FinCEN – We Will Identify Where Compliance Is Not Taking Place And Take Appropriate Action

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Sheppard Mullin Richter & Hampton LLP

Last week we reported that FinCEN had issued new guidance addressing cryptocurrency and other convertible virtual currency. The need for compliance was reinforced this week. In a speech by Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence, during blockchain week in NY, a stern warning was issued. The message was clear. Regulatory compliance is not an option and you must do it right from the start – not just after you got a call from regulators or law enforcement.

The speech in part stated:

Since 2011, FinCEN’s regulations have stated that individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the Bank Secrecy Act and its implementing regulations.  This includes transactions in fiat-to-virtual currency, as well as virtual currency-to-virtual currency.

When IRS or FinCEN examiners show up at the door to your business, they will be looking to see if you complied with all of these requirements.  That is, did you:  (1) register with FinCEN as a money services business, (2) develop, implement, and maintain an AML program designed “to prevent [them] from being used to facilitate money laundering and terrorist financing,” and (3) establish recordkeeping, and reporting measures, including filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs)?  We will be checking whether you did all this right from the start of your business – not just after you got a call from regulators or law enforcement.

Some other points made in the speech were:

  • Requiring AML/CFT standards around the world is vital for creating a level playing field and ensuring that bad actors don’t just gravitate to jurisdictions that have no safeguards.  I also want to be clear that our rules apply to any money transmitter — even if foreign-located—so long as they do business in whole or substantial part in the United States.
  • OFAC compliance obligations are the same regardless of whether a transaction is in digital currency or traditional fiat currency.  OFAC requirements apply equally to brick and mortar banks as they do to the digital currency world.  And compliance is not optional:  there are civil and criminal penalties if you fail.  See “A Framework for OFAC Compliance Commitments”.
  • Treasury is very focused on pursuing those who disregard their obligations.  She noted, “we’ve gone after some of the biggest non-compliant actors in this industry, such as BTC-e, which was shut down, and one of its directors and supervisors, Alexander Vinnik, indicted.” However, she indicated that they will  also go after the individual actors who—while maybe smaller in size— egregiously flaunt their obligations.  She noted that just last month, FinCEN issued a money penalty against a peer-to-peer exchanger named Eric Powers, who failed to register as a money services business and had no written policies or procedures for ensuring compliance with the BSA.

These and other actions make clear that regulatory compliance is not an option (not that it ever was) and that more enforcement actions are likely to come for those that do not heed the message.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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