[Federal Register Volume 69, Number 239 (Tuesday, December 14, 2004)]
[Rules and Regulations]
[Pages 74439-74441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27287]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103


Financial Crimes Enforcement Network; Interpretive Release 2004-
1--Anti-Money Laundering Program Requirements for Money Services 
Businesses With Respect to Foreign Agents or Foreign Counterparties

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Final rule; interpretive release.

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SUMMARY: This Interpretive Release sets forth an interpretation of the 
regulation requiring Money Services Businesses that are required to 
register with FinCEN to establish and maintain anti-money laundering 
programs. Specifically, this Interpretive Release clarifies that the 
anti-money laundering program regulation requires such Money Services 
Businesses to establish adequate and appropriate policies, procedures 
and controls commensurate with the risk of money laundering and the 
financing of terrorism posed by their relationship with foreign agents 
or foreign counterparties of the Money Services Business.

DATES: Effective June 13, 2005.

FOR FURTHER INFORMATION CONTACT: Office of Regulatory Policy and 
Programs Division, 1-800-800-2877, Office of Chief Counsel (703) 905-
3590 (not a toll free number).

SUPPLEMENTARY INFORMATION: Section 5318(h) of the Bank Secrecy Act, 
which is codified in subchapter II of chapter 53 of title 31, United 
States Code, requires every financial institution to establish an anti-
money laundering program. The Bank Secrecy Act regulations define 
financial institution to include money service businesses. On April 29, 
2002, FinCEN issued interim final rules-31 CFR 103.125-concerning the 
application of the anti-money laundering program requirement to money 
services businesses. 67 FR 21114.

List of Subjects in 31 CFR Part 103

    Authority delegations (government agencies), bank, banking, 
currency, investigations, reporting and recordkeeping requirements.

Department of the Treasury

31 CFR Chapter I

Authority and Issuance

0
For the reasons set forth in the preamble, part 103 of title 31 of the 
Code of Federal Regulations is amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

0
1. The authority citation for part 103 continues to read as follows:

    Authority: 12 U.S.C. 1829b and 1951-1959: 31 U.S.C 5311-5314 and 
5316-5332; title III, secs. 312, 313, 314, 319, 326, 352, Pub. L. 
107-56, 115 Stat. 307, 12 U.S.C. 1786(q).

0
2. Part 103 is amended by adding a new appendix C to read as follows:

APPENDIX C TO PART 103--INTERPRETIVE RULES

Release No. 2004-01

    This Interpretive Guidance sets forth our interpretation of the 
regulation requiring Money Services Businesses that are required to 
register with FinCEN to establish and maintain anti-money laundering 
programs. See 31 CFR 103.125. Specifically, this Interpretive 
Guidance clarifies that the anti-money laundering program regulation 
requires Money Services Businesses to establish adequate and 
appropriate policies, procedures, and controls commensurate with the 
risks of money laundering and the financing of terrorism posed by 
their relationship with foreign agents or foreign counterparties of 
the Money Services Business.\1\
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    \1\ This Interpretive Guidance focuses on the need to control 
risks arising out of the relationship between a Money Service 
Business and its foreign counterparty or agent. Under existing 
FinCEN regulations, only Money Service Business principals are 
required to register with FinCEN, and only Money Service Business 
principals establish the counterparty or agency relationships. 31 
CFR 103.41. Accordingly, this Interpretive Guidance only applies to 
those Money Service Businesses required to register with FinCEN, 
that is, only those Money Service Businesses that may have a 
relationship with a foreign agent or counterparty.
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    Under existing Bank Secrecy Act regulations, we have defined 
Money Services Businesses to include five distinct types of 
financial services providers and the U.S. Postal Service: (1) 
Currency dealers or exchangers; (2) check cashers; (3) issuers of 
traveler's checks, money orders, or stored

[[Page 74440]]

