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State, Federal Authorities Increase Scrutiny of Virtual Currencies, Emerging Payment Providers
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.
The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. On August 12, the leaders of that committee, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans,” “strategies,” or “ongoing initiatives” regarding virtual currencies. The letter specifically notes the importance of balancing the need to deal with “potential threats and risks . . . swiftly” with the goal of ensuring that “rash or uninformed actions don’t stifle a potentially valuable technology.”
This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
FinCEN Introduces New Form for Authorizing FBAR Filing by Spouses and Third Parties
On July 29, FinCEN released a new form for filers who submit Reports of Foreign Bank and Financial Accounts (FBARs) jointly with spouses, or who wish to submit them via third-party preparers. Filers interested in using the form would obtain it from FinCEN or the IRS, and filers and account owners would maintain the form but would not submit it to FinCEN. FinCEN also announced (i) technical adjustments to ease FBAR filing and allow for enhancements such as introducing new space on the form for filers to provide reasons for late filing as well as the addition of third party preparer information, and (ii) the availability of batch filing capability for testing. FinCEN anticipates the revised electronic FBAR and batch capability will be available for general use by September 30, 2013.
FinCEN Creates CTR Exemption for Armored Car Transactions
On July 12, FinCEN issued a ruling to exempt financial institutions from collecting data about certain armored car transactions required for Currency Transaction Reports (CTR). Under a 2009 ruling, FinCEN clarified that when a financial institution customer hires an armored car service (ACS) to conduct business on its behalf, the customer’s financial institution is subject to the same CTR requirements as it would be with any other third-party facilitating a transaction for a customer. FinCEN now recognizes that the 2009 ruling created practical issues in application – financial institutions have had difficulty differentiating transactions conducted by a given ACS on behalf of the institution from those the ACS conducted on behalf of a customer, and have had trouble obtaining drivers’ personal information required for the CTR. With its current ruling, FinCEN authorized an exception to the CTR data collection and aggregation requirements that applies only to deposits or withdrawals conducted by an ACS employee pursuant to instructions from the financial institution’s customer or from a third party.
FinCEN Announces Functional Reorganization
On June 24, FinCEN announced its new organizational structure, effective immediately. The new structure organizes employees based on their job function, whereas previously employees were organized based on the stakeholder that they served. FinCEN believes the change will maximize its ability to efficiently further its anti-money laundering and counterterrorist financing efforts.
FinCEN Publishes SAR Activity Review and Annual SAR Data Report
This week, FinCEN published its semiannual SAR Activity Review, which provides information about the preparation, use, and value of Suspicious Activity Reports (SARs) filed by financial institutions. The report identifies SAR trends, reviews law enforcement cases that demonstrate the importance and value of Bank Secrecy Act (BSA) data to the law enforcement community, and highlights issues related to financial exploitation of older Americans. FinCEN also published an annual companion report, “By the Numbers,” which compiles numerical data gathered from SARs filed by financial institutions.
FinCEN Issues Guidance on Syria
On April 15, FinCEN issued Advisory FIN-2013-A002, which advises financial institutions to review regulations that require U.S. financial institutions to perform money laundering or other suspicious activity due diligence or enhanced due diligence for correspondent accounts and private banking accounts established, maintained, administered, or managed in the U.S. for foreign financial institutions or non-U.S. persons. The advisory states that as part of those requirements, covered institutions should be vigilant against transactions involving persons specifically designated for sanctions relating to Syria, as well as proxies acting on behalf of such persons. FinCEN advises institutions to (i) take reasonable risk-based steps with respect to the potential movement of assets that may be related to the current unrest in Syria, (ii) consider whether they have any financial contact with persons or entities (foreign or otherwise) that may be acting directly or indirectly for or on behalf of any senior foreign political figures of the Government of Syria, and (iii) file Suspicious Activity Reports when appropriate.
FinCEN Issues Guidance on Virtual Currencies
On March 18, FinCEN issued guidance to clarify the applicability of Bank Secrecy Act regulations to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. FinCEN clarifies that a person that obtains a virtual currency to purchase goods or service (a “user”) does not fit within the regulatory definition of a money transmission service, and therefore is not subject to the relevant regulations. However, a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency (an “exchanger”), and a person engaged as a business in issuing a virtual currency, and who has the authority to redeem such virtual currency (an “administrator”), generally are considered money transmitters under FinCEN's regulations if they (i) accept and transmit a convertible virtual currency or (ii) buy or sell convertible virtual currency for any reason. The guidance reviews FinCEN’s specific determinations regarding different activities involving virtual currencies and the appropriate regulatory treatment of administrators and exchangers under each of the scenarios. Specifically, the guidance addresses (i) brokers and dealers of e-currencies and e-precious metals; (ii) centralized convertible virtual currencies; and (iii) de-centralized convertible virtual currencies.
FinCEN Reminds Financial Institutions about E-Filing Reports
On March 7, FinCEN issued a notice reminding institutions that they must use FinCEN’s new electronic reports to file most Bank Secrecy Act Reports, including Suspicious Activity Reports, Currency Transaction Reports, Registration of Money Services Business, and Designation of Exempt Person Reports. In February 2012, FinCEN issued a final notice requiring electronic filing of most reports by July 1, 2012. Shortly thereafter, FinCEN made available new formats for those reports, which all institutions must begin using by April 1, 2013. The new forms will support the agency’s enforcement efforts. For example, FinCEN Director Jennifer Shasky Calvery explained recently that in 2012 more than 23 percent of SAR filers selected “other” as the type of suspicious activity. The new form expands the number of options for type of activity being reported from 21 to 70 and adds a text field, allowing filers to described activities more accurately. FinCEN warned that companies that fail to comply with the electronic filing mandate may be subject to civil money penalties.
FinCEN Proposes Third-Party Filing of FBAR Reports
On Mach 5, FinCEN published a notice and request for comment on proposed changes to the Foreign Bank and Financial Accounts Report (FBAR) to standardize it with other BSA electronically filed reports and allow for a third party preparer to file the report. FinCEN is seeking public comments by May 6, 2013.
FinCEN Reminds Institutions about Tax Refund Fraud and SAR Filing
On February 26, FinCEN issued Advisory FIN-2013-A001 to remind financial institutions of their important role in identifying tax refund fraud and provide a list of red flags to aid in such identification. The Advisory also reminds institutions that they may be required to filed a SAR if they know, suspect or have reason to suspect that a transaction conducted or attempted by, at, or through the financial institution (i) involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, (ii) is designed to evade regulations promulgated under the Bank Secrecy Act, or (iii) lacks a business or apparent lawful purpose. Institutions completing a tax refund fraud SAR should use the term “tax refund fraud” in the narrative section of the SAR and provide a detailed description of the activity, and are encouraged to notify their local IRS Criminal Investigation Field Office of the filed SAR.