Amendment to the Bank Secrecy Act Regulations Relating to Orders for Transmittals of Funds by Financial Institutions

FEDERAL RESERVE SYSTEM

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA17

Amendment to the Bank Secrecy Act Regulations Relating to Orders

for Transmittals of Funds by Financial Institutions

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Final rule.

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SUMMARY: On January 3, 1995, the Financial Crimes Enforcement Network

(FinCEN) of the Department of the Treasury (Treasury) and the Board of

Governors of the Federal Reserve System (the Board) jointly adopted a

final rule (the joint rule) requiring financial institutions to collect

and retain certain information pertaining to transmittals of funds, and

Treasury adopted a final rule (the travel rule) requiring financial

institutions to include in transmittal orders certain information

collected under the joint rule. In response to industry concerns about

the application of the joint rule and the travel rule to transmittals

of funds involving foreign financial institutions, Treasury and the

Board have amended the joint rule to conform certain of the definitions

of the parties to transmittals of funds to definitions found in Article

4A of the Uniform Commercial Code (see document published elsewhere in

today's Federal Register). This final rule amends the travel rule to

reflect the amended definitions in the joint rule, and amends the

travel rule to clarify that the exceptions applicable for the joint

rule are also applicable for the travel rule.

There is one further change to the travel rule that was not a part

of the original proposed rule, new paragraph (g)(3). This change

responds to a significant compliance issue that the banking industry

did not identify until after the comment period: until all banks

convert to the expanded Fedwire format, there will not always be enough

space to include in a transmittal order all of the information required

by the rule.

Finally, because solving these problems has taken longer than

anticipated, this final travel rule, like the final joint rule, will be

effective not on April 1, 1996, as originally planned, but on May 28,

1996.

EFFECTIVE DATE: May 28, 1996.

FOR FURTHER INFORMATION CONTACT: Charles D. Klingman, Office of

Financial Institutions Policy, at (703) 905-3920, or Joseph M. Myers,

Office of Legal Counsel, (703) 905-3590.

SUPPLEMENTARY INFORMATION:

I. Background

The statute generally referred to as the Bank Secrecy Act (BSA)

(Title I and Title II of Pub. L. 91-508, codified at 12 U.S.C. 1829b

and 1951-1959, and 31 U.S.C. 5311-5330), authorizes the Secretary of

the Treasury (the Secretary) to require 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, and to implement anti-money laundering programs and

compliance procedures. The Secretary's authority to administer the BSA

has been delegated to the Director of the Financial Crimes Enforcement

Network (FinCEN). Section 1515 of the Annunzio-Wylie Anti-Money

Laundering Act of 1992 (Title XV of Pub. L. 102-550 (Annunzio-Wylie)),

codified at 12 U.S.C. 1829b(b), amended the BSA (1) to require the

Secretary and the Board jointly to promulgate recordkeeping

requirements for international funds transfers by depository

institutions and nonbank financial institutions; and (2) to authorize

the Secretary and the Board jointly to promulgate regulations for

domestic funds transfers by depository institutions. Section 1517(a) of

[[Page 14387]]

Annunzio-Wylie, codified at 31 U.S.C. 5318 (g) and (h), authorizes the

Secretary to require financial institutions to carry out anti-money

laundering programs.

In January 1995, Treasury and the Board jointly adopted a rule (the

joint rule) that imposed recordkeeping requirements for transmittals of

funds by banks and other financial institutions (60 FR 220, January 3,

1995). Treasury also adopted a rule (the travel rule) requiring

financial institutions (including banks) to include in transmittal

orders certain information collected under the joint rule (60 FR 234,

January 3, 1995). The joint rule defined the terms used in both rules.

These rules were to become effective on January 1, 1996.

