Financial Crimes Enforcement Network; Proposed Amendments to the Bank Secrecy Act RegulationsSpecial Currency Transaction Reporting Requirement for Money Transmitters

Federal RegisterMay 21, 1997

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA19

Financial Crimes Enforcement Network; Proposed Amendments to the

Bank Secrecy Act Regulations--Special Currency Transaction Reporting

Requirement for Money Transmitters

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Financial Crimes Enforcement Network (``FinCEN'') is

proposing to amend the regulations implementing the Bank Secrecy Act to

require money transmitters and their agents to report and retain

records of transactions in currency or monetary instruments of at least

$750 but not more than $10,000 in connection with the transmission or

other transfer of funds to any person outside the United States, and to

verify the identity of senders of such transmissions or transfers. The

proposed rule is intended to address the misuse of money transmitters

by money launderers and is in addition to the existing rule requiring

currency transaction reports for amounts exceeding $10,000.

DATES: Written comments on all aspects of the proposal are welcome and

must be received on or before August 19, 1997.

ADDRESSES: Written comments should be submitted to: Office of Legal

Counsel, Financial Crimes Enforcement Network, Department of the

Treasury, 2070 Chain Bridge Road, Vienna, Virginia 22182, Attention:

NPRM--Money Transmitters--Special CTR Rule. Comments also may be

submitted by electronic mail to the following Internet address:

``[email protected],'' with the caption, in the body of the

text, ``Attention: NPRM--Money Transmitters--Special CTR Rule.'' For

additional instructions on the submission of comments, see

SUPPLEMENTARY INFORMATION under the heading ``Submission of Comments.''

Inspection of comments. Comments may be inspected at the Department

of the Treasury between 10:00 a.m. and 4:00 p.m., in the FinCEN reading

room, on the third floor of the Treasury Annex, 1500 Pennsylvania

Avenue, NW., Washington, DC 20220. Persons wishing to inspect the

comments submitted should request an appointment by telephoning (202)

622-0400.

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director, and

Charles Klingman, Financial Institutions Policy Specialist, FinCEN, at

(703) 905-3920; Stephen R. Kroll, Legal Counsel, Joseph M. Myers,

Deputy Legal Counsel, Cynthia L. Clark, on detail to the Office of

Legal Counsel, Albert R. Zarate, Attorney-Advisor, and Eileen P. Dolan,

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

SUPPLEMENTARY INFORMATION:

I. Introduction

This document contains a proposed rule that would amend 31 CFR part

103 to impose requirements on money transmitters and their agents to

report and retain records of transactions in currency or monetary

instruments of at least $750 but not more than $10,000 in connection

with the transmission or other transfer of funds to any person outside

the United States. The proposed rule also would amend the regulations

implementing the Bank Secrecy Act to require that money transmitters

verify the identity of the sender of the kind of transmission described

above. Treasury has been moved to this unusual step by continuing

evidence of serious abuses of the money transmitting industry by money

launderers.

II. Background

A. Statutory Provisions

The Bank Secrecy Act, Titles I and II of Public Law 91-508, as

amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31

U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia,

to issue regulations requiring financial institutions to keep records

and file reports that are determined to have a high degree of

usefulness in criminal, tax, and regulatory matters, and to implement

counter-money laundering programs and compliance procedures.

Regulations implementing Title II of the Bank Secrecy Act (codified at

31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the

Secretary to administer Title II of the Bank Secrecy Act has been

delegated to the Director of FinCEN.

Section 5313 grants the Secretary of the Treasury broad authority

to require financial institutions to report domestic transactions in

coins or currency. Paragraph (a) of that section states:

When a domestic financial institution is involved in a

transaction for the payment, receipt, or transfer of United States

coins or currency (or other monetary instruments the Secretary of

the Treasury prescribes), in an amount, denomination, or amount and

denomination, or under circumstances the Secretary prescribes by

regulation, the institution and any other participant in the

transaction the Secretary may prescribe shall file a report on the

transaction at the time and in the way the Secretary prescribes. A

person acting for another person shall make the report as the agent

or bailee of the person and identify the person for whom the

transaction is being made.

Under 31 CFR 103.22, which was issued under the broad authority of

section 5313(a), financial institutions generally are required to

report transactions in currency in excess of $10,000. Under the Bank

Secrecy Act, the term ``financial institution'' at present (that is,

before the changes proposed to be made today) includes, inter alia,

``licensed transmitter[s] of funds, or other person[s] engaged in the

business of transmitting funds.'' 31 CFR 103.11(n)(5).

In 1992, Congress amended the Bank Secrecy Act to allow the

Secretary to require financial institutions to carry out anti-money

laundering programs. See 31 U.S.C. 5318(h) (added to the Bank Secrecy

Act by section 1517 of the Annunzio-Wylie Anti-Money Laundering Act,

Title XV of the Housing and Community Development Act of 1992, Pub. L.

102-550 (October 28, 1992)). Under section 5318(h), anti-money

laundering programs must at a minimum include, inter alia, the

``development of internal policies, procedures, and controls.'' In

1994, Congress again amended the Bank Secrecy Act, this time to require

the registration of money services businesses. See 31 U.S.C. 5330

(added to the Bank Secrecy Act by section 408 of the Money Laundering

Suppression Act of 1994, Title IV of the Riegle Community Development

and Regulatory Improvement Act of 1994, Pub. L. 103-325 (September 23,

1994)). Section 5330 defines a money services

[[Page 27910]]

business 1 as any business, other than a bank or the United

States Postal Service, that is required to file reports under 31 U.S.C.

