[Federal Register Volume 76, Number 146 (Friday, July 29, 2011)]
[Rules and Regulations]
[Pages 45403-45420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19116]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010 and 1022
RIN 1506-AB07
Bank Secrecy Act Regulations--Definitions and Other Regulations
Relating to Prepaid Access
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Final rule.
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SUMMARY: FinCEN is issuing this final rule to amend the Bank Secrecy
Act (``BSA'') regulations applicable to Money Services Businesses
(``MSB'') with regard to stored value. More specifically, this final
rule amends the regulations by: renaming ``stored value'' as ``prepaid
access'' and defining that term; deleting the terms ``issuer'' and
``redeemer'' of stored value; imposing suspicious activity reporting,
customer information and transaction information recordkeeping
requirements on both providers and sellers of prepaid access, and,
additionally, a registration requirement on providers only; and
exempting certain categories of prepaid access products and services
posing lower risks of money laundering and terrorist financing from
certain requirements. These changes address regulatory gaps that have
resulted from the proliferation of prepaid innovations over the last
twelve years and their increasing use as an accepted payment method.
DATES: Effective Date: This rule is effective September 27, 2011.
Compliance Date: The compliance date for 31 CFR 1022.380 is January
29, 2012.
FOR FURTHER INFORMATION CONTACT: FinCEN, Regulatory Policy and Programs
Division at (800) 949-2732 and select Option 1.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
A. In General
The BSA, Titles I and II of Public Law 91-508, as amended, codified
at 12 U.S.C. 1829b and 1951-1959, and 31 U.S.C. 5311-5314 and 5316-
5332, authorizes the Secretary of the Treasury (the ``Secretary'') to
issue regulations requiring financial institutions to keep records and
file reports that the Secretary determines ``have a high degree of
usefulness in criminal, tax, or regulatory investigations or
proceedings, or in the conduct of intelligence or counterintelligence
matters, including analysis to protect against international
[[Page 45404]]
terrorism.'' \1\ The Secretary's authority to administer the BSA and
its implementing regulations has been delegated to the Director of
FinCEN.\2\ FinCEN has interpreted the BSA through implementing
regulations (``BSA regulations'' or ``BSA rules'') that appear at 31
CFR Chapter X.\3\
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\1\ 31 U.S.C. 5311.
\2\ See Treasury Order 180-01 (Sept. 26, 2002).
\3\ On October 26, 2010, FinCEN issued a final rule creating a
new Chapter X in title 31 of the Code of Federal Regulations for the
BSA regulations. See 75 FR 65806 (October 26, 2010) (Transfer and
Reorganization of Bank Secrecy Act Regulations Final Rule) (referred
to herein as the ``Chapter X Final Rule''). The Chapter X Final Rule
became effective on March 1, 2011. Because the Notice of Proposed
Rulemaking, Definitions and Other Regulations Relating to Money
Services Businesses, 74 FR 22129 (May 12, 2009), was issued before
the Chapter X Final Rule became effective, it was proposed in the 31
CFR part 103 format. In this Final Rule, for ease of reference and
where appropriate, we have included the former 31 CFR part 103
citation after the 31 CFR chapter X regulatory citation.
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FinCEN has defined the BSA term ``financial institution'' to
include a ``money services business,'' \4\ (``MSB'') a category that
includes: a dealer in foreign exchange; a check casher; an issuer,
seller, or redeemer of traveler's checks, money orders, or stored
value; and money transmitter.\5\ FinCEN is authorized to deem any
business engaged in an activity determined by regulation to be an
activity similar to, related to, or a substitute for these activities a
``financial institution.'' \6\
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\4\ ``MSB'' is a term FinCEN created that refers to certain non-
bank financial institutions that offer specific services (often in
combination) and are without a Federal functional regulator.
\5\ 31 CFR 1010.100(ff) implementing 31 U.S.C. 5312(a)(2)(J),
(K), (R) and (V).
\6\ 31 U.S.C. 5312(a)(2)(Y).
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FinCEN has issued regulations implementing the recordkeeping,
reporting, and other requirements of the BSA. MSBs are required with
some exceptions to: (1) Establish written anti-money laundering (AML)
programs that are reasonably designed to prevent the MSB from being
used to facilitate money laundering and the financing of terrorist
activities; \7\ (2) file Currency Transaction Reports (``CTRs'') \8\
and Suspicious Activity Reports (``SARs''); \9\ and (3) maintain
certain records, including records relating to the purchase of certain
monetary instruments with currency,\10\ relating to transactions by
dealers in foreign exchange,\11\ and relating to certain transmittals
of funds.\12\ Most types of MSBs are required to register with
FinCEN.\13\
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\7\ See 31 CFR 1022.210.
\8\ See 31 CFR 1010.311.
\9\ See 31 CFR 1022.320. Check cashers and transactions solely
involving the issuance, sale or redemption of stored value are not
covered by the SAR requirement. See 31 CFR 1022.320(a)(1) and
(a)(5).
\10\ See 31 CFR 1010.415.
\11\ See 31 CFR 1022.410
\12\ See 31 CFR 1010.410(e)-(f).
\13\ See 31 CFR 1022.380.
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On May 22, 2009, the President signed the Credit Card
Accountability Responsibility and Disclosure (CARD) Act of 2009 (``CARD
Act'').\14\ Section 503 of the CARD Act required the issuance of
``regulations in final form implementing the Bank Secrecy Act,
regarding the sale, issuance, redemption, or international transport of
stored value, including stored value cards.'' \15\ Pursuant to the BSA
and the CARD Act, FinCEN published the Notice of Proposed Rulemaking
Definitions and Other Regulations Relating to Prepaid Access on June
28, 2010 (``NPRM'').\16\
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\14\ Public Law 111-24 (May 22, 2009), 123 Stat. 1734.
\15\ Id., Sec. 503(a), (c).
\16\ 75 FR 36589.
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B. Prior Regulation of Stored Value
In 1999, when FinCEN issued its final MSB rule,\17\ it deferred
certain requirements for stored value based on its complexity and the
desire to avoid unintended consequences with respect to an industry
then in its infancy. Therefore, unlike most other categories of MSB, an
issuer, seller, or redeemer of stored value was not required to
register as an MSB with FinCEN or to file SARs. An issuer, seller or
redeemer of stored value, as defined by our regulations, was required
to file CTRs \18\ and to establish a written AML program, including
policies, procedures, and internal controls commensurate with its
activities and reasonably designed to prevent it from being used to
facilitate money laundering and the financing of terrorist
activities.\19\
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\17\ Definitions Relating to, and Registration of, Money
Services Businesses, 64 FR 45438 (Aug. 20, 1999).
\18\ 31 CFR 1010.311.
\19\ 31 CFR 1022.210.
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In a 2009 notice of proposed rulemaking generally addressing the
MSB definition,\20\ we proposed folding all regulated entities dealing
with stored value into one category so that issuers of stored value and
sellers or redeemers of stored value would be in the same category. In
that rulemaking, FinCEN did not propose making any substantive changes
to the definition of this category, reserving those changes for the
rulemaking specifically focused on prepaid access.
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\20\ See Definitions and Other Regulations Relating to Money
Services Businesses, 74 FR 22129 (May 12, 2009).
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II. Notice of Proposed Rulemaking
A. General Considerations
FinCEN's proposed rule on the regulation of prepaid access marked
the agency's effort to establish a more comprehensive regulatory regime
over an industry in which technological advances had outpaced existing
regulation. Previously regulated to a lesser degree than its MSB
counterparts, prepaid access (formerly ``stored value'') is becoming
increasingly pervasive in American commerce, far more so than in the
late 1990s when the original MSB categories were established and
accompanying regulations were drafted. We believe that the prepaid
access market has matured and now warrants, at a minimum, commensurate
regulation with other MSBs.
In the NPRM, we sought to regulate this industry with an approach
and terminology that acknowledged its unique characteristics, in that
it inhabits both the physical, tangible dimension (cards, key fobs,
tokens), yet appears to exhibit increasing migration to the Internet
space (e-retailers and social networking sites). Increasingly, other
technology developments, such as smartphones, are being employed for
tendering and receiving payment, by both individuals and merchants.
These technological innovations are being widely embraced by the
American consumer, particularly among the younger demographic.
The growth of prepaid access in the marketplace continues to
flourish. The most recent Federal Reserve Payments Study \21\ noted
that, of all forms of noncash payment methods included in its research,
prepaid card usage was the fastest growing segment. On average, the
number of prepaid card transactions increased 21.5 percent per year
from 2006 to 2009, and the value of prepaid transactions increased 22.4
percent per year. Private label (commonly known as ``gift cards'') was
the most used type of prepaid card, with 2.7 billion transactions in
2009.\22\ A 2005 American Bankers Association study revealed that
consumers prefer both giving and receiving retailer-specific gift cards
instead of cash, as they are considered more personal and valued by the
recipient.\23\ Based on the above, the American public has not just
accepted
[[Page 45405]]
prepaid access; it often prefers it to other types of payment methods.
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\21\ The 2010 Federal Reserve Payments Study--Noncash Payment
Trends in the United States: 2006-2009, pg. 6. http://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf.
\22\ See id. at 17.
\23\ 2005/2006 Study of Consumer Payment Preferences, published
October 2005.
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B. Reconciling Varied Stakeholder Positions
Our NPRM addressing prepaid access proposed comprehensive
regulation of stored value, addressing the needs of law enforcement,
the financial services industry, and the general public. From FinCEN's
law enforcement stakeholders, we have heard that prepaid access has
been implicated in a number of criminal enterprises, for example,
involving border smuggling of blank card stock. Law enforcement
generally has expressed the need for strict regulation of prepaid
access, in some cases extending beyond existing requirements for other
MSBs. Law enforcement's concern comes in part due to the ease with
which prepaid access can be obtained, the high velocity of money that
potentially can be moved with prepaid access, and the anonymous use of
some, primarily closed loop, prepaid access. While we seek to empower
law enforcement with the necessary information to perform its mission,
we also seek to balance the many legitimate uses and societal benefits
offered by prepaid access.
The prepaid industry and other financial services member
stakeholders have an interest in delivering payment options to the
general public that have proven popular and are increasing in demand.
Other stakeholders, such as transit systems, university and academic
environments, and even segments of the Federal government are also
among those finding that prepaid access is an attractive, cost-
effective method to transact business.
In the following, we will discuss the principal issues surfaced by
the public comments received in response to our NPRM, and how we have
resolved the issues in the final rule. In total, we received 76 comment
letters, representing viewpoints from depository institutions, prepaid
access program managers, service providers, industry trade
associations, retailers, state and Federal government agencies, private
individuals and others. As varied were the sources, so were the
opinions offered. We have carefully read, catalogued and analyzed the
information provided to us and have used it to inform our final
decisions.
C. The Definition of ``Provider of Prepaid Access''
In the NPRM we sought to define the provider of a prepaid access
program consistently with the other categories of MSBs.\24\ To that
end, we expressly stated that the provider would be determined by the
``facts and circumstances'' surrounding the activities in which the
party engaged. To aid the reader, we also offered a list of five
activities that we believed would generally be descriptive of the
provider role while cautioning that no single act or duty alone would
be determinative. The ``facts and circumstances'' standard would employ
a totality approach.
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\24\ See 31 CFR 1010.100(ff)(5)(ii).
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Consistency with wording in other MSB regulations, while important,
was not our only reason for this approach. We believed that prepaid
programs, although many and varied in their purposes and operation,
would always involve a central entity that would meet the definition of
a provider, according to the factors and activities that we delineated.
1. Comments on the Definition
The commenting public, to a degree, agreed that our five elements
were fundamental aspects of any prepaid program; but, in general, they
strongly disagreed that one entity would always, or even primarily, be
responsible for these duties. They asserted that the duties were
typically allocated among several entities, and that the various
activities might circulate from one participant to another at various
points throughout the development of a prepaid program. FinCEN received
approximately 26 letters commenting on these issues.\25\
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\25\ Many of the comment letters we received were critical of
our initial provider definition. The approach that we used,
outlining criteria that we believed were generally descriptive of
the provider role, was criticized by several industry members and
some state regulatory officials as too indefinite and ambiguous.
