The FinCEN Travel Rule: A Deep Dive
The FinCEN “Travel Rule” has many requirements and nuances that can challenge and confuse new and seasoned AML compliance professionals alike. From the basics of what types of transactions fall under the Rule, to mandatory versus optional data requirements, to all the various exceptions – plus the many nuances addressed by subsequent guidance not contained in the Rule itself – compliance professionals need to understand the details of this longstanding BSA regulation.
In this webinar, you will:
- Understand the fundamental requirements and underlying purpose of the FinCEN Travel Rule
- Understand the definition of a funds transfer, and what types of transactions are and are not considered funds transfers for Travel Rule purposes
- Understand the circumstances where the Travel Rule does not apply
- Be aware of the proposed changes to the Travel Rule per the October 2020 NPR, including new requirements for crypto-currency/digital asset transfers
- Understand how the wire transfer data requirements of the FRB’s Fedwire system differs from those of the Travel Rule
- Learn how to comply with the Travel Rule in special situations, including aggregated transfers, transfers for non-customers, and various originator name issues
Here are the answers to the questions from the presentation.
Q: In a lending situation, where a borrower requests a drawdown on their loan through new wire instructions and asked that the funds be sent to them at a third party bank, and the lending bank sends those funds from their general ledger account. Who do you think should be listed as the originator on the wire disbursing those funds?
A: I think that the customer should be, the borrower. Because regardless of where you are taking the funds out of, it is that customer who originated the payment order themselves. So, yes, it should be the borrower as the originator.
Q: What are the travel rule requirements when the originator and originator’s bank are one and the same? So, for example, foreign exchange settlements between financial institutions?
A: Okay, so this gets a little confusing. But, yes, on a funds transfer, the originator can be the bank and the originator’s financial institution is also the bank. So, for instance, we did that all the time at my institution because, for example, we were making settlements on, say, syndicated loans or participated loans where we’re sending funds to another bank for their share of interest on a loan they were participating in with us. And same thing with foreign exchange types of things. The bank is the originator, because they’re the ones who created the payment order, and they are their own bank. So they are listed as the originator’s bank. Good point.
Q: Is a U.S. branch of a foreign bank considered to meet the definition for a cross border transaction?” For example, if a bank sends a wire from their New York branch of HSBC to your account at the New York branch of Standard Chartered, is that cross border?
A: That’s a good question, and that’s part of what the confusion over this proposed rule comes about. So, in that case, both of the financial institutions would be considered U.S. financial institutions. But I would think, and again, this is just my interpretation, is that you would need to look at the originator and the beneficiary. So if the originator is located in a foreign country, that may then be considered a cross border transaction. But again, it’s very vague. So questions just like this one are going to come up pretty frequently, and hopefully may be addressed in the final rule. Or what’s going to happen, like what happens all the time, is that then FinCEN has to issue interpretive guidance to explain what they meant when all of these interesting scenarios come up.
Q: How do you comply with the travel rule as a correspondent bank with no Fed access, with incoming wires, when the sending bank usually does not send full information?
A: So as the receiving bank, whether you’re acting as an intermediary/correspondent, or if you’re the ultimate beneficiary’s bank, you have only the requirement to keep what you get. So you are in compliance if you keep a record of what you received from that originating bank regardless of the lack of information that may have not been included on the transfer. Now something that’s sort of tangentially may occur is that that may ultimately wind up being suspicious activity depending on what the nature of the transfer is. But keeping in mind that transfers between banks don’t have to follow the travel rule. So, again, it all depends on the nature of the transaction. But, for travel or compliance purposes as a receiving bank, your job is to keep a record of what you get.
Q: Do you have the case where people are trying to be elusive or changed the beneficiary name?
A: Well, the beneficiary name is really, that’s…the originator has to provide that. We can’t confirm that. We can’t validate it. It’s information that they provide. Some institutions do that on the receiving end, but from the originator’s bank’s perspective, no, there is no way you could validate that.
But I have experienced in the past certain foreign banks, and actually one of the big ones, it was actually a fraud situation, was a social engineering fraud against our customer where the fraudster had given instructions to this customer to send a wire transfer to a bank in China to a particular beneficiary. And the Chinese bank returned that wire to us, fortunately, because the account name did not match up with the account number. And so that actually saved our customer about $600,000 which was a small miracle. So, on the receiving end, banks may do that, but on the originating side, you wouldn’t have any way to validate that information.
