8/15/2014

FinCEN Exempts Trusts from Anti-Money Laundering Rules

New proposed rulemaking exempts banks from onerous identity and status requirements of trust beneficiaries and should allow trustee certificates in lieu of full copies of trust instruments


In the wake of the September 11 terrorist attacks, a little known federal agency known as the Financial Crimes Enforcement Network (“FinCEN”) stepped up efforts to prevent money-laundering, in particular as it can be used to finance terrorist activity. FinCEN exercises its authority by imposing obligations on financial institutions to collect information from customers designed to ferret out money-laundering activity. In the last several years, FinCEN has been developing specific rules governing financial institutions’ obligations to collect information from customers who are “entities,” such as corporations, other types of business entities, and, until recently, trusts.

Up until recently, this has caused a great deal of confusion with respect to banks’ obligations to collect information from customers who are opening bank accounts in the name of trustees of trusts such as revocable trusts intended for routine estate planning purposes (for stylistic purposes, the term “banks” is used to describe all types of financial institutions at which individuals typically carry on banking activity). To be on the safe side of the compliance line, banks have routinely required such customers to provide full copies of trust instruments when opening accounts in order to allow the banks to verify the information FinCEN obligated them to collect. This procedure has been objectionable to customers and their estate planning attorneys because trust instruments often contain sensitive information, such as provisions designed to protect a beneficiary’s interest from spendthrift tendencies or divorce concerns. Customers and their attorneys have preferred to provide abstracts of the trust instruments known as trustee certificates. Banks have resisted this practice because it was not clear whether such certificates contained all the information FinCEN required banks to collect. Adding to this tension, in 2012, FinCEN proposed expanded rules that may have required banks to verify the identity and status of all trust beneficiaries, which would have required customers to disclose even more sensitive information, and would have made compliance almost impossible in cases where the full scope of the identity of beneficiaries is not presently known (such as when interests could be divided among people not yet born at a future point in time).

In a somewhat surprising move, FinCEN has now issued further proposed rulemaking that would exempt most trusts from the expanded anti-money laundering rules previously proposed in 2012. You can read the full proposed rulemaking here, and can find the specific discussion about trusts at page 34. This move is especially surprising in light of the fact that the proposed rulemaking generally increases banks’ information collection obligations with respect to other entity customers such as corporations and other business entities.

The new proposed rulemaking would exempt banks from having to delve into the identity and status of trust beneficiaries (the new burden contained in the 2012 proposed rules). However, it appears that banks will still be obligated to collect information regarding the identity and status of trustees of trusts, and other basic information concerning trusts. Hopefully, banks will take the relaxed approach presented by the new proposed rules as a signal that they may rely on trustee certificates for the purpose of collecting this information. But, the rules are still proposed (as opposed to final), and we will now enter a new phase of customers testing banks’ policies. Many estate planning attorneys will be advising clients to present trustee certificates in lieu of full copies of trust instruments, and time will tell how banks will respond to this.

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