April 2018 Newsletters
By James McGrath, Associate General Counsel
On May 11th, 2018, the much-discussed “beneficial ownership (BO) rule,” found in the federal regulations at 31 CFR §1010.230, becomes effective law. As we’re sure most of you know by now, this rule places a new onus on financial institutions to collect additional account-opening information from “non-person entities”—certain customers that aren’t individuals, like businesses and partnerships.
One common issue with this new rule, which has yet to be addressed directly by FinCEN, is how to handle Interest on Lawyers’ Trust Accounts, or IOLTAs for short. These specialized accounts are either authorized or required by all 50 states and DC—though some states call them by a different name (IOLAs in New York come to mind)—and essentially capture interest from attorney client trust funds, then send that interest to a distinct non-profit entity or direct arm of the state bar, primarily for the purpose of providing legal services to indigent individuals.
How should IOLTAs be treated under the BO rule, then? A good place to start might be the preamble to the Final Rule, which states: “FinCEN understands that many attorneys maintain client trust or escrow accounts containing funds from multiple clients and other third parties in a single account. Funds flow in and out of these accounts during the normal course of business, and while these movements may not be as frequent as those found in, for example, pooled accounts in the securities and futures industries, they nevertheless create significant operational challenges to collecting this information with reference to the relevant clients and third parties. . . . FinCEN believes that it would be unreasonable to impose [BO] collection obligations for information that would likely be accurate only for a limited period of time. FinCEN also understands that State bar associations impose extensive recordkeeping requirements upon attorneys with respect to such accounts. . . . For these reasons, FinCEN . . . deem[s] such escrow accounts intermediated accounts for purposes of the beneficial ownership requirement.” https://www.federalregister.gov/d/2016-10567/p-228
So that’s it, then! No BO information required for IOLTAs, right? Not so fast.
Upon closer study of this passage, two issues arise. First, the passage does not provide an exception to the BO rule, but rather a stipulation—namely, that “client trust or escrow accounts” will be treated like ‘intermediated accounts’ rather than accounts opened in the name(s) of the individual client(s) whose funds are stored in the IOLTA. The final rule clarifies elsewhere that for ‘intermediated accounts,’ a bank must treat the account’s ‘intermediary’ as its customer, rather than the clients. But this then begs the question, “Who the heck is an ‘intermediary’ on an IOLTA?”
This leads to the second issue with the passage: it appears to be envisioning private lawyer trust accounts set up entirely by a law firm, rather than IOLTAs, which are a bit of a special deal. IOLTAs often are set up in both the name of a law firm and the association where the interest is being sent—in fact, these accounts typically will use the tax ID number of the association, rather than the tax ID of the law firm.
All of this gives rise to the following conundrum: are IOLTAs actually ‘intermediated’ by a government entity collecting the interest? Or are they accounts where a non-profit entity is serving as ‘intermediary?’ Or, still yet, are they accounts where the law firm alone serves as the ‘intermediary?’
At present, the only way to answer this question fully is to consult with local counsel and your state law on IOLTAs. If you feel your state’s IOLTAs are opened in the name of the state, then no BO collection would be required, as the ‘intermediary’ is a government entity, which is exempt from BO requirements. Alternatively, if your state’s IOLTAs are structured so that they are more opened in the name of a private non-profit entity, then per the BO rule for non-profits, you should be obtaining the “control prong” information for that non-profit entity, but not information on the non-profit’s beneficial owners. The most conservative practice, which we advocate if you are unsure of your state’s law, is to assume the account-opening law firm is serving as ‘intermediary,’ and collect both ownership and control prong information for them (assuming they’re an entity and not an individual lawyer); and additionally, obtain control prong information for the association collecting IOLTA interest if that association isn’t a government entity.
