrument applies only to the $10,000 CMIR filing obligation; it does not extend to other requirements, such as the $3,000 recordkeeping requirement applicable to monetary instruments.

Interestingly, however, the NPRM also acknowledges that FinCEN is only authorized to extend CMIR reporting to items similar to U.S. currency based on the legislative purpose behind BSA reporting, that is to facilitate “the traceability of currency and its equivalents and eliminating anonymous international flows of money.” To the extent prepaid cards are not the equivalent to currency, and do not provide for “anonymous international flows of money” arguably the extension of CMIR reporting should not apply.

This proposal appears to have only a limited direct impact on prepaid card issuers and program managers. However, it will impact cardholders directly, possibly with negative consequences for customer experience and satisfaction. The proposal may result in holders of prepaid cards feeling discriminated against and/or stigmatized as compared to holders of debit and credit cards, who do not need to report their associated funds nor their access to lines of credit. It may also result in increased inquiries from law enforcement to designated providers of prepaid access and/or issuing banks about the value of specific cards crossing the border as well as increased website traffic and calls to customer service from individuals checking card balances to determine whether reporting is required and for what amount.

What is a “tangible prepaid access device”?

The term “tangible prepaid access device” is defined as “any physical item that can be transported, mailed, or shipped into or out of the United States and the use of which is dedicated to obtaining access to prepaid funds or the value of funds by the possessor in any manner without regard to whom the prepaid access is issued.” (Emphasis added.) The value of a tangible prepaid access device for reporting purposes would be the amount of funds available to which the device provides access, at the time it is transported, mailed or shipped.

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