[Federal Register Volume 68, Number 36 (Monday, February 24, 2003)]
[Proposed Rules]
[Pages 8568-8571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4173]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RINs 1506-AA28; and 1506-AA41


Financial Crimes Enforcement Network; Anti-Money Laundering 
Programs for Businesses Engaged in Vehicle Sales

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Advance Notice of Proposed Rulemaking.

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SUMMARY: FinCEN is in the process of implementing the requirements 
delegated to it under the USA PATRIOT Act of 2001, in particular the 
requirements of the Act that require financial institutions to 
establish anti-money laundering compliance and customer identification 
programs. The term ``financial institution'' is defined to include a 
``business engaged in vehicle sales, including automobile, airplane, 
and boat sales.'' FinCEN is issuing this advance notice of proposed 
rulemaking (ANPRM) to solicit public comments on a wide range of 
questions pertaining to these requirements, including the money 
laundering risks that are posed by these businesses, whether these 
businesses should be subject to these requirements, and if so, how the 
requirements should be structured.

DATES: Written comments may be submitted on or before April 10, 2003.

ADDRESSES: Because paper mail in the Washington, DC, area may be 
subject to delay, commenters are encouraged to e-mail comments. 
Comments may be submitted by electronic mail to 
[email protected] with the caption in the body of the text, 
``ATTN: ANPRM--Sections 352 and 326--Vehicle Seller Regulations.'' 
Comments may be mailed to FinCEN, P.O. Box 39, Vienna, VA 22183, ATTN: 
ANPRM--Sections 352 and 326--Vehicle Seller Regulations. Comments 
should be sent by one method only. Comments may be inspected at FinCEN 
between 10 a.m. and 4 p.m., in the FinCEN Reading Room in Washington, 
DC. Persons wishing to inspect the comments submitted must request an 
appointment by telephoning (202) 354-6400 (not a toll-free number).

[[Page 8569]]


FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN, (703) 
905-3590; the Office of the General Counsel, (202) 622-1927; or the 
Office of the Assistant General Counsel (Banking and Finance), (202) 
622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001 (Public 
Law 107-56) (the Act). Title III of the Act makes a number of 
amendments to the anti-money laundering provisions of the Bank Secrecy 
Act (BSA), which are codified in subchapter II of chapter 53 of title 
31, United States Code. These amendments are intended to promote the 
prevention, detection, and prosecution of international money 
laundering and the financing of terrorism. Section 352(a) of the Act, 
which became effective on April 24, 2002, amended section 5318(h) of 
the BSA. As amended, section 5318(h)(1) requires every financial 
institution to establish an anti-money laundering program that 
includes, at a minimum: (i) The development of internal policies, 
procedures, and controls; (ii) the designation of a compliance officer; 
(iii) an ongoing employee training program; and (iv) an independent 
audit function to test programs. When prescribing minimum standards for 
anti-money laundering programs, section 352 directs the Treasury to 
consider the extent to which such standards are commensurate with the 
size, location, and activities of the financial institutions to which 
such regulations apply.
    As a ``business engaged in vehicle sales'' (vehicle seller) is 
defined as a financial institution under the BSA, 31 U.S.C. 
5312(a)(2)(T), it is subject to the anti-money laundering program 
requirement. On April 29, 2002, and again on November 6, 2002, FinCEN 
temporarily exempted certain financial institutions, including vehicle 
sellers, from the requirement to establish an anti-money laundering 
compliance program. The purpose of the deferral was to enable FinCEN to 
study the affected industries and consider the extent to which anti-
money laundering program requirements should be applied to them, taking 
into account the specific characteristics of the various entities 
defined as financial institutions by the BSA.\1\
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    \1\ See 31 CFR 103.170, as codified by interim final rule 
published at 67 FR 21110 (April 29, 2002), as amended at 67 FR 67547 
(November 6, 2002) (as corrected at 67 FR 68935 (November 14, 
2002)).
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    In addition, section 326 of the Act added new subsection (l) to 31 
U.S.C. 5318, which requires Treasury to prescribe regulations setting 
forth minimum standards for financial institutions to identify 
customers applying to open accounts. Section 326 applies to all BSA 
financial institutions that open accounts for their customers.
    The business of vehicle sellers encompasses various segments, 
including sellers of: (1) New land-based vehicles, such as automobiles, 
trucks, RVs, and motorcycles; (2) new aircraft, including fixed wing 
airplanes and helicopters; (3) new boats and ships; and (4) used 
vehicles (as well as those who broker the sale of used vehicles).\2\
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    \2\ FinCEN does not intend to impose anti-money laundering 
program obligations on individuals in connection with the sale of 
their own personal vehicle to others, whether as a ``trade-in'' with 
a retail vehicle dealer or by private sale with another party, 
unless an individual is engaged in the business of selling vehicles.
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    Businesses engaged in the selling of vehicles comprise a 
significant percentage of the total gross domestic product of the 
United States, and the vehicles that they collectively sell account for 
a major portion of U.S. consumption, exports, and other important 
economic indicia.\3\ As such, because of both the economic significance 
of this industry, and the important and pervasive role that vehicles, 
and therefore vehicles sales, play in the United States, this ANPRM is 
intended to assist FinCEN in striking a balance between the important 
statutory requirements of the Act, and the important benefits that 
vehicle sellers provide to our country.
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    \3\ According to the Department of Transportation, in the year 
2000 there were 8,847,000 new automobiles, 578,700 boats, and 3,285 
civilian aircraft sold at retail. U.S. Dept. of Transportation 
Bureau of Transportation Statistics, National Transportation 
Statistics 2002 (GPO July 2002).
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    Some vehicle sellers are tied to the manufacturing of the vehicles, 
while others may not be. While some vehicle sellers are publicly traded 
companies, most are privately held or family owned. Some may be 
characterized as wholesale sellers of vehicles, while others are 
engaged in retail sales of the vehicles. In each segment, there is 
often substantial variety in function and practice.
    Vehicle sellers range in size from very large entities that sell 
vehicles with a total value that is measured in billions of dollars 
annually, to very small entities (such as a neighborhood used car 
dealer) that may only sell a few vehicles each year. Vehicle sellers 
may sell either new or used vehicles, and may sell to customers 
domestic or foreign, or both. Moreover, the characteristics of vehicle 
sellers often vary based on the type of vehicles sold. For example, 
retail sellers of large, multi-engine commercial aircraft are generally 
much larger businesses than sellers of small, general aviation 
aircraft, reflecting the capital and business risks needed to maintain 
inventory. In a like manner, sales of large marine ships in excess of 
100,000 deadweight tons are conducted very differently than sales of 
pleasure watercraft, such as sail boats. Similarly, sellers of used 
vehicles often have different characteristics than sellers of new 
vehicles, reflecting the different relationships with vehicle 
manufacturers and the differences in these markets.

