DOJ Assistant AG Caldwell Delivers Remarks at the ABA’s National Institute on Bitcoin and Other Digital Currencies

Today, Assistant Attorney General Leslie Caldwell delivered remarks at the ABA’s National Institute on Bitcoin and Other Digital Currencies. Speaking on the DOJ Criminal Division’s approach to the developing landscape of virtual currency, Caldwell acknowledged the legitimate uses of virtual currencies, such as having the ability to lower costs for brick and mortar businesses and its potential to promote a more efficient online marketplace, while also addressing the Department’s concern for the criminal activity surrounding  virtual currencies, noting, “virtual currency facilitates a wide range of traditional criminal activities as well as sophisticated cybercrime schemes.” Citing recent actions against various individuals and groups involved in criminal activities that “sought to exploit decentralized systems such as Bitcoin” – specifically, Silk Road and Ross Ulbricht; and Carl Force and Shaun Bridges, both involved in the Baltimore Silk Road Task Force – Caldwell stressed that there are “many exchanges that don’t concern themselves with following the law.” She explained that the primary legal bases for enforcement are money services business, money transmission, and anti-money laundering statutes, as well as state money transmitter licensing laws and, in some states like New York, virtual-currency specific licensing requirements. Caldwell also noted the Department’s partnership with FinCEN, summarizing its involvement in the Ripple Labs resolution to show that “compliance and remediation can lead to a more favorable resolution of criminal investigations.”  Further, Caldwell observed that while there is no “one-size-fits-all” compliance program, the adherence to regulations and state licensing laws by those involved in virtual currency businesses will reduce liability and complying with anti-money laundering guidelines will allow “the legitimate use of virtual currency to grow and be responsive to infiltration and abuse by criminal elements.”

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FinCEN Fines MSB and Its Owner for Alleged BSA Violations

Today, FinCEN announced the assessment of a civil money penalty against a Los Angeles-based Money Services Business (MSB) and its owner for alleged violations of the Bank Secrecy Act (BSA). During a 2011 examination of the MSB, FinCEN determined that, from October 1, 2010 through the present, the MSB knowingly violated the BSA by failing to (i) establish and ensure ongoing compliance with an adequate AML program; (ii) provide adequate training; and (iii) conduct independent testing of its compliance program. In addition, the MSB violated the BSA’s reporting requirements by failing to “file required currency transaction reports (“CTRs”) on all of its reportable transactions during the examination scope period,” and continued to file untimely CTRs even after the examination scope period ended on March 31, 2011. Finally, FinCEN expressed concern over the MSB owner’s failure to disclose that the MSB “frequently exchanged check for cash with another MSB, an arrangement known as ‘wholesaling’ or ‘bulk check cashing.’” According to the assessment document, the MSB’s owner, who was also the designated AML compliance officer, participated in the BSA violations by failing to accept his responsibility to “ensure that [an] AML program was in place, was effective, and was followed.” To resolve FinCEN’s allegations, the MSB and its owner admitted to violating the BSA program and its reporting requirements and will pay a civil money penalty of $60,000.

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FinCEN Fines Michigan MSB For BSA/AML Violations, Bans Owner From Serving at Any U.S. Financial Institution

On May 29, a Michigan-based money service business (MSB), along with its owner, admitted to repeated violations of the BSA and have agreed to pay FinCEN a civil money penalty in the amount of $12,000. The company violated the BSA in numerous ways, including but not limited to: (i) failing to maintain a sufficient anti-money laundering program; (ii) engaging in high-risk transactions, including wire transfers to Yemen, totaling millions of dollars, without keeping proper records of the transfers or performing due diligence; and (iii) conducting suspicious transactions “with no apparent business or lawful purpose.” According to FinCEN, the MSB failed to monitor the suspicious transactions, had no review process in place, and neglected to file a Suspicious Activity Report or a Currency Transaction Report while operating as a business entity.  Furthermore, in addition to the aforementioned MSB, the owner opened an additional MSB in October 2010, containing similar BSA deficiencies. The owner has “agreed to immediately and permanently cease serving as an employee, officer, director, or agent of any financial institution located in the United States or that conducts business within the United States.”

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Utah Enacts Money Transmitter Act

On March 27, Utah Governor Gary Herbert signed S.B. 24, which modifies provisions related to persons and entities subject to the jurisdiction of Utah’s Department of Financial Institutions (DFI), amends the state’s Mortgage Lending and Servicing Act, and enacts the Money Transmitter Act. The Money Transmitter Act establishes new licensing requirements and grants rulemaking authority to the DFI to (i) prohibit practices that are misleading, unfair, or abusive, (ii) promote full disclosure of the terms and conditions of agreements between a customer and a money transmitter, and (iii) assure uniform application of applicable state or federal laws and regulations.

