The Cayman Islands Monetary Authority has written to the Bankers Association about two regulatory changes in the United States that are affecting banks locally and in the region.
The CIMA letter noted the enactment of the Anti-Money Laundering Act 2020 on 1 Jan. 2021, which expands the subpoena powers of US government regulators over foreign correspondent accounts even if there is no nexus with the US.
The second issue raised by the regulator concerns changes to the so-called ‘travel rule’ and record-keeping under the Bank Secrecy Act. The travel rule requires financial institutions transferring money across international borders to collect and share information about the sender and recipient.
The Federal Reserve Board and the Financial Crimes Enforcement Network (FinCEN) proposed last October to lower the threshold for the travel rule from US$3,000 to US$250 for funds transfers by financial institutions that begin or end outside the US.
The travel rule is a key tool to fight money laundering, terrorism financing, international organised crime and fraud. The proposed rule change reflects the regulatory concerns that criminals have been using small, cross-border transactions to stay undetected.
FinCEN justified its call for a lower threshold, citing an analysis of 2,000 suspicious activity reports of 1.29 million underlying funds transfers. The SARs were filed between 2016 and 2019 and believed to be linked to terrorist financing. More than 57% of these transfers were for less than $300.
In its letter, CIMA asked the Bankers Association to inform its membership of the changes and to provide a formal response to the regulator about any concerns members may have.
In the US, the American Bankers Association rejected the idea in a public consultation, urging the agencies to withdraw the proposal.
The association said FinCEN had offered no evidence how the lack of data from transactions that were so far not subject to the travel rule had hampered prosecutions.
The ABA suggested regulators should take more time to analyse the impact of the lower thresholds for law enforcement and financial institutions.
“Financial institutions […] will require significant additional resources for quality control, updates to policies and procedures, training, auditing, and compliance reviews. These increased burdens and costs may cause banks to eliminate or reduce international wire transfer services,” the ABA wrote in its official response.
Under the travel rule, banks and money-service businesses must collect, internally retain and transmit the sender’s name and address, the amount transferred, the execution date, payment instructions, and the recipient’s name, address, financial institution, account number and any specific identifiers.
The rule change would also affect virtual asset service providers (VASPs) as it specifically includes cryptocurrency transfers as a class of transactions to which the proposal would apply.
VASPs were made subject to the travel rule after the Financial Action Task Force, the global anti-money laundering standard setter, changed its guidance for crypto service providers and FinCEN issued its version of the regulation for VASPs in 2019.
It forces crypto services, such as cryptocurrency exchanges and digital wallet providers, to add an identity layer onto a decentralised technology that was originally designed to be pseudonymous.
In practice, this is easier said than done and compliance with the rule has been difficult and almost impossible for some. Some virtual asset service providers are collaborating in a US Travel Rule Working Group to develop a solution.
One of the issues is that in the virtual world it is difficult to determine that a “payment” is made cross-border.
Crypto compliance solutions provider CipherTrace estimates the lower threshold would more than double the transactions covered by the travel rule and significantly increase the information that has to be transmitted and retained by VASPs.