Financial Crimes Enforcement Network; Proposed Amendment to the Bank Secrecy Act RegulationsRequirement of Money Transmitters and Money Order and Traveler's Check Issuers, Sellers, and Redeemers To Report Suspicious Transactions

Federal RegisterMay 21, 1997

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA20

Financial Crimes Enforcement Network; Proposed Amendment to the

Bank Secrecy Act Regulations--Requirement of Money Transmitters and

Money Order and Traveler's Check Issuers, Sellers, and Redeemers To

Report Suspicious Transactions

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 Bank Secrecy Act regulations to require money

transmitters, and issuers, sellers, and redeemers, of money orders and

traveler's checks, to report suspicious transactions involving at least

$500 in funds or other assets. The proposal is a further step in the

creation of a comprehensive system (to which banks are already subject)

for the reporting of suspicious transactions by financial institutions.

Such a system is a core component of the counter-money laundering

strategy of the Department of the Treasury.

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--Suspicious Transaction Reporting--Money Services Businesses.

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--Suspicious Transaction

Reporting--Money Services Businesses.'' 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, Albert R. Zarate, Attorney-Advisor, Cynthia L.

Clark, detailed to the Office of Legal Counsel of FinCEN, and Eileen P.

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

3590.

SUPPLEMENTARY INFORMATION:

I. Introduction

This document proposes to add a new section 103.20 to 31 CFR part

103, to require (i) money transmitters, (ii) issuers, sellers, and

redeemers of money orders, and (iii) issuers, sellers, and redeemers of

traveler's checks, to report to the Department of the Treasury any

suspicious transaction relevant to a possible violation of law or

regulation. The proposal would extend to these ``money services

businesses,'' which are part of the universe of financial institutions

subject to the Bank Secrecy Act, the suspicious transaction reporting

regime to which the nation's banks,

[[Page 27901]]

thrift institutions, and credit unions have been subject since April 1,

1996.1

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\1\ The suspicious transaction reporting rules for banks are

found at 31 CFR 103.21 (which this notice of proposed rulemaking

proposes to renumber as 31 CFR 103.18). The term bank, for purposes

of the Bank Secrecy Act regulations, includes all depository

institutions. See 31 CFR 103.11(c).

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II. Background

A. Statutory Provisions

The Bank Secrecy Act, 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 the Bank

Secrecy Act has been delegated to the Director of FinCEN.

The authority to require reporting of suspicious transactions is

contained in 31 U.S.C. 5318(g). That subsection was added to the Bank

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

Act (the ``Annunzio-Wylie Anti-Money Laundering Act''), Title XV of the

Housing and Community Development Act of 1992, Public Law 102-550; it

was expanded by section 403 of the Money Laundering Suppression Act of

1994 (the ``Money Laundering Suppression Act''), Title IV of the Riegle

Community Development and Regulatory Improvement Act of 1994, Public

Law 103-325, to require designation of a single government recipient

for reports of suspicious transactions.

The provisions of 31 U.S.C. 5318(g) deal with the reporting of

suspicious transactions by financial institutions subject to the Bank

Secrecy Act and the protection from liability to customers of persons

who make such reports. Subsection (g)(1) states generally:

The Secretary may require any financial institution, and any

director, officer, employee, or agent of any financial institution,

to report any suspicious transaction relevant to a possible

violation of law or regulation.

Subsection (g)(2) provides further:

A financial institution, and a director, officer, employee, or

agent of any financial institution, who voluntarily reports a

suspicious transaction, or that reports a suspicious transaction

pursuant to this section or any other authority, may not notify any

person involved in the transaction that the transaction has been

reported.

Subsection (g)(3) provides that neither a financial institution,

nor any director, officer, employee, or agent

that makes a disclosure of any possible violation of law or

regulation or a disclosure pursuant to this subsection or any other

authority * * * shall * * * be liable to any person under any law or

regulation of the United States or any constitution, law, or

regulation of any State or political subdivision thereof, for such

disclosure or for any failure to notify the person involved in the

transaction or any other person of such disclosure.

Finally, subsection (g)(4) requires the Secretary of the Treasury,

``to the extent practicable and appropriate,'' to designate ``a single

officer or agency of the United States to whom such reports shall be

made.'' 2 The designated agency is in turn responsible for

referring any report of a suspicious transaction to ``any appropriate

law enforcement or supervisory agency.'' Id., at subsection (g)(4)(B).

