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July 28, 1997

Study Highlights Potential Money Laundering Vulnerabilities in ‘Money Services Businesses’

The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued the first comprehensive study of money services businesses and their potential vulnerability to money laundering. The study, commissioned by FinCEN and conducted by the consulting firm of Coopers & Lybrand, provides an in-depth examination of this industry’s size, services, geographic and transaction attributes.

The term "money services businesses" was coined by FinCEN to describe those businesses and their authorized agents who provide services of money transmission, check cashing, currency exchange, and the issuance, sale and redemption of money orders and traveler’s checks. FinCEN estimates that, overall, money services businesses handle transactions valuing approximately $200 billion per year through approximately 160,000 locations nationwide.

The study was used to help FinCEN formulate three proposed anti-money laundering regulations which were announced in May of this year by Treasury Secretary Robert Rubin. The regulations are particularly significant in light of Treasury’s experience with the New York Geographical Targeting Order (GTO), in which certain licensed money transmitters in the New York metropolitan area and their agents were subject to report information about the senders and recipients of all cash-purchased transmissions to Colombia of $750 or more.

The GTO caused an immediate and dramatic reduction in the flow of narcotics proceeds to Colombia through New York money transmitters. In response to the results achieved through the GTO, President Clinton asked Treasury to look for ways to translate into a permanent solution the benefits realized through this interim measure. The three proposed rules seek to achieve this goal.

"The recent success of the New York GTO clearly illustrated the need for permanent regulatory measures," said Raymond W. Kelly, Treasury Under Secretary for Enforcement. "The information we are asking for under these regulations is needed to prevent and detect money laundering in the money services industry."

One of the regulations proposes to permanently reduce - from $10,000 to $750 -- the threshold for money transmitters to report remittances purchased in cash for any international destination. This change is based largely on the experience of the New York GTO, which confirmed that the money transmitting industry is particularly subject to abuse by organized money launderers. The Coopers & Lybrand study indicates that the while the industry remits $11 billion annually, the average money remittance is approximately $300, therefore Treasury does not believe the rule would have an adverse impact on legitimate commerce.

Treasury also proposes to register all qualifying money services businesses in a centralized database. This registry will be available to law enforcement and appropriate federal and state regulatory agencies. Registered money services businesses will be required to maintain and make available updated lists of their authorized agents, and certain large agents will be required to register independently. It is a federal crime to operate a money services business without complying with applicable federal or state licensing or registration requirements. The proposed registration rule includes within the definition of "money services business" issuers, sellers, and redeemers (for funds) of stored value, commonly called electronic money or e-money.

In addition, Treasury proposes to extend the suspicious activity reporting requirement, already in place with respect to banks, to money transmitters and issuers and sellers of money orders and traveler’s checks. Because customers of this subset of money services businesses do not maintain account relationships comparable to banks, it is often difficult for these businesses to know their customers well enough to identify suspicious activity. In recognition of this fact, the proposed rule lists as guidance to the industry a number of specific indicia of suspicion culled from historical money laundering investigations.

"It is a challenge, first to accurately define, then to craft appropriate anti-money laundering rules for this important but diverse and little understood segment of the financial services industry," said Stanley E. Morris, Director of FinCEN. "We need to hear the concerns of the industry to ensure that the regulations are workable. The proposed rules are intended to make life difficult only for money launderers and their accomplices, not the industry."

FinCEN hosted a public meeting today in New York to give members of the financial services industry an opportunity to discuss these three proposed regulations. An earlier meeting was held at FinCEN. Additional meetings will take place in San Jose, CA on August 1 and Chicago on August 15.

In order to provide industry with an opportunity to attend these meetings and then formulate their comments, the comment period to respond to these proposals has been extended from August 19 to September 30, 1997.