Other commenters made the point that often it is only the issuing
bank that meets the definitional test of a provider under our
criteria. Many commenters advocated allowing the participants to
allocate responsibilities by agreement. Other commenters preferred
some form of bright-line test rather than the facts and
circumstances approach that FinCEN proposed.
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Another objection, offered by 16 commenters, was the lack of an
MSB-entity in the prepaid transaction chain that could accurately meet
the definitional test of a provider as defined in the NPRM. Instead,
these comments explained, the various duties and the ``centrality''
concept would lead directly to the issuing bank \26\ in most cases.
Although all of these commenting parties agreed that the appropriate
regulatory focus should be on the depository institution, they differed
with respect to their preferred alternative regulatory approaches. Some
stated that banks are already sufficiently regulated; while others
argued for additional regulatory constraints on banks involved in the
prepaid access business. Of these 16 letters, four were submitted by
prepaid access-issuing banks themselves.\27\
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\26\ By virtue of the regulatory definition of a money services
business, neither a bank nor any other participants in the bank-
centered prepaid program would be required to register with FinCEN.
\27\ Banks currently serving in a role that could otherwise fit
the definition of a provider of prepaid access are not subject to
this rule because FinCEN has excluded banks from its definition of
MSB. See 31 CFR 1010.100(d), (ff). However, banks are subject to
distinct FinCEN rules implementing the BSA with respect to their
products and services generally. Additionally, banks are subject to
regulation by the Federal banking agencies (``FBAs'') and, as such,
must comply with the appropriate provisions of Title 12 of the CFR.
FinCEN and the FBAs have issued examination guidance directed
specifically at banks involved in the operation of a prepaid
program. This guidance may be found at: http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_061.htm, specifically pages 234-
238, entitled ``Electronic Cash--Overview.''
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2. Determining the Provider by Agreement
The body of opinions addressing how to identify the correct party
as the provider was quite varied, but a single common recommendation
surfaced among many of the commenters: the best solution, both for
clarity among the participants in the prepaid program and for
simplicity in administration, would be to allow a contractual
determination among the participants as to who would serve as the
provider (``the agreement approach''). Commenters were nearly unanimous
in the belief that only this approach allowed for a clear allocation of
duties that would benefit the operation of the program, as well as
regulators and law enforcement authorities. The ability to clearly
identify the provider by the mutually-determined decision, along with
the requisite submission to FinCEN of MSB registration materials, would
offer instant identification of the principal entity in the
transaction. FinCEN is finalizing the rule with the agreement approach.
Under the agreement approach, the provider will serve as the
principal conduit of information for the other members of the program,
thereby simplifying the production and strengthening the integrity of
required reports and recordkeeping. The provider will accept and manage
the flow of information generated by all of the program participants in
such a way as to comply with regulatory requirements. The decisions
regarding what processes or methodologies are established to accomplish
this objective are best left to the program participants; the provider
[[Page 45406]]
simply must have the ability to amass the appropriate information with
dispatch.
We understand that prepaid transactions often involve more parties
and sub-parties than might be typical of routine debit or credit card
transactions and, for this reason, the information generated by the
sale and use of prepaid access is often more dispersed. But because the
information needs of law enforcement often necessitate speed and
efficiency for successful criminal investigation and prosecution,
requiring the separate pursuit of various records or documents all
along the points of the transaction chain would be inefficient and
inevitably lead to lost opportunities. Having the provider serve as the
central source of information should help to minimize the inefficiency
and allow for those most knowledgeable about how the business operates
to make this fundamental business decision.
3. Retaining the NPRM Provider Criteria
As we have discussed, the final rule adopts the agreement approach,
and we begin our regulatory text by stating that the participants
within a prepaid program must determine a single participant to be the
provider of prepaid access. A determination among the program
participants, communicated through the appropriate filing of an MSB
registration with FinCEN, will identify the participant subject to
regulatory obligations as the provider.
We noted previously, however, that there is rapid growth and
innovation in many segments of the payments industry and such is
certainly the case with prepaid access. We believe that our regulations
should anticipate, to the degree possible, situations where the program
participants fail to come to an agreement.
In the NPRM, we listed five criteria pertaining to the oversight
and control necessary to be deemed a provider of prepaid access. While
we heard objections to this list of factors when it was published as
the determinative criteria in the NPRM, we have chosen to retain the
language in the final rule as illustrative of the analytical factors
that would be useful in determining the provider. We note that while
the commenters took issue with the application of our list of criteria
to a single entity, they offered positive observations on the accuracy
and utility of the list. Commenters stated that the factors were
appropriate and helpful and demonstrated FinCEN's understanding of the
complexities of the ways in which prepaid programs function.
We understand that it would be unlikely to find all of these
characteristics present in a single entity in the prepaid program;
however, it may be helpful to weigh and assess the totality of the
factors against the characteristics of the various program participants
in reaching a regulatory determination of the provider. The list of
factors is by no means exhaustive. We retain them within the regulatory
text, however, to demonstrate that FinCEN will use these factors to
make a provider determination in instances where a provider of prepaid
access has failed to register.
D. Sellers of Prepaid Access
In the NPRM, FinCEN proposed to regulate sellers of prepaid access
as a separate category of MSB. Specifically, the NPRM proposed to
require sellers to: (1) Develop and implement an effective AML program;
(2) report suspicious activity; and (3) comply with recordkeeping
requirements related to customer identifying information and
transactional data. The NPRM did not include a registration requirement
for sellers of prepaid access. The NPRM did, however, raise the
possibility of an additional limitation to the definition of a seller
of prepaid access, which would cover only those entities that sold
prepaid products (including products not covered under the regulatory
definition of prepaid program) in an amount over $1,000 to any person
on any day in one or more transactions.
The rationale behind covering sellers of prepaid access under the
BSA was based on the unique role played by sellers in the prepaid
transaction chain. Typically, sellers of prepaid access are general
purpose retailers such as pharmacies, convenience stores, supermarkets,
discount stores or any of a number of other types of businesses
offering a full spectrum of products. Sellers of prepaid access
generally have face-to-face contact with consumers at the point of sale
and, thus, they are in the best position to collect customer
identifying information. As a general matter, AML program requirements
applicable to a range of financial institutions can play an important
role in mitigating risks involved in certain face-to-face transactions
as they relate to the ``placement'' stage of money laundering.
In response to the NPRM, FinCEN received 45 comment letters that
addressed the proposal to regulate sellers of prepaid access. These
letters were primarily from companies whose business operations include
some aspect of providing or selling prepaid access, including
individual retailers, issuing banks, prepaid program managers, prepaid
card networks, payment processors, other service providers, trade
groups and other associations. Most of these commenters opposed any
direct regulation of sellers of prepaid access. Some commenters
questioned whether the Internal Revenue Service (IRS), the current
delegated examiner for MSBs, has the resources to adequately examine
and enforce such rules, and whether the information collected by
sellers of prepaid access would be useful to law enforcement. Other
commenters expressed concerns that implementation of the proposed rule
would result in: high compliance costs; customer service challenges;
privacy and data security issues; conflicts with state laws; and
stigmatization of the unbanked and underbanked population.
None of these comments challenge the underlying rationale behind
regulating sellers of prepaid access. Although, as some commenters
pointed out, prepaid access devices and vehicles may be sold in
convenience stores, pharmacies and other retail establishments
alongside non-financial products, prepaid access is fundamentally
different than non-financial products and services. It would be an
unacceptable loophole in the BSA rules if prepaid access could be
bought and sold without adequate oversight. Because prepaid access is
essentially a financial service that provides consumers with access to
the financial system, it should be subject to an appropriate level of
regulation to prevent its misuse.
Based on this underlying rationale, FinCEN continues to consider it
appropriate to regulate sellers of prepaid access as a type of MSB.
However, FinCEN has decided to make certain changes to the rule with
respect to sellers of prepaid access, balancing the concerns expressed
in the comment letters with the legitimate need to mitigate money
laundering risks and provide law enforcement with the information and
investigatory tools necessary to prevent the use of prepaid access for
money laundering, terrorist financing and other criminal purposes.
FinCEN has adopted a targeted approach to regulating sellers of prepaid
access, focusing on the sale of prepaid access whose inherent features
or high dollar amounts pose heightened money laundering risks.
E. Prepaid Programs and Exclusions
1. In General
The NPRM defined a prepaid program broadly as ``an arrangement
under which one or more persons acting together provide(s) a particular
form of
[[Page 45407]]
prepaid access.'' The NPRM excluded from the definition of prepaid
program five types of arrangements because they are typically low-risk.
However, the NPRM also identified three high-risk factors that would
negate any exclusion.
Comments tended to focus on the various exclusions from the core
definition of ``prepaid program'' rather than on the core definition
itself. Many public comments received in response to the various
exclusions from the definition of a prepaid program argued for a more
liberal, expansive reading of the relevant exclusions. Some commenters
asserted that the exclusions were appropriate carve-outs, but that they
did not go far enough. Other commenters expressed concerns about the
effect of the three limits to the exclusions: international use,
person-to-person transfers, and re-loads from a non-depository source
other than for closed loop prepaid access. These limits to the
exclusions, many commenters asserted, undercut the efficacy of the
exclusions and would effectively render them meaningless. Only a
handful of commenters chose not to address the program exclusions at
all.
We revised the rule in an effort to reconcile the need to make the
exclusions as precise as possible with limiting any possible risks or
vulnerabilities. The final rule differs from the NPRM with a new
framework to more effectively achieve our goal of targeting those
arrangements that present a realistic risk of being used for money
laundering, terrorist financing, or other illicit activities.
2. Closed Loop Prepaid Access
We heard from a broad range of American retailers, including lines
of business as diverse as amusement parks, restaurants, and Internet
software sales, commenting that our inclusion of closed loop prepaid
access was an unwelcome departure from long-standing FinCEN policy. For
a number of years, FinCEN has held that closed loop gift certificates
and gift cards were not included within the regulatory interpretation
of stored value.\28\
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\28\ ``FinCEN does not currently interpret the definition of
stored value to include closed system products such as a mall-wide
gift card program. However, please be advised that FinCEN intends to
engage in further rulemaking relating to the definition of stored
value. Therefore, nothing in this letter should be relied upon by [
] as binding on FinCEN with respect to any changes to the current
rules * * *'' FinCEN Ruling 2003-4 (Definition of Money Transmitter/
Stored Value (Gift Certificates/Gift Cards) (Aug. 15, 2003)).
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Many commenters asserted that the inclusion of any closed loop
prepaid access as a type of prepaid program was unnecessary. They
explained that closed loop prepaid access offers very limited criminal
or money laundering opportunities given that, by its nature, it only
allows use within a narrowly-defined universe of entities, such as a
specific retailer, a retail chain (including franchisees), a shopping
center, or a group of retailers linked by common ownership, corporate
affiliation or geographic proximity. In all of these instances, the
prepaid access is ``closed'' to any other retailers which are not part
of the specifically identified group of retailers. In addition, many of
these commenters noted that closed loop prepaid access involved
relatively low dollar amounts, most commonly issued in denominations of
$500 or less. Such low dollar limits and the inability, except under
rare, de minimis situations,\29\ to convert closed loop prepaid access
to cash make it an inefficient, cumbersome tool for use by money
launderers.
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\29\ See e.g., Cal. Civ. Code Sec. 1749.5.
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In the NPRM, we explained that there were attributes potentially
associated with closed loop prepaid access that raised its risk level.
We treated these potential attributes in two of the proposed ``limits
to the exclusions.'' \30\ Based on information provided by law
enforcement, we were concerned that closed loop prepaid access, when
used internationally or with the ability to transfer value from person-
to-person, heightened its money laundering vulnerability considerably.
We asked specific questions in the NPRM on this topic, and we received
a great many responses. A total of 45 comment letters were received
referencing closed loop prepaid access.
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\30\ 75 FR 36608.
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Some commenters provided very comprehensive, thoughtful responses
in which they offered data and statistics about how their products
operate and the reasons they view them as inapplicable to this
rulemaking. The most frequent and strongly asserted statement was the
limited dollar/limited scope of closed loop prepaid access. Even in a
forum such as a shopping mall or a university campus, closed loop
prepaid access offers the consumer only goods or services.
