[Federal Register: May 12, 2009 (Volume 74, Number 90)]
[Proposed Rules]
[Page 22129-22142]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12my09-15]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA97
Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations--Definitions and Other Regulations Relating to
Money Services Businesses
AGENCY: Financial Crimes Enforcement Network (FinCEN), Department of
the Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Financial Crimes Enforcement Network (``FinCEN''), a
bureau of the Department of the Treasury (``Treasury''), is proposing
to revise the regulations implementing the Bank Secrecy Act (``BSA'')
regarding money services businesses (``MSBs'') to clarify which
entities are covered by the definitions. Specifically, we are reviewing
the MSB regulatory framework with a focus on providing efficient and
effective regulation for the industry, as well as improving the ability
of regulators, law enforcement, and FinCEN to safeguard the U.S.
financial system from the abuses of terrorist financing, money
laundering, and other financial crime.
The proposed changes are intended to more clearly delineate the
scope of entities regulated as MSBs, so that determining which entities
are obligated to comply will be more straightforward and predictable.
This rulemaking proposes to amend the current MSB regulations in the
following ways: By ensuring that certain foreign-located MSBs with a
U.S. presence are subject to the BSA rules; by updating the MSB
definitions to reflect past guidance and rulings, current business
operations, evolving technologies, and merging lines of business; and
by combining all of stored value into one category, without
substantively changing the existing definition, so that issuers of
stored value and sellers or redeemers of stored value are in the same
category. In addition, this rulemaking solicits comments on stored
value to assist FinCEN with a future rulemaking proposing a revised
definition of stored value and revising related regulations.
DATES: Written comments on the notice of proposed rulemaking must be
submitted on or before September 9, 2009.
ADDRESSES: You may submit comments, identified by RIN 1506-AA97, by any
of the following methods:
Federal e-rulemaking portal: http://www.regulations.gov.
Follow the instructions for submitting comments. Refer to Docket number
TREAS-FinCen-2009-0002.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN
1506-AA97 in the body of the text.
Inspection of comments: Comments may be inspected, between 10 a.m.
and 4 p.m., in the FinCEN reading room in Vienna, VA. Persons wishing
to inspect the comments submitted must request an appointment with the
Disclosure Officer by telephoning (703) 905-5034 (Not a toll free
call).
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, FinCEN (800) 949-2732 and select option 1.
SUPPLEMENTARY INFORMATION:
I. Introduction
The term MSB, as currently defined in the BSA regulations, refers
to each of the following distinct categories of financial service
providers: (1) Currency dealer or exchanger, (2) check casher, (3)
issuer of traveler's checks, money orders, or stored value, (4) seller
or redeemer of traveler's checks, money orders, or stored value, (5)
money transmitter, and (6) the United States Postal Service.\1\
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\1\ 31 CFR 103.11(uu)(1)-(6).
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MSBs play a critical role in providing financial services to, among
others, a segment of the population that generally does not maintain
bank accounts. Law enforcement, FinCEN, and other federal regulators
have repeatedly stressed the need to prevent transactions that
typically flow through these businesses from going underground, which
would diminish transparency with respect to these transactions. Because
MSBs
[[Page 22130]]
provide needed financial services to numerous communities throughout
the country and often facilitate the transmission of money to those in
foreign countries, they are vital to both domestic and foreign
economies.
In drafting this rulemaking, FinCEN reviewed past industry survey
studies that were conducted to gain perspective on the size, revenue,
geographic distribution, and other characteristics of the various
service sectors of MSBs. The industry has grown in size and operational
complexity since FinCEN first proposed MSB regulations in 1997.
A 1997 study estimated that the MSB industry population (both
principals and agents) was around 158,000, and provided approximately
$200 billion annually in financial services.\2\ The study estimated
that fewer than ten large businesses accounted for the bulk of MSB
activity (involving money transmissions, money orders, traveler's
checks, and check cashing and currency exchange) conducted within the
United States. The financial services were provided primarily through
systems of agents.
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\2\ Coopers and Lybrand LLP, ``Non-Bank Financial Institutions:
A Study of Five Sectors'' (Feb. 28, 1997).
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In 2005, FinCEN again studied the MSB population and services
provided and determined that the industry had grown to approximately
$284 to $305 billion annually in financial services.\3\ The increase
reflected a growth rate for the MSB industry of about 50% over the
previous decade. The study found that approximately 50% of all MSBs
offered both check cashing and money order services.
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\3\ KPMG 2005 Money Services Business Industry Survey Study
(Sept. 26, 2005), available on FinCEN's Web site, http://
www.fincen.gov.
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This rulemaking proposes to amend 31 CFR 103.11(uu) by revising the
MSB definitions. In addition to discussing our rationale for such
revisions, we have asked questions of the general public to assist us
with understanding the impact that the proposed changes may have on the
affected businesses, as well as on law enforcement and regulatory
efforts. These questions are asked both throughout the document and
again in section IV with additional specific requests for comments.
In drafting this rulemaking, we have proposed folding all of stored
value into one category so that issuers of stored value and sellers or
redeemers of stored value are in the same category, without making any
substantive changes to the definition of this category. We have
determined that a separate, comprehensive proposal is warranted for
stored value and will make such a proposal at a later date. To
facilitate this process, we urge interested parties to respond to the
requests for comments about stored value that we have included within
this rulemaking.\4\
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\4\ See Section IV, below.
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II. Background
A. Statutory and Regulatory Background
The BSA, Titles I and II of Public Law 91-508, as amended, codified
at 12 U.S.C. 1829b, 18 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and
5316-5332, authorizes the Secretary of the Treasury (the ``Secretary'')
to issue regulations requiring financial institutions to keep records
and file reports that the Secretary determines ``have a high degree of
usefulness in criminal, tax, or regulatory investigations or
proceedings, or in the conduct of intelligence or counterintelligence
matters, including analysis, to protect against international
terrorism.'' \5\ The Secretary's authority to administer the BSA and
its implementing regulations has been delegated to the Director of
FinCEN.\6\ FinCEN has interpreted the BSA through implementing
regulations (``BSA regulations'' or ``BSA rules'') that appear at 31
CFR Part 103.
