[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Proposed Rules]
[Pages 27909-27917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13302]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA19
Financial Crimes Enforcement Network; Proposed Amendments to the
Bank Secrecy Act Regulations--Special Currency Transaction Reporting
Requirement for Money Transmitters
AGENCY: Financial Crimes Enforcement Network, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Financial Crimes Enforcement Network (``FinCEN'') is
proposing to amend the regulations implementing the Bank Secrecy Act to
require money transmitters and their agents to report and retain
records of transactions in currency or monetary instruments of at least
$750 but not more than $10,000 in connection with the transmission or
other transfer of funds to any person outside the United States, and to
verify the identity of senders of such transmissions or transfers. The
proposed rule is intended to address the misuse of money transmitters
by money launderers and is in addition to the existing rule requiring
currency transaction reports for amounts exceeding $10,000.
DATES: Written comments on all aspects of the proposal are welcome and
must be received on or before August 19, 1997.
ADDRESSES: Written comments should be submitted to: Office of Legal
Counsel, Financial Crimes Enforcement Network, Department of the
Treasury, 2070 Chain Bridge Road, Vienna, Virginia 22182, Attention:
NPRM--Money Transmitters--Special CTR Rule. Comments also may be
submitted by electronic mail to the following Internet address:
``[email protected],'' with the caption, in the body of the
text, ``Attention: NPRM--Money Transmitters--Special CTR Rule.'' For
additional instructions on the submission of comments, see
SUPPLEMENTARY INFORMATION under the heading ``Submission of Comments.''
Inspection of comments. Comments may be inspected at the Department
of the Treasury between 10:00 a.m. and 4:00 p.m., in the FinCEN reading
room, on the third floor of the Treasury Annex, 1500 Pennsylvania
Avenue, NW., Washington, DC 20220. Persons wishing to inspect the
comments submitted should request an appointment by telephoning (202)
622-0400.
FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director, and
Charles Klingman, Financial Institutions Policy Specialist, FinCEN, at
(703) 905-3920; Stephen R. Kroll, Legal Counsel, Joseph M. Myers,
Deputy Legal Counsel, Cynthia L. Clark, on detail to the Office of
Legal Counsel, Albert R. Zarate, Attorney-Advisor, and Eileen P. Dolan,
Legal Assistant, Office of Legal Counsel, FinCEN, at (703) 905-3590.
SUPPLEMENTARY INFORMATION:
I. Introduction
This document contains a proposed rule that would amend 31 CFR part
103 to impose requirements on money transmitters and their agents to
report and retain records of transactions in currency or monetary
instruments of at least $750 but not more than $10,000 in connection
with the transmission or other transfer of funds to any person outside
the United States. The proposed rule also would amend the regulations
implementing the Bank Secrecy Act to require that money transmitters
verify the identity of the sender of the kind of transmission described
above. Treasury has been moved to this unusual step by continuing
evidence of serious abuses of the money transmitting industry by money
launderers.
II. Background
A. Statutory Provisions
The Bank Secrecy Act, Titles I and II of Public Law 91-508, as
amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31
U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia,
to issue regulations requiring financial institutions to keep records
and file reports that are determined to have a high degree of
usefulness in criminal, tax, and regulatory matters, and to implement
counter-money laundering programs and compliance procedures.
Regulations implementing Title II of the Bank Secrecy Act (codified at
31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the
Secretary to administer Title II of the Bank Secrecy Act has been
delegated to the Director of FinCEN.
Section 5313 grants the Secretary of the Treasury broad authority
to require financial institutions to report domestic transactions in
coins or currency. Paragraph (a) of that section states:
When a domestic financial institution is involved in a
transaction for the payment, receipt, or transfer of United States
coins or currency (or other monetary instruments the Secretary of
the Treasury prescribes), in an amount, denomination, or amount and
denomination, or under circumstances the Secretary prescribes by
regulation, the institution and any other participant in the
transaction the Secretary may prescribe shall file a report on the
transaction at the time and in the way the Secretary prescribes. A
person acting for another person shall make the report as the agent
or bailee of the person and identify the person for whom the
transaction is being made.
Under 31 CFR 103.22, which was issued under the broad authority of
section 5313(a), financial institutions generally are required to
report transactions in currency in excess of $10,000. Under the Bank
Secrecy Act, the term ``financial institution'' at present (that is,
before the changes proposed to be made today) includes, inter alia,
``licensed transmitter[s] of funds, or other person[s] engaged in the
business of transmitting funds.'' 31 CFR 103.11(n)(5).
In 1992, Congress amended the Bank Secrecy Act to allow the
Secretary to require financial institutions to carry out anti-money
laundering programs. See 31 U.S.C. 5318(h) (added to the Bank Secrecy
Act by section 1517 of the Annunzio-Wylie Anti-Money Laundering Act,
Title XV of the Housing and Community Development Act of 1992, Pub. L.
102-550 (October 28, 1992)). Under section 5318(h), anti-money
laundering programs must at a minimum include, inter alia, the
``development of internal policies, procedures, and controls.'' In
1994, Congress again amended the Bank Secrecy Act, this time to require
the registration of money services businesses. See 31 U.S.C. 5330
(added to the Bank Secrecy Act by section 408 of the Money Laundering
Suppression Act of 1994, Title IV of the Riegle Community Development
and Regulatory Improvement Act of 1994, Pub. L. 103-325 (September 23,
1994)). Section 5330 defines a money services
[[Page 27910]]
business 1 as any business, other than a bank or the United
States Postal Service, that is required to file reports under 31 U.S.C.
5313 and that provides check cashing, currency exchange, or money
transmitting services, or issues or redeems money orders, traveler's
checks, and other similar instruments. In requiring the registration of
money services businesses, Congress recognized that such businesses are
``frequently used in sophisticated schemes to * * * transfer large
amounts of money which are the proceeds of unlawful enterprise.'' 31
U.S.C. 5330 (Historical and Statutory Notes).2
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\1\ The statute uses the term ``money transmitting business'' to
name those businesses subject to registration. See 31 U.S.C.