For some retailers, such as coffee vendors or fast food
restaurants, convenience was the reason for offering closed loop
prepaid access. The product array they offer is often limited to items
retailing for just a few dollars, with conservative caps set on the
maximum value available on the closed loop prepaid access they offer.
They asserted that their closed loop prepaid access served consumers'
needs when making repeat, low-dollar ticket purchases when the only
other option would be cash; and it worked to the merchants' advantage
for speedy transactions as well as encouraging repeat business and more
liberal ``spend per ticket.''
Other retail segments, such as furniture sellers, pointed out that
closed loop prepaid access was used as a form of voucher in situations
where a big-ticket item was returned, and that the limitations
established in the NPRM were unworkable. Rather than returning cash in
amounts of several hundred or thousand dollars, often exceeding the
amount of cash maintained on hand, the merchant wanted the option to
provide closed loop prepaid access as an accommodation to the customer
and a convenience to the merchant itself. The furniture retailer was
assured of repeat business and the customer was not burdened with the
prospect of theft or loss of a large sum of cash. We believe that, for
this segment of the closed loop prepaid access market whose inventory
is comprised of mostly high-dollar merchandise, we have drawn a
suitable compromise. As discussed below, FinCEN revised the threshold
of closed loop in the final rule. Closed loop prepaid access sold in
amounts of $2,000 or less is exempted, which will accommodate this
practice of returns.
Based on comments received in response to the NPRM specifically
with regard to closed loop prepaid access, FinCEN understands that a
requirement to collect customer identifying information may necessitate
changes in the way that businesses escheat funds to states if those
funds are not claimed by their owners, depending on the differences
between escheat laws for funds belonging to identifiable persons and
for anonymous funds. As discussed herein, the final rule significantly
limits the scope of closed loop prepaid access covered under the
definition of a prepaid program. Accordingly, the final rule should
have minimal effects, if any, on businesses in connection with state
escheat laws.
The most common theme underlying the varying objections in the
comment letters was that closed loop prepaid access products were used
by retailers to pre-sell goods and services, not to serve as a medium
through which the funds paid can later be recovered in the form of
cash. If an individual is seeking to launder funds, closed loop prepaid
access is a cumbersome and ineffective method to accomplish such; funds
placed in closed loop prepaid access do not offer withdrawal or
transfer options. Retailers commented that a closed loop gift card that
is redeemed for cash rather
[[Page 45408]]
than merchandise is of little economic benefit to them.
As a result of the many, diverse comment letters we received that
addressed this aspect of the NPRM, we now better appreciate that closed
loop prepaid access differs from open loop prepaid access in a very
material way, both in operation and purpose. Closed loop prepaid access
has evolved in its present form from the paper ``gift certificate''
that has existed for many years in the traditional retail environment.
The migration to a card bearing a magnetic stripe reflects
technological improvements that allow the merchant to track the
remaining balance, the goods or services purchased, demographic data
and other valuable marketing information. But, fundamentally, the
closed loop prepaid access remains limited to its defined merchant and
it is not redeemable in cash.
In our analysis of the appropriate treatment of closed loop prepaid
access in the final rule, we have attempted to reconcile the
perspectives of the commenting public with the cautions we continue to
receive from law enforcement. Law enforcement has stressed to us that,
in very large dollar amounts, closed loop prepaid access remains
vulnerable to use by criminal enterprises for laundering funds through
merchandise and trade, particularly for the purchase of consumer
electronics and technology hardware.
Accordingly, FinCEN has chosen to set a dollar threshold of $2,000
for closed loop prepaid access, which helps address the concerns of
both retailers and law enforcement. We believe that law enforcement
presents legitimate concerns about potential for abuse in a limited
segment of the closed loop prepaid access market. Of equal importance,
however, is FinCEN's objective to facilitate legitimate commerce. As
discussed below, we have determined that the limits to exclusions we
had proposed for closed loop pertaining to international use and third-
party transfers are not necessary at this point; all closed loop
prepaid access that is issued in amounts of $2,000 or less will be
excluded from the definition of prepaid program. This dollar level
should encompass the bulk of retail sales of closed loop prepaid access
for most consumer goods and services, and mitigate the potential for
abuse by those who might otherwise seek to intermediate significant
amounts of value outside of regulatory controls under the premise of
the closed loop exclusion.
3. Government Funded Prepaid Access
In the NPRM, we discussed the increasing use by the Federal
government of open loop branded prepaid access as a means of delivering
various types of benefits and assistance, such as Social Security,
disability and disaster relief payments. We also noted that state and
local governments were increasingly interested in using prepaid access
to deliver regular payments, such as unemployment benefits or child
support, in a more efficient way than the traditional issuance and
mailing of a check.
The available market research indicated that both government
entities and recipients were receptive to this migration to prepaid
access.\31\ For the government payor, prepaid access offered a lower-
cost, more secure payment method. For the payee, security features and
the immediacy of the funds were considered very positive
characteristics.
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\31\ U.S. Department of the Treasury, Financial Management
Service Direct Express[reg] Debit MasterCard[supreg] Survey (July
21, 2009). See http://www.godirect.org/media/release/half-million-choose-direct-express/.
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In the NPRM, we asked whether the use of prepaid access for the
payment of government benefits posed any identifiable vulnerability. We
had generally concluded that adequate controls were in place for
government-administered prepaid access programs to safeguard against
illicit use. But we believed that we could benefit by posing specific
questions to the commenting public for issues or recommendations worthy
of attention.
We received only a handful of comment letters that addressed this
issue. All of these commenters strongly supported the use of prepaid
access by government agencies. We also heard from a government agency
at the Federal level charged with responsibility for establishing and
operating prepaid access programs, with a very thorough explanation of
the controls and safeguards in place.
Given these factors, we believe that our initial stance in the NPRM
remains correct, and that these prepaid access programs are
appropriately excluded from coverage under the final rule. As noted
below, the exclusion will not be limited in the final rule. We have
expanded the regulatory text to capture all facets of government at the
Federal, state and local level, to include Tribal governments and U.S.
Territories and Insular Possessions. The revised language is consistent
with our intent in the NPRM and with other BSA regulations.
4. Flexible Spending and Dependent Care Funded Prepaid Access
We have retained the exclusion for prepaid access to flexible
spending and dependent care funds in the final rule. As noted below,
there will be no limitations on this exclusion. The wording of the
regulatory text used in the final rule differs slightly from that in
the NPRM, due to recommendations offered to us by the IRS. The addition
of the regulatory citations is not intended to broaden or limit the
scope of this exclusion from that proposed in the NPRM.
We received significant public comment on this section of the
proposed rule. Most commenters approved of this specific exclusion, and
many recommended a broadening to include any type of employer-sponsored
reimbursement account, such as fitness/wellness programs and commuter
benefits programs. Additionally, some commenters urged us to expand the
exclusion to include Health Savings Accounts (``HSAs''), which allow
the commingling of health and non-health related funds.
We have chosen to retain our original scope of reimbursements as
proposed in the NPRM. With respect to HSAs, we have consulted with the
IRS and understand that funds in these types of accounts are not
required to be earmarked for health care. Because the strict
limitations inherent in health reimbursement arrangements (``HRAs'')
are not present with HSAs, it is not prudent to allow any prepaid
access associated with their use to be excluded from the definition of
a prepaid program. We have also determined that it would not be
appropriate to exclude prepaid access issued by various employer-
sponsored reimbursement programs from the definition of a prepaid
program. The operation of these private programs can vary greatly, and
they also do not meet the same strict standards that apply to HRAs.
5. Limited Exclusions
In the NPRM, the limitations applied to all of the exclusions from
the definition of a prepaid program. In the final rule, by contrast, we
have identified only two categories of prepaid access that may present
vulnerabilities to criminal use, but at the same time offer
considerable benefits to American commerce and to the individual
consumer. Under the final rule these two categories of prepaid access
may remain outside the definition of a prepaid program but only if the
use of the prepaid access is restricted in ways that limit the risk of
misuse.
[[Page 45409]]
The limited exclusions under the final rule only apply to prepaid
access to: (1) employment benefits, incentives, wages or salaries; or
(2) funds not to exceed $1,000 maximum value and from which not more
than $1,000 maximum value can be initially or subsequently loaded, used
or withdrawn on any day through a device or vehicle. Such prepaid
access is not entitled to exclusion, and therefore is a prepaid
program, if it permits (1) funds or value to be transmitted
internationally; (2) transfers between or among users of prepaid access
within a prepaid program; or (3) loading additional funds or the value
of funds from non-depository sources.
The use of prepaid access to deliver employment benefits,
incentives, wages or salaries is a popular and widespread application.
In many instances, it is a cost minimizer for the employer, who no
longer must issue paper checks that may be lost, stolen or altered, and
that often carry attendant postage costs. Instead, the employer
appreciates the ability to assign payment electronically to prepaid
access with a minimum of effort and cost; the employee is equally
pleased with the efficiencies and cost savings, and the ability to
access funds immediately with no need to cash a paper check. In
addition, the use of prepaid access offers a solid audit trail that
equals and sometimes exceeds that of paper instruments.
Commenters also pointed to the attributes of prepaid access over
some payment situations where wages are paid out in cash, for example,
to seasonal or migrant workers. Under these circumstances, the wage
earner may not have access to traditional banking services or may be
unable to transact business in a traditional setting, due to language
or cultural barriers. The use of the prepaid access can serve as a form
of ``mainstreaming'' for this individual.
Unfortunately, for all of the attributes that prepaid access
presents for the payment of wages and salaries, it is also one of the
areas of greatest law enforcement concern. Repeatedly, we have heard
that payroll schemes involving prepaid access are growing in breadth
and dollar volume, and that criminal actors continue to thrive in this
environment. Where prepaid access to wages and salaries can be used to
move significant amounts of money, on a repeated basis, to many
different individuals, we believe that it is appropriate to require
reasonable regulatory protections against misuse.
The final rule provides such protection by retaining the qualified
exclusion for the use of payroll prepaid access that was proposed in
the NPRM, under which prepaid program status is triggered if funds can
be transmitted internationally, transferred to others, or reloaded at a
non-depository institution. Businesses that provide payroll prepaid
access will either tailor their prepaid access programs to the
limitations or subject their prepaid program to the regulatory
requirements associated with prepaid program status. Although this
decision to keep payroll prepaid access subject to these limitations
runs counter to the majority of the opinions expressed in the public
comments, we believe that the better view is to exercise caution with
respect to this type of prepaid access, especially because law
enforcement has strongly warned about its vulnerability to money
laundering.
Similarly, we have chosen to retain the three limitations with
respect to prepaid access to funds that can exceed $1,000 in load, use
or withdrawal capability at any time through a device or vehicle. We
have done so based on the same continuing concerns about the
vulnerability to money laundering of unlimited low denomination prepaid
access that we have with respect to payroll prepaid access. We have,
however, eliminated the requirement in the NPRM for a dollar limit to
be clearly visible on the prepaid access device or vehicle in response
to the many comments that this was not practicable and that it
discriminated against those technologies for which it was impossible to
manifest such a dollar limit on the prepaid access device or vehicle.
If payroll cards and prepaid access products below the $1,000
threshold do not permit international use, person-to person payments,
or non-depository source loads, then such prepaid access is excluded
from BSA regulation. In this construct, FinCEN wishes to clarify that
we do not intend to sweep back into the scope of the rule prepaid
access that might be used in conjunction with another prepaid access
device that permits such activities, when the first prepaid access
device does not. In that regard, status as a prepaid program is
determined by the functionality of the product(s) within that program,
not by the functionality of other products or services which they can
purchase. Thus, a prepaid product that could be used to reload another
prepaid product might not necessarily trigger the scope of the
regulations, but such a prepaid product that was reloaded might itself
be part of a program subject to the regulations if it can, for example,
be used internationally. With respect to the limitations to the
exclusions pertaining to transfers between or among users and
reloadability by non-depository institutions, the same construct
applies.