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\5\ 31 U.S.C. 5311.
\6\ See Treasury Order 180-01 (Sept. 26, 2002).
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The BSA defines the term ``financial institution'' to include, in
part: A currency exchange; an issuer, redeemer, or casher of travelers'
checks, checks, money orders, or similar instruments; the United States
Postal Service; a person involved in the transmission of funds; and any
business or agency which engages in any activity which is determined by
regulation to be an activity which is similar to, related to, or a
substitute for these activities.\7\
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\7\ 31 U.S.C. 5312(a)(2)(J), (K), (R), (V), and (Y).
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The Director of FinCEN, through delegated authority, has
implemented regulations under the BSA interpreting the recordkeeping,
reporting, and other requirements of the BSA. Like other financial
institutions under the BSA, MSBs must implement anti-money laundering
(AML) programs, make certain reports to FinCEN, and maintain certain
records to facilitate financial transparency. MSBs are required to: (1)
Establish written AML programs that are reasonably designed to prevent
the MSB from being used to facilitate money laundering and the
financing of terrorist activities; \8\ (2) file Currency Transaction
Reports (CTRs) \9\ and Suspicious Activity Reports (SARs) \10\ and (3)
maintain certain records, including those relating to the purchase of
certain monetary instruments with currency; \11\ relating to
transactions by currency dealers or exchangers; \12\ and relating to
certain transmittals of funds.\13\ Most types of MSBs are required to
register with FinCEN \14\ and all are subject to examination for BSA
compliance by the Internal Revenue Service (IRS).\15\
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\8\ See 31 CFR 103.125.
\9\ See 31 CFR 103.22.
\10\ See 31 CFR 103.20. Check cashers and transactions solely
involving the issuance, sale or redemption of stored value are not
covered by the SAR requirement. See 31 CFR Sec. 103.20(a)(1), (5).
\11\ See 31 CFR 103.29.
\12\ See 31 CFR 103.37.
\13\ See 31 CFR 103.33(f)-(g).
\14\ See 31 CFR 103.41.
\15\ 31 CFR 103.56(b)(8).
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B. Past Public MSB Meetings
In 1997, FinCEN held public meetings to give members of the
financial services industry an opportunity to discuss the proposed MSB
regulations and any impact they might have on operations.\16\ In
drafting the final rules defining the MSB categories,\17\ FinCEN relied
on the contributions from these public forums.
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\16\ These public meetings were held in Vienna, Virginia, on
July 22, 1997; New York, New York, on July 28, 1997; San Jose,
California, on August 1, 1997; Chicago, Illinois, on August 15,
1997; and Vienna, Virginia, on September 3, 1997. The discussions
focused on how businesses operate and how best to regulate them.
Discussion regarding whether a definitional threshold was warranted
and if so, how to arrive at one, provided invaluable information to
FinCEN.
\17\ Definitions Relating to, and Registration of, Money
Services Businesses, 64 FR 45438 (Aug. 20, 1999) (``1999
Rulemaking'').
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On March 8, 2005, FinCEN held a fact-finding meeting in Washington,
DC on the provision of banking services to MSBs.\18\ MSBs recounted
their challenges in obtaining and maintaining banking services due to
the perception that their businesses posed a high risk of money
laundering and terrorist financing. In 2006, FinCEN issued an advance
notice of proposed rulemaking seeking input on how to address these
challenges,\19\ and received 142 comments in response, which have
informed this rulemaking.\20\
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\18\ FinCEN conducted the meeting through the Non-bank Financial
Institutions and the Examination Subcommittees of the Bank Secrecy
Act Advisory Group (``BSAAG''). BSAAG is an advisory group created
by Congress consisting of industry, regulatory, and law enforcement
participants for the purpose of engaging in open dialogue related to
the protection of the U.S. financial system from money laundering,
terrorist financing, and other abuses. BSAAG uses a variety of
permanent and ad hoc subcommittees to identify and analyze relevant
issues.
\19\ Provision of Banking Services to Money Services Businesses,
71 FR 12308 (March 10, 2006).
\20\ These comments are available in files dated March 10 and
May 15, 2006 at http://www.fincen.gov/statutes_regs/frn/reg_
proposal_comments.html.
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[[Page 22131]]
C. The Term ``Money Services Businesses''
In 1999, FinCEN added ``money services business'' to the definition
of ``financial institution'' in the BSA regulation.\21\ The term MSB
was created to: (1) clarify statutory language in a way that
effectively captured industry operations and (2) refine a subset of
non-bank financial institutions that are not subject to federal
functional regulation at the federal level. We substituted the term
``money services business'' for the statutory term ``money transmitting
business'' to avoid using a general term that could too easily be
confused with ``money transmitter,'' which was being proposed as a
specific category of MSB.\22\
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\21\ 1999 Rulemaking, supra note 17, at 45438.
\22\ See Definition and Registration of Money Services
Businesses, 62 FR 27890, 27890 (May 21, 1997) (``1997 Proposal'').
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Over the years, MSBs have asserted that using a single term to
identify actors engaging in particular diverse activities is inadequate
for assessing money laundering and terrorist financing risks.
Furthermore, industry has argued that the use of the term MSB has
adversely affected their access to banking services. For these reasons,
industry has asked us to eliminate the term ``money services business''
to describe this particular group of non-bank financial institutions
and describe the businesses as ``non-bank financial institutions.''
It would be ineffective and confusing to use the broader term
``non-bank financial institution'' to describe the subset of ``MSBs.''
Even in the late 1990s, the term ``non-bank financial institutions''
encompassed broker-dealers in securities and casinos, as well as those
businesses currently incorporated within the term MSB. The term is even
less helpful now, as there are more types of non-bank financial
institutions subject to BSA regulations, such as mutual funds,
insurance companies, credit card system operators, dealers in precious
metals, stones, and jewels, and futures commission merchants.
