Key Takeaways:

• The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Treasury dedicated to protecting the financial system from illicit use.
• FinCEN fights against money laundering, terrorism financing, and other financial crimes through regulation, analysis, and enforcement actions.
• The agency ensures compliance with a range of anti-money laundering (AML) and counter-terrorist financing (CTF) laws and regulations.

 

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 Data Are Collected by FinCEN?

Understanding that the Bank Secrecy Act (BSA) establishes the regulations and FinCEN enforces compliance is crucial. Given these conditions, what are the two most critical pieces of data that both banks and non-bank financial institutions are required to submit?

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

Suspicious Activities Reports (SARs)

Under the BSA, banks are tasked with monitoring, identifying, and reporting suspicious activities. Upon detection of any suspicious activity, a thorough investigation must be conducted to decide whether filing a SAR is warranted. This process should be completed within 30 days of the transaction date. Key indicators include:

• Criminal violations involving any amount.
• Violations amounting to $5,000 or more when a suspect is identified.
• Criminal offenses involving $25,000 or more without a suspect.
• Transactions totaling $5,000 or more that could be related to money laundering or a BSA violation.

Currency Transaction Reports (CTRs)

How Does FinCEN Collect and Act on Data?

FinCEN oversees the Bank Secrecy Act (BSA) compliance, indirectly accessing data from diverse financial institutions to monitor electronic and cash transactions. Money launderers obscure the movement of funds to hinder traceability while making the funds seem legitimate, posing challenges for tracking. Below are the steps FinCEN uses to collect and process data:

1. Receives SARs and CTRs — FinCEN daily collects Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) submitted by financial institutions.
2. Analyzes the Data — The information from SARs and CTRs is analyzed to identify individuals, entities, and criminal networks, including their methods in money laundering, terrorism financing, weapons proliferation, and other illegal operations.
3. Connects Unrelated Parties — Through analysis, FinCEN can link seemingly unconnected local or international criminal organizations and individuals based on transaction data.
4. Law Enforcement Action — The analyzed data is shared with law enforcement agencies, aiding financial investigations. Information derived from SARs and CTRs has proven to be a vital resource for criminal probes over the years.

FinCEN Approach to Beneficial Ownership and Customer Due Diligence

In 2018, FinCEN introduced a significant update to its banking requirements: the Beneficial Ownership rule, also referred to as the Customer Due Diligence Final Rule (CDD Final Rule). This rule mandates that financial institutions perform customer due diligence on entities seeking to use their services, aiming to prevent the use of shell companies by criminals for money laundering or other illicit financial activities.

What Is Beneficial Ownership? 

Beneficial Ownership is a legal concept that refers to an individual’s rights over certain properties or shares in a company. Legally, a beneficial owner is defined as anyone who owns more than 25% of a company’s shares, whether through direct control, management, or voting rights.

Beneficial ownership structures can range from straightforward to complex, especially in organizations with multiple subsidiaries, which may themselves have subsidiaries. These intricate structures are sometimes deliberately established for questionable purposes. Prior to the CDD Final Rule enacted by FinCEN in 2018, AML compliance predominantly focused on individual customers. This rule expanded the requirement to include due diligence on the beneficial owners of companies.

What Are Shell Companies?

Shell companies are utilized for a variety of purposes, including acting as international business corporations, serving as personal investment vehicles to safeguard assets, or holding funds not required for immediate business needs. They can also be exploited for fraudulent schemes and money laundering.

FinCEN Oversight of Virtual Currencies

What Are Money Service Businesses (MSBs)?

Money Service Businesses (MSBs) represent a category used by FinCEN and other financial authorities to identify entities engaged in the transmission or conversion of currency. The definition of MSBs extends to include Non-Banking Financial Institutions (NBFIs), covering a broad range of activities. According to FinCEN, businesses involved in any of the following are classified as MSBs:

• Currency dealers or exchangers (including virtual asset service providers like exchanges, brokers, wallet providers, etc.)
• Check cashers
• Issuers, sellers, or redeemers of traveler’s checks, money orders, or stored value
• Money transmitters
• The U.S. Postal Service

FinCEN And Crypto: The Journey So Far

The dynamic world of cryptocurrencies and virtual assets has witnessed substantial governmental engagement over time. This evolution, characterized by a series of regulatory measures and actions by FinCEN and other agencies, demonstrates the government’s careful yet firm stance on digital currencies. The following timeline captures significant developments:

What Is the Travel Rule?

The Travel Rule, as mandated by FinCEN, obligates financial institutions to share and record the details of both the sender and the recipient during financial transactions. This requirement also extends to cryptocurrency exchanges, in line with the revised FATF Recommendation 15 for Virtual Asset Service Providers (VASPs). Under the Travel Rule, when a transaction occurs, financial institutions are required to collect and share the following information:

Sender’s Information:

• Name of the sender (transmitter)
• Sender’s account number, if applicable
• Sender’s address
• Identity of the sender’s financial institution
• Amount of the transaction
• Date of the transaction
• Identity of the recipient’s financial institution

Recipient’s Information (to be provided by the beneficiary bank):

• Name of the recipient
• Recipient’s address
• Recipient’s account number
• Any other specific identifier of the recipient

For transactions involving Virtual Asset Service Providers (VASPs), FATF guidelines necessitate the exchange of additional details:

Originating VASP Must Share:

• Originator’s name (customer)
• Originator’s account number for the transaction
• Unique identifiable information, such as national identity number, passport number, social security number, driving license number, or residential address

Receiving VASP Must Share Upon Receipt of Funds:

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

Conclusion

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