CUNA Regulatory Comment Call

August 10, 2009

EXECUTIVE SUMMARY

• The Financial Crime Enforcement Network (FinCEN) is revising the Bank Secrecy Act regulations pertaining to Money Services Businesses (MSBs) to clarify which entities are covered by the definitions.
• The proposed rules amend the current MSB regulations to bring certain foreign-located MSBs with a United States presence under the purview of the BSA rules.
• The proposed rules update the MSB regulations and definitions to reflect past guidance and rulings, current business operations, evolving technologies, and emerging business lines.
• The proposed rules also create a comprehensive stored value category that incorporates issuers, sellers and redeemers of store value products but makes no substantive changes. However, the rulemaking does solicit comments on stored value to assist FinCEN with a future rulemaking intended to revise the definition of stored value and related stored value regulations.
• Please submit your comments on this proposed rulemaking to CUNA no later than August 26, 2009. Comments directed to FinCEN must be received no later than September 9, 2009.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com or to Federal Compliance Counsel Nichole Seabron at nseabron@cuna.com; or mail them to Mary or Nichole in c/o CUNA’s Regulatory Affairs Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us for a copy of the regulation or access them on the Internet here.

DISCUSSION

The Bank Secrecy Act (BSA) authorizes the Secretary of Treasury to issue regulations requiring financial institutions to keep records and file reports designated as having a high degree of usefulness in criminal, tax, or regulatory investigations, proceedings or in intelligence or counterintelligence matters. Utilizing this authority, FinCEN proposes to update the Money Services Business provisions of the BSA regulation to incorporate past guidance and rulings and clearly delineate the type of businesses and activities regulated under the BSA.

Money Services Businesses Regulation

Under the current regulation, the term “Money Services Businesses” refers to the following categories of financial service providers: (i) currency dealer or exchanger, (ii) check casher, (iii) issuers, sellers or redeemer’s of traveler’s checks, money orders or stored value, (iv) money transmitters, and (v) The United States Postal Service. The proposed rule seeks to revise the current definition of MSB as follows:

“Doing Business”

The proposed rule replaces the term “doing business” with “engaged in activities” in the regulation to minimize confusion. FinCEN clarifies that the term “doing business” should be interpreted to mean the activity in which the person is engaged, rather than describing an entity’s status, such as a licensed business. The proposed rule clarifies “to the extent that a person engages in one ore more of the enumerated activities listed in the definition, it is an MSB; to the extent thta a person does not engage in such activities, it is not.” FinCEN adds that whether or not a person is a business in any formal sense is not determinative of whether or not it falls under MSB definitions and, thus, subject to MSB regulation.

“Dollar Threshold”

Under the current regulation, certain categories of financial service providers must meet an activity threshold of $1000 per person, per day in order to be classified as MSBs. This threshold applies to all MSB categories except money transmitters, which do not have an activity threshold. FinCEN is not currently amending the threshold under this proposed rule, but it is considering the need to issue a separate rulemaking to make possible adjustments to the activity threshold and is seeking comments on the potential impact of increasing or lowering the dollar threshold.

“Foreign-located MSBs”

FinCEN has authority, under the BSA, to define a financial institution as “domestic” without regard to whether or not it is physically located in the United States (U.S.). FinCEN’s proposed rule makes clear that “a foreign-located business that meets the definition of a financial institution and that is conducting business in the U.S. in such capacity is a domestic financial institution. The rule notes that an MSB is defined based on the activity (e.g. acting in one of the defined MSB categories) it conducts in the U.S. and not exclusively by the physical presence of its agents, agencies, branches or offices within the U.S. Additionally, the proposed rule includes within the MSB regulations those entities that have a presence in the U.S. based on the Internet or that have accounts with U.S. financial institutions and are transmitting money through those accounts with U. S. customers or recipients. The determination of whether a particular foreign-located business falls under the purview of the MSB regulation would depend on the facts and circumstances and whether U.S. customers or recipients are involved in the activities.