Despite the diverse risks posed across and even within MSB
industries,\23\ MSBs share certain qualities. In particular, these
businesses offer financial services that Congress grouped together in
the BSA.\24\ MSBs provide a range of financial services to many people
without bank accounts similar to those services offered by banks to
their customers. FinCEN therefore sees the continuing utility in the
general term ``MSB'' as a concise way to refer to certain non-bank
financial institutions that are without a federal functional regulator;
\25\ that offer specific services (often in combination), and that have
similar BSA requirements.
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\23\ FinCEN has expressed its view that not all MSBs pose the
same level of risk and will not require the same level of due
diligence. See, e.g., FFIEC Manual (2007) at 277 (Non-bank Financial
Institutions--Overview--Providing Banking Services to Money Services
Businesses) and ``Interagency Interpretive Guidance on Providing
Banking Services to Money Services Businesses Operating in the
United States'' (April 26, 2005) (``[t]he range of products and
services offered, and the customer bases served by money services
businesses, are equally diverse * * * while they all fall under the
definition of a money services business, the types of businesses are
quite distinct''). We also have communicated this message at
compliance schools for banking examiners, on public panels, and at
other speaking engagements.
\24\ See 31 U.S.C. 5330(d)(1).
\25\ The Internal Revenue Service examines these businesses only
for compliance with the BSA. It is not a ``functional'' regulator of
MSBs.
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D. Genesis of the Proposed Revisions
In June 2007, FinCEN adopted its BSA efficiency and effectiveness
initiative, which includes as one of its initial provisions, clarifying
the scope of the MSB definitions. The initiative makes it a priority
for FinCEN to review, and revise if appropriate, the MSB definitions in
light of the money laundering risks posed.
We believe the current MSB regulatory definitions should be revised
to describe with greater particularity the types of activity that would
subject a business to the BSA rules.\26\ For example, under the current
regulations, to be deemed a check casher, a business only has to cash
checks in amounts greater than the definitional threshold. The
regulatory language does not provide insight, for instance, into the
types of instruments a check casher may accept and does not detail what
may be redeemed and whether it could be a combination of items (e.g.,
currency, another instrument, or a combination of instruments). The
intent in clarifying the definitions is to resolve such ambiguities in
the regulations so that the rules can be applied with more certainty by
potential MSBs, the banks who maintain accounts for them, law
enforcement, and regulators. The rationale for our proposed changes is
provided in the section-by-section analysis below.
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\26\ The 1997 open forums on MSBs included discussions on
whether to create definitions based on the type of institution
involved or instead based on the activity or function performed by
an entity regardless of the type of institution. Ultimately, FinCEN
determined that changes in the industry over time may make relying
on the type of institution problematic while creating definitions
based on the underlying activity would enable the regulations to
account for new technologies, services, and products.
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E. Need for Review and Updates
Nearly ten years have passed since FinCEN issued the BSA
regulations defining the categories of MSBs.\27\ Since that time,
FinCEN has received numerous requests to clarify the application of the
MSB regulations to particular businesses. Over one-third of these
requests came from persons inquiring whether or not they were an
MSB.\28\ Some of these requests for guidance reflect significant
technological advances such as the online provision of financial
services, as well as new financial products developed after the
publication of our current rules such as stored value products and
electronic currency. All of these developments have changed the nature
of the MSB industry. Where possible, we have provided guidance to the
industry on how to interpret and apply the regulations.
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\27\ 1999 Rulemaking, 64 FR 45438 (Aug. 20, 1999).
\28\ This statistic comes from a review of requests for guidance
from our Regulatory Helpline.
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With respect to check cashers and money transmitters in particular,
we have developed a large body of guidance in the years since the
issuance of the final MSB regulations. For check cashers, FinCEN's
guidance and rulings provide several examples of activities that do not
meet the regulatory definition of a check casher, though they may
involve check activity in amounts exceeding the regulatory threshold.
Examples of businesses that are not check cashers include: (1) A payday
lender that holds checks as collateral for repayment of the loan by the
customer and does not deposit or negotiate the checks; \29\ (2) a
business cashing its employees' payroll checks; \30\ (3) a business
cashing its own checks issued as payment for goods or services provided
by non-employees; \31\ (4) a tax preparer cashing its own refund
anticipation loan checks for taxpayers for whom it has prepared tax
returns; \32\ and (5) a consumer finance company cashing its own loan
checks to borrowers.\33\
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\29\ FinCEN Ruling 2002-2 (Definition of Check Casher (Payday
Lenders)), (Feb. 5, 2002).
\30\ FinCEN Guidance 2006-G005 (Frequently Asked Questions--
Businesses Cashing Their Own Checks) (March 31, 2006).
\31\ Id.
\32\ Id.
\33\ FinCEN Ruling 2007-R001 (Whether a Publicly Traded Company
that Cashes its own Checks Issued to Loan Customers is a Money
Services Business) (Jan. 8, 2008).
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Similarly, over the years, FinCEN has issued guidance and
administrative rulings that provide examples of
[[Page 22132]]
activities that do not meet the regulatory definition of a money
transmitter, even though entities engaged in such activities may be
involved in accepting and transmitting funds, such as: (1) Payment
processing businesses that only provide merchants with a portal to
financial institutions with access to the ACH system for the receipt of
payments for goods and services already provided;\34\ (2) debt
management companies, with respect to their submission of payments to
creditors on behalf of debtors in conjunction with a debt management
plan;\35\ (3) merchants and ATMs associated with a network of banks
that accept and transmit funds that will become stored value used
through the network, but that do so only as a conduit between
individual banks and their customers;\36\ and (4) businesses that only
accept payments on behalf of the utilities with which they have
contracted, and that decline to accept and transmit funds for any other
purpose.\37\
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\34\ FinCEN Ruling 2003-8 (Definition of Money Transmitter
(Merchant Payment Processor)) (Nov. 19, 2003).
\35\ FinCEN Ruling 2004-4 (Definition of Money Services
Businesses (Debt Management Company)) (Nov. 24, 2004).
\36\ FinCEN Ruling 2008-R005 (Whether Certain Reloadable Card
Operations are Money Services Businesses) (March 10, 2008)
(Merchants and ATMs associated with a network of banks were not
deemed money transmitters).