5313 and that provides check cashing, currency exchange, or money

transmitting services, or issues or redeems money orders, traveler's

checks, and other similar instruments. In requiring the registration of

money services businesses, Congress recognized that such businesses are

``frequently used in sophisticated schemes to * * * transfer large

amounts of money which are the proceeds of unlawful enterprise.'' 31

U.S.C. 5330 (Historical and Statutory Notes).2

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\1\ The statute uses the term ``money transmitting business'' to

name those businesses subject to registration. See 31 U.S.C.

5330(a)(1) and (d)(1). However, FinCEN believes that the statutes's

use of this term to refer to all the types of businesses subject to

registration and its later use of the nearly identical term ``money

transmitting service'' to refer to a particular type of business

subject to registration, compare 31 U.S.C. 5330(d)(1)(A) with 31

U.S.C. 5330(d)(2), may lead to confusion. Therefore, FinCEN has

adopted the term ``money services business'' in place of the term

``money transmitting business'' throughout this document and uses

the same terminology in the other rules it is proposing today.

\2\ See also, H. Conf. Rep. 652, 103d Cong., 191 (1994).

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B. Nature of the Problem

1. Money Transmitters--General

This notice is the third in a set of three notices of proposed

rulemaking being published in this separate part of the Federal

money services businesses. The first of these notices relates to the

registration of money services businesses (the ``Registration Rule'').

The second would impose on some of these businesses a requirement to

report suspicious transactions (the ``Suspicious Transaction Rule'').

In proposing these rules, the Department of the Treasury is responding

to the need to update and more carefully tailor the application of the

Bank Secrecy Act to a major, if little understood, part of the

financial sector in the United States.3

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\3\ The Congress has long-recognized the need generally to

address problems of abuse by money launders of ``non-bank''

financial institutions. See, e.g., Permanent Subcommittee on

Investigations, Senate Comm. on Governmental Affairs, Current Trends

in Money Laundering, S. Rep. No. 123, 102d Cong., 2d Sess. (1992).

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``Money services business'' is a newly coined term that refers to

five distinctive types of financial services providers: currency

dealers or exchangers; check cashers; issuers of traveler's checks,

money orders, or stored value; sellers or redeemers of traveler's

checks, money orders, or stored value; and money transmitters. These

businesses are quite numerous; based on a study performed for FinCEN by

Coopers & Lybrand, L.L.P., they comprise approximately 158,000

4 outlets or selling locations, and provide financial

services involving approximately $200 billion. To a significant extent,

the customer base for such businesses lies in that part of the

population that does not use, either in whole or in part, traditional

financial institutions, primarily banks.

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\4\ The number does not include Post Offices (which sell money

orders), participants in stored value product trials, or sellers of

various stored value or smart cards in use in, e.g., public

transportation systems.

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The proposed special reporting rule contained in this document

relates to money transmitters, a class of money services businesses.

For purposes of this notice of proposed rulemaking, and consistent with

the definition proposed in the Registration Rule, a money transmitter

(i) any person, whether or not licensed or required to be

licensed, who accepts currency, or funds denominated in currency,

and transmits the currency or funds, or the value of the currency or

funds, by any means through a financial agency or institution, a

Federal Reserve Bank or other facility of the Board of Governors of

the Federal Reserve System, or an electronic funds transfer network;

or (ii) [a]ny other person engaged as a business in the transfer of

funds.

Based on the study performed by Coopers & Lybrand, L.L.P., several

broad generalizations can be made about the money transmitting industry

in the United States. Due to the global trend of rapidly increasing

electronic commerce and the increase in the number of persons who use

international transfer services to send money to family and friends,

the United States market for money transmission services has grown

steadily over the last ten years. Money transmitters in the United

States remitted approximately $10.8 billion in 1996, exclusive of fees,

each year, through approximately 43,000 locations nationwide. The

international component of the money transmission market has been

growing at a rate of at least 20 per cent per year for the last five

years. Even these estimates are believed to be low, because there is by

all accounts a significant, ``informal'' international money transfer

market.

The ``formal'' part of the non-bank money transmitter industry is

highly concentrated: the vast majority of the formal funds transfers

are handled by two major national companies through their network of

agents. Most of the money transmission outlets are concentrated in six

major states: California, New York, Texas, New Jersey, Florida, and

Illinois. There appears to be a disproportionately large number of

outlets as well in Georgia, Michigan, North Carolina, and Pennsylvania.

Most of the smaller money transmitters in competition with the

major national companies are oriented toward particular markets and

rely on their own service infrastructures for transferring funds and

for communications and settlement among outlets. These niche

transmitters often are bilingual, with outlets located in urban

communities. Their customers are willing to pay a premium for value

added services, such as receiving informal news from other countries.

State regulators have been monitoring the growing money

transmission market with great interest. Twenty-three states now have

licensing requirements for money transmitters. Some states, such as New

York, also require each licensed money transmitter to register the

names and locations of each of its legal agents or vendors, but in

general, state regulations vary a great deal, and are primarily focused

on consumer protection issues.

