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NY Regs Threaten Bitcoin and Digital Currencies

by Bradley Jansen July 23rd, 2014 12:15 pm

The New York Department of Financial Services (NYDFS) has issued new proposed proposed BitLicense rules and regulations that would curtail not encourage digital currencies like Bitcoin.

Many years ago when I first started in Rep. Ron Paul's office, I initiated and led a fight against a similar anti-money laundering proposal called "Know Your Customer" which would have increased regulations, violated financial privacy and threatened currency competition. Lots of background on that fight here.

I and other bloggers here have written a lot on how the anti-money laundering regulations do more to inhibit currency competition now than legal tender laws do. Lots of background here. Check out Larry White's talk about these issues at Cato too:

The Chamber of Digital Commerce is calling on the Bitcoin community to submit comments to the NYDFS. Instructions on how to submit comments can be found on the NYDFS website at http://www.dos.ny.gov/info/register.htm.  More on the new Chamber of Digital Commerce here.

A new digital currency trade association is fighting the regulations. Their press release can be read here:

“One egregious aspect is that the NYDFS is only giving 45 days to comment, which is severely inadequate to proposed regulations of this scope” said Perianne Boring, President of the Digital Chamber. “We are requesting that the NYDFS extend the comment period through the end of 2014, to allow the industry adequate time to properly review and respond.”

When fighting the KYC proposal, I generated 300,000 comments against the proposal (with only 105 in favor). Let's organize those groups and experts interested in these issues to figure out how to fix this proposal now: contact me at bjansen @ financialprivacy.org and stay tuned here if interested in joining this fight!

Kudos for the NYDFS for being pro-active to secure a legal path to digital currency use, but the proposal as written would do much more harm than good. Let's hope they are open to making sure they get this right and don't end up shifting digital currencies and other financial innovations away from New York. Even more thanks go out to Perianne Boring for her efforts!

Now is the time to stand up and make the world (well, at least New York) safe for digital currencies and alternatives to the Fed!

 

EDIT: the new proposed rules are now online here (scroll to page 14):

 

The National Law Review has a post here.


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Cayman Financial Review: Repeal the AMLs

by Bradley Jansen February 24th, 2014 3:23 pm

My call to repeal the anti-money laundering laws got published in the current issue of the Cayman Financial Review.  In "Repeal the anti-money laundering laws" I explain how the AMLs stifle currency competition.  I concluded:

There are political costs to consider. The increased scrutiny of politically exposed persons and sanctions greatly complicate AML compliance, increase costs and can cause unintended political by-products. In addition, to the extent the AML programs are successful, they can divert funds away from monitored channels to places with no financial intelligence. Iran trades with gold marginally reducing demand for the U.S. dollar in international trade. Individual Iranians use bitcoins as an alternative to their currency instead of the U.S. dollar. Just recently, the Cuban interest section in Washington, D.C. is closing for lack of legitimate banking options because of AML and FATCA compliance concerns.

Even when the authorities shut down the Liberty Reserve operation (an alternative electronic currency operation allegedly set up for money laundering), they admitted that most people using the site were there for the low 1 percent transaction fees for remittances or get around forex restrictions. The plight of the KenyanGuatemalan and Somali people and others around the world who depend on low-cost money transfers to survive or rise out of poverty or recover quickly from disasters should not be ignored.

AMLs stifle needed new payment systems such as bitcoin. Less regulated industries such as technology are adapting much faster than the financial system. Actors in the financial industry are often late adopters to quickly changing technologies. On the other hand, new electronic monies have been less regulated (though this is changing).

It is bitcoin, Liberty Reserve and others that are allowing faster and cheaper mobile payments to more of the world’s population, including the unbanked, than has ever been possible. These changes mean more money is reaching the people who need it most ─ and faster including situations when lives depend on it. Grafting a failed AML approach from the polyester-wearing disco music era onto the fast changing 21st Century technologies can’t end well.

In conclusion, as I cited in my 2001 Congressional testimony on what became the USA PATRIOT Act, money launderers do not have a statistically significant chance of being caught so the deterrent effect of our AML approach is negligible. Only a minuscule fraction one percent of CTRs and SARs result in criminal convictions. I know of no examples where AML reports prevented any terrorist events.

Our AMLs are a failure: the drug trade continues unabated, financial fraud is more prevalent now than ever, and terrorist groups continue to finance their operations. The greatest tragedy is what everyone knows and policymakers don’t seem to care: it is the unbanked, the poor, and the racially and ethnic minorities in rich countries (and the populations of poorer countries) that suffer these costs for such elusive benefits.

Time to reboot our AML policies to aid law enforcement, encourage innovation, cut costs and protect privacy and other human rights.