II. Issues for Comment

1. What Is the Potential Money Laundering Risk Posed by Vehicle 
Sellers? Do Money Laundering Risks Vary by (1) Vehicle Type (e.g., 
Boat, Airplane, Automobile); (2) Market (Wholesale vs. Retail); or (3) 
Business Line (International Sales, Sales to Governments)?

    The threshold issue being addressed by this ANPRM is the extent to 
which vehicle sellers pose a significant risk of money laundering.\4\ 
For example, a money laundering risk is presented where a vehicle is 
purchased with cash.\5\ This is particularly true for the placement 
stage of money laundering; that is, where the money launderer seeks to 
cleanse illegal proceeds by introducing them into the financial system. 
A large cash purchase of an expensive vehicle could form the placement 
stage for a money laundering scheme.\6\ While the risk of money 
laundering is minimized, to some

[[Page 8570]]

extent, by the existing obligation on all vehicle sellers to report, 
pursuant to 26 U.S.C. 6050I, 31 U.S.C. 5331, and 31 CFR 103.30, the 
receipt of cash or monetary instruments in excess of $10,000,\7\ a rule 
that requires an anti-money laundering compliance or customer 
identification program may alleviate further the money laundering risk 
associated with large cash purchases. In response to documented 
instances of abuse, industry associations representing new car dealers 
have already taken steps to guard against the laundering of illicit 
proceeds through the purchase of automobiles with cash, providing their 
members with educational materials concerning their legal obligations 
and cash-related money laundering red flags.
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    \4\ For the purpose of this ANPRM, FinCEN is focusing on the 
money laundering risks associated with the sale of the vehicles 
themselves, and not with the financing of such sales. Although some 
vehicle sellers that provide financing for their products (generally 
through a finance subsidiary) perform a function similar to that of 
traditional financial institutions such as banks and loan companies, 
that function will be addressed separately by a proposed rule to be 
issued that will require loan and finance companies to have anti-
money laundering programs.
    \5\ Recently, in Operation Lightning Strike, manufacturers of 
illegal liquor were convicted of laundering the illegal proceeds of 
untaxed liquor sales by using cash transactions and purchasing a 
number of vehicles in the names of other family members.
    \6\ See, e.g., U.S. v. Cruz, 993 F.2d 164 (8th Cir. 1993) 
(narcotics dealer laundered proceeds by purchasing three automobiles 
for cash in amount that greatly exceeded his stated income).
    \7\ Sellers of vehicles for personal consumption (as opposed to 
commercial sales) fall within the type of retail business required 
to report receipts of monetary instruments (cashier's checks, 
traveler's checks, money orders) that have face amounts of less than 
$10,000 and which are used to make a purchase of greater than 
$10,000. See 31 CFR 103.30.
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    The next stage of money laundering, the layering stage, involves 
the distancing of illegal funds from their criminal source through the 
creation of complex layers of financial transactions. Examples of 
layering through the vehicle sellers industry might include trading in 
vehicles for other vehicles and engaging in successive transactions of 
buying and selling both new and used vehicles.
    Vehicle sales businesses also could be used for integrating illicit 
income into assets that appear legitimate. Integration occurs when 
illegal funds appear to have been derived from a legitimate source. 
This could occur, for instance, when the funds or vehicles received 
from the vehicle seller in the aftermath of the layering transactions 
are held out as coming from a legitimate source.
    Vehicle sellers may need to have an understanding of the identity 
of customers who participate in transactions with money laundering 
risk. For purchases of vehicles involving large sums of cash, knowing 
the customer's identity may be an essential part of an effective anti-
money laundering program. Customers may request complex invoicing 
arrangements or payment arrangements or may structure their cash 
payments to avoid BSA reports. While vehicle sellers may scrutinize 
non-cash transactions to manage fraud risk, they are undoubtedly less 