2. Use of Money Transmitters by Money Launderers

Work of the El Dorado Task Force. Since 1992, the El Dorado Task

Force (the ``Task Force'') has been conducting an investigation into

the money transmitting industry in the New York metropolitan area and

its use by drug traffickers to return drug proceeds to narcotics source

countries.5 In the course of its work, the Task Force

uncovered widespread abuse within segments of the money transmitter

industry in New York.6 One major money transmitter has

itself pled guilty to money laundering charges,7 and

investigations of several other

[[Page 27911]]

transmitters and their agents are underway.8

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\5\ The Task Force was established by Treasury law enforcement

agencies in 1992 specifically to investigate narcotics related money

laundering in the New York metropolitan area. The Task Force is a

joint effort of federal, state, and local authorities, and includes

approximately 140 agents, police officers and administrative

personnel from the Customs Service, the Criminal Investigative

Division of the Internal Revenue Service, the Secret Service, the

New York State Banking Department, the New York City Police

Department, and a number of other local police authorities.

\6\ The Task Force's investigations have led to the conviction

of 97 persons and the seizure and forfeiture of over $10 million

associated with money laundering through the licensed money

transmitters.

\7\ United States v. Vigo Remittance Corp., No. 96-575

(J.S.)(E.D.N.Y.)(July 24, 1996)(entry of plea). It is fair to note

that, since its guilty plea, Vigo has strengthened its Bank Secrecy

Act compliance measures significantly.

\8\ See, e.g., United States v. Remesas America Oriental, No. S1

96 Cr. 919 (S.D.N.Y. 1996).

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The results of the Task Force's investigations confirm that the

money transmitting industry in New York shares many common

characteristics with the industry nationwide. First, the typical

legitimate customer of a money transmitter in New York is someone who,

because of lack of access for credit reasons or lack of sufficient

documentation, has decided not to use banks to obtain financial

services.

Second, with rare exceptions, almost all licensed money

transmitters in New York operate through agents. Agents of the licensed

money transmitters receive the transmitted funds from the sender, along

with sender information, such as name, address, and telephone number,

and recipient information, usually name and telephone number. The

agents enter this information into computers provided by the money

transmitters, and invoices are generated. The agents then send the

information to the money transmitters by computer (or by fax, if the

particular agent does not have a computer).

The agents must deposit the funds to be transmitted into bank

accounts set up for the agents but controlled by the money

transmitters. On a daily basis, each money transmitter will transfer

all of the money it intends to transmit into one of several main

transmission accounts maintained at a financial institution with access

to CHIPS and FEDWIRE.9 The funds are then moved through the

domestic and foreign banking system by way of wire transfer. Once the

transmitted funds have arrived at their destinations, foreign

correspondents notify the recipients that their money is available to

be picked up.

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\9\ Clearing House Interbank Payments System (CHIPS) and FEDWIRE

are commonly-used funds transfer systems.

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The primary method of laundering funds through money transmitters

in New York that has come to light to date is the structuring of

transactions beneath the thresholds for recordkeeping and reporting

imposed by existing Bank Secrecy Act rules. Corrupt agents accept

illicit funds, in amounts greater than $3,000 or $10,000, structure the

funds to avoid the recordkeeping and reporting requirements, and then

deposit the funds into accounts controlled by the money transmitter.

The money transmitter then transmits the funds to the designated

recipient locations.

Most often, the traffickers bring the agents large amounts of

currency which need to be returned to a drug source country. The agents

create invoices which make it appear as if the money had been brought

in by a number of different senders, in amounts below the recordkeeping

and reporting thresholds. These corrupt agents also provide the money

transmitters with lists of recipient names in the foreign countries for

each remittance, again using a different name for each remittance. In

this way, each time it appears as if there were a number of smaller,

unrelated remittances instead of one remittance, in excess of $3,000,

that would trigger the recordkeeping rules of 31 CFR 103.33, or in

excess of $10,000, which would trigger the filing of a Currency

Transaction Report (``CTR'').

New York Geographic Targeting Order. Based in large part on the

evidence produced by the Task Force, a large group of money

transmitters (now 23 licensed transmitters and their approximately

3,200 agents) in the New York Metropolitan Area have been the subject

of a Geographic Targeting Order (the ``Order''). Issued last August,

the Order is grounded in 31 U.S.C. 5326 and 31 CFR 103.26, and is

directed at the remittance of funds to Colombia.10 The

Order, first directed against 12 money transmitters and 1,600 agents,

was expanded in October 1996, and again in April 1997. Its original 60-

day period has been extended several times under the statutory rules,

and the Order is at present set to expire on June 2, 1997.

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\10\ The Order was issued by Raymond W. Kelly, Under Secretary

(Enforcement) of the Department of the Treasury, in response to an

application from the United States Attorneys for the Eastern

District of New York, the Southern District of New York, and the

District of New Jersey and senior officials of the Customs Service

and the Internal Revenue Service. (The statute allows such orders to

be issued either upon a request from an appropriate law enforcement

authority, or by the Treasury upon its own initiative.) Issuance of

an order requires a finding, amply documented in this case, that

there is reason to believe that special reporting or recordkeeping

requirements are necessary to carry out the purposes, or prevent

evasions of, the Bank Secrecy Act.