FinCEN also wishes to clarify that the limitation on international
transmission is specifically intended to cover prepaid access devices
that can be directly used outside of the United States. For example,
while a network branded prepaid card with an initial and maximum load
limit of $500 would generally be excluded, if it can be used to
withdraw cash or purchase goods and services directly from foreign ATMs
or merchants (via the Internet, in person, or otherwise) the limitation
would apply and providers and sellers of such cards would be subject to
the prepaid access rules. The limitation does not apply to prepaid
access products that cannot be directly used for such foreign
transactions. An example of such a product would be a network branded
prepaid card with controls in place to prevent it from being used to
withdraw cash or purchase goods and services directly from foreign ATMs
or merchants (via the Internet, in person, or otherwise).
With respect to Internet transactions, the relevant issue is the
foreign location of the merchant rather than the location of the person
using the prepaid access product or the location where products are
delivered or services rendered. Thus, for example, a prepaid card that
permits an individual visiting a foreign country to make Internet
purchases from a U.S.-based merchant would not be covered under the
international use limitation by virtue of that functionality because
the card cannot be used as a vehicle for moving money outside the
United States. Additionally, if a prepaid access product can be used to
fund a U.S.-based bank or other account or to purchase a different
prepaid access device that permits international use, the original
product does not trigger the international use limitation by virtue of
that functionality.
III. Section-by-Section Analysis
A. Definition of Provider of Prepaid Access
1. In General
Section 1010.100(ff)(4)(i) defines a provider of prepaid access as
the one participant among the entities engaged in offering a particular
prepaid access program that agrees to serve as the contact and source
of information for FinCEN, law enforcement and regulators for the
particular program. The participants in a particular prepaid program
should determine the single participant that serves as provider of
prepaid access. As discussed above, this change was made because we
were
[[Page 45410]]
persuaded of the value of the ability to clearly identify the provider
by the mutually-determined decision, which offers other members of the
program and law enforcement instant identification and expedient access
to the entity in the transaction chain that will serve as ``the
principal conduit of access to information.'' The provider must
register as an MSB with FinCEN and will be subject to BSA regulations.
The provider will be subject to oversight and examination for these
obligations which include maintaining an AML program, reporting SARs,
and recordkeeping and customer identification requirements.
2. Considerations for Provider Determination
Section 1010.100(ff)(4)(ii) provides factors for determination of
the provider of prepaid access in the event that no participant in the
prepaid program registers as the provider. Determining the provider of
prepaid access in such a situation is a matter of identifying the
participant with ``principal oversight and control.'' The determination
of which participant in the prepaid program has principal oversight and
control will be a matter of facts and circumstances. We recognize that
there may be situations in which no single participant engages in all
of the factors listed in 1010.100(ff)(4)(ii). However, there will be an
identifiable participant in the prepaid program with the principal
oversight and control, which will be in the best position to serve as a
conduit for information for regulatory and law enforcement purposes.
The rule lists the following five factors, each not dispositive on its
own, which may indicate ``principal oversight and control'' and which
FinCEN will use to identify a provider of prepaid access when there has
been a failure by the parties to do so:
a. Organizing the prepaid program.
``Organizing the prepaid program'' includes the initiation and
establishment of the prepaid program. This may involve actions or
activities as diverse as identifying the need for a prepaid program,
developing a business plan, obtaining financing, and contracting with
other principals. A participant that organizes the prepaid program
demonstrates oversight and control.
b. Setting the terms and conditions of the prepaid program and
determining that the terms have not been exceeded.
This factor concerns the technical specifications involved in
establishing and operating the prepaid program. Setting the terms and
conditions encompasses a range of decisions concerning sales locations
for prepaid access, fees assessed for activation and reloading,
providing customer service, and other aspects of the program. A
participant that sets the terms and conditions of a prepaid program
demonstrates oversight and control.
c. Determining the other businesses that will participate in the
prepaid program, which may include the issuing bank, the payment
processor, or the distributor.
This factor addresses the participant that identifies and recruits
the other participants involved in the prepaid program. The provider of
prepaid access may choose other participants based on geographic
proximity, specialized expertise in a particular line of prepaid access
such as payroll programs, market expertise, or other considerations.
Regardless of the reasons other participants are chosen, a participant
that determines the other entities involved demonstrates oversight and
control.
d. Controlling or directing the appropriate party to initiate,
freeze, or terminate prepaid access.
The ability to affect the movement of funds is a very important
factor in determining the provider of prepaid access. We understand
that a participant in a prepaid program may exercise this authority
alone, in tandem with other participants or at the direction of law
enforcement or judicial authority. A participant that either moves or
suspends funds or directs another participant to move or suspend funds
demonstrates oversight and control.
e. Engaging in activity that demonstrates oversight and control of
the prepaid program.
This factor is intended to capture situations where oversight and
control may be evidenced by activities that do not fit squarely within
items (a) through (d), preceding. To the extent that both the prepaid
industry and our understanding of it continue to evolve, this criterion
provides the flexibility needed to ensure reasonable longevity for the
rule.
3. Prepaid Program
Section 1010.100(ff)(4)(iii) defines a prepaid program as an
arrangement under which one or more persons acting together provide(s)
prepaid access. There are circumstances, however, where particular
arrangements involving prepaid access may be organized in such a way
that they do not fall within the definition of a prepaid program.
Arrangements whose operations fall squarely within one or more of the
exclusions described below in (a)-(d) present such a low risk of money
laundering or other illicit behavior that they do not justify
regulation under the BSA and are therefore, not deemed to be a prepaid
program under the rule. An arrangement is not a prepaid program if:
a. It provides closed loop prepaid access to funds not to exceed
$2,000 maximum value that can be associated with a prepaid access
device or vehicle on any day.
An arrangement that provides closed loop prepaid access to funds
not to exceed $2,000 is not defined under this rule as a prepaid
program. The effort required to use closed loop prepaid access for the
placement, layering or integration of funds makes them unattractive and
unlikely vehicles for moving large sums of money efficiently. Closed
loop prepaid access is only used for particular goods or services,
which limits the ability to use it to move money quickly and easily in
large amounts. The limitation to an identifiable merchant (which is an
element of the definition of ``closed loop prepaid access,'' as
discussed below) similarly restricts the utility of closed loop prepaid
access for money laundering purposes.
As discussed above, the exemption for closed loop prepaid access
has been changed in response to comments. The exemption now applies to
closed loop prepaid access of less than $2,000 maximum value.\32\
Unlike the NPRM, it exempts such closed loop prepaid access even if it
allows international use, transfers within the prepaid program, or
loading from non-depository sources. We believe these changes more
accurately reflect the risks associated with closed loop prepaid
access.
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\32\ See II. e.2 above. The threshold of $2,000 reflects a
balancing of concerns between retailers and law enforcement and
FinCEN's intent to assess money laundering risks while facilitating
legitimate commerce.
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b. It provides prepaid access solely to funds provided by a
Federal, State, local, Territory and Insular Possession, or Tribal
government agency.
Various government agencies provide funds for many types of
obligations such as salaries, tax refunds and benefits including
unemployment, child support, disability, Social Security, veterans'
benefits and disaster relief assistance through prepaid access. Given
governmental oversight over these programs and the single source of the
funds, we see minimal opportunity for the placement or layering of
illicit funds into the financial system through prepaid access to
government benefits.
As discussed above, the exemption for government funded prepaid
access has been changed in response to comments
[[Page 45411]]
to exempt all such prepaid access without regard to international use,
transfers within the prepaid program, or loading from non-depository
sources. These changes more accurately reflect the low risks associated
with government funded prepaid access.
c. It provides prepaid access solely to funds from pre-tax flexible
spending arrangements for health care and dependent care expenses, or
from Health Reimbursement Arrangements (as defined in 26 U.S.C. 105(b)
and 125) for health care expenses.
Generally administered by a central payor, these arrangements are
pre-funded by employee and/or employer contributions to an account
maintained by the payor. There are maximum annual dollar limits
established for these accounts, and the funds can only be accessed as
reimbursement for defined, qualifying expenses. We believe that these
types of highly controlled, low risk accounts are of minimal value to
potential money launderers as a means of placing or layering funds. For
this reason, we have excluded these arrangements from the definition of
prepaid program.
As discussed above, the exemption for health and dependent care
flexible spending prepaid access has been changed in response to
comments to exempt all such prepaid access even if it allows
international use, transfers within the arrangement, or loading from
non-depository sources. We believe these changes more accurately
reflect the low risks associated with health and dependent care
flexible spending prepaid access.
d. It provides prepaid access solely to (i) employment benefits,
incentives, wages or salaries; or (ii) funds not to exceed $1,000
maximum value and from which no more than $1,000 maximum value can be
initially or subsequently loaded, used, or withdrawn on any one day
through a device or vehicle, subject to certain limitations.
Prepaid access to benefits and salaries and prepaid access subject
to low funds limits do not fall within the definition of prepaid
program under this final rule unless they contain certain higher risk
features that obscure financial transparency, thereby meriting
regulation. Specifically, arrangements limited to funding employment
benefits, incentives, wages or salaries, and those limited to funds not
to exceed $1,000 maximum value and from which no more than $1,000
maximum value can be initially or subsequently loaded, used, or
withdrawn on any day through a device or vehicle, do not fall within
the definition of prepaid program under this final rule if they do not
allow international use, person-to-person transfers, or loading from
non-depository sources.
i. Employment benefits, incentives, wages or salaries.
In most employer-employee relationships, the necessary personal
details regarding the employee (such as full name, address, date of
birth and a government identification number) are known to the
employer. In those situations, where the individual employees paid
under the program are identified by the employer, and where this
information is shared with (or made available to) the provider of
prepaid access, there are sufficient checks on possible money
laundering abuse to warrant exclusion for this type of program. These
payroll programs, in addition to regularly scheduled wage and benefits
payments, may also include bonus or incentive payments paid at
intervals outside the norm. This exemption applies only to arrangements
in which the employer, and not the employee, can add to the funds. The
ability to co-mingle funds accessed through the payroll card from
sources other than the employer would obscure financial transparency
and greatly increase the money laundering risk. The payment of
``[b]enefits, incentives, wages or salaries'' solely from the employer
generally does not represent an opportunity for the placement of ill-
gotten funds into the financial system (at least as distinct from
criminal activity on the part of the employer originating the payments,
not related to the use of prepaid access).
ii. Funds not to exceed $1,000 maximum value and from which no more
than $1,000 maximum value can be initially or subsequently loaded,
used, or withdrawn on any day through a device or vehicle.
We believe that the potential for misuse is significantly lessened
where the prepaid access is to funds limited to a $1,000 maximum
limitation and no subsequent loading or reloading can increase the
funds beyond the stated maximum on any day through a device or vehicle.
We have chosen a $1,000 maximum for this provision for a number of
reasons: (1) 2009--2010 industry research findings for average and
maximum initial loads; \33\ (2) consistency with thresholds established
for other MSB categories; and (3) the appropriate balance between the
concerns expressed by law enforcement and industry.
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\33\ FinCEN conducted research of prepaid program providers and
reviewed the maximum daily load values of various programs available
on public Web sites. Generally, programs reviewed through this
research restricted cash loads or withdrawals to $950 or less per
day.
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This final rule differs from the NPRM in that the phrasing of the
$1,000 maximums has been collapsed from three separate subsections into
one because it is more concise and, we believe, clearer. It also
clarifies that this limitation applies to a single device or vehicle,
not across an entire prepaid program. Additionally, the NPRM included a
requirement that the maximum value of the prepaid access product
eligible for this exemption must be clearly visible on the product
itself. The final rule does not include this requirement based on
present concerns, as informed by some comments, that the requirement
may be un-workable and may not be technologically neutral.
iii. Limitations on the payroll and limited value prepaid access
exemptions.
Payroll cards and limited value prepaid access devices or vehicles
are subject to a qualified exception under the final rule, allowing the
programs to fall outside of the requirements unless key risk factors
change. Specifically, the exemption is not applicable, and prepaid
program status is triggered, if funds can be transmitted
internationally, electronically transferred to other users of the
prepaid access, or reloaded at a non-depository institution. While not
inherently suspect, arrangements having these characteristics have
risks significantly greater than the otherwise minimal risk presented
by payroll and limited value prepaid access arrangements.\34\
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\34\ For a fuller discussion on the risks inherent in
international use of prepaid access, see 75 FR 36589, 36599-600.
