Compliance Blog

Written by Stephanie Lyon, Regulatory Compliance Counsel, NAFCU

As it generally happens, more guidance can also mean more questions and this is what we have observed with FinCEN's most recent interpretative guidance. The latest question that seems to be on a lot of credit unions' minds is on the vehicle leasing exemption to the beneficial ownership requirement of the Customer Due Diligence (CDD) rule. 

As a refresher, the CDD rule requires credit unions to obtain beneficial ownership information any time a new account (e.g., share and loan account) is opened after the mandatory compliance deadline of May 11, 2018. The rule lists certain exemptions to this requirement such as accounts opened for a legal entity member that is intended to "finance the purchase or leasing of equipment and for which payments are remitted directly by the [credit union] to the vendor or lessor of the equipment." 31 C.F.R. § 1010.230(h)(1)(iv).

FinCEN's interpretative guidance further highlights the equipment leasing exemption in questions 30 and 31. This prompted several credit unions to wonder if they could take advantage of this exemption for indirect lending relationships in which the credit union originates the loan and the member is not intending to use the credit union as their primary financial institution. The problem here is that before a credit union can make a loan, the legal entity must first become a member of the credit union by subscribing to a share of stock and paying the initial installment. See, 12 U.S.C. § 1759. This initial installment (i.e., the par value) is generally held in a deposit account at the credit union. 

The equipment leasing exemption clearly exempts the loan account from the beneficial ownership requirements of the rule, but what is not as clear is whether the transaction account (which is not defined by this rule) is also exempted if opened solely to establish membership in the credit union. Unfortunately, FinCEN's regulations are sometimes written in a bank-centric manner so they sometimes forget to discuss things that only affect credit unions such as share accounts established solely to hold par value. 

From examining the preamble to the rule and the interpretative guidance, it seems FinCEN is willing to exempt leasing equipment loan accounts because of the low risk associated with money laundering. See, 81 Fed. Reg. 29418.  However, share accounts in which a member can make payments or receive payments from or to third parties do not carry the same low level of risk because cash can be deposited and withdrawn from these accounts even in indirect lending relationships where the credit union may make the par deposit and the legal entity member does not utilize the share account. 

The key differentiator here is that the business could start using their share account with the credit union if they chose to as there's nothing preventing them from doing so. Hence, these types of accounts carry similar money laundering risks as a legal entity opening a savings account solely for deposit needs which does trigger the CDD requirement to identify and verify beneficial owners. 

Because the interpretative guidance does not discuss share accounts with limited utility, it is important to note the Federal Credit Union Act does not require that credit unions hold the par value in a regular share account (or any other specific type of account). Rather, a dated NCUA Legal Opinion Letter states, "Section 109…does not dictate that the one share be in a regular share account. Neither the Act nor the Regulations precludes an FCU from requiring an individual to establish membership in the FCU through an account other than a regular share account." NCUA Legal Opinion Letter 92-0522.  

This legal opinion letter leaves the door open for credit unions to potentially allow members to join without having to open a transaction account. Hence, if the credit union's systems allow it, it could be possible that a transaction account is not opened when making indirect loans to finance the purchase of business equipment such as company vehicles. This could alleviate the issue of having to identify and verify the beneficial owners of legal entity members who simply want to finance business equipment. 

There is another wrinkle in this exemption, if the member can "cash out" meaning they can close the loan account and receive any type of cash back associated with the lease, this would trigger the requirement to conduct the beneficial ownership check at that time. See, 31 C.F.R. § 1010.230(h)(2)(ii). This creates more uncertainty as to whether the refund of the par value when the account is closed could be considered a cash out component requiring a beneficial ownership identification and verification. Again, this is not discussed in the CDD rule but there might be a way to structure the par value to be applied to the loan as part of the final payment. 

If a credit union is interested in exploring the no transaction account route and potentially structuring the par value to be applied to the loan's last payment to avoid any type of cash out, it may be important to consult with knowledgeable counsel how to make this arrangement so that it is properly disclosed in the credit union's loan or account agreement and ensure it meets the exemption criteria of the CDD rule.

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Updated CDD Examination Procedures. The Federal Financial Institutions Examination Council (FFIEC) recently released updated examination procedures to account for the new requirements under the CDD rule. These procedures will apply to credit unions so it may be important to review these documents and test the credit union's BSA compliance program before a credit union's next NCUA examination. Remember, according to NCUA's 2018 supervisory priorities, NCUA will begin "assessing compliance with this new regulation in the second half of 2018."