Statutes: Bank Secrecy Act (31 U.S.C. §§ 5311 – 5355)
Regulations: 31 C.F.R. Chapter X
Regulatory Authority: FinCEN
Under the Bank Secrecy Act (the “BSA”), a money services business (“MSB”) is subject to the federal anti-money laundering regulations of the Financial Crimes Enforcement Network (“FinCEN”). In addition, the Internal Revenue Service (the “IRS”) has the authority to examine MSBs with respect to their compliance with FinCEN’s anti-money laundering regulations.
A “money transmitter” is a type of MSB that is regulated by FinCEN. FinCEN defines the term “money transmitter” as “a person that provides money transmission services" or "any other person engaged in the transfer of funds.” 31 C.F.R. § 1010.100(ff)(5)(i). FinCEN defines “money transmission services” as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” 31 C.F.R. § 1010.100(ff)(5)(i)(A).
On March 18, 2013, FinCEN deemed a “money transmitter” to include (i) a virtual currency exchange and (ii) an administrator of a centralized repository of virtual currency who has the authority to both issue and redeem the virtual currency. FinCEN issued guidance that stated as follows: “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.” See FIN-2013-G001, Application of FinCEN’s Regulations to Person’s Administering, Exchanging or Using Virtual Currencies (March 18, 2013). PDF
Since January 2014, FinCEN has issued several additional virtual currency administrative rulings about whether certain virtual currency businesses were deemed to be money transmitters. They are as follows:
|Date||FinCEN Administrative Ruling|
|01/30/2014||Application of FinCEN's Regulations to Virtual Currency Mining Operations (FIN-2014-R001)|
|01/30/2014||Application of FinCEN's Regulations to Virtual Currency Software Development and Certain Investment Activity (FIN-2014-R002)|
|04/29/2014||Application of Money Services Business Regulations to the Rental of Computer Systems for Mining Virtual Currency (FIN-2014-R007)|
|10/27/2014||Application of FinCEN's Regulations to a Virtual Currency Trading Platform (FIN-2014-R011)|
|10/27/2014||Application of FinCEN’s Regulations to Virtual Currency Payment System (FIN-2014-R012)|
|08/14/2015||Application of FinCEN's Regulations to Persons Issuing Physical or Digital Negotiable Certificates of Ownership of Precious Metals (FIN-2015-R001).|
In addition, on February 13, 2018, in response to a letter from Senator Ron Wyden (see PDF), FinCEN made the following statements about the application of anti-money laundering requirements to issuers of initial coin offerings ("ICOs"):
ICO Currency Tokens: "Under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically also be a money transmitter."
ICO Security or Derivative Tokens: "To the extent that an ICO is structured in a way that it involves an offering or sale of securities or derivatives, certain participants in the ICO could fall under the authority of the SEC, which regulates brokers and dealers in securities, or under the authority of the CFTC, which regulates merchants and brokers in commodities. In such a case, the AML/CFT requirements imposed by SEC or CFTC regulations would apply to such ICO participants. Treasury expects businesses involved in ICOs to meet the BSA obligations that apply to them."
As they are money transmitters, cryptocurrency exchanges, cryptocurrency ATM operators, and certain other cryptocurrency businesses must register as an MSB with FinCEN. Registration is done by the money transmitter filing a “FinCEN Registration of Money Services Business” at FinCEN’s BSA E-Filing System website at bsaefiling.fincen.treas.gov. The registration must be renewed every two years. See 31 U.S.C. § 5330; 31 C.F.R. § 1022.380; FinCEN Registration of Money Services Business (RSMB) Electronic Filing Instructions (July 2014). PDF
An MSB that is money transmitter must conduct a comprehensive risk assessment of its exposure to money laundering and implement an anti-money laundering ("AML") program based on such risk assessment. FinCEN regulations require MSBs to develop, implement, and maintain a written program that is reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities.The AML program must: (i) incorporate written policies, procedures and internal controls reasonably designed to assure ongoing compliance; (ii) designate an individual compliance officer responsible for assuring day to day compliance with the program and Bank Secrecy Act requirements; (iii) provide training for appropriate personnel, which specifically includes training in the detection of suspicious transactions; and (iv) provide for independent review to monitor and maintain an adequate program. See 31 U.S.C. §§ 5318(a)(2), 5318(h); 31 C.F.R. § 1022.210; FinCEN Money Laundering Prevention Guide for Money Services Businesses (2008). PDF. FinCEN requires a money transmitter's anti-money laundering program to identify its customers, report suspicious activities for transfers in amounts of $2,000 or more in a day, retain detailed records for transfers by a single customer in one day of $3,000 or more, keep records for at least five years, and file a Currency Transaction Report for single customer transactions that are more than $10,000 a day. The AML program should be a robust and detailed program that will permit (in the event an examination by the IRS or FinCEN) the management of the MSB to provide satisfactory answers to the sample interview questions set forth in FinCEN's AML/BSA Manual for MSBs. PDF.