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B. Definition of Seller of Prepaid Access
In the NPRM, a seller of prepaid access was defined as ``any person
that receives funds or the value of funds in exchange for providing
prepaid access as part of a prepaid program directly to the person that
provided the funds or value, or to a third party as directed by that
person.'' As discussed more fully below, FinCEN has modified the
definition of seller of prepaid access to cover a much smaller, more
targeted universe of retailers. The NPRM also proposed to require
sellers of prepaid access to: (1) Develop and implement an effective
AML program; (2) report suspicious activity; and (3) comply with
recordkeeping requirements related to customer identifying information
and transactional data. These regulatory requirements remain largely
unchanged in the final rule.
[[Page 45412]]
In the final rule, FinCEN has replaced the phrase ``* * * in
exchange for providing prepaid access as part of a prepaid program
directly to the person that provided the funds or value, or to a third
party as directed by that person'' with ``in exchange for an initial
loading or subsequent loading of prepaid access. * * *'' Thus, if the
other conditions of the rule are met, a person is a seller of prepaid
access if the person accepts payment in exchange for the initial or
subsequent loading of prepaid access. The modified language more
clearly articulates the types of transactions covered under the
definition.
As proposed, the rule would only apply to retailers that sell
prepaid access devices or vehicles that are part of a prepaid program
as defined in the rule. One of the primary issues raised in the comment
letters was that low-dollar closed loop prepaid access (with some
comments also referring to closed loop prepaid access that permits
international use), was covered under the proposed definition of
prepaid program. As such, the proposed rule would have subjected
retailers that sell such prepaid access to regulation as sellers of
prepaid access. Commenters argued that low-dollar closed loop prepaid
access is relatively low-risk, and retailers that sell such access
should not be subject to the regulation by virtue of that activity
alone. FinCEN agrees that low-dollar closed loop prepaid access poses
limited money laundering risks. Therefore, as discussed above, FinCEN
has modified the definition of prepaid program in the final rule to
cover only closed loop prepaid access with a value of $2,000 or more.
Additionally, as discussed above, the definition of prepaid program in
the final rule does not cover closed loop prepaid access merely because
it can be used internationally. Under the final rule, retailers that
sell low-dollar closed loop prepaid access are not subject to
regulation as sellers of prepaid access by virtue of that activity
alone. However, retailers that sell high-dollar (in excess of $2,000)
closed loop prepaid access are subject to regulation as sellers of
prepaid access.
FinCEN continues to believe that prepaid access such as general
purpose reloadable products with no restrictions on international use
poses heightened money laundering risks, regardless of the value of the
funds to which such access is being provided. As discussed above, the
final rule adopts the formulation in the NPRM that includes this
prepaid access under the definition of prepaid program. Accordingly,
this type of prepaid access triggers the regulatory obligations
applicable to both providers and sellers of prepaid access.
Under section 1010.100(ff)(7) of the final rule, a seller of
prepaid access is any person that receives funds or the value of funds
in exchange for an initial loading or subsequent loading of prepaid
access if that person sells prepaid access offered under a prepaid
program that can be used before verification of customer identification
under Sec. 1022.210(d)(1)(iv); or sells prepaid access (including
closed loop prepaid access) to funds that exceed $10,000 to any person
during any one day, and has not implemented policies and procedures
reasonably adapted to prevent such a sale.
Under paragraph (ff)(7)(i), a person is a seller of prepaid access
if the person sells any prepaid access under any prepaid program, where
the customer can use the prepaid access before verification of customer
identification by any participant in the prepaid program. However, a
person is not a seller of prepaid access under this provision with
respect to the sale of prepaid access that requires post-purchase
activation and the collection of customer identifying information
before use. The phrase ``that can be used before verification of
customer identification'' only refers to use of features of a prepaid
access product that would make it qualify as a prepaid program. For
example, the sale of a prepaid access product that allowed the initial
funds loaded, if below $1,000, to be used for purchases and did not
have access to features such as international use, person-to-person
transfers, and loads from non-depository sources prior to verification
would not make a retailer a seller. FinCEN believes this approach
appropriately regulates retailers that sell high-risk products, while
not imposing undue obligations on retailers that only sell relatively
low-risk products.
Under paragraph (ff)(7)(ii), a person is a seller of prepaid access
if the person sells any prepaid access--even that which is not covered
under the definition of prepaid program--that provides access to more
than $10,000 to any person during any one day, subject to an exemption
for retailers with policies and procedures reasonably adapted to
prevent such sales. FinCEN believes this additional activity threshold
is necessary in light of FinCEN's more targeted approach to regulating
sellers of prepaid access in this final rule. All retailers should
already be familiar with reporting requirements for cash transactions
exceeding $10,000. Retailers are obligated under the BSA rules to file
reports on the receipt of currency in excess of $10,000 in the course
of engaging in a trade or business.\35\ However, the sale of prepaid
access in an amount greater than $10,000 should automatically raise a
red flag with a retailer, regardless of whether the customer makes the
purchase in cash or some other form of payment. High dollar
transactions involving prepaid access pose inherent money laundering
risks. To permit such transactions to occur without the prospect of any
BSA reporting or recordkeeping requirements, other than the reporting
of cash transactions, would deprive law enforcement of access to highly
useful information. Therefore, it is appropriate to regulate retailers
that sell prepaid access in an amount greater than $10,000, requiring
them to maintain an anti-money laundering program, report suspicious
activity and collect customer identifying information.
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\35\ See 31 CFR 1010.330(a), formerly 31 CFR 103.30(a).
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However, we do not think it is necessary to impose such regulatory
burdens on retailers that implement and adhere to policies and
procedures that are reasonably adapted to prevent the sale of more than
$10,000 of prepaid access. This is consistent with a risk-based
regulatory approach. Retailers may take into consideration their lines
of business, customer base, and prepaid access sales volume in
developing their internal policies and procedures in such a way as to
reduce their risk of money laundering. FinCEN believes that such a
risk-based approach for sellers strikes the right balance with respect
to including certain sellers within the scope of the rule, while at the
same time enabling those with lower risks to avoid the full scope of
the rule. FinCEN believes the definition of seller of prepaid access
will apply to a relatively small number of retailers and will not
impose an unjustifiable burden on any retailers.
C. Definition of Prepaid Access
The prior regulations used the term ``stored value.'' 31 CFR
1010.100(ww), formerly 103.11(vv), defined the term as funds or the
value of funds represented in digital electronic format (whether or not
specially encrypted) and stored or capable of storage on electronic
media in such a way as to be retrievable and transferable
electronically. The term ``stored value,'' as discussed previously, was
known from its inception to be a less-than-perfect label for this
payment mechanism, given that no value is actually ``stored'' on the
card. Very shortly after the publication of the MSB final rule in 1999,
the term ``prepaid''
[[Page 45413]]
emerged as the more common industry term. This rule revises our term to
correspond to the more accurate, more prevalent term in the
marketplace.
This rule employs more precise terminology while still striving for
regulatory flexibility, so that the rule will not become obsolete with
the next innovative product. We believe the definition has the
necessary regulatory elasticity to survive future technological
advancements. Specifically, we define ``prepaid access'' as ``[a]ccess
to funds or the value of funds that have been paid in advance and can
be retrieved or transferred at some point in the future through an
electronic device or vehicle, such as a card, code, electronic serial
number, mobile identification number, or personal identification
number.'' The definition has been changed somewhat from that proposed
in the NPRM to clarify that prepaid access is not itself a device or
vehicle, but that such a device or vehicle is a means through which
prepaid funds are accessed. The two main elements of prepaid access are
stated in the definition: (1) funds have been paid in advance; and (2)
those funds can be retrieved or transferred at some point in the
future. We also reduce the number of examples in the definition to
eliminate redundancy.
D. Definition of Closed Loop Prepaid Access
The term ``closed loop prepaid access'' is defined as ``[p]repaid
access to funds or the value of funds that can be used only for goods
or services involving a defined merchant or location (or a set of
locations), such as a specific retailer or retail chain, a college
campus, or a subway system.'' This definition, which supersedes the
definition of ``closed loop stored value'' proposed in FinCEN's 2009
MSB rulemaking, revises slightly the definition proposed in the NPRM.
Compared to the definition proposed in the NPRM, it limits closed loop
prepaid access to use for goods and services, excluding transfers of
value to third parties and cash withdrawals.\36\ It continues to limit
closed loop prepaid access to transactions involving a defined merchant
or location(s). In this context, FinCEN wishes to clarify that a
defined merchant may comprise a set of affiliated retailers or retail
chains.
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\36\ Other than de minimis redemptions of cash value required by
law, see, e.g., Cal. Civ. Code 1749.5(b)(2).
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E. Anti-Money Laundering Programs for Money Services Businesses
This rule revises the regulation implementing 31 U.S.C. 5318(h)
that requires MSBs to maintain an adequate anti-money laundering
program. Specifically, it amends 31 CFR 1022.210(d)(1), formerly 31 CFR
103.125(d)(1), by prescribing that, as part of their anti-money
laundering programs, providers and sellers of prepaid access must have
policies and procedures for access to and retention of customer
identifying information and either retaining that information (in the
case of sellers of prepaid access) or retaining access to that
information (in the case of providers of prepaid access).
In implementing 31 CFR 1022.210, FinCEN stated that the uniqueness
of each financial institution required the adaptation of policies,
procedures, and internal controls to a level commensurate to the risks
in the financial institution's business model, including geography and
customer base. Therefore, we did not intend for each MSB to have
identical policies and procedures for their AML programs. Based on
inherent risks, some businesses would be required to implement more
comprehensive policies, procedures, and internal controls than others.
This regulation adds a customer information recordkeeping
requirement (including, name, date of birth, address, and
identification number) for the provider and seller of prepaid access.
Providers of prepaid access must retain access to such identifying
information for five years after the last use of the prepaid access.
Sellers of prepaid access must retain such identifying information for
five years from the date of the sale of the prepaid access. FinCEN
believes that obtaining and retaining (or retaining access to) such
customer information is necessary for greater financial transparency
concerning the purchasers of prepaid access. We anticipate that access
to and retention of such records will assist providers and sellers, and
may be of great value to law enforcement.
The requirement that providers of prepaid access must obtain the
identifying information of a person who obtains prepaid access under a
prepaid program is linked to and narrowed by the definition of
``prepaid program.'' Accordingly, providers of prepaid access in an
arrangement that does not fall within the definition of a prepaid
program under 31 CFR 1010.100(ff)(4)(iii) will not be required to
obtain customer information. For example, prepaid access to funds less
than $1,000 through a device or vehicle that does not allow
international use, transfers between prepaid access products within one
prepaid program, or loads from non-depository sources does not require
a provider to collect customer identification.
With respect to sellers of prepaid access, there are two situations
under which customer information must be collected. Under one
situation, sellers that fall within the scope of the regulations by
virtue of the definition at 31 CFR 1010.100(ff)(7)(i) (i.e., where the
customer can access funds under a prepaid access program without
verification of customer identification) are responsible for collecting
customer information. Since this definition is also linked to the
definition of prepaid program, this situation will involve both the
provider and the seller of prepaid access being responsible for the
collection of this information. While both are responsible under the
regulation for the collection of this information, they may agree with
one another as to which will collect the information. Under the other
situation, sellers that fall within the scope of the regulations by
virtue of 31 CFR 1010.100(ff)(7)(ii) (i.e., sale of any type of prepaid
access in a combined amount greater than $10,000) must also obtain
customer identification. Since this definition is linked to the sale of
more than $10,000 of any type of prepaid access, whether covered under
a prepaid program or not (including closed loop access), there may be
situations under which the seller, but not the provider, is obligated
to collect the customer information.
The rule requires collection, verification, and retention of
standard identifying information, including name, date of birth,
address, and identification number. This information will be highly
useful to law enforcement in the investigation and prosecution of
criminal, tax, and regulatory investigations and proceedings. These
requirements are intended to mirror the customer identification
programs required of other financial institutions and draws on the
explanations and interpretations issued with respect to those
requirements.\37\ Providers and sellers of prepaid access are reminded
that the AML programs they develop pursuant to this rule should be
appropriate for their prepaid program operations. AML programs must be
sufficiently detailed with standards and criteria specified for how the
information is to be accessed, collected, verified, and retained. There
should also be provisions addressing communication to employees and for
the training of any individuals or entities acting as their agents.
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\37\ 31 CFR 1020.220(a), formerly 103.121(b).