5330(a)(1) and (d)(1). However, FinCEN believes that the statutes's
use of this term to refer to all the types of businesses subject to
registration and its later use of the nearly identical term ``money
transmitting service'' to refer to a particular type of business
subject to registration, compare 31 U.S.C. 5330(d)(1)(A) with 31
U.S.C. 5330(d)(2), may lead to confusion. Therefore, FinCEN has
adopted the term ``money services business'' in place of the term
``money transmitting business'' throughout this document and uses
the same terminology in the other rules it is proposing today.
\2\ See also, H. Conf. Rep. 652, 103d Cong., 191 (1994).
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B. Nature of the Problem
1. Money Transmitters--General
This notice is the third in a set of three notices of proposed
rulemaking being published in this separate part of the Federal
Register that deal with the application of the Bank Secrecy Act to
money services businesses. The first of these notices relates to the
registration of money services businesses (the ``Registration Rule'').
The second would impose on some of these businesses a requirement to
report suspicious transactions (the ``Suspicious Transaction Rule'').
In proposing these rules, the Department of the Treasury is responding
to the need to update and more carefully tailor the application of the
Bank Secrecy Act to a major, if little understood, part of the
financial sector in the United States.3
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\3\ The Congress has long-recognized the need generally to
address problems of abuse by money launders of ``non-bank''
financial institutions. See, e.g., Permanent Subcommittee on
Investigations, Senate Comm. on Governmental Affairs, Current Trends
in Money Laundering, S. Rep. No. 123, 102d Cong., 2d Sess. (1992).
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``Money services business'' is a newly coined term that refers to
five distinctive types of financial services providers: currency
dealers or exchangers; check cashers; issuers of traveler's checks,
money orders, or stored value; sellers or redeemers of traveler's
checks, money orders, or stored value; and money transmitters. These
businesses are quite numerous; based on a study performed for FinCEN by
Coopers & Lybrand, L.L.P., they comprise approximately 158,000
4 outlets or selling locations, and provide financial
services involving approximately $200 billion. To a significant extent,
the customer base for such businesses lies in that part of the
population that does not use, either in whole or in part, traditional
financial institutions, primarily banks.
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\4\ The number does not include Post Offices (which sell money
orders), participants in stored value product trials, or sellers of
various stored value or smart cards in use in, e.g., public
transportation systems.
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The proposed special reporting rule contained in this document
relates to money transmitters, a class of money services businesses.
For purposes of this notice of proposed rulemaking, and consistent with
the definition proposed in the Registration Rule, a money transmitter
is
(i) any person, whether or not licensed or required to be
licensed, who accepts currency, or funds denominated in currency,
and transmits the currency or funds, or the value of the currency or
funds, by any means through a financial agency or institution, a
Federal Reserve Bank or other facility of the Board of Governors of
the Federal Reserve System, or an electronic funds transfer network;
or (ii) [a]ny other person engaged as a business in the transfer of
funds.
Based on the study performed by Coopers & Lybrand, L.L.P., several
broad generalizations can be made about the money transmitting industry
in the United States. Due to the global trend of rapidly increasing
electronic commerce and the increase in the number of persons who use
international transfer services to send money to family and friends,
the United States market for money transmission services has grown
steadily over the last ten years. Money transmitters in the United
States remitted approximately $10.8 billion in 1996, exclusive of fees,
each year, through approximately 43,000 locations nationwide. The
international component of the money transmission market has been
growing at a rate of at least 20 per cent per year for the last five
years. Even these estimates are believed to be low, because there is by
all accounts a significant, ``informal'' international money transfer
market.
The ``formal'' part of the non-bank money transmitter industry is
highly concentrated: the vast majority of the formal funds transfers
are handled by two major national companies through their network of
agents. Most of the money transmission outlets are concentrated in six
major states: California, New York, Texas, New Jersey, Florida, and
Illinois. There appears to be a disproportionately large number of
outlets as well in Georgia, Michigan, North Carolina, and Pennsylvania.
Most of the smaller money transmitters in competition with the
major national companies are oriented toward particular markets and
rely on their own service infrastructures for transferring funds and
for communications and settlement among outlets. These niche
transmitters often are bilingual, with outlets located in urban
communities. Their customers are willing to pay a premium for value
added services, such as receiving informal news from other countries.
State regulators have been monitoring the growing money
transmission market with great interest. Twenty-three states now have
licensing requirements for money transmitters. Some states, such as New
York, also require each licensed money transmitter to register the
names and locations of each of its legal agents or vendors, but in
general, state regulations vary a great deal, and are primarily focused
on consumer protection issues.
2. Use of Money Transmitters by Money Launderers
Work of the El Dorado Task Force. Since 1992, the El Dorado Task
Force (the ``Task Force'') has been conducting an investigation into
the money transmitting industry in the New York metropolitan area and
its use by drug traffickers to return drug proceeds to narcotics source
countries.5 In the course of its work, the Task Force
uncovered widespread abuse within segments of the money transmitter
industry in New York.6 One major money transmitter has
itself pled guilty to money laundering charges,7 and
investigations of several other
[[Page 27911]]
transmitters and their agents are underway.8
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\5\ The Task Force was established by Treasury law enforcement
agencies in 1992 specifically to investigate narcotics related money
laundering in the New York metropolitan area. The Task Force is a
joint effort of federal, state, and local authorities, and includes
approximately 140 agents, police officers and administrative
personnel from the Customs Service, the Criminal Investigative
Division of the Internal Revenue Service, the Secret Service, the
New York State Banking Department, the New York City Police
Department, and a number of other local police authorities.
\6\ The Task Force's investigations have led to the conviction
of 97 persons and the seizure and forfeiture of over $10 million
associated with money laundering through the licensed money
transmitters.
