3 tips for compliance examinations (that are actually useful)

April 11, 2022
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Is your cryptocurrency business ready for your next compliance examination? How well would your business fare if federal or state regulators came knocking today?

Many business owners in the crypto space are becoming concerned about their ability to adhere to increasingly stringent federal and state statutes as well as the subsequent uptick in money transmitter licensing (MTL) compliance examinations.

Preparing for and undergoing these reviews are among the most stressful and tedious tasks that companies in the cryptocurrency industry undertake. But with the right knowledge and tools, compliance examinations can become routine and painless processes.

A breakdown of federal and state examinations

Cryptocurrency businesses in the U.S. operate under extensive federal and multi-state money transmitter licensing regulations. Understanding the state and federal examinations you’ll face is the first step.

The different kinds of federal examinations explained

The most significant federal examination concern for cryptocurrency businesses is the IRS Title 31 examination. This review determines whether your business meets the Title 31 Anti-Money Laundering (AML) requirements. It applies to cryptocurrency kiosks/ATMs, online exchanges, and any other crypto businesses that are considered money transmitters, no matter the size of the company.

IRS Title 31 examinations require cryptocurrency companies to have a Bank Secrecy Act (BSA) Compliance Officer and register as a money services business (MSB)/money transmitter with the Financial Crimes Enforcement Network (FinCEN).

Businesses in this space also need to implement regular compliance training for employees, as well as a system of internal and external auditing and testing processes. Last but not least, MSBs must have policies and procedures designed to prevent, detect and report Money Laundering and criminal activity.

The different kinds of state examinations explained

State examinations vary, but there are some commonalities. They are generally assessments of:

  • The financial condition of the company
  • The effectiveness of accounting, operational, risk assessment, and other internal controls
  • The scope, frequency, transparency, and effectiveness of internal and external audit functions
  • The ability of the company’s information technology systems to handle the necessary reports, audits, and other compliance activities
  • The severity of any deficiencies in these aspects
  • Know-Your-Customer (KYC) completion and Suspicious Activity Reports (SARs) review, although this doesn’t tend to be the primary focus of state exams. 

The qualifications for passing a state-level examination also vary. The New York Department of Financial Services, for example, assigns cryptocurrency businesses a FILMS rating based on the above criteria with “1” being in strong compliance and “5” being unsatisfactory compliance. MTL licensees that receive a “4” (marginal compliance) or “5” are subject to fines as well as license suspension or revocation.

3 tips for sailing through examination

The regulations that govern cryptocurrency operations and their related examinations can be overwhelming and missteps can have massive consequences. But surviving a state or federal compliance examination doesn’t have to be as difficult as it seems.

What can help? Having the right knowledge and tools to help you prepare for an Independent AML review or state exam. 

Update your current compliance policies and procedures

The integrity and effectiveness of your compliance program is the most important part of an examination. Even policies and procedures that seem strong can benefit from updates in light of new regulations, improved technologies, or more effective methods so regular evaluation and revision will help companies stay current and compliant.

To get started, ask yourself these questions:

  • When were our policies and procedures last updated?
  • Do our policies and procedures still fit our operations and the latest regulations?
  • Are we consistently adhering to our policies and procedures?
  • Do our decision-makers and staff have a solid understanding of the policies and procedures?
  • What areas of compliance are we falling short in? Are there knowledge gaps we need to fill? How do we start addressing them ASAP?

The answers to these questions can help give you an idea of where your company stands as far as compliance strengths and weaknesses. 

It’s also important that all registrations are up to date, including FinCEN and state MTL filings. There are a lot of different deadlines so staying on top of this can be tricky, especially when you operate in multiple states.

Optimize your recordkeeping

Examiners request a number of documents so having the right records on hand is also crucial to a successful compliance review. As with your evaluation of your policies and procedures, you should consider a few key things:

  • Are we maintaining sufficient records of transactions, KYC documentation, investigations of alerted activities, and other compliance paperwork?
  • Are our records detailed and complete?
  • Are our records well-organized and easily accessed by relevant parties?

Moving away from spreadsheets and using multiple tools to handle all areas of recordkeeping and document management, as well as automating these processes as much as possible will streamline your efforts and make it much easier to provide the records examiners need.

Keep everyone in the loop

Even the best recordkeeping and compliance policies will be ineffective if the decision-makers, staff, and other stakeholders don’t know what’s going on. Everyone should have the same information about deadlines, tasks, and documents and should be able to share updates in real-time.

Your BSA Compliance Officer should take the lead as far as company compliance goes, but it’s important that everyone in the organization has the information they need to keep your compliance policy up to date.

Key takeaways

Despite these difficulties, solid time management and record management, as well as standardized processes, can make state and federal examinations fairly straightforward processes. The issue many companies face, however, is being organized enough to get – and keep – these things in order. To this end, ComplyFit created an efficient, helpful tool to streamline the most burdensome aspects of regulatory compliance.

We’ve developed a solution to help you manage the maintenance of your state money transmitter license reporting obligations. Our automated scheduling and workflows keep the deadlines and tasks associated with compliance examinations organized. An intuitive dashboard and timely alerts help keep you up to date on upcoming deadlines and reviews.

Tasks are marked complete once they’re done, keeping everyone on the same page about important examination to-dos.

Our recordkeeping tools and functions eliminate paper or spreadsheet-based systems and reduce the need for manual data entry. Creating, organizing, and managing reports, licenses and other compliance records becomes a painless process.  

We’ve also eliminated the need to send multiple emails or input data into a bunch of spreadsheets to provide updates. Everyone who has access to the dashboard has access to the same real-time information and notifications of new documents, task updates, and reminders are provided immediately.

Simply put, ComplyFit puts it all in one place, organized, easy to instantly recall, and accurate – everything you need to stay organized and on top of state MTL reporting while promoting efficiencies and realizing potential cost savings for your compliance function.

Ready to get, and stay, organized? Get in touch with us for a demo.

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