\37\ FinCEN Ruling 2008-R006 (Whether an Authorized Agent for
the Receipt of Utility Payments is a Money Transmitter) (May 21,
2008).
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Given the nature and scope of these important interpretative
rulings, we think it is appropriate to update, streamline, and clarify
the MSB regulations by incorporating these interpretations into the
proposed regulatory revisions and extending them where appropriate. The
proposed regulations also reflect proposed policy changes, on which we
also seek comment.
III. Section-by-Section Analysis
Pursuant to FinCEN's authority to interpret the provisions of 31
U.S.C. 5312, this document proposes to amend 31 CFR Part 103, primarily
by revising the definitions of ``money services business.'' These
proposed changes would affect multiple categories of MSBs by: (1)
Removing the ``doing business'' language in the definition of MSB
merely for purposes of removing unclear language without broadening the
application of the regulation beyond its present scope and (2) revising
the general language to ensure that activity within the United States
that does not involve the physical presence in the United States of an
MSB's agent, agency, branch or office is directly regulated. The
proposed changes are more fully discussed below.
A. Meaning of the Term ``Money Services Business''
In issuing the current MSB regulations in 1999, FinCEN was
responding to a growing need to apply effective BSA regulation to a
relatively little known or little understood part of the financial
sector in the United States.\38\ FinCEN's regulations established broad
definitions for each enumerated MSB activity. This had the effect of
capturing national and multinational MSB operations as well as the
small enterprises that competed with them. It also captured businesses
that exclusively provided MSB services as well as businesses that
provided both financial services and unrelated products or
services.\39\
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\38\ See 1999 Rulemaking, 64 FR 45439.
\39\ Id.
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Since the issuance of these regulations, FinCEN has continued to
seek input on defining the categories of MSBs appropriately and
establishing appropriate dollar thresholds for activity with the goal
of covering those businesses that are significantly engaged in
providing products and services that are legitimate subjects of
regulatory interest. FinCEN is now in a position to tailor the 1999
definition in a number of ways.
Doing Business
The current regulatory definition of MSB includes ``[e]ach agent,
agency, branch, or office within the United States of any person doing
business, whether or not on a regular basis or as an organized business
concern, in one or more of the capacities listed in paragraphs (uu)(1)
through (uu)(6) of this section.'' \40\ Banks and persons registered
with, and regulated or examined by, the Securities and Exchange
Commission or the Commodity Futures Trading Commission have been
excluded from the MSB definitions.\41\
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\40\ 31 CFR 103.11(uu) (emphasis added).
\41\ Id.
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Whether a person is doing business as an MSB depends on all of the
facts and circumstances. We use the term ``doing business'' to mean the
activity in which the person is engaged, rather than any status that
the entity has either taken on itself or been assigned, such as a
business licensed by a state. In this proposed rulemaking, FinCEN
continues to regulate an MSB by its activity and the context in which
the activity occurs and not simply its status. Whether a person is a
business in any formal sense should not be determinative of whether it
is subject to the MSB definitions, absent statutory requirements to the
contrary.
To avoid confusion that might result from the focus on the status
of an entity and not its activity and the context in which the activity
occurs, we have revised the language in the MSB definition in section
103.11(uu) by deleting the ``doing business'' language and replacing it
with ``engaged in activities * * *'' ``Doing business'' had caused
uncertainty which we expect will be alleviated with this change. By
removing the phrase ``doing business,'' however, we do not intend to
broaden the application of the regulation beyond its present scope. To
the extent that a person engages in one or more of the enumerated
activities listed in the definition, it is an MSB; to the extent that a
person does not engage in such activities, it is not.
Dollar Threshold
The regulation currently includes an activity threshold of $1,000
for any person in any one day. This threshold applies to all MSB
categories, except money transmitters which do not have any activity
threshold, and was established to exclude certain activities under that
dollar amount from the BSA requirements.\42\
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\42\ See 1999 Rulemaking, 64 FR at 45446 (the threshold attempts
to eliminate treating certain businesses as MSBs, like grocery
stores and hotels, which cash checks and exchange currency as an
accommodation to customers otherwise buying goods and services).
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The issue of a dollar threshold was discussed at FinCEN's publicly-
held meetings in 1997 with the industry to vet issues arising from the
originally proposed rules. During the meetings, various methods of
arriving at a dollar threshold were discussed. Certain members of the
industry proposed a threshold based on total gross fee income. FinCEN
did not favor that approach because it allowed for potential
manipulation on the part of a business seeking to avoid the
registration requirement by not collecting a fee and obtaining payment
for the service in some other way. Some participants also recommended
tying the threshold to an economic indicator, like the minimum for
social security payments or the federal minimum wage, which was
ultimately rejected. In the final rule, FinCEN doubled the originally
proposed threshold of $500 in part based on input received from the
industry.\43\
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\43\ The final rule also indicated that many MSB transactions
regularly occur in amounts greater than the originally proposed
definitional threshold of $500. See 1999 Rulemaking, 64 FR at 45446.
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[[Page 22133]]
Although FinCEN does not propose amending the current threshold in
this rulemaking, we are considering the need for a separate rulemaking
to make possible adjustments to the threshold. A lower threshold may
increase the amount of information available to law enforcement by
expanding the scope of entities subject to BSA requirements, but would
also add additional entities that conduct incidental and low-value MSB
activities in which the benefits of regulation many not outweigh the
costs. Moreover, the effect on the clients whom these MSBs serve would
need to be carefully studied. Conversely, a higher threshold may remove
from the scope of the BSA entities that conduct incidental and low-
value MSB activities in which the benefits of regulation many not
outweigh the costs.
Questions for Comment
We seek information on the average daily transaction
amount for the different MSB services offered: check cashing; money
orders; money transmission; foreign exchange; stored value; and
traveler's checks.
We specifically seek comment from law enforcement on how
adjusting the threshold higher or lower would impact their
investigations and prosecutions.
We specifically seek comment from community groups on how
adjusting the threshold higher or lower would impact the clients who
utilize MSB firms.