value; (4) sellers or redeemers of traveler's checks, money orders, 
or stored value; and (5) money transmitters. See 31 CFR 103.11(uu). 
With limited exception, Money Services Businesses are subject to the 
full range of Bank Secrecy Act regulatory controls, including the 
anti-money laundering program rule, suspicious activity and currency 
transaction reporting rules, and various other identification and 
recordkeeping rules.\2\
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    \2\ See 31 CFR 103.125 (requirement for Money Service Businesses 
to establish and maintain an anti-money laundering compliance 
program); 31 CFR 103.22 (requirement for Money Service Businesses to 
file currency transaction reports); 31 CFR 103.20 (requirement for 
Money Service Businesses, other than check cashers and issuers, 
sellers, or redeemers of stored value, to file suspicious activity 
reports); 31 CFR 103.29 (requirement for Money Service Businesses 
that sell money orders, traveler's checks, or other instruments for 
cash to verify the identity of the customer and create and maintain 
a record of each cash purchase between $3,000 and $10,000, 
inclusive); 31 CFR 103.33(f) (requirement for Money Service 
Businesses that send or accept instructions to transmit funds of 
$3,000 or more to verify the identity of the sender or receiver and 
create and maintain a record of the transmittal regardless of the 
method of payment); and 31 CFR 103.37 (requirement for currency 
exchangers to create and maintain a record of each exchange of 
currency in excess of $1,000).
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    Many Money Services Businesses, including the vast majority of 
money transmitters in the United States, operate through a system of 
agents both domestically and internationally. We estimate that a 
substantial majority of all cross-border remittances by money 
transmitters are conducted using this model. Other Money Services 
Businesses may operate through more informal relationships, such as 
the trust-based hawala system.\3\ Regardless of the form of the 
relationship between a Money Services Business and its foreign 
agents or counterparties, Money Services Business transactions 
generally are initiated by customers seeking to send or receive 
funds, cash checks, buy or sell money orders or traveler's checks, 
or buy or sell currency. The customer directs the Money Services 
Business to execute the transactions; the Money Services Business 
does not unilaterally determine the recipient of its products or 
services. Although the customer can use the Money Services Business' 
services, the customer does not typically establish an account 
relationship with the Money Services Business. The focus of this 
Interpretive Guidance is the establishment of, and ongoing 
relationship between, a Money Services Business and its foreign 
agent or foreign counterparty that facilitates the flow of funds 
cross-border into and out of the United States on behalf of 
customers.
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    \3\ For an analysis of informal value transfer systems, see 
FinCEN's Report to Congress Pursuant to Section 359 of the Patriot 
Act, available on www.fincen.gov.
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The Cross-Border Flow of Funds through Money Services Businesses and 
Associated Risks

    Ensuring that financial institutions based in the United States 
establish and apply adequate and appropriate policies, procedures, 
and controls in their anti-money laundering compliance programs to 
protect the international gateways to the U.S. financial system is 
an essential element of the Bank Secrecy Act regulatory regime. This 
Interpretive Guidance forms a part of our comprehensive approach to 
accomplishing this goal. To the extent Money Services Businesses 
utilize relationships with foreign agents or counterparties to 
facilitate the movement of funds into or out of the United States, 
they must take reasonable steps to guard against the flow of illicit 
funds, or the flow of funds from legitimate sources to persons 
seeking to use those funds for illicit purposes, through such 
relationships.
    The money laundering or terrorism financing risks associated 
with foreign agents or counterparties are similar to the risks 
presented by domestic agents of Money Services Businesses. For 
example, the foreign agent of the domestic Money Services Business 
may have lax anti-money laundering policies, procedures, and 
internal controls, or actually may be complicit with those seeking 
to move illicit funds. In some instances, the risk with foreign 
agents can be greater than with domestic agents because foreign 
agents are not subject to the Bank Secrecy Act regulatory regime; 
the extent to which they are subject to anti-money laundering 
regulation, and the quality of that regulation, will vary with the 
jurisdictions in which they are located.
    There are a variety of ways in which a Money Services Business 
may be susceptible to the unwitting facilitation of money laundering 
through foreign agents or counterparties. For example, our review of 
Bank Secrecy Act data revealed several instances of suspected 
criminal activity--detected by existing anti-money laundering and 
suspicious activity reporting programs of Money Services Businesses 
and banks--where foreign agents of Money Services Business have 
engaged in bulk sales of sequentially numbered, U.S. denominated 
traveler's checks or blocks of money orders, to one or two 
individuals. The individuals involved frequently purchased the 
instruments on multiple dates and in different locations, 
structuring the purchases to avoid reporting thresholds and issuer 
limits on daily instrument sales. The instruments usually had 
illegible signatures or failed to designate a beneficiary or payor. 
The instruments were then negotiated with one or more dealers in 
goods, such as diamonds, gems, or precious metals, deposited in 
foreign banks, and cleared through U.S. banks. In such cases, the 
clearing banks were so far removed from the transactions that they 
could not trace back or screen either the intervening transactions 
or the individuals involved in the transactions.
    A case involving suspicious activity in a Money Services 
Business' domestic agent provides a further example of the type of 
high-risk activity that also may be engaged in by foreign agents or 
counterparties. In this instance, the domestic Money Service 
Business had policies, procedures, and controls that facilitated the 
detection of illicit activity at the agent. A group of six customers 
entered a money transmitter agent at approximately five-minute 
intervals to send the same structured amounts ($2,500) to the same 
receiver in a foreign country. Several weeks later, another group of 
six customers entered the same agent location and conducted an 
identical pattern of successive $2,500 transfers (a few minutes 
apart) to the same recipient in the same foreign country as the 
first set of transactions. Some of the individuals in the second 
group had the same last names as customers in the first group. 
Additional suspicious activity reports filed by the primary Money 
Services Business identified several other groups of customers 
initiating money transfers at this same agent business location, in 
the same manner, and in the same overall time frame. This activity 
by an agent drew the scrutiny of the Money Services Business, and in 
addition to the filing of suspicious activity reports, led to the 
termination of the relationship of the Money Services Business with 
the agent.
    These examples of illicit activity occurring at the agents of 
Money Services Businesses underscore the need for Money Services 
Businesses to include, as a part of their anti-money laundering 
programs, procedures, policies, and controls to govern relationships 
with foreign agents and counterparties to enable the Money Services 
Business to perform the appropriate level of suspicious activity and 
risk monitoring. We believe that this obligation is an essential 
part of each Money Services Business' existing obligation under 31 
CFR 103.125 to develop and implement an effective anti-money 
laundering program.\4\ This Interpretive Guidance will aid Money 
Services Businesses in adopting appropriate risk-based policies, 
procedures, and controls on cross-border relationships with foreign 
agents and counterparties.
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    \4\ FinCEN previously interpreted 31 CFR 103.125 to impose a 
similar obligation on a money transmitter with respect to its 
domestic agents. See Matter of Western Union, No. 2003-2 (Mar. 6, 
2003) (www.fincen.gov).
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Anti-Money Laundering Program Elements Relating to Foreign Agents and 
Counterparties