\7\ United States v. Vigo Remittance Corp., No. 96-575
(J.S.)(E.D.N.Y.)(July 24, 1996)(entry of plea). It is fair to note
that, since its guilty plea, Vigo has strengthened its Bank Secrecy
Act compliance measures significantly.
\8\ See, e.g., United States v. Remesas America Oriental, No. S1
96 Cr. 919 (S.D.N.Y. 1996).
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The results of the Task Force's investigations confirm that the
money transmitting industry in New York shares many common
characteristics with the industry nationwide. First, the typical
legitimate customer of a money transmitter in New York is someone who,
because of lack of access for credit reasons or lack of sufficient
documentation, has decided not to use banks to obtain financial
services.
Second, with rare exceptions, almost all licensed money
transmitters in New York operate through agents. Agents of the licensed
money transmitters receive the transmitted funds from the sender, along
with sender information, such as name, address, and telephone number,
and recipient information, usually name and telephone number. The
agents enter this information into computers provided by the money
transmitters, and invoices are generated. The agents then send the
information to the money transmitters by computer (or by fax, if the
particular agent does not have a computer).
The agents must deposit the funds to be transmitted into bank
accounts set up for the agents but controlled by the money
transmitters. On a daily basis, each money transmitter will transfer
all of the money it intends to transmit into one of several main
transmission accounts maintained at a financial institution with access
to CHIPS and FEDWIRE.9 The funds are then moved through the
domestic and foreign banking system by way of wire transfer. Once the
transmitted funds have arrived at their destinations, foreign
correspondents notify the recipients that their money is available to
be picked up.
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\9\ Clearing House Interbank Payments System (CHIPS) and FEDWIRE
are commonly-used funds transfer systems.
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The primary method of laundering funds through money transmitters
in New York that has come to light to date is the structuring of
transactions beneath the thresholds for recordkeeping and reporting
imposed by existing Bank Secrecy Act rules. Corrupt agents accept
illicit funds, in amounts greater than $3,000 or $10,000, structure the
funds to avoid the recordkeeping and reporting requirements, and then
deposit the funds into accounts controlled by the money transmitter.
The money transmitter then transmits the funds to the designated
recipient locations.
Most often, the traffickers bring the agents large amounts of
currency which need to be returned to a drug source country. The agents
create invoices which make it appear as if the money had been brought
in by a number of different senders, in amounts below the recordkeeping
and reporting thresholds. These corrupt agents also provide the money
transmitters with lists of recipient names in the foreign countries for
each remittance, again using a different name for each remittance. In
this way, each time it appears as if there were a number of smaller,
unrelated remittances instead of one remittance, in excess of $3,000,
that would trigger the recordkeeping rules of 31 CFR 103.33, or in
excess of $10,000, which would trigger the filing of a Currency
Transaction Report (``CTR'').
New York Geographic Targeting Order. Based in large part on the
evidence produced by the Task Force, a large group of money
transmitters (now 23 licensed transmitters and their approximately
3,200 agents) in the New York Metropolitan Area have been the subject
of a Geographic Targeting Order (the ``Order''). Issued last August,
the Order is grounded in 31 U.S.C. 5326 and 31 CFR 103.26, and is
directed at the remittance of funds to Colombia.10 The
Order, first directed against 12 money transmitters and 1,600 agents,
was expanded in October 1996, and again in April 1997. Its original 60-
day period has been extended several times under the statutory rules,
and the Order is at present set to expire on June 2, 1997.
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\10\ The Order was issued by Raymond W. Kelly, Under Secretary
(Enforcement) of the Department of the Treasury, in response to an
application from the United States Attorneys for the Eastern
District of New York, the Southern District of New York, and the
District of New Jersey and senior officials of the Customs Service
and the Internal Revenue Service. (The statute allows such orders to
be issued either upon a request from an appropriate law enforcement
authority, or by the Treasury upon its own initiative.) Issuance of
an order requires a finding, amply documented in this case, that
there is reason to believe that special reporting or recordkeeping
requirements are necessary to carry out the purposes, or prevent
evasions of, the Bank Secrecy Act.
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The Order requires daily reporting by agents of the 23 money
transmitters, and weekly reporting by their principals (i.e., state-
licensed money transmission companies), of information about the
senders and recipients of all money transmissions of $750 or more to
Colombia paid for with currency or bearer monetary instruments, as well
as the reporting of any transactions or patterns of transactions that
appear suspicious. Special verification of identity rules for such
transactions are also imposed by the Order.
A number of factors in addition to the direct evidence adduced by
the Task Force supported the Order's issuance. Perhaps most strikingly,
the New York area money transmitters' business volume to Colombia was
significantly out of harmony with legitimate demographic expectations.
New York State Banking Department figures indicated that the 12
originally targeted transmitters had been sending approximately $1.2
billion annually to South America; about two thirds of this amount, or
approximately $800 million, went to Colombia. To account for this
figure, each of the approximately 25,500 Colombian households in the
New York area (earning an average gross annual income of $27,000) would
have had to send approximately $30,000 per year through money
transmitters to Colombia.
Implementation of the Order almost immediately caused dramatic
changes in the volume and character of money transmissions, indicating
a major reduction in the amount of illicit funds moving through New
York money transmitters.11 Analysis of data generated by the
Order is ongoing, but the targeted money transmitters' business volume
to Colombia appears to have dropped approximately 30 percent. (Three of
the money transmitters subject to the Order have simply stopped sending
any funds to Colombia.) Most of the money that would in the past have
been placed abroad through the use of money transmitters appears to
have been physically removed from the New York Metropolitan area,
either for transfer through money transmitters operating in other
American cities, or for bulk smuggling out of the United States. The
change demonstrates graphically both that narcotics money launderers
have been extensively abusing a segment of the relatively unsupervised
money transmitter industry, and that the underground market does
respond to regulatory and enforcement pressures.