Foreign-Located MSBs
The BSA authorizes us to define a domestic financial institution
without reference to its physical presence in the United States. 31
U.S.C. 5312(b)(1) states that the term ``domestic financial
institution'' applies to an action in the United States, not to the
physical location of the financial agency or institution taking the
action. Thus, it is within FinCEN's authority to write regulations
establishing that a foreign-located business that meets the definition
of a ``financial institution'' and is conducting business in the United
States in such a capacity is a ``domestic financial institution.''
We propose to use this authority to amend the regulatory language
implementing 31 U.S.C. 5312(a)(2)(J), (K), and (R)--the provisions on
which our regulatory definition of MSBs is based--to ensure that
certain foreign-located entities engaging in MSB activities in the
United States are subject to the requirements of the BSA. We propose to
do this by revising our MSB definition to state that an entity is
defined as an MSB by the activity it conducts within the United States,
and not exclusively by the physical presence of one or more of the
entity's agents, agencies, branches or offices within the United
States. Accordingly, we propose the following text: ``The term ``money
services business'' shall include a person wherever located engaged in
the activities that take place wholly or in substantial part within the
United States, in one or more of the capacities listed in paragraphs
(uu)(1) through (uu)(6) of this section, whether or not on a regular
basis or as an organized business concern. This includes but is not
limited to maintenance of any agent, agency, branch, or office within
the United States.''
Technological advances make it increasingly possible for MSBs to
offer financial services through mechanisms other than ``brick and
mortar'' locations. Foreign entities can and do offer services in the
U.S. through other instrumentalities, such as the Internet or a U.S.-
based bank account. Under this rulemaking, we seek to ensure that a
foreign-located entity engaging in activities in the United States in
one of the capacities listed in 31 CFR 103.11(uu)(1)-(5) is regulated
as an MSB. We intend to include an entity that has a presence in the
U.S. by means of the internet or similar mechanism, or by means of an
account with a U.S. financial institution and who, for instance, is
transmitting money through the account with U.S. customers or
recipients. Establishing the degree to which the activities of a
foreign-located MSB occurs within the United States depends on all the
facts and circumstances and whether U.S. customers or recipients are
involved in the activities.\44\ If a foreign-located business is an MSB
according to our regulations, then it will have the same reporting and
recordkeeping and other requirements as an MSB with a physical presence
in the United States, with respect to its U.S. activities.\45\
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\44\ See FinCEN Ruling 2004-1 (March 29, 2004). Guidance
(Definition of Money Services Business) (Foreign-Located Currency
Exchanger With U.S. Bank Account) (A foreign-located currency
exchanger whose only presence in the U.S. was a bank account was not
deemed an MSB when the currency exchange transactions occurred
solely in a foreign country for foreign-located customers and the
use of the U.S. bank account was limited to issuing and clearing
dollar-denominated monetary instruments.)
\45\ See Section II.A of this rulemaking above for MSB
compliance obligations.
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FinCEN seeks to ensure that our AML regulations apply equally to
all persons engaging in activities in the United States as MSBs. The
U.S. system is not fully protected when some MSB transactions are
covered and others are not. We are concerned that mechanisms such as
the Internet increasingly can be used to conduct business within the
United States from a foreign jurisdiction. Use of such mechanisms may
avoid both our regulations and the regulations of the foreign
jurisdiction. This undermines the legitimate interest of the United
States in protecting its own financial system from abuse.
Effectively regulating the use of the U.S. financial system by all
actors, both domestic and foreign, is consistent with the efforts to
establish an international community designed to help countries and
other jurisdictions work in concert to protect the inextricably
intertwined global financial system. These efforts in turn help support
the efforts of individual countries to prevent their financial systems
from being used as conduits for financial crimes.
We seek comment on the effectiveness of the proposed text changes
regarding the application of the MSB definition to certain foreign-
located MSBs. In addition, we request input on the effectiveness of
examining and enforcing such entities' compliance with BSA
requirements, such as the requirement that a foreign-located MSB
maintain registration records in the United States that are readily
available at the request of FinCEN or any appropriate law enforcement
agency.\46\ Moreover, we seek comment on the implications of requiring
a foreign-located MSB to file SARs with respect to transactions taking
place within the United States and the ability to enforce the
confidentiality and safe harbor provisions of the SAR,\47\ or to
enforce the issuance of a civil money penalty \48\ on such an MSB.\49\
We seek comment
[[Page 22134]]
from law enforcement on how such changes may impact their work if
certain foreign businesses were regulated as MSBs. Alternatively, we
solicit comment on whether we should expand the definition of ``foreign
financial institution'' \50\ in the foreign correspondent account rule
to include check cashers and issuers and/or sellers of traveler's
checks and/or money orders.
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\46\ See 1999 Rulemaking, 64 FR at 45441 (``A money services
business is not required to keep records required by section Sec.
103.41 in a centralized location so long as the records are
maintained in the United States'').
\47\ 31 CFR 103.20(d). See also FinCEN Form 107 (Registration of
Money Services Business) (Jan. 2005), which allows for the
registration of a foreign located MSB in Part III.
\48\ 31 CFR 103.56-103.57.
\49\ The practical issues that may arise in enforcing these
requirements are distinct from the legal issues as to whether FinCEN
has the authority to impose these requirements on foreign-located
MSBs, and whether federal courts have the authority to impose
sanctions for the failure of a foreign-located MSB to comply with
these requirements. MSB activity wholly or substantially within the
United States is an economic activity substantially affecting
interstate commerce, and it is therefore clearly amenable to federal
regulation. See United States v. Morrison, 529 U.S. 598, 609-610,
120 S.Ct. 1740, 1749-1750 (2000). As noted, the BSA authorizes
FinCEN to regulate action within the United States without reference
to the actor's physical presence in the United States. See 31 U.S.C.