    Under 31 CFR 103.125(a), Money Services Businesses are required 
to develop, implement, and maintain an effective anti-money 
laundering program reasonably designed to prevent the Money Services 
Business from being used to facilitate money laundering and the 
financing of terrorist activities. The program must be commensurate 
with the risks posed by the location, size, nature, and volume of 
the financial services provided by the Money Services Business. 
Additionally, the program must incorporate policies, procedures, and 
controls reasonably designed to assure compliance with the Bank 
Secrecy Act and implementing regulations.
    With respect to Money Services Businesses that utilize foreign 
agents or counterparties, a Money Services Business' anti-money 
laundering program must include risk-based policies, procedures, and 
controls designed to identify and minimize money laundering and 
terrorist financing risks associated with foreign agents and 
counterparties that facilitate the flow of funds into and out of the 
United States. The program must be aimed at

[[Page 74441]]

preventing the products and services of the Money Services Business 
from being used to facilitate money laundering or terrorist 
financing through these relationships and detecting the use of these 
products and services for money laundering or terrorist financing by 
the Money Services Business or agent. Relevant risk factors may 
include, but are not limited to:
    <bullet> The foreign agent or counterparty's location and 
jurisdiction of organization, chartering, or licensing. This would 
include considering the extent to which the relevant jurisdiction is 
internationally recognized as presenting a greater risk for money 
laundering or is considered to have more robust anti-money 
laundering standards.
    <bullet> The ownership of the foreign agent or counterparty. 
This includes whether the owners are known, upon reasonable inquiry, 
to be associated with criminal conduct or terrorism. For example, 
have the individuals been designated by Treasury's Office of Foreign 
Assets Control as Specially Designated Nationals or Blocked Persons 
(i.e., involvement in terrorism, drug trafficking, or the 
proliferation of weapons of mass destruction)?
    <bullet> The extent to which the foreign agent or counterparty 
is subject to anti-money laundering requirements in its jurisdiction 
and whether it has established such controls.
    <bullet> Any information known or readily available to the Money 
Services Business about the foreign agent or counterparty's anti-
money laundering record, including public information in industry 
guides, periodicals, and major publications.
    <bullet> The nature of the foreign agent or counterparty's 
business, the markets it serves, and the extent to which its 
business and the markets it serves present an increased risk for 
money laundering or terrorist financing.
    <bullet> The types and purpose of services to be provided to, 
and anticipated activity with, the foreign agent or counterparty.
    <bullet> The nature and duration of the Money Services Business' 
relationship with the foreign agent or counterparty.
    Specifically, a Money Services Business' anti-money laundering 
program should include procedures for the following:

