by Franca Harris Gutierrez, Boyd Johnson, Bruce Newman, Michael Dawson, Zachary Goldman, Rachel Dober, Michael Romais, Alina Lindblom, and Andrew Miller

This is Part III of a three-part post. For Part II, discussing SAR reform, click here. For Part I, discussing the collection of beneficial ownership information, click here.

Expanded Scope of BSA Coverage

The NDAA and recent regulatory action also broaden the scope of the BSA. Specifically, lawmakers and FinCEN are broadening the scope of the AML regulatory framework to account for convertible assets such as antiquities and cryptocurrencies—both of which can be misused for money laundering and other illicit purposes. These developments demonstrate the evolving nature of the AML landscape and indicate that financial institutions and other companies should remain up to date on their BSA/AML obligations with respect to different types of assets.

Antiquities

The NDAA amends the BSA to include antiquities dealers within the definition of “financial institution” subject to the act.[1] It also specifically directs the Secretary of the Treasury to issue proposed rules implementing the change within a year, taking into account factors such as the specific persons who should be subject to the rule, the value of the antiquities whose trade should be subject to regulation, and other related matters.[2]

Cryptocurrencies

Over the past few years, FinCEN and other agencies have increased the specificity with which they apply existing regulations to cryptocurrencies and have increasingly promulgated new rules to cover this rapidly evolving space.[3] This trend continued throughout 2020, during which the agencies emphasized AML obligations relating to cryptocurrencies. While these developments largely do not create “new” obligations for financial institutions and other businesses, they do apply existing requirements to certain transactions or dealings in cryptocurrencies. Secretary of the Treasury Janet Yellen, who was confirmed on January 26, is expected to advocate further regulation of cryptocurrencies and other financial technologies. In her Senate confirmation hearing testimony, Secretary Yellen noted that the Treasury Department should consider regulations to “curtail[] [cryptocurrencies and other digital assets’] use for malign and illegal activities,” such as financing of terrorism and money laundering. Such regulations would continue the recent trend focusing on misuse of cryptocurrencies.

1. OCC Enforcement Action

In January 2020, for example, the OCC brought its first known enforcement action against a bank for AML failures related to cryptocurrency customers.[4] And in May 2020, FinCEN Director Ken Blanco delivered remarks emphasizing the agency’s focus on financial crimes involving cryptocurrencies. Director Blanco noted that the agency “expect[s] each financial institution to have appropriate controls in place based on the products or services it offers, consistent with the obligation to maintain a risk-based AML program,” and that the agency is “taking a close look at the AML/CFT controls [regulated entities] put on the types of virtual currency [they] offer.”[5]

2. FinCEN Regulatory Changes

In September 2020, FinCEN issued a final rule regarding the BSA requirements applicable to banks that lack a federal functional regulator, including state-chartered non-depository trust companies.[6] The rule sets minimum standards for those institutions’ AML programs and requires them to establish customer identification programs and fulfill beneficial ownership requirements.[7] This rule heightens the compliance expectations for certain cryptocurrency companies because many cryptocurrency custody businesses take the corporate form of state-chartered non-depository trust companies.

On December 23, 2020, FinCEN published a significant NPRM, “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.”[8] If adopted, FinCEN’s proposed rule would require banks and money service businesses “to submit reports, keep records, and verify the identity of customers” that participate in certain transactions involving cryptocurrencies held in unhosted wallets or held in wallets hosted in certain jurisdictions to be identified by FinCEN.[9] In its notice, FinCEN notes that its proposed rule is motivated, in part, by the government’s finding that “malign actors are increasingly using [cryptocurrency] to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering,” as well as for other nefarious purposes such as ransomware attacks.[10] Although the window for the submission of comments regarding the proposed rule initially closed on January 7, 2021, FinCEN has since reopened the window, and extended the time for submission of comments;[11] it is therefore unclear whether the rule will be adopted and, if so, in what format.

If FinCEN adopts a rule similar to the one for which it provided notice, the impact on cryptocurrency businesses would be significant. In order to comply with this regulation, U.S.-based cryptocurrency exchanges would be required to build and implement technical systems for capturing the identity of their customers’ counterparties in transactions involving un-hosted wallets, as well as systems for fulfilling the new reporting requirements. This type of requirement is novel for the BSA. Even if FinCEN promulgates an amended rule, however, its focus on regulating cryptocurrencies will remain.

A few days later, on December 31, 2020, FinCEN issued a succinct notice, “Report of Foreign Bank and Financial Accounts (“FBAR”) Filing Requirement for Virtual Currency.”[12] In its statement, FinCEN announced its intention to amend the BSA regulations “regarding reports of [FBAR] to include virtual currency as a type of reportable account under 31 CFR 1010.350.” As with the NPRM described above, this proposed amendment would subject the holders of virtual currency in foreign accounts to greater reporting requirements.

