Comments are due Sept. 30 on the Treasury Department's proposal to apply the Bank Secrecy Act, or BSA, for the first time to the electronic banking and commerce industry.
Issued by the Financial Crimes Enforcement Network (Fincen) May 21, the federal government's first major regulatory effort in this growing industry could have significant implications.
By requiring the disclosure of detailed information on customers and their transactions, the proposed regulations would conflict with the confidentiality inherent in encrypted communications in electronic banking and commerce. In addition, the implicit manual intervention to achieve this disclosure is at odds with the largely automated nature of the industry.
The entities primarily affected would be participants in the stored- value card, digital payments, and home banking sectors. Although banks have long been subject to the BSA, the proposed regulations are broadly drawn and would potentially cover a wide variety of service providers, including operating subsidiaries of banks that increasingly are the vehicle for electronic banking services.
While the proposed regulations in a certain sense would provide a level playing field between banking and nonbanking entities, they could in fact complicate development of the industry to the detriment of all participants.
The basis for the proposal is the Money Laundering Suppression Act of 1994, which required money transmitting services to register with Fincen.
Enacted well before the electronic banking and commerce industry had become a significant factor in financial services or the public consciousness, the law was aimed strictly at combating money laundering.
The proposed regulations are largely inconsistent with the hands-off approach to regulation advocated by Clinton administration officials and lawmakers in hearings and conferences on electronic banking and commerce over the last several years.
Although the intent of the statute is to require registration of the roughly 158,000 mom-and-pop operations that sell money orders and transmit funds, the proposed regulations are more than a mere registration exercise. Subject to minor exceptions, they potentially apply many substantive BSA requirements to any participant in the electronic banking and commerce industry that issues, sells, or redeems "stored value"; "transmits money"; or acts as an "agent" of an entity that does any of the preceding.
Three primary BSA obligations would affect the electronic banking and commerce industry:
First, the BSA requires financial institutions to give Fincen detailed reports on currency transactions over $10,000.
Second, the BSA requires financial institutions to keep (and make available to Fincen on demand) records on international funds transfers exceeding $3,000, including the collection and transmittal through each stage of the funds transfer process of specified detailed information on the parties to the transaction.
Third, under the BSA Fincen requires financial institutions to report "suspicious transactions" and "known or suspected criminal violations."
The proposed rules would amend the BSA to establish a newly regulated entity called a "money services business," which would include an "issuer, seller, or redeemer of stored value"; a "money transmitter"; or potentially any "agent" of the foregoing.
Virtually any banking or nonbanking entity involved in the chain of an electronic banking or commerce transaction would be potentially covered as a "money services business."
In the words of Fincen, "the proposed language would eliminate any lingering doubt that offerers and operators of advanced electronic payment systems are subject to the Bank Secrecy Act."
As such, Fincen acknowledges they would be fully subject to existing BSA requirements unless otherwise exempted-potentially imposing time-consuming, duplicative filings and redundant record maintenance requirements, as well as significant civil penalties of up to $5,000 per violation for each day the violation continues.
However, a $500 de minimis exception in the proposal for stored-value issuers, sellers, or redeemers may mitigate the impact on that particular class of service provider. (No comparable exception applies to "money transmitters.")
Proposed companion regulations would reduce the $10,000 threshold for filing currency transaction reports to $750 for money transmitters or their agents. However, the lower threshold would not apply to stored value or to depository institutions. While the latter would remain subject to the existing $10,000 threshold, the new $750 threshold would appear to apply to operating subsidiaries of banks.
Fincen no doubt has genuine concerns about the potential for abuse of the electronic banking and commerce industry by money launderers and criminals. Fincen has proposed a detailed and thoughtful approach-some of it in the nature of a trial balloon-for meeting these concerns.
Fincen is holding a series of meetings around the country on the proposal and has actively solicited comments. It is up to the electronic banking and commerce industry to tell Fincen why its approach is premature and to explain the possibility that overly broad regulation would harm rather than protect the industry.