Sec. 5312(b)(1). Finally, the nature of MSB activity is such that a
foreign-located MSB engaging in such activity wholly or
substantially within the United States is making a conscious
decision to do so and is aware of where the activity is taking
place. It should therefore be possible to identify a federal
judicial district with which the foreign-located MSB has sufficient
minimum contacts that the maintenance of a suit against the foreign-
located MSB does not offend due process or traditional notions of
fair play and substantial justice, see International Shoe Co. v.
Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158 (1945), either
because the suit arises out of the MSB's specific contacts with the
district and the MSB has purposefully directed its efforts towards
residents of the district, see Burger King v. Rudzewicz, 471 U.S.
462, 476, 105 S.Ct. 2174, 2184 (1985), or because the MSB has
maintained continuous and systematic general business contacts with
the district, see Helicopteros Nacionales de Colombia v. Hall, 466
U.S. 408, 416, 104 S.Ct. 1868, 1873 (1984). It should therefore be
possible for a federal court to assert personal jurisdiction over
the MSB on either a general jurisdiction or specific jurisdiction
theory, notwithstanding the MSB's lack of physical presence in the
United States. See Gator.com Corp. v. L.L. Bean, Inc., 341 F.3d
1072, 1079 (9th Cir. 2003) (federal district court has personal
jurisdiction over defendant lacking physical presence in district
because defendant's ``highly interactive'' website operates as
``virtual store'' in district), Gorman v. Ameritrade Holding Corp.,
293 F.3d 506, 512-513 (D.C.Cir. 2002) (federal district court may
have personal jurisdiction over defendant lacking physical presence
in district because residents of district ``use its website to
engage in electronic transactions with the firm''); see also
Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284
F.3d 1114, 1123-1126 (9th Cir. 2002) (federal district court may
have personal jurisdiction over defendant notwithstanding
defendant's lack of physical presence in the United States), United
States v. Swiss American Bank, Ltd., 274 F.3d 610, 619-625 (1st Cir.
2001) (same).
\50\ 31 CFR 103.175(h).
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B. Meaning of the Term ``Dealer in Foreign Exchange''
Pursuant to FinCEN's authority to interpret the provisions of 31
U.S.C. 5312, this section proposes to amend 31 CFR Part 103 by amending
the regulation implementing 31 U.S.C. 5312(a)(2)(J), which defines ``a
currency exchange'' as a financial institution and 31 U.S.C.
5312(a)(2)(Y) and (Z), which permit the Secretary to designate as a
financial institution ``any business * * * which engages in any
activity * * * which is similar to, related to, or a substitute for any
activity in which any business [defined to be a financial institution]
is authorized to engage [or] any other business whose cash transactions
have a high degree of usefulness in criminal, tax, or regulatory
matters.''
Currently, 31 CFR 103.11(uu)(1) defines a ``currency dealer or
exchanger,'' as ``[a] currency dealer or exchanger (other than a person
who does not exchange currency in an amount greater than $1,000 in
currency or monetary or other instruments for any person on any day in
one or more transactions).'' The proposed changes would revise 31 CFR
103.11(uu)(1) to state: ``Dealer in Foreign Exchange. A person who
accepts the currency, or other monetary instruments, funds, or other
instruments denominated in the currency, of one or more countries in
exchange for the currency, or other monetary instruments, funds, or
other instruments denominated in the currency, of one or more other
countries in an amount greater than $1,000 for any other person on any
day in one or more transactions, whether or not for same-day
delivery.''
The term ``dealer in foreign exchange'' can be found in the first
BSA regulations published in 1972.\51\ Although the term later was
deleted from the regulations, the deletion and subsequent changes were
not intended to change the meaning of the category.\52\ The use of the
word ``dealer'' in the proposed definition is intended to include both
dealers (persons taking one side of a position and seeking to earn a
spread) and brokers (persons bringing the buyers and sellers together
for a commission and who, like a dealer, will conduct the transaction
on its books and through its accounts). ``Dealer'' is intended to
include all persons who are in the business of engaging in transactions
involving the current or future acquisition or disposition of funds
denominated in a particular currency by exchanging them for funds
denominated in another currency.
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\51\ See 37 FR 6912 (April 5, 1972) (defining ``financial
institution'' to include ``a person who engages as a business in
dealing in or exchanging currency as, for example, a dealer in
foreign exchange or a person engaged primarily in the cashing of
checks'').
\52\ See 51 FR 30233, 30234 (Aug. 25, 1986) (proposing to define
``financial institution'' to include ``a currency dealer or
exchanger, including a check casher,'' with no notice that this
change in language would constitute a change in the scope of the
definition); 52 FR 11436, 11439-11440 (Apr. 8, 1987) (adopting the
proposed language changes).
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We have removed the word ``currency'' from the name of the category
to make clear that businesses that meet this definition may be
exchanging not only currency, but also other monetary instruments,
funds, or other instruments that are denominated in currency. Although
the statute uses the language ``currency exchange,'' \53\ we believe
the language was intended to capture the underlying activity involved
in foreign exchange services and that our interpretation is consistent
with the original intent and current industry practices. We seek
comment on the name change of this category of MSB and whether the
revision is consistent with current practices.
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\53\ 31 U.S.C. 5312(a)(2).
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The insertion of the word ``foreign'' clarifies our consistent
position that any exchange that occurs in the United States could be
covered by this definition, even if it does not involve U.S. dollars.
Therefore, if all other requirements are fulfilled, and a business
exchanges currency, other monetary instruments, funds or other
instruments denominated in a currency other than U.S. dollars for
currency, other monetary instruments, funds or other instruments
denominated either in dollars or in another non-U.S. currency, we would
consider the business a dealer in foreign exchange for purposes of our
rules. Though such a transaction may not involve U.S. dollars, the
potential use of a dealer in foreign exchange to launder money, finance
terrorism, or carry out other illicit activity nevertheless would
impact the U.S. financial system and should be subject to regulation.
This proposed clarification also reflects the reality of the
international nature of money laundering and terrorist financing as
well as the jurisdictional responsibility of the U.S. Government to
safeguard the financial system against those risks. Although U.S.
dollars are considered an attractive medium for money laundering and
terrorist financing because of the worldwide acceptance of the dollar
as a means of payment, failing to capture exchanges within the United
States of two foreign (non-U.S. dollar) currencies or of payment
instruments denominated in two foreign currencies would leave a
significant class of potentially vulnerable transactions that occur
within the United States unregulated.
