September 2018 JD Supra
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FinCEN’s Director Comments on Virtual Currency Compliance deficiencies was published by JD Supra on 9/11/18.

On August 8, 2018, FinCEN Director Kenneth A. Blanco, delivered a speech at the 2018 Chicago-Kent Block (Legal) Tech Conference.   Highlights from the commentary include:   

  • Innovation in financial services and adopting to new technologies creates opportunities for financial crimes and Virtual Currency (VC) is an example.
  • Money Services Businesses (MSB) are seeking to incorporate Blockchain payments to expedite remittances to locations around the world and like any payment system or medium of exchange, VC currency has the potential to be exploited for money laundering and other illicit finance.
  • Bank Secrecy Act and Regulations are designed to protect the financial system – but compliance with the Anti Money Laundering/Countering the Financing of Terrorism (AML/CFT) framework is critical to protecting all the innovation in Financial Technology.
  • FinCEN’s role is to protect and secure the financial system from misuse.
  • FinCEN focuses on exchangers, administrators, and other persons involved in money transmission denominated in convertible VC.
  • In 2011, FinCEN issued a final rule amending definitions and other regulations relating to money services businesses to provide that money transmission covers the acceptance and transmission of value that substitutes for currency.  Virtual currency is such a substitute and is covered by that regulation.
  • In 2013, FinCEN issued guidance on the application of FinCEN’s regulations to persons administering, exchanging, or using VC.
  • FinCEN works closely with the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) for coordinated policy development and regulatory approaches and addressing risks.
  • Risks include potential illicit finance and fraud surrounding Initial Coin Offerings (ICOs).   ICO arrangements vary depending on their structure, but the businesses involved in ICOs are expected to meet all of their AML/CFT obligations.  
  • FinCEN/SEC/CFTC committed to taking appropriate action when these obligations are not prioritized, and the U.S. financial system is put at risk.
  • FinCEN’s rules apply to all transactions involving money transmission—including the acceptance and transmission of value that substitutes for currency, which includes VC.
  • FinCEN regulations cover transactions where the parties are exchanging fiat and convertible VC, and to transactions from one VC to another VC.
  • Businesses providing anonymizing services (“mixers” or “tumblers”) seeking to conceal the source of the transmission of VC, are money transmitters when they accept and transmit convertible VC and have regulatory obligations under the BSA.
  • Individuals and Entities that accept and transmit physical currency or convertible VC from one person to another or to another location are money transmitters and are subject to the AML/CFT requirements of the BSA.   

VC money transmitters are required to:

  • register with FinCEN as a money services business,
  • develop, implement, and maintain an AML program designed “to prevent the [MSB] from being used to facilitate money laundering and terrorist finance,” and
  • establish recordkeeping, and reporting measures, including filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs).
  • These requirements apply equally to domestic and foreign-located convertible VC currency money transmitters, even if the foreign located entity has no physical presence in the United States, as long as it does business in whole or substantial part within the United States.
  • Financial Institutions adopting new Financial Technology need to assess and understand whether the new financial products and services may make them vulnerable to financial crime exploitation.  
  • New Financial Technology adopted by Financial Institutions needs to be analyzed for AML/CFT compliance under FinCEN’s regulations.  
  • Blanco stated: “We can help answer the question, but avoiding the question for fear of the answer is not a legitimate strategy; indeed it is unwise” referring to financial institutions.  

On Examination and Supervision Efforts

  • FinCEN and BSA examiners at IRS work to ensure that VC MSBs understand and comply with their regulatory obligations through effective supervisory examinations.
  • FinCEN and the IRS have examined over 30 percent of all registered VC exchangers and administrators since 2014.  
  • The goal is to ensure that all VC money transmitters undergo regular and routine compliance examinations.
  • Suspicious Activity Reports (SAR) filings from virtual exchanges have risen tremendously over the past few years.
  • Examinations have included VC trading platforms, administrators, virtual currency kiosks (or ATM) companies, crypto-precious metals dealers, and individual peer-to-peer exchangers.  
  • Examinations have focused on registered and unregistered exchanges.
  • Compliance with AML/CFT is expected whether a business is operating as an individual peer-to-peer exchanger of one virtual currency, or a large, multi-national trading platform offering numerous virtual currencies.  Blanco stated: “And there is no question we have noticed some compliance shortcomings”.
  • All financial institutions ought to implement strong AML programs long before they first receive notice that an examination is forthcoming and not after they receive notice and Blanco stated: “This does not constitute compliance”, “compliance does not begin because you may get caught, or because you are about to be discovered.  That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate”.
  • Companies and Individuals will be held accountable if they disregard their obligations – whether in wire transfers or cryptocurrencies.
  • BTC-e (a foreign-located MSB) is an example of FinCEN’s commitment to pursuing entities that fail to have BSA/CTF controls in place as evidenced by the $110 million penalty FinCEN issued against BTC-e.  FinCEN’s BSA enforcement investigation also led to the assessment of a $12 million civil money penalty against one of BTC-e’s administrators, Alexander Vinnik—the largest individual liability penalty FinCEN has assessed to date.
  • FinCEN is sharing experiences with the Egmont Group of Financial Intelligence Units (FIU) and other international forums with VC being a priority area.   
  • FinCEN now receives over 1,500 SARs per month describing suspicious activity involving VC, with reports coming from MSBs and other financial institutions.
  • SAR filings played a critical role in the investigation of the BTC-e case.  Filings by banks and other VC currency exchanges provided the critical leads to law enforcement; including ultimate beneficial ownership information.  
  • FinCEN is in process of setting up the VC focused “FinCEN Exchange Program” – with law enforcement and the private sector.  
  • Blanco stated that: “FinCEN will aggressively pursue individuals and companies who do not take their obligations under U.S. law seriously, whether by targeting victims or enabling those who do”

Don’t be a victim of your own making

Blanco’s statements are clear that the US Treasury and its agencies will continue to pursue those Individuals, Businesses and “Enablers” that are not VC compliant.  If you are a VC investor or a business engaged in VC, consult your Tax specialist to ensure that you are meeting all the regulatory compliance requirements.