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\11\ One money transmitter surrendered its license to the New
York Banking Department immediately before the Order became
effective. Two other money transmitters subject to the Order simply
stopped sending any funds to Colombia.
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Ancillary results of the Order also have been significant. The
Treasury has observed a dramatic increase in Customs Service
interdiction and seizure activity at air and seaports, on common
carriers, and on highways--over $50 million during the first seven
months of the Order's operation, a figure over three times higher than
that for comparable periods in prior years. Also significant is the
fact that the cost of sending funds to Colombia through money
transmitters in New York has dropped, from 7 percent to 5 percent of
[[Page 27912]]
the value of the transfer, since the Order was put in place.
At the same time, it is clear that a significant number of money
transmitter agents have been willing to structure transactions beneath
the Order's $750 reporting threshold, in an attempt to move narcotics-
tainted funds abroad even during a period of known surveillance of the
industry and its agents. (At least one money transmitter has itself
actively worked with federal authorities during this period to identify
suspicious transactions, even those involving its own agents.) The
number of transactions in amounts below $750 has risen sharply, and the
amount of funds transferred to Colombia in such increments appears to
have almost doubled. The Task Force has already executed search
warrants on twenty-two money transmitter agents suspected of
intentionally structuring transactions in violation of the Order; all
but five businesses served have closed, five people have been indicted,
and four people have already pleaded guilty. Three additional arrest
warrants are outstanding. The Task Force is continuing to pursue
investigations of this type, and the Treasury will consider imposing
civil penalties against violators who are not pursued criminally.
Texas State Investigations. The New York GTO experience is not an
isolated phenomenon. The Texas Attorney General's office began
investigating so called ``giro houses'' in the Houston area in the
early 1990s. Giro houses are independent money transmitters that also
provide ancillary services such as cargo shipment and long distance
telephone access. Before 1991, there were as many as 100 giro houses in
Houston processing over $450 million per year in wire transfers,
primarily to Colombia. The Texas Attorney General's Office, working
with the Texas Department of Banking and the Houston office of the
Internal Revenue Service, opened formal investigations of a number of
giro houses. These investigations, like the El Dorado Task Force's
investigations in New York, revealed a pattern of money laundering
through false invoices designed to justify the large currency deposits
at local banks.
From late 1994 through 1995 the Texas Attorney General's Office
obtained and executed 11 search warrants at Houston giro houses. Many
businesses closed while under investigation, and the overall effect of
the Texas investigations on the illegitimate trade was dramatic. A
recent count of giro houses lists eight sending funds to Colombia, and
the total amount of money processed through giro houses has dropped to
approximately $10 million.
A significant factor in the Texas investigations has been the state
requirement that any wire transaction over $1,000 be recorded on a
receipt that includes driver's license and social security or other
photo identification numbers, birth date and address of the sender.
Because false identification and addresses are commonly used by money
launderers sending funds in excess of $1,000, the identification
requirement has provided a clear mechanism for detecting and proving
illegal behavior. In the case of businesses that are willing to
structure transactions beneath the $1,000 threshold, surveillance has
been used to document the deviation between the number of people
observed patronizing the business and the number of customers reflected
in business records during the surveillance period.
C. Need for Special Reporting and Recordkeeping Rules for Money
Transmitters
This notice proposes to amend the Bank Secrecy Act regulations to
require money transmitters and their agents to report and keep records
of, and verify the identity of senders of, transactions in currency or
monetary instruments of at least $750 but not more than $10,000 in
connection with a transmission or other transfer of funds to any person
outside the United States. While Treasury recognizes the significance
of this proposed action, it believes that the step is nevertheless
clearly warranted based on the potential, and the record of actual,
abuse of the money transmission industry documented, inter alia, by the
Task Force's investigations and the results of the Order.
As indicated above, the Order and the Texas investigations have had
a significant impact in providing crucial information to the Treasury
as well as disrupting the flow to Colombia, through money transmitters,
of illegally-derived funds. But geographic targeting orders are by
their nature relatively temporary measures, intended to illuminate,
rather than solve, long-term enforcement problems. Given the structural
factors that created the situation to which the Order was addressed
(plus the evidence of extensive structuring that has taken place to
avoid even the Order-imposed threshold of $750), the likelihood that
launderers are now moving large sums through other money transmitters
in other cities, and will resume doing so in New York once the Order
expires, cannot responsibly be discounted, let alone ignored.
The Task Force's investigations and the Order focused on money
transmitters in the New York Metropolitan Area. But the Texas giro
house investigations and the consensus of law enforcement officials
simply confirms what the New York situation itself would lead one to
expect, namely that elements of the money transmission industry, given
a combination of factors, are very susceptible to systematic misuse,
extending unfortunately in some cases to infiltration and corruption,
by money launderers.
It should be emphasized at the outset that, as in the case of the
nations's banks and securities firms, most money services business
operators and agents are completely law-abiding and as interested in
cost-effective financial law enforcement as the Treasury itself. A
number of major national money remitters and issuers of traveler's
checks and money orders have already taken their own steps to devise
anti-money laundering compliance programs.
The challenges for reasonable implementation of the Bank Secrecy
Act posed by the situation the New York Order illuminates are daunting.
Implementation of a comprehensive counter-money laundering strategy for
money transmitter and other money services businesses raises
significant issues not present in devising counter-money laundering
strategies for banks, largely due to unique structural factors
affecting money services businesses. Money transmitters (like other
money services businesses) operate largely through the medium of
independent enterprises that agree to serve as agents for the
businesses' products or services.
Thus, the public does not deal directly with the businesses that
issue the instruments, or actually perform the services, purchased, and
the activities of the agents are subject to less systematic control
than in the case, for example, of branch banks or brokerage offices.