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\2\ This designation is not to preclude the authority of

supervisory agencies to require financial institutions to submit

other reports to the same agency or another agency ``pursuant to any

other applicable provision of law.'' 31 U.S.C. 5318(g)(4)(C).

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B. Importance of Suspicious Transaction Reporting in the Treasury's

Counter-Money Laundering Program

The Congressional mandate to require reporting of suspicious

transactions recognizes two basic points that are central to Treasury's

counter-money laundering and anti-financial crime programs. First, it

is to financial institutions that money launderers must go, either

initially or eventually. Second, the officials of those institutions

are more likely than government officials to have a sense as to which

transactions appear to lack commercial justification or otherwise

cannot be explained as falling within the usual methods of legitimate

commerce. Moreover, because money laundering transactions are designed

to appear legitimate in order to avoid detection, the creation of a

meaningful system for detection and prevention of money laundering is

impossible without the cooperation of financial institutions. Indeed,

many non-banks have come increasingly to recognize the increased

pressure that money launderers have come to place upon their operations

and the need for innovative programs of training and monitoring

necessary to counter that pressure.

The reporting of suspicious transactions is also a key to the

emerging international consensus on the prevention of money laundering.

One of the central recommendations of the Financial Action Task Force--

recently updated and reissued--is that:

If financial institutions suspect that funds stem from a

criminal activity, they should be required to report promptly their

suspicions to the competent authorities.

Financial Action Task Force Annual Report (June 28,

1996),3 Annex 1 (Recommendation 15). The recommendation,

which applies equally to money services businesses as to banks, revises

the original recommendation, issued in 1990, that required institutions

to be either ``permitted or required'' to make such reports. (Emphasis

supplied.) The revised recommendation makes clear the international

consensus that a mandatory suspicious transaction reporting system is

essential to an effective counter-money laundering program.

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\3\ The FATF is an inter-governmental body whose purpose is

development and promotion of policies to combat money laundering.

Originally created by the G-7 nations, its membership now includes

Australia, Austria, Belgium, Canada, Denmark, Finland, France,

Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan,

Luxembourg, the Kingdom of the Netherlands, New Zealand, Norway,

Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, the United

Kingdom, and the United States, as well as the European Commission

and the Gulf Cooperation Council.

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Similarly, the European Community's Directive on prevention of the

use of the financial system for the purpose of money laundering calls

for member states to

ensure that credit and financial institutions and their directors

and employees cooperate fully with the authorities responsible for

combating money laundering * * * by [in part] informing those

authorities, on their own initiative, of any fact which might be an

indication of money laundering.

EC Directive, O.J. Eur. Comm. (No. L 166) 77 (1991), Article 6.

Accord, the Model Regulations Concerning Laundering Offenses Connected

to Illicit Drug Trafficking and Related Offenses of the Organization of

American States, OEA/Ser. P. AG/Doc. 2916/92 rev. 1 (May 23, 1992),

Article 13, section 2.4 All of these documents recognize the

importance of extending the counter-money laundering controls to ``non-

traditional'' financial institutions, not simply to banks, both to

ensure fair competition in the marketplace and to

[[Page 27902]]

recognize that non-banks as well as depository institutions are an

attractive mechanism for, and are threatened by, money launderers. See,

e.g., Financial Action Task Force Annual Report, supra, Annex 1

(Recommendation 8).

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\4\ The OAS reporting requirement is linked to the provision of

the Model Regulations that institutions ``shall pay special

attention to all complex, unusual or large transactions, whether

completed or not, and to all unusual patterns of transactions, and

to insignificant but periodic transactions, which have no apparent

economic or lawful purpose.'' OAS Model Regulation, Article 13,

section 1.

