The Federal Reserve Board (FRB) and Financial Crimes Enforcement Network (FinCEN) are continuing to focus on cross-border money flows, as shown by a recent proposed rule change that would require financial institutions to collect, retain, and transmit information from a much larger volume of international transactions.  This is part of an ongoing trend of cross-border enforcement that has implications for banks, money transmitters, and virtual currency exchanges.  The proposed rule would (1) lower the threshold at which financial institutions must collect, retain, and transmit information for cross-border transactions, and (2) make explicit that these regulations apply to transactions involving convertible virtual currencies (CVCs) such as Bitcoin.

Expanded requirements for cross-border transactions

On October 27, 2020, the FRB and FinCEN proposed rule amendments that would require financial institutions to collect, retain and transmit information related to funds transfers [1] and transmittals of funds for all cross-border transactions of $250 or more.[2]  The current threshold is $3,000 for transactions that “begin or end outside the United States.”  The new threshold was proposed after FinCEN analyzed data from Suspicious Activity Reports and concluded that a large percentage of cross-border transactions of interest fell below the $3,000 threshold.  While the threshold for domestic transactions would remain unchanged, the proposed rule would significantly change requirements for global transfers.

This significant amendment to the regulations demonstrates a continued commitment to regulating cross-border money flows and is consistent with recent AML reforms in other jurisdictions tightening controls around banks handling cross-border transactions (such as the EU 5th Anti-Money Laundering Directive).

Focus on virtual currency

The proposed amendments would define “money” within the meaning of the regulations at issue to include CVC, such as Bitcoin.  This codifies earlier guidance issued by FinCEN in May 2019 and makes clear that FinCEN and the FRB are continuing to focus on CVC as a source of AML risk.

As an example of this, FinCEN recently assessed a $60 million civil money penalty against Larry Dean Harmon, the founder, administrator, and primary operator of Bitcoin mixers Helix and Coin Ninja for allegedly violating the BSA by failing to: (1) register Helix and Coin Ninja as money services businesses, (2) implement and maintain an effective AML program, and (3) report suspicious activities.

According to FinCEN, “Mr. Harmon actively aided cybercriminals and other threat actors in circumventing the policies, procedures, and internal controls in place at U.S.-based convertible virtual currency exchanges.”[3] From around 2014 through 2017, Mr. Harmon allegedly conducted millions of transactions without collecting and/or retaining customer and transaction information, including with Iran-affiliated accounts [4].

Both the proposed rule change and this enforcement action show that transactions in virtual currency are squarely in the sights of regulators.

Conclusion

In issuing this proposed rule, FRB and FinCEN acknowledge that the amendments would create additional burdens on and costs to financial institutions and the CVC industry, and invite comments on this point.  The agencies note, however that they believe the effect of these amendments will be “low.” [5] Regardless of the effect, the commentary to the proposed rule suggests that both lowering the threshold for cross-border transactions and the application of the regulations to CVC are enforcement priorities for the agencies.  Comments to the proposed rule must be submitted before November 27, 2020.

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[1] A “funds transfer” is a series of transactions beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order. 31 CFR 1010.100(w).

[2] A “transmittal of funds” is defined as a series of transactions beginning with the transmitter's transmittal order, made for the purpose of making payment to the recipient of the order.  31 CFR 1010.100(ddd).  A transmittal of funds includes funds transfers.

[3] In the Matter of Larry Dean Harmon d/b/a Helix, Assessment of Civil Money Penalty, Statement of Facts, 4, https://www.fincen.gov/sites/default/files/enforcement_action/2020-10-19/HarmonHelix%20Assessment%20and%20SoF_508_101920.pdf.

[4] Id. at 5.

[5] https://www.federalregister.gov/documents/2020/10/27/2020-23756/threshold-for-the-requirement-to-collect-retain-and-transmit-information-on-funds-transfers-and.