On a humorous personal note, the original story ran with a bio that added a "g" to the end of my dot org email address before I got it corrected.

Relatedly, Larry White made many of the same points in his talk at the Cato Monetary Conference last year.  Video here.

Edit: The American Banker has a white paper out calling for reform of the AMLs making similar arguments to mine.  They want to "modernize" them "using predictive analytics to pinpoint suspicious activity."


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Parliament to Scottish Nationalists: "Get Your Own B__y Money!"

by George Selgin November 27th, 2013 5:50 pm

There are, I'm sure, some parts of the Scottish National party's recent blueprint for an independent Scotland to which the British government might reasonably take umbrage.   But the plan's call for Scotland's continued use of the pound sterling, which has drawn the most criticism, isn't one of them.

The pound sterling has been Scotland's monetary unit since 1707, when the Act of Union led to its adoption in place of the Pound Scots.  Scotland's actual paper currency, on the other hand, has mainly consisted of sterling-denominated notes supplied by several of its own commercial banks.    The nationalists' proposal is therefore  largely (though not entirely) a call for adhering to the status quo, and a rejection of the alternatives of either adopting the Euro or having Scotland once again establish an independent monetary standard.

How has such a seemingly reasonable and innocuous plan managed to ruffle Parliament's feathers? According to The New York Times, the British government

says it is unlikely to agree to share the pound with an independent Scotland, citing the problems experienced by the 17-nation euro zone to illustrate the dangers of a common currency without political union. London says it would be difficult to have the Bank of England act as guarantor of the pound if Scotland had a different fiscal policy from Britain, for example. Nationalists hint that if Scotland cannot keep the pound, it will not accept its share of Britain’s debt.

Now I've no dog in the fight over Scottish independence, but it seems to me that the folks who are saying this hae git thair bums oot the windae. For starters, an independent Scotland would hardly need the British government's permission to go on using the pound sterling: it's hard to imagine how the U.K.-sans-Scotland could prevent Scottish citizens and banks from continuing to use the pound without resort to such Draconian legislation as would make U.S. money-laundering laws seem toothless in comparison. In both England and Scotland today, for example, it's perfectly legal for banks to offer foreign currency demand deposit accounts, not to mention other sorts of foreign currency services. Just how would a truncated British government contrive to prevent, and to justify preventing, an independent Scotland from continuing to enjoy the right to offer such services, while adding the pound sterling to the list of "foreign" currencies to which the right pertains?

If the Brits were really willing to play hardball, I suppose they could try placing an embargo on shipments of Bank of England currency to Scotland, like the one the U.S. imposed, as part of its effort to topple Manuel Noriega's government, on shipments of fresh Federal Reserve notes to Panama. But whereas Federal Reserve notes had long been the only form of paper currency known in Panama's dollarized economy, the Scots, as I've already observed, have long managed without Bank of England notes, and could easily continue doing so, especially once freed from British-imposed banking regulations. Settlements and redemptions of Scottish bank balances would presumably have to be done using London funds. But unless the Brits wanted to impose severe exchange controls, which besides being embarrassing would harm English citizens no less than Scottish ones, that option would pose no great difficulty.

And the Eurozone comparison? A load of mince! The reason the Eurozone is a mess is because the Euro isn't the German mark--that is, because it's a multinational currency supplied through a multinational central bank, rather than a national currency that happens to be employed by several nations. Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid, and especially so since the Growth and Stability Pact became a dead letter in 2003. Creditors to dollarized countries, on the other hand, have no reason to count on Fed bailouts. Were either Ecuador or El Salvador unable to service its debt, or were a Panamanian bank teetering at the brink of insolvency, it would be of no concern to the Fed, or the FDIC, or any other U.S. government agency. Dollarized or not, Ecuador, El Salvador and Panama have to manage on their own.

And how have those countries been doing despite having no lender of last resort to turn to in a crisis? Just dandy, as a matter of fact. Indeed, it seems that not having a lender of last resort has proved to be something of a boon to dollarized economies, because, by doing away with, or at least greatly limiting, any prospect of a bailout, it has caused creditors and banks to behave more prudently.

If the experience of dollarized countries can be relied upon, Scotland, besides not needing England's permission to go on using the British pound, would be better off not having such permission. It stands to benefit, in other words, by steering clear of any formal arrangements that might appear to make the Bank of England, or any other non-Scottish authority, responsible in any way for the safety and soundness of Scottish bank liabilities or government securities. Let the Scots follow the example of Ecuador and El Salvador, and "poundize" unilaterally. If the British Parliament refuses to cooperate, so much the better. Who knows: Scotland could even end up with a banking system as good as the one it had before 1845, when Parliament, which knew almost as little about currency then as it does now, began to bugger it up.