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C. Suspicious Transaction Reporting by Money Services Businesses

This notice of proposed rulemaking, the second of the notices of

proposed rulemaking being published in this separate part of the

Federal Register dealing with application of the Bank Secrecy Act to

money services businesses, would generally require money transmitters,

businesses issuing, selling, or redeeming money orders, and businesses

issuing, selling, or redeeming traveler's checks, to report suspicious

transactions to the Department of the Treasury.5 Money

services businesses have not in the past been the subject of the same

concentrated attention as banks in the administration of the Bank

Secrecy Act.6 The Annunzio-Wylie Anti-Money Laundering and

Money Laundering Suppression Acts were crafted by the Congress in

significant part to give the Treasury flexible tools to deal with non-

bank institutions, and today's notices of proposed rulemaking represent

an attempt by the Department of the Treasury to design Bank Secrecy Act

rules that address the problems encountered by law enforcement agents,

regulators, and money services businesses themselves, in fighting money

laundering in this part of the financial sector. The notice and its

timing reflect both the general course of Treasury's counter-money

laundering program and specific developments that indicate the need for

immediate extension of updated and appropriately-tailored Bank Secrecy

Act rules to money services businesses, especially to money

transmitters, but also to money order and traveler's check

services.7

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\5\ Readers of the discussion that follows may wish to refer to

the Notice of Proposed Rulemaking entitled ``Amendment to the Bank

Secrecy Act Regulations--Definition and Registration of Money

Services Businesses,'' for a general description of money services

businesses in the United States.

\6\ The placement of illegally-derived currency into the

financial system and the smuggling of such currency out of the

country remain two of the most serious issues facing financial law

enforcement efforts in the United States and around the world. But

banks, in cooperation with law enforcement agencies and federal and

state banking regulators, have responded in many positive ways to

the challenges posed by money laundering. It is now far more

difficult than in the past to pass large amounts of cash directly

into the nation's banks unnoticed and far easier to identify and

isolate those banks and officials still willing to assist or ignore

money launderers.

\7\ The Congress has long-recognized the need generally to

address problems of abuse by money launderers 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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It should be emphasized at the outset that, as in the case of the

nation's banks and securities firms, most money service business

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

cost-effective financial law enforcement as the Treasury itself.

Money Transmitters. Since last August, 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 pursuant to 31

U.S.C. 5326 and 31 CFR 103.26, that is directed at the remission of

funds to Colombia.8 The original 60-day period of the Order

has been extended several times under the statutory rules, and the

Order is at present set to expire on June 2, 1997. The Order, first

directed against 12 money transmitters and 1,600 agents, was expanded

in October 1996 and again in April 1997.

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\8\ 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 such 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

record keeping 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 remittances 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.

The Order was issued against a backdrop of several years of

intensive investigative work conducted by the Customs and Internal

Revenue Service-led El Dorado Task Force, which had uncovered

widespread laundering of narcotics funds within segments of the money

transmitter industry in New York. El Dorado agents have been able

repeatedly to show the complicity of money remitter agents in the

simple scheme of structuring of large cash transactions to evade the

existing Bank Secrecy Act reporting and recordkeeping obligations

applicable to such transactions, using, for example, false invoices and

fabricated identities of senders and recipients.9 One major

licensed money transmitter had itself pled guilty to money laundering

charges,10 and investigations of several other transmitters

and their agents were underway.11

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\9\ Over the years preceding the issuance of the Order, El

Dorado's ``Operation Wire Drill'' investigations 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.

\10\ 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 sought to strengthen its Bank

Secrecy Act compliance measures significantly.

\11\ See, e.g., United States v. Remesas America Oriental, Inc.,

No. S1 96 Cr. 919 (TPG) (S.D.N.Y.).

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But a number of other factors also supported the Order's issuance.

Perhaps most strikingly, the New York area money transmitters' business

volume to Colombia was strikingly 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.

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.12 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 transmission services

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

[[Page 27903]]

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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\12\ One money transmitter surrendered its license to the New

York State Banking Department upon being served with the Order.

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Ancillary results of the Order have also 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 $36 million during the first six months

of the Order's operation, a figure approximately four times higher than

for comparable periods in prior years.

Despite the Order, it is clear that a not insubstantial 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 the same time, at

least one money transmitter has itself 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 El Dorado Task

Force has already executed search warrants on 22 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.

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 IRS, 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 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.

Money Order Sellers. The use by money launderers of money orders,

whether issued by the United States Postal Service or private

companies, is well-documented. As one example, a Postal Inspection

Service investigation beginning in the late 1980s and early 1990s,

whose offshoots continue to this day, revealed a multiple step scheme

in which money orders, in individual amounts of $1,000 or less, were

purchased from New York area banks and post office outlets (often in

bulk), sent abroad for negotiation or deposit, and then repatriated to

the United States for clearance or deposit into banks from which the

aggregated funds were again to be wired abroad. The scheme involved

some 99,000 money orders worth approximately $70 million that were

deposited into three bank accounts in New York and Miami; it resulted

in the 1992 guilty plea of two individuals, and the 1993 forfeiture of

approximately $2.1 million.