An MSB that is a money transmitter must report suspicious activities of customers for transfers in amounts of $2,000 or more in a day. An MSB must report transactions that the MSB “knows, suspects, or has reason to suspect” are suspicious, if the transaction is conducted or attempted by, at, or through the MSB, and the transaction involves or aggregates to at least $2,000.00 in funds or other assets. A transaction is “suspicious” if the transaction: (a) involves funds derived from illegal activity; (b) is intended or conducted in order to hide or disguise funds or assets derived from illegal activity, or to disguise the ownership, nature, source, location, or control of funds or assets derived from illegal activity; (c) is designed, whether through structuring or other means, to evade any requirement in the Bank Secrecy Act or its implementing regulations; (d) serves no business or apparent lawful purpose, and the MSB knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or (e) involves use of the MSB to facilitate criminal activity." 31 C.F.R. § 1022.320(a)(2).
As part of its customer identification program, an MSB is also required to confirm that their customers are not foreign nationals who are on the Specially Designated Nationals and Blocked Entities List ("SDN List") of the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC"). OFAC provides an updated and searchable version of its SDN List at: sanctionssearch.ofac.treas.gov. OFAC requires all U.S. citizens to "block" (i.e., freeze) the assets of individuals and companies who are engaging in transactions with (i) countries that are subject to U.S. economic sanctions ("blocked countries"), (ii) certain companies and entities that act as agents for such countries (“blocked parties”) and (iii) certain individuals that act as agents for such countries (“specially designated individuals” or “SDNs”). It is important to have a compliance program in place to avoid (or mitigate) receiving civil and criminal penalties from OFAC for non-compliance. See 31 C.F.R. Part 501 (OFAC Reporting Regulations); OFAC Economic Sanctions Enforcement Guidelines (Nov. 9, 2009). PDF
On March 19, 2018, OFAC published on its website certain answers to questions about the OFAC compliance requirements on digital currency businesses. See OFAC Questions on Virtual Currency, Q-559 - Q-563 (March 19, 2018).
On November 28, 2018, OFAC, for the first time, identified two digital currency addresses associated with two Iranian nationals who were on the SDN List. See OFAC Press Release, Treasury Designates Iran-Based Financial Facilitators of Malicious Cyber Activity and for the First Time Identifies Associated Digital Currency Addresses (November 28, 2018).
The failure of an MSB to comply with FinCEN's anti-money laundering regulations can result in the assessment of civil money penalties and criminal prosecution. Set forth below are copies of recent settlements and court decisions that penalized virtual currency companies and their executive officers for failing to comply with FinCEN's anti-money laundering regulations.
|Date||Civil Money Penalty or Criminal Penalty|
|12/19/2014||U.S. District Court SDNY - 2 Year Prison Sentence and $950,000 Penalty for CEO of Bitinstant LLC|
|05/05/2015||FinCEN Order - Assessment of $700,00 Civil Money Penalty Against Ripple Labs, Inc.|
|05/05/2017||DOJ Settlement Agreement - Ripple Labs, Inc.|
|06/27/2017||U.S. District Court SDNY - 5 1/2 Year Prison Sentence for CEO of Coin.mx|
|07/26/2017||FinCEN Order - Assessment of $110,003,314 Civil Money Penalty Against BTC-e|
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