By:
Susan F. Pollack
New York
While many aspects of the Bank Secrecy Act and Regulations have received considerable attention, some of those that should be matters of concern have not. Both the new focus of the regulators on "suspicious transactions" reports (from the bright line of dollar-mandated reports) and the details of money-laundering investigations have been extensively commented on in the news. Little public attention, however, has been paid to the new wire-transfer information disclosure requirements that substantially impact banks' funds transfer operations.
(a) Banks must now grapple with the day-to-day consequences of the so called "travel rule" provisions of the Bank Secrecy Act and Regulations issued jointly by the Department of the Treasury and the Board of Governors of the Federal Reserve System. Under the travel rule, banks must not only obtain and/or maintain information on funds transfers but must also include and transmit this information as part of the funds' transfer instructions themselves. Specifically, each "transmittal order" for the transmittal of $3,000 or more must include the following information about the customer sending the funds (called the "transmitter") and the person receiving the funds (called the "recipient"): (a) the name (and account number, if the money comes from an account at the bank) of the transmitter; (b) the address of the transmitter; (c) the amount of the transmittal order (how much money is being sent); (d) the execution date of the transmittal order (when the funds are being sent); (e) the recipient's financial institution (i.e., the ultimate destination of the money); (f) as much information on the recipient as the sending institution has -- name and address of the recipient, the account number of the recipient and any other specific identifier of the recipient; and (g) either the name and address or specific numeric identifier of the transmitter's financial institution (CHIPS number or whatever other numeric identification used by the transmitter's bank).
These requirements must be met by each bank through which the funds flow; if several banks are in the chain of wire transfers, each of them is required to include the mandatory information in the next stage of the funds transfer. The only exception to these requirements is a temporary one. To the extent a bank is effecting the transfer through Fedwire, until that bank has converted to the expanded Fedwire format, it does not need to include the transmitter's address and need include only one of the items listed in (f) above.
The implementation of these rules obviously has raised serious systemic hurdles for banks in the United States. But beyond the costs and complexity of converting wire transfer systems to conform with these rules, there are a number of areas where the consequences may be serious, but are not necessarily apparent at first glance.
1. The "traveling" address: The require-ment that the address of the transmitter/sender be included in wire instructions may be of particular concern to individual customers, for whom confidentiality may be a very significant issue.
Before the recent increase in attention due to the new "suspicious transaction" reporting requirements, banks already had to satisfy them-selves that they had sufficient information to identify customers correctly. For every individual customer, banks had an address at which that customer could be reached, even if it was the office of a lawyer or an accountant. But for those customers for whom confidentiality was significant, banks could control internal access to the address information by eliminating it from general files and keeping it in restricted files. If the customer so wished, the bank could also designate the account "hold all mail," so that account information would never be mailed to a customer.
With the advent of the travel rule, however, banks will now need to indicate the customer's address on the transmittal instructions, which instructions will be passed along from bank to bank. Regulators have indicated that simply putting "hold all mail" will not satisfy the requirements of the regulation. And by extension, listing a foreign branch of the originating bank will do no better. By the time a bank has converted to the expanded Fedwire format, therefore, it will have to obtain a "public" mailing address for each of its customers for whom it effects wire transfers of $3,000 or more. Private bankers in particular should take note.
Even before conversion to expanded Fedwire format, however, a bank in the transmittal chain that has address information about the transmitter or the recipient must supply that information back up the chain if the prior bank(s) are requesting it because of a lawful order. In other words, a bank will be obliged to provide address information (to the extent the bank received it) on transmitters and recipients even though such bank, itself, has not received a subpoena.
2. Extraterritorial application: Although the Bank Secrecy Act and Regulations on their face limit themselves to banks (and other institutions) located in the United States, their reach is not limited to transactions which begin or end in the United States. Not only do the criminal sections of Title 18 make clear that they apply to any funds transfer which passes "by, through, or to a financial institution" in the United States (18 U.S.C. Sec. 1956(c)(3)), but the language of the suspicious-transaction reporting requirements contains no limitation relating to the origin or end point of any transaction. In fact, it is reasonable to assume that the regulators will argue that any funds transfer involving U.S. dollars, which must (therefore) clear through the United States to some extent, is subject to the reach of U.S. bank secrecy laws. Thus banks must be prepared to comply with the travel rule even when the transfer originates outside the United States.
An intermediary bank must, therefore, include in the ongoing wires all the information it has received on both the transmitter and the recipient, although it can accept wires from overseas which lack information which would otherwise be required within the United States. Whether or not this will lead private bank customers to effect their U.S. dollar transfers from outside the United States is an interesting question. Certainly U.S. bankers would be in violation of the Bank Secrecy Act if they arranged for their customers to move their accounts offshore, but foreign bankers will have no trouble explaining the benefits of having a non-U.S. based relationship.
3. Consequences of Consolidated Processing: In the interests of efficiency, many financial institutions have been consolidating their worldwide processing into a limited number of processing centers, often with one such center located in the United States. However, these consolidation decisions may have consequences beyond efficiency. If a U.S. processing center handles the non-dollar transactions of its off-shore operations, there is at least an argument that those transactions are subject to the travel rule, even though they would not have been had they been processed in the country or countries where the transfers originated. Clearly, complying with the travel rule would not be the dispositive factor in deciding where to centralize operations, but it is symptomatic of the kinds of concerns facing organizations which might otherwise select the United States as a stable base of operations.
4. Technological Challenges: Modifying a bank's systems to enable it to add all the incremental information required by the travel rule is a very significant undertaking. While not as all-encompassing as the issues caused by the switch to the year 2000, the travel rule does impact virtually every funds wire transfer. Not only are the man-hours of programming involved substantial, but old or "legacy" systems utilized by many banks may simply not be capable of handling the necessary incremental fields. For such institutions, hardware as well as software upgrades are involved. An extension of the deadline to deal with the travel rule has been requested, and hopefully will be granted by the regulators.
As with other aspects of the U.S. effort to combat money laundering, the travel rule will make it yet more difficult for criminal elements to move money using the banking system. In fact, the effectiveness of the array of bank-focused laws and rules has been demonstrated by the fact that the regulators have now realized that greater attention must be paid to non-bank means of transferring funds, such as the check-cashing industry. Nonetheless, for the banks the challenge of compliance continues, with unanticipated consequences to the way they choose to compete in the world of financial services.