Even more important, the experience encountered in New York and
Texas indicates that the rules of the Bank Secrecy Act are not now
appropriately tailored to reflect the particular operating realities,
problems, and potential for abuse of an industry that deals in sums far
below $10,000 per transaction. Given a truly ``cash'' industry, that
moves impressively large sums in the aggregate, with few of the
structural controls in place that banks and their regulators impose,
and that is not subject to the sorts of market discipline to which
banks are subject with respect to avoiding collaboration
[[Page 27913]]
with criminals, a single strategy does not easily suggest itself.
The issue facing the Treasury is how to move from the world of a
temporary geographic targeting order to stabilize the situation of this
industry. The decision to propose a $750 currency transaction reporting
requirement for outbound transmissions reflects two determinations. The
first is that such a rule, while in effect, will create a source of
information that should help nationwide to stop the relatively
uncontrolled outflow of narcotics proceeds through money transmitters.
The second is that such a rule will allow more long-term (and less
absolute) measures, most important, heightened industry procedures and
programs based on a mandatory suspicious transaction reporting regime,
backed by nation-wide registration of money services businesses, the
time to become effective.
Treasury has considered a number of alternatives in seeking to
craft the proposed rule. The value of reporting in this situation is
plain. Mandatory reporting creates a critical source of information for
Treasury enforcement and bank regulators about the transactions that
move through money transmitters. That the reporting requirement also
creates a deterrent effect and drives launderers from the system,
cannot, Treasury believes, be seriously debated.
No Bank Secrecy Act requirement other than the New York Order (and
previous geographic targeting orders, in Phoenix in 1989 and Houston in
1991) has ever keyed reporting requirements or special recordkeeping
requirements at a level as low as $750. The next standard rung in the
ladder is $3,000; money transmitters, like other financial
institutions, currently are subject to a requirement to maintain
records of funds transfers of $3,000 or more, see 31 CFR 103.33, and to
a requirement to report transactions in currency of more than $10,000.
See 31 CFR 103.22(a). It is, in part, the evasion of the $3,000
recordkeeping requirement that the New York Order was put in place to
prevent.
In addition, enforcement and regulatory analyses increasingly
confirm what the experience under the Order amply demonstrates, namely
that a $3,000 threshold has small relevance to an industry that most
commonly deals in sums far below that amount. A study by Coopers &
Lybrand concluded that the average transaction amount for funds
transferred by money transmitters to persons outside the United States
is approximately $320. The fact that $750 is more than twice the amount
of the average transaction decreases the likelihood that legitimate
transactions will be put off track by this simple reporting
requirement.
Another issue is whether the rule should apply to transfers to all
destinations outside the United States, rather than, say, applying only
to transmissions to particular countries. Any rule directed at
transmissions to a particular nation would simply move the process to
create a switching station in some third country, for funds ultimately
bound to the country designated. (For example, there is some basis for
a conclusion that funds destined for Colombia, once the New York Order
was in place, were simply routed through transmitters in other Latin
American nations, on their way to their ultimate destination in
Colombia.) Not only is singling out a particular country likely to be
ineffective, but it could also contravene international agreements to
which the United States is a party.
Money transmitters provide a valuable service, especially in lower-
income communities in which access to banks may be limited. In issuing
this notice of proposed rulemaking, Treasury has sought to avoid
imposing undue hardship on any segment of the United States population.
On the contrary, by establishing a reporting threshold more than double
the average amount of funds transferred outside the United States by a
money transmitter, it is targeting the criminals who misuse money
transmitters to send the profits of their illegal activity to drug
source countries. Indeed, if the New York experience holds true, a
lower reporting threshold may actually lead to a reduction in the cost
to customers of remitting funds abroad through money transmitters.
As indicated above, it is not necessarily the case that any special
$750 reporting rule, once made final, would be permanent. The
Department of the Treasury intends carefully to review the experience
of the industry and the results of reporting under the blanket $750
reporting rule. The Department of the Treasury intends, at the same
time that its programs emphasize a government-industry thrust to bring
counter-money laundering programs in the money services industry up to
a workable standard, to determine whether, and to what extent, a
special reporting rule continues to be necessary.
D. Authority for Special Reporting and Recordkeeping Rule for Money
Transmitters
This notice of proposed rulemaking is grounded in the broad
authority granted the Secretary of the Treasury by section 5313(a) and
section 5318(h). Section 5313(a) authorizes the Secretary to require a
domestic financial institution to report transactions involving coins,
currency or other monetary instruments. Section 5318(h) authorizes the
Secretary to require a financial institution to carry out anti-money
laundering programs, including at a minimum the development of internal
policies, procedures, and controls.
While 31 CFR 103.22(a) imposes a general reporting and
recordkeeping threshold of more than $10,000 for domestic financial
institutions, section 5313(a) does not mandate any single threshold
amount. Instead, the statute grants the Secretary the discretion to
require reports of transactions ``in an amount, denomination, or amount
and denomination'' as the Secretary may prescribe. FinCEN believes this
language permits the Secretary to impose a reporting threshold lower
than $10,000, where the circumstances warrant.12
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\12\ This plain reading of section 5313(a) is consistent with
the statute's relevant legislative and administrative histories.
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Similarly, the statute is silent on whether the Secretary may set a
different reporting threshold for different kinds of financial
institutions. Section 5313(a) does state, however, that reports of
transactions may be required ``under circumstances the Secretary
prescribes by regulation.'' FinCEN reads this broadly-stated language
as permitting the Secretary to set a reporting threshold for money
transmitters that is different than the reporting threshold for other
financial institutions.13
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\13\ Again, the relevant legislative and administrative
histories of section 5313(a) do not conflict with this plain reading
of the statute.
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The proposal contained in this document that would lower the
general reporting threshold of more than $10,000 has historical
antecedents. Both Congress and the Department of the Treasury have in
the past each drafted a law or proposed a rule that would have lowered
the $10,000 reporting threshold generally applicable to financial
institutions. On these occasions, FinCEN is unaware of any challenge
ever being made to Treasury's legal authority under the Bank Secrecy
Act or its implementing regulations to make such a change.