Following publication of the joint rule and the travel rule, it

became apparent that there was confusion within the banking industry

about the application of the rules to transmittals of funds involving

foreign financial institutions. Several banks and bank counsel advised

Treasury and the Board that compliance with the rules was complicated

by the fact that certain of the joint rule definitions of parties to

funds transfers differed from the definitions of those terms in Article

4A of the Uniform Commercial Code (UCC 4A). Because a financial

institution's obligations under the joint and travel rules depend upon

its role in a particular transmittal of funds, the differences between

the Bank Secrecy Act regulations definitions and UCC 4A definitions had

material operational consequences.

The most significant effect of the difference in the definitions

was the treatment of a U.S. financial institution that receives a

transmittal order from a foreign financial institution. Under the

definitions in the original joint rule, the foreign financial

institution sending the transmittal order would be the transmittor and

the U.S. financial institution would be the transmittor's financial

institution. The U.S. financial institution would be subject to the

travel rule requirements imposed on a transmittor's financial

institution, and compliance might require significant changes in

standard business practices.

II. Proposed Amendments

In response to industry concerns, Treasury and the Board proposed

amendments to the joint rule to conform the definitions of banks that

are parties to funds transfers to the definitions found in UCC 4A and

to change the definitions of the terms applicable to financial

institutions so that their meanings are parallel to the definitions in

UCC 4A (60 FR 44146, August 24, 1995). At the same time, Treasury

proposed amendments to the travel rule to reflect the proposed

amendments to the definitions (60 FR 44151, August 24, 1995). The

changes to the travel rule were necessary in order to clarify that

although a foreign financial institution may be considered a

transmittor's financial institution, only financial institutions

located within the U.S. are subject to the requirements of the travel

rule.

The proposed amendments also proposed to add to the travel rule new

paragraph 103.33(g)(3), in order to clarify that transactions excepted

under the joint rule pursuant to paragraphs 103.33(e)(6) and

103.33(f)(6) are also excepted from the travel rule. Those sections

provide that a transmittal of funds is not subject to the requirements

of the joint rule if the parties to the transmittal are both banks or

brokers and dealers in securities, or their subsidiaries, or government

entities, or if the transmittor and recipient are the same person and

the transmittal involves a single bank or broker/dealer.

III. Comments

Treasury received three comments on the proposed changes to the

travel rule. The commenters were in favor of the proposed amendments,

and agreed that the amendments would reduce confusion and uncertainty

about the application of the rules, and that the rules would be less

burdensome if the proposed amendments were adopted. One commenter

specifically agreed that the inclusion of the exceptions in the travel

rule was a positive change. Based on the comments received, Treasury is

adopting the amendments as proposed, except that the proposed new

paragraph 103.33(g)(3) will appear at 103.33(g)(4).

IV. New Section 103.33(g)(3)

As noted above, there is one further change to the travel rule that

was not a part of the proposed rule, new paragraph (g)(3). This change

responds to a significant compliance issue that the banking industry

did not identify until after the comment period: until all banks

convert to the expanded Fedwire format, there will not always be enough

space to include in a transmittal order all of the information required

by paragraphs (g)(1) (i), (ii), and (vii) and (g)(2) (i), (ii), and

(vii).1 Banking industry representatives have assured FinCEN that

the expanded Fedwire format, scheduled to be adopted industry-wide by

January 1, 1998, will allow all information required by paragraph (g)

to be sent and received. If the travel rule were finalized as proposed,

banks that are in the process of adopting the expanded Fedwire format

would have to expend considerable resources to create an interim system

to accommodate all of the information required by paragraph 103.33(g)

until January 1, 1998. Accordingly, new paragraph (g)(3) provides that,

until it has converted to the new Fedwire format, a financial

institution will be deemed to be in compliance with paragraph (g), even

if some information required to be included on a transmittal order is

not so included, provided that, when either requested by a

corresponding financial institution to assist in retrieval of

information in connection with Bank Secrecy Act compliance efforts or

in response to a law enforcement request, or when presented itself with

a judicial order, subpoena or administrative summons requesting any

information required by paragraphs (g)(1)(i), (g)(1)(ii), (g)(1)(vii),

(g)(2)(i), (g)(2)(ii), or (g)(2)(vii), the financial institution

retrieves such information within a reasonable time.

