To Fight Terrorism, FinCEN and Federal Reserve Board Request Comment on Proposed Major Expansion of Recordkeeping and Travel Rules for International Transfers

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Stated Concern is that Terrorism is Funded Primarily Through Small International Transfers

Proposed Change Would Expand BSA Definition of “Money” to Include Virtual Currency

The Financial Crimes Enforcement Network (“FinCEN”) and the Federal Reserve Board (“Board”) have requested comment on an important proposed new rule that would amend the “Recordkeeping Rule” and “Travel Rule” under the Bank Secrecy Act (“BSA”) and expand them significantly. The proposed regulation would reduce the current $3,000 threshold to only $250 for international transfers, thereby substantially expanding the scope of these rules.

Even by FinCEN’s own estimates, the effect would be broad. According to FinCEN, the new regulation would affect an estimated 5,306 banks, 5,236 credit unions, and 12,692 money transmitters – including exchangers of digital assets, who arguably would be most impacted by the new regulation. Further, FinCEN estimates – likely conservatively – that compliance would require no less than 3.3 million additional hours, annually. FinCEN and the Board strongly suggest that such compliance burdens are worth the effort, given the perceived value to law enforcement in combatting terrorism, which tends to be funded by small international transfers.

The Current Travel and Recordkeeping Rules

The “Travel Rule” and the “Recordkeeping Rule” are linked. Under the Recordkeeping Rule, the originator’s bank or transmittor’s financial institution must collect and retain the following: (a) name and address of the originator or transmittor; (b) the amount of the payment or transmittal order; the (c) the execution date of the order; (d) any payment instructions received from the originator or transmittor with the order; and (e) the identity of the beneficiary’s bank or recipient’s financial institution. The originator’s bank or transmittor’s financial institution also must retain the following information if it receives that information from the originator or transmittor: (a) name and address of the beneficiary or recipient; (b) account number of the beneficiary or recipient; and (c) any other specific indentifier of the beneficiary or recipient. The originator’s bank or transmittor’s financial institution must verify the identity of the person placing a payment or transmittal order if the order is made in person and the person placing the order is not an established customer. If the beneficiary’s bank or recipient’s financial institution delivers the proceeds to the beneficiary or recipient in person, the bank or nonbank financial institution must verify the identity of the beneficiary or recipient – and collect and retain various items of information identifying the beneficiary or recipient – if the beneficiary or recipient is not an established customer. Finally, an intermediary bank or financial institution – and the beneficiary’s bank or recipient’s financial institution – must retain originals or copies of orders.

Under the Travel Rule, the orginator’s bank or transmittor’s financial institution must include information, including all information required under the Recordkeeping Rule, in a payment or transmittal order sent by the bank or nonbank financial institution to another bank or nonbank financial institution in the payment chain. An intermediary bank or financial institution is also required to transmit this information to other banks or nonbank financial institutions in the payment chain, to the extent the information is received by the intermediary bank or financial institution. Currently, the threshold for both the Recordkeeping and Travel Rules is $3,000.

The Proposed Change

The press release summarizes the request for comment on the proposed regulation as follows:

. . . . FinCEN and the Board, pursuant to their shared authority, are proposing amendments to the recordkeeping rule jointly, while FinCEN, pursuant to its sole authority, is proposing amendments to the travel rule.

Under the current recordkeeping and travel rule regulations, financial institutions must collect, retain, and transmit certain information related to funds transfers and transmittals of funds over $3,000. The proposed rule lowers the applicable threshold from $3,000 to $250 for international transactions. The threshold for domestic transactions remains unchanged at $3,000.

The proposed rule also further clarifies that those regulations apply to transactions above the applicable threshold involving convertible virtual currencies, as well as transactions involving digital assets with legal tender status, by clarifying the meaning of “money” as used in certain defined terms.

Comments will be accepted for 30 days after publication in the Federal Register.

Further, compliance with the new regulation would involve a component of subjective knowledge by the financial institution. Specifically, a transmittal of funds would be considered to begin or end outside the United States if the financial institution has reason to know that the transmittor or recipient, or their financial institution, is “located in, is ordinarily resident in, or is organized under the laws of a jurisdiction other than the United States or a jurisdiction within the United States.” Moreover, “a financial institution would have ‘reason to know’ that a transaction begins or ends outside the United States only to the extent such information could be determined based on the information the financial institution receives in the transmittal order, collects from the transmittor to effectuate the transmittal of funds, or otherwise collects from the transmittor or recipient to comply with regulations implementing the BSA.”

FinCEN makes clear that the motivation behind this expansion is the perception that “malign actors” frequently fund their illicit conduct through small-value, cross-border transfers. In particular, FinCEN states that an analysis of Suspicious Activity Reports (“SARs”) filed by money transmitters regarding potential terrorist financing-related transmission of funds indicates that 99 percent of such transfers were either to or from the United States, and that approximately 71 percent of these transfers were at or below $500. Approximately 57 percent of these transfers were at or below $300. Although the request for comment provides many other details, statistics and anecdotes, the clear thrust is: the monetary thresholds for the Recordkeeping and Travel Rules need to be lowered to capture the low-value transfers promoting terrorism.

Focus on Virtual Currency

Significantly, the request for comment proposes that the term “money,” as it is incorporated within the terms “funds transfer,” “payment order” and “transmittal of funds” for the purposes of applying the Recordkeeping and Travel Rules, should include convertible virtual currencies (“CVC”). Specifically, “[t]his proposed rule also would revise the definitions of payment order and transmittal order set forth in the BSA regulations so that the Recordkeeping Rule and Travel Rule would explicitly apply to domestic and cross-border transactions in CVC and digital assets having legal tender status.”

Similarly, the request for comment observes that the Financial Action Task Force (“FATF”) issued guidance in June 2019, about which we have blogged here, instructing its 180 international member governments to similarly demand that virtual asset service providers, or VASPs, collect “accurate originator information and required beneficiary information” on transactions of $1,000 or more. Although FATF’s pronouncement sent some shockwaves through the digital currency industry, FinCEN now is proposing a requirement with an even lower monetary threshold. As we have blogged, application of the Travel Rule to virtual currencies has been a stated priority of FinCEN, but it also raises significant practical problems.

Particular Requests for Comment

The filing requests particular comments from both industry and law enforcement. Despite the effort at neutrality in particular requests for comment, the preceding sections of the notice strongly suggest that FinCEN and the Board are bent on significantly lowering the monetary threshold for the Recordkeeping and Travel Rules for international transfers. Indeed, some requests for particular comments appear designed to soften resistance by lowering the bar, such as by asking whether compliance burdens would be different if the rule instead applied to all transactions, regardless of any monetary amount and whether the transaction was international or domestic [answer: yes]. The particular request for comments from industry ask in part the following:

  • To what extent would the proposed rule impose a burden on financial institutions?
  • Would the burden be different for thresholds such as $0, $500 or $1,000?
  • Would the burden be different if the threshold included all transfers, including domestic transfers?
  • To what extent would the compliance burden be mitigated if the threshold still was $250 but nonbank financial institutions did not have to collect a social security number or employer identification number for non-established customers?
  • To what extent would the compliance burden be reduced if FinCEN and the Board issued “specific guidance about appropriate forms of identification to be used in conjunction with identify verification, including in regards to whether there are circumstances in which verification may be done remotely and what documents are acceptable as proof?”

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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