In August 1986, the House of Representatives considered legislation
(HR 5484) aimed at countering the misuse of financial institutions by
narcotics launderers. One provision of that bill would have authorized
the Secretary of the Treasury to order domestic financial institutions
to report
[[Page 27914]]
and retain records of any transaction of more than $3,000 involving
currency or other monetary instruments. The version of the bill
containing this provision was never enacted into law.14
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\14\ Nevertheless, certain amendments to the Bank Secrecy Act
(e.g., making structuring a crime) eventually were made by the Money
Laundering Control Act of 1986, Subtitle H of the Anti-Drug Abuse
Act of 1986, Pub. L. 99-570 (October 27, 1986).
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When HR 5484 was introduced, the Department of the Treasury issued
a notice of proposed rulemaking that would have amended the Bank
Secrecy Act regulations to require domestic financial institutions to
report and retain records of certain transactions in currency less than
$10,000. See 51 FR 30233 (August 25, 1986). Specifically, the notice
would have required that financial institutions obtain and retain a
report from each purchaser of any official bank check, cashier's check,
money order or traveler's check, if the purchase involved a transaction
in currency of $3,000 or more. The rule then proposed would have
required that each such report be signed by the purchaser and certify
whether or not the purchaser had purchased more than $10,000 of these
kinds of instruments in any one day. Under the notice, the selling
financial institution would have been required to treat any affirmative
certification, or refusal to certify, as a reportable transaction, that
would require the financial institution to file a CTR. Based on
Treasury's conclusions that these proposals were ``not advisable at
this time,'' the proposals were eventually withdrawn. See 58 FR 6611
(February 29, 1988).
The notice of proposed rulemaking containing these proposals
generated approximately 300 comments. While most commenters objected to
lowering the reporting threshold from $10,000 to $3,000 for
transactions involving the kinds of instruments listed above, no
commenter questioned Treasury's legal authority under the Bank Secrecy
Act and its implementing regulations to establish either a reporting
threshold other than $10,000 or a different reporting threshold for
different kinds of transactions.
III. Specific Provisions
A. 31 CFR 103.22(i)(1) General
Proposed paragraph (i)(1) states the special reporting rule for
money transmitters. It provides that money transmitters and their
agents must report transactions in currency or monetary instruments of
at least $750 but not more than $10,000 in connection with a
transmission or other transfer of funds to any person outside the
United States.
Reporting Institutions
Any enterprise that is a money transmitter, within the definition
proposed in the Registration Rule, or agent of a money transmitter, is
subject to the proposed special reporting rule contained in this
document.
As proposed, the special reporting rule would not apply to
depository institutions, despite the fact that some depository
institutions accept funds transmission business from non-customers.
Depository institutions are subject to national examination by the
federal financial supervisory agencies for, inter alia, compliance with
the Bank Secrecy Act and adequacy of systems to prevent money
laundering. They are also subject to the obligation to report
suspicious transactions to the Department of the Treasury, and FinCEN
will be issuing a suspicious transaction report advisory to banks with
respect to the potential for abuse of the funds transmittal system by
non-account customers in the near future. In addition, FinCEN does not
possess information about the segment of the money transmission
business that involves bank transmissions for non-account customers
that indicates the sorts of abuses demonstrated, in the case of some
non-bank money transmitters and their agents, by the New York Order,
the Texas investigations, other enforcement activities, and industry
analyses.
Under these circumstances, and in the absence of demonstrated abuse
of the bank non-customer segment of the money transmission industry,
the Department of the Treasury is not proposing the extension to
depository institutions, at this time, of the rules proposed for other
money transmitters by this notice of proposed rulemaking. However,
comments are specifically requested on the question whether either
competitive or other factors make it necessary for the special
reporting rules to apply to banks, for non-customers, as well as to
other money transmitters.
Reportable Transactions
The proposed reporting rule applies to transactions in currency or
monetary instruments of at least $750 but not more than $10,000 in
connection with a transmission or other transfer of funds to any person
outside the United States. (At the more than $10,000 level, the normal
reporting rules apply.) The $750 threshold for reporting under the
proposed rule reflects information about the money transmitting
industry provided voluntarily by the industry, collected by Coopers &
Lybrand, L.L.P., and confirmed by the Task Force's investigations and
the results of the Order. Law enforcement sources agree that, across
the industry and throughout the United States, the average legitimate
funds transfer to Colombia ranges in amount between $200 and
$500.15 Thus, reports about transfers of $750 or more should
impose neither an undue burden on the legitimate business conducted by
money transmitters nor an undue government intrusion into the financial
affairs of their legitimate customers. In this regard, it is worth
noting that the maximum available value of a U.S. Postal Service money
order--a monetary instrument widely used for bill paying by the same
part of the population that has a legitimate need for the services of
money transmitters such as those targeted by the proposed special
reporting rule--is $700.
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\15\ According to the Coopers & Lybrand study, noted above, the
average amount of a funds transfer from the United States to another
country is approximately $320.
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Any transmission or other transfer of funds to any person outside
the United States of at least $750 but not more than $10,000 would be
subject to the proposed reporting rule. As discussed above, any
limitation of the rule's attention to a particular country or group of
countries would ignore the reality that organized financial crime and
its money-moving circuits are worldwide in scope and would likely raise
far more problems than it solved. Any such limitation would be both
unfair and ill-tailored to the realities of the money laundering
problem.
The reporting range for this proposed special reporting rule has
been set at an amount of at least $750 but no more than $10,000 to
avoid any overlap with the general reporting requirement of 31 CFR
103.22(a) to report transactions in currency of $10,000 or more.
