Table of Contents
- 1 Key Takeaways:
- 2 What Is the Financial Crimes Enforcement Network (FinCEN)?
- 3 The History Behind Financial Crimes Enforcement Network (FinCEN)
- 4 What Is the Bank Secrecy Act (BSA)?
- 5 What Are FinCEN’s Responsibilities?
- 6 How Does FinCEN Combat Financial Crime Internationally?
- 7 FinCEN Enforcement of SAR and CTR Reporting Requirements
- 8 What Are the Steps FinCEN Uses to Detect Money Laundering?
- 9 FinCEN Update to Banking Regulations
- 10 How FinCEN Applies to Virtual Currencies
- 11 Money Service Businesses (MSBs) and Their Role in Financial Compliance
- 12 Timeline of FinCEN Cryptocurrency Compliance Measures and Enforcement
- 13 What Is the Travel Rule?
- 14 Conclusion
- 15 Identity.com
Key Takeaways:
- The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Treasury that works to detect and stop financial crimes.
- FinCEN achieves this by collecting and analyzing financial data, which helps in identifying and preventing money laundering, terrorist financing, and other illicit activities.
- FinCEN works with international financial intelligence units (FIUs) and other global entities to combat transnational financial crimes
What Is the Financial Crimes Enforcement Network (FinCEN)?
How Does FinCEN Combat Financial Crime Internationally?
To effectively track and combat financial crime, FinCEN, as the U.S. Financial Intelligence Unit (FIU), collaborates with various organizations both domestically and internationally. Beyond U.S. borders, FinCEN exchanges critical information with FIUs from other countries to protect global financial systems from criminal threats.
FinCEN Enforcement of SAR and CTR Reporting Requirements
Understanding that the Bank Secrecy Act (BSA) sets the regulations and FinCEN enforces compliance is crucial. So, what are the two most important types of data that both banks and non-bank financial institutions are required to submit?
- Suspicious Activities Reports (SARs)
- Currency Transaction Reports (CTRs)
Suspicious Activities Reports (SARs)
Under the BSA, financial institutions must monitor and report suspicious activities. When a potentially suspicious activity is detected, a thorough investigation must be conducted to determine if filing a SAR is necessary. This process should be completed within 30 days of the transaction. SARs are required in the following cases:
- Criminal violations involving any amount.
- Violations of $5,000 or more when a suspect is identified.
- Criminal offenses involving $25,000 or more without a suspect.
- Transactions of $5,000 or more potentially linked to money laundering or BSA violations.
Currency Transaction Reports (CTRs)
What Are the Steps FinCEN Uses to Detect Money Laundering?
FinCEN enforces compliance with the Bank Secrecy Act (BSA) by collecting and analyzing data from financial institutions to monitor electronic and cash transactions. Money launderers attempt to obscure the movement of funds to make them appear legitimate, posing challenges for law enforcement. FinCEN follows these steps to collect and process data:
- Receives SARs and CTRs — FinCEN collects Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) submitted daily by financial institutions.
- Analyzes the Data — Information from SARs and CTRs is analyzed to identify individuals, entities, and criminal networks involved in money laundering, terrorism financing, weapons proliferation, and other illegal activities.
- Connects Unrelated Parties — Through its data analysis, FinCEN can link seemingly unconnected local or international criminal organizations and individuals based on their transaction data.
- Law Enforcement Action — The analyzed data is shared with law enforcement agencies, aiding in financial investigations. SARs and CTRs have been crucial to numerous criminal investigations over the years.
FinCEN Update to Banking Regulations
In 2018, FinCEN introduced a major update to its banking regulations with the Beneficial Ownership rule, also known as the Customer Due Diligence (CDD) Final Rule. This rule requires financial institutions to conduct thorough due diligence on the beneficial owners of companies utilizing their services. The goal is to prevent criminals from using shell companies for activities like money laundering or other illegal financial transactions.
What Is Beneficial Ownership?
Beneficial ownership refers to the rights an individual has over certain assets or shares within a company. Legally, a beneficial owner is someone who owns more than 25% of a company’s shares, whether through direct ownership, management, or voting rights.
The structure of beneficial ownership can vary from simple to highly complex, especially in organizations with numerous subsidiaries. These intricate structures are often created for nefarious purposes. Before the CDD Final Rule in 2018, Anti-Money Laundering (AML) compliance was mainly focused on individual customers. The new rule expanded this to include the beneficial owners of companies, ensuring financial transparency.
What Are Shell Companies?
