On April 4, 2016, the Financial Crimes Enforcement Network (FinCEN), the US agency charged with enforcement of the US anti-money laundering (AML) laws, published a proposed rule that would subject crowdfunding portals, introduced under a recent amendment to the US federal securities laws, to the same AML requirements as securities broker-dealers. Comments should be submitted on or before June 3, 2016.
The US Bank Secrecy Act allows the Secretary of the Treasury to impose by regulation AML reporting and recordkeeping requirements on certain categories of financial institutions. Currently, a broker or dealer in securities (broker-dealer) is required to comply with such requirements. A broker or dealer in securities is defined in the AML regulations, in relevant part, as “[a] broker or dealer in securities, registered or required to be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.” The proposed regulation would add crowdfunding portals to that definition.
The 2012 Jumpstart our Business Startups (JOBS) Act introduced the concept of “crowdfunding,” through which an issuer can use the Internet to raise money for a business purpose through small contributions from investors. An issuer can use either a registered broker-dealer as an intermediary in these sales or a “funding portal.” As defined in the JOBS Act, a funding portal is an Internet-based platform that acts as an intermediary in the offer or sale of securities for third parties solely pursuant to the JOBS Act and that must meet certain other criteria, including soliciting purchases or sales of securities displayed on its website, handling investor funds and not using the account to provide investment advice.
Under the final SEC crowdfunding regulations, a funding portal is not required to register as a broker-dealer, although it is subject to SEC examination, enforcement and rulemaking authority, and must become a member of a national securities association. The SEC had proposed including in its crowdfunding regulations a requirement that funding portals be subject to the same AML regulations applicable to broker-dealers. However, the more appropriate place for making funding portals subject to the AML requirements for broker-dealers is in the AML regulations themselves. That is why while the SEC chose to leave the requirement out of its final crowdfunding regulations, FinCEN is proposing to include funding portals in their proper place in the broker-dealer AML regulations.
In the supplementary information discussing the reasoning for the proposal, FinCEN notes that funding portals are similar to introducing brokers, which usually do not accept cash or maintain customer accounts yet are subject to the AML requirements for broker-dealers. Funding portals raise the same money laundering risks as broker-dealers and thus both FinCEN and the SEC believe funding portals should be treated the same as broker-dealers for AML purposes.
AML Requirements for funding portals
If adopted as proposed, funding portals will be required to comply with the following requirements:
- Establishment and maintenance of AML compliance programs
- Complying with suspicious activity reporting requirements
- Reporting large cash transactions
- Maintaining certain information on funds transfers and ensuring that certain identifying information travels with a funds transfer order
- Establishing customer identification programs
- Complying with certain special information requests from law enforcement
- Conducting enhanced due diligence with respect to its correspondent and private banking accounts for non-US persons, and maintaining certain records with respect to those correspondent accounts
- Not establishing correspondent accounts for shell banks
- Complying with any “special measures” imposed by FinCEN on specific non-US financial institutions determined to be of primary money laundering concern
FinCEN notes that the AML requirements are risk-based and that it expects funding portals to design compliance programs in line with their more limited business model than full-service broker-dealers.
While comments are welcome on all aspects of the proposed regulations, FinCEN has specifically requested comment on whether funding portals should be subject to all of the AML obligations for broker-dealers and whether there should be any special exceptions from the broker-dealer AML requirements for funding portals.