The ease with which money orders can be redeemed or negotiated--the

very factors that make them attractive commercially--also make them an

attractive tool for money launderers. The orders are negotiable, may be

made out to ``cash,'' and operate as virtually the equivalent of cash,

especially when backed by the credit of the Postal Service or one of

the two major commercial money order issuers that, together with the

Postal Service, dominate the money order market. Money order issuers

have made major strides in recognizing their obligations to report

suspicious activity and in designing computer systems to, e.g.,

identify suspicious sequential money order purchases, and to that

extent today's proposal recognizes those developments and makes clear

that the protective provisions of 31 U.S.C. 5318(g) (2)-(3) apply

equally to reports by money order issuers, sellers, and redeemers as to

reports by banks. Despite that fact, however, the extremely large

number of agents and other businesses that deal in money orders as

financial instruments makes the promulgation of a general suspicious

transaction reporting rule for such businesses essential.

Traveler's Checks. Traveler's checks raise the same issues as money

orders. Clearly, the requirement that traveler's checks be counter-

signed on issuance and at the time they are negotiated makes them more

difficult to abuse, but the counter-signature requirement can be evaded

by a corrupt sales agent and may have less force abroad than in the

United States. Traveler's checks are already included within the

definition of monetary instruments at 31 CFR 103.11(u)(ii), and their

potential for abuse was recognized in the 1992 amendments to the

definition of ``cash'' for purposes of the reporting of cash purchases

of goods and services valued over $10,000. See 26 U.S.C. 6050I(d)(2);

26 CFR 6050I-1(c)(1)(ii); 56 FR 57974, 57977 (Nov. 15, 1991).

Special Structural Problems Affecting Money Services Businesses. In

issuing this notice of proposed rulemaking, the Department of the

Treasury is again expressing its judgment that reporting of suspicious

transactions in a timely fashion is a component of the flexible and

cost-efficient compliance system required to prevent the use of the

nation's financial system--in this case money services businesses--for

illegal purposes. Implementation of a comprehensive counter-money

laundering strategy for money services businesses, however, raises

significant issues not present in devising counter-money laundering

strategies for banks, largely due to unique structural factors

affecting money services businesses.

First, most money services businesses operate through the medium of

independent enterprises that agree to serve as agents for the

businesses' products or services; thus the public often does not deal

directly with the businesses that issue or back the instruments, or

actually perform the services, purchased. Second, and as a corollary,

money services businesses permit performance of a specific function--

the conversion of money into a money order or traveler's check, or the

sending of money to a distant location--but generally neither offer nor

are capable of maintaining continuing account relationships. Third,

money services businesses are not subject generally to federal

regulation and are regulated, in differing degrees, by some, but not

all, states.13 Finally, and perhaps

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most important, the rules of the Bank Secrecy Act have not been

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. For all of these reasons, the

assumptions that underlay design of a suspicious transaction reporting

system for banks cannot be assumed to apply with equal force to the

money services businesses with which this notice of proposed rulemaking

deals.

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\13\ Section 407 of the Money Laundering Suppression Act, 31

U.S.C. 5311 note, states the sense of the Congress that, ``[f]or

purposes of preventing money laundering and protecting the payment

system from fraud and abuse,'' the states should ``establish uniform

laws for licensing and regulating'' the businesses which are

referred to as money services businesses in the proposed amendments

to the Bank Secrecy Act regulations published today, and ``provide

sufficient resources * * * to enforce such laws * * *.'' Section

407(c) calls for the Secretary of the Treasury to study the progress

of the states in meeting the Congressional goal and section 407(d)

requires the Secretary to report to Congress on the results of its

study and any recommendations flowing therefrom.

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Check Cashers and Currency Exchangers. Check cashers and currency

exchangers would not be subject to the suspicious transaction reporting

requirement contained in this proposed rulemaking. Because the

operations of those businesses generally involve disbursement rather

than receipt of funds, the appropriate definition of suspicious

activity involves issues not present to the same degree in the case of

money transmitters and money order and traveler's check services.

