SPECIAL ALERT TO BANKS AND OTHER COVERED
NEW FINCEN CUSTOMER DUE DILIGENCE/BENEFICIAL OWNERSHIP RULES
TAKE EFFECT MAY, 11, 2018
On April 11, the U.S. Financial Crimes Enforcement Network (FinCen) issued FAQs on the new rules, which extend anti-laundering and relat
ed customer due diligence rules to determinations of beneficial ownership of legal entities.
In addition to banks, the rules apply to
federally-insured credit unions, savings associations, corporations organized for international or foreign banking or financial operations, trust banks or trust companies that are federally regulated and subject to an anti-money laundering program requirement, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.
The FAQs, due to the good efforts of ELFA, include a description of the following exception:
Question 31: Does the equipment lease and purchase exemption apply when the customer leases directly from the covered institution?
Answer: Yes, consider the following. Aviation LLC, which operates several flight training schools, visits Aircraft Vendor to acquire five aircraft for its flight training schools. Aviation LLC selects the aircraft and contacts the Lessor Covered Financial Institution to obtain the necessary equipment finance to acquire the aircraft. After a review of the aircraft and Aviation LLC's business, the Lessor Covered Financial Institution agrees to purchase the aircraft from Aircraft Vendor and then lease them to Aviation LLC for a specified rent amount and duration. The Lessor Covered
Financial Institution purchases the aircraft, pays the purchase price directly to Aircraft Vendor, and obtains title to the aircraft as collateral. The Lessor Covered Financial Institution then enters into a lease agreement with Aviation LLC, which opens an account at the financial institution solely for the purpose of obtaining the aircraft and making periodic rent payments. There is no possibility of a cash refund to Aviation LLC under the lease terms.
The equipment lease and purchase exemption would apply because the account established at the covered financial institution meets all of the requirements of the exemption, which are that (1) the account's purpose is to finance the purchase or leasing of equipment, (2) payments are remitted directly by the financial institution to the vendor or lessor, and
(3) there is no possibility of a cash refund on the account activity
. First, Covered Financial Institution remit full payment directly to the vendor and obtained title to the equipment in order to lease the equipment to the legal entity customer. Second, Aviation LLC opened the account solely for the purpose of financing an equipment lease to acquire aircraft for its training schools. Finally, there is no possibility of a cash refund to Aviation LLC. As noted in the final rule, accounts created to provide financing for equipment lease or purchase, subject to certain conditions, are exempt from the beneficial ownership requirement because they present a low risk for money laundering and terrorist financing.
ank equipment lessors and lenders should bear in mind that any program that includes potential cash refunds to the customer is likely to fall outside of the exception. It will remain to be seen how minimal cash down payments reimbursed by the lessor or lender will be treated.
e will continue to monitor developments in this area of the law.