Key Takeaways:

• Financial Crimes Enforcement Network (FinCEN) safeguards the US financial system from illicit activities, protecting national security and promoting fair and transparent markets.

• Enforces anti-money laundering (AML) and combats terrorism financing (TF).

• Collaborates internationally through the Egmont Group to enhance global financial security.

• Oversees the Bank Secrecy Act (BSA) and has expanded its focus on cryptocurrencies to combat illicit financial activity.

• Works closely with Congress, law enforcement agencies, and other regulatory bodies to address financial crime threats.

In an era where digital transactions are pivotal, the financial system faces heightened risks from cyberattacks and illegal activities. Just as the National Guard is committed to protecting America’s physical boundaries, FinCEN, the Financial Crimes Enforcement Network, serves as the protector of the U.S. financial system against these invisible threats.

What Is the Financial Crimes Enforcement Network (FinCEN)?

FINCEN’s Global Collaborations

Understanding the challenges of tracking and combating financial crime, FinCEN, as the U.S. Financial Intelligence Unit (FIU), often works with other entities and organizations. This collaboration extends beyond the U.S. To protect both the national and global financial systems from criminal threats, FinCEN exchanges information with FIUs from other countries.

This international cooperation is facilitated through the Egmont Group, which consists of 166 independent FIUs. The group coordinates the exchange of intelligence and cooperation among its members, playing a vital role in maintaining global financial security.

Brief History of the Financial Crimes Enforcement Network (FinCEN)

FinCEN, established in 1990, has been a crucial force in the fight against dirty money in the U.S. financial system. From its founding until 2022, FinCEN has made significant progress in tackling illegal financial activities, using valuable information from the Bank Secrecy Act (BSA).

The BSA, set up 20 years before FinCEN, lays out specific policies for financial institutions. FinCEN’s job is to make sure these institutions follow these rules. Since 1990, FinCEN has been managing the BSA, reinforcing its role as a key financial regulator. Under the U.S. government’s authority, FinCEN issues financial regulations aligned with the BSA. The agency reports its activities to Congress and the Secretary of the Treasury, and the “Under Secretary of the Treasury for Terrorism and Financial Intelligence” appoints its director.

FinCEN and the U.S. Congress

As mandated by Congress, FinCEN collects, analyzes, and manages data associated with FinCEN’s purview, including other related data that help safeguard the financial system. Some of these responsibilities include:

• Issuing and interpreting government guidance and regulations.
• Ensure compliance with BSA regulations.
• Managing data filed by financial institutions under FinCEN’s reporting requirements.
• Supports law enforcement investigations and prosecution in civil enforcement actions.
• Collaborates with local, state, and federal regulatory bodies and law enforcement agencies.
• Exchanges information and coordinates with foreign financial intelligence units (FIU) counterparts on anti-money laundering and terrorism financing efforts.
• Support policymakers, regulatory bodies, law enforcement, and intelligence agencies.

What Is the Bank Secrecy Act (BSA)?

As a result of the BSA’s relationship with FinCEN, it is important to understand what the BSA is all about. The Bank Secrecy Act (BSA) is a legislative requirement for U.S. financial institutions to prevent the illicit use of the financial system. U.S. financial organizations are expected to comply with all the stated requirements as part of the government’s efforts to combat financial crimes.

For example, if a cash transaction or purchase by an individual or entity exceeds $10,000 per day, the BSA requires financial establishments to file a report. Additionally, if a transaction or a customer’s account raises suspicion, a report must be filed.

What Are the Data Collected by FinCEN?

By now, you should know that the BSA makes the rules, and FinCEN enforces compliance. So assuming the conditions surrounding them are met, what are the two most important data points that banks and non-banks must submit?

1. Suspicious Activities Reports (SARs)
2. Currency Transaction Reports (CTRs)

Suspicious Activities Reports (SARs)

Among the bank’s responsibilities under the BSA are monitoring, identifying, and reporting suspicious activities. If any suspicious activity is noticed, further investigation should be done to determine whether to file a SAR form. These steps must be completed within 30 days of the transaction date; below are some points to watch out for:

• Criminal violations of any amount.
• Violations of up to $5,000 or more when a suspect is known.
• A criminal offense is punishable by up to $25,000 when there is no suspect.
• A transaction aggregating $5,000 or more that may be money laundering or a violation of the BSA.

Currency Transaction Reports (CTRs)

Banks must submit an electronic currency transaction report (CTRs) for transactions above $10,000. Any time it is noticed that a customer is structuring transactions to avoid the $10,000 reporting threshold, a CTR should be filed regardless of the amount involved. The CTR must be submitted within 15 days of the transaction date.