aware of possible money laundering risk with both cash and non-cash 
transactions.
    FinCEN has received reports indicating that some vehicle sellers 
have engaged in structuring \8\ sequential deposits of cash near the 
reporting threshold of $10,000. FinCEN also has received reports of the 
purchase of automobiles with structured checks and money orders. Other 
instances of suspicious activity reported to FinCEN concerning this 
industry include consumer loan fraud and check fraud. These instances 
all involve the placement stage of money laundering.
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    \8\ Structuring refers to the breaking up of a transaction into 
multiple smaller transactions to evade recordkeeping or reporting 
requirements.
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    Accordingly, FinCEN solicits comments on the existence of the 
above, and other, types of risks in the vehicle sellers business. 
Specifically, FinCEN is interested in identifying risks in the products 
that vehicle sellers provide that make them uniquely susceptible to 
money laundering, as opposed to the risks inherent in all businesses 
that sell products or services to the public that may be purchased with 
tainted funds. Such heightened risks include, for example, the payment 
of funds to the seller by third parties on behalf of customers, 
particularly from jurisdictions with lax money laundering controls, and 
the ability to pay funds to the vehicle seller and, in return, receive 
funds from the seller that have the appearance of legitimacy. FinCEN 
further seeks comment on whether differentiation should be made for 
lines of business that appear to have minimal money laundering risks, 
such as the sale of vehicles to federal, state, and local governments. 
Are there other functional distinctions that should be made?

2. Should Vehicle Sellers Be Exempt from Coverage Under Sections 352 
and 326 of the Patriot Act?

    Based on the determination of the extent of the risk of money 
laundering posed by vehicle sellers, the question arises as to whether 
the industry should be exempt under sections 352 and 326 of the Act. If 
the risk of money laundering in the vehicle sellers industry is 
determined to be minimal such that it does not justify the imposition 
of a regulatory burden, it might be reasonable to exempt the industry 
from coverage of these provisions. This judgment will be based on the 
existing risks of money laundering, the potential risks of money 
laundering, as well as the volume of possible illicit funds that may 
flow through vehicle sellers.
    In light of these issues, FinCEN would like to solicit comments 
with regard to the issue of whether there should be an exemption from 
these provisions for vehicle sellers, or any category thereof. These 
comments should be designed to enable FinCEN to decide whether or not 
to propose an appropriate regulation designed to provide protection for 
the vehicle seller industry from the risks of money laundering.

3. If Vehicle Sellers, or Some Subset of the Industry, Should Be 
Subject to the Anti-Money Laundering Program Requirements, How Should 
the Program Be Structured?

    In applying section 352 of the Act to vehicle sellers, FinCEN must 
take into account which requirements are ``commensurate with the size, 
location, and activities'' of this industry. In undertaking this 
review, FinCEN recognizes that vehicle sellers likely have some 
programs already in place to meet existing legal obligations. For 
example, as a nonfinancial trade or business, vehicle sellers are 
required to report on Form 8300 the receipt of over $10,000 in currency 
and certain monetary instruments. Vehicle sellers also may have 
procedures in place to protect themselves against fraud. Such 
procedures may be sufficient in themselves, given the money laundering 
risk in the industry, or they may serve as a foundation on which 
additional anti-money laundering program requirements could be based. 
FinCEN therefore seeks comment on the particular elements that should 
be included in any required anti-money laundering program, should it be 
determined that such a requirement should be imposed on this industry. 
In this regard, comment is requested regarding the types of programs 
vehicle sellers currently have in place to prevent fraud and illegal 
activities, and the applicability of such programs to the prevention of 
money laundering.