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AMLs Screw Somalis, Again

by Bradley Jansen August 6th, 2013 6:46 pm

Pity the poor Somali people.  Not just because of the situation in their home country, but what the US government and multi-lateral organizations are doing to them.  The people there are the ones who survived brutal dictatorships and possibly even more brutal civil war and warlord rule.  Many got out and created the Somali diaspora--including some in the United States.  Being decent and generous people, many send money back home to help friends and relatives there.

The remittances are hugely important to the Somali people--often the difference between life and death.  "More than US$1.2 billion is remitted to the Somali territories annually. This is over half of Somalia's gross national income," explains Abdirashid Duale in a good but long article on the allAfrica.com website, "Somalia, Remittances and Unintended Consequences: in Conversation With Abdirashid Duale."  What does the cutting off of money services mean for the Somali people and people in other countries and territories mean?  Again, Mr. Duale explains:

I can honestly say it would be a recipe for disaster. It is estimated that remittances from the diaspora provide essential support to 40% of the Somali territories. We have nearly 300 branches in the territories and thousands of agents servicing people in towns and rural areas. For them, money sent from relatives overseas is an economic lifeline. It is mainly spent on food, medicines and school fees - for the absolute basics, not for luxuries.

Those affected are not just the Somali people, but others as well including Somali veterans of British military service and their widows, investors creating businesses and jobs there, and the Non-Governmental Organizations working there as well.  They have taken note and sounded the alarm.

Oxfam blasts the human toll of our misguided anti-money laundering laws, "Disruptions to diaspora remittances threaten Somalia":

The role of remittances during the food crisis in Somalia in 2011 was plain to see; the generosity of the Somali diaspora played a vital role in helping Somali families survive. But when a bank in the United States closed the accounts of several Somali-American money transfer operators (MTOs) that year, it became clear that the entire remittance system could come to a screeching halt at a moment’s notice.

Somali-American MTOs—really the only game in town when it comes to distributing cash in Somalia—need bank accounts in the United States to facilitate transfers from Somali-Americans. They have found those accounts hard to come by in recent years. Though they have invested significantly in anti-money laundering compliance systems, policies, and training, most US banks haven’t taken heed.

While generally skeptical of the private sector and unsympathetic to the banks necessary to make the life-saving remittances work, Oxfam concedes:

For the most part, the banks in question have refused to substantively engage with the money transfer companies, which have been asking how they can further improve their compliance systems. Admittedly banks are operating in an environment of regulatory uncertainty. The Treasury Department on one hand has assured banks that they could open accounts for high-risk money transfer companies, provided they do their due diligence. But Treasury auditors’ scrutiny of money transfer company accounts and the threat of multimillion dollar fines on banks send a different message [emphasis added].

A joint report by Oxfam America, Adeso and the Inter-American Dialogue can be found here:

http://www.oxfamamerica.org/publications/keeping-the-lifeline-open-remittances-and-markets-in-somalia

The report explains:

Somali-American MTOs need bank accounts in the united States to facilitate transfers, but have found it difficult to obtain them in recent years. They have invested significantly in compliance systems, policies, and training to ensure that they do not run afoul of uS anti-money laundering/combating the financing of terrorism (AMl/CFT) requirements, but most uS banks have ignored these investments. In recent years, many uS banks have branded Somalia a risky destination for money transfers and have unceremoniously closed the accounts of Somali-American MTOs without providing any specific reasons or justifications.

There are, of course, good reasons to be skeptical of government regulation and management of remittances.  The collusion of government and cronyism hurts the poor.  Take a look at the current scandal rocking Pakistan right now where the Federal Investigation Agency (FIA) issued arrest warrants for three senior officials of the Exchange Policy Department (EPD) of State Bank of Pakistan (SBP).  What's needed are fewer government regulations nearly literally taking food out the mouths of staving children and more market competition.  Pakistan's Express Tribune explains:

Those whose arrest warrants have been issued include SBP Executive Director Asad Qureshi, Director Mansoor Ali Khan, and Additional Director Moinuddin, while the magistrate has cancelled the pre arrest bail of co-accused Najamul Saqib, Senior Joint Director of the EPD.
However, while talking to The Express Tribune, central bank spokesperson Umer Siddique said that the SBP has not received copies of the arrest warrants of EPD officials.
The arrest warrants of SBP officials comes amidst FIA’s ongoing investigations into alleged collusion between senior officials of the SBP, Western Union (WU) and Zarco Exchange Company Pvt Limited (ZECPL) in a remittance scam which has caused huge loss.
Similarly, the court has also issued the arrest warrants of Senior Vice President Middle East and Africa of WU, Jean Claude Farah and Regional Director of WU, Sobia Rehman, while the case of Abdul Hameed Fareed, Country Head of WU has been fixed for July 30.