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The Order requires daily reporting by agents of the 23 money

transmitters, and weekly reporting by their principals (i.e., state-

licensed money transmission companies), of information about the

senders and recipients of all money transmissions of $750 or more to

Colombia paid for with currency or bearer monetary instruments, as well

as the reporting of any transactions or patterns of transactions that

appear suspicious. Special verification of identity rules for such

transactions are also imposed by the Order.

A number of factors in addition to the direct evidence adduced by

the Task Force supported the Order's issuance. Perhaps most strikingly,

the New York area money transmitters' business volume to Colombia was

significantly out of harmony with legitimate demographic expectations.

New York State Banking Department figures indicated that the 12

originally targeted transmitters had been sending approximately $1.2

billion annually to South America; about two thirds of this amount, or

approximately $800 million, went to Colombia. To account for this

figure, each of the approximately 25,500 Colombian households in the

New York area (earning an average gross annual income of $27,000) would

have had to send approximately $30,000 per year through money

transmitters to Colombia.

Implementation of the Order almost immediately caused dramatic

changes in the volume and character of money transmissions, indicating

a major reduction in the amount of illicit funds moving through New

York money transmitters.11 Analysis of data generated by the

Order is ongoing, but the targeted money transmitters' business volume

to Colombia appears to have dropped approximately 30 percent. (Three of

the money transmitters subject to the Order have simply stopped sending

any funds to Colombia.) Most of the money that would in the past have

been placed abroad through the use of money transmitters appears to

have been physically removed from the New York Metropolitan area,

either for transfer through money transmitters operating in other

American cities, or for bulk smuggling out of the United States. The

change demonstrates graphically both that narcotics money launderers

have been extensively abusing a segment of the relatively unsupervised

money transmitter industry, and that the underground market does

respond to regulatory and enforcement pressures.

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\11\ One money transmitter surrendered its license to the New

York Banking Department immediately before the Order became

effective. Two other money transmitters subject to the Order simply

stopped sending any funds to Colombia.

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Ancillary results of the Order also have been significant. The

Treasury has observed a dramatic increase in Customs Service

interdiction and seizure activity at air and seaports, on common

carriers, and on highways--over $50 million during the first seven

months of the Order's operation, a figure over three times higher than

that for comparable periods in prior years. Also significant is the

fact that the cost of sending funds to Colombia through money

transmitters in New York has dropped, from 7 percent to 5 percent of

[[Page 27912]]

the value of the transfer, since the Order was put in place.

At the same time, it is clear that a significant number of money

transmitter agents have been willing to structure transactions beneath

the Order's $750 reporting threshold, in an attempt to move narcotics-

tainted funds abroad even during a period of known surveillance of the

industry and its agents. (At least one money transmitter has itself

actively worked with federal authorities during this period to identify

suspicious transactions, even those involving its own agents.) The

number of transactions in amounts below $750 has risen sharply, and the

amount of funds transferred to Colombia in such increments appears to

have almost doubled. The Task Force has already executed search

warrants on twenty-two money transmitter agents suspected of

intentionally structuring transactions in violation of the Order; all

but five businesses served have closed, five people have been indicted,

and four people have already pleaded guilty. Three additional arrest

warrants are outstanding. The Task Force is continuing to pursue

investigations of this type, and the Treasury will consider imposing

civil penalties against violators who are not pursued criminally.

Texas State Investigations. The New York GTO experience is not an

isolated phenomenon. The Texas Attorney General's office began

investigating so called ``giro houses'' in the Houston area in the

early 1990s. Giro houses are independent money transmitters that also

provide ancillary services such as cargo shipment and long distance

telephone access. Before 1991, there were as many as 100 giro houses in

Houston processing over $450 million per year in wire transfers,

primarily to Colombia. The Texas Attorney General's Office, working

with the Texas Department of Banking and the Houston office of the

Internal Revenue Service, opened formal investigations of a number of

giro houses. These investigations, like the El Dorado Task Force's

investigations in New York, revealed a pattern of money laundering

through false invoices designed to justify the large currency deposits

at local banks.

From late 1994 through 1995 the Texas Attorney General's Office

obtained and executed 11 search warrants at Houston giro houses. Many

businesses closed while under investigation, and the overall effect of

the Texas investigations on the illegitimate trade was dramatic. A

recent count of giro houses lists eight sending funds to Colombia, and

the total amount of money processed through giro houses has dropped to

approximately $10 million.

A significant factor in the Texas investigations has been the state

requirement that any wire transaction over $1,000 be recorded on a

receipt that includes driver's license and social security or other

photo identification numbers, birth date and address of the sender.

Because false identification and addresses are commonly used by money

launderers sending funds in excess of $1,000, the identification

requirement has provided a clear mechanism for detecting and proving

illegal behavior. In the case of businesses that are willing to

structure transactions beneath the $1,000 threshold, surveillance has

been used to document the deviation between the number of people

observed patronizing the business and the number of customers reflected

in business records during the surveillance period.