By: Silvia Garcia Maggio, CRCM, Deputy General Counsel
In the lead-up to the Beneficial Ownership rule May effective date, there have been a ton of questions as to the requirements of the rule. Since last summer, we’ve heard a lot of hearsay about triggering events like beneficial owners does or does not apply to renewing CDs or it does but not to autorenewing CDs but there was never an official answer from the source of the rule: FinCEN. With the FAQs, FinCEN has answered some pressing questions but probably doesn’t give the answers banks wanted to here. While a full FAQ summary is forthcoming, let’s talk about the FAQs’ answers to Hotline’s most frequently asked questions.
First: Is a renewal of CD or Loan a triggering event? What about autorenewals? The FAQs at Question 12 make it clear that renewals, including autorenewals are including under the definition of “new” account so it is a triggering event. That being said, FinCEN took a common sense approach that requires a new certification but only as to the validity of the original certification which will help reduce paperwork. In addition, if you get an attestation, at the time of their original beneficial ownership compliance, that the customer will update you as to any changes, that is compliant, too.
Second: Are we required to redo the Beneficial Ownership work every time the customer opens a new account? FinCEN takes this on in Question 10. As we know, Beneficial Ownership’s triggering event is opening a new account. However, FinCEN has taking a similar approach here and allows for a certification that the information in the original beneficial ownership process is still up-to-date and accurate. This is great news for processes but remember, if the bank has reason to know that the ownership information or the verifying ID isn’t up-to-date and accurate, that wouldn’t meet this exception.
Third: Do we have to keep digging if the legal entity customer is owned by a legal entity? While the answer to this has always been “yes” because the rule relates to direct or indirect ownership, Question 3 gives us an exact example of their interpretation of indirect ownership. This question even includes a helpful chart. Banks will need to be able to ask for enough information to discern whether any natural person owns at least 25% of the legal entity customer – not the legal entity of which they are a natural person owner.
Spanning thirty-seven questions over twenty-four pages, the FAQs also reiterate items that are in the rule but also clarifies pressing questions (as you would hope from an FAQ). In addition to the 2018 FAQ, there is also an FAQ from the summer the rule was released in 2016. Both of the FAQs and the rule itself are a worthwhile read leading up to implementation day. In the meantime, you can find Beneficial Ownership tools in the BSA/AML/OFAC toolkit on the website.
By Chance Williams, CRCM, Compliance Specialist
On January 26, 2018, the Consumer Financial Protection Bureau (Bureau) published a Request for Information on its Civil Investigative Demands and Associated Processes. Civil Investigative Demands (CIDs) are issued whenever the Bureau has reason to believe that any person that may have custody, possession, or control of documents or other information relevant to a violation. The Request for Information (RFI) was issued to assess the efficiency and effectiveness of its CID processes.
To see the entire document, click here: https://www.federalregister.gov/documents/2018/03/22/2018-05783/request-for-information-regarding-bureau-civil-investigative-demands-and-associated-processes
The Bureau asked industry and attorneys who practice before the Bureau to comment on its enforcement processes. Comments were due on March 27, 2018. The request solicited feedback on all aspects of the CID process, but specifically asks for comments on following topic areas: (1) the process for initiating investigations and issuance of CIDs; (2) the delegation of authority for tasks; (3) the time frames applicable to each step to make the process less burdensome; (4) improving CID recipients’ understanding of investigations so that they can comply with such requests; (5) standards for taking testimony from an entity and rights of witnesses; (6) handling inadvertent production of privileged information; and (7) the requirements for responding to the CIDs and processes concerning petitions to modify or set aside CIDs.
The Bureau issued procedural rules, 12 C.F.R. Part 1080, which provides its procedures for CIDs and investigations. A few hurdles that led to the RFI was the imposed burdens on the recipients, such as short deadlines to respond, delegation of authority for tasks, overly broad request for documents and testimony, and recourse—filing a petition for an order modifying or setting aside a demand.
Agencies, such as the Federal Trade Commission (FTC), have chimed in on the processes and have made recommendations that the Bureau adopt some of the FTC’s best practices to make the process smoother and more efficient for both the Bureau and recipients of CIDs. The FTC suggested adopting a similar approach to opening and closing investigations to ensure such procedures are aligned with the Bureau’s priorities and objectives. This process would include frequent communication across the board, and openly discussing investigative matters across regional offices, and identifying potential issues that may arise, and working through those issues for consistency and efficiency purposes. Further, the FTC recommends an independent assessment by someone who is not conducting the investigation, thus re-examining the delegation of authority to those who are not directly involved in the investigation.