 What is the result of the government crackdown on people serving the poor?  Duale again:

Others would resort to sending cash with unregulated couriers - which will be much more expensive and less reliable than the current system - and by illegal means. Lorries and planes of cash would come in from neighbouring countries. Lots of small informal operators would fill the gap left by Dahabshiil and the regulated firms whose transaction records can be inspected.

We have seen this before - when al-Barakat's money transfer business was closed down in the USA after 9/11. As far as aid agencies and businesses are concerned, I have no idea how they could carry on operating as usual.

Basically, the transfer business would be driven underground. It would be much smaller and it would be exploited. I understand the global concern about money-laundering and terrorist financing by a small minority of MTBs, but bashing the regulated and reputable firms like Dahabshiil is not the way to counter this. When law enforcement agencies come to us, we always help them.

Here he references the disaster that was the implementation of the USA PATRIOT Act after 9/11 and the crackdown on terrorism financing.  The US Treasury's Financial Crimes Enforcement Network (FinCEN) issued regulations that forced the Mom and Pop, and often ethnic, money transmitters out business.  Instead of cutting off funds for terrorism, we cut off the pipeline of indispensable aid to the poor abroad.

In response, US Rep. Mark Kennedy and US Sen. Norman Coleman stepped up and provided the necessary leadership and common sense usually lacking from FinCEN.  In an August 2006 letter to FinCEN in response to their 2005 regulation, Kennedy and Coleman wrote:

"Many groups of new Americans depend on banks and money service businesses to provide critical financial support in the form of remittances to loved ones, friends and former communities in their troubled homelands, Kennedy and Coleman wrote. "The Somali community faces an especially pressing need to keep this system open as remittance flows account for nearly one-sixth of the $600 per capita yearly income in Somalia."

Where are today's leaders who see through the anti-money laundering charade and are willing to stand up for the poor?  Free banking is a human rights issue.  The sooner we make common cause with groups concerned with human rights, immigrants and global poverty the better.


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Bitcoin as Money Depends on FinCEN

by Bradley Jansen May 16th, 2013 4:27 pm

Since 1997, I have been an active and vocal critic of the anti-money laundering mission of the US Treasury's Financial Crimes Enforcement Network (FinCEN).  Early that year, then-US Rep Ron Paul tasked me with monitoring FinCEN that monitors many of our financial transactions (I was working for him at the time).  Although I had never heard of FinCEN before that (like most Americans), I immediately started my study of the Treasury bureau (which became an "real" agency under the USA PATRIOT Act), monitored their activities (along with the Federal Reserve, etc.), and even got a personal tour of their Vienna, Virginia headquarters.

Even before the "Know Your Customer" proposed regulatory change that I sunk my teeth into and eventually defeated, I had the privilege of visiting the FinCEN HQ and meeting several of the key staffers. I'll write more about this experience later, but suffice it to say for now that the more they tried to impress me with how much info they had and how capable they were collating and connecting enormous amounts of data the more I realized I was staring in the face of Big Brother.  And of course, Big Brother comes at a price.

One article in PaymentsSource tries to warn people about the need to get up to speed on Big Brother's regulatory compliance:

To many, Bitcoin's appeal has been its unregulated, anonymous, cash-like nature. Adding regulation eliminates many of these traits.

Some companies that handle Bitcoin, such as CoinLab Inc. and BitInstant LLC, are already registered with FinCEN as money services businesses. As a result of the new FinCEN guidance, many more may have to do the same.

"What they did here is clever," says Charlie Shrem, co-founder and CEO of BitInstant, in an email. "They said, not only is a Bitcoin business an MSB, it is also a MTB (Money Transmitter); 48 states require separate MTB licensing."

The federal government requires only registration, reporting and recordkeeping from MSBs. But as MTBs, Bitcoin companies will also have to comply with the separate licensing practices.

State licensing looks like the biggest hurdle facing most Bitcoin companies now.  Even mainstream payments providers such as Square Inc. have encountered pushback from state regulators over licensing.

The article goes on to explain how burdensome regulations create costs and raise hurdles for (currency) competition, but readers of this blog and our accompanying Facebook page are well-familiar with these arguments.

Separately, Alex Kadochnikov writes up a primer for people to understand the FinCEN guidance here.  While I can't vouch for all of his analysis (and I have seen competing interpretations and others pointing out problems with the guidance), this seems to be a good start for those trying to get a handle on the registering, reporting and record-keeping requirements not just for FinCEN but the state regulators as well.   He also offers one of the better critiques and alternatives for FinCEN:

It is really unfortunate that FinCEN decided to apply Treasury Department regulations to all virtual currency folks through the definition of Money Transmitter. Using the definition of a currency exchanger instead of a money transmitter would have made things so much easier. Here is why.

