In a nutshell – US AML regulation for Crowdfunding platforms

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, recently put out a news release with regard to its proposal to amend the Bank Secrecy Act’s (BSA) definition of “Broker or Dealer in Securities” to include funding portals (see related post).

FinCEN stated that its proposal seeks to ensure that funding portals implement policies and procedures reasonably designed to achieve compliance with the BSA requirements, including the filing of suspicious activity reports, currently applicable to brokers or dealers in securities. FinCEN stressed that this proposal does not affect other activities, beyond securities, conducted by these businesses.

Currently, the BSA regulatory definitions of broker or dealer in securities do not include funding portals. The current BSA regulations define broker-dealers in securities as being those persons “registered, or required to be registered, as a broker or dealer with the SEC under the 1934 Act.” In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act) that created a new exemption for offerings of crowdfunded securities under certain circumstances. The JOBS Act also exempted certain funding portals from the 1934 Act’s registration requirements, thus excluding them from the BSA’s definition of brokers or dealers in securities. After consulting the SEC, FinCEN is proposing to amend the relevant BSA definitions to include funding portals, and therefore retain access to the important reports and records that these businesses may provide to combat money laundering and terrorist finance.

The thought behind the proposal is clear: to make sure that Crowdfunding platforms cannot be abused for money laundering. The idea that legitimate activities are used to channel dirty money isn’t irrational, charities and non-profits for instance are constantly subject to regulatory supervision (if you want to know more about it, have a look at the Financial Action Task Force’s reports on the topic here). It doesn’t even need to be a simple front for some criminal activity (which initially led to the term money laundering – have a look here) since often organisations are used for money laundering or terrorist financing without realising that they are in on it.

FinCEN’s mission statement is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities”, so it’s clear that they are looking into this.

However, on the other side the idea behind the JOBS act is to encourage funding of small businesses by easing various securities regulations. The AML requirements, that crowdfunding platforms would be subject to, seem to point in the opposite direction though. If the proposal goes through, the following regulations would apply to funding portals:

  • Establishing and maintenance of AML programs
  • Compliance with suspicious activity reporting requirements
  • Reporting large cash transactions exceeding $10,000
  • Record collection and keeping of certain information on funds transfers and ensuring that certain identifying information travels with a funds transfer order
  • Establishing of customer identification programs
  • Compliance with certain special information requests from law enforcement
  • Conducting enhanced due diligence with respect to its correspondent and private banking accounts for non-US persons, and maintaining certain records with respect to those correspondent accounts
  • Prohibition on Correspondent Accounts for Foreign Shell Banks; Records Concerning Owners of Foreign Banks and Agents for Service of Legal Process
  • Compliance with any special measures imposed by FinCEN on specific non-US financial institutions determined to be of primary money laundering concern

Without question, implementing the proposal would represent work and cost intensive measures for crowdfunding platforms, even though the JOBS Act prohibits a funding portal from holding, managing, possessing, or handling customer funds or securities. So this seems to somewhat contradict the intention of the JOBS act to foster innovation by reducing the regulatory burden.

FinCEN’s reasoning though is that these portals in the regulator’s opinion are similar to that of introducing brokers, which typically do not accept cash from customers or maintain custody of customer securities, but yet are subject to the BSA regulations. As such, funding portals raise at least the same degree of AML and counter financing of terrorism risk as some other broker-dealers registered with the SEC, and should be regulated commensurately under the BSA.

So, as ever so often at this point, it is a tough balance between the objectives of financial regulation – financial stability, consumer protection and reduction of financial crimes – on one hand and the aim not to suffocate business and innovation on the other hand with rules that are too rigid. However, if you want to share your thoughts with FinCEN, written comments on this Notice of Proposed Rulemaking (‘‘NPRM’’) must be submitted on or before June 3, 2016.