FinCEN Finalizes AML Regulations for Housing Government Sponsored Enterprises

The Financial Crimes Enforcement Network ("FinCEN") issued final anti-money laundering ("AML") regulations that now require Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks (collectively, the housing government sponsored enterprises or "GSEs") to develop programs to prevent money laundering. The regulations also require the housing GSEs to file suspicious activity reports ("SARs") directly with FinCEN, as opposed to their regulator, the Federal Housing Finance Authority ("FHFA"). FHFA will be responsible for monitoring the housing GSEs' compliance with the new rules. The housing GSEs must comply with their new obligations within 180 days from the publication of the final regulations in the Federal Register.

FinCEN's expansion of AML obligations to housing GSEs was prompted by its stated belief that the housing GSEs are vulnerable to fraud and financial crimes because they provide financing to the residential mortgage market, and because any laundered proceeds could be invested in real property or securitized mortgages and other financial instruments.

Although the housing GSEs do not fall within the definition of a financial institution under the Bank Secrecy Act ("BSA") and thus are not automatically subject to AML compliance obligations, the catch-all provision of the BSA authorizes the Secretary of the Treasury to require non-financial institution businesses to comply with the AML provisions of the BSA if those businesses "engage in any activity 'similar to, related to, or a substitute for' any business listed in the BSA." FinCEN, as the designee of the Treasury Secretary, found that the housing GSEs engage in activities similar to regulated financial institutions and, thus, should be subject to the AML provisions of the BSA.

During the comment period preceding implementation of the final rule, three housing GSEs noted that they do not have insight or visibility into the underlying retail mortgage loan originations or facts related to the borrowers, financing terms and other transaction-related information. They also noted their concern that they would, in order to comply with their new AML reporting obligations, be required to acquire additional transaction information. This concerned them as well, since the majority of the information that the proposed rule required the housing GSEs to report would already have been reported by the retail banks serviced by the housing GSEs and, thus, would provide duplicative information to law enforcement.

Significantly, FinCEN all but rejected out of hand the comments relating to the housing GSEs' lack of information about the original residential mortgage financing transactions that they were financing in the secondary market. While FinCEN did not require that the housing GSEs amend its agreements with its retail banking customers or change its business models, it warned that the housing GSEs were responsible for doing adequate risk assessments and insuring that they were obtaining all relevant information necessary to comply with their new AML obligations.

The new AML compliance obligations for housing GSEs require those entities to develop and implement a written AML program that is reasonably designed to prevent them from being used to facilitate money laundering or the financing of terrorist activities. The minimum requirements of such a policy include: (i) development of policies and internal controls focusing on a risk-based assessment of the money laundering risks associated with its businesses; (ii) the appointment of a compliance officer with responsibility for the effective implementation, updating and training of newly established AML and SAR responsibilities; (iii) provisions for independent testing and monitoring of compliance; and (iv) development of adequate training programs and policies.

See: Final Rule; Press Release.