The first part of this article series covered the basics of FinCEN cryptocurrency regulation and provided a deeper insight into four key considerations for money services businesses, especially in the field of FinTech. In this part, we take a closer look at one of the most important aspects of FinCEN regulation – the FinCEN Funds Transfer Rule.
Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts.
FinCEN Funds Transfer Rule
The FinCEN Funds Transfer Rule is also known as the Travel Rule that requires financial institutions to collect and retain certain information related to funds transfers and transmittals. On March 15, 2019, FinCEN Director Kenneth A. Blanco was speaking at a Blockchain Symposium when he stated that the FinCEN Funds Transfer Rule should apply to all CVCs. Mr. Blanco also stated that: “FinCEN, through delegated examiners at the Internal Revenue Service, has been conducting examinations that include compliance with the Funds Travel Rule since 2014. In fact, to date, it is the most commonly cited violation by the IRS against MSBs engaged in CVC money transmission”.
Mr. Blanco’s comments were made following the release of FinCEN’s 2019 guidance on the application of AML rules, including the Travel Rule, to businesses engaging in virtual currency activities. Moreover, in the same year, the Financial Action Task Force (FATF), which combats money laundering and terrorism financing, issued its FATF Recommendation 16, which requires Virtual Asset Service Providers to share Know-Your-Customer (KYC) and Personal Identifiable Information data between the transacting receivers and senders before the transaction is executed. Virtual Asset Service Providers are, among others, cryptocurrency exchanges, custody providers, and Bitcoin ATMs.
Recordkeeping and Travel Rules
In 1995, the Board of Governors of the Federal Reserve and FinCEN issued a joint Rule for banks and other non-bank financial institutions. This Rule had to do with the information required to be included on transfers of funds and is made up of two parts – the Recordkeeping Rule and the Travel Rule.
The Recordkeeping Rule mandates that financial institutions collect and keep hold of the very same information that the Travel Rule pertains to. The Travel Rule mandates that each time a transfer of funds occurs, certain information has to be passed along and “travel” to each following financial institution in the transfer chain. To be compliant with the FinCEN Funds Transfer Rule, the following information is needed:
- The name of the transmitter
- The account number of the transmitter
- The address of the transmitter
- The identity of the financial institution
- The transferred amount
- The transfer date
FinCEN made clear that the financial institution of the recipient should retain the same information as the originator, as long as that information has been provided by the originating MSB.
2020 Modifications and Updates to the Rules
The Board of Governors of the Federal Reserve System and FinCEN issued a joint Notice of Proposed Rulemaking (NPRM) in October of 2020. The authorities sought to gather public comments on proposed amendments seeking to modify the Recordkeeping and Funds Transfer Rules by:
- Lowering the requirement for collecting, retaining, and transmitting information when transferring and transmitting funds from $3,000 to $250, in the case where transactions are ending or have begun outside of the U.S.
- Including CVCs in the existing definition of money
Later, in December of 2020, FinCEN issued an NPRM that would mandate cryptocurrency exchanges, banks, and MSBs to gather KYC data on any person transferring crypto equivalent to or greater than $3,000 in value, both from or to a private wallet. The NPRM would also require MSBs and banks to gather, maintain, and report all information about customers that take part in virtual currency transactions with unhosted wallets.
Equivalent requirements would also be placed on hosted wallet transactions held by a financial institution to which the BSA does not apply and that are located in any of the jurisdictions found on the FinCEN Foreign Jurisdictions List.
The NPRM would mean that impacted businesses would have to increase their KYC efforts - by collecting and storing data on, as well as reporting on more transactions than ever before. This would only increase the pressure on companies to invest more efforts in order to remain compliant.
Implementing a Risk-Based Approach to Prepare for FinCEN’s Funds Transfer Rule
The Funds Transfer Rule could structurally change how Virtual Asset Service Providers operate going forward. As documented by FATF, the best way of preparing for this is for cryptocurrency exchanges to utilize a risk-based approach based on FinCEN’s guidelines and have clear and defined procedures and policies in place. For example:
- Risk-assessing unhosted wallets. Incorporating risk assessment into the AML program of a crypto organization allows for higher levels of both protection and detection of suspicious unhosted wallet transactions. Using software that enables denial and freezing of transactions to achieve compliance is highly recommended.
- Third-party risk management. Having risk management procedures and standards for dealing with third parties will help transactions to be communicated within the ambit of BSA guidelines.
- Analyzing the market. Smaller firms should assess their market position with the utmost care and caution to ensure optimal doing of business. Making sure that best industry practices are being employed in order to prevent regulatory probes and, consequently, financial and reputational damage is of paramount importance.
Conclusion
The best way to ensure compliance with FinCEN Funds Transfer Rule is to have a strong Customer Due Diligence (CDD) and KYC process that collects crucial information while onboarding customers. The most advisable course of action is to engage an established, experienced expert on the matter, thus ensuring that your business is in good hands and remains fully compliant.
The Author
InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013. InnReg specializes on mitigating regulatory risk while helping clients launch and grow innovative fintech products and services.
