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From Banking and Finance Law Daily, August 24, 2016

Bank Secrecy Act requirements proposed for banks without federal regulators

By Richard A. Roth, J.D.

The Financial Crimes Enforcement Network is proposing to require banks that do not have federal functional regulators to institute customer identification and anti-money laundering programs and satisfy account beneficial owners identification duties. The agency estimates that approximately 625 financial institutions that currently are exempt from comparable rules for federally regulated financial institutions would be covered by the proposed rules.

FinCEN says its analysis has revealed five types of financial institutions that are covered by the regulatory definition of "bank" (in 31 CFR 1010.100(d)) but are not currently subject to all of the Bank Secrecy Act obligations:

  1. state-chartered nondepository trust companies;
  2. state-chartered credit unions that are not federally insured;
  3. private banks;
  4. state-chartered banks and savings associations that are not federal insured; and
  5. international banking entities.

It is difficult to count precisely the number of institutions that would be covered by the proposal, FinCEN concedes. Also, the numbers of some types are small—there appear to be no more than a dozen covered state-chartered banks and thrifts, while there is "at least one private bank." However, there may be additional companies that the regulation would consider to be banks that do not have federal regulators, the proposal notes. In fact, the proposal asks for information on covered banks that FinCEN has not identified.

New requirements. According to FinCEN, banks without federal functional regulators are just as vulnerable to being used for money laundering or terrorism financing as banks with federal regulators. Uniform requirements would make it more difficult for criminals to locate banks with less rigorous AML programs.

Most of the banks covered by the proposal are likely already to have some form of AML program, FinCEN believes, so the rule would not be unduly burdensome.

For reasons of system vulnerability and regulatory consistency, all banks should have customer identification and beneficial ownership identification programs, according to FinCEN.

The proposal would take effect chiefly by removing exemptions that currently benefit banks without federal regulators, so it would bring about a consistent regulatory approach for all banks regardless of what agency is responsible for their regulation. Since the expectation that BSA programs would be appropriate for each bank’s specific risk profile is maintained, the specific programs adopted by banks without federal regulators might not be the same as those adopted by other banks.

Currently applicable obligations. Banks without federal functional regulators are not exempt from all BSA duties, the proposal notes. They currently are required to file currency transaction reports and suspicious activity reports. Also, they are prohibited from allowing foreign shell banks to have correspondent accounts and they must obtain information on the ownership of foreign banks.

Comments on the proposal are due by Oct. 24, 2016.

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