C. Need for Special Reporting and Recordkeeping Rules for Money

Transmitters

This notice proposes to amend the Bank Secrecy Act regulations to

require money transmitters and their agents to report and keep records

of, and verify the identity of senders of, transactions in currency or

monetary instruments of at least $750 but not more than $10,000 in

connection with a transmission or other transfer of funds to any person

outside the United States. While Treasury recognizes the significance

of this proposed action, it believes that the step is nevertheless

clearly warranted based on the potential, and the record of actual,

abuse of the money transmission industry documented, inter alia, by the

Task Force's investigations and the results of the Order.

As indicated above, the Order and the Texas investigations have had

a significant impact in providing crucial information to the Treasury

as well as disrupting the flow to Colombia, through money transmitters,

of illegally-derived funds. But geographic targeting orders are by

their nature relatively temporary measures, intended to illuminate,

rather than solve, long-term enforcement problems. Given the structural

factors that created the situation to which the Order was addressed

(plus the evidence of extensive structuring that has taken place to

avoid even the Order-imposed threshold of $750), the likelihood that

launderers are now moving large sums through other money transmitters

in other cities, and will resume doing so in New York once the Order

expires, cannot responsibly be discounted, let alone ignored.

The Task Force's investigations and the Order focused on money

transmitters in the New York Metropolitan Area. But the Texas giro

house investigations and the consensus of law enforcement officials

simply confirms what the New York situation itself would lead one to

expect, namely that elements of the money transmission industry, given

a combination of factors, are very susceptible to systematic misuse,

extending unfortunately in some cases to infiltration and corruption,

by money launderers.

It should be emphasized at the outset that, as in the case of the

nations's banks and securities firms, most money services business

operators and agents are completely law-abiding and as interested in

cost-effective financial law enforcement as the Treasury itself. A

number of major national money remitters and issuers of traveler's

checks and money orders have already taken their own steps to devise

anti-money laundering compliance programs.

The challenges for reasonable implementation of the Bank Secrecy

Act posed by the situation the New York Order illuminates are daunting.

Implementation of a comprehensive counter-money laundering strategy for

money transmitter and other money services businesses raises

significant issues not present in devising counter-money laundering

strategies for banks, largely due to unique structural factors

affecting money services businesses. Money transmitters (like other

money services businesses) operate largely through the medium of

independent enterprises that agree to serve as agents for the

businesses' products or services.

Thus, the public does not deal directly with the businesses that

issue the instruments, or actually perform the services, purchased, and

the activities of the agents are subject to less systematic control

than in the case, for example, of branch banks or brokerage offices.

Even more important, the experience encountered in New York and

Texas indicates that the rules of the Bank Secrecy Act are not now

appropriately tailored to reflect the particular operating realities,

problems, and potential for abuse of an industry that deals in sums far

below $10,000 per transaction. Given a truly ``cash'' industry, that

moves impressively large sums in the aggregate, with few of the

structural controls in place that banks and their regulators impose,

and that is not subject to the sorts of market discipline to which

banks are subject with respect to avoiding collaboration

[[Page 27913]]

with criminals, a single strategy does not easily suggest itself.

The issue facing the Treasury is how to move from the world of a

temporary geographic targeting order to stabilize the situation of this

industry. The decision to propose a $750 currency transaction reporting

requirement for outbound transmissions reflects two determinations. The

first is that such a rule, while in effect, will create a source of

information that should help nationwide to stop the relatively

uncontrolled outflow of narcotics proceeds through money transmitters.

The second is that such a rule will allow more long-term (and less

absolute) measures, most important, heightened industry procedures and

programs based on a mandatory suspicious transaction reporting regime,

backed by nation-wide registration of money services businesses, the

time to become effective.

Treasury has considered a number of alternatives in seeking to

craft the proposed rule. The value of reporting in this situation is

plain. Mandatory reporting creates a critical source of information for

Treasury enforcement and bank regulators about the transactions that

move through money transmitters. That the reporting requirement also

creates a deterrent effect and drives launderers from the system,

cannot, Treasury believes, be seriously debated.

No Bank Secrecy Act requirement other than the New York Order (and

previous geographic targeting orders, in Phoenix in 1989 and Houston in

1991) has ever keyed reporting requirements or special recordkeeping

requirements at a level as low as $750. The next standard rung in the

ladder is $3,000; money transmitters, like other financial

institutions, currently are subject to a requirement to maintain

records of funds transfers of $3,000 or more, see 31 CFR 103.33, and to

a requirement to report transactions in currency of more than $10,000.

See 31 CFR 103.22(a). It is, in part, the evasion of the $3,000

recordkeeping requirement that the New York Order was put in place to

prevent.

In addition, enforcement and regulatory analyses increasingly

confirm what the experience under the Order amply demonstrates, namely

that a $3,000 threshold has small relevance to an industry that most

commonly deals in sums far below that amount. A study by Coopers &

Lybrand concluded that the average transaction amount for funds

transferred by money transmitters to persons outside the United States

is approximately $320. The fact that $750 is more than twice the amount

of the average transaction decreases the likelihood that legitimate

transactions will be put off track by this simple reporting

requirement.

Another issue is whether the rule should apply to transfers to all

destinations outside the United States, rather than, say, applying only

to transmissions to particular countries. Any rule directed at

transmissions to a particular nation would simply move the process to

create a switching station in some third country, for funds ultimately

bound to the country designated. (For example, there is some basis for

a conclusion that funds destined for Colombia, once the New York Order

was in place, were simply routed through transmitters in other Latin

American nations, on their way to their ultimate destination in

Colombia.) Not only is singling out a particular country likely to be

ineffective, but it could also contravene international agreements to

which the United States is a party.