While shell companies can be used for legitimate purposes like asset protection or holding investments, they are also frequently exploited for money laundering and fraudulent activities. Due to the risks they pose, financial institutions are required to conduct more rigorous due diligence when working with shell companies, following FinCEN’s 2018 Beneficial Ownership rule.
How FinCEN Applies to Virtual Currencies
Money Service Businesses (MSBs) and Their Role in Financial Compliance
Money Service Businesses (MSBs) encompass various entities that handle the transmission or conversion of currency. FinCEN defines MSBs broadly to include both banking and non-banking financial institutions (NBFIs). Entities engaged in any of the following activities are classified as MSBs:
- Currency dealers or exchangers, including virtual asset service providers like exchanges and brokers
- Check cashers
- Issuers or sellers of traveler’s checks, money orders, or stored value
- Money transmitters
- The U.S. Postal Service
Timeline of FinCEN Cryptocurrency Compliance Measures and Enforcement
The evolving world of cryptocurrencies and virtual assets has seen increasing regulatory attention from the U.S. government, particularly from FinCEN. Over the years, the agency has implemented various measures to ensure compliance with financial regulations, signaling the government’s cautious yet firm stance on digital currencies. Below is a timeline highlighting significant regulatory actions and developments:
| Year | Event Description |
| 2011 | Virtual assets recognized as Money Service Businesses (MSBs) under “other value that substitutes for currency.” |
| 2012 | U.S.-based MSBs, including crypto service providers, required to comply with BSA and AML regulations. |
| 2013 | Virtual currencies equated to traditional ones, requiring adherence to BSA and AML regulations and reporting to FinCEN. |
| 2015 | Ripple Labs, associated with XRP token, fined $700,000 for MSB registration violations (First Civil Enforcement Action). |
| 2017 | BTC-e, a foreign-based MSB, fined $110 million for operating without a U.S. license and alleged money laundering. Its founder, Alexander Vinnick, faced extradition to the U.S. for criminal charges, highlighting regulators’ determination to enforce compliance. |
| 2019 (April) | FinCEN penalized a peer-to-peer crypto exchanger, Mr. Eric Powers (First individual trader punishment). |
| 2019 (May) | FinCEN issued guidance for Convertible Virtual Currencies (CVC) businesses to consider themselves as MSBs. |
| 2019 | SEC and CFTC joint efforts against AML non-compliance and stablecoin classification as money transmitters. |
| 2020 | Crypto exchanges required to submit Suspicious Activity Reports (SARs) for transactions over $10,000. Proposed regulations sought wallet owner identification for transactions exceeding $3,000. |
| 2021 | Biden administration proposed rules for crypto exchanges as brokers, mandating BSA/AML compliance similar to traditional banks. |
| 2021 | CFTC charged 14 crypto firms for registration failures and two for misleading public statements about their cryptocurrencies. |
| 2022 | White House issued an Executive Order focusing on responsible development of digital assets, including a potential U.S. Central Bank Digital Currency (CBDC) |
| 2023 | FinCEN received 4.6 million SARs, with over half filed by depository institutions, reflecting the growing scrutiny on crypto-related financial activity. |
| 2024 | Continued focus on crypto enforcement, with new rules anticipated on wallet identification and AML measures to mitigate risks from decentralized finance (DeFi) platforms. |
What Is the Travel Rule?
The Travel Rule, enforced by FinCEN, requires financial institutions to share and maintain detailed information about both the sender and the recipient during financial transactions. This rule has been extended to cover cryptocurrency exchanges under the revised FATF Recommendation 15 for Virtual Asset Service Providers (VASPs). The purpose of the Travel Rule is to ensure transparency and traceability in financial transactions, helping to combat money laundering and other illicit activities.
For each transaction, financial institutions must collect and share the following information:
Sender’s Information:
- Sender’s name (transmitter)
- Sender’s account number (if applicable)
- Sender’s address
- Sender’s financial institution
- Transaction amount
- Transaction date
- Recipient’s financial institution
Recipient’s Information (provided by the beneficiary bank):
- Recipient’s name
- Recipient’s address
- Recipient’s account number
- Any other specific identifier of the recipient
When it comes to Virtual Asset Service Providers (VASPs), the FATF guidelines require additional information to be shared:
Originating VASP Must Provide:
- Originator’s name (customer)
- Originator’s account number for the transaction
- Unique identifiable information (such as a national identity number, passport number, social security number, driving license number, or residential address)
Receiving VASP Must Share Upon Receipt of Funds:
- Beneficiary’s name (customer)
- Beneficiary’s account number used for the transaction
Conclusion
Identity.com
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