\1\ In addition, some software application programs allow large,

institutional customers to generate and transmit payment orders

directly through a bank's electronic funds transfer system. Some of

these software application programs follow the format of the Fedwire

system. Thus, banks may have difficulty complying with section

103.33(g) with respect to payment orders transmitted directly by

their customers.

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Treasury notes that new paragraph (g)(3)(i)(A) still requires

inclusion in the transmittal order, to the extent such items are

received with the prior transmittal order, of certain recipient

information as required by paragraphs (g)(1)(vi) and (g)(2)(vi). These

paragraphs themselves, however, are not fully effective with respect to

transmittals of funds effected through the Fedwire funds transfer

system until such time as the bank that sends the order to the Federal

Reserve Bank completes its conversion to the expanded Fedwire message

format. Treasury anticipates that funds transfers effected through the

Fedwire system will be covered equally by both the current exception

provision for paragraphs (g)(1)(vi) and (g)(2)(vi) as well as the new

safe harbor provision of paragraph (g)(3). Thus, as an operational

matter in pre-conversion Fedwire transfers, paragraph (g)(3) will

require that the transmittal order include only one of the items

otherwise required by paragraphs (g)(1)(vi) and (g)(2)(vi), if received

with the transmittal order.

V. Effect on Law Enforcement; Ongoing Review

Treasury believes that today's changes in the joint rule and in

this final rule will reduce the burden of compliance,

[[Page 14388]]

while maintaining the usefulness for law enforcement of the information

passed on in transmittal orders pursuant to the travel rule. While the

requirement placed on an intermediary financial institution is limited

to information that it receives, generally the information passed on

should be of greater use to law enforcement because the information

obtained will pertain to the true transmittor and recipient in the

transaction. Furthermore, the financial institutions that must be

identified will more likely be ones with which the transmittor and

recipient have account relationships.

As stated in the joint and travel rules when they were adopted in

January 1995, Treasury will monitor the effectiveness of the rules to

assess their usefulness to law enforcement and their effect on the cost

and efficiency of the payments system. Within 36 months of May 28,

1996, Treasury will review the effectiveness of the travel rule and

will consider making any appropriate modifications.

VI. Executive Order 12866

Treasury finds that this final rule is not a significant rule for

purposes of Executive Order 12866. The final rule is not anticipated to

have an annual effect on the economy of $100 million or more. It will

not affect adversely in a material way the economy, a sector of the

economy, productivity, competition, jobs, the environment, public

health or safety, or state, local, or tribal governments or

communities. It creates no inconsistencies with, nor does it interfere

with actions taken or planned by other agencies. Finally, it raises no

novel legal or policy issues. A cost and benefit analysis is therefore

not required.

VII. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act,

Treasury hereby certifies that this final rule will not have a

significant economic impact on a substantial number of small entities.

This final rule will eliminate uncertainty as to the application of the

joint rule and the travel rule and will reduce the cost of complying

with the rules' requirements. Accordingly, a regulatory flexibility

analysis is not required.

VIII. Paperwork Reduction Act

The collection of information required by the rule that is amended

by this final rule was submitted by the Treasury to the Office of

Management and Budget in accordance with the requirements of the

Paperwork Reduction Act (44 U.S.C. 3504(h) and 3507(d)) under control

number 1505-0063 (see 60 FR 237, January 3, 1995). The collection is

authorized, as before, by 12 U.S.C. 1829b and 1959 and 31 U.S.C. 5311-

5330.

This final rule will eliminate information collection requirements

that were previously required. Therefore no additional Paperwork

Reduction Act submissions are required.

IX. Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law

104-4, signed into law on March 22, 1995, requires that an agency

prepare a budgetary impact statement before promulgating a rule that

includes a federal mandate that may result in expenditure by state,

local, and tribal governments, in the aggregate, or by the private

sector, of $100 million or more in any one year. Treasury has

determined that it is not required to prepare a written budgetary

impact statement for this final rule, and has concluded that this final

rule is the most cost-effective and least burdensome means of achieving

Treasury's objectives.

