This week, two Senate Committees—Homeland Security and Governmental Affairs and Banking, Housing and Urban Affairs—held hearings to hear from regulators and other stakeholders about how virtual currencies fit within the existing regulatory framework, and to assess whether there is a need to alter that framework in response to potential risks presented by emerging virtual currency technologies. The hearings followed an inquiry initiated by Senate Homeland Security leaders over the summer. Senators who participated in the hearings did not indicate any desire to move quickly to establish new federal regulations to address potential risks presented by innovation in virtual currencies. Rather, the lawmakers generally expressed a desire not to inhibit continued innovation, while supporting market participants who want to play by the rules and protecting the market from those who do not. In both hearings, FinCEN Director Jennifer Shasky Calvery described her agency’s ability to address the BSA/AML and terrorism financing risks presented by virtual currencies by employing FinCEN’s existing statutory authority and regulatory tools. Similarly, during the Senate Banking hearing, the Conference of State Bank Supervisors expressed confidence in the ability of state regulators to address consumer protection and other risks posed by virtual currencies through the existing state regulatory framework and processes. Still, committee members raised broader questions about the how to define or categorize virtual currencies (e.g. as a currency versus as a security) and the impact of such a classification on a range of other issues including monetary policy and tax administration. The breadth of the issues, which may need to be addressed by a range of government actors, formed the basis of Senate Homeland Security Committee Chairman Tom Carper’s (D-DE) call for a “whole government” approach to virtual currency.
On December 3, FinCEN and the Federal Reserve Board issued a final rule to amend the definitions of “funds transfer” and “transmittal of funds” under regulations implementing the Bank Secrecy Act. The agencies finalized the rule as proposed. The changes are intended to maintain the scope of the definitions following recent related amendments to the Electronic Fund Transfer Act, so as to avoid certain currently covered transactions being excluded from BSA requirements. The changes take effect January 3, 2014.
On October 31, FinCEN issued a fact sheet to highlight Section 314(b) of the USA PATRIOT Act, which provides financial institutions with the ability to share information with one another under a safe harbor that offers protections from liability. The provision is intended to help institutions better identify and report potential money laundering or terrorist activities. Though the program is voluntary, the fact sheet states the FinCEN strongly encourages information sharing through Section 314(b). The fact sheet reviews the institutions eligible to participate and the process for doing so, and details the information that can be shared and anticipated benefits to participating institutions.
On September 27, FinCEN issued Advisory FIN-2013-A007, which informs U.S. financial institutions about the potential impacts of 2010 Mexican finance ministry restrictions placed on U.S. currency transactions by Mexican banks on the repatriation of illicit proceeds. The Advisory references a “best practices” guide for Mexican banks prepared by Mexico’s financial institution regulator to guide Mexican banks in establishing or maintaining relationships with U.S. banks. FinCEN also reiterates existing guidance to U.S. institutions to monitor the potential use of alternative methods to move funds linked to the laundering of criminal proceeds and to report that information as required under the Bank Secrecy Act and its implementing regulations.
This week, federal authorities announced the assessment of civil money penalties against two financial institutions for alleged Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance failures. In the first action, FinCEN and the OCC alleged that a national bank failed to file suspicious activity reports (SARs) from April 2008 to September 2009 for activity in accounts belonging to a law firm through which one of the firm’s principals ran a Ponzi scheme. The agencies claim that the bank willfully violated the BSA’s reporting requirements by failing to detect and adequately report suspicious activities in a timely manner, even when the bank’s anti-money laundering surveillance software identified the suspicious activity (the bank subsequently filed five late SARs related to this conduct in 2011). FinCEN and the OCC assessed concurrent $37.5 million penalties. The FinCEN penalty is the first assessed by that agency’s recently created Enforcement Division. In addition, the SEC charged the bank and a former executive with related securities violations and ordered the bank to pay an additional $15 million penalty and to cease and desist from the alleged activity, including providing misleading information to investors as to amounts of money in particular accounts and actions the bank had taken to limit fraudulent activity.
In a second action, coordinated among FinCEN, the OCC, and the U.S. Attorney for the District of New Jersey, federal authorities assessed $8.2 million in total penalties against a now defunct community bank for compliance failures related to Mexican and Dominican Republic money exchange houses. The government alleged that the bank willfully violated the BSA by (i) failing to implement an effective AML program reasonably designed to manage risks of money laundering and other illicit activity, (ii) failing to conduct adequate due diligence on foreign correspondent accounts, and (iii) failing to detect and adequately report suspicious activities in a timely manner. FinCEN and the OCC assessed concurrent $4.1 million penalties, and the DOJ will collect an additional $4.1 million through civil asset forfeiture.
On September 17, FinCEN issued Advisory FIN-2013-A006, which provides considerations for financial institutions when reviewing their obligations and risk-based approaches with respect to certain jurisdictions. The Financial Action Task Force (FATF) recently updated its lists of jurisdictions that appear in two documents: (i) jurisdictions that are subject to the FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to their Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies and (ii) jurisdictions identified by the FATF to have AML/CFT deficiencies. The Advisory summarizes the changes made by the FATF, provides specific guidance regarding jurisdictions listed in each category, and reiterates general guidance that if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.
