On September 28, 2018, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively the Federal Banking Agencies or FBAs), with the concurrence of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), issued an interagency order (the Order) exempting premium finance lenders from the requirements of the customer identification program (CIP) rules imposed by the Bank Secrecy Act (BSA). The exemption applies to banks and their subsidiaries subject to the FBAs’ jurisdiction who offer loans to commercial customers (i.e., corporations, partnerships, sole proprietorships, and trusts) to facilitate purchases of property and casualty insurance policies (herein referred to as premium finance loans or premium finance lending). The FBAs based their exemption on FinCEN’s conclusion that certain structural aspects of such loans make them a low risk for money laundering or terrorist financing, and also on their conclusion that such lending did not present a safety or soundness issue.
The structural aspects of these loans that make them low risk include (1) the fact that loan proceeds typically are remitted to the insurance company directly or through a broker or agent, and not to the borrower; (2) property and casualty insurance policies have no investment value; and (3) borrowers cannot use these accounts to purchase other merchandise, deposit or withdraw cash, write checks, or transfer funds.
The FBAs found no safety and soundness issue because: (1) in the event of default by the borrower, the insurance company is legally obligated to return unearned premiums to the lender; and (2) most bank-affiliated lenders will finance premiums only for insurance issued by creditworthy insurers.
The order builds on FinCEN’s previous determination, in its 2016 customer due diligence rule, to exempt premium finance accounts from the requirement to collect beneficial ownership information on legal entity customers based on the low money laundering risk associated with such lending. The continued application of CIP requirements to banks and bank-affiliated premium finance companies for such accounts despite FinCEN’s finding of negligible money laundering risk put these companies at a competitive disadvantage against non-bank affiliated premium finance lenders that are not subject to regulation under the BSA. In particular, such entities are not required to obtain and verify customer identifying information such as social security numbers, allowing them to process loan requests more quickly and less intrusively. This led a consortium of bank-affiliated premium finance lenders to petition FinCEN for a change in the rules to harmonize its approach to this issue across both CIP and beneficial ownership rules. Although it took the FBAs more than two years to respond to this request with an exemption, it shows a welcome and thoughtful flexibility in the administration of the BSA and related AML rules that could provide a useful model in other contexts. It also appears to represent only the second time that a categorical exemption to CIP rules has been granted. (FinCEN previously granted an exemption for certain state address confidentiality programs).
Practical Considerations
The exemption applies only to CIP requirements, and banks must continue to comply with various other BSA requirements for such accounts, including the requirement to file suspicious activity reports (SARs). Accordingly, although their obligations will be easier than for typical accounts, banks should continue to provide in their AML programs for the collection of basic information as needed to establish a customer risk profile, to understand the nature and purpose of such accounts, and to update customer information on a risk-basis, so as to allow them to file SARs or take other action when necessary. Automated commercial diligence services likely will be helpful in this regard.