In Effort to Reduce Cross-Border Financial Crime, FinCEN Proposes Lower Recordkeeping Thresholds

Proposed Amendments to Recordkeeping and Travel Rules

The Board of Governors of the Federal Reserve System (Board) and the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would:

  1. Reduce the threshold for the Recordkeeping and Travel Rules (the Rules) from $3,000 to $250 for transactions that begin or end outside of the US; and
  2. Clarify the application of these rules to convertible virtual currencies (CVC) and digital assets.

Summary

On October 23, 2020, the Board and FinCEN (collectively, the Agencies) issued a joint notice of a proposed rule that would revise the Bank Secrecy Act’s (BSA) Recordkeeping and Travel Rules. The proposed changes would lower the threshold of these Rules for cross-border transactions from $3,000 to $250 and clarify the Rules’ applicability to CVC. The notice explained that, in choosing the proposed new threshold, the Agencies considered the usefulness of transaction information associated with smaller-value cross-border transfers and transmittals of funds to help national security authorities and law enforcement agencies, noting that information available to the Agencies showed that bad actors are increasingly using smaller-value transactions to conduct illicit activity. For example, the notice highlighted that in a sample of 2,000 suspicious activity reports (SARs) relating to potential terrorist financing, approximately 99% of transmitted funds began or ended outside the US and 57% (a total of $103 million) were $300 or less. The notice added that the Money Laundering and Asset Recovery Section of the Criminal Division of the Department of Justice supported a lower dollar threshold, and that the changes were in line with current Financial Action Task Force (FATF) recommendations. The Agencies posited that the effect of the lower thresholds on financial institutions would be minimal. 

In addition, in response to industry assertions that CVC is not money and therefore not subject to the Rules, the proposed changes would amend the Rules to define money to explicitly include digital assets and CVCs. In support of the proposed amendment, the notice cites increased public use of CVCs, employment of CVCs by bad actors to facilitate international terrorist financing and financial crimes, and the use of foreign government-backed digital currencies to evade sanctions.

What's New? 

The Recordkeeping Rule requires banks and nonbank financial institutions to collect and retain information relating to certain funds transfers and transmittals of funds. The Travel Rule in turn requires banks and nonbank financial institutions to transmit information relating to transfers and transmittals to other banks and nonbank financial institutions participating in the transaction. Currently, the Rules apply to transfers and transmittals of $3,000 or more. Under the proposed rules, this threshold would be lowered to $250 for fund transfers or transmittals of funds that begin or end outside the US. The proposed rule clarifies that a funds transfer or transmittal of funds would be considered to begin or end outside the US if the financial institution has reason to know that the transmitter, the recipient, or their respective financial institutions, is located in, is ordinarily resident in, or is organized under the laws of a jurisdiction other than the US. A financial institution would have reason to know that a transaction begins or ends outside the US based on the information received in the transmittal order, collected from the transmitter to effectuate the transmittal of funds, or otherwise collected from the transmitter or recipient to comply with regulations implementing the BSA.

Practical Impact to Financial Institutions and Digital Asset Businesses 

In the notice, FinCEN estimates that the proposed change would impact 5,306 banks, 5,236 credit unions, and 12,692 money transmitters. The Agencies consider the effect of lowering the $3,000 threshold on financial institutions to be minimal, in part because a number of them already collect the required information under the current dollar threshold for SAR reporting purposes. Nonetheless, industry actors have expressed concerns regarding the proposed rule due to expected additional compliance and technology costs.

Regardless of the dollar threshold, the Travel Rule presents a significant operational challenge for virtual asset service providers (VASPs), which have been scrambling to implement a solution following FATF and regulators’ guidance clarifying its application to CVC. Unlike the SWIFT network, the blockchain technology underlying CVC does not have an intermediary to collect the necessary personally identifiable information. Several industry groups are working on possible technical solutions. Any protocol that enables compliance with the Rules likely requires a technical solution that is scalable, cost-effective, applicable to all virtual assets, and involves minimal disruption for users. The discrepancy between the threshold proposed in the new rule and international standards may exacerbate the burden for US-based cryptocurrency businesses, placing them at a regulatory disadvantage as they navigate compliance with varying applicable jurisdictional requirements.

What Should You Start Doing?

Covered entities should consider proactively assessing their exposure based on the proposed rule and reviewing areas requiring enhancement should the new rule take effect. This includes identifying and assessing any operational or technical limitations that would inhibit compliance with the proposed amendments and evaluating their current policies, procedures, and controls relating to collection and transmittal of information associated with funds transfers and transmittals of funds to identify required updates. Banks and nonbank financial institutions should also consider developing a plan to implement necessary changes, including additional costs and resources required, to help ensure they are in a position to timely comply with the revised rules.

How Guidehouse Can Help

Guidehouse can help financial institutions and VASPs assess their compliance programs in light of the proposed regulatory changes, including determining changed obligations under the proposed rules and developing and implementing updates to operations, policies, procedures, controls, and technology. Its areas of relevant expertise include the following:

  • Anti-money laundering
  • Sanctions
  • Strategic planning
  • Risk management
  • Vendor sourcing and governance
  • Executive training

Guidehouse can quickly review and assess your financial crime program to determine whether it is sound, identify gaps or weaknesses, or conduct training on AML and Sanctions compliance, including blockchain tracing and analytics. Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to heightened regulatory requirements

Special thanks to Jonathan Le Ruyet for contributing to this article. 

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