This regulation makes an exception for currency exchangers who transact currency exchages in the amount greater than $1,000 on any given day. This would have made life a lot easier for some bitcoin miners — most of whom probably make way less than $1,000 a day from their mining activities. The problem is that FinCEN classifies virtual currency exchangers and administrators as money transmitters, and not as currency exchangers.

A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. Virtual currency does not meet the criteria to be considered “currency” under the BSA, because it is not legal tender. Therefore, a person who accepts real currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations. (See pages 5 and 6.)

He also explains the consequences of not complying:

U.S. law imposes both civil and criminal penalties for failing to register a business as a money transmitter.

This law specifically imposes criminal penalties on operation of unlicensed money transmitting businesses.

Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

Once the statutory six month period for when virtual currency money transmitters must register is up, the government will be able to start prosecuting people who do not comply. Though most likely the government will not go after a small-time Bitcoin miner, because that will be a tremendous waste of time and resources.

These warnings are not hollow, as The Hill reports:

The DHS seized bank accounts belonging to Mt. Gox, a company which converts government-backed currencies into the untraceable, digital currency called bitcoins. The agency said the company violated U.S. laws which require money exchanges register with the federal government and prohibit commerce that is derived from or could be used to support unlawful activity.

This is a critical time for the Bitcoin community to get its act together and step up to the plate.  Burying your head in the ground is not going to make the problems go away.

 

 


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Bitcoin Prosecutions Threaten Its Survival

by Bradley Jansen May 15th, 2013 7:50 am

One of the most interesting competing currency wannabes is firmly in the crosshairs of law enforcement.  As my friend Declan McCullagh writes for CNET, "Homeland Security cuts off Dwolla bitcoin transfers," Bitcoin's survival may depend on whether it complies with (granted, onerous) government regulations--especially the anti-money laundering laws.  Declan doesn't actually go that far, but he should. 

As my colleague here George Selgin has explained Bitcoin is not (yet) a currency in that it fails the "generally accepted" test.  From its inception until the FinCEN guidance, there has been a remarkable increase in the growth of the Bitcoin market.  The trend line intimated that Bitcoin *might* be on its way to becoming a full-fledged, generally accepted and widely recognized currency.  That path is now at a crossroads.

Explains Declan:

The U.S. Department of Homeland Security confirmed it has initiated legal action that prompted the Dwolla payment service to stop processing bitcoin transactions.

Nicole Navas, a spokesperson for U.S. Immigration and Customs Enforcement, confirmed the legal action to CNET this afternoon.

Dwolla, a Des Moines, Iowa-based startup, which raised $16.5 million in funding two weeks ago, notified users about the move earlier Tuesday. It blamed the decision on "recent court orders" limiting its ability to send money through Mt. Gox, the largest bitcoin exchange.

 As I have said privately many times and publicly at the Privacy Working Group, the FinCEN guidance on emerging payment systems (e.g. Bitcoin) raises more questions than it answers and the best way to make sense of the guidance is that law enforcement had prosecutions in the works and needed FinCEN to cover their backsides to try to make them stick.  I fear the prosecutions we are seeing now will just be the tip of the iceberg.

Whether Bitcoin can continue on its path towards a full-fledged, generally-accepted currency or not will largely depend on if the Bitcoin community can get its act together and respond appropriately to the FinCEN guidance.


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FinCEN and FATF Team Up Against the Poor

by Bradley Jansen April 24th, 2013 9:57 pm

I've been posting a lot about FinCEN (the US Treasury's Financial Crimes Enforcement Network) following their Guidance on Emerging Payment Systems including virtual currencies (read Bitcoin). Today they put out their latest--this time teaming up with the Financial Action Task Force (FATF) to make sure poor people in select poor countries not following their dictates remain poor (I'm paraphrasing, but not by much).

The Financial Action Task Force (FATF) is the sister organization of the Organization for Economic Cooperation and Development (OECD). The OECD has a campaign to stamp out what it calls "harmful tax competition" and uses the FATF to financially strangle Non Complying Countries and Territories. It helps to understand what is going on in this context to think of of the OECD and FATF as a cartel of mostly rich, white, former colonial powers that take offense when their mostly poorer, darker-skinned former colonies get too uppity. I've written a lot about the FATF over the years here.

Which of the two groups' descriptions fits this list of countries? Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Bangladesh, Bolivia, Brunei Darussalam, Cambodia, Cuba, Kuwait, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Philippines, Sri Lanka, Sudan, Thailand, Tajikistan, Zimbabwe. Yup. How about this list? Iran and Democratic People's Republic of Korea (DPRK), Ecuador, Ethiopia, Indonesia, Kenya, Myanmar, Nigeria, Pakistan, São Tomé and Príncipe, Syria, Tanzania, Turkey, Vietnam, and Yemen. Same?