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[[Page 45414]]
F. Reports by Money Services Businesses of Suspicious Transactions
This rule revises the regulation implementing 31 U.S.C. 5318(g),
which requires MSBs to report certain suspicious activity. In
particular, this rule removes the stored value exemption, found at 31
CFR 1022.320(a)(5), formerly 103.20(a)(5), from the regulation
requiring MSBs to report suspicious activity. When the exemption was
proposed, FinCEN considered issuers, sellers, and redeemers of stored
value to be among the institutions that could provide valuable
information concerning suspicious transactions.\38\ However, at that
time FinCEN determined that it was not appropriate to specifically
require issuers, sellers, and redeemers of stored value to file SARs
because of the infancy of the industry and the fledgling use of stored
value products in the United States.\39\ Over the last decade, however,
the growth of the prepaid industry has made it an attractive medium
through which money launderers can conduct illicit transactions.
Prepaid access is easily transportable and, in some cases, can be
loaded from a number of different locations. Therefore, the underlying
rationale for the exemption from SAR reporting no longer applies.
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\38\ 62 FR 27900, 27904 (May 21, 1997).
\39\ Id.
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G. Registration of Money Services Businesses
This rule revises the regulation implementing 31 U.S.C. 5330 that
requires MSBs to register with FinCEN. Specifically, FinCEN is amending
31 CFR 1022.380, formerly 31 CFR 103.41, by removing the exemption from
registration accorded to issuers, sellers, and redeemers of stored
value. Since the initial exemption was granted, the prepaid access
industry has experienced rapid growth. FinCEN no longer feels that
regulatory requirements such as registration will inhibit the
successful development of the industry. By removing the exemption,
providers of prepaid access will now be required to register as MSBs
with FinCEN.\40\
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\40\ Any MSB, including a seller of prepaid access, that is an
MSB solely because it is the agent of another MSB, is exempt from
the registration requirement. See 31 CFR 1022.380(a).
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Identifying information about each of the individual prepaid
programs for which an entity serves as provider is fundamentally
important to the law enforcement community. The most efficient way to
obtain this information and make it available for law enforcement use
is via the registration process, which now requires that ``[e]ach
provider of prepaid access must identify each prepaid program for which
it is the provider of prepaid access.'' A provider of prepaid access
registering as an MSB must submit, as part of its registration and
registration renewals, a complete list of the prepaid programs for
which it serves as provider. The list of prepaid programs must include
sufficient identifying information for FinCEN and law enforcement to
identify the provider of prepaid access based on the information
submitted in the registration process and the information present on
the device or included with the vehicle.
Compliance with the requirement that a complete list of prepaid
programs be submitted with registration, however, will require a change
to FinCEN Form 107, Registration of Money Services Business. The
current form does not contain a field in which such information can be
included. FinCEN will soon publish a new proposed form for notice and
comment which makes a number of conforming changes to reflect this
final rule, including renaming stored value prepaid access and allowing
for identification of prepaid programs. Accordingly, this rule provides
that compliance with 31 CFR 1022.380 is not required until six months
after the date of publication of this final rule in the Federal
Register, by which time the revised FinCEN Form 107, Registration of
Money Services Business, will be final and available.
H. Records Required To Be Maintained By Money Services Businesses
Our discussions with the law enforcement community have revealed
the utility of detailed records and recordkeeping on the part of
regulated financial institutions over a substantial period of time,
generally five years. This facilitates investigations in which law
enforcement is attempting to reconstruct a pattern, or a history of
transaction activity, that substantiates criminal behavior involving
prepaid products or services. Section 1022.210 requires access to
recordkeeping related to the customer involved in the initial purchase
of the prepaid access product. Section 1022.420 requires access to
transactional records generated in the ordinary course of business that
would be necessary to reconstruct prepaid access activation, loads,
reloads, purchases, withdrawals, transfers, or other prepaid related
transactions for a period of five years.
These records would routinely reflect: (1) Type of transaction (ATM
withdrawals, point-of-sale purchase, etc.); (2) amount and location of
transaction; (3) date and time of transaction; and (4) any other unique
identifiers related to transactions. These records need not be kept in
any particular format, or by any particular participant in the prepaid
program. The provider of prepaid access, however, bears the
responsibility for complying with these recordkeeping requirements.
Additionally, the records must be easily accessible and retrievable
upon the appropriate request of FinCEN, law enforcement or judicial
order.
IV. Regulatory Flexibility Act
When an agency issues a rulemaking, the Regulatory Flexibility Act
(``RFA'') requires the agency to ``prepare and make available for
public comment a regulatory flexibility analysis'' which will
``describe the impact of the rule on small entities'' (5 U.S.C.
603(a)). Section 605 of the RFA allows an agency to certify a rule, in
lieu of preparing an analysis, if the rulemaking is not expected to
have a significant economic impact on a substantial number of small
entities.
A. Impact on Providers of Prepaid Access
1. Estimate of the number of small entities to which the rule will
apply
For the purpose of arriving at an estimated number of providers of
prepaid access, FinCEN is relying on information regarding the
industries as identified by their North American Industry
Classification System (``NAICS'') \41\ codes. In particular, FinCEN
finds that prepaid providers will be listed as NAICS code 522320
(Financial transaction processing, reserve and clearinghouse
activities). The United States Census Bureau estimates there are about
3000 entities in this classification. However, this classification
includes services that are outside of those provided by prepaid
providers (i.e. check validation services, bank clearinghouse
associations, and credit card processing services). Because prepaid
providers utilize electronic funds transfers systems to conduct
business, FinCEN narrowed the estimated industry to those entities that
are within NAICS code 522320 and perform either electronic funds
transfers or electronic financial payment services. FinCEN was unable
to obtain a number for these entities from the United States
[[Page 45415]]
Census Bureau and therefore relies on commercial database information.
Based on this information, FinCEN estimates that there are 700 entities
that share this classification.\42\ Within this classification those
entities that have less than seven million dollars in gross revenue are
considered small. FinCEN estimates that 93% of the affected industry is
considered a small business, and that the regulation will affect all of
them.\43\
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\41\ NAICS was developed as the standard for use by Federal
statistical agencies in classifying business establishments for the
collection, analysis, and publication of statistical data related to
the business economy of the United States. NAICS was developed under
the auspices of the Office of Management and Budget (OMB), and
adopted in 1997.
\42\ Dun and Bradstreet, D&B Duns Market Identifiers Plus (US)
(Accessed on Nov 19, 2009) (Search of Codes NAICS 522320 with
removal of outlying institutions).
\43\ For NAICS code 522320, those entities that generate less
than $7 million in annual revenue are considered small entities by
the SBA. FinCEN estimates that each prepaid card generates $450 in
annual revenue to a prepaid provider through all relevant fees such
as purchase and maintenance fees. For analytical purposes, we
consider any prepaid provider issuing no more than 15,000 cards
annually to be a ``small entity.'' [15,000 x $450 = $6.7 million].
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2. Description of the Projected Reporting and Recordkeeping
Requirements of the Rule
The rule requires prepaid providers to comply with the same BSA
requirements as those with which other MSBs are already complying. By
requiring this, FinCEN is addressing vulnerabilities in the U.S.
financial system and is leveling the playing field among MSBs.
Currently, all MSBs are required to maintain AML programs, report
certain currency transactions, and maintain certain records. Also,
MSBs, except check cashers and issuers, sellers, and redeemers of
stored value, have been required to file reports on suspicious
transactions. The rule requires prepaid providers to comply with these
same requirements. The rule requires prepaid providers to register with
FinCEN. Additionally, prepaid providers are required to maintain
records about customer identification and transactional information. As
discussed below, FinCEN does not foresee a significant impact on the
regulated industry from these requirements.
3. AML Program Requirement in General
The rule requires prepaid providers to maintain AML programs. The
majority of providers have not been previously required by regulation
to maintain AML programs. However, FinCEN does not believe there are
special skills required to develop an AML program other than
effectively identifying risk. Risk assessment is a standard,
fundamental precept of any entity seeking to limit fraud, loss, and
other harm to the business.
To assist entities new to FinCEN oversight, we offer guidance and
information through our public Web site and through a toll-free, live
telephone helpline. We publish overview and compliance guidance in
English and eight other languages, provided free of charge upon
request. In all of this information, we emphasize that an AML program
should be commensurate with an institution's risks stemming from
various factors including size. Therefore, we would generally expect a
smaller entity's AML Program to be less complex than that of a larger
entity, involving the dedication of less time and fewer resources.
Additionally, through discussions with industry and representations
from a prepaid card association, FinCEN has determined that prepaid
providers are already maintaining AML programs, typically as part of
their contractual obligations to their partner banks or credit card
networks. When an issuing bank partners with a prepaid provider the
bank may require that the provider maintain an AML program commensurate
with the bank's risk tolerance. To assist these prepaid providers,
prepaid card associations publish reports on AML best practices.
Providers that may already be contractually obligated to maintain an
AML program through an agreement with the issuing bank will now be
legally required to do so under this rule. FinCEN estimates that the
impact of this requirement will be minimal as it only codifies current
business practice.
4. Currency Transaction Reporting
The rule will require prepaid providers to report transactions in
currency in amounts greater than $10,000. Because the average load
amounts for prepaid cards are well below the $10,000 threshold and the
majority of prepaid loads above $1,000 are made through direct deposit,
FinCEN does not foresee a significant burden in this requirement. In
support of this assertion, several prepaid providers have stated to
FinCEN that they have rarely, if ever, encountered a transaction of
over $10,000 in currency, per person, per day, associated with their
prepaid programs.
5. Suspicious Activity Reporting
The rule will require prepaid providers to report on transactions
of $2,000 or more which they determine to be suspicious. Prepaid
providers have not been required previously to comply with such a
requirement by regulation. It is important to highlight that these
reports are not required to be filed unless a transaction is suspicious
and is for an amount of $2,000 or more. The average transaction amount
for a point-of-sale debit is about $40.\44\ This is substantially less
than the $2,000 threshold. Additionally, through an overview of
currently operating programs, FinCEN has determined that few prepaid
programs allow a customer to withdraw more than $1,000 from an ATM in a
day. Lastly, in discussions with the industry, prepaid providers
indicated that they rarely encountered transactions for which they
would need to file a SAR if required by regulation. Therefore, FinCEN
estimates that the number of SARs required to be filed by prepaid
providers and sellers will be low. FinCEN estimates the cost to
generate such SAR at $36.\45\
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\44\ Cheney, Julia ``An Update on trends in the Debit Card
Market,'' Payment Cards Center, June 2007, pg. 3 (citing The Nilson
Report Issue 865); available at http://www.phil.frb.org/payment-cards-center/publications/discussion-papers/2007/D2007JuneUpdateDebitCardMarketTrends.pdf.
\45\ FinCEN's estimate of 90 minutes to complete and record a
SAR multiplied by the average hourly wage of a compliance officer
($24.57) is $36. According to Bureau of Labor Statistics, the mean
hourly wage of a compliance officer is $24.47. See Bureau of Labor
Statistics, ``Occupational Employment and Wages, May 2006'', http://www.bls.gov/oes/2006/may/oes131041.htm.
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FinCEN understands that the costs in SAR reporting go beyond the
actual cost in filing the report and include procedures in place to
monitor transactions. FinCEN also understands that a majority of
prepaid providers are already engaged in this monitoring. To assist
small entities with compliance, FinCEN provides a SAR Reference Guide
in English and eight other languages.\46\
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\46\ http://www.fincen.gov/financial_institutions/msb/materials.html.
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6. Customer Identification Information Collection and Retention
The rule will require prepaid providers and sellers to implement
procedures to collect and retain customer information relating to
prepaid access within prepaid programs as defined by this rule.
Providers of prepaid access have not previously been required to retain
this information by regulation.
Similar to the discussion of AML programs above, prepaid providers
are currently required to obtain and retain customer identification
information through contractual obligations with the bank partners.
Since the implementation of section 326 of the USA PATRIOT Act, banks
have been required to obtain customer identification for each account
they open. Through discussions with prepaid industry members and
associations, FinCEN has determined that, to mitigate
[[Page 45416]]
risks, banks have extended this customer information requirement to
their prepaid provider partners through contractual obligations.
