Background

On September 30, 2010, the Financial Crimes Enforcement Network (“FinCEN”) issued a notice of proposed rulemaking1 (“Proposed Rule”) that, if implemented, would mandate certain depository institutions and money service businesses (“MSBs”) to affirmatively provide records and report information to FinCEN relating to certain cross-border electronic transmittals of funds (“CBETF”).2 Federal regulations (and certain state money transmitter laws) already require that these financial institutions maintain and make available essentially the same information, but do not require the affirmative reporting of this information, if it does not rise to the level of a suspicious transaction.

FinCEN issued the proposed rule to meet the requirements of the Intelligence Reform and Terrorism Prevention Act of 2004 (“IRTPA”). Section 6302 of IRTPA directed the Secretary of the Treasury (“the Secretary”) to study the feasibility of requiring certain financial institutions to report to FinCEN certain cross-border electronic transmittals of funds, “if the Secretary determines that reporting of such transmittals is reasonably necessary to conduct the efforts of the Secretary against money laundering and terrorist financing.”3 The Treasury Department, which completed its study in January,4 concluded that the information that FinCEN is seeking to be reported is reasonably necessary to support the Secretary’s efforts to combat money laundering and terrorist financing.5 In determining the reasonableness of the reporting requirement, the study highlighted law enforcement’s weakness in identifying significant relationships to active targets asresult of its inability to conduct proactive analysis on the information currently recorded by banks. The study also recommended, among other things, a phased implementation of CBETF data rules. Subsequently, FinCEN conducted a comprehensive study addressing the proposed first step of implementation of CBETF reporting.6 The Proposed Rule is based on the conclusions of these two studies.

According to FinCEN, the proposed reporting requirement would create a centralized database of very basic CBETF information in a single format and link it with other highly relevant financial intelligence, which is necessary to eliminate the exploitation of loopholes in the wire transfer rules for money laundering, terrorist financing and tax evasion purposes.7 Furthermore, FinCEN believes that the information concerning such transfers provides both a source of information that can provide new leads standing alone and can potentially enhance the usefulness of current Bank Secrecy Act (“BSA”) data collected by FinCEN, when combined with other data sources.

The Proposed Rule

The Proposed Rule requires the periodic filing of CBETF reports by certain banks for all CBETFs and by certain money transmitters for all CBETFs of at least $1,000. The Proposed Rule defines a “reporting financial institution,” as any bank or money transmitter acting as a “first-in” or “last-out” financial institution.8 A first-in financial institution would be any reporting financial institution that receives a transmittal order or the advice of a transmittal order from a foreign financial institution. Conversely, a last-out financial institution would be defined as any reporting financial institution that sends the transmittal order or the advice of the transmittal order to a foreign financial institution. These definitions would apparently exempt from CBETF reporting requirements smaller financial institutions that do not play a role in cross-border transmittals or are not equipped to complete a CBETF because these smaller institutions rely on large banks to process their CBETFs. Essentially, FinCEN believes that the obligation to report CBETFs should lie with those U.S. institutions that transmit an electronic funds transfer instruction directly to a non-U.S. financial institution or conversely, should lie with those that receive such instructions directly from a non-U.S. financial institution. This approach, FinCEN believes, will aim to capture funds transfer instructions at the point at which they cross the U.S. border.

The Proposed Rule would require all reporting financial institutions to file a report for each CBETF, which FinCEN proposes to define as a “transmittal of funds where either the transmittal order or the advice is: (i) communicated through electronic means; and (ii) sent or received by either a first-in or a last-out financial institution.” A reporting financial institution would be required to file its reports with FinCEN no later than five (5) business days after issuing or receiving the transmittal notice or its advice. FinCEN made it clear from the proposed definition that its concentration is on the evidence of payments (as opposed to the actual payment itself), represented by a transmittal order or an advice of a transmittal order. The Proposed Rule will thus require the reporting of transmittal orders, regardless of whether the actual payment of the order occurs. Only messages exchanged by electronic means, between a foreign financial institution and either a first-in financial institution or a last-out financial institution, will trigger the reporting requirement.9