Suppose you're a Bitcoin "money transmitter" and/or "Money Service Business" and think you're complying with all of FinCEN's registration and reporting requirements. Maybe, maybe not. Perhaps you're really just an agent of financial terrorism (in the eyes of the powers that be).

Here is the latest from FinCEN:

FinCEN Issues FATF-Related Advisories on AML/CFT Risks

Today, the Financial Crimes Enforcement Network (FinCEN) issued an advisory (FIN-2013-A004) to inform banks and other financial institutions operating in the United States of the risks of money laundering and financing of terrorism associated with jurisdictions identified by the Financial Action Task Force (FATF) on February 22, 2013 as having deficiencies in their anti-money laundering/counter-terrorist financing (AML/CFT) regimes and that (i) have not made sufficient progress in addressing these deficiencies or (ii) are subject to FATF’s call for countermeasures. In addition, FinCEN issued a complementary advisory (FIN-2013-A003) that addresses a separate, but related, FATF document identifying jurisdictions with strategic AML/CFT deficiencies, for which each jurisdiction has provided a high-level political commitment to address.

· FIN-2013-A004 -- Guidance to Financial Institutions Based on the Financial Action Task Force Public Statement on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Risks (http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A004.pdf)

· FIN-2013-A003 -- Guidance to Financial Institutions Based on the Financial Action Task Force Publication on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Risks posed by Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Bangladesh, Bolivia, Brunei Darussalam, Cambodia, Cuba, Kuwait, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Philippines, Sri Lanka, Sudan, Thailand, Tajikistan, Zimbabwe, and the substantial AML/CFT improvements in Ghana and Venezuela (http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-A003.pdf)

Addendum: Let's keep in mind that non-official transfers are far more important to help the global poor than foreign aid is. As BBC reports, people sending money to family back home are hugely important for the recipient countries, "In 2010 - the most recent year for which meaningful comparisons can be made, according to [Hong Kong-based Ghanaian academic Adams Bodomo] - the African diaspora remitted $51.8bn (£34bn) to the continent." It continues, "Worldwide remittances from people who hail from developing countries totalled $350bn," he said; "far exceeding ODA at $130bn...In the case of Africa, about 75% of remittances are sent informally - we can't track that."

Obviously they're all financing terrorism not helping their struggling families. Just ask FinCEN and the FATF.

And as allAfrica.com reports, the Africans are working hard to comply with FATF dictates, "The first Gulf of Aden Counter-Terrorism Forum...called for countries in the region to tighten controls on the movement of money that can be used to fund terrorism, appealed to the international community to help dry up terrorism financing by refraining from paying ransom to terrorist groups, and called for work to begin on a convention to combat terrorism to be signed by all member states, to strengthen regional co-ordination and build up marine forces and customs units...The Forum also wants to see a joint military mechanism formed to co-ordinate efforts to combat terrorism, piracy, illegal immigration smuggling and human trafficking." In fact, one might say they are quite militant about it.


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More Analyses of FinCEN's Virtual Currency Guidance

by Bradley Jansen April 22nd, 2013 9:42 am

I posted recently about the US Treasury's Financial Crimes Enforcement Network's (FinCEN) guidance and virtual currencies and a followup post on the FinCEN director's speech about it after a similiar one. I wasn't the only one who took a look.

The International Law Office (.com)'s newsletter has a good examination of the FinCEN guidance and raises some important questions. It urges:

Companies engaged in activities involving convertible virtual currencies should assess the impact of the guidance on their obligations under the Bank Secrecy Act Regulations without delay. In addition, in light of the indirect influence that FinCEN positions can have on interpretations of state money transmitter licensing laws, administrators and exchangers of convertible virtual currency may want to re-evaluate their status under those laws.

Its background explains

Money services businesses are subject to certain requirements under the regulations, which are partially dictated by the type of activity that qualifies the entity as a money services business. Such requirements include an obligation to maintain an anti-money laundering programme, as well as registration, reporting and record-keeping requirements.

The guidance applies only to convertible virtual currency and generally provides that administrators and exchangers of convertible virtual currency are money transmitters and therefore are money services businesses under the regulations, subject to any applicable limitation or exemption. The guidance also provides that users of convertible virtual currency are not considered money services businesses under the regulations.

Most of the analysis looks at Convertible Virtual Currency (most significantly Bitcoin) and "Administrators and exchangers of convertible virtual currency as money transmitters." One of the most obvious problem is the "guidance" makes some things less clear, "There are some critical ambiguities in this construct. First, notwithstanding the appellation 'convertible' virtual currency, the definition itself incorporates no reference to the ability to convert virtual currency to real currency" and that " it remains somewhat difficult to parse the distinction drawn in the guidance between 'pre-paid access' and 'convertible virtual currency'."

