FinCEN Should Not Lower Money Transmission Thresholds

COMMENTARY Economic and Property Rights

FinCEN Should Not Lower Money Transmission Thresholds

Nov 19th, 2020 6 min read
COMMENTARY BY
Norbert J. Michel, Ph.D.

Director, Center for Data Analysis

Norbert Michel studies and writes about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, has vowed to reverse the Trump administration’s so-called easing of financial regulations. Pool / Pool / Getty Images

Key Takeaways

Waters singled out two rules, one that deals with the Community Reinvestment Act, and another that adjusted the Volcker rule.

The main feature of the rule lowers the reporting threshold from $3,000 to $250 for cross-border payments (remittances).

If the administration goes forward with this rule, Congress should consider using the Congressional Review Act to rescind it.

Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, has vowed to reverse the Trump administration’s so-called easing of financial regulations. Waters singled out two rules, one that deals with the Community Reinvestment Act, and another that adjusted the Volcker rule.

It remains unclear exactly how Waters will be able to do much to change these rules, especially since the agencies would have to go through any new rulemaking procedures on their own. According to Waters, “We are emerging from the dark days of the Trump administration into the dawn of a new progressive America, where pro-consumer and pro-investor policies will always be first on the agenda.”

If Waters really wants to improve regulations to benefit consumers and investors, she should focus on the Trump administration’s new funds transfer rule. The new rule will impose higher costs on business owners and people who electronically transfer as little as $250.

Although the administration had the chance to raise reporting thresholds, thus lowering the regulatory burden that comes with transferring money, it chose to go in the opposite direction. The proposed rule—which did not follow an advanced notice—gives firms only 30 days to comment.

Meeting that 30-day deadline will be tough for many non-bank firms that transfer funds, and not just because it came without warning. The comment period overlaps the time of the year that these companies have to renew their state licenses, and any firm with a nationwide presence has to renew 49 separate licenses. The administration surely knew this.

In addition to providing money transmitters a single national license, Congress could fix all kinds of problems with this rule if they want to benefit consumers and investors.

The main feature of the rule lowers the reporting threshold from $3,000 to $250 for cross-border payments (remittances). Because the transfer networks are such a complicated patchwork—largely due to regulatory issues that Congress needs to fix—there is good reason to believe that the new rule will snare domestic transfers as well as cross-border transfers. The rule will also “clarify” that the new thresholds apply to both cross-border and domestic transactions that involve digital currencies.

Lowering the thresholds is exactly the wrong approach.

These rules implement the Bank Secrecy Act of 1970, an act originally aimed at deterring foreign banks from laundering criminal proceeds and helping people evade federal income taxes. This law gave banks an affirmative duty to report any cash transaction of more than $10,000 to the Treasury Department, and made failure to report such transactions a criminal offense.

Congress has never adjusted that threshold for inflation. Had it done so, it would be close to $70,000 today. Similarly, neither Congress nor the Financial Crimes Enforcement Network (FinCEN) have adjusted other reporting thresholds for inflation, such as the 1990s era $3,000 threshold in this new rule. (The Federal Reserve and FinCEN jointly issued the new rule).

The rule essentially repeats the same mantra that federal agencies have used for years with virtually no supporting evidence: They need more suspicious activity reports because they have information that “indicates that malign actors are using smaller-value cross-border wire transfers to facilitate or commit terrorist financing, narcotics trafficking, and other illicit activity.”

But financial firms already send millions of suspicious activity reports to FinCEN every year. Aside from the high compliance cost that consumers and investors already have to deal with, there is good reason to believe that this framework is counterproductive. The regime costs billions of dollars each year, a figure that works out to at least $7 million for each anti-money laundering (AML) conviction.

The rule does supply a few anecdotes of cases that involve criminal transactions under the $3,000 threshold, but these stories do not amount to compelling evidence that FinCEN should lower the thresholds.

For starters, it is unclear whether the AML violations themselves exposed the criminals or if law enforcement added on the AML violations after they had caught the criminals. This is a long-running problem that federal officials have consistently refused to address with improved record keeping.

More important, these stories make it clear that law enforcement already has the tools to find terrorist and other criminals. If FinCEN’s information is solid, and “malign actors” really are using “smaller-value cross-border wire transfers” to commit crimes, then they should prosecute those individuals.

Dropping the reporting thresholds to levels that appear to be below the average remittance (see page 68008) is likely to push many transactions underground, thus making it even harder to trace criminal activity.

It is also one of the world’s worst kept secrets that law enforcement agencies generally do not go after cases unless they involve a high dollar value, something close to at least a half million dollars. This combination of facts seems to confirm what many consumer advocates have long argued—that lowering the thresholds amounts to forced record keeping, most of which nobody will ever use for anything.

Firms throughout the financial industry have consistently asked for more feedback from federal agencies on AML programs, with the explicit goal of improving the rules and achieving better results. The industry is in no way against AML rules.

If the administration goes forward with this rule, Congress should consider using the Congressional Review Act to rescind it. Then, they can require both the Government Accountability Office and FinCEN to publish a rigorous, data-driven, cost-benefit analysis of the current AML framework. If they want to help protect consumers and investors, Congress should ensure such an analysis is completed before any agency promulgates new AML rules.

This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2020/11/17/fincen-should-not-lower-money-transmission-thresholds/?sh=46c465326c59