Therefore, some providers of prepaid access are already obtaining and
maintaining information on their customers to comply with contractual
obligations. Beyond these obligations, many prepaid providers are
maintaining this information to assist in their fraud monitoring and
targeted marketing programs. FinCEN estimates the time required to
obtain customer information under this rule at 2 minutes per prepaid
access card. In our analysis of the effects of this portion of the rule
under the Regulatory Flexibility Act and the Paperwork Reduction Act,
we have attempted to extrapolate from available business resources and
information (e.g., commercial databases, U.S. government Web sites and
publications) to the available open-source data about the emerging
prepaid industry. For both RFA and PRA, we sought to determine the
overall impact of this portion of the rule by identifying increases to
total business payroll costs.
As explained previously under this section, in footnote
50, we have calculated that each prepaid card generates
approximately $450 in annual revenue to a prepaid provider. Using the
most applicable NAICS category, and the identification of $7 million or
less in annual revenue as the Small Business Administration's
definition of a ``small business'' for this category, we have arrived
at a determination of a very modest projected impact on annual company
payroll.
We applied the two minute time allotment per prepaid access card,
described above, to the number of prepaid cards issued annually by a
small business prepaid provider (15,000), to arrive at a total time
value of 30,000 minutes (or 500 hours). Since we have previously stated
that we believe the average lifespan of a prepaid card to be three
years, we divided the total by 3, and multiplied using the $25 average
hourly wage of a compliance officer (see footnote 43) to
calculate a total annual impact on company payroll of $4,100. This
figure represents an impact of only .2 percent of the average annual
payroll of $1.8 million for entities under this NAICS category.
For comparative purposes, we also applied the same analysis to
entities generating only $100,000 in annual revenue, considered by the
SBA to be the minimum level of a ``small business'' within this NAICS
category. Small businesses at this revenue level would issue
approximately 220 cards per year. Applying the same assumptions for
revenue level per card, hourly salary for compliance personnel and
lifespan of a card, the calculations (using average annual payroll of
$64,000 for these entities within the NAICS category 522320) results in
an increase of 2 hours (or $50 annually) for a very marginal effect on
total annual company payroll of .07 percent.
7. Transaction Records Generated in the Ordinary Course of Business
The rule will require providers of prepaid access to retain
transaction specific records generated in the ordinary course of
business. Currently, providers are not required to maintain these
records under the BSA. However, for transactions processed through a
point-of-sale system or other access gateway, the Electronic Funds
Transfer Act requires the retention of this information for a period of
two years.\47\ FinCEN will extend this retention to a period of five
years to be commensurate with other BSA record retention obligations.
In its PRA statement, FinCEN estimates that the annual impact of this
requirement is 16 hours per recordkeeper. FinCEN has determined that
for those entities with annual revenue close to $7,000,000, this
requirement will increase costs to payroll by .02%. For those entities
with annual revenue of $100,000, this requirement will increase costs
to payroll by .6%.
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\47\ See 12 CFR 205.13.
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8. Registration of Providers
The rule will require providers of prepaid access to register with
FinCEN. The FinCEN registration form is two pages and must be filed
once every two years. Under OMB control number 1506-0013, FinCEN
estimates that the biannual burden from reporting and recordkeeping
associated with this registration is two and a half hours.\48\ In
accordance with the estimated hours in its PRA statement, FinCEN
estimates that this requirement will impact small entities by $36
annually.
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\48\ The estimated average annual burden associated with the
recordkeeping requirement in 31 CFR 1022.380 is 30 minutes per
recordkeeper for the completion, filing, and recordkeeping of
registration forms, and an additional 120 minutes for the
completion, filing, and recordkeeping of the list of prepaid
programs subject to the regulation.
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B. Impact on Sellers of Prepaid Access
1. Estimate of the Number of Small Entities To Which the Rule Will
Apply
For the purpose of identifying sellers of prepaid access, FinCEN is
unable to rely on NAICS codes because sellers, including grocery
stores, convenience stores, and department stores, will be classified
under the primary services that they provide. To arrive at an estimated
number of sellers of prepaid access, FinCEN is relying on information
about distribution channels obtained through informal discussions with
members of the prepaid industry. In addition, FinCEN is relying on
information concerning prepaid access selling patterns identified in
the 2005 Money Services Business Industry Survey Study conducted by
KPMG.\49\
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\49\ http://www.fincen.gov/news_room/rp/reports/pdf/FinCEN_MSB_2005_Survey.pdf.
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In the NPRM, FinCEN estimated that there were 70,000 sellers of
prepaid access operating within prepaid programs. In response to
comments received, FinCEN has made changes to the definition that
substantially limits the number of sellers of prepaid access that will
be affected by this final rule. First, closed loop prepaid access must
provide access to funds in excess of $2,000 to be covered under the
definition of prepaid program. The vast majority of retailers that sell
closed loop prepaid access do not thereby provide access to amounts
over $2,000. These retailers would not be subject to the final rule.
Second, the final rule only affects retailers to the extent they either
(1) sell prepaid access that is immediately useable at the point of
sale and requires no later activation, or (2) sell prepaid access to
more than $10,000 to any person on any day. Commenters to the NPRM
indicated that very few prepaid programs, if any, permit immediate
usage without a later activation process that includes appropriate
customer identification procedures, and that very few retailers, if
any, sell prepaid access in such large amounts.
Retailers that sell immediately usable prepaid access that is not
closed loop prepaid access are appropriately regulated as sellers of
prepaid access under the final rule if those products pose heightened
money laundering risks by: (1) Permitting access to funds in excess of
$1,000; or (2) permitting international use, person-to-person
transfers, or additional loading of funds from non-depository sources.
The prepaid industry can avoid the regulation of retailers as sellers
of prepaid access by implementing pre-use activation procedures that
include appropriate customer identification information collection,
already common with respect to many prepaid programs.
Although FinCEN is unable to determine an exact number of sellers
that participate in programs that pose heightened money laundering
risks such as high-dollar anonymous programs, comments received in
response to the
[[Page 45417]]
NPRM suggest that these products make up less than 1% of the current
market. From this, we believe a small percentage of the population of
retailers will be required to implement the full ambit of BSA
requirements. In addition, based on an assessment of the number of
stored value entities that have filed reports with FinCEN under BSA
regulations, FinCEN believes there is further evidence that the number
of entities engaging in activities that would trigger the requirements
with respect to sellers of prepaid access can be estimated to be less
than 700.\50\ Therefore, FinCEN estimates that the rule will have a
significant impact on less than 1% of the 70,000 sellers estimated by
FinCEN in its NPRM.
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\50\ FinCEN received comments that stated the existence of
products in amounts over $1,000 that can be used prior to customer
identity verification is rare and these products would be issued by
foreign banks instead as debit cards. FinCEN reviewed BSA
information and conducted industry specific research to determine
that virtually all reloadable prepaid cards that are purchased in
the United States are associated with a major payment processor or
domestic bank and require customer verification before the product
can be used in amounts above $1,000. FinCEN also received comments
that the international use of prepaid products issued in the United
States is less than 1% of all use. Therefore, although FinCEN is
unable to determine an exact number of businesses that sell these
high-risk products, FinCEN estimates that it is less than 1% of all
sellers.
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Additionally, retailers that sell any type of prepaid access to
funds in excess of $10,000 to any person during any one day are
regulated as sellers of prepaid access under the final rule. Based on
the comments received in response to the NPRM, FinCEN believes that
such sales are exceedingly rare, and it would be relatively easy for
retailers to implement policies and procedures that would ensure that
they did not engage in such sales. Retailers that implement policies
and procedures reasonably designed to ensure that they do not sell over
$10,000 of prepaid access to one person in one day will not be
considered sellers of prepaid access. Development and implementation of
such policies and procedures will affect essentially all sellers.
2. Description of the Projected Reporting and Recordkeeping
Requirements of the Rule
Under the final rule, certain sellers, less than 1%, will be
required to create an AML Program, file SARs and CTRs, and retain
customer transaction information including obtaining the identification
of the purchaser. Commenters expressed that although these activities
have been performed by providers of prepaid access, these requirements
would be a new burden imposed on the sellers of prepaid access and
would have a significant impact on those sellers. As stated above,
FinCEN revised the regulatory obligations on sellers, limiting the
impact to only those sellers that sell a particular type of prepaid
access other than closed loop prepaid access that allows high dollar
amounts, international use, person-to-person transfers, or loads from
non-depository sources. Both law enforcement and the industry agree
that these are hallmarks of high risk for money laundering. Therefore,
although the impact will be significant on a certain number of sellers,
those sellers make up less than 1% of the population.
The remaining 99% of retailers will be required to implement
reasonable policies and procedures to ensure that they do not sell more
than $10,000 of prepaid access devices to any one person in any one
day. These procedures should be commensurate with the institution's
level of risk.
C. Certification
As discussed above, the final rule will affect two separate
populations of small entities. Of the population of providers of
prepaid access, the final rule will affect an estimated 700 providers
of prepaid access, 93% of which are considered small entities. FinCEN
estimates that the impact of the requirements will increase the annual
payroll between .3% and .8% overall. FinCEN believes that this is not a
significant impact.
Of the population of sellers of prepaid access, the final rule will
impact 70,000. The impact on 99% of these sellers will be
insignificant. The only significant impact that FinCEN expects the
final rule to have is on those sellers of prepaid access that sell
certain products that are highly susceptible to criminal activity. As
discussed above, FinCEN estimates that the population of entities that
sell these products is less than 1% of all sellers.
Accordingly, FinCEN certifies that the rule will not have a
significant impact on a substantial number of small entities.
V. Paperwork Reduction Act Notices
The collections of information contained in this rule have been
approved by the Office of Management and Budget (``OMB'') for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control numbers 1506-0013, 1506-0015, 1506-0020, 1506-0052, 1506-
0056, and 1506-0058.
A. AML Program for Providers and Sellers of Prepaid Access
Anti-money laundering programs for money services businesses (31
CFR 1022.210). OMB Control Number: 1506-0020.
This information is required to be retained pursuant to 31 U.S.C.
5318(h) and 31 CFR 1022.210. The collection of information is
mandatory.
The information collected pursuant to 31 CFR 1022.210(c) will be
used by examiners to determine whether providers of prepaid access
comply with the BSA. By defining providers and sellers of prepaid
access as MSBs, the rule will increase the estimated number of entities
by 1400. However, by removing issuers, sellers, and redeemers of stored
value from the definition of MSB, the rule will reduce the estimated
number of entities by 10,000. Overall, the rule will decrease the
number of entities that collect information under 31 CFR 1022.210(c) by
8600.
Description of Recordkeepers: MSBs as defined in 31 CFR
1010.100(ff)(4) and (7).
Estimated Number of Recordkeepers: The rule decreases the number of
recordkeepers by 8600.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1022.210(c) is one hour.
Estimated Total Annual Recordkeeping Burden: The current burden
will be reduced by 10,000 hours and increased by 1,400 hours, for a net
decrease to the current burden of 8600 hours.
B. Customer Identification Requirement for Providers and Sellers of
Prepaid Access
The information collected pursuant to 31 CFR 1022.210(d) will be
used by law enforcement agencies in the enforcement of criminal and
regulatory laws. The rule affects an estimated 1400 providers and
sellers of prepaid access. The rule requires two minutes of collection
burden per issuance of prepaid access device or vehicle.
Description of Recordkeepers: MSBs as defined in 31 CFR
1010.100(ff)(4) and (7).
Estimated Number of Recordkeepers: The rule increases the number of
recordkeepers to 1400.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1022.210(d) is two minutes per issuance of a
prepaid access device or vehicle. At any given moment, there are
[[Page 45418]]
an estimated 7.5 million network branded prepaid cards in the
marketplace. FinCEN estimates that the average lifespan of a prepaid
card is three years. Therefore, FinCEN estimates that there are 2.5
million new prepaid cards or other devices or vehicles issued each year
that are covered by the rule.
Estimated Total Annual Recordkeeping Burden: The burden will be
83,300 hours. OMB Control Number: 1506-0020.
C. SAR Filing for Providers and Sellers of Prepaid Access
Suspicious activity reports for money services businesses (31 CFR
1022.320). OMB Control Number: 1506-0015.
