FinCEN Should Direct the FCA to Enforce the Bank Secrecy Act

By Bert Ely

A banker recently posed a most interesting question: Is the Farm Credit System subject to the Financial Crimes Enforcement Network’s final rule on beneficial ownership with respect to customer due diligence requirements? Bankers are becoming painfully aware of the burdens imposed by this new rule. According to a memorandum from Covington & Burling, a Washington law firm, “the final rule requires covered financial institutions to adopt due diligence procedures to identify and verify a legal entity customer’s beneficial owner(s) at the time a new account is opened.” The new rule is intended to counter money laundering, corruption, and tax evasion. The legal basis for the rule is the Bank Secrecy Act, which is administered by FinCEN. The bank regulatory agencies along with other financial regulators are charged with ensuring that the financial institutions they regulate comply with the BSA and FinCEN’s rules. As bankers know all too well, the bank regulators are very diligent in enforcing these rules.

Most interestingly, the Farm Credit Administration, the FCS’s regulator, stated in an email that “[FCS] institutions are not subject to the [BSA].” That is an extremely dubious assertion given that FCS institutions are financial institutions. Additionally, although FCS institutions are not authorized under the Farm Credit Act to accept deposits, in recent years a number of FCS associations, in cooperation with the FCS banks funding those associations, have become very aggressive in offering “cash management services” to FCS member/borrowers; those “services” include accepting deposits. For example, Compeer Financial, which serves portions of Minnesota, Wisconsin, and Illinois, advertises its offering of remote deposit services to its member/borrowers. In this most important regard, Compeer is no different than the commercial banks it competes against. Because Compeer and many other FCS associations now accept deposits, they can easily facilitate the laundering of illicitly obtained funds into farmland and other agricultural assets.

That the FCA believes FSC institutions are exempt from the BSA reflects FinCEN’s misinterpretation of the BSA. Specifically the beneficial ownership rule applies to “covered financial institutions,” which includes FDIC-insured banks and savings associations. The BSA, however, does not define the term “covered financial institution.” Instead, this statute defines “financial institutions” to encompass a broad range of financial institutions, including any “agency of the Unites States government . . . carrying out a duty or power of a business” that is described as a financial institution. In other words, because FCS institutions, which effectively are government agencies, lend money and, in some cases, also accept deposits, they should be subject to the same rules and requirements of the BSA as any FDIC-insured bank. Therefore, FinCEN needs to expand its regulatory definition of “covered financial institution” to include FCS institutions. More importantly, it needs to direct the FCA to implement rules and compliance procedures to ensure that FCS institutions are as vigilant as FDIC-insured banks in blocking money-laundering transactions as well as other activities that would violate the BSA.

In 2013, the FCA adopted four regulations which the FCA might argue approximate what the FCS would be subject to if was determined that FCS institutions fall within the jurisdiction of FinCEN with regard to enforcing the BSA. Essentially, the regulations provide that “to ensure public confidence in the [FCS], to ensure the reporting of known or suspected criminal activity, to reduce potential losses to institutions, and to ensure the safety and soundness of institutions,” FCS institutions are “to notify the appropriate Federal authorities when any known or suspected Federal criminal violations . . . involving the assets, operations, or affairs of an [FCS] institution . . . are discovered” The FCA provides a criminal referral form on its website. While the FCA examination manual provides some guidance to examiners on assessing an FCS institution’s compliance with the criminal referral regulation, it does not appear to require the rigor of the BSA examinations to which banks are subject. Of course, if the FCA did issue an enforcement order penalizing an FCS institution for not making a criminal referral or not properly monitoring its transactions in order to detect money laundering or other BSA-like violations, the public would never know about it because of the FCA’s longstanding policy of not publicizing its enforcement actions, a policy I have criticized on numerous occasions.

New FCA director has been nominated

On Sept. 12, President Trump nominated Glen R. Smith of Atlantic, Iowa, to fill a vacancy on the FCA’s three-member board of directors. If confirmed by the Senate, Smith would serve for the rest of a term ending on May 21, 2022, a board seat last occupied by the late Kenneth Spearman. Smith is the president and co-owner of Smith Land Service, a company he found in 1982; it specializes in farm management, land appraisal, and farmland brokerage services. Smith also owns and serves as president of a family farm operation that encompasses about 2,000 acres of mainly corn and soybeans in western Iowa. Smith graduated from Iowa State University in 1979 with a B.S. in agricultural business. There is no indication from readily available biographic materials if Smith has ever been an FCS borrower or if, as a borrower, he has been active in FCS affairs or served as an officer or director of an FCS institution. Iowa is served by FCS of America, the FCS’s largest association. If Smith is confirmed, it will be interesting to see if he makes any waves at the FCA.

FCA updates mission compliance examination procedures

On Sept. 7, the FCA issued an update to the Mission Compliance section of its Examination Manual. Bankers have long complained, with substantial justification, that the FCS lends outside of its congressionally-mandated mission. There is some sound guidance in this section of the manual (“know its customer base and agricultural marketplace” and have “a marketing plan”) and lots of “do’s.” However, the Examination Procedures and Guidance related to Mission Compliance leave much to be desired. In particular, this guidance is sorely lacking in “don’ts,” i.e., the types of loans the Farm Credit Act bars the FCS from making, such as lending to large, investor-owned utilities or financing hunting lodges and fishing camps that although rural in nature, have nothing to do with production agriculture, farm-related service businesses, or agricultural processing or marketing operations. While noting that the FCS finances rural homes, the guidance does not warn that FSC home loans must only be for moderately priced homes in rural areas or towns of less than 2,500 and must be the borrower’s principal residence — loans on rural mansions, even a principal residence, are verboten. The discussion on YBS (young, beginning, and small) lending fails to differentiate, for example, lending to genuine young (under 35) farmers just getting started from loans to young Silicon Valley millionaires seeking cheap financing for a country estate on which they plan to run a few cows or grow some trees.


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