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Portals and Rails, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Portals and Rails and look forward to collaborating with you.

November 08, 2010


Proposed rule targets cross-border wire transfers

In its simplest terms, money laundering generally involves the creation of an intricate series of financial transactions designed to conceal the identity, source, and destination of illicitly obtained funds. The success or failure of the laundering process generally turns on whether the launderer successfully minimizes or eliminates the trail that would lead law enforcement to trace the illicit proceeds back to their illegal source.

One common method for laundering money is wire transfers, particularly cross-border wire transfers, as they permit funds to move instantaneously from one account to another within and among international financial institutions. The Financial Crimes Enforcement Network (FinCEN) recently took action to address the money laundering risks commonly associated with cross-border wire transfers by proposing more stringent reporting requirements for financial institutions.

Expanded reporting for cross-border wire transfers
On September 27, 2010, FinCEN issued a notice of proposed rulemaking that would lower the reporting threshold on cross-border electronic fund transfers (CBEFT) from $10,000 to $1,000. FinCEN based its proposed rule on the conclusions of two studies: Feasibility of a Cross-Border Electronic Funds Transfer Reporting System under the Bank Secrecy Act, and Implications and Benefits of Cross-Border Funds Transmittal Reporting. The proposed rule would also require certain depository institutions and money services businesses to provide records to FinCEN of certain cross-border electronic transmittals of funds. Banks directly transacting with foreign financial institutions would be required to report all cross-border wire transfers to FinCEN.

The proposal would also require financial institutions to report the taxpayer identification numbers (TIN) of individuals who make CBETFs. Banks would file a list of these numbers annually for all CBETFs, regardless of the amount. MSBs would file TINs for CBETFs of $3,000 or more.

Currently, financial institutions are subject only to reporting suspicious wire transfers and maintaining and making available upon request to FinCEN records of cross-border wire transfers. According to FinCEN, the proposed rule will most likely affect larger financial institutions that use centralized message systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication), Fedwire, and CHIPS (Clearing House Interbank Payments System).

The challenge in monitoring cross-border wire transfers
Monitoring cross-border wire transfers can present unique challenges since their processing can sometimes involve several intermediary financial institutions before the intended funds are received by the beneficiary. Effectively monitoring these transfers for anti-money laundering purposes generally requires that banks and nonfinancial institutions be knowledgeable of an account's normal and reasonable activity so they are better armed to identify transactions that may fall outside a known pattern.

According to a paper by the Basel Committee on Banking Supervision, there is need for improved transparency in cross-border wires due to the variance with the existing wire structure, which has done little to enable institutions to report the difference between cross-border and domestic wire transfers. The paper states that existing messaging practices can impair an institution's risk management and compliance obligations.

The proposed cross-border wire transfer reporting requirements are intended to improve transparency by facilitating more information gathering and enhancing money laundering due diligence. The proposed rule may also further assist law enforcement with the arduous task of unraveling the launderers' intricate web of tracing laundered proceeds back to their illegal source. FinCEN estimates that the proposed rule will spur 500 million to 700 million new reports a year. Currently, financial institutions and MSBs file more than 15 million reports per year.

Containing existing loopholes
FinCEN indicates that the enhanced reporting requirements will help close certain loopholes in the existing wire transfer rules that are exploited for money laundering, terrorist financing, and tax evasion—for instance, money launderers often purposefully send funds in increments below the current reporting threshold and use multiple institutions to avoid detection. Nevertheless, it is hoped that heightened reporting of account activity will help law enforcement and regulatory authorities detect, mitigate, and investigate money laundering and other illicit financial crimes. Or will the increased reporting requirements only serve to flood FinCEN with massive amounts of wire transfer data? But that is the topic of a future post.

The proposed rule is open for comment until December 29, 2010.

By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed

November 8, 2010 in cross-border wires, law enforcement, money laundering, money services business (MSB), regulators | Permalink

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