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Australian AML Regulator Fines Company For Failing to Register Affiliates

On January 21, the Australian Transaction Reports and Analysis Centre (AUSTRAC) announced a $122,400 penalty (Australian dollars) against a large financial services company for failing to register six affiliate businesses as remittance services providers. AUSTRAC serves as Australia’s regulator of anti-money laundering and counter-terrorism financing activities. AUSTRAC noted the company’s voluntary disclosure was taken into consideration when determining its enforcement approach.

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FinCEN Issues Statement On Providing Banking Services to Money Services Businesses

On November 10, FinCEN released a statement to reiterate that banking organizations can serve Money Services Businesses (MSB) while meeting obligations under the Bank Secrecy Act. FinCEN noted that there is concern that banks may be terminating the accounts of MSBs on a wholesale basis because of potential regulatory scrutiny and that as a result MSBs are losing access to banking services. FinCEN stated that they do “not support the wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk.” Rather, the risks presented by a given MSB can vary and, therefore, financial institutions should assess the risks on a case-by-case basis. FinCEN expects that banking organizations will manage the risks associated with MSB accounts and are committed to addressing the “wholesale de-banking of an important part of the financial system.”

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Department Of Treasury Continues Work To Support Money Transmitters

On October 8, the Treasury released a statement regarding its continued efforts to support the legitimate use of money transmitters by fostering financial inclusion and financial transparency, while simultaneously addressing its vulnerabilities of money laundering and terrorist financing. Highlighting its progress in the last 15 years, the statement notes that “record volumes of remittances are being transmitted through legitimate and transparent channels.” Looking forward, the treasury will improve upon its efforts to increase banking access for money transmitters by (i) making its expectations for banks clearer; (ii) improving AML/CFT controls and compliance; (iii) heightening AMC/CFT oversight; and (iv) reaching out to financial institutions and their customers. Finally, the Treasury is working with federal banking agencies to ensure that not all money transmitters are treated as high risk by banking institutions. Ensuring that these efforts are both domestic and international, the Treasury is working with the United Kingdom, the World Bank, and G-20.

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CFPB Finalizes Rule Defining Larger Participants Of The International Money Transfer Market

On September 23, the CFPB issued a Final Rule that defines which nonbank covered persons are designated “larger participants” for purposes of the international money transfer market. In particular, this rule, which finalizes a January 2014 proposed rule, defines an entity as a larger participant if it has at least one million aggregate annual international money transfers. The final rule will be effective December 1, 2014. In addition, the Final Rule defines an international money transfer market to cover certain electronic transfers of funds sent by nonbanks that are international money transfer providers. These transfers must be requested by a sender in a State to be sent to a designated recipient in a foreign country. While the Final Rule’s definitions are modeled in part on the definitions of “remittance transfer” and related terms in the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E, there are some substantive differences. For example, transfers of $15 or less can be ‘‘international money transfers’’ but not “remittance transfers.” The CFPB provides a procedure for a person to dispute whether it qualifies as a larger participant in the international money transfer market and also asserts that there are only approximately 10 potential larger participants that qualify as small businesses.

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FinCEN Rules Regulations on Money Services Businesses Do Not Apply to ISOs and Exempt Payment Processors

On August 27, FinCEN issued FIN-2014-R009, an administrative ruling clarifying that Independent Sales Organizations (“ISOs”) and exempt payment processors are not money transmitters subject to Bank Secrecy Act (“BSA”) regulations applicable to Money Services Businesses (“MSBs”). Under BSA MSB regulations, the term “money transmitter” applies to any person that provides money transmission services or otherwise engages in the transfer of funds. The term “money transmission services” includes the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. Applying these standards, FinCEN determined that BSA MSB regulations do not apply to an ISO, so long as it: (i) merely solicits merchants to offer them the credit and debit card processing services of two counterparties; and (ii) does not take possession or control of merchant funds at any point. However, FinCEN concluded that BSA MSB regulations will apply to a payment processor unless the payment processor qualifies for the payment processor exemption established by 31 CFR § 1010.100(ff)(5)(ii)(B) and clarified by FIN-2013-R002. Under this exemption, BSA MSB regulations do not apply to a payment processor, so long as it: (i) facilitates the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only BSA-regulated financial institutions; (iii) provides its services pursuant to a formal agreement; and (iv) the agreement itself is at a minimum with the seller or creditor that provides the goods or services and receives the funds. For a copy of the ruling, please see: Application of Money Services Business Regulations to a Company Acting as an Independent Sales Organization and Payment Processor.