This information is required to be provided pursuant to 31 U.S.C.
5318(g) and 31 CFR 1022.320. This information will be used by law
enforcement agencies in the enforcement of criminal and regulatory laws
and to prevent money services businesses from engaging in illegal
activities. The collection of information is mandatory. The rule will
increase the number of recordkeepers by 1400.
Description of Recordkeepers: MSBs as defined in 31 CFR
1010.100(ff)(4) and (7).
Estimated Number of Recordkeepers: Providers of prepaid access will
be required to file SARs. The number of recordkeepers would be
increased by 1400.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1022.320 is 90 minutes per report.
Estimated Total Annual Recordkeeping Burden: The rule should
increase the estimated annual burden by 289,800 hours.
D. Registration of Providers of Prepaid Access
Registration for money services businesses (31 CFR 1022.380). OMB
Control Number: 1506-0013.
This information is required to be provided pursuant to 31 U.S.C.
5330 and 31 CFR 1022.380. The information will be used by law
enforcement and regulatory agencies in the enforcement of criminal,
tax, and regulatory laws and to prevent money services businesses from
engaging in illegal activities. The information will also be valuable
to FinCEN, allowing analysts to more accurately quantify the universe
of MSBs generally and the universe of providers of prepaid access
specifically. The collection of information is mandatory. Providers of
prepaid access need to register and list the prepaid programs subject
to this final rule; the number of recordkeepers will be increased by
700.
Description of Recordkeepers: Providers of prepaid access as
defined in 31 CFR 1010.100(ff)(4).
Estimated Number of Recordkeepers: The number of recordkeepers
would be increased by 700 MSBs.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1022.380 is 30 minutes per recordkeeper for the
completion, filing, and recordkeeping of registration forms, and an
additional 120 minutes for the completion, filing, and recordkeeping of
the list of prepaid programs subject to the regulation.
Estimated Total Annual Recordkeeping Burden: We will increase the
number of burden hours under this collection by 1,750 hours.
E. Recordkeeping and Retrieval Requirement
Customer and Transactional Data Recordkeeping Requirements (31 CFR
1010.410, 1010.430, 1022.420, and 1022.210). OMB Control Number: 1506-
0052.
This information is required to be provided pursuant to Section 21
of the Federal Deposit Insurance Act (12 U.S.C. 1829b), 31 U.S.C.
5318(m), and 31 CFR 1010.410, 1010.430, 1022.420, and 1022.210. This
information will be used by law enforcement agencies in criminal, tax,
and regulatory investigations and proceedings. Prepaid providers will
be required to retain information in a format that allows for its
retrieval upon request. Both providers and sellers of prepaid access
are responsible for the recordkeeping of customer and transactional
data that is routinely captured and maintained in the ordinary course
of business under the regulation. The number of recordkeepers will be
increased by 1400.
Description of Recordkeepers: MSBs as defined in 31 CFR
1010.100(ff)(4) and (7).
Estimated Number of Recordkeepers: The number of recordkeepers
would be increased by 1400 MSBs.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1010.410, 1010.430, 1022.420, and 1022.210 is 16
hours per recordkeeper for the maintenance of customer and
transactional data that routinely is captured and maintained in the
ordinary course of business.
Estimated Total Annual Recordkeeping Burden: We will increase the
number of burden hours under this collection by 22,400 hours.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number. Records required to be
retained under the Bank Secrecy Act must be retained for five years.
VI. Executive Order 12866 and Executive Order 13563
Executive Orders 13563 and 12866 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. This rule has been designated a ``significant regulatory
action,'' although not economically significant, under section 3(f) of
Executive Order 12866. Accordingly, the rule has been reviewed by OMB.
VII. 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 may result in expenditure by the state, local, and Tribal
governments, in the aggregate, or by the private sector, of 100 million
dollars 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. Taking into account the
factors noted above and using conservative estimates of average labor
costs in evaluating the cost of the burden imposed by the rule, FinCEN
has determined that it is not required to prepare a written statement
under section 202.
List of Subjects in 31 CFR Parts 1010 and 1022
Administrative practice and procedure, Banks, Banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations,
[[Page 45419]]
Penalties, Reporting and recordkeeping requirements, Securities,
Terrorism.
Authority and Issuance
For the reasons set forth above in the preamble, Chapter X of title
31 of the Code of Federal Regulations is amended as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; Title III, sec. 314, Pub. L. 107-56, 115 Stat. 307;
Title V, sec. 503, Pub. L. 111-24.
0
2. Amend Sec. 1010.100 by:
0
a. Revising paragraph (ff) introductory text;
0
b. Revising paragraph (ff)(2)(ii)(A);
0
c. Revising paragraph (ff)(4);
0
d. Revising paragraph (ff)(5)(ii)(E);
0
e. Adding new paragraph (ff)(7);
0
f. Revising paragraph (ww); and
0
g. Adding new paragraph (kkk) to read as follows.
Sec. 1010.100 General definitions.
* * * * *
(ff) Money services business. A person wherever located doing
business, whether or not on a regular basis or as an organized or
licensed business concern, wholly or in substantial part within the
United States, in one or more of the capacities listed in paragraphs
(ff)(1) through (ff)(7) of this section. This includes but is not
limited to maintenance of any agent, agency, branch, or office within
the United States.
* * * * *
(2) * * *
(ii) * * *
(A) A person that sells prepaid access in exchange for a check (as
defined in the Uniform Commercial Code), monetary instrument or other
instrument;
* * * * *
(4) Provider of prepaid access--(i) In general. A provider of
prepaid access is the participant within a prepaid program that agrees
to serve as the principal conduit for access to information from its
fellow program participants. The participants in each prepaid access
program must determine a single participant within the prepaid program
to serve as the provider of prepaid access.
(ii) Considerations for provider determination. In the absence of
registration as the provider of prepaid access for a prepaid program by
one of the participants in a prepaid access program, the provider of
prepaid access is the person with principal oversight and control over
the prepaid program. Which person exercises ``principal oversight and
control'' is a matter of facts and circumstances. Activities that
indicate ``principal oversight and control'' include:
(A) Organizing the prepaid program;
(B) Setting the terms and conditions of the prepaid program and
determining that the terms have not been exceeded;
(C) Determining the other businesses that will participate in the
prepaid program, which may include the issuing bank, the payment
processor, or the distributor;
(D) Controlling or directing the appropriate party to initiate,
freeze, or terminate prepaid access; and
(E) Engaging in activity that demonstrates oversight and control of
the prepaid program.
(iii) Prepaid program. A prepaid program is an arrangement under
which one or more persons acting together provide(s) prepaid access.
However, an arrangement is not a prepaid program if:
(A) It provides closed loop prepaid access to funds not to exceed
$2,000 maximum value that can be associated with a prepaid access
device or vehicle on any day;
(B) It provides prepaid access solely to funds provided by a
Federal, State, local, Territory and Insular Possession, or Tribal
government agency;
(C) It provides prepaid access solely to funds from pre-tax
flexible spending arrangements for health care and dependent care
expenses, or from Health Reimbursement Arrangements (as defined in 26
U.S.C. 105(b) and 125) for health care expenses; or
(D) (1) It provides prepaid access solely to:
(i) Employment benefits, incentives, wages or salaries; or
(ii) Funds not to exceed $1,000 maximum value and from which no
more than $1,000 maximum value can be initially or subsequently loaded,
used, or withdrawn on any day through a device or vehicle; and
(2) It does not permit:
(i) Funds or value to be transmitted internationally;
(ii) Transfers between or among users of prepaid access within a
prepaid program; or
(iii) Loading additional funds or the value of funds from non-
depository sources.
* * * * *
(5) * * *
(ii) * * *
(E) Provides prepaid access; or
* * * * *
(7) Seller of prepaid access. Any person that receives funds or the
value of funds in exchange for an initial loading or subsequent loading
of prepaid access if that person:
(i) Sells prepaid access offered under a prepaid program that can
be used before verification of customer identification under Sec.
1022.210(d)(1)(iv); or
(ii) Sells prepaid access (including closed loop prepaid access) to
funds that exceed $10,000 to any person during any one day, and has not
implemented policies and procedures reasonably adapted to prevent such
a sale.
* * * * *
(ww) Prepaid access. Access to funds or the value of funds that
have been paid in advance and can be retrieved or transferred at some
point in the future through an electronic device or vehicle, such as a
card, code, electronic serial number, mobile identification number, or
personal identification number.
* * * * *
(kkk) Closed loop prepaid access. Prepaid access to funds or the
value of funds that can be used only for goods or services in
transactions involving a defined merchant or location (or set of
locations), such as a specific retailer or retail chain, a college
campus, or a subway system.
PART 1022--RULES FOR MONEY SERVICES BUSINESSES
0
3. The authority citation for part 1022 continues to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314, Pub. L. 107-56, 115 Stat. 307.
0
4. Amend Sec. 1022.210 by:
0
a. Revising paragraph (d)(1)(i); and
0
b. Adding new paragraph (d)(1)(iv) to read as follows.
Sec. 1022.210 Anti-money laundering programs for money services
businesses.
* * * * *
(d) * * *
(1) * * *
(i) Policies, procedures, and internal controls developed and
implemented under this section shall include provisions for complying
with the requirements of this chapter including, to the extent
applicable to the money services business, requirements for:
(A) Verifying customer identification, including as set forth in
paragraph (d)(1)(iv) of this section;
(B) Filing Reports;
(C) Creating and retaining records;
(D) Responding to law enforcement requests.
* * * * *
[[Page 45420]]
(iv) A money services business that is a provider or seller of
prepaid access must establish procedures to verify the identity of a
person who obtains prepaid access under a prepaid program and obtain
identifying information concerning such a person, including name, date
of birth, address, and identification number. Sellers of prepaid access
must also establish procedures to verify the identity of a person who
obtains prepaid access to funds that exceed $10,000 during any one day
and obtain identifying information concerning such a person, including
name, date of birth, address, and identification number. Providers of
prepaid access must retain access to such identifying information for
five years after the last use of the prepaid access device or vehicle;
such information obtained by sellers of prepaid access must be retained
for five years from the date of the sale of the prepaid access device
or vehicle.
* * * * *
0
5. Amend Sec. 1022.320 by:
0
a. Revising the first sentence of paragraph (a)(1) to read as follows;
and
0
b. Removing paragraph (a)(5).
Sec. 1022.320 Reports by money services businesses of suspicious
transactions.
(a) General. (1) Every money services business described in Sec.
1010.100(ff)(1), (3), (4), (5), (6), and (7) of this chapter, shall
file with the Treasury Department, to the extent and in the manner
required by this section, a report of any suspicious transaction
relevant to a possible violation of law or regulation. * * *
* * * * *
0
6. Amend Sec. 1022.380 by revising paragraph (a)(1) to read as
follows:
Sec. 1022.380 Registration of money services businesses.
(a) Registration requirement--(1) In general. Except as provided in
paragraph (a)(3) of this section, relating to agents, and except for
sellers of prepaid access as defined in Sec. 1010.100(ff)(7) of this
chapter to the extent that they are not already agents, each money
services business (whether or not licensed as a money services business
by any State) must register with FinCEN. Each provider of prepaid
access must identify each prepaid program for which it is the provider
of prepaid access. Each money services business must, as part of its
registration, maintain a list of its agents as required by 31 U.S.C.
5330 and this section. This section does not apply to the United States
Postal Service, to agencies of the United States, of any State, or of
any political subdivision of a State.
* * * * *
0
7. Add new Sec. 1022.420 to subpart D to read as follows:
Sec. 1022.420 Additional records to be maintained by providers and
sellers of prepaid access.
With respect to transactions relating to providers and sellers of
prepaid access described in Sec. 1010.100(ff)(4) and (7) that are
subject to the requirements of this chapter, each provider of prepaid
access shall maintain access to transactional records for a period of
five years. The provider of prepaid access, as defined in Sec.
1010.100(ff)(4), shall maintain access to transactional records
generated in the ordinary course of business that would be needed to
reconstruct prepaid access activation, loads, reloads, purchases,
withdrawals, transfers, or other prepaid-related transactions.
Dated: July 22, 2011.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2011-19116 Filed 7-28-11; 8:45 am]
BILLING CODE 4810-02-P