4. How Should a Vehicle Seller Be Defined? Should There Be a Minimum 
Threshold Value in the Definition? Should it Include Wholesale and 
Retail Sellers? Should Sellers of Used Vehicles Be Included?

    In the event FinCEN determines to propose requirements on vehicle 
sellers under sections 352 and 326 of the Act, it will be necessary to 
define the term vehicle seller. Although the BSA identifies a vehicle 
seller as a financial institution, the statute contains no definition 
of the term, other than to state that it includes sellers of 
automobiles, airplanes, and boats. The legislative history of the BSA 
provides no insight into how Congress intended the term to be defined, 
nor has FinCEN had an occasion to define the term in a regulation.

[[Page 8571]]

    As discussed above, vehicle sellers form an extremely large and 
diverse industry, accounting for a major portion of American 
consumption as well as exports. Given this diversity in the vehicle 
sellers industry, the risks of money laundering and the costs of 
preventive programs can vary widely. Thus, FinCEN solicits comment on 
whether any proposed rule should limit the definition to sellers of 
particular types of vehicles, to retail or wholesale vehicle sellers, 
or sellers of new or used vehicles. In addition, FinCEN's regulations 
in the past have recognized that businesses that do not transact in 
sufficient dollar amounts or volume, or in cash or monetary 
instruments, may not present sufficient money laundering risk to 
require the imposition of federally mandated programs. For example, 
under the BSA, money services businesses other than money transmitters 
(currency exchangers, check cashers, and issuers, sellers, and 
redeemers of traveler's checks and money orders) are defined as 
financial institutions only if they transact over $1,000 in covered 
transactions for any one person in any one day.\9\ This threshold 
reflects the judgment that businesses that never engage in transactions 
above that level fail to present a money laundering risk sufficient to 
justify the regulatory burden. FinCEN solicits comment on whether, if 
vehicle sellers are required to implement anti-money laundering 
programs, there should be a monetary threshold of some kind in defining 
a vehicle seller for purposes of the BSA. Commenters should address 
whether any such threshold should be transaction based, as with the 
money services business rules, or on an annual gross income, or some 
other basis.
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    \9\ 31 CFR 103.11(uu).
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5. Do Vehicle Sellers Maintain ``Accounts'' for Their Customers?

    Section 326 requires the setting of minimum standards for 
identification of customers ``in connection with the opening of an 
account at a financial institution.'' Section 311 of the Patriot Act 
provides a definition of ``account'' for banks, but requires the 
Secretary to promulgate a regulation defining ``account'' for non-bank 
financial institutions. Although such a regulation has yet to be 
issued, the definition for banks (``a formal banking or business 
relationship established to provide regular services, dealings, and 
other financial transactions'') is a useful starting point. This 
definition incorporates two key concepts: (1) Formality of the business 
relationship, and (2) regularity of dealings. In light of these 
concepts, FinCEN solicits comments as to whether (and to what extent) 
vehicle sellers maintain accounts for their customers, in addition to 
fleet accounts. What kinds of services do vehicle sellers provide to 
any such account holders (including fleet accountholders)? Are these 
account relationships ongoing? Are accounts established to receive 
recurring payments from a customer, or are additional services provided 
to the accountholder?

III. Conclusion

    With this ANPRM, FinCEN is seeking input to assist it in 
determining how to implement the requirements of sections 352 and 326 
of the Act with respect to vehicle sellers. FinCEN welcomes comments on 
all aspects of this potential regulation and encourages all interested 
parties to provide their views.

IV. Executive Order 12866

    Because this is an ANPRM, FinCEN does not know whether or in what 
form it may issue a regulation pursuant to sections 352 and 326 of the 
Act affecting vehicle sellers. Accordingly, FinCEN does not know 
whether potential regulations will constitute a significant regulatory 
action under the Executive Order. This ANPRM neither establishes nor 
proposes any regulatory requirements. FinCEN has submitted a notice of 
planned regulatory action to OMB for review. Because this ANPRM does 
not contain a specific proposal, information is not available with 
which to prepare an economic analysis. FinCEN will prepare a 
preliminary analysis if it proceeds with a proposed rule that 
constitutes a significant regulatory action.
    Accordingly, FinCEN solicits comments, information, and data on the 
potential effects of any potential regulation. FinCEN will carefully 
consider the costs and benefits associated with this rulemaking.

    Dated: February 12, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-4173 Filed 2-21-03; 8:45 am]
BILLING CODE 4810-02-P