Q: Our online banking software passes originator information to our wire system from the core. For our internal accounts that originator wires through online banking, the wire is sometimes on behalf of a customer, not the bank. So due to the way the systems are integrated, the bank’s info is passed to the wire system as the originator. Are we complying with the travel rule if we enter the true originator’s name, address, and truncated account number in the beneficiary message field, or does the information have to go into the specific originator and account number fields?
A: It’s a long question, but I think I know what this person may be getting at. So if the bank… Here’s an example that I’ll give that was very frequent at my institution. Because we were a lender and did a lot of syndicated loans or participation loans where other banks were sharing in that loan. Yeah, we were the administrator or the agent bank in these deals. So the customer itself was the borrower, and if that customer, for example, requested an advance off of the loan, then that wire transfer would reflect the customer as the originator.
But there were many times where the, on this syndicated or shared loan, as the agent bank, it was our job to give all the other banks that were a part of this loan their share of things. So like their share of interest payments or principal payments made by the customer, or if the customer didn’t advance on their loan, then we needed to receive money from the other participating banks to reimburse us for the entire amount of the funds transfer made by the customer.
So those transfers where my bank was remitting funds to another bank with respect to this particular customer’s loan, then, yes, we, as that bank, would indicate it ourselves as the originator as well as the originator’s bank. And then the beneficiary was the receiving bank, the other participating banks. That’s where I’m thinking this is kind of where this person may be coming from. That’s my best answer at this point without having more information.
Q: So if there’s no travel police to police the rule, they just want to get confirmation, I mean, you still have to follow the rule because you have internal and external auditors requesting to see this information. Is this correct?”
A: Like I said, there’s no travel rule police verifying that you are following the travel rule, and the recipient banks, it’s not their job to come back and tell you, “Hey, you left this off.” But where it’s going to show up later is if you’re asked for this information by law enforcement or a regulator, and you can’t provide it, then that’s going to get you in trouble. So it kind of comes in on the backend if somebody actually asks for that information.
Q: Does a Bitcoin Operator need to follow the travel rule, and if yes, what should be the upper threshold if over 3,000?”
A: There is no upper threshold. I can tell you that right off the bat. And here’s my knowledge of this is that there’s various nuances to different types of what FATF calls virtual asset service providers in the cryptocurrency world. And if, whomever they are, based on their operations, they meet the definition of a money service business, then in turn, they must comply with the Bank Secrecy Act like any other money service business which means they must also comply with the travel rule.
Now where they have pushed back over the years is specifically in this, around this definition of money. So the travel rule says, “Well, it applies to transfers of money.” Well, the virtual currency world said, “Well, crypto isn’t defined as money so, therefore, it doesn’t apply to us.” Well, now this NPRM is now putting that to rest and saying, “Yes, cryptocurrency is now money so, therefore, there’s no question that transmittals of this are then subject to the travel rule.”
Q: Could you give an example of a transaction involving CVC, a Convertible Virtual Currency that would require recordkeeping and travel rule under this NPRM?
A: Any transmittal of funds from one person or entity to another, to a recipient someplace else, that which is probably at another currency exchange or even within accounts in that currency exchange would need to comply.
Q: Do most banks return wires if the beneficiary information is not provided?
A: It depends on the practice of the bank. I know at my bank if we received a wire transfer that didn’t have clear beneficiary information, we would bend over backwards to try to figure out who this was meant for. And that would include through Fedwire. You can send something called the service message back to the sending bank and say, “Hey, we need more information in order to post this wire.” But there…I guess, it really does depend on the practices of that bank. It’s a policy decision.
If there’s no beneficiary information or if the account number that’s provided doesn’t match up with any of your records, then you may decide to just return it. That’s purely an option based on the bank. One example that I did give that was kind of interesting in our last presentation was that some banks will return a wire if the name on the wire as the beneficiary doesn’t match up with the name on the account that’s also on the wire transfer. They may reject it. And we had a customer who was a victim of a social engineering fraud and had sent a wire transfer to China. And the fraudsters had given them bad information so the name they were told to put on as the beneficiary didn’t match up with the account number they were told to put on the wire. And so the Chinese bank returned it to us.