Table of Contents
- FinCEN Regulations & Requirements
- FinCEN Beneficial Ownership Final Rule
- What are the Requirements in the FinCEN Final Rule?
- FinCEN Bank Secrecy Act: What It Means
- FinCEN Issues Final Rule to AML Program
FinCEN Regulations & Requirements
FinCEN requirements: FinCEN regulations function under the Bank Secrecy Act (BSA) of 1970, amended by Title III of the USA PATRIOT Act of 2001. The BSA is the US's first initiation and most comprehensive Federal AML/CFT statute. Under the BSA, the Secretary of the Treasury is authorized to issue regulations that require financial institutions such as banks and others to take a number of precautions against money laundering. This would include the establishment of AML programs within the institutions, filing reports that are suspected to trigger a high degree in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. For FinCEN regulations, the Director is authorized by the Secretary of the Treasury to implement, administer, and enforce compliance with the BSA and associated regulations.
Data reported under FinCEN regulations is to be collected, analyzed, and disseminated along with and other related data, in support of government and financial industry partners at the Federal, State, local, and international levels as authorized by the Congress. FinCEN does the following in order to fulfill FinCEN regulations toward the detection and deterrence of financial crime:
- It issues and interprets regulations that are authorized under the Act
- It applies compliance with those regulations
- It supports, coordinates, and analyzes data regarding compliance examination functions delegated to other Federal regulators
- It manages the collection, processing, storage, dissemination, and protection of data filed under FinCEN's reporting requirements
- It maintains a government-wide access service to FinCEN's data and networks users with overlapping interests
- It supports law enforcement investigations and prosecutions
- It synthesizes data to recommend internal and external allocation of resources to areas of greatest financial crime risk
- It shares information and coordinates with foreign financial intelligence unit (FIU) counterparts on AML/CFT efforts
- It conducts analysis to support policymakers - law enforcement, regulatory, and intelligence agencies, FIUs, and the financial industry
FinCEN Beneficial Ownership Final Rule
FinCEN beneficial ownership final rule: FinCEN issued its long-awaited FinCEN beneficial ownership final rule on May 5th, 2016. It was with respect to customer due diligence (CDD) requirements and required insured financial institutions to adopt due diligence procedures to identify and verify a legal entity customer’s beneficial owner at the time their new account is made. The FinCEN beneficial ownership final rule became applicable to all covered financial institutions by May 11, 2018.
Issued by the Obama administration as part of reforms intended to counter money laundering, corruption, and tax evasion, the FinCEN beneficial ownership final rule was initially proposed by FinCEN in 2014 after advance notice of proposed rulemaking was issued in 2012. The duration that was for a long period for the rulemaking process reflects the significant legal, compliance, and operational challenges related to FinCEN requirements reporting along with the two-year implementation period.
What are the Requirements in the FinCEN Final Rule?
FinCEN requirements: The final rule applies to covered financial institutions:
- Depository institutions which include - insured and commercial banks, savings associations, credit unions insured federally, trust companies regulated federally, US agencies & branches of foreign bank
- Securities broker-dealers
- Mutual funds
- Futures commission merchants and introducing brokers (IB) in commodities
Under FinCEN requirements, financial institutions are required to establish and maintain written procedures for the identification and verification of beneficial owners of legal entity customers.
FinCEN Bank Secrecy Act: What It Means
FinCEN Bank Secrecy Act: The Currency and Foreign Transactions Reporting Act of 1970, which legislative framework is commonly referred to as the FinCEN Bank Secrecy Act (BSA), requires that financial institutions assist the US government agencies to help detect and prevent money laundering. Records of cash purchases of negotiable instruments have to be maintained by the FIs. They are also required to file reports of cash transactions exceeding $10,000 and report suspicious activity that might signify money laundering or other criminal activities. The FinCEN Bank Secrecy Act was passed by Congress in 1970 and is sometimes referred to as an AML law or jointly as BSA/AML. Several AML acts since then, including the USA PATRIOT Act have been enacted and issued to the present day to amend and strengthen the FinCEN Bank Secrecy Act.
FinCEN Issues Final Rule to AML Program
FinCEN final rule: FinCEN final rule issued and established anti-money laundering (AML) program requirements on September 15, 2020. For banks ‘lacking a federal functional regulator,’ a category which includes private banks, insured credit unions, and certain trust companies. Up until now, these institutions had been covered by an exemption from the AML program requirements in the BSA. Although they were subject to a number of other BSA requirements, including the filing of CTRs and SARs. The FinCEN final rule subjects financial institutions to the same customer due diligence obligations that FinCEN imposed on federally-regulated banks in its 2016 CDD rule. Non-federally regulated banks are also required to implement customer identification programs (CIPs).
The FinCEN final rule establishes parallel AML program obligations for banks without a federal functional regulator which contains the same requirements as federally-regulated banks. Except for a provision that requires federally-regulated banks to comply with the requirements of their federal banking regulators. In particular, now, with the FinCEN final rule, banks without a federal functional regulator will be required to maintain an AML program that includes:
- Internal controls to assure ongoing compliance
- Independent testing for compliance
- Designation of an MLRO for coordinating and monitoring compliance
- Training of appropriate personnel
- Risk-based procedures for ongoing customer due diligence, which includes, understanding the nature and purpose of customer relationships for developing a customer risk profile, ongoing monitoring, and reporting of suspicious transactions, customer information needs to be updated based on the changes that affect customer risk
- A CIP to verify the identity of its customers
- Verification of the beneficial ownership of legal entity customers
The FinCEN final rule became effective recently, on November 16, 2020, and will be expected to comply starting on March 15, 2021. Banks without a federal functional regulator long have been required to file CTRs and SARs and to keep certain records, according to FinCEN. Along with this, certain banks without a federal regulator, which include private banks, non-federally insured credit unions, and trust companies, have for some time been required to have CIPs, justified FinCEN, when asked about the shorter timeframe. It reasoned that because it is difficult to comply with these obligations along with state law, without having some form of program, and bringing such programs would not be burdensome in line with the AML program requirements that apply to federal banks.
Under FinCEN requirements, it is also required that these obligations be extended to non-federal banks because law enforcement partners had provided evidence of bad actors taking advantage of the discrepancy in AML coverage. This includes “multiple investigations related to terrorist financing, espionage, narcotics trafficking, and public corruption.” The examination authority over such institutions has been delegated to the Internal Revenue Service, by FinCEN.
Apart from these FinCEN requirements, many FIs or “banks lacking a Federal functional regulator” have already been maintaining AML programs modeled on BSA regulations applicable to federally-regulated banks. They are positioned well to adjust to the new requirements without any disruption but should review their programs to confirm they cover all required elements and are being implemented effectively. Any institution that hasn’t been doing so will have to recruit staff and build effective programs over the next six months. This rule may be particularly impactful for the electronic currency industry - where state-chartered trust companies and international financial entities, both without a federal functional regulator have been popular choices for virtual currency businesses.
Read further to know more about RegTech that can enhance your company’s regulatory processes, or about other govt bodies that work towards money laundering, such as the Financial Action Task Force (FATF).
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