New Treasury guidance on intersection of AML/BSA, SBA and PPP stimulus loans could cause more confusion than clarity

The Skinny:

  • New U.S. Treasury guidance on AML compliance tethers to the coronavirus stimulus package could confuse and add complexity where clarity is needed.
  • The guidance, part of a larger FAQ document and highlighted by FinCEN, details some of the updated expectations for a core component of the CARES Act, the Paycheck Protection Program (PPP).
  • At issue is that while FinCEN is trying to make it easier to offer emergency loans to existing customers, some of the requirements under AML Bank Secrecy Act (BSA) beneficial ownership rules and Small Business Administration (SBA) duties don’t fully align.
  • The result: that leaves banks in a difficult position to make decisions more on the side of supporting desperate businesses in order to prop up a foundering economy, rather than engage in industry AML best practices – leaving the door open to regulatory scrutiny and knuckle wrapping later.

By Brian Monroe
bmonroe@acfcs.org
April 13, 2020

Fresh guidance by the U.S. Treasury on how financial institutions should balance financial crime compliance duties while reviewing and extending hundreds of thousands of loans under the just-released pandemic stimulus package could cause more confusion than clarity.

The tight, two-page guidance highlighted Monday by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) is part of a broader, 10-page Frequently Asked Questions (FAQs) document, and focuses on the potential anti-money laundering (AML) stumbling blocks related to a core component of the more than $2 trillion CARES Act: The Paycheck Protection Program (PPP).

At its heart, under the new program, a company can take out a loan to keep or rehire workers and – if the operation is able to keep staffers employed – the loan can be turned into a grant and effectively wouldn’t have to be repaid as the bank would be reimbursed by the federal government.

The expansive $2 trillion package has tethers to AML requirements because financial institutions must typically engage in certain identity, beneficial ownership and risk verification requirements, before loaning money.

At issue is that there are some, but not all, overlapping requirements to satisfy Small Business Administration (SBA) lending and AML beneficial ownership requirements.

Moreover, what a bank should do to satisfy both AML, also referred to as the Bank Secrecy Act (BSA) obligations, and SBA requirements get significantly more complicated depending on the risk of current customers and further out, if institutions decide to take on new corporate customers.

The result: that leaves banks in a difficult position to make decisions more on the side of supporting desperate businesses in order to prop up a foundering economy, rather industry AML best practices – leaving the door open to regulatory scrutiny and knuckle wrapping later.  

In the latest piece of guidance, FinCEN is attempting to find a middle ground between getting loans out quickly, but also allowing institutions to devote fewer resources to current corporate customers.

One key concession FinCEN has said: Offering a loan to an existing customer under the PPP does not immediately constitute a new account and trigger requirements to capture, review and verify already-attained beneficial ownership details.

If a bank has already captured beneficial ownership information under AML obligations down to the 20 percent level, the institution doesn’t have to re-verify and re-certify down to the 25 percent level – a similar requirement under SBA rules.

But there are still murky areas that could lead to regulatory second-guessing later.

If an institution, however, has not captured beneficial ownership details for existing customers, the operation also doesn’t have to immediately capture that information before extending the loan, depending on the bank’s original assessment of the corporate customer under the AML risk-based approach, FinCEN stated.

For new customers, the “lender’s collection of the following information from all natural persons with a 20% or greater ownership stake in the applicant business will be deemed to satisfy applicable [AML] requirements.”

Pressure builds for FinCEN to ease BSA, SBA loan logjam

If FinCEN’s latest statement sounds like it won’t make everyone happy, you would likely be right.

This would be the third bite at the apple for FinCEN in trying to quell what has quickly become a flashpoint issue, with vitriol and finger pointing coming from all sides.

With estimates that the country’s jobless rate could hit 20 percent, equating to more than 20 million filing for unemployment, U.S. banks are under intense pressure to process and approve the hundreds of thousands of loans representing hundreds of billions of dollars that could allow companies to keep hired, or rehire, employees and stabilize the economy.

To FinCEN’s credit, even with the supposed AML-related speed bumps, the money is flowing.

As of April 13, the SBA has approved nearly 1.04 million loans totaling $248 billion through the PPP, according to a report released by SBA and reviewed by the American Bankers Association (ABA).