In an attempt to reduce compliance costs and mitigate the possibility of implication of privacy laws, and in light of the study revealing that banks, by and large, keep records for funds transfers regardless of dollar value, the Proposed Rule would require banks to report all CBETFs, regardless of dollar amount.10 Reporting money transmitters, however, would be required to report CBETFs only exceeding $1,000. Money transmitters are treated differently, in part, because the industry has adopted global recordkeeping requirements and keep records at the lowest regulatory threshold required regardless of jurisdiction, thus assuring them of compliance in all applicable jurisdictions. FinCEN views the $1,000 reporting threshold as reasonable because of the industry’s current compliance with the same threshold implemented by many jurisdictions, which is also the threshold recommended by the Financial Action Task Force (“FATF”).

To satisfy CBETF reporting requirements, reporting financial institutions would be able to submit copies of certain standard funds transmittal orders directly to FinCEN.11 Because a significant portion of transmittal orders are carried by third parties, third-party reporting of the transmittal orders, at the express direction of the bank, would satisfy the reporting requirement under the Proposed Rule. However, in such instances, the reporting obligation and accountability for compliance would still remain with the bank. Alternatively, if a reporting financial institution is unable to submit copies of the standard format transmittal orders, or an associated third party fails to do so, it would be required to submit to FinCEN the required information in alternative formats to be prescribed by FinCEN. FinCEN proposes to require institutions utilizing the alternative reporting format to submit only the following information, if available, about all CBETFs:12

  1. Unique transaction identifier number;
  2. Either the name and address or the unique identifier of the transmittor’s financial institution;
  3. Name and address of the transmittor;
  4. The account number of the transmittor (if applicable);
  5. The amount and currency of the funds transfer;
  6. The execution date of the funds transfer;
  7. The identity of the recipient’s financial institution;
  8. The name and address of the recipient;
  9. The account number of the recipient; and
  10. Any other specific identifiers of the recipient or transaction.

Further, for reportable transactions of $3,000 or more, the Proposed Rule would require that money transmitters include, in addition to the above required information, the U.S. taxpayer identification number of the transmittor or recipient13 in their reports. All CBETF reporting would be submitted electronically, either discretely on a transaction-by-transaction basis, or by batching transactions, unless a reporting financial institution can demonstrate that this would be unnecessarily burdensome.

As a separate but related FinCEN proposal, all banks (not just the reporting institutions described above) would be required to file with FinCEN an annual report of the account number and accountholder’s U.S. tax identification number (“TIN”) of all accounts used to originate or receive CBETFs subject to reporting under Section 6302 of IRTPA. This annual reporting requirement would apply to all banks that maintained any customer account that was debited or credited to originate or receive a CBETF, for any amount, during the previous calendar year.14 The report would have to be submitted by April 15 of the year following the CBETF transaction date. FinCEN believes that this proposal will increase the utility of the funds transfer data to “better detect, investigate, and prosecute money laundering and terrorist financing to the extent that such crimes also may involve tax evasion.”15

Reporting Exemptions

Under the Proposed Rule, FinCEN intends to exempt from both reporting requirements funds transfers that are conducted entirely through, and messaged entirely through, systems that are proprietary to banks (e.g., interbranch transfers), including those developed by banks, or those off-the-shelf systems acquired and adopted or adapted by banks. This exemption would not apply to money transmitters, because their business model for the transmittal of funds relies almost solely upon proprietary systems. FinCEN is also proposing to exempt from both reporting requirements CBETFs where both the transmittor and the recipient are a bank, meaning there is no third-party customer involvement in the transaction.

FinCEN is seeking public comment on numerous aspects of the Proposed Rule, including, among other things, effects on customer privacy, cost and impact on affected financial institutions, and effect of TIN reporting on the banking and money transmitter industries. FinCEN does not anticipate issuing a final rule until 2012. In addition, FinCEN has indicated that it expects delaying the compliance date of the final rule to provide financial institutions with sufficient time to adjust their systems for compliance. Written comments are due on or before Dec. 29, 2010.