More than two years after the Financial Crimes Enforcement Network (FinCEN) exempted covered financial institutions (FIs) from the beneficial ownership requirements as to accounts used only to finance commercial insurance premiums for property and casualty policies, provided the payments are made directly by the FI to the insurance provider or broker, the Federal Banking Agencies (FBAs), by Order and with FinCEN's concurrence, exempted these same transactions from the Bank Secrecy Act's Customer Identification Program (CIP) rules.
This exemption recognizes the lack of money laundering risk in FIs extending loans to commercial customers to facilitate the purchase of property and casualty insurance policies ("premium finance lending" or "premium finance loans"), appreciates the lack of ability to put the insurance premium loans to an illicit use, and removes a substantial compliance burden from FIs.
The result will be a market that functions more efficiently and effectively, allowing FIs to concentrate AML resources – a substantial burden on any FI – where needed and more appropriate.
The anti-money laundering (AML) rules for banks normally require a bank to have a written CIP, as part of an AML compliance program that has at least the following requirements:
- Customer information: Name, date of birth (for an individual), address (residential or business for an individual, principal place of business, or other physical location for a business), and either a tax identification number (for a U.S. person (individual or business) or passport number or foreign government-issued document (for non-U.S. persons).
- Customer verification: Procedures for verifying the identity of the customer through documents, non-documentary methods, or a combination of the two. These must include procedures for responding to circumstances when the FI cannot "form a reasonable belief that it knows the true identity of a customer."
- Records of customer information and verification procedures.
- Comparison of customer identities with information on Office of Foreign Assets Control and similar State Department lists.
- Notice to the customer that verification information is being requested.
Following the successful request by a number of FIs that FinCEN exempt the premium finance lending business from the beneficial ownership requirements of the CDD rule (see link, above), a group of banks submitted a request to FinCEN and the FBAs to exempt FIs from the CIP requirements as well. The requesting banks used the provisions of 31 CFR 1020.220(b), which gives the "appropriate Federal functional regulator, with the concurrence of the Secretary [whose authority has been delegated to FinCEN]" the authority, by "order or regulation," to "exempt any bank or type of account from the requirements of this section."
In reaching its decision, the FBAs reviewed the AML requirements applicable to FIs, dissected the premium finance lending industry, analyzed the request for an exemption, and reached the following conclusions:
- Premium finance loans, as FinCEN concluded in the CDD process, present a low risk of money laundering because the loan proceeds are remitted either directly or indirectly (through an agent/broker) to the insurance company; property and casualty insurance policies have no investment value; and borrowers cannot use the loan accounts for any purpose other than to pay insurance premiums.
- FinCEN's previous exemption of commercial property and casualty insurance policies from the Bank Secrecy Act (BSA) compliance program rule for insurance companies supports a corresponding exemption for FIs.
- An exemption is consistent with safe and sound banking practices. The exemption will not result in practices contrary to "generally accepted standards of prudent banking operation" and will not give rise to "abnormal risk or loss or damage to an institution."
The FBAs concluded with a statement that describes the premium finance loan industry while cautioning FIs to maintain certain standards in approving these loans, with the implication that should the standards change, the FBAs will revisit the CIP exemption:
- Premium finance loans are described as a form of secured lending, such that should a borrower default, the insurance company must return any unearned premium to the lender;
- Lenders require insurance companies involved to have a satisfactory credit rating; and
- The current structural characteristics of the industry present a low money laundering risk and thereby pose little safety and soundness risk to the banking industry.
D. E. (Ed) Wilson, Jr. and Michael C. Davis are partners in the Washington, DC office of Venable LLP. Ed is a former U.S. Treasury official whose practice includes anti-money laundering compliance. Michael's practice focuses largely on insurance matters.