The proposed definition also clarifies that dealing in foreign
exchange is not limited to the physical exchange of the currency of one
country for the currency of another country. The phrase ``currency, or
other monetary instruments, funds, or other instruments'' clarifies
which mediums of exchange are included under the current rule's
phrasing ``currency or monetary or other instruments.'' Our current
rules and existing body of administrative rulings make clear our
determination that a person that
[[Page 22135]]
converts funds denominated in the currency of one country to funds
denominated in the currency of another country is a currency dealer or
exchanger.\54\ ``Other instruments'' is intended to capture those types
of payment instruments that do not fall precisely into one of the other
categories, but nevertheless are readily recognizable as payment
instruments.
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\54\ See FinCEN Ruling 2008-R003 (Whether a Person That is
Engaged in the Business of Foreign Exchange Risk Management is a
Currency Dealer or Exchanger or Money Transmitter) (May 9, 2008);
FinCEN Ruling 2008-R002 (Whether a Foreign Exchange Dealer is a
Currency Dealer or Exchanger or Money Transmitter) (May 9, 2008);
and 31 CFR 103.37(b)(6).
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The addition of the phrase ``of one or more other countries'' \55\
to the text of the definition signals a proposed policy clarification,
which we believe better comports with a more common understanding of
the business of exchanging currency. This phrase indicates that a
person would no longer be considered a dealer in foreign exchange when
converting currency, other monetary instruments, funds or other
instruments denominated in U.S. currency for currency, other monetary
instruments, funds or other instruments also denominated in U.S.
currency. Similarly, if a person were to accept currency, other
monetary instruments, funds or other instruments denominated in a
particular foreign currency in exchange for currency, other monetary
instruments, funds or other instruments denominated in that same
foreign currency, that person would not be considered an MSB. By way of
example, a person accepting a traveler's check denominated in Mexican
pesos in exchange for Mexican pesos in currency form would not be
considered a dealer in foreign exchange.
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\55\ The addition of ``one or more other countries'' is intended
to capture the fact that some foreign currencies are used by
multiple countries. For instance, the Euro is used by the member
states of the European Union. Accordingly, a dealer in foreign
exchange may accept funds of one or more other countries in exchange
for funds of one or more other countries.
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The proposed language ``for any other person'' was inserted into
the definition to explicitly reflect the interpretation that a person
is not a dealer in foreign exchange ``[t]o the extent that [he is]
exchanging * * * and transporting [his] own money on behalf of
[him]self.'' \56\
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\56\ See, e.g., FinCEN Ruling 2003-9, (Definition of Money
Services Business (Money Transmitter/Currency Dealer or Exchanger))
(October 20, 2003). See also, FinCEN Ruling 2004-3, (Definition of
Money Services Business (Money Transmitter/Currency Dealer or
Exchanger)) (Aug, 17, 2004).
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We added the phrase ``whether or not for same-day delivery'' to
account for the potential time difference between the date on which the
exchange rate is agreed and the date of the exchange. Common settlement
terms in foreign exchange markets include: (1) Same-day or cash--where
the parties both agree to an exchange of currency and conclude the
exchange on the same working day; (2) spot--where the parties agree to
an exchange of currency on one date, with the exchange taking place two
working days thereafter; (3) cash forward--where the parties agree to
an exchange of currency on one date, with the exchange of currency
deferred until an agreed-upon date in the future; and (4) future--where
the parties agree to an exchange of currency on one date, with
settlement to occur in an agreed upon delivery period in the future
typically by payment of an amount reflecting the change in the foreign
currency rate between the time of the agreement and delivery. A
contract for future delivery of currency may also be settled with the
delivery of currency, resulting in the exchange of the currencies
underlying the futures contract.
The subject definition would apply only to exchanges of currency in
the over-the-counter markets.\57\ Exchange-traded contracts and the
persons who intermediate them are regulated by the Commodity Futures
Trading Commission, and therefore are excluded from the definition of
dealer in foreign exchange.\58\ However, currency is an ``excluded
commodity'' under the Commodity Exchange Act,\59\ and foreign exchange
futures may be traded over-the-counter in limited circumstances,
Consequently, this discrete category of futures contracts would fall
within this definition.
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\57\ The terms of a spot, forward, or futures contract typically
will permit either delivery of the underlying foreign currency or
settlement of the contract in the local currency. As the option of
delivering the foreign currency always exists, these contracts cause
the contracting parties to fall under the dealer in foreign exchange
definition.
\58\ 31 CFR 103.11(uu).
\59\ 7 U.S.C. 1a(13).
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Requests for Comment
Does limiting this definition to only dealers in foreign
exchange increase the risk for money laundering? How? We especially
seek input from law enforcement.
Does the definition appropriately include the mediums of
exchange that are used to effect these transactions?
Should all categories of MSB be required to maintain and
retain additional records on customers similar to those of currency
dealers and exchangers in 31 CFR Sec. 103.37?
C. Meaning of the Term ``Check Casher''
Currently, under 31 CFR Sec. 103.11(uu)(2), a check casher is
defined as ``a person engaged in the business of a check casher (other
than a person who does not cash checks in an amount greater than $1,000
in currency or monetary or other instruments for any person on any day
in one or more transactions).'' FinCEN is proposing to amend 31 CFR
103.11(uu)(2) to clarify the meaning of the term ``check cashing'' by
splitting the existing regulatory definition into two subsections--one
defining check cashing activity and one excluding certain activity from
that definition.
The proposed revision would change the definition of check cashier
to state (in part): ``A person who accepts checks (as defined in the
Uniform Commercial Code [U.C.C. Article 3--Negotiable Instruments Sec.
3-104]) or monetary instruments (as defined in Sec. 103.11(u)(1)(ii),
(iii), (iv) and (v)) in return for currency or a combination of
currency and other monetary instruments or other instruments in an
amount greater than $1,000.''