A reporting money services business is subject to this section only

with respect to transactions that involve or relate to the business

activities described in Sec. 103.11(uu) (3), (4), (5), or (6). Thus,

for example, a seller of money orders (a money services business

described in Sec. 103.11(uu)(4)) that is also a check casher (a money

services business described in Sec. 103.11(uu)(2)) is not required to

report under this section with respect to its check cashing activities

in general, although it would be required to report check cashing

activity that was part of a series of transactions that led to, for

example, the purchase of money orders if the money order purchases were

required to be reported hereunder. In addition, check cashing and

currency exchange services may be subject to the suspicious activity

rules to the extent they redeem either money orders or traveler's

checks for currency (U.S. or other) or other monetary or negotiable

instruments and hence qualify as redeemers of money orders or

traveler's checks, to whom the proposed rules do apply. See proposed

section 103.11(uu)(4), which would treat as a redeemer of money orders

and traveler's checks, respectively, any enterprise that redeems such

instruments ``in an amount greater than $500 in currency or monetary

instruments per person per day.'' 14

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\14\ In addition, of course, a business that engages in business

as a money transmitter, or in covered money order or traveler's

check services, as well as check cashing or currency exchange

services, would be subject to the suspicious transaction reporting

rules with respect to the former services, even if not to the

latter.

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Stored Value Products. As noted in the preamble to the Registration

Rule, the Department of the Treasury believes that a business that

issues or facilitates the digital transfer of electronically-stored

value 15 is a money services business covered by the Bank

Secrecy Act.16 However, it is not appropriate, given the

infancy of the use of stored value products in the United States, to

propose a rule specifically dealing with suspicious transaction

reporting by non-banks with respect to stored value products at this

time. Thus, proposed paragraph (a)(4) would exempt transactions solely

involving such products from the operation of the rule at present.

Treasury invites specific comments about the manner in which the

suspicious transaction reporting rules for money services businesses

should apply to transactions involving stored value products.

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\15\ See proposed 31 CFR 103.11(vv), which defines stored value.

\16\ It should be clearly understood that the treatment of

stored value and similar products for purposes of the operation of

31 U.S.C. 5330 and the Registration Rule is solely a matter of

federal law and cannot be taken as the expression of any view by the

Department of the Treasury on the issue whether particular money

services businesses are (or, indeed, should be) within the scope of

state laws requiring the registration of money transmitters, check

cashers, currency exchange businesses, or issuers, sellers, or

redeemers of money orders or traveler's checks.

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III. Specific Provisions 17

A. 103.11(ii)--Transaction

The definition of ``transaction'' in the Bank Secrecy Act

regulations for purposes of suspicious transaction reporting conforms

generally to the definition Congress added to 18 U.S.C. 1956 when it

criminalized money laundering in 1986. See Pub. L. 99-570, Title XIII,

1352(a), 100 Stat. 3207-18 (Oct. 27, 1986). This notice proposes to

amend that definition explicitly to include the purchase of any money

order and the payment or order for any money remittance or transfer. No

similar amendment is necessary in the case of traveler's checks, which

are already defined clearly as monetary instruments in 31 CFR

103.11(u)(ii). This definition of transaction is broad enough to cover

all activity that should be reported under the proposed rule.

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\17\ Because proposed Sec. 103.20 reflects the terms of the

reporting rule for banks, readers of this document may wish to

consult the notice of proposed rulemaking and the document

containing the final reporting rule for banks, at 60 FR 46556

(September 7, 1995) (proposed rule) and 61 FR 4326 (February 5,

1996) (final rule). The bank suspicious activity reporting rule is

found at Sec. 103.21, but proposed by this notice to be renumbered

as Sec. 103.18).

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B. 103.15--Determination by the Secretary

Section 103.20 is redesignated as section 103.15 in order to make

room in part 103 for the proposed rule and to create space for future

changes to the Bank Secrecy Act regulations.

C. 103.18--Reports by Banks of Suspicious Transactions

Section 103.21 is redesignated as section 103.18 to make room in

subpart B, ``Reports Required To Be Made,'' for the suspicious

transaction reporting requirement proposed in this notice.

D. 103.20--Reports of Suspicious Transactions, General

Proposed section 103.20 contains the rules setting forth the

obligation of certain money services businesses to file reports of

suspicious transactions involving at least $500 in funds or other

assets. Paragraph (a) contains the general statement of the obligation

to file, and a general definition of the term ``suspicious

transaction.'' It is important to recognize that transactions are

reportable under this rule and 31 U.S.C. 5318(g) whether or not they

involve currency.

