The Securities & Exchange Commission (SEC), Financial Crimes Enforcement Network (FinCEN) and Commodity Futures Trading Commission (CFTC) have issued a joint statement that reminds certain parties of their continuing obligations under the Bank Secrecy Act (BSA) with respect to crypto and digital currency related activities. The guidance applies to “financial institutions” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.
All crypto transactions should be dealt with similarly to an institution’s dealings with cash or cash equivalents. The BSA requires that Know Your Customer and Customer Identification Program protocols be implemented, as the institutions are responsible for preventing money laundering, terrorist financing, and reporting of any suspicious activity. Penalties for failing to comply with the Act are steep.
Specifically, the Act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports if the daily aggregate exceeds $10,000, and report suspicious activity that may signify money laundering, tax evasion, or other criminal activities. Therefore, any transactions involving cryptocurrency or digital currency needs to be recorded in the same manner ie., identity of the purchaser, customer, transferor, beneficial interest holder, or buyer needs to be ascertained and retained by the institution. Source of the funds needs to be obtained as well.
Three main types of reports need to be filed by various parties:
- Currency transaction reports: a currency transaction report (CTR) reports cash transactions exceeding $10,000 in one business day, regardless of whether it’s in one transaction or several cash transactions.
- Suspicious activity report: a suspicious activity report (SAR) must report any cash transaction where the customer seems to be trying to avoid BSA reporting requirements. A SAR must also be filed if the customer’s actions suggest that they are laundering money or otherwise violating federal criminal laws and committing wire transfer fraud, check fraud, or mysterious disappearances.
- FBAR: U.S. citizens and residents with a financial interest in or authority over foreign bank accounts or “foreign financial accounts” with an aggregate value of $10,000 are required to file a Foreign Bank Account Report (FBAR) with the U.S. Treasury by October 15 every year.
There are heavy penalties for individuals and financial institutions that fail to file the various reports. There are also penalties for a bank which discloses to its client that it has filed a SAR about the client. Penalties include heavy fines and prison sentences. Specific and strict filing timelines are involved. IRC §6038D requires that all U.S. persons, individuals, corporations, partnerships, LLCs, and trusts, provide timely information regarding their foreign accounts, otherwise a $10,000 penalty will result for every month it is late.
Please contact Belenky Law Firm PLLC if you have any compliance questions for your institution. This firm works with organizations of all sizes and types and is expert in navigating the BSA’s strict requirements.