WASHINGTON — A Financial Crimes Enforcement Network plan to require banks to report all international wire transfers to the government is fundamentally flawed and must be significantly scaled back or withdrawn, according to several banks and their representatives.
The banking industry is taking issue with virtually every part of the proposal, contending that Fincen does not have the technology in place to make use of the reports and that the requirement would capture far too many transactions.
Many also derided it as a government overreach.
"We feel this proposal places additional undue burden on already over-regulated financial institutions and violates the privacy of law-abiding citizens and entities," Kelly Etherington, senior vice president of corporate anti-money-laundering compliance manager of Zions Bancorp., said in a comment letter to Fincen. "Multiple rules are already in place for law enforcement to obtain information regarding [cross-border wire transfers] and other transactions through the USA Patriot Act's information sharing … as well as the general legal subpoena process."
At issue is a proposal released in September that would require banks to report all international wire transfers to the government. The plan focuses on so-called gatekeeper banks that transmit or receive data to and from overseas, which would be responsible for reporting the information.
While that idea has been raised in the past, the proposal added a new twist by also adding a requirement that would force banks to create an annual report including the account number and account holder's tax identification number for any person or entity that originated or received an international wire transfer.
While Fincen says the proposal would require roughly 20,000 reports a week from large institutions, the American Bankers Association said the real number is more than double that. Small institutions, the ABA said, would have to report an average of 115 transactions each week.
The "proposal constitutes just such an unauthorized expansion of financial reporting to government law enforcement agencies of legal activities of law-abiding people engaged in international transactions and we seriously question whether this proposal is the best use of limited resources," wrote Richard Riese, the ABA's senior vice president and Robert Rowe, the group's vice president and senior counsel.
The proposal was an unpleasant surprise for the industry, because four years ago Fincen apparently had abandoned the idea over cost and technology concerns.
Fincen still does not appear technologically ready to implement the proposal. In its plan, the agency said it needs extra time to build its capacity, saying it would not implement the plan until 2012.
That drew criticism from several commenters, who argued Fincen should not proceed with a plan it cannot yet implement.
"It is unclear whether Fincen's technology system is capable of storing, securing and cross-referencing the millions of transmittal reports it will receive with the corresponding annual reports of taxpayer identification numbers," wrote Lily Thomas, vice president and regulatory counsel for the Independent Community Bankers of America. "Fincen should not issue a reporting requirement of such magnitude without first being able to fully utilize the information it will receive as well as ensure consistent security and privacy controls between financial institutions, Fincen and law enforcement agencies."
The primary concern of the 32 comment letters, however, was the annual reporting of tax identifier information. Respondents said it was not only an invasion of privacy, but also largely useless data.
"Logically, the more sensitive consumer financial information that is transmitted and collected, the more susceptible this information is to misuse and misappropriation," wrote Moises James and M. Brandon Meadows of BBVA Group. "We believe that the required periodic reporting of [cross-border wire transfers] will provide sufficient information to perform meaningful data analysis. Consequently, we believe the annual reporting requirement is unnecessary."
Further, many said Fincen already has access to this wire transfer and tax ID data on a case-by-case basis, while law enforcement agencies could subpoena such information.
The National Association of Federal Credit Unions "understands such information may be useful to some extent," wrote Dillon Shea, the group's associate director of regulatory affairs.
"However, it may be more appropriate to request that information as necessary, as is the current practice instead of a blanket reporting requirement of all transactions," Shea wrote. "Next, NAFCU questions the utility of requesting this massive amount of new information in light of the information the agency already receives via suspicious activity reports, currency transaction reports, and other similar tools."
The Institute of International Bankers suggested that Fincen drop the call for annual reporting of taxpayer information until it conducts further study.
"We do … have significant reservations regarding the proposed new annual reporting requirement and urge Fincen not to take any further action to implement such a requirement pending further study of its necessity, the extent to which other reporting requirements can be relied on to achieve the same purpose, and a more detailed assessment of the potential systems and other operational ramifications such a new requirement might have for banks," wrote Richard Coffman, the institute's general counsel.
Some banks said reporting all tax IDs would be too costly.
"Regarding the annual [taxpayer information number] reporting, HSBC believes the estimate suggested in the reporting proposal severely underestimates the effort and cost," wrote Thomas Halpin, the company's senior vice president and global head of financial institution payments and clearing product management. "HSBC's internal analysis has determined that there is no functionality that could be levered from HSBC's … reporting process. Unlike the suggestion in the notice of proposed rulemaking; an entirely separate reporting process would be required."
