This alert summarizes three recent anti-money laundering (AML) developments highlighting the federal government's continuing efforts to include non-bank financial institutions within the scope of AML laws:

  1. The potential expansion of AML suspicious activity reporting (SAR) obligations to certain non-bank entities;
  2. Warnings from the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency (OCC), and the Financial Action Task Force on Money Laundering (FATF) against bank "de-risking" with respect to money services businesses; and
  3. Two administrative rulings from FinCEN confirming that virtual currency exchanges and payment systems are likely to trigger money transmitter AML requirements.

FinCEN's Interest in Expanding Suspicious Activity Reporting Requirements

At the annual ABA/ABA Money Laundering Enforcement Conference in early November 2014, David Cohen, U.S. Treasury Under Secretary for Terrorism and Financial Intelligence, stated that FinCEN is exploring rules to require "operators of credit card systems," check cashers, SEC-registered investment advisers, and Retail Foreign Exchange Dealers and Commodity Pool Operators to file SARs. Existing FinCEN regulations require SAR filings for suspicious or potentially suspicious activity under the Bank Secrecy Act (BSA) from banks; casinos and card clubs; money services businesses; brokers or dealers in securities; mutual funds; insurance companies; futures commission merchants and introducing brokers in commodities; and residential mortgage lenders and originators.

FinCEN has spent the past several years examining the extension of the BSA's requirements to the non-bank entities noted above. In light of FinCEN's interest in this area, many credit card firms, registered investment advisors, and other non-covered entities have voluntarily adopted AML programs and occasionally file SARs (even though not required by law).

Expect FinCEN to renew its efforts in this area in the New Year. For general information on SAR filing statistics, FinCEN publishes a quarterly report on its website.

Warnings against Bank De-Risking for Money Services Businesses

On November 10, 2014, the U.S. Treasury Department and FinCEN cautioned banks against terminating relationships (known as "de-risking") with money services businesses (MSBs) they consider risky, such as check cashers and money transmitters. The OCC followed on November 19, 2014, with Bulletin 2014-58, advising OCC-regulated banks on the agency's expectations for offering banking services to MSBs. The term MSB describes various types of businesses that transmit or convert money or cash checks. Federal regulators consider MSBs critical to maintaining transparency in the financial system because they provide financial services to those who do not use, or lack access to, traditional banking services. (On November 25, 2014, for example, FinCEN, assessed a $300,000 penalty against North Dade Community Development Federal Credit Union for failure to conduct sufficient due diligence and oversight related to MSB customers in high-risk jurisdictions.)

The FinCEN and OCC guidance came a few weeks after the Financial Action Task Force (FATF) advised financial institutions against de-risking in reaction to recent supervisory and enforcement actions. FATF is an intergovernmental organization focused on combating money laundering and terrorism financing. FinCEN, the OCC, and FATF each cautioned that de-risking is not an alternative to implementing a risk-based AML program. Instead, banks must evaluate customer relationships on a case-by- case basis, and only terminate relationships where the risks of money laundering and terrorist financing cannot be mitigated.

The FinCEN, OCC, and FATF guidance presents an interesting contrast to recent enforcement efforts of the Federal Trade Commission, Consumer Financial Protection Bureau, and the Department of Justice (through its Operation Chokepoint) to pressure banks and payment processors to refuse banking services to certain "high risk" industries such as payday lending. These enforcement actions, at least on the surface, seem difficult to square with the FinCEN, OCC, and FATF guidance against de-risking. In this regard, the most recent FinCEN and OCC guidance is similar to guidance issued by FinCEN and others in 2005, which suggests that banking regulators are also struggling to square the recent consumer protection enforcement actions with the need to maintain transparency in the financial system.

In sum, the federal government's conflicting messages have placed financial institutions and nonbank service providers in a difficult position. On the one hand, federal financial institution regulators have warned against "de-risking;" on the other, federal consumer protection regulators continue to target entities that do business with high risk industries. The challenge for banks (and other financial institutions) is how to manage their customers on a "case-by-case" basis without being second-guessed with an enforcement action.

Virtual Currency Transactions That Trigger Money Transmitter Obligations

On October 27, 2014, FinCEN issued two rulings on virtual currencies (Bitcoin, in the examples addressed) in response to questions submitted by two companies seeking guidance on the application of FinCEN's MSB requirements to the new payment technology. The rulings supplement FinCEN's initial March 2013 guidance regarding virtual currencies and the definition of "money transmitter."

  • In FIN-2014-R011, FinCEN stated that setting up a trading and booking platform for virtual currencies would subject a company to FinCEN regulations as an MSB. The platform at issue involved a trading system to match offers to buy and sell convertible virtual currency for real currency anonymously among the platform's customers. Under this advisory opinion, accepting anything of value "with the intent and/or effect of transmitting currency, funds, or any value that substitutes for currency to another person or location" makes that person "a money transmitter."
  • In FIN-2014-R012, FinCEN explained that a company would be considered a money transmitter if it accepted customers' credit card payments and then transferred the payments to merchants in virtual currencies. Companies in such a system would be subject to FinCEN regulations because the companies "engage[] as a business in accepting and converting the customer's real currency into virtual currency for transmission to the merchant."

The two rulings do not, as some had wanted, take the position that virtual currencies may only be equated to legal tender. The Internal Revenue Service, in Notice 2014-21 (March 25, 2014), previously determined that virtual currencies are capital goods and will be taxed on that basis. Therefore, it is possible that as the virtual currency market develops, dealers in these "currencies" may find themselves subject to regulation either by the Securities & Exchange Commission as a broker/dealer or the Commodities Futures Trading Commission.