Money transmitters provide a valuable service, especially in lower-

income communities in which access to banks may be limited. In issuing

this notice of proposed rulemaking, Treasury has sought to avoid

imposing undue hardship on any segment of the United States population.

On the contrary, by establishing a reporting threshold more than double

the average amount of funds transferred outside the United States by a

money transmitter, it is targeting the criminals who misuse money

transmitters to send the profits of their illegal activity to drug

source countries. Indeed, if the New York experience holds true, a

lower reporting threshold may actually lead to a reduction in the cost

to customers of remitting funds abroad through money transmitters.

As indicated above, it is not necessarily the case that any special

$750 reporting rule, once made final, would be permanent. The

Department of the Treasury intends carefully to review the experience

of the industry and the results of reporting under the blanket $750

reporting rule. The Department of the Treasury intends, at the same

time that its programs emphasize a government-industry thrust to bring

counter-money laundering programs in the money services industry up to

a workable standard, to determine whether, and to what extent, a

special reporting rule continues to be necessary.

D. Authority for Special Reporting and Recordkeeping Rule for Money

Transmitters

This notice of proposed rulemaking is grounded in the broad

authority granted the Secretary of the Treasury by section 5313(a) and

section 5318(h). Section 5313(a) authorizes the Secretary to require a

domestic financial institution to report transactions involving coins,

currency or other monetary instruments. Section 5318(h) authorizes the

Secretary to require a financial institution to carry out anti-money

laundering programs, including at a minimum the development of internal

policies, procedures, and controls.

While 31 CFR 103.22(a) imposes a general reporting and

recordkeeping threshold of more than $10,000 for domestic financial

institutions, section 5313(a) does not mandate any single threshold

amount. Instead, the statute grants the Secretary the discretion to

require reports of transactions ``in an amount, denomination, or amount

and denomination'' as the Secretary may prescribe. FinCEN believes this

language permits the Secretary to impose a reporting threshold lower

than $10,000, where the circumstances warrant.12

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\12\ This plain reading of section 5313(a) is consistent with

the statute's relevant legislative and administrative histories.

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Similarly, the statute is silent on whether the Secretary may set a

different reporting threshold for different kinds of financial

institutions. Section 5313(a) does state, however, that reports of

transactions may be required ``under circumstances the Secretary

prescribes by regulation.'' FinCEN reads this broadly-stated language

as permitting the Secretary to set a reporting threshold for money

transmitters that is different than the reporting threshold for other

financial institutions.13

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\13\ Again, the relevant legislative and administrative

histories of section 5313(a) do not conflict with this plain reading

of the statute.

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The proposal contained in this document that would lower the

general reporting threshold of more than $10,000 has historical

antecedents. Both Congress and the Department of the Treasury have in

the past each drafted a law or proposed a rule that would have lowered

the $10,000 reporting threshold generally applicable to financial

institutions. On these occasions, FinCEN is unaware of any challenge

ever being made to Treasury's legal authority under the Bank Secrecy

Act or its implementing regulations to make such a change.

In August 1986, the House of Representatives considered legislation

(HR 5484) aimed at countering the misuse of financial institutions by

narcotics launderers. One provision of that bill would have authorized

the Secretary of the Treasury to order domestic financial institutions

to report

[[Page 27914]]

and retain records of any transaction of more than $3,000 involving

currency or other monetary instruments. The version of the bill

containing this provision was never enacted into law.14

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\14\ Nevertheless, certain amendments to the Bank Secrecy Act

(e.g., making structuring a crime) eventually were made by the Money

Laundering Control Act of 1986, Subtitle H of the Anti-Drug Abuse

Act of 1986, Pub. L. 99-570 (October 27, 1986).

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When HR 5484 was introduced, the Department of the Treasury issued

a notice of proposed rulemaking that would have amended the Bank

Secrecy Act regulations to require domestic financial institutions to

report and retain records of certain transactions in currency less than

$10,000. See 51 FR 30233 (August 25, 1986). Specifically, the notice

would have required that financial institutions obtain and retain a

report from each purchaser of any official bank check, cashier's check,

money order or traveler's check, if the purchase involved a transaction

in currency of $3,000 or more. The rule then proposed would have

required that each such report be signed by the purchaser and certify

whether or not the purchaser had purchased more than $10,000 of these

kinds of instruments in any one day. Under the notice, the selling

financial institution would have been required to treat any affirmative

certification, or refusal to certify, as a reportable transaction, that

would require the financial institution to file a CTR. Based on

Treasury's conclusions that these proposals were ``not advisable at

this time,'' the proposals were eventually withdrawn. See 58 FR 6611

(February 29, 1988).

The notice of proposed rulemaking containing these proposals

generated approximately 300 comments. While most commenters objected to

lowering the reporting threshold from $10,000 to $3,000 for

transactions involving the kinds of instruments listed above, no

commenter questioned Treasury's legal authority under the Bank Secrecy

Act and its implementing regulations to establish either a reporting

threshold other than $10,000 or a different reporting threshold for

different kinds of transactions.