Overall, several bankers suggested that Fincen's assumptions in making the proposal are not borne out by the reality. Under the proposal, gatekeeper banks and credit unions must report all international wire transfers no matter the amount, while money transmitters must report any transactions at or above $1,000.
In the plan, Fincen claims that banks already keep records for funds transferred regardless of dollar value, and would prefer not to have to segregate funds based on their amount.
But some bankers, credit unions and even regulators said there should be a threshold and it should be at least $3,000, the same level already required for currency transaction reports.
"We encourage Fincen to implement [cross-border wire transfer] reporting requirements that utilize dollar limit thresholds that have been established in [CTRs], which requires maintenance of certain records for transmittals of funds," Neil Milner, president and CEO of the Conference of State Bank Supervisors, wrote, along with Joseph Rooney, president and director of the Money Transmitter Regulators Association. "By utilizing the dollar threshold limits from the current BSA record requirements for money transmitters, there is consistency between existing BSA laws and regulations and the proposed requirements that would allow for effective regulatory governance and oversight."
Leigh Williams, president of the BITS, a division of the Financial Services Roundtable, warned of a potential competitive impact if Fincen moves forward with the plan.
"We encourage Fincen's inclusion of money transmitters in reporting requirements as they are often used for international fund transfers and could be an additional method for money laundering or terrorist funding," Williams wrote. "We believe the reporting thresholds for money transmitters should be equivalent to financial institutions as individuals utilize their services for all sizes of fund transfers."
While bankers were generally appreciative that Fincen limited the reports to "gatekeeper" banks, they argued that distinguishing first-in/first out transfers is not always simple.
"Financial institutions have various degrees of sophistication in their data management systems," wrote DJ Culkar, senior vice president and assistant general counsel and assistant secretary for Comerica Bank. "It may be that some institutions have no automated mechanism or process to identify and capture the location of its sender or receiving institution. This information is imperative in order for an institution to know if it is the first-in or last-out. … This will, for many reporting financial institutions, be a large cost and expense."
Joseph Blount, senior vice president and payment systems consultant for BB&T Corp., agreed.
"Bank wire transfer and deposit account processing systems are generally not set up to automatically distinguish wires sent to/received from foreign financial institutions and those to/from domestic banks," Blount wrote. "The proposed rules will likely require significant system modifications to identify and properly code reportable cross-border transfers based on the sending/receiving bank address."
With all the pending regulations on their way as a result of the regulatory reform bill, meanwhile, many bankers said Fincen should delay any finalization of the proposal by at least 18 months.
"Financial institutions will also be devoting very significant resources to comply with more than 240 separate rulemakings mandated by the Dodd-Frank regulatory reform legislation," Blount wrote. "Because of unprecedented volume of new regulatory compliance obligations banks will be addressing in the next several years, we urge Fincen to adopt compliance dates that provide sufficient dates that provide sufficient time for financial institutions to adapt to the new requirements in a reasonable and orderly manner that is not disruptive to their ongoing operations and client service standards."
Jason Pendleton, vice president of compliance for the $453 million-asset First Harrison Bank in Indiana, agreed.
"Nothing in the proposal seems to lessen the heavy burden on the banking industry to analyze these transactions themselves for suspicious activity," Pendleton wrote. "It is duplicitous and unnecessary to retain the obligation on the banking industry to also analyze such transactions for potential money laundering or terrorist financing."
In the proposal rule, Fincen said it would allow institutions to use third parties, such as Swift, a standardized messaging processing system, to submit the reports.
But institutions want Fincen to go further and provide them with "safe harbor" or liability protection if they use Swift.
"Fincen should be clear that a bank that uses this option would be in compliance with the reporting rules and would have the benefit of the same safe harbor as if it had sent the required report itself," wrote Joseph Alexander, senior vice president, deputy general counsel and secretary for the Clearing House Association LLC.
John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists, said bankers also need a safe harbor for privacy concerns.
"Similar to provisions of the Bank Secrecy Act providing a safe harbor to institutions that send confidential client information through prescribed processes, a similar safe harbor should be provided to protect institutions providing such a large volume of confidential client data," Byrne wrote. "Consideration needs to be given to data protection regulations of foreign jurisdictions and provide immunity for institutions."