How FinCEN Collects and Acts on Data

Since FinCEN administers the BSA and financial institutions’ compliance with banking regulations, it indirectly has access to data from different financial organizations and can track electronic and cash transactions. It is difficult to track these activities because money launderers complicate the processes by which the money is transferred, preventing the tracing of the funds while making them appear legitimate funds. Here are the steps FinCEN takes to receive and process data:

1. Receives SARs and CTRs — FinCEN receives Suspicious Activities Reports (SARs) and Currency Transaction Reports (CTRs) from financial institutions daily.
2. Analyzes The Data — The data supplied by these SARs and CTRs analyze individuals, entities, and criminal organizations, including the techniques employed in money laundering, terrorism financing, weapons proliferation, and other illegal activities.
3. Connect Unrelated Parties — The information supplied and the analyses done on them can help connect local or international criminal organizations and/or individuals that appear unconnected at an ordinary glance of the money transactions.
4. Law Enforcement Action — This information is then shared with law enforcement agencies, which will help in financial investigations. Over the years, information from FinCEN through submitted SARs & CTRs has been the most reliable source of information for criminal investigations.

SARs and CTRs filed by one bank can easily be combined with those filed by other banks and non-banking institutions. The interoperability nature of these pieces of data to create a bigger picture can easily tell a better story for FinCEN or law enforcement agencies to trace complex money laundering patterns by criminal groups.

FinCEN and Beneficial Ownership

2018 brought with it a new rule in the FinCEN requirements for banks. The Beneficial Ownership rule, also known as the Customer Due Diligence Final Rule (i.e. CDD Final Rule), requires financial institutions to conduct customer due diligence on entities wanting to use the bank’s services. The goal is to prevent criminals from laundering money through shell companies or using them for illegal financial activities.

What Is Beneficial Ownership? 

A Beneficial Owner is a legal term describing an individual’s right to specific properties or a share of a company. By law, a beneficial owner is anyone who holds more than 25% of a company’s shares. This can be in the form of control over the company’s management or voting rights.

Beneficial ownership can be simple or complex in organizations with many subsidiaries (in some cases, the subsidiaries have subsidiaries). Sometimes, these complex structures are intentionally set up for dubious purposes. For example, AML compliance requires customer due diligence on individual customers, while the new CDD Final Rule under FinCEN in 2018 extended this requirement to companies’ beneficial owners.

What Are Shell Companies?

Shell companies are seen as international business corporations, personal investment vaults to protect assets or funds not needed for business operations. Criminals can also use them for fraud and money laundering.

Since the owners are not publicly known, financial activities can only occur by revealing the individuals behind them. The high-risk nature of a shell company requires banks to carry out more detailed due diligence according to the 2018 FinCEN CDD Rule or Beneficial Ownership rule.

FinCEN and Virtual Currencies

Previously, the crypto community operated freely without regard to BSA, AML, and FinCEN regulations. However, that changed in 2019 when the then-serving director, Kenneth A. Blanco, recalled the 2011 Money Service Business (MSB) definition, which included virtual assets as well as convertible virtual currencies as part of the definition with the exact phrase “other value that substitutes for currency”. Immediately following this, crypto-related firms were warned to be prepared for compliance with BSA and AML regulations. If FinCEN classifies cryptocurrencies under MSBs, what then are MSBs?

What are MSBs?

Money Service Businesses (MSBs) is a term FinCEN, and other financial regulators use to classify businesses that transmit or convert currencies. MSBs extend beyond banks to encompass Non-Banking Financial Institutions (NBFIs). FinCEN considers any business dealing with the following as an MSB:

1. Currency dealers
2. Exchanges of currencies (virtual asset service providers, such as exchanges, brokers, wallet providers, etc.)
3. Check cashing
4. Issuers of traveler’s checks, money orders, or stored value
5. Seller or redeemer of traveler’s checks, money orders, or stored value
6. Money transmitter
7. U.S. Postal Service

FinCEN And Crypto — The Journey So Far

The evolving landscape of cryptocurrencies and virtual assets has seen significant government involvement over the years. This journey, marked by a series of regulations and actions by FinCEN and other regulatory agencies, outlines the government’s cautious yet decisive approach towards these digital assets. Below is a timeline highlighting key milestones:

What Is the Travel Rule?

FinCEN’s Travel Rule requires financial institutions to exchange customer information during financial transactions. This includes exchanging and recording the sender’s details with the beneficiary’s bank.

Cryptocurrency exchanges are also subject to these requirements, as outlined in the updated FATF Recommendation 15 for Virtual Assets Service Providers (VASPs). When money is transmitted, FinCEN mandates that financial institutions comply with the following Travel Rule requirements:

• The name of the transmitter (sender)
• The account number of the transmitter, if used
• The address of the transmitter
• The identity of the transmitter’s financial institution
• The amount of the transmittal order
• The execution date of the transmittal order
• The identity of the recipient’s financial institution

When funds reach the beneficiary, the beneficiary bank must provide:

• The name of the recipient
• The address of the recipient
• The account number of the recipient
• Any other specific identifier of the recipient

For Virtual Asset Service Providers (VASPs), as per FATF guidelines, the following information exchange is required:

Originator VASP must share:

• Originator’s name (customer)
• Originator account number used for the transaction
• Unique identifiable information, e.g., national identity number, passport number, social security number, driving license number, residential address, etc.

Beneficiary VASP must share upon receiving funds:

• Beneficiary name (customer)
• Beneficiary account number used for the transaction

Conclusion

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