FinCEN Regulation Of Unhosted Wallets

Objective

The objective of this rule is to alleviate the risk of the increasing usage of CVC to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering. It also places reporting and recordkeeping obligations on banks and MSBs on transactions between customers of hosted and unhosted wallets.

Major Provisions

Foreign Jurisdiction List

FinCEN proposed to define otherwise covered wallets as those wallets that are held at a financial institution that is not subject to the BSA and is located in a foreign jurisdiction identified by FinCEN on a List of Foreign Jurisdictions. Initially, FinCEN proposed that this list would comprise all the jurisdictions that have primary money laundering concerns like Burma, Iran, and North Korea. But now, FinCEN also identified that the Foreign Jurisdiction List could be expanded to include jurisdictions that are identified to have significant deficiencies in their regulation of CVC or LTDA. This could have a great implication for other countries.

The reason FinCEN is including the transactions with wallets hosted in jurisdictions listed on the Foreign Jurisdictions List is that these jurisdictions do not have an effective anti-money laundering regime to prevent suspicious activity and monitor transactions with due diligence. There is a lack of intermediation that would apply a variety of controls that reduces finance risk. FinCEN anticipates that the number of transactions subject to reporting and recordkeeping related to otherwise covered wallets hosted by foreign financial institutions located in jurisdictions on the Foreign Jurisdictions List will be more complex to be included in the Travel Rule and thus had to be regulated.

It exempts reporting those transactions that are between a filer’s hosted wallet customer and a counterparty hosted wallet at a financial institution that is either regulated under the BSA or located in a foreign jurisdiction that is not on the Foreign Jurisdictions List. In making a determination of the applicability of the exemption to a wallet hosted by a foreign financial institution, banks and MSBs would need to confirm that the foreign financial institution is not located in a jurisdiction on the Foreign Jurisdictions List, and would need to apply reasonable, risk-based, documented procedures to confirm that the foreign financial institution is complying with registration or similar requirements that apply to financial institutions in the foreign jurisdiction.

The rule about expanding the Foreign Jurisdiction List to include jurisdictions that are identified to have significant deficiencies in their regulation of CVC or LTDA might have an impact on countries like India which is at its nuanced stages in regulating hosted and unhosted wallets. FinCEN is also very ambiguous about what is included in the bracket of “significant deficiencies in the regulation” which could prove fatal. Thus this proposed rule has a greater impact on other countries than anticipated even though its motive is to regulate transactions with the USA.

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