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Kansas Bank Commissioner Issues Virtual Currency Guidance

On June 6, the Kansas Office of State Bank Commissioner (OSBC) issued guidance on the regulatory treatment of virtual currencies under the Kansas Money Transmitter Act (KMTA). The guidance focuses on money transmission activities involving decentralized cryptocurrencies, such as Bitcoin. The guidance states that cryptocurrencies in their current form are not covered by the KMTA because they do not fall within the definition of “money”—no cryptocurrency is currently authorized or adopted by any governmental entity as part of its currency—or “monetary value”—there is no recognized standard of value or set value for a single unit of a cryptocurrency. The guidance explains that since the KMTA does not apply to transmission of decentralized cryptocurrencies, an entity engaged solely in the transmission of such currency is not required to obtain a money transmitter license. The guidance adds that, if transmission of virtual currency includes the involvement of sovereign currency in a transaction, it may be considered money transmission depending on how the transaction is organized. The guidance provides several examples of common types of transactions involving cryptocurrency and whether the KMTA applies to each, and outlines for cryptocurrency businesses that conduct money transmission, and entities engaged in money transmission, actions necessary to comply with state law, including licensing.

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House Passes Financial Services Bills

On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.

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Maryland Adds Training, Disclosure Requirements For Money Transmitters

On May 5, Maryland Governor Martin O’Malley signed HB 723, which requires state licensed money transmitters to (i) provide on transmittal forms a clear, concise, and conspicuous fraud warning that includes a toll-free telephone number for individuals to call to report fraud or suspected fraud; (ii) provide annual training to agents related to financial abuse and financial exploitation of elders; and (iii) allow an individual to voluntarily be disqualified from sending or receiving money transmissions in the state for a specified period of time. The changes, which take effect October 1, 2014, do not apply to a licensee or an agent that engages (i) in selling or issuing stored value devices, traveler’s checks, or money orders, or providing bill payer services, as long as the licensee or agent does not engage in any other business regulated under the money transmission law; or (ii) in the business of money transmission solely through the Internet.

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FinCEN Issues Five Rulings On Application Of BSA Regulations To Certain Activities

On April 29, FinCEN issued five rulings in response to companies who sought clarification regarding whether their company is a money service business under the BSA. In FIN-2014-R006, FinCEN determined that a company that operates an online real-time deposit, settlement, and payment services platform for banks, businesses, and consumers is considered a money transmitter, not a provider of prepaid access, and should be registered as a money services business under BSA regulations. In two other rulings—FIN-2014-R004 and FIN-2014-R005— FinCEN clarified the exemption from the money transmitter definition for persons that accept and transmit funds “only integral to the sale of goods or the provision of services, other than money transmission services.” FinCEN determined that the escrow services at issue in FIN-2014-R004 and the transaction management services at issue in FIN-2014-R005 fit within that exemption because the acceptance and transmission of funds in these cases is not a separate and discrete service in addition to the underlying service, but instead is a necessary and integral part of the service itself. Therefore, these companies are not considered to be money transmitters subject to registration. FinCEN determined in FIN-2014-R007 that a company that rents computer systems used to mine virtual currencies is not a money transmitter. Finally, in FIN-2014-R008, FinCEN determined that although the company, which uses armored cars to facilitate the exchange of coins and cash, does not qualify for the “armored car” exemption in the money transmitter definition, it is still not considered a money transmitter. FinCEN stated that the transportation of currency and/or coin of certain denominations from the company’s vault to the customer’s location and the return transportation of currency and/or coin in the exact amount of the change provided to the company’s own vault does not constitute the acceptance of value from one person and the transportation of such value to another person or location.

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FinCEN Announces Enforcement Action Over MSB’s Currency Transaction Reporting

On April 24, FinCEN released an assessment of civil money penalty against a Florida money services business (MSB) and its owner for failing to comply with the Bank Secrecy Act’s program, reporting, and recordkeeping requirements. FinCEN determined that since at least 2008, the MSB, which operated as both an independent check casher and as a foreign currency exchange dealer, willfully violated the BSA by failing to register with FinCEN and failing to develop and implement an effective AML program. Specifically, FinCEN found that the MSB lacked adequate AML programs to verify the identities of persons conducting transactions, to monitor for suspicious activities, to identify currency transactions exceeding $10,000, and to ensure that the MSB filed the required currency transaction reports (CTRs) in a timely manner. According to FinCEN, the MSB also failed to implement internal controls sufficient for creating and retaining adequate BSA records related to currency exchange, and its owner and compliance officer failed to conduct a BSA/AML risk assessment. As a result of the compliance deficiencies, FinCEN determined the MSB failed to file, or failed to timely file CTRs on $4.5 million worth of transactions. The MSB and its owner admitted to these determinations and agreed to pay a $10,000 penalty.

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CFPB Proposes Remittance Rule Amendments

On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…

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