Importantly, the analysis takes the same look as I did on how FinCEN stifles currency competition, "the guidance takes the position that if the broker or dealer transfers funds between the customer and a third party that is not part of the transaction, it is operating as a money transmitter. In examples that appear to be modelled after the ill-fated e-Gold service, FinCEN describes the typical activities of these types of entity as the electronic distribution of digital certificates of ownership of real currencies or precious metals."

They make a distinction between centralized virtual currencies and decentralized ones (here targeting Bitcoin), "a person is a money transmitter under the regulations if he or she creates units of convertible virtual currency and sells them to a third party for real currency or its equivalent. In addition, the guidance indicates that a person is an exchanger and a money transmitter under the regulations if he or she accepts convertible virtual currency from one person and transmits it to another person."

Security Management's "Security's Web Connection" site has an article "Treasury Department Using Advanced Analytics to Help Detect, Prevent Money-Laundering" that looked at the same FinCEN director speech as I analyzed here. The article basically mimics her remarks that they are getting their technical act together, that their new analytics tool FinCEN Query "allows investigators to more easily search the 11 years of BSA data and apply filters. That has already facilitated investigations, but the next step is predictive analytics." FinCEN seems to dream of a Vanilla Sky future where they can predict and prevent financial crimes.

DataGuidance's Privacy This Week devoted an article "USA: FinCEN says AML rules applicable to 'convertible' virtual currencies" on the same guidance. The article quotes David E. Teitelbaum, Partner at Sidley Austin, as saying that the guidance will be "challenging" and Angela Angelovska-Wilson, Counsel at Latham & Watkins in Washington D.C. and a Member of the Finance Department and the Financial Regulatory Group, as explaining as others have how the guidance creates more confusion than it clarifies: the new definitions introduce ambiguities and where it seems to target Bitcoin it isn't clear if it affects programs offering "miles" or "points," etc.

The article quotes the FBI's Bitcoin report

'The FBI assesses with low confidence, based on current user and vendor acceptance, that malicious actors will exploit Bitcoin to launder money. This assessment is based on observed criminal activities, investigations, and prosecutions of individuals exploiting other virtual currencies, such as e-Gold and WebMoney. A lack of current reporting specific to Bitcoin restricts the confidence level.'

And it notes the European Central Bank's (ECB) report "Virtual Currency Schemes" (October 2012) worrying that "virtual currency schemes […] could represent a challenge for public authorities, given the legal uncertainty surrounding these schemes, as they can be used by criminals, fraudsters and money launderers to perform their illegal activities." The ECB is also targeting Amazon Coins!

The article elaborates that the rise of social networking and distrust of the current financial system increase the acceptance of virtual currencies.

We can only hope that the UK Guardian gets it right

The future of money may or may not include a Federal Reserve Bank of Amazon, but it probably does involve the gradual decentralisation and democratisation of currency. Virtual currencies aren't just a new-fangled sort of Monopoly money. Rather, they may just be the thing that ends the monopoly on money.


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FinCEN's Director on Virtual Currencies

by Bradley Jansen April 20th, 2013 10:32 am

Earlier this week, FinCEN Director Jennifer Shasky Calvery addressed the National Cyber-Forensics Training Alliance CyFin 2013 Conference.

She explains again how the Financial Crimes Enforcement Network (FinCEN) gets its data from the reports it mandates that banks use to spy on their customers against them. Lots and lots of reports.

But she promises:

However, right now this is long and arduous work as analysts sift through hundreds and sometimes thousands of reports. Very soon, new capacities made possible by our internal technology modernization will allow our analysts to deal with such data sets to find leads in a fraction of the time previously necessary. Very soon, we will be able to point law enforcement and other stakeholders precisely to where they should be looking. Our analysts, working hand- in-hand with our superb technology team, are now putting these new capacities into place.

But her talk really focused on "Emerging Payment Systems." Her comments have echoed mine (from an entirely different perspective) that technology (and specifically mobile apps) offer great opportunities (for free banking) and that those not well served by our current system (the "unbanked" in the US--immigrants, poor, racial and ethnic minorities--and people in countries with less mature financial systems or sound currencies) are a great target market.

As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce.

Don't worry, FinCEN is working to strangle these initiatives in their crib with their regulations.

She pays special attention to "crypto-currencies" in her talk.

We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. While probably most of today’s audience understands what these emerging payments systems are and how they work, many line analysts, investigators, and prosecutors in law enforcement may not, and part of FinCEN’s role is to help be the bridge to explain these new systems. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems.
In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas.

