The South Dakota Division of Banking (the “Division”) issued a Memorandum notifying all licensed South Dakota money lenders and non-residential mortgage lenders that the Division has taken the position that they are subject to the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) obligations imposed by a 2020 Final Rule published by the Financial Crimes Enforcement Network (“FinCEN”) regarding banks lacking a federal functional regulator (“Final Rule”). The Final Rule became effective in 2020, and the Memorandum requires licensees to comply by March 31, 2024.  No other state has taken this same position, and the Final Rule itself stated that it applied to approximately 567 banks. 

Accordingly, all money lender and non-residential mortgage lender licensees covered by the Memorandum must develop a BSA/AML compliance program that aligns with the Memorandum’s requirements, which are equivalent to that of a “bank” under FinCEN’s regulations. The compliance program must include a risk assessment, ongoing transaction monitoring, and filing of Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”), among other requirements. In addition, licensees must register with FinCEN for BSA e-filing.

The statutory BSA/AML framework has always applied to “financial institutions.” The statutory definition is broad and includes entities such as banks, trust companies, pawnbrokers, and casinos. 31 U.S.C. § 3512(a)(2).

Over time, FinCEN has promulgated regulations to bring certain financial institutions under the scope of the regulations as well as set certain limited exemptions. For example, pawnbrokers are included in the statutory definition of a financial institution but are exempt (for now) from having a BSA/AML compliance program. Likewise, the statutory term “financial institution” includes loan or finance companies, which FinCEN has interpreted to date to apply to only non-bank residential mortgage loan originators. 31 C.F.R. § 1010.100(lll)(1).

The Memorandum states that FinCEN’s 2020 Final Rule applies to South Dakota licensees as “non-bank financial institutions.”

FinCEN’s Final Rule

FinCEN’s Final Rule closed a regulatory gap and extended certain BSA/AML requirements to “banks” lacking a federal functional regulator. We previously blogged on the final rule here.

The preamble to the Final Rule indicates that the scope of the rulemaking covers “non-Federal state chartered banks.” 85 Fed. Reg. 57129, 57131. The final rule did not amend the term “bank,” which is defined in FinCEN’s regulations as:

  1. A commercial bank or trust company organized under the laws of any State or of the United States;
  2. A private bank;
  3. A savings and loan association or a building and loan association organized under the laws of any State or of the United States;
  4. An insured institution as defined in section 401 of the National Housing Act;
  5. A savings bank, industrial bank or other thrift institution;
  6. A credit union organized under the law of any State or of the United States;
  7. Any other organization (except a money services business) chartered under the banking laws of any state and subject to the supervision of the bank supervisory authorities of a State;
  8. A bank organized under foreign law;
  9. Any national banking association or corporation acting under the provisions of section 25(a) of the Act of Dec. 23, 1913, as added by the Act of Dec. 24, 1919, ch. 18, 41 Stat. 378, as amended (12 U.S.C. 611–32).

31 C.F.R. § 1010.100(d).

The Final Rule removed the language providing a limited exemption for entities under the supervision of a bank supervisory authority from the list of financial institutions that do not have to have a BSA/AML compliance program. However, the definition of a “bank” does not include an entity under the supervision of a bank supervisory authority unless that entity is also chartered under the banking laws of the state.

It appears that the South Dakota is taking the stance that due to the removal of the exemption language, any licensee is a non-bank financial institution that must have a BSA/AML compliance program equivalent to that of a “bank.”  As noted, this appears to be a novel interpretation and application of FinCEN’s Final Rule.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.  Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.