The choice of a $500 threshold for suspicious transaction reporting

by reporting money services businesses reflects the judgment, discussed

more generally above, that the levels of reporting appropriate for

other financial institutions, for example, the $5,000 suspicious

activity reporting threshold for banks, are not appropriate given the

patterns of transactions prevalent in such money services businesses.

The threshold reflects FinCEN's understanding of normal transaction

levels for the businesses involved. Given the fact that one of the

purposes of suspicious transaction reporting is to identify

structuring, a higher reporting threshold would significantly limit the

effectiveness of the proposed rule, in light of the reporting levels

proposed for special currency transaction reporting by money

transmitters, in the third of the related notices of proposed

rulemaking relating to money services businesses that are being

published today.

Reporting Institutions. Any enterprise that is a money services

business,

[[Page 27905]]

within the definition proposed today, because it is a money transmitter

or an issuer, seller, or redeemer 18 of money orders or

traveler's checks (including the Postal Service), is subject to the

proposed suspicious activity reporting rule. However, banks, broker-

dealers, and casinos are not subject to the proposed rule.

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\18\ Under the definition in proposed Sec. 103.11(uu)(4), a

person is a ``redeemer'' of money orders and traveler's checks only

insofar as the instruments involved are redeemed for monetary

value--that is, for currency or monetary instruments. The taking of

the instruments in exchange for goods or services is not a

redemption for purposes of the rules proposed today.

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Reportable Transactions. The proposed rule designates three classes

of transactions as requiring reporting. The first class, described in

proposed paragraph (a)(2)(i), includes transactions involving funds

derived from illegal activity or intended or conducted in order to hide

or disguise funds or assets derived from illegal activity. The second

class, described in proposed paragraph (a)(2)(ii), involves

transactions designed, whether through structuring or other means, to

evade the requirements of the Bank Secrecy Act. The third class,

described in proposed paragraph (a)(2)(iii), involves transactions that

appear to serve no business or apparent lawful purpose, and for which

the money services business knows of no reasonable explanation after

examining the available facts relating thereto.

The operating circumstances of money services businesses,

especially the absence of account relationships, necessarily make the

standards by which transactions are to be evaluated less easy to apply

than in the case of banks in many situations. For that reason, and

given the differences in structure, operation, and regulation between

banks and money services businesses, the proposed rule contains

specific illustrations (noted below) of the sorts of transactions for

which reporting is sought within the text of the rule itself.

Paragraph (a)(2)(iii) provides the following examples (by way of

illustration, but not limitation) of such transactions:

A. The contemporaneous purchase of multiple remittances to the

same beneficiary or city by the same purchaser;

B. The purchase of multiple instruments or remittances in the

same or similar amounts by the same person;

C. A large volume of transactions, sequential invoices, or both,

directed to one correspondent from one agent (operating either

through a single or multiple offices) on a single day;

D. Patterns of remittances to the same city or correspondent

purchased at approximately the same time;

E. The deposit of large numbers of instruments, especially

sequentially-numbered instruments, into or through the same or

related bank or other financial institution accounts;

F. Patterns of instruments or remittances purchased just below

the dollar thresholds for particular Bank Secrecy Act reporting or

recordkeeping requirements;

G. Presentation for redemption or encashment of third-party

endorsed instruments, or of blocks of instruments purchased by the

party seeking redemption, in either case in sums outside of normal

commercial or personal usage;

H. Significant changes or fluctuations in volume at one or more

of the business' agents or branches;

I. Significant variations in the size of the average remittance

at a business' agents or branches; and

J. Multiple senders of remittances using the same recipient's

last name, address, or telephone number.

Of course, determinations as to whether a report is required must

be based on all the facts and circumstances relating to the transaction

and the money services customer in question. Different fact patterns

will require different types of judgments. In some cases, the

circumstances of the transaction or pattern of transactions may clearly

indicate the need to report. For example, an individual's seeking

regularly to purchase or redeem instruments in bulk, or to purchase

transmissions to multiple overseas locations, all to the same named

beneficiary should, in the absence of unique qualifying circumstances,

place the money services business on notice that a suspicious

transaction is underway. Similarly, the fact that a customer refuses to

provide information necessary for the money services business to make

reports or keep records required by 31 CFR 103 or other regulations,

provides information that a money services business determines to be

false, or seeks to change or cancel the transaction after such person

is informed of currency transaction reporting or information

verification or recordkeeping requirements relevant to the transaction

or of the money services business' intent to file a currency

transaction report with respect to the transaction, would all indicate

that a SAR-MSB should be filed. (Of course, as the proposed rule makes

clear, the money services business may not notify the customer that it

intends to file or has filed a suspicious transaction report with

respect to the customer's activity.)