The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. Read more…
On July 29, FinCEN released a new form for filers who submit Reports of Foreign Bank and Financial Accounts (FBARs) jointly with spouses, or who wish to submit them via third-party preparers. Filers interested in using the form would obtain it from FinCEN or the IRS, and filers and account owners would maintain the form but would not submit it to FinCEN. FinCEN also announced (i) technical adjustments to ease FBAR filing and allow for enhancements such as introducing new space on the form for filers to provide reasons for late filing as well as the addition of third party preparer information, and (ii) the availability of batch filing capability for testing. FinCEN anticipates the revised electronic FBAR and batch capability will be available for general use by September 30, 2013.
On July 12, FinCEN issued a ruling to exempt financial institutions from collecting data about certain armored car transactions required for Currency Transaction Reports (CTR). Under a 2009 ruling, FinCEN clarified that when a financial institution customer hires an armored car service (ACS) to conduct business on its behalf, the customer’s financial institution is subject to the same CTR requirements as it would be with any other third-party facilitating a transaction for a customer. FinCEN now recognizes that the 2009 ruling created practical issues in application – financial institutions have had difficulty differentiating transactions conducted by a given ACS on behalf of the institution from those the ACS conducted on behalf of a customer, and have had trouble obtaining drivers’ personal information required for the CTR. With its current ruling, FinCEN authorized an exception to the CTR data collection and aggregation requirements that applies only to deposits or withdrawals conducted by an ACS employee pursuant to instructions from the financial institution’s customer or from a third party.
On June 24, FinCEN announced its new organizational structure, effective immediately. The new structure organizes employees based on their job function, whereas previously employees were organized based on the stakeholder that they served. FinCEN believes the change will maximize its ability to efficiently further its anti-money laundering and counterterrorist financing efforts.
This week, FinCEN published its semiannual SAR Activity Review, which provides information about the preparation, use, and value of Suspicious Activity Reports (SARs) filed by financial institutions. The report identifies SAR trends, reviews law enforcement cases that demonstrate the importance and value of Bank Secrecy Act (BSA) data to the law enforcement community, and highlights issues related to financial exploitation of older Americans. FinCEN also published an annual companion report, “By the Numbers,” which compiles numerical data gathered from SARs filed by financial institutions.
On April 15, FinCEN issued Advisory FIN-2013-A002, which advises financial institutions to review regulations that require U.S. financial institutions to perform money laundering or other suspicious activity due diligence or enhanced due diligence for correspondent accounts and private banking accounts established, maintained, administered, or managed in the U.S. for foreign financial institutions or non-U.S. persons. The advisory states that as part of those requirements, covered institutions should be vigilant against transactions involving persons specifically designated for sanctions relating to Syria, as well as proxies acting on behalf of such persons. FinCEN advises institutions to (i) take reasonable risk-based steps with respect to the potential movement of assets that may be related to the current unrest in Syria, (ii) consider whether they have any financial contact with persons or entities (foreign or otherwise) that may be acting directly or indirectly for or on behalf of any senior foreign political figures of the Government of Syria, and (iii) file Suspicious Activity Reports when appropriate.
On March 18, FinCEN issued guidance to clarify the applicability of Bank Secrecy Act regulations to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. FinCEN clarifies that a person that obtains a virtual currency to purchase goods or service (a “user”) does not fit within the regulatory definition of a money transmission service, and therefore is not subject to the relevant regulations. However, a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency (an “exchanger”), and a person engaged as a business in issuing a virtual currency, and who has the authority to redeem such virtual currency (an “administrator”), generally are considered money transmitters under FinCEN’s regulations if they (i) accept and transmit a convertible virtual currency or (ii) buy or sell convertible virtual currency for any reason. The guidance reviews FinCEN’s specific determinations regarding different activities involving virtual currencies and the appropriate regulatory treatment of administrators and exchangers under each of the scenarios. Specifically, the guidance addresses (i) brokers and dealers of e-currencies and e-precious metals; (ii) centralized convertible virtual currencies; and (iii) de-centralized convertible virtual currencies.
On March 7, FinCEN issued a notice reminding institutions that they must use FinCEN’s new electronic reports to file most Bank Secrecy Act Reports, including Suspicious Activity Reports, Currency Transaction Reports, Registration of Money Services Business, and Designation of Exempt Person Reports. In February 2012, FinCEN issued a final notice requiring electronic filing of most reports by July 1, 2012. Shortly thereafter, FinCEN made available new formats for those reports, which all institutions must begin using by April 1, 2013. The new forms will support the agency’s enforcement efforts. For example, FinCEN Director Jennifer Shasky Calvery explained recently that in 2012 more than 23 percent of SAR filers selected “other” as the type of suspicious activity. The new form expands the number of options for type of activity being reported from 21 to 70 and adds a text field, allowing filers to described activities more accurately. FinCEN warned that companies that fail to comply with the electronic filing mandate may be subject to civil money penalties.
On Mach 5, FinCEN published a notice and request for comment on proposed changes to the Foreign Bank and Financial Accounts Report (FBAR) to standardize it with other BSA electronically filed reports and allow for a third party preparer to file the report. FinCEN is seeking public comments by May 6, 2013.