Regulators establish expectation of value transfer market participants

Nov 03, 2021
Business risk consulting Risk consulting
U.S. agencies issue enforcement actions on value transfer providers, confirming that the same requirements apply for BSA/AML programs and proper KYC guidelines.

While questions continue to rise regarding regulatory requirements and whether the Bank Secrecy Act and Anti-Money Laundering (BSA/AML) programs are worth their expense and resourcing, regulatory experts recently provided some much-needed guidance and insight. At a recent financial crime prevention conference, relevant regulators and digital asset organizations placed value transfer services at the top of the list for the presenters.

Oddly enough, they were in sync with each other in the compliance mindset and the expectations for what is needed to sustain regulatory programs. It was repeatedly stated that, “…crypto space is considered a Money Services Business (MSB) and must register, as such, with FinCEN.”

This article isn’t dedicated to crypto-specific activity but tackles a broader conversation to raise some points of interest that may catch your attention and cause you to think twice about your programs.

Representatives participating at the event and regulators represented in this article regarding value transfer organizations include:

  • Financial Crime Enforcement Network (FinCEN)
  • Office of the Comptroller of the Currency (OCC)
  • Financial Industry Regulatory Authority (FINRA)
  • Commodity Futures Trading Commission (CFTC)
  • Federal Reserve Board (FRB)
  • Federal Deposit Insurance Company (FDIC)

Below are some the highlights from the conference:

What Defines a Value Transfer?

Among the many naming conventions used at the conference, the term “value transfer” was more prominently mentioned by the regulators than other terms. As legislation attempts to keep up with the changes and constant expansion of activities within the financial industry, regulators may be taking a broad stroke when identifying which companies fall under their purview. Apparently, the term value transfer is a catch-all that has been, perhaps informally, adopted to identify a service that pertains to any movement of an asset with an intrinsic value. If this escapes the walls of the conference and becomes the industry norm, we are going to be reverting to the financial Wild West in 2022.

Reining in Unregistered Futures

Some other changes include sanctioning the rapidly expanding convertible virtual currencies industry. This issue was raised regarding a recent enforcement action that has been well publicized. The Financial Crimes Enforcement Network (FinCEN) has assessed a civil money penalty in the amount of $100 million against BitMEX, one of the oldest and largest convertible virtual currency derivatives exchanges, for violations of the Bank Secrecy Act (BSA) and FinCEN’s implementing regulations. This particular case, sets an example for others in these areas to evaluate operations to ensure proper oversight and understanding is given to BSA/AML programs.

The following is noted from the enforcement action as providing commodity futures contracts and swaps:

  • Accepted money
  • Accepted securities
  • Accepted property

The above activities included bitcoin to margin, guarantee and secure trades on their platform. In this case, they also provided money transmission services by accepting currency, funds or other value that substitutes for currency. The definition around the activities for digital currencies is still evolving. Where the misinterpretation may be emerging is more about the specifics; that if a regulation doesn’t specifically state an organization type falls under an advisory, regulation or guidance, then it doesn’t apply.

In the example above, it was determined the organization in question was operating as a Futures Commission Merchant (FCM) and was required to register with the CFTC under the Commodity Exchange Act. However, this doesn’t limit the list of attributes above that you or your services may fall into that require attention. FinCEN’s Deputy Director AnnaLou Tirol stated, “…rapid growth into one of the largest futures commission merchants offering convertible virtual currency derivatives without a commensurate anti-money laundering program put the U.S. financial system at meaningful risk… it is critical that platforms build in financial integrity from the start, so that financial innovation and opportunity are protected from vulnerabilities and exploitation.”

Regulators to Expand Their Reach

After this particular conference, we’re learning it may be important to rethink how you operate your entities. Regulators are now more agile, and whether the requirements include your industry or similar ones, they are very rapidly expanding to include the types of services, products and operations that you provide. While this type of oversight is nothing new for those accustomed to working with regulators, stricter mandates are now being imposed for others as well. It’s important to know that there is oversight from agencies on the newer actors on stage who may be vulnerable and may not be compliance subject matter experts.

After reviewing the panelist presentations on assessing enforcement actions, we are seeing that FinCEN will step up efforts to investigate malfeasance and enforce the need for appropriate programs to mitigate the risks associated for the services offered to its customers.

Regulators across the board made it clear that cryptocurrencies fall under the AML regime. While enforcement will require collaboration across organizational departments, the monitoring, investigation and reporting are expected to be handled the same as suspicious activity. Granted, it’s a new way of thinking from the investigational perspective to understand the nuances, but based on this conference, they made it clear that the framework and the outcomes are the same.

Let Us Help

If you think you are at risk of maintaining sufficient compliance programs or may be the subject of regulatory enforcement action, call us today for a consultation. And talk with your counterparts, vendors and consultants. Being newer to the rapidly changing landscape shouldn’t intimidate you; everyone should be working together to establish processes, programs and regulatory compliance guidance. Best practices are being established to adapt to the new environments.

RSM’s advisors can help you understand how to successfully adapt to and integrate this new area of financial community expansion. Learn from our experience with your peer groups to successfully manage and navigate your BSA/AML programs and regulatory expectations.