Moreover, the proposed special reporting rule does not affect in any
way the obligation of money transmitters to comply with the suspicious
transaction reporting requirements, as set forth in the Suspicious
Transaction Rule. The proposed rule further does not affect the
obligation for money transmitters to comply with the recordkeeping
requirements for funds transfers as set forth in 31 CFR 103.33.
B. 31 CFR 103.22(i)(2) Identification Required
Proposed paragraph (i)(2) requires that before any money
transmitter or agent completes a transaction in currency of at least
$750 but not more
[[Page 27915]]
than $10,000 in connection with any transmission or other transfer of
funds to any person outside the United States, the money transmitter or
agent involved must verify and record the name and address of the
sender of the funds and satisfy with respect to such transaction the
requirements of 31 CFR 103.28, provided that for purposes of the
special reporting requirement, only a drivers license, passport, alien
registration card or state-issued identification card, containing a
photograph of the individual involved, may be accepted for verification
of identity.
C. 31 CFR 103.22(i)(3) Person Required To File and Keep Records
As is the case with the Suspicious Transaction Rule, proposed
paragraph (i)(3) places responsibility for reporting on each money
transmitter, as well as on its agents,
regardless of whether, and the terms on which, the money transmitter
treats such person as an agent or independent contractor for other
purposes.
The allocation of principal-agent liability in particular cases,
under the governing terms of the Bank Secrecy Act, is too complex a
subject to be dealt with in this notice of proposed rulemaking.
However, the Department of the Treasury believes that at a minimum the
operators of money transmitters have a duty to know their agents
sufficiently well to be able to fulfill the reporting and recordkeeping
obligations involved in compliance with the proposed rule. As in the
case of the rules for suspicious activity reporting by banks, 31 CFR
103.21, and exemptions from the requirement to report transactions in
currency by banks, 31 CFR 103.22(h), the proposed rule is intended to
introduce a concept of due diligence into the reporting procedures, and
that diligence applies equally to a review of activities of agents as
to a review (by both principals and agents) of transactions of
consumer-customers of money transmitters.
Treasury invites comments on whether the rule should contain more
detailed procedures or rules dealing with the allocation of
responsibility between principals (the money transmitters) and agents,
as well as specific rules for compliance programs that recognize the
realities of the business operations in this part of the financial
sector.
D. 31 CFR 103.22(i)(4) Recordkeeping
Proposed paragraph (i)(4) makes it clear that records maintained by
a money transmitter or its agent in compliance with and administration
of the rules of this paragraph (i) must be maintained in accordance
with the recordkeeping provisions of 31 CFR 103.38, which, inter alia,
requires that records be maintained for a period of five years.
E. 31 CFR 103.27(a)(3)
Proposed paragraph (a)(3) states the filing deadline applicable to
any report required to be filed by proposed paragraph (i)(1). Any such
report must be filed within 30 days following the day on which the
reportable transaction occurred.
IV. Proposed Effective Date
The amendments to 31 CFR Part 103 contained in this notice of
proposed rulemaking will become effective 30 days following the
publication in the Federal Register of the final rule to which this
notice of proposed rulemaking relates.
V. Submission of Comments
An original and four copies of any comment (other than one sent
electronically) must be submitted. All comments will be available for
public inspection and copying, and no material in any such comments,
including the name of any person submitting comments, will be
recognized as confidential. Accordingly, material not intended to be
disclosed to the public should not be submitted.
VI. Regulatory Flexibility Act
FinCEN certifies that the proposed rule contained in this document
will not have a significant economic impact on a substantial number of
small entities. The average money transmission from the United States
to another country is approximately $320. This amount is substantially
below the $750 threshold that triggers reporting under the proposed
rule. Thus, FinCEN believes that the threshold has been set at a level
that will avoid a significant economic burden on small businesses.
VII. Paperwork Reduction Act Notices
Special Currency Transaction Report for Money Transmitters
In accordance with requirements of the Paperwork Reduction Act of
1995, 44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR
part 1320, the following information concerning the collection of
information on International Transmission of Funds Report is presented
to assist those persons wishing to comment on the information
collection.
FinCEN anticipates that this proposed rule, if enacted as proposed,
would result in a total of 300,000 International Transmission of Funds
Report forms to be filed. This result is an estimate, based on a
projection of the size and volume of the industry.16
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\16\ Given the state of our knowledge of the industry and
patterns of illegal transactions, these estimates are extremely hard
to generate.
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Title: International Transmission of Funds Report.
OMB Number: To be determined.
Description of Respondents: Money transmitters.
Estimated Number of Respondents: 100,000.
Frequency: As required.
Estimate of Burden: Reporting average of 19 minutes per response;
recordkeeping average of 5 minutes per response.
Estimate of Total Annual Burden on Respondents: 300,000 responses.
Reporting burden estimate = 95,000 hours; recordkeeping burden estimate
= 25,000 hours. Estimated combined total of 120,000 hours.
Estimate of Total Annual Cost to Respondents for Hour Burdens:
Based on $20 per hour, the total cost to the public is estimated at
$2,400,000.
Estimate of Total Other Annual Costs to Respondents: None.
Type of Review: New.
FinCEN specifically invites comments on the following subjects: (a)
Whether the proposed collection of information is necessary for the
proper performance of the mission of FinCEN, including whether the
information shall have practical utility; (b) the accuracy of FinCEN's
estimate of the burden of the proposed collection of information; (c)
ways to enhance the quality, utility, and clarity of the information to
be collected; and (d) ways to minimize the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology.
In addition, the Paperwork Reduction Act of 1995 requires agencies
to estimate the total annual cost burden to respondents or
recordkeepers resulting from the collection of information. Thus,
FinCEN also specifically requests comments to assist with this
estimate. In this connection, FinCEN requests commenters to identify
any additional costs associated with the completion of the form. These
comments on costs should be divided into two parts: (1) Any additional
costs associated with reporting; and (2) any additional costs
associated with recordkeeping.
