The Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve Board (referred to as “the Agencies”) are soliciting comments on or by November 27, 2020, on a proposed rule that would significantly expand the “Recordkeeping Rule” and “Travel Rule” regulations under the Bank Secrecy Act. The purpose is to fight terrorism, narcotics trafficking, and other illegal activities.

The proposed rule makes two major changes – it lowers the monetary threshold for the Recordkeeping and Travel Rules to apply, and it expands the definition of “money” to include virtual currencies.

Lower Threshold

The Recordkeeping Rule (31 CFR 1020.410(a) and 1010.410(e)) and the Travel Rule (31 CFR 1010.410(f)) are complementary. The Recordkeeping Rule requires the collection and retention of information about payments or transmittal orders. This information includes:

  • Name and address of the originator
  • Amount and date of the payment
  • Any payment instructions
  • Identity of the beneficiary’s financial institution

If the originator’s financial institution receives identifying information about the beneficiary from the originator, it must retain that information as well. Both the originator’s and the beneficiary’s financial institutions must verify identities if the parties are not already established customers and they are placing or receiving the order in person. Intermediary financial institutions, as well as that of the beneficiary, must retain originals or copies of payments and transmittal orders.

The Travel Rule functions similarly. The originator’s financial institution must include information (including that required by the Recordkeeping Rule) in a payment or transmittal order. Intermediary financial institutions also must send the information to any other institutions in the payment chain.

Presently, the threshold for complying with the Recordkeeping and Travel Rules is $3,000. The proposed rule would lower it to $250 for transactions that the institution has “reason to know” begin or end outside the United States (the threshold for domestic transfers would remain at $3,000). “Reason to know” is based on the information the institution collects or receives in the process of the transaction.

The Agencies consider this change necessary because of “malign actors” using small transfers of funds to facilitate terrorist activities, narcotics trafficking, and other illegal activities. The Agencies are particularly relying on the Suspicious Activity Reports, filed by money transmitters, that indicate a significant amount of potentially illegal transfers are below the $3,000 threshold. The goal is that increased reporting for smaller transfers will be helpful to law enforcement and national security and deter or prevent illegal activity.

Inclusion of Virtual Currency

Currently, the Recordkeeping Rule does not define the term “money.” It instead defers to the definition in the UCC – which defines “money” as “a medium of exchange currently authorized or adopted by a domestic or foreign government.” The proposed rule would expand the definition to include virtual currencies.

This change is for the same reason –malign actors can use virtual currencies “to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering, as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals.”

Estimated Impact

The Agencies think the effect of these changes will be low. However, the notice estimates how many more hours will be required for institutions to comply with the new rule –a total of 3,315,844 hours, which is hardly insignificant. The changes are estimated to affect 23,234 financial institutions (5,306 federally regulated banks, 5,236 federally regulated credit unions, and 12,692 money services businesses).

Additionally, they assess that the minimum burden for administering the rule is approximately $79.58 million annually, which does not include some costs, such as IT.

The Agencies are adamant that these costs will be worth it for the value of the information that will be available to law enforcement and national security agencies, and the illicit activities it could prevent.

Questions for Comment

All comments are helpful, but the Agencies specifically asked for comments on several questions. These include:

  • Is the estimated burden of collecting the information accurate?
  • How can the burden of complying be minimized?
  • Would the burdens be different for different thresholds, such as $0, $500, or $1000?
  • To what extent would the burden be mitigated if non-bank financial institutions didn’t have to collect social security numbers or employment identification numbers for non-established customers when the transaction is between $250 and $3000?
  • To what extent would the burden be mitigated if the Agencies issued guidance about appropriate forms of identification?