III. Specific Provisions

A. 31 CFR 103.22(i)(1) General

Proposed paragraph (i)(1) states the special reporting rule for

money transmitters. It provides that money transmitters and their

agents must report transactions in currency or monetary instruments of

at least $750 but not more than $10,000 in connection with a

transmission or other transfer of funds to any person outside the

United States.

Reporting Institutions

Any enterprise that is a money transmitter, within the definition

proposed in the Registration Rule, or agent of a money transmitter, is

subject to the proposed special reporting rule contained in this

document.

As proposed, the special reporting rule would not apply to

depository institutions, despite the fact that some depository

institutions accept funds transmission business from non-customers.

Depository institutions are subject to national examination by the

federal financial supervisory agencies for, inter alia, compliance with

the Bank Secrecy Act and adequacy of systems to prevent money

laundering. They are also subject to the obligation to report

suspicious transactions to the Department of the Treasury, and FinCEN

will be issuing a suspicious transaction report advisory to banks with

respect to the potential for abuse of the funds transmittal system by

non-account customers in the near future. In addition, FinCEN does not

possess information about the segment of the money transmission

business that involves bank transmissions for non-account customers

that indicates the sorts of abuses demonstrated, in the case of some

non-bank money transmitters and their agents, by the New York Order,

the Texas investigations, other enforcement activities, and industry

analyses.

Under these circumstances, and in the absence of demonstrated abuse

of the bank non-customer segment of the money transmission industry,

the Department of the Treasury is not proposing the extension to

depository institutions, at this time, of the rules proposed for other

money transmitters by this notice of proposed rulemaking. However,

comments are specifically requested on the question whether either

competitive or other factors make it necessary for the special

reporting rules to apply to banks, for non-customers, as well as to

other money transmitters.

Reportable Transactions

The proposed reporting rule applies to transactions in currency or

monetary instruments of at least $750 but not more than $10,000 in

connection with a transmission or other transfer of funds to any person

outside the United States. (At the more than $10,000 level, the normal

reporting rules apply.) The $750 threshold for reporting under the

proposed rule reflects information about the money transmitting

industry provided voluntarily by the industry, collected by Coopers &

Lybrand, L.L.P., and confirmed by the Task Force's investigations and

the results of the Order. Law enforcement sources agree that, across

the industry and throughout the United States, the average legitimate

funds transfer to Colombia ranges in amount between $200 and

$500.15 Thus, reports about transfers of $750 or more should

impose neither an undue burden on the legitimate business conducted by

money transmitters nor an undue government intrusion into the financial

affairs of their legitimate customers. In this regard, it is worth

noting that the maximum available value of a U.S. Postal Service money

order--a monetary instrument widely used for bill paying by the same

part of the population that has a legitimate need for the services of

money transmitters such as those targeted by the proposed special

reporting rule--is $700.

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\15\ According to the Coopers & Lybrand study, noted above, the

average amount of a funds transfer from the United States to another

country is approximately $320.

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Any transmission or other transfer of funds to any person outside

the United States of at least $750 but not more than $10,000 would be

subject to the proposed reporting rule. As discussed above, any

limitation of the rule's attention to a particular country or group of

countries would ignore the reality that organized financial crime and

its money-moving circuits are worldwide in scope and would likely raise

far more problems than it solved. Any such limitation would be both

unfair and ill-tailored to the realities of the money laundering

problem.

The reporting range for this proposed special reporting rule has

been set at an amount of at least $750 but no more than $10,000 to

avoid any overlap with the general reporting requirement of 31 CFR

103.22(a) to report transactions in currency of $10,000 or more.

Moreover, the proposed special reporting rule does not affect in any

way the obligation of money transmitters to comply with the suspicious

transaction reporting requirements, as set forth in the Suspicious

Transaction Rule. The proposed rule further does not affect the

obligation for money transmitters to comply with the recordkeeping

requirements for funds transfers as set forth in 31 CFR 103.33.

B. 31 CFR 103.22(i)(2) Identification Required

Proposed paragraph (i)(2) requires that before any money

transmitter or agent completes a transaction in currency of at least

$750 but not more

[[Page 27915]]

than $10,000 in connection with any transmission or other transfer of

funds to any person outside the United States, the money transmitter or

agent involved must verify and record the name and address of the

sender of the funds and satisfy with respect to such transaction the

requirements of 31 CFR 103.28, provided that for purposes of the

special reporting requirement, only a drivers license, passport, alien

registration card or state-issued identification card, containing a

photograph of the individual involved, may be accepted for verification

of identity.

C. 31 CFR 103.22(i)(3) Person Required To File and Keep Records

As is the case with the Suspicious Transaction Rule, proposed

paragraph (i)(3) places responsibility for reporting on each money

transmitter, as well as on its agents,

regardless of whether, and the terms on which, the money transmitter

treats such person as an agent or independent contractor for other

purposes.

The allocation of principal-agent liability in particular cases,

under the governing terms of the Bank Secrecy Act, is too complex a

subject to be dealt with in this notice of proposed rulemaking.