“Dealer in Foreign Exchange”

The proposed rule replaces the term “Currency Dealer or Exchanger” with the term “Dealer in Foreign Exchange.” Under the proposed rule, the new term is defined as “a person who accepts the currency, or other monetary instruments, funds or other instruments denominated in the currency, of one or more countries in exchange for the currency, or other monetary instruments, fund or other monetary instruments, funds, or other instruments denominated in the currency, of one or more countries in an amount greater than $1000 for any other person on any day in one or more transactions, whether or not for same-day delivery.”

The new term is intended to encompass all persons (dealers and brokers) who engage in transactions involving the purchase or disposal of funds denominated in a particular currency by exchanging them for funds denominated in another currency. By removing the term “currency,” activity outside of currency exchanges would be subject to this rule also. For example, exchanges involving monetary instruments, funds or other instruments (such as payment instruments that fall outside of the other categories) would also fall within this definition. The proposed change is intended to capture any exchanges that occur within the U.S., even in those instances in where U.S. dollars are not involved. Foreign exchange activities are not limited to only those instances in which there is a physical exchange of currency from one country for currency of another country.

“Check Casher”

The proposed rule attempts to clarify the term “check casher” by dividing the definition into two subsections: one that specifies what is considered to be check-chasing activity and another that identifies activities that are excluded from the definition (such as selling closed-loop stored value products). The rule also asks for comments as to whether a future rulemaking should apply Suspicious Activity Reporting (SAR) requirements to check cashers.

“Issuer or Seller of Traveler’s Checks or Money Orders”

Under the current regulation, there are separate definitions for issuers, sellers and redeemers of traveler’s checks or money orders. The proposed rule provides a combined definition for issuers and sellers of traveler’s checks or money orders (“monetary instruments”) that capture a person who issues or sells traveler’s checks or money orders in an amount greater than $1000 per person, per day in one or more transactions. The proposed rule does away with the “redeemer” language in the current rule. FinCEN notes that, typically, monetary instruments are “redeemed” by their issuers making a separate redemption category redundant. Additionally, in those instances where these monetary instruments were redeemed by non-issuers, the activity would be close enough to check cashing activity to be captured under that definition. Finally, the rule would determine whether or not a person is considered an “issuer” based on the total amount at which a monetary instrument is sold. For example, the rule takes into account not only the face value of the monetary instrument but also any applicable fees.

“Stored Value”

There are no substantive changes to the definition. Under the current rule, stored value and monetary instruments are divided into two groups, those handled by issuers and those handled by sellers or redeemers. The proposed rule groups issuers, sellers and redeemers of stored value products together and updates the definition to reflect this change. The proposed rule notes that FinCEN is reviewing the current status of stored value regulations, taking into consideration the risks of this emerging industry, and will determine if a future rulemaking is appropriate.

“Money Transmitter”

Under the proposed rule, a money transmitter is defined as “a person who provides money transmission services such as the acceptance of currency, funds, or value that substitutes for currency from one person and the transmits such currency, funds, or value to another location by any means.” Generally, the transmission of currency uses typical banking means such as financial agencies, institutions, Federal Reserve Bank System, electronic funds transfer networks, etc. The proposed rule attempts to define the term “money transmitter” broad enough to include both formal and informal value transfer systems in an effort to capture such providers within the regulations.

Similar to the current regulation, the proposed rule contains a facts and circumstances limitation that excludes certain persons that engage in money transmission activities as a necessary part of executing and settling transactions. For example, entities that would not be able to do business without engaging in the transmission of funds would be excluded. FinCEN also attempts to provide additional clarity in the rule as to which potential money transmitters would qualify for this exemption and enumerates examples of individuals who would be excluded from the term “money transmitters.” For example, a person that engages in the following activities is generally excluded from the definition:

• providing the delivery, communication or network access services used by a money transmitter to support money transmission services;
• acting as a payment processor to facilitate the purchase or payment of a bill for a good or service through a clearance and settlement system by agreement with the creditor or seller;
• operating a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions;
• providing closed loop stored value products;
• physically transporting currency, other monetary instruments, other commercial paper or other value that substitutes for currency as a person engaged in such business from one person to the same person at another location or to an account belonging to the same person at a financial institution, provided that the person engaged in physical transportation has no more than a custodial interest in the currency, other monetary instruments, other commercial papers, or other value at any point during the transportation; and
• accepting and transmitting funds only integral to the sale of goods of the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.