3. OCC Interpretive Letter

Finally, on January 4, 2021, the OCC published an interpretive letter announcing that national banks and federal savings associations are authorized to use “independent node verification networks” (i.e., blockchain technology) and stablecoins (i.e., cryptocurrencies whose value are pegged to fiat currency, other stablecoins, or commodities such as gold) to conduct payment activities.[13] In addition to constituting further evidence of the federal banking agencies’ interest in financial technologies, the OCC’s letter implies that the agency views cryptocurrencies and the blockchain networks on which they operate as “new technological means of carrying out bank-permissible payment activities”[14] — that is, banks continue to play an intermediary role, “facilitating the flow of money and credit among different parts of the economy,” but may leverage new technological developments to do so.[15]

As the OCC notes in its letter, however, the use of new technologies carries unique benefits as well as AML risks. While blockchain technology and cryptocurrencies can achieve efficiencies in payment activities, such as increased resiliency and speed, banks that choose to serve as nodes on blockchain networks or use blockchain networks or stablecoins to facilitate payment activities must be attuned to the risks inherent in those activities. As the OCC describes, these risks include money laundering by bad actors, cross-border transfers, and reporting and recordkeeping challenges.[16] Yet these risks are not insurmountable, and the OCC recognizes that “banks have significant experience with developing BSA/AML compliance programs to assure compliance with the reporting and recordkeeping requirements of the BSA and to prevent such usage of their systems by bad actors.”[17]

Conclusion

Financial institutions are well aware that this is an exciting, but uncertain, time in AML. We expect AML compliance to remain a top risk facing financial institutions and a top regulatory and law enforcement priority in the new Administration. Financial institutions should be sure to keep abreast of the significant changes occurring. And financial institutions, collectively or individually, should engage in the rulemaking and reform process to enhance compliance efficiencies and effectiveness for all stakeholders.

Footnotes

[1] Id. § 6110(a)(1) (amending 31 U.S.C. § 5312(a)(2)(Y)). The NDAA directs the Secretary of the Treasury to coordinate with the Director of the Federal Bureau of Investigation, the Attorney General, and the Secretary of Homeland Security in “perform[ing] a study of the facilitation of money laundering and the financing of terrorism through the trade in works of art.” Id. § 6110(c). The NDAA specifies that the study should include consideration of potential regulations for the art market. Id.

[2] Id. § 6110(b).

[3] FinCEN has been publishing guidance regarding cryptocurrencies since at least 2013. See, e.g., FIN-2013- G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (PDF: 238 KB). 

[4] See Franca Harris Gutierrez, David S. Cohen, Zachary Goldman & Alina Lindblom, Recent OCC Actions Focus Attention on Financial Crime Controls for Cryptocurrency Custody Businesses, WilmerHale (Aug. 6, 2020), https://www.wilmerhale.com/en/insights/client-alerts/20200806-recent-occ-actions-focus-attentionon-financial-crime-controls-for-cryptocurrency-custody-businesses.

[5] Press Release, FinCEN, Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the Consensus Blockchain Conference (May 13, 2020), https://www.fincen.gov/news/speeches/preparedremarks-fincen-director-kenneth-blanco-delivered-consensus-blockchain.

[6] Press Release, FinCEN, FinCEN Issues Final Rule to Require Customer Identification Program, AntiMoney Laundering Program, and Beneficial Ownership Requirements for Banks Lacking a Federal Functional Regulator (Sept. 14, 2020), https://www.fincen.gov/news/news-releases/fincen-issues-final-rulerequire-customer-identification-program-anti-money.

[7] 85 Fed. Reg. 57,129 (Sept. 15, 2020), https://www.govinfo.gov/content/pkg/FR-2020-09-15/pdf/2020- 20325.pdf (PDF: 315 KB).

[8] 85 Fed. Reg. 83,840 (proposed Dec. 23, 2020), https://www.govinfo.gov/content/pkg/FR-2020-12- 23/pdf/2020-28437.pdf (PDF: 401 KB).

[9] Id. at 83,840–41. Although this alert uses the term “cryptocurrency,” the regulation covers “transactions involving convertible virtual currency (‘CVC’) or digital assets with legal tender status (‘legal tender digital assets’ or ‘LTDA’).” Id.

[10] Id. at 83,841.

[11] Press Release, FinCEN, FinCEN Extends Reopened Comment Period for Proposed Rulemaking on Certain Convertible Virtual Currency and Digital Asset Transactions (Jan. 26, 2021), https://www.fincen.gov/news/news-releases/fincen-extends-reopened-comment-period-proposed-rulemakingcertain-convertible.

[12] FinCEN Notice 2020-2, Report of Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual Currency (Dec. 31, 2020), https://www.fincen.gov/sites/default/files/shared/Notice-Virtual%20Currency%20Reporting%20on%20the%20FBAR%20123020.pdf (PDF: 118 KB).

[13] OCC Interpretive Letter 1174, OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities (Jan. 2021), https://www.occ.treas.gov/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf (PDF: 261 KB). The OCC also published two significant interpretive rules regarding cryptocurrencies in 2020. See OCC Interpretive Letter 1170, Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers (July 2020), https://www.occ.gov/topics/charters-and-licensing/interpretations-andactions/2020/int1170.pdf (PDF: 158 KB); OCC Interpretive Letter 1172, OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves (Oct. 2020), https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf (PDF: 173 KB). 

[14] Id. at 4.

[15] Id. at 2, 3 (“Over time, banks’ financial intermediation activities have evolved and adapted in response to changing economic conditions and customer needs. Banks have adopted new technologies to carry out bank-permissible activities, including payment activities.”).

[16] See id. at 8–9.

[17] Id. at 9.

Franca Harris Gutierrez, Boyd Johnson, Bruce Newman, and Michael Dawson are partners, Zachary Goldman and Rachel Dober are counsel, Michael Romais and Alina Lindblom are senior associates, and Andrew Miller is an associate, at Wilmer Cutler Pickering Hale and Dorr LLP.

Disclaimer

The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.