Treasury ultimately must rely on creation of a working partnership

with the various types of money services business that will assist

those businesses to apply their knowledge of both their customers and

business patterns to identify and report suspicious activity. FinCEN

hopes and expects to enter into a dialogue with the money services

businesses to which this rule would apply about the manner in which a

combination of government guidance, training programs, and government-

industry information exchange can smooth the way for operation of the

new suspicious activity reporting system in as flexible and cost-

efficient a way as possible.

Treatment of Agents. 31 U.S.C. 5318(g)(1) authorizes Treasury to

require suspicious transaction reporting not only by financial

institutions but by ``any director, officer, employee, or agent of any

financial institution.'' The authorization parallels the definition of

financial institution itself in 31 U.S.C. 5312 (a)(2) and (b), and 31

CFR 103.11(n). The operating realities of money services businesses

place special importance on the relationships between the operators of

the money services businesses involved and the otherwise unrelated

businesses that, in many cases, sell the financial products involved,

in the case of money orders or traveler's checks, or that serve, in the

case of money remissions, as receivers of the funds to be transmitted.

Thus, paragraph (a)(3) places responsibility for reporting on each

money services business, as well as its agents,

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

business treats such person as an agent or independent contractor

for other purposes.

It is important to recognize that the definition of money services

business for this purpose is broader than it is for purposes of the

registration rules proposed to be added to part 103 as 31 CFR 103.41.

Thus, an agent of a money transmitter may (indeed usually will) itself

be a money services business for purposes of the reporting rule

(although not necessarily for purposes of the registration rule).

Certain patterns of suspicious dealing that may not be apparent to

a particular agent may become visible when various remission or

instrument purchase activities are aggregated by the principal

business. In other situations, a principal may, upon reviewing

transaction records, uncover an indication of patterns of suspicious

transactions at a particular agent that, unfortunately, arise because

of the cooperation of the agent with money launderers. Thus, it is

impossible to specify the particular method for reporting that will

[[Page 27906]]

comprehend all situations. The same issues arise, of course, when

headquarters or central processing facility bank compliance officials

uncover a pattern of suspicious dealing at or through a bank branch.

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 services businesses have a duty to know their agents

sufficiently well to be able to satisfy the reporting obligations

involved in compliance with the proposed rule. As in the case of the

rules for suspicious activity reporting by banks, the proposed rule is

intended to introduce a concept of due diligence into the reporting

procedures, and that diligence applies equally to review of the actions

of agents of money services businesses as to review of the transactions

of customers of those businesses. Treasury invites comments on:

1. Whether the rule should contain more detailed procedures or

rules dealing with the allocation of responsibility between principals

(the issuers of the money orders or traveler's checks, and the

companies actually arranging for the remission of funds) and agents;

2. Whether language should be added to the rule to make it clear

that a money services business's duty of diligence extends not only to

supervision of its agents but also to supervision of money services

businesses in the distribution chain for financial services products

that may not technically be either agents under the broad definition

used in the proposed rule or independent contractors; and

3. Whether the rule should contain more specific rules for

compliance programs that recognize the realities of the business

operations in this part of the financial sector.

Filing Procedures. Paragraph (b) sets forth the filing procedures

to be followed by money services businesses making reports of

suspicious transactions. Within 30 days after a money services business

becomes aware of a suspicious transaction, the business must report the

transaction by completing a Suspicious Activity Report-MSB

19 and filing it in a central location, to be determined by

FinCEN. The SAR-MSB will resemble the SAR now used by banks to report

suspicious transactions, and a draft form will be made available for

comment when ready.

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\19\ The term ``MSB'' is an abbreviation for ``money services

businesses'' and is used to distinguish the form from forms for

reporting by other non-bank institutions.

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Supporting documentation relating to each SAR-MSB is to be

collected and maintained separately by the money services business and

made available to law enforcement and regulatory agencies upon request.

Special provision is made for situations requiring immediate attention,

in which case money services businesses are to telephone the

appropriate law enforcement authority in addition to filing a SAR-MSB.

