August 14, 2012

Anti-Money Laundering Program: Preparation is Protection


The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, recently finalized regulations (Final Rule) requiring non-bank Residential Mortgage Lenders and Originators (RMLOs) to establish an Anti-Money Laundering Program (AML Program) and file Suspicious Activity Reports (SARs), as FinCEN requires of other types of financial institutions.
FinCEN issued these regulations defining non-bank residential mortgage lenders and originators as loan or finance companies for the purpose of requiring them to establish AML Programs and report suspicious activities under the Bank Secrecy Act (BSA).
The effective compliance date for the Final Rule is Aug. 13, 2012.
FinCEN may impose civil monetary penalties for non-compliance with its regulations, including a penalty for each suspicious activity reporting violation, so compliance with the SAR regulations should be considered mandatory on the part of responsible management.
BSA authorizes the Treasury to issue regulations requiring financial institutions, including any “loan or finance company” to keep records and file reports that are deemed to have “a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”
In the supplementary information to the Final Rule, the term loan or finance company “can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Some loan and finance companies extend personal loans and loans secured by real estate, mortgages and deeds of trust, including home equity loans.”
The following constitutes these categorical definitions recognized by FinCEN:
Loan or finance company: A person engaged in activities that take place wholly or in substantial part within the United States in one or more of the capacities listed below, whether or not on a regular basis or as an organized business concern. This includes but is not limited to maintenance of any agent, agency, branch or office within the United States. The term “loan or finance company” shall include a sole proprietor acting as a loan or finance company, and shall not include: a bank, a person registered with and functionally regulated or examined by the Securities & Exchange Commission (SEC) or the U.S. Commodity Futures Trading Commission (CFTC), any government-sponsored enterprise (GSE) regulated by the Federal Housing Finance Agency (FHFA), any federal or state agency or authority administering mortgage or housing assistance, fraud prevention or foreclosure prevention programs, or an individual employed by a loan or finance company or financial institution. A loan or finance company is not a financial institution as defined in these regulations.
Residential mortgage lender: The person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement. The term “residential mortgage lender” shall not include an individual who finances the sale of the individual’s own dwelling or real property.
Residential mortgage originator: The person accepting a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan.
Residential mortgage loan: The loan that is secured by a mortgage, deed of trust or other equivalent consensual security interest on:
A residential structure that contains one to four units, including (if used as a residence) an individual condominium unit, cooperative unit, mobile home or trailer; or
Residential real estate upon which such a structure is constructed or intended to be constructed.
FinCEN interprets the term “loan or finance company” under the BSA to include any non-bank residential mortgage lenders and originators (i.e., “mortgage companies,” mortgage bankers or lenders,” and “mortgage brokers”) in the residential mortgage business sector.
In this article, I will provide a brief overview of but a few of the many salient features that should be expected in every AML Program. To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over 50 pages—which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures—the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.

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