The FTC suggests limiting the scope of information received, as this is costly and time consuming, especially when it comes to receiving irrelevant information. The FTC uses a meet-and-confer process, which provides recipient with opportunity to discuss compliance issues. In turn, this may lead to a modification of the CID, ultimately increasing efficiency on both ends and eliminate unnecessary burdens for both the agency and recipient.
From a time frame perspective, aligning with Federal Rule of Civil Procedure 34(b)(2), which requires a party to whom discovery request is directed to respond in writing within 30 days of being served, this will aid in keeping things simple, consistent, and reduce burdens.
It’s important to note; the overall objective is to improve upon its current processes for CIDs. The FTC is not suggesting that the Bureau does away with their current statutory and regulatory objectives, but to reduce any undue burden. Adding more detail about the scope and purpose of investigation; limiting relevant time periods to minimize undue burden on companies; shortening the instructions—including using plain language; and increasing response times will be useful for both entities and consumers. The Bureau is hoping to create a less burdensome, more effective process. For now, we will be looking for additional RFIs and the Bureau implementing some of the feedback received from the industry and attorneys.
By Jennifer Kirby, Compliance Specialist
On March 16, the D.C. Circuit Court of Appeals issued a long-awaited decision on challenges to four aspects of the Federal Communications Commission’s (the FCC) Declaratory Ruling and Order issued in 2015 (2015 Declaratory Ruling) regarding the Telephone Consumer Protection Act (the TCPA or the Act). Three of the four sets of challenges have created compliance challenges for banks: (1) which sorts of automated dialing equipment are subject to the TCPA’s restrictions on unconsented calls; (2) when a caller obtains a party’s consent, does a call nonetheless violate the Act if, unbeknownst to the caller, the consenting party’s wireless number has been reassigned to a different person who has not given consent; and (3) how may a consenting party revoke her consent.
In sum, the unanimous three-judge panel decision offers some good news for banks. The court set aside two of the three challenges: (1) the FCC’s explanation of which devices qualify as an autodialer (which the court noted was “unreasonably expansive”); and (2) the FCC’s assignment of liability approach for calls to reassigned numbers. The court, however, upheld the FCC’s ruling that a party can revoke consent through any reasonable means clearly expressing a desire to receive no further calls or texts. This is an important step toward allowing customers to receive information they need and want, in the way they want to receive it.
It’s important to note, that the court overturned but did not replace the FCC’s interpretations of the definition of “autodialer” or the treatment of reassigned numbers. The FCC must now decide how it intends to proceed with interpreting these critical aspects of the TCPA. Until then, these issues are left unsettled and will remain open to interpretation by trial courts. This could present compliance and litigation challenges to banks. The court struck down the FCC’s interpretation of the definition of an “autodialer.” As a result, the court has created uncertainty about what equipment qualifies as an autodialer. Similarly, the court invalidated the FCC’s safe harbor for the first call attempt made to a phone number that has been reassigned. Which means the court has removed the limited protection from liability for calling a reassigned number that had been afforded by this safe harbor. On the issue of revocation of consent, the court did not find fault with the FCC’s treatment of revocations, but the court also did not exclude the FCC from issuing a new interpretation of how companies may limit the means by which a consumer can revoke consent.
On all three issues, the court’s ruling provides the FCC with ample room to create new interpretations of the TCPA. On the bright side, since the 2015 Declaratory Ruling was issued, the FCC’s leadership has changed, and Ajit Pai, who dissented vigorously from the 2015 Declaratory Ruling while serving as a commissioner, is now Chairman. Let’s hope that under Chairman Pai, the FCC’s interpretations will move in a more positive direction for the financial services industry. For now, we will be watching how both courts and the FCC address these matters in the coming months.