Reports filed under the terms of the proposed rule will be lodged

in a central data base (on the model of the data base used to process,

analyze, and retrieve bank suspicious activity reports). Information

will be made electronically available to federal and state law

enforcement and regulatory agencies, to enhance the ability of those

agencies to carry out their mandates to fight financial crime.

Maintenance of Records. Paragraph (c) provides that filing money

services businesses must maintain copies of SAR-MSBs and the original

related documentation for a period of five years from the date of

filing. As indicated above, supporting documentation is to be made

available to FinCEN and appropriate law enforcement authorities on

request.

Safe Harbor from Civil Liability. Paragraph (d) incorporates the

terms of 31 U.S.C. 5318 (g)(2) and (g)(3). This paragraph thus

specifically prohibits persons filing SAR-MSBs from making any

disclosure, except to law enforcement and regulatory agencies, about

either the reports themselves, the information contained therein, or

the supporting documentation. The paragraph also restates the broad

protection from liability for making reports of suspicious

transactions, and for failures to disclose the fact of such reporting,

contained in the statute. The regulatory provisions do not extend the

scope of either the statutory prohibition or the statutory protection;

however, because Treasury recognizes the importance of these statutory

provisions to the overall effort to encourage meaningful reports of

suspicious transactions, they are described in the regulation in order

to remind compliance officers and others of their existence.

Auditing and Enforcement. Paragraph (e) notes that compliance with

the obligation to report suspicious transactions will be audited, and

provides that failure to comply with the rule may constitute a

violation of the Bank Secrecy Act and the Bank Secrecy Act regulations,

which may subject non-complying money services businesses to

enforcement action.

Effective Date. Finally, paragraph (f) provides that the new

suspicious activity reporting rules are effective 30 days after [the

date on which the final regulations to which this notice of proposed

rulemaking relates are published in the Federal Register].

IV. Submission of Comments

An original and four copies of any written hard copy 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.

V. Regulatory Flexibility Act

FinCEN certifies that this proposed regulation will not have a

significant economic impact on a substantial number of small entities.

The average money order sold is approximately $102, and the average

money transmission is approximately $240 within the United States and

approximately $320 outside the United States. Both of these amounts are

substantially below the $500 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

entities.

VI. Paperwork Reduction Act Notices

Suspicious Activity Report for Certain Money Services Businesses.

In accordance with requirements of the Paperwork Reduction Act of

1995, 44 U.S.C. 3506(c)(2)(A), and its implementing regulations, 5 CFR

part 1320, the following information concerning the collection of

information on Suspicious Activity Report--Money Services Businesses 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 10,000 Suspicious Activity Report--Money

Services Businesses forms to be filed annually. This result is an

estimate, based on a projection of the size and volume of the industry.

Title: Suspicious Activity Report--Money Services Businesses

OMB Number: To be determined.

[[Page 27907]]

Description of Respondents: Money transmitters, and issuers,

sellers, and redeemers of money orders or traveler's checks, and their

agents.

Estimated Number of Respondents: 10,000.

Frequency: As required.

Estimate of Burden: Reporting average of 20 minutes per response;

recordkeeping average of 10 minutes per response.

Estimate of Total Annual Burden on Respondents: 10,000 responses.

Reporting burden estimate = 3,333 hours; recordkeeping burden estimate

= 1,667 hours. Estimated combined total of 5,000 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

$100,000.

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 103.20

In accordance with requirements of the Paperwork Reduction Act of

1995, 44 U.S.C. 3506(c)(2)(A), and its implementing regulations, 5 CFR

1320, the following information concerning the collection of

information as required by 31 CFR 103.20 is presented to assist those

persons wishing to comment on the information collection.

Title: Suspicious Activity Report--Money Services Businesses.

OMB Number: 1506-0006.

Description of Respondents: Specified Money Services Businesses.

Money transmitters, and issuers, sellers, and redeemers of money orders

or traveler's checks, and their agents.

Estimated Number of Respondents: 10,000.

Frequency: As required.

Estimate of Burden: Recordkeeping average of 100 hours per Money

Service Business.

Estimate of Total Annual Burden on Respondents: Recordkeeping

burden estimate = 1,000,000 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

$20,000,000.

Estimate of Total Other Annual Costs to Respondents: $100 for each

report of suspicious transactions made.

Type of Review: Extension.