Who’s in charge of your institution’s MTL compliance?

August 9, 2022
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One way to put your cryptocurrency firm out of business is to run afoul of regulators.

Unfortunately, in the U.S., regulations haven’t caught up to innovation, and cryptocurrency business owners find themselves trying to navigate a complicated maze of federal and state regulations and compliance obligations.

Firms must comply with federal AML regulations and adhere to the nuanced rules and regulations in every state in which they conduct business. Often, there is little consistency from state to state in terms of the reporting requirements, including differing forms, due dates, methods of delivery, and regulatory points of emphasis. Further, state regulatory reporting requirements and compliance expectations can and do change, often without notice, leaving cryptocurrency firms on a compliance merry-go-round with no way to get off.

The Financial Crimes Enforcement Network (FinCEN) considers most cryptocurrency business models to be money services business (MSB) money transmitters. If you’re unsure of whether your business is considered an MSB, then feel free to set up a free consultation with compliance experts at our sister company, BitAML.

That said, all states have their own definition of a money transmitter that may not necessarily coincide with that of FinCEN. While all MSBs must register with FinCEN at a federal level, whether or not you need to obtain a money transmitter license in a particular state will vary according to your business’ unique facts and circumstances and that state regulator’s review and interpretation thereof.

It’s important to consult an attorney or other expert if you have any doubt about whether you need to obtain a state license in any of the states where you plan to do business.

No matter how small, every cryptocurrency MSB must ensure compliance with federal and state laws, including the Bank Secrecy Act (BSA) and Anti Money Laundering (AML) rules. In an MSB, the BSA Compliance Officer and Board of Directors have the responsibility of implementing and carrying out the institution’s compliance program.

At the state level, FinCEN compliance is always implied, even if the state doesn’t specify the same regulations or mandate licensure.

As states continue to establish new requirements, both the BSA Compliance Officer and the Board of Directors have to spend more time understanding their money transmitter license (MTL) obligations for each state and designing compliance protocols to ensure adherence.

When discussing cryptocurrency compliance, it’s essential to talk about the four pillars of AML/BSA compliance, a framework designed to help businesses understand their obligations under the BSA. The four pillars are:

  1. A designated compliance officer
  2. controls policies, procedures, and controls designed to detect and deter money laundering
  3. Ongoing and relevant AML training of personnel
  4. Independent testing of your BSA/AML program

All four pillars must be in place for compliance to work correctly, and for the business to be in compliance.

The role of the BSA Compliance Officer

To operate legally, MSBs must comply with specific rules, including registering with the federal government and building an effective AML program. The AML program is required to meet federal regulatory obligations. One of the first obligations is to appoint a BSA Compliance Officer.

To understand the role, you must first understand the compliance framework and the basics of the Bank Secrecy Act, which in 1970 established the laws used to fight money laundering in the U.S. Under the Act, financial institutions must maintain records of certain customer and transaction information to help authorities identify and address financial crimes, prosecute criminals, and otherwise enforce regulations.

BSA Compliance Officers are responsible for ensuring your MSB follows all necessary federal and state AML regulations. The BSA Compliance Officer is also responsible for:

  • Keeping current on relevant federal and state legislation applicable to the institution, including, among others, the BSA, the USA Patriot Act, Dodd-Frank Wall Street Reform, the Consumer Protection Act of 2010, and rulemaking set forth by the Consumer Financial Protection Bureau (CFPB).
  • Using available tools and resources to carry out day-to-day AML compliance responsibilities.
  • Providing AML compliance training to all employees.
  • Understanding the potential money laundering risks associated with cryptocurrency transactions, activities, customers, products, and services.
  • The timely filing of Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) to FinCEN
  • When it comes to ensuring compliance with state regulations for a cryptocurrency entity, the BSA Compliance Officer must be mindful of the different requirements that vary from state to state.

Because there is no single or uniform license allowing a money transmitter to operate in every state, MSBs are challenged with understanding obligations that affect them across multiple states. Each state approaches cryptocurrency and, for that matter, money transmission differently, and there is little consistency in state licensing requirements.

Also, state regulatory reporting requirements and expectations can and often do change without notice. BSA Compliance Officers must monitor changes by reviewing FinCEN, the Nationwide Multistate Licensing System (NMLS), and each state’s MTL regulatory agency website.

While federal regulations are designed to prevent, detect, and deter money laundering and otherwise safeguard the integrity of our financial system, most state regulatory oversight focuses on consumer protection .

Firms with a reputation for promptly addressing consumer complaints and providing clear disclosures of fees and risks to the consumer are generally viewed favorably by consumers and prospective customers. Over the past several months, state regulators and policymakers have prioritized consumer protection. Often this can take the form of either or both enforcement actions and legislation. It’s easy to understand why, as the once nascent crypto industry surges in popularity and grabs the attention of a larger, more mainstream audience of prospective customers. BSA Compliance Officers must rise to the occasion by developing and investing in consumer protection policies and procedures that adequately address and stay ahead of this regulatory point of emphasis.

The role of the Board of Directors

While at first glance many small businesses might think a board of directors isn’t necessary, establishing one now helps you maintain consistency as the business grows. Indeed, a Board of Directors provides oversight to ensure the institution operates in compliance.

While the Board isn’t involved in day-to-day, frontline compliance activities, they are responsible for ensuring the MSB adheres to its fiduciary and legal responsibilities and maintains a practical AML compliance framework.

As part of its oversight of the AML program, the Board of Directors is responsible for ensuring the MSB fulfills state licensing requirements and follows state regulatory requirements. With consumer protection becoming a hot button issue both at the state and federal level, the Board must also ensure adequate consumer protection protocols are in place.

Key takeaways

What makes cryptocurrency compliance challenging is that MSBs need to comply with both federal regulations and each state’s unique money transmitter regulatory requirements. Staying current on all the changing rules and MTL requirements is difficult for anyone, especially with compliance obligations that constantly change, sometimes without notice. Monitoring the different state regulator websites for any changes and updates is very time-consuming.

Compliance teams are faced with the challenge of keeping up with both established and constantly evolving regulatory requirements.

However, not complying with the rules and regulations can be very costly. MSBs face hefty fines, increased regulator scrutiny, and put the very survival of their business in jeopardy.

When BSA Compliance Officers first see the ComplyFit platform, they are impressed and imagine the cost savings and improved productivity, not to mention the look of relief on their compliance team’s faces.

ComplyFit monitors changes to MTL reporting requirements across all 50 states and provides real-time updates. In addition to updating reporting requirements, ComplyFit streamlines many day-to-day compliance tasks for financial institutions, including reporting, and recordkeeping.

If your business is struggling to stay on top of all the changing regulatory and compliance obligations, find out more about how using ComplyFit can make state MTL reporting more manageable, easier, and give you peace of mind.

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