Compliance and Regulatory Alerts - 10-23-19

Digital Assets - Financial Agencies Remind Firms of AML Compliance Obligations

Digital Assets - Financial Agencies Remind Firms of AML Compliance Obligations

On October 11, 2019, the heads of FinCEN, the SEC and CFTC issued a joint statement to remind financial institutions of their Bank Secrecy Act (“BSA”) obligations for transactions involving “digital assets.” The statement begins with an acknowledgement by the regulators that the terminology used to describe a digital asset (or those providing financial services involving a digital asset) “may not necessarily align with how that asset, activity or service is defined under the BSA, or under the laws and rules administered by the CFTC and the SEC.” The regulators’ joint statement makes the central point that, “regardless of the label,” for purposes of compliance with the BSA, it is “the facts and circumstances underlying the asset, activity or service,” that determines the regulatory treatment of the activity.

BSA anti-money laundering obligations include the establishment and implementation of an effective program, recordkeeping and suspicious activity reporting. Agency leaders reaffirmed that "financial institutions" subject to these obligations include futures commission merchants, brokers obligated to register with the CFTC, broker-dealers and mutual funds entities obligated to register with the SEC, and money services businesses ("MSBs") obligated to register with FinCEN.

In an attempt at clarifying which agencies, or combinations of agencies, have authority over other market participants that engage in digital transactions, the regulators explained that the “nature of the digital asset related activities” would be key to determining if a person must register with the CFTC, FinCEN or the SEC. In separate additional statements, the agencies described the scope of their specific jurisdictions. The regulators noted, for example, that broker-dealer-related digital asset financial services may fall under the SEC, FinCEN and FINRA and that the BSA obligations “apply very broadly” regardless of whether the digital activity involves a “security” or “commodity.”

In additional specific comments, the Director of FinCEN reminded money transmitters and other MSBs (i.e. dealers in a foreign exchange, a check casher, an issuer or seller of traveler’s checks or money orders, or a seller or provider of prepaid access) to be mindful of recently issued interpretive guidance on the application of the BSA obligations to their businesses. (See Bates Research article on the FinCEN’s 2019 Convertible Virtual Currencies “CVC” Guidance.)

“By this joint statement, the agency heads are warning market participants engaging in digital asset transactions that they are seeking compliance with anti-money laundering requirements,” said Bates AML and Financial Crimes Managing Director Ed Longridge. “Now is the time for these players to determine whether their businesses are appropriately registered, and to have the appropriate AML programs in place.”

To learn more about Bates AML and Financial Crimes services, please contact Edward Longridge, Managing Director, Bates AML & Financial Crimes at elongridge@batesgroup.com

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