Alert May 20, 2008

FinCEN Clarifies Anti-Money Laundering Obligations for Foreign Exchange Service Providers

The Financial Crimes Enforcement Network (“FinCEN”) released three letters designed to clarify the status of certain foreign exchange businesses under the Bank Secrecy Act (“BSA”).  Specifically, FinCEN addressed whether each of three foreign exchange parties is a “money services business” and, thereby, obligated to meet the requirements applicable to such businesses under the BSA.

In the first letter (FIN-2008-R002), FinCEN found a foreign exchange dealer to be a “money transmitter” because the dealer accepts funds from its customers and transmits funds to its customers’ third-party counterparts.  FinCEN noted that the dealer’s funds movements did “not constitute an integral part of the execution and settlement of any transaction other than the [foreign exchange] funds transmission itself.”   For this reason, the dealer’s activities triggered the application of FinCEN’s money transmission regulation.  In so holding, FinCEN also clarified that the definition of money transmitter is not limited to those who deal with physical currency or funds.

In the second letter (FIN-2008-R003), FinCEN determined that a firm engaged in the business of foreign exchange risk management for Internet sellers also was a “money transmitter.”  FinCEN reached this determination, in part, because the firm settles transactions by moving funds between its clients and the clients’ foreign suppliers and, as above, these transactions were not integral to any other transaction.  At the same time, FinCEN reiterated its earlier position that the firm’s submission of bank card information of a client’s customer, which the firm has received from the client, to the card processor for authorization and payment would not, by itself, have caused the firm to be a money transmitter.

In a final letter (FIN-2008-R004), FinCEN addressed how an intermediate foreign exchange broker should be treated under the BSA.  The broker acts as foreign exchange consultant and, in some circumstances, has no involvement in the foreign exchange transaction, which is handled directly between the broker’s client and an executing bank.  In other situations, the broker transmits its clients’ U.S. dollars to an executing bank, which will conduct the foreign exchange transaction and remit funds in the foreign currency to the counterparties of the broker’s clients (without the involvement of the broker).  FinCEN found that, in both circumstances, the broker is not a money transmitter.  In the first case, the broker has no involvement in the funds transmission at all.  In the second case, the broker is sending dollars, but only to settle a foreign exchange transaction at the executing bank that the broker has arranged. 

As a result of FinCEN’s letters, many foreign exchange businesses that currently are not registered with FinCEN may need to do so.  A failure to register as a money services business with FinCEN has grave consequences, including potential criminal liability.  12 USC § 1960.