1. Conduct of Due Diligence on Foreign Agents and Counterparties

    Money Services Businesses should establish procedures for 
conducting reasonable, risk-based due diligence on potential and 
existing foreign agents and counterparties to help ensure that such 
foreign agents and counterparties are not themselves complicit in 
illegal activity involving the Money Services Business' products and 
services, and that they have in place appropriate anti-money 
laundering controls to guard against the abuse of the Money Services 
Business' products and services. Such due diligence must, at a 
minimum, include reasonable procedures to identify the owners of the 
Money Services Business' foreign agents and counterparties, as well 
as to evaluate, on an ongoing basis, the operations of those foreign 
agents and counterparties and their implementation of policies, 
procedures, and controls reasonably designed to help assure that the 
Money Services Business' products and services are not subject to 
abuse by the foreign agent's or counterparty's customers, employees, 
or contractors.\5\ The extent of the due diligence required will 
depend on a variety of factors specific to each agent or 
counterparty. We expect Money Services Businesses to assess such 
risks and perform due diligence in a manner consistent with that 
risk, in light of the availability of information.
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    \5\ Our anti-money laundering program rule, 31 CFR 
103.125(d)(iii), permits Money Service Businesses to satisfy this 
last requirement with regard to their domestic agents (which are 
also Money Service Businesses under the BSA regulations), by 
allocating responsibility for the program to their agents. Such an 
allocation, however, does not relieve a Money Service Business from 
ultimate responsibility for establishing and maintaining an 
effective anti-money laundering program. Id.
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2. Risk-based Monitoring of Foreign Agents or Counterparties

    In addition to the due diligence described above, in order to 
detect and report suspected money laundering or terrorist financing, 
Money Services Businesses should establish procedures for risk-based 
monitoring and review of transactions from, to, or through the 
United States that are conducted through foreign agents and 
counterparties.\6\ Such procedures should also focus on identifying 
material changes in the agent's risk profile, such as a change in 
ownership, business, or the regulatory scrutiny to which it is 
subject.
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    \6\ Nothing in this Interpretive Guidance is intended to require 
Money Service Businesses to monitor or review, for purposes of the 
Bank Secrecy Act, transactions or activities of foreign agents or 
counterparties that occur entirely outside of the United States and 
do not flow from, to, or through the United States.
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    The review of transactions should enable the Money Services 
Business to identify and, where appropriate, report as suspicious 
such occurrences as: instances of unusual wire activity, bulk sales 
or purchases of sequentially numbered instruments, multiple 
purchases or sales that appear to be structured, and illegible or 
missing customer information. Additionally, Money Services 
Businesses should establish procedures to assure that their foreign 
agents or counterparties are effectively implementing an anti-money 
laundering program and to discern obvious breakdowns in the 
implementation of the program by the foreign agent or counterparty.
    Similarly, money transmitters should have procedures in place to 
enable them to review foreign agent or counterparty activity for 
signs of structuring or unnecessarily complex transmissions through 
multiple jurisdictions that may be indicative of layering. Such 
procedures should also enable them to discern attempts to evade 
identification or other requirements, whether imposed by applicable 
law or by the Money Services Business' own internal policies. 
Activity by agents or counterparties that appears aimed at evading 
the Money Services Business' own controls can be indicative of 
complicity in illicit conduct; this activity must be scrutinized, 
reported as appropriate, and corrective action taken as warranted.

3. Corrective Action and Termination

    Money Services Businesses should have procedures for responding 
to foreign agents or counterparties that present unreasonable risks 
of money laundering or the financing of terrorism. Such procedures 
should provide for the implementation of corrective action on the 
part of the foreign agent or counterparty or for the termination of 
the relationship with any foreign agent or counterparty that the 
Money Services Business determines poses an unacceptable risk of 
money laundering or terrorist financing, or that has demonstrated 
systemic, willful, or repeated lapses in compliance with the Money 
Services Business' own anti-money laundering procedures or 
requirements.
    While Money Services Businesses may already have implemented 
some or all of the procedures described in this Interpretive 
Guidance as a part of their anti-money laundering programs, we wish 
to provide a reasonable period of time for all affected Money 
Services Businesses to assess their operations, review their 
existing policies and programs for compliance with this Advisory, 
and implement any additional necessary changes. We will expect full 
compliance with this Interpretive Release within 180 days.
    Finally, we are mindful of the potential impact that this 
Interpretive Release may have on continuing efforts to bring 
informal value transfer systems into compliance with the existing 
regulatory framework of the Bank Secrecy Act. Experience has 
demonstrated the challenges in securing compliance by, for instance, 
hawalas and other informal value transfer systems. Further 
specification of Bank Secrecy Act compliance obligations carries 
with it the risk of driving these businesses underground, thereby 
undermining our ultimate regulatory goals. On balance, however, we 
believe that outlining the requirements for dealing with foreign 
agents and counterparties, including informal networks, is 
appropriate in light of the risks of money laundering and the 
financing of terrorism.

William J. Fox,
Director.
[FR Doc. 04-27287 Filed 12-13-04; 8:45 am]
BILLING CODE 4810-02-P