And, as our Bitcoin fans know--at least those who follow my posts here or my rants on our Facebook page, FinCEN has "virtual currencies" in their sights. And, remember too, it was FinCEN that shut down e-gold back in the day and crippled the crypto-currency movement last century.

I'll quote her in the entirety of her virtual currency remarks:

In fact, just last month, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies, such as Bitcoin, which has in recent weeks gained significant attention. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them.
FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.
The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance.
Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers have already registered with FinCEN as MSBs, though they have not necessarily identified themselves as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities and that all who need to, register appropriately.

The second half of her speech talked about account takeovers via malware, risks with third party payment processors, improvements they are making to their analytical work (after some false starts!), their public-private partnerships with industry, and her personal initiative "The Delta Team" ("The purpose of the Delta Team is for industry, regulators, and law enforcement to come together and examine the space between compliance risks and illicit financing risks. The goal is to reduce the variance between the two.").

And let's not forget FinCEN's dreams of global domination. They are in a partnership of 130 other "Financial Intelligence Units" as part of the Egmont Group.

The text of her remarks is available at the following link:

http://www.fincen.gov/news_room/speech/pdf/20130416.pdf


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FinCEN Head Elaborates on New Payment System Regs

by Bradley Jansen March 20th, 2013 4:05 am

The head of the Financial Crimes Enforcement Network (FinCEN) spoke recently to an anti-money laundering conference and elaborated on their thinking for the new regulations on new payment systems such as Bitcoin and e-precious metals.

Here is an excerpt of her remarks:

Emerging Payment Systems
I’d like to begin today by discussing how FinCEN’s analysts are working hard to stay ahead of the curve in understanding emerging payment systems and related financial flows and vulnerabilities and to put that information into the hands of those customers who need it most.
As we all know, during the past decade, the development of new market space and new types of payment systems have emerged as alternatives to traditional mechanisms for conducting financial transactions, allowing developing countries to reach beyond underdeveloped infrastructure and reach those populations who previously had no access to banking services. For consumers and businesses alike, the development and proliferation of these systems are a significant continuing source of positive impact on global commerce.
These new systems have also expanded the boundaries of “money transmission” as more sophisticated payment systems have become available. And the inherent added complexity of these systems opens them to potential misuse by criminals.
FinCEN’s analysts are continually working to understand the schemes and methods used to exploit emerging payment methods for money laundering and terrorist financing, and to develop related guidance for law enforcement. This guidance provides law enforcement with information on key sectors’ operations, recordkeeping practices, and efforts to identify and counter vulnerabilities.
Partnership is key. As our analysts develop their understanding of these new systems, they are significantly aided by working directly with the financial industry. This partnership enables them to better follow financial trails and realistically understand financial mechanisms.
For instance, FinCEN’s analysts are working to finalize a bulletin that will explore the relatively new payment technology of digital currency systems. FinCEN’s bulletin will help “de- mystify” the digital currency realm by explaining to the broader law enforcement community how these systems work. The bulletin will also address the role of traditional financial institutions as intermediaries.
We’re viewing our analytic work in this space as an important part of an ongoing conversation between industry and law enforcement. FinCEN is dedicated to learning more about digital currency systems, along with other emerging mechanisms, to protect those systems from abuse and to aid law enforcement in ensuring that they are getting the leads and information they need to prosecute the criminal actors. As our knowledge base develops, in concert with you, we will look to leverage our new capabilities to identify trends and patterns among the interconnection points of the traditional financial sector and these new payment systems.
To date, FinCEN’s analysts have explored and produced reference products for law enforcement on many traditional and emerging payment systems. These include: cross border funds transfers and correspondent accounts, money transmitters, online payment systems, prepaid cards, and mobile payments. FinCEN’s analysts then follow up this work by providing in-person analysis and training to thousands of investigators each year.
In addition to developing products to help law enforcement follow the financial trails of emerging payments methods, FinCEN also develops guidance for the financial industry to clarify their regulatory responsibilities as they relate to emerging areas.
In fact, just yesterday, FinCEN issued interpretive guidance to clarify the applicability of BSA regulations to virtual currencies. The guidance responds to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use virtual currencies or make a business of exchanging, accepting, and transmitting them.
FinCEN’s rules define certain businesses or individuals as money services businesses (MSBs) depending on the nature of their financial activities. MSBs have registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities under FinCEN’s regulations. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN’s definition of MSBs.
The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. Those who use virtual currencies exclusively for common personal transactions like receiving payments for services or buying goods online are not affected by this guidance. Those who are intermediaries in the transfer of virtual currencies from one person to another person, or to another location, are money transmitters that must register with FinCEN as MSBs unless an exception applies. Some virtual currency exchangers arealready registered with FinCEN as MSBs, though not necessarily as money transmitters. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities.

The whole speech is here:


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