FinCEN Seeks Comment on Cost Analysis of CDD Proposal (Jan. 12, 2016)
A proposed rule that would place new Customer Due Diligence (CDD) requirements on financial institutions—including prepaid issuers—has taken a step forward with the release of two new documents estimating the impact and cost the rule would have on regulated institutions. FinCEN initially proposed the CDD requirements in August 2014, publishing a Notice of Proposed Rulemaking (NPRM) in the Federal Register. The new rule would require financial institutions to identify the “beneficial owners” of their legal entity customers to increase safeguards against money laundering, fraud and terrorist financing. In its notice, FinCEN defined “beneficial owners” as individuals holding more than 25 percent of the equity in the entity. At the time of the NPRM, FinCEN declined to issue an Initial Regulatory Flexibility Analysis (IRFA) on the proposed rule, instead certifying that the rule would was “not expected to have a significant economic impact on a substantial number of small entities.” However, during the comment period following the NPRM, many respondents argued that the rule would in fact be more costly than FinCEN had estimated.
In response to those comments, FinCEN last month released a formal IRFA, which upheld the agency’s initial claim that the proposed rule would not significantly impact many small entities. The IRFA addressed three specific areas referenced often in the responses to the proposed rule: additional time at account opening; employee training; and IT updates. Basing its findings on telephone interviews with “several financial institutions that had submitted comments, including three small financial institutions,” FinCEN concluded that none of the cost increases in those areas would be overly burdensome for small institutions, adding that many aspects of CDD procedures already are implicit in AML requirements, and thus should generate little if any additional cost. Along with the IRFA, FinCEN released a preliminary Regulatory Impact Assessment (RIA) with statistical analysis on the costs and benefits of the proposed rule, concluding that the net benefits of reduced crime and terrorist activity stemming from the CDD requirements would equal or outweigh any increased costs.
The proposed rule could prove problematic for prepaid providers. The NPRM was not clear on which entities are required to disclose beneficial ownership, some industry observers suggest. For instance, while a prepaid program manager opening a new account with an issuing bank would be covered by the requirement, it’s unclear whether the program manager’s own customer—an employer opening an account for payroll cards, for instance—would also be required to disclose beneficial ownership. The rules also could place undue burden on low-risk products, such as gift cards and other non-reloadable products, should such products fall under the CDD requirements.
FinCEN is seeking input on the IRFA and RIA, including suggestions for less burdensome alternatives it should consider. Comments are due Jan. 25, 2016, and may be submitted via the Federal E-rulemaking Portal at http://www.regulations.gov. Include RIN 1506-AB25 in the submission and refer to Docket Number FINCEN—2014—0001. Comments also can be send by mail to FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-AB25 in the body of the text.