Related Regulation – Service of Process

The proposed rule incorporates a new provision that requires foreign-located MSBs to designate an agent to accept service of legal process in the U.S. The provision would require foreign-located MSBs to provide the name and address of a person who resides in the U.S. and is authorized (and has agreed to) to be an agent and accept service of process on behalf of the MSB.

FinCEN invites comments on all aspects of the proposal to revise the MSB definition and related regulations. However, they are soliciting comments on the following questions:

GENERAL

• Is there a need to define the term “funds” for purposes of the BSA? Currently, FinCEN uses “funds” to refer to money held in bank accounts and “value of funds” to denote something different from money actually held in a bank account, such as the value reflected on a stored value card in a chip-based product.
  
  

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• Should transactions involving multiple MSB services be aggregated for purposes of determining whether definitional thresholds have been met?
  
  

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• For ease of compliance, should the regulatory threshold remain uniform for applicable MSB categories or should the threshold differ between the categories based on the risks involved in particular activities?
  
  

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• Should foreign MSB principals who engage in MSB activities with U.S. persons or residents through U.S. agents or bank accounts be subject to the BSA rules?
  
  

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• Would adding check cashers and issuers, sellers, or redeemers of money orders and/or traveler’s checks to 31 CFR 103.175(h), render them foreign financial institutions subject to special due diligence by banks, broker-dealers, and other financial institutions that are obligated to comply with our rule implementing the correspondent account provisions of the USA Patriot Act? What would the consequences be?
  
  

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STORED VALUE

FinCEN intends to issue a separate rulemaking proposing a revised definition of stored value products and related regulations. However, FinCEN seeks your input on the following:

• Should the definition, found at 31 CFR 103.11(v), be technologically neutral and consistent with the actual use of stored value products within the economy? Should the definition be neutral in regards to the type of entity that provides/issues the stored value products?
  
  

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• Is it more beneficial to maintain the current definition under 31 CFR 103.11; use the definition of stored value under the Uniform Money Services Act, which defines a stored value product as one where monetary value is evidenced by an electronic record that is stored and can be retrieved; or use an alternative definition such as “electronic monetary value that is generally accepted as a medium of exchange, whether or not redeemable for currency or funds”?
  
  

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• How would treating all forms of stored value products as a form of money transmission impact the needs of the industry?
  
  

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• Should open loop stored value products (a multipurpose product such as gift cards and payroll cards) be regulated differently from closed loop products (a single purpose product such as cards limited to specific retailers)? If so, how?
  
  

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• Should only certain uses or types of value transfers involving stored value products be considered money transmissions? If so, please describe or explain.
  
  

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• If stored value products were excluded completely from being considered a form of money transmission under the rule, how would that impact the industry?
  
  

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• Should only issuers of stored value products be regulated or also sellers and redeemers? Why? How should they be defined? Should there be a threshold for determining whether an entity is an issuer, seller, or redeemer of stored value products? What should the threshold be? Should the threshold be consistent with the $1000 per person, per day threshold applicable to other categories of MSBs ?
  
  

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• Should regulatory requirements vary depending on whether the stored value product is in bearer form or not? Should regulatory requirements vary depending on whether the stored value product is anonymous versus tied to an identifiable account holder?
  
  

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• Should memory chip products be regulated differently from magnetic stripe products?
  
  

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• Are distinctions between open and closed loop stored value product systems still meaningful?
  
  

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• What other issues or questions should be considered in developing the appropriate regulatory framework for stored value products in light of the actual risks of money laundering and terrorist financing associated with these systems?
  
  

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Copyright © 2009 - Credit Union National Association, Inc.