Within the final decade, conventional monetary establishments corresponding to banks and broker-dealers have confronted elevated scrutiny from federal regulators and prosecutors associated to the adequacy of their anti-money laundering (AML) compliance packages. Till not too long ago, nevertheless, the federal authorities’s enforcement efforts in opposition to cryptocurrency trade platforms and different digital forex corporations topic to the Financial institution Secrecy Act (BSA), 31 U.S.C. § 5311 et seq., had been comparatively restricted. Latest developments recommend that the times of this restricted focus could also be over and that federal authorities might now be positioning themselves to scrutinize the adequacy of digital monetary corporations’ AML compliance packages in 2020 and past.
In 2013, FinCEN issued interpretive steering to make clear that the AML compliance obligations mandated by the BSA apply to corporations concerned within the transmission or trade of convertible digital currencies (CVCs), simply as they do to extra conventional cash companies enterprise (MSBs).1 This consists of the requirement to file suspicious exercise reviews (“SARs”) to alert federal regulation enforcement of buyer transactions which will point out illicit exercise and the requirement to implement and keep an efficient anti-money laundering program focused at figuring out and mitigating the chance that the corporate’s companies will likely be exploited by criminals.
Within the years that instantly adopted FinCEN’s 2013 interpretive steering, FinCEN and the Division of Justice (DOJ) targeted their enforcement efforts on what may be characterised because the low-hanging fruit of digital AML compliance, specifically, digital forex exchangers that (1) that completely didn’t register with FinCEN, as required, or (2) that operated or facilitated so-called “darknet” markets for illicit items and companies and had been thereby immediately complicit in cash laundering.
Extra not too long ago, nevertheless, FinCEN and different federal authorities, together with the Division of Justice, have signaled that they anticipate extra from digital forex exchanges than mere licensure and non-complicity in felony acts; they anticipate implementation of compliance packages which can be adequately tailor-made to the particular AML dangers posed by digital property.
One of many first indicators of this shift in focus got here in Could 2019, when FinCEN issued an advisory on the distinctive AML dangers posed by digital currencies.2 In that advisory, FinCEN suggested that entities topic to the BSA “ought to rigorously assess and mitigate any potential cash laundering, terrorist financing, and different illicit financing dangers related to” digital forex. The advisory went on to element particular pink flags for digital forex abuse that monetary establishments needs to be looking out for. These pink flags included using mixers and tumblers to obscure the provenance of funds, in addition to transaction exercise in line with the operation of an unregistered peer-to-peer (P2P) trade. Within the months following issuance of the advisory, FinCEN reported a rise—totaling greater than 11,000—in SAR filings from digital forex service suppliers like exchanges and kiosks.three
Then, in February 2020, Treasury issued an up to date Nationwide Illicit Finance Technique (2020 Treasury Technique), which recognized key vulnerabilities within the U.S. monetary system so as to information the deployment of AML enforcement assets inside the federal authorities.four One of many key sources of vulnerability recognized within the report was the misuse of digital property. Just like the Could 2019 FinCEN advisory, the Treasury 2020 Technique highlighted the heightened potential AML dangers posed by anonymity-enhanced currencies.
The concentrate on digital property within the 2020 Treasury Technique is supported by latest capability constructing amongst regulators and DOJ. The SEC’s hiring in 2018 of a digital forex “czar” was broadly reported. Garnering lesser consideration however no much less important, DOJ’s Cash Laundering and Asset Restoration Part (MLARS) additionally now has a everlasting “Digital Forex Counsel,” liable for coordinating enforcement and rising capability all through DOJ on this space.
In gentle of those developments, corporations that transact in digital property might want to consider their publicity to the distinctive AML dangers posed by digital property and be sure that correct inner controls are in place to reply to shifting dangers on this rising space, paying explicit consideration to the pink flags recognized by FinCEN. As a result of the 2020 Treasury Technique additionally identifies cash companies companies (MSBs) as a separate vulnerability to AML threat, digital MSBs, together with digital forex exchanges and cost processors,5 ought to take note of their compliance obligations in 2020 and past.
The necessity to mitigate the dangers posed by digital forex transactions shouldn’t be restricted to Fintech corporations, nevertheless. In remarks delivered to the American Bankers Affiliation/American Bar Affiliation Monetary Crimes Enforcement Convention in December 2019, FinCEN director Kenneth Blanco suggested that each one monetary establishments, not simply digital forex platforms, might “have to reevaluate whether or not their establishments are uncovered to cryptocurrency.”6 Given the heightened enforcement consideration being paid to the Fintech area, coupled with the elevated penetration by digital forex into conventional monetary spheres, banks and different conventional monetary corporations ought to consider third-party enterprise relationships and establish touchpoints with high-risk digital forex transactions to make sure an enough risk-based response.
In sum, scrutiny of digital currencies might improve in 2020 and past. For corporations working on this area, the challenges of working legally aren’t solely comparatively novel however are more and more extra complicated. On the identical time, the present second presents a singular window of alternative for corporations to assist form coverage on this space, as enforcement authorities proceed to grapple with how one can match rising applied sciences into current AML frameworks. The 2020 Treasury Technique explicitly encourages public-private communication as a key precedence for mitigating AML threat. Ahead-leaning corporations may need not solely to rigorously consider their compliance packages utilizing the standard BSA protocols, but in addition to think about the potential for engagement with enforcement authorities to make sure that rising enforcement coverage on this area accommodates new technological and enterprise realities.
1 FinCEN, Application of FinCEN’s Laws to Individuals Administering, Exchanging, or Utilizing Digital Currencies, FIN-2013-G001 (Mar. 18, 2013).
2 FinCEN, Advisory on Illicit Exercise Involving Convertible Digital Forex, FIN-2019-A003 (Could 9, 2019).
three See Ready Remarks of FinCEN Director Kenneth A. Blanco, delivered on the American Bankers Affiliation/American Bar Affiliation Monetary Crimes Enforcement Convention (Blanco Remarks) (Dec. 10, 2010).
four Dep’t of Treasury, Nationwide Technique for Combating Terrorist and Different Illicit Financing (2020)
5 In keeping with FinCEN, though the BSA typically exempts “cost processors” from its AML compliance program obligations, the availability of cost processing companies by digital forex transmission “typically is unable to fulfill” the circumstances for qualification as a “cost processor” below the BSA, as a result of “such cash transmitters don’t function . . . by clearing and settlement techniques that solely admit BSA-regulated monetary establishments as members.” See FinCEN, Software of FinCEN’s Laws to Sure Enterprise Fashions Involving Convertible Digital Currencies, FIN-2019-G001 at 21 (Could 9, 2019).
6 Blanco Remarks (Dec. 10, 2010).
©2020 Greenberg Traurig, LLP. All rights reserved.