List of Subjects in 31 CFR Part 103

Administrative practice and procedure, Banks, banking, Brokers,

Currency, Foreign banking, Foreign currencies, Gambling,

Investigations, Law enforcement, Penalties, Reporting and recordkeeping

requirements, Securities, Taxes.

Amendment

For the reasons set forth in the preamble, 31 CFR Part 103 is

amended as set forth below:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND

FOREIGN TRANSACTIONS

1. The authority citation for Part 103 continues to read as

follows:

Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5330.

2. In Sec. 103.33, paragraphs (g) introductory text and (g)(1)

introductory text are revised and paragraphs (g)(3) and (g)(4) are

added to read as follows:

Sec. 103.33 Records to be made and retained by financial institutions.

* * * * *

(g) Any transmittor's financial institution or intermediary

financial institution located within the United States shall include in

any transmittal order for a transmittal of funds in the amount of

$3,000 or more, information as required in this paragraph (g):

(1) A transmittor's financial institution shall include in a

transmittal order, at the time it is sent to a receiving financial

institution, the following information:

* * * * *

(3) Safe harbor for transmittals of funds prior to conversion to

the expanded Fedwire message format. The following provisions apply to

transmittals of funds effected through the Federal Reserve's Fedwire

funds transfer system by a financial institution before the bank that

sends the order to the Federal Reserve Bank completes its conversion to

the expanded Fedwire message format.

(i) Transmittor's financial institution. A transmittor's financial

institution will be deemed to be in compliance with the provisions of

paragraph (g)(1) of this section if it:

(A) Includes in the transmittal order, at the time it is sent to

the receiving financial institution, the information specified in

paragraphs (g)(1)(iii) through (v), and the information specified in

paragraph (g)(1)(vi) of this section to the extent that such

information has been received by the financial institution, and

(B) Provides the information specified in paragraphs (g)(1)(i),

(ii) and (vii) of this section to a financial institution that acted as

an intermediary financial institution or recipient's financial

institution in connection with the transmittal order, within a

reasonable time after any such financial institution makes a request

therefor in connection with the requesting financial institution's

receipt of a lawful request for such information from a federal, state,

or local law enforcement or financial regulatory agency, or in

connection with the requesting financial institution's own Bank Secrecy

Act compliance program.

(ii) Intermediary financial institution. An intermediary financial

institution will be deemed to be in compliance with the provisions of

paragraph (g)(2) of this section if it:

(A) Includes in the transmittal order, at the time it is sent to

the receiving financial institution, the information specified in

paragraphs (g)(2)(iii) through (g)(2)(vi) of this section, to the

extent that such information has been received by the intermediary

financial institution; and

(B) Provides the information specified in paragraphs (g)(2)(i),

(ii) and (vii) of this section, to the extent that such information has

been received by the intermediary financial institution, to a financial

institution that acted as an intermediary financial institution or

[[Page 14389]]

recipient's financial institution in connection with the transmittal

order, within a reasonable time after any such financial institution

makes a request therefor in connection with the requesting financial

institution's receipt of a lawful request for such information from a

federal, state, or local law enforcement or regulatory agency, or in

connection with the requesting financial institution's own Bank Secrecy

Act compliance program.

(iii) Obligation of requesting financial institution. Any

information requested under paragraph (g)(3)(i)(B) or (g)(3)(ii)(B) of

this section shall be treated by the requesting institution, once

received, as if it had been included in the transmittal order to which

such information relates.

(4) Exceptions. The requirements of this paragraph (g) shall not

apply to transmittals of funds that are listed in paragraph (e)(6) or

(f)(6) of this section.

* * * * *

Dated: March 26, 1996.

Stanley E. Morris,

Director, Financial Crimes Enforcement Network.

[FR Doc. 96-7682 Filed 3-29-96; 8:45 am]

BILLING CODE 4820-03-P