The report notes that a total of more than 4,600 lenders were participating in the program as of Monday.

PPP loans have been approved in all U.S. states and territories, according to the ABA report. Seventy percent of approved loans have been for smaller amounts less than $150,000.

Overall, the average loan size was $239,152. About half of the funds allocated so far have gone to four sectors: construction; professional, scientific and technical services; manufacturing; and health care and social assistance, according to the ABA.

But before approving a loan and doling out funds, that is considered under banking rules as a new account – even if the loan is for a longtime business customer – and typically requires financial institutions to engage in certain AML rules, including updating and verifying beneficial ownership information. 

Bankers must balance speed, risk of stimulus loans

FinCEN has attempted to address this issue with a statement elucidating, in essence, that for eligible federally insured depository institutions and federally insured credit unions, PPP loans for existing customers “will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.”

In essence this means that banks won’t have to engage in a broad update of the corporate customer, including updating beneficial ownership information, a newer requirement in recent years banks have had to adopt to make it harder for criminals and corrupt oligarchs to operate behind anonymous, impenetrable ownership structures.

For non-PPP loans, FinCEN stated that certain exceptive relief to beneficial ownership requirements granted in September 2018 is still in effect, such as not having certain annual rollover products forcing a bank to re-verify all corporate customer beneficial ownership information.

So with many of the largest banks across the nation facing criticism for prioritizing existing customers over new ones who are seeking coronavirus rescue loans, these institutions have shifted the target and “put the blame on federal rules meant to catch terrorists and money launderers,” according to media reports. 

Graphic courtesy Jim Richards

In PPP divided by AML, 5+4=6

The lenders, who have been getting hammered by small businesses and lawmakers alike, have pressed FinCEN for guidance – and what was released has some very confusing interpretations, according to longtime compliance thought leader Jim Richards, the former head of AML at Wells Fargo.

“For BSA purposes, you need to collect the [Date of Birth (DOB)] of up to 4 legal owners and 1 control person, but not percentage of ownership or title,” Richards said, referring to beneficial ownership obligations under the 2018 Customer Due Diligence (CDD) rule.

Under the rule, finalized in 2016, but which became effective in mid-2018, financial institutions were required to “identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.”

But when trying to determine how the BSA and SBA overlap, there could be challenges.

“For SBA purposes, you need to collect the percentage of ownership and title of up to 5 legal owners, but not DOB,” Richards said. “But to satisfy BSA requirements for SBA purposes you need to collect 6 pieces of information from up to 4 persons. And you don’t have to collect any information on a control person.”

To read more analysis from Richards on how five plus four can equal six, click here.

What’s more, how banks decide to answer these questions, while enabling businesses to stay open, could, conversely, open the door to fraudsters trying to steal or move money – a dynamic that could later cause regulators to chide an institution for any missed steps of an AML program, particularly missed suspicious activity reports (SARs).

“The likelihood of rampant money laundering through PPP loans is pretty slim,” Richards wrote in a missive on this issue. “The likelihood of fraud, though, is 100%. How much fraud is dependent on a lot of factors, but banks are adept at lending money and keeping fraud rates down. In normal times. These are not normal times.”

But making the lenders “collect six pieces of information on the owners of small businesses when neither of the applicable regulatory regimes require them to collect more than five seems to add a layer of unnecessary complexity and can only slow down the lending process,” he said.

Overall, having to “collect 5 pieces of information (but not DOB) from as many as five legal owners for SBA purposes, and to collect four pieces of information (including DOB) from as many as four legal owners AND one control person for BSA purposes, and now to have to collect SIX pieces of information (including DOB) from five persons for SBA/BSA purposes creates confusion.”

A possible solution: capture information now, lend liberally, verify later

Treasury needs to “take its own risk-based approach: satisfy SBA requirements today, BSA requirements before you forgive the loan,” Richards wrote.

His solution: Allow PPP lenders to rely on the certifications in the Form 2483 PPP Borrower form.

Further, that opens the door to allow those lenders to “satisfy their BSA-related beneficial ownership requirements by the earlier of (i) September 30, 2020, or (ii) before the PPP loan is forgiven.”

In other words, “focus on the PPP borrowers and requirements today, and worry about the BSA requirements later this summer. Full stop,” Richards said.