May 23, 2022

Volume XII, Number 143

Advertisement
Advertisement

May 20, 2022

Subscribe to Latest Legal News and Analysis

FinCEN and Federal Reserve Seek Comments on Proposed Amendments to the Recordkeeping and Travel Rules

On October 23, 2020, the Board of Governors of the Federal Reserve System (the ‘‘Board’’) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) (collectively, the “Agencies”) issued a joint Notice of Proposed Rulemaking (“NPRM”) soliciting public comment on questions relating to potential amendments to Bank Secrecy Act (“BSA”) regulations. The proposed amendments seek to modify the existing Recordkeeping Rule and Travel Rule by:

  • Lowering the requirement to collect, retain, and transmit information on funds transfers and transmittals of funds from $3,000 to $250 for transactions that begin or end outside the United States; and

  • Superseding the existing definition of money to include convertible virtual currencies (“CVCs”).

These proposed changes, especially the change to the definition of money, could significantly impact financial institutions’ BSA compliance requirements. The NPRM follows guidance issued by FinCEN in May 2019 indicating that CVC transfers by a nonbank financial institution could fall under the Recordkeeping and Travel Rules.  The proposed rule would implement FinCEN’s guidance subject to the Agencies consideration of the comments received.

Background

On January 3, 1995, the Agencies jointly issued the Recordkeeping Rule[1] requiring banks and nonbank financial institutions to collect and retain information related to funds transfers and transmittals of funds in amounts of $3,000 or more. At the same time, FinCEN issued the Travel Rule[2] that requires banks and nonbank financial institutions to transmit information on certain funds transfers and transmittals of funds to other banks or nonbank financial institutions participating in the transfer or transmittal. The proposed changes discussed below would amend both the Recordkeeping Rule and the Travel Rule.

Proposed Amendments

  1. Lowering of Threshold From $3,000 to $250 for International Funds Transfers and Transmittals of Funds by Financial Institutions

The Agencies are proposing to lower the value threshold under the Recordkeeping Rule, and FinCEN is proposing to lower the threshold under the Travel Rule, from $3,000 to $250 for cross-border funds transfers and transmittals of funds. The Agencies believe that these changes will benefit national security and facilitate law enforcement’s efforts to detect illegal activity because evidence indicates that a substantial amount of illicit international activity, particularly terrorism financing, occurs below the $3,000 threshold.  According to the NPRM, these changes are supported by the Department of Justice’s Money Laundering and Asset Recovery Section and are consistent with recommendations by the Financial Action Task Force (“FATF”).

The Agencies are seeking comment from financial institutions on the following questions:

  • To what extent the proposed rule would impose a burden on financial institutions, including with respect to information technology implementation costs?

  • To what extent would the burden be mitigated if nonbank financial institutions did not have to collect a social security number or employer identification number for non-established customers engaging in transmittals of funds between $250 and $3,000 that begin or end outside the United States?

  • To what extent would the burden be reduced if the Agencies issued specific guidance about appropriate forms of identification to be used in conjunction with identity verification?

  • To what extent would the burden be mitigated if the Agencies were to include the standard for determining when an institution would be subject to the $250 threshold for cross-border transfers, including what would satisfy the “reason to believe” standard?

  1. Applying the Recordkeeping and Travel Rules to Digital Assets That Have Legal Tender Status and Convertible Virtual Currency

The existing Recordkeeping and Travel Rules mirror the definition of money as provided by the Uniform Commercial Code—“a medium of exchange currently authorized or adopted by a domestic or foreign government.’’ However, since development of the Rules, CVCs such as Bitcoin and Ethereum, have grown in popularity and bad actors have capitalized of the proliferation of opportunities to use these currency equivalents to evade United States laws and regulations.  In response to similar developments globally, FATF has advised that countries should consider virtual assets as “property,” “proceeds,” “funds,” “funds or other assets,” or other “corresponding value” and should apply relevant FATF anti-money laundering/counter-terrorist-financing measures to virtual assets.

Accordingly, the proposed amendments seek to modify the definition to money to be more inclusive. The amendments would modify the definition of money to include “a medium of exchange currently authorized or adopted by a domestic or foreign government, including any digital asset that has legal tender status in any jurisdiction,” and “a medium of exchange (such as cryptocurrency) that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status.”

The Agencies are seeking comment from financial institutions on the following questions:

  • What would be the additional cost, if any, to comply with the Recordkeeping Rule and Travel Rule in light of the clarification included in the proposed rule, including with respect to information technology costs?

  • What mechanisms have persons that engage in CVC transactions developed to comply with the Recordkeeping Rule and Travel Rule and what is the impact of adopting these solutions on the CVC industry, including on other BSA compliance efforts?

Why These Proposed Changes Matter

The proposed amendments potentially create additional burdens for financial institutions to comply with BSA requirements. While lowering the dollar threshold and including certain digital assets and virtual currencies may yield additional information of value to law enforcement, this will also significantly increase the number of transactions that will now become subject to the Recordkeeping and Travel Rules.

The Agencies are expressly requesting comments from interested parties in the financial industry to help tailor the proposed amendments such that they accomplish the desired law enforcement purpose, but do so in a way that minimizes the additional burden on financial institutions. Additionally, all financial institutions will be required to evaluate and update their BSA programs based on the rules the Agencies ultimately implement. Every financial institution should therefore take advantage of the invitation to provide input on these proposed changes that will shape their compliance obligations for years to come.

Interested parties must submit written comments on the proposed amendments on or before November 27, 2020.


[1] The Recordkeeping Rule is codified at 31 CFR 1020.410(a) and 1010.410(e).

[2] The Travel Rule is codified at 31 CFR 1010.410(f).

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 315
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Kevin McCart White Collar Attorney Squire Patton Boggs Washington DC
Partner

Corporations and individuals facing allegations of white-collar criminal and civil violations call upon Kevin McCart to provide the effective legal strategies and investigative skills that will help them avoid prosecution and minimize damaging outcomes. Kevin has been lead counsel in criminal and civil matters in federal district and circuit courts, as well as military courts-martial. His global government and internal investigations background includes representing financial institutions, corporations and individuals in economic sanctions, money laundering, bank fraud, the Bank Secrecy...

202-457-6457
Claiborne Clay W. Porter Partner Squire partner Boggs
Partner

Clay Porter’s practice focuses on representing clients, including financial institutions, non-bank financial institutions, cryptocurrency businesses and corporations, in complex white collar criminal defense, regulatory enforcement defense, internal investigations and compliance counseling matters. Clay has particular expertise handling cases involving economic sanctions, the Bank Secrecy Act/anti-money laundering laws and regulations (BSA/AML), sensitive employee issues, fraud and embezzlement, corruption and the Foreign Corrupt Practices Act (FCPA). In addition, Clay is routinely called...

202-457-6511
Advertisement
Advertisement
Advertisement