``In return'' has been added to the definition to more accurately
describe the activity that occurs when cashing a check or redeeming a
monetary instrument. The Uniform Commercial Code reference has been
added in order to provide a clear definition of ``check.'' A reference
to the definition of ``monetary instruments'' has also been provided.
``Other instruments'' is intended to capture those types of payment
instruments that do not fall precisely into one of the other
categories. The term is meant to capture those instruments that are
readily recognizable as payment instruments--an instrument such as a
stored value card that is treated in commerce as a cash equivalent--
without capturing goods or services that may be purchased with a check
or monetary instrument.
For the sake of efficiency, this proposed definition would also
incorporate the redeeming of monetary instruments into the definition
of check casher. Given its similarity to check cashing, we believe it
is unnecessary to treat this activity separately from check
cashing.\60\ Accordingly, under this proposal, a person engaged in
redeeming monetary instruments (including traveler's checks and money
orders) would be a check casher if it redeemed checks for currency or a
combination of currency and monetary or other instruments. Our intent
in this revision is not to capture activity that is tantamount to
merely exchanging one
[[Page 22136]]
monetary instrument for another monetary or other instrument and
accordingly, the proposed rule would require currency to be included in
the redeeming.
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\60\ FinCEN does not interpret ``redeem'' to include payment
instruments or mechanisms taken in exchange for goods or services.
See 1999 Rulemaking, 64 FR at 45441-45443.
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The proposed revision also would clarify what activities would not
be subject to the check casher definition. The proposed definition also
would include the following: ``Whether a person is a check casher as
described in this section is a matter of facts and circumstances. The
term `check casher' shall not include: a person that sells closed loop
stored value \61\ purchased with a check, monetary instrument or other
instruments as referenced above in this definition; a person that
redeems its own checks; \62\ or a person that only holds a customer's
check as collateral for repayment by the customer of a loan.\63\ These
businesses are being excluded from the definition of check casher
because of their limited purpose and low risk.''
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\61\ We are proposing to define closed-loop stored value as
stored value that is limited to a defined merchant or location (or
set of locations), such as a specific retailer or retail chain, a
college campus, or a subway system. Cf., Federal Reserve Board, A
Summary of the Roundtable Discussion on Stored-Value Cards and Other
Prepaid Products (Nov. 12, 2004) available at http://
www.federalreserve.gov/paymentsystems/storedvalue/.
\62\ See FinCEN Guidance FIN-2006-G005 (Frequently Asked
Questions--Businesses Cashing Their Own Checks) (March 31, 2006).
\63\ FinCEN Ruling 2002-2 (Definition of Check Casher (Payday
Lenders)), (Feb. 5, 2002).
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Finally, under the current regulations, redeemers of traveler's
checks and money orders currently have SAR obligations while check
cashers do not. As we are proposing to combine these two current
categories of MSB, we seek comment on whether FinCEN should amend its
regulations in a future rulemaking to require check cashers to report
suspicious activity to FinCEN under the BSA. Would such a requirement
be necessary, considering, for example, that issuers of traveler's
checks and money orders will continue to have SAR reporting
requirements with respect to the instruments that they issue?
Requests for Comment
Should there be an exemption or other relief for certain
types of lower risk checks (e.g., federal, state, or local government
entitlement checks)?
Should check cashers be subject to a SAR requirement?
Should there be any other exceptions or limitations on the
check casher definition?
FinCEN invites comment on the impact of the proposed
changes, if any, on current business practices.
We specifically seek comment from law enforcement on how
the proposed changes may affect their investigations and prosecutions.
D. Meaning of the Term ``Issuer or Seller of Traveler's Checks or Money
Orders''
FinCEN proposes to replace existing sections 103.11(uu)(3),
``issuer of traveler's checks, money orders, or stored value'' and
103.11(uu)(4), ``seller or redeemer of travelers checks, money orders,
or stored value'' with new section 103.11(uu)(3), ``issuer or seller of
traveler's checks or money orders.'' This proposed new section defines
an issuer or seller of traveler's checks or money orders as ``[a]
person that (i) issues traveler's checks or money orders that are sold
in an amount greater than $1,000 for any person on any day in one or
more transactions or (ii) sells traveler's checks or money orders in an
amount greater than $1,000 for any person on any day in one or more
transactions.''
The proposed rule eliminates the ``redeemer'' language that is
contained in our current definitions. Although the current rules
include those who ``redeem'' traveler's checks and money orders,
traveler's checks typically are redeemed by their issuers, making a
separate redemption category redundant in such circumstances. Moreover,
redeeming a traveler's check or money order by a non-issuer is close
enough to the activity of a check casher that we think it can be
incorporated into that definition with little difficulty.\64\
Accordingly, we are removing the ``redeemer'' provision from the
proposed rule.
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\64\ FinCEN has never held that a business that provides goods
or services in exchange for payment in the form of money orders or
traveler's checks is an MSB. See 1999 Rulemaking, 64 FR at 45447.
Accordingly, only a business that redeems these instruments for
currency, or exchanges them for a combination of currency and
monetary or other instruments would be considered an MSB,
specifically a check casher, under the proposed rule.
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The proposed rule defines an issuer by virtue of the amount at
which its monetary instruments or travelers checks are sold, as opposed
to the amounts at which they are issued. For example, we contemplate
the amount of the sale including the face value of the monetary
instruments plus any fees. Because money orders are not issued in round
dollar increments like traveler's checks, but are rather sold either
directly by the issuer or by its agent to a customer who specifies the
exact amount, a business must look at this activity to determine
whether its transactions exceed the definitional threshold per person
per day. Similarly, although traveler's checks are usually issued in
large round amounts (e.g., $20, $50, or $100), the definition is linked
to the aggregate amount at which those checks are sold, either directly
by the issuer or at the agent level, to a customer in a single day.
Requests for Comment
Is it appropriate to link the definitional threshold for
an issuer to the value at which the money orders and traveler's checks
are sold?
In light of the proposed definition of a check casher, is
the ``redeemer'' provision no longer necessary for traveler's checks
and money orders?
|