Recordkeeping Requirements of 31 CFR 103.22(i)
In accordance with requirements of the Paperwork Reduction Act of
1995,
[[Page 27916]]
44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR Part
1320, the following information concerning the collection of
information as required by 31 CFR 103.22(i) is presented to assist
those persons wishing to comment on the information collection.
Title: Currency transaction special reporting.
OMB Number: 1506-0006.
Description of Respondents: All financial institutions.
Estimated Number of Respondents: 100,000.
Frequency: As required.
Estimate of Burden: Recordkeeping average of 10 minutes per
response; 300,000 responses.
Estimate of Total Annual Burden on Respondents: Recordkeeping
burden estimate = 50,000 hours.
Estimate of Total Annual Cost to Respondents for Hour Burdens:
Based on $20 per hour, the total cost to the public is estimated to be
$1,000,000.
Estimate of Total Other Annual Costs to Respondents: None.
Type of Review: Extension.
FinCEN specifically invites comments on the following subjects: (a)
Whether the proposed collection of information is necessary for the
proper performance of the mission of FinCEN, including whether the
information shall have practical utility; (b) the accuracy of FinCEN's
estimate of the burden of the proposed collection of information; (c)
ways to enhance the quality, utility, and clarity of the information to
be collected; and (d) ways to minimize the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology.
In addition, the Paperwork Reduction Act of 1995 requires agencies
to estimate the total annual cost burden to respondents or
recordkeepers resulting from the collection of information. Thus,
FinCEN also specifically requests comments to assist with this
estimate. In this connection, FinCEN requests commenters to identify
any additional costs associated with the completion of the form. These
comments on cost should be divided into two parts: (1) Any additional
costs associated with reporting; and (2) any additional costs
associated with recordkeeping.
Comments may be submitted to FinCEN, at the address specified at
the beginning of this document, Attention: Paperwork Reduction Act.
Responses to this request for comments under the Paperwork
Reduction Act will be summarized and included in the request for Office
of Management and Budget approval. All comments will become a matter of
public record.
VIII. Executive Order 12866
The Department of the Treasury has determined that this proposed
rule is not a significant regulatory action under Executive Order
12866.
IX. Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded
Mandates Act''), Public Law 104-4 (March 22, 1995), requires that an
agency prepare a budgetary impact statement before promulgating a rule
that includes a federal mandate that may result in expenditure by
state, local and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 202 of the Unfunded Mandates Act
also requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule. FinCEN has
determined that it is not required to prepare a written statement under
section 202 because it believes that the proposed amendments will not
result in the expenditure of $100 million or more in any one year by
either state, local and tribal governments, in the aggregate, or by the
private sector.
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, banking, Currency, Foreign banking,
Foreign currencies, Gambling, Investigations, Law enforcement,
Penalties, Reporting and recordkeeping requirements, Securities, Taxes.
Proposed Amendments to the Regulations
For the reasons set forth above in the preamble, 31 CFR 103 is
proposed to be amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for Part 103 continues to read as
follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5330.
2. Paragraph (i) of section 103.22 is added to read as follows:
Sec. 103.22 Reports of currency transactions.
* * * * *
(i) Reporting of the transmission or other transfer of funds
outside the United States--(1) General. In addition to any reports
required by paragraph (a) of this section, each money transmitter or
its agent shall file a report, in such manner as FinCEN may prescribe,
of any transaction or attempted transaction in currency or monetary
instruments in an amount of at least $750 but not more than $10,000, in
connection with a request or order for the transmission or other
transfer of funds, directly or indirectly, to any person outside the
United States. For purposes of the preceding sentence, multiple
transactions in currency shall be treated as a single transaction if
the money transmitter or its agent has knowledge that the transactions
are by or on behalf of any person and result in the transmission or
other transfer of funds of at least $750 but not more than $10,000 on a
single calendar day.
(2) Identification required. Before concluding any transaction
described in paragraph (i)(1) of this section, a money transmitter or
its agent must verify and record the name and address of the individual
presenting such transaction and satisfy with respect to such
transaction the requirements of Sec. 103.28, provided that for purposes
of this paragraph (i), only a drivers license, passport, alien
registration card, state-issued identification card, containing a
photograph of the individual involved, may be accepted for verification
of identity.
(3) Person required to file and keep records. The obligation to
report each transaction that is described in paragraph (i)(1) of this
section and to maintain records as described in paragraph (i)(4) of
this section, rests with the money transmitter involved and its agent,
regardless of whether, and the terms on which, the money transmitter
treats such person as an agent or independent contractor for other
purposes. Notwithstanding this paragraph (i)(3), the filing of a report
and maintaining of records by either the money transmitter involved or
its agent satisfies the obligations imposed by this paragraph (i). If
an agent of a money transmitter completes and files a report, a copy of
the report also must be sent to the money transmitter for which the
agent is acting.
(4) Recordkeeping. The records maintained by a money transmitter or
its agent to document its compliance with and administration of the
rules of this paragraph (i) shall be maintained in accordance with the
provisions of Sec. 103.38.
(5) Excluded persons. This paragraph (i) does not require reporting
by depository institutions as defined in 31 U.S.C. 5313(g).
[[Page 27917]]
(6) Effective date. This paragraph (i) is effective [30 days
following the publication in the Federal Register of the final rule to
which this notice of proposed rulemaking relates].
3. In Sec. 103.27, paragraphs (a)(3) and (a)(4) are redesignated as
paragraphs (a)(4) and (a)(5), respectively, and new paragraph (a)(3) is
added to read as follows:
Sec. 103.27 Filing of reports.
(a) * * *
(3) A report required by Sec. 103.22(i) shall be filed within 30
days following the day on which the reportable transaction occurred.
* * * * *
Dated: May 16, 1997.
Stanley E. Morris,
Director, Financial Crimes Enforcement Network.
[FR Doc. 97-13302 Filed 5-16-97; 4:32 pm]
BILLING CODE 4820-03-P