However, the Department of the Treasury believes that at a minimum the

operators of money transmitters have a duty to know their agents

sufficiently well to be able to fulfill the reporting and recordkeeping

obligations involved in compliance with the proposed rule. As in the

case of the rules for suspicious activity reporting by banks, 31 CFR

103.21, and exemptions from the requirement to report transactions in

currency by banks, 31 CFR 103.22(h), the proposed rule is intended to

introduce a concept of due diligence into the reporting procedures, and

that diligence applies equally to a review of activities of agents as

to a review (by both principals and agents) of transactions of

consumer-customers of money transmitters.

Treasury invites comments on whether the rule should contain more

detailed procedures or rules dealing with the allocation of

responsibility between principals (the money transmitters) and agents,

as well as specific rules for compliance programs that recognize the

realities of the business operations in this part of the financial

sector.

D. 31 CFR 103.22(i)(4) Recordkeeping

Proposed paragraph (i)(4) makes it clear that records maintained by

a money transmitter or its agent in compliance with and administration

of the rules of this paragraph (i) must be maintained in accordance

with the recordkeeping provisions of 31 CFR 103.38, which, inter alia,

requires that records be maintained for a period of five years.

E. 31 CFR 103.27(a)(3)

Proposed paragraph (a)(3) states the filing deadline applicable to

any report required to be filed by proposed paragraph (i)(1). Any such

report must be filed within 30 days following the day on which the

reportable transaction occurred.

IV. Proposed Effective Date

The amendments to 31 CFR Part 103 contained in this notice of

proposed rulemaking will become effective 30 days following the

publication in the Federal Register of the final rule to which this

notice of proposed rulemaking relates.

V. Submission of Comments

An original and four copies of any comment (other than one sent

electronically) must be submitted. All comments will be available for

public inspection and copying, and no material in any such comments,

including the name of any person submitting comments, will be

recognized as confidential. Accordingly, material not intended to be

disclosed to the public should not be submitted.

VI. Regulatory Flexibility Act

FinCEN certifies that the proposed rule contained in this document

will not have a significant economic impact on a substantial number of

small entities. The average money transmission from the United States

to another country is approximately $320. This amount is substantially

below the $750 threshold that triggers reporting under the proposed

rule. Thus, FinCEN believes that the threshold has been set at a level

that will avoid a significant economic burden on small businesses.

VII. Paperwork Reduction Act Notices

Special Currency Transaction Report for Money Transmitters

In accordance with requirements of the Paperwork Reduction Act of

1995, 44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR

part 1320, the following information concerning the collection of

information on International Transmission of Funds Report is presented

to assist those persons wishing to comment on the information

collection.

FinCEN anticipates that this proposed rule, if enacted as proposed,

would result in a total of 300,000 International Transmission of Funds

Report forms to be filed. This result is an estimate, based on a

projection of the size and volume of the industry.16

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\16\ Given the state of our knowledge of the industry and

patterns of illegal transactions, these estimates are extremely hard

to generate.

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Title: International Transmission of Funds Report.

OMB Number: To be determined.

Description of Respondents: Money transmitters.

Estimated Number of Respondents: 100,000.

Frequency: As required.

Estimate of Burden: Reporting average of 19 minutes per response;

recordkeeping average of 5 minutes per response.

Estimate of Total Annual Burden on Respondents: 300,000 responses.

Reporting burden estimate = 95,000 hours; recordkeeping burden estimate

= 25,000 hours. Estimated combined total of 120,000 hours.

Estimate of Total Annual Cost to Respondents for Hour Burdens:

Based on $20 per hour, the total cost to the public is estimated at

$2,400,000.

Estimate of Total Other Annual Costs to Respondents: None.

Type of Review: New.

FinCEN specifically invites comments on the following subjects: (a)

Whether the proposed collection of information is necessary for the

proper performance of the mission of FinCEN, including whether the

information shall have practical utility; (b) the accuracy of FinCEN's

estimate of the burden of the proposed collection of information; (c)

ways to enhance the quality, utility, and clarity of the information to

be collected; and (d) ways to minimize the burden of the collection of

information on respondents, including through the use of automated

collection techniques or other forms of information technology.

In addition, the Paperwork Reduction Act of 1995 requires agencies

to estimate the total annual cost burden to respondents or

recordkeepers resulting from the collection of information. Thus,

FinCEN also specifically requests comments to assist with this

estimate. In this connection, FinCEN requests commenters to identify

any additional costs associated with the completion of the form. These

comments on costs should be divided into two parts: (1) Any additional

costs associated with reporting; and (2) any additional costs

associated with recordkeeping.

Recordkeeping Requirements of 31 CFR 103.22(i)

In accordance with requirements of the Paperwork Reduction Act of

1995,

[[Page 27916]]

44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR Part

1320, the following information concerning the collection of

information as required by 31 CFR 103.22(i) is presented to assist

those persons wishing to comment on the information collection.

Title: Currency transaction special reporting.

OMB Number: 1506-0006.

Description of Respondents: All financial institutions.

Estimated Number of Respondents: 100,000.

Frequency: As required.

Estimate of Burden: Recordkeeping average of 10 minutes per

response; 300,000 responses.

Estimate of Total Annual Burden on Respondents: Recordkeeping

burden estimate = 50,000 hours.

Estimate of Total Annual Cost to Respondents for Hour Burdens:

Based on $20 per hour, the total cost to the public is estimated to be

$1,000,000.

Estimate of Total Other Annual Costs to Respondents: None.

Type of Review: Extension.