Legal Seminar, Denver, CO

071018 Discussion Draft

3. BSA/AML Rules. Cash facilitates anonymous transactions. Sellers generally lack natural incentives to verify identity in a transaction for cash, unless they are in some kind of regulated industry. Financial institutions (including banks, money transmitters, and certain others) that are in a position to handle significant cash transactions are thus effectively deputized to assist government in monitoring cash transactions, preventing crime and tax evasion. They are gatekeepers who are asked to identify customers and begin the process of regulating the payment space. For an overview, see Eileen Lyon, Money Laundering and Tax Enforcement 169-93 in E LECTRONIC P AYMENT S YSTEMS (2018). a. What began with banks expanded to other financial service providers, albeit with different levels of requirements (and effectiveness). b. Written AML policies are required to include (1) customer identification; (2) ongoing monitoring of customer identity; (3) investigation and reporting of suspicious activities. c. Compliance activities will vary depending on the risk level of the customer, nature of the transaction (e.g., international vs. domestic). d. Data analytics is an important tool to implement those policies; enhanced collection of electronic data is made possible by electronic payment systems. e. Movements to electronic payments potentially bring more data into scrutiny, but computer technology is also needed for enforcement. For example, in 2017, depository institutions generated over 916K SARS and money service businesses produced another 874K. See https://www.fincen.gov/reports/sar- stats (using year and type of business filters). o This high volume suggests regulated institutions are putting forth considerable compliance efforts. o Do government agencies have sufficient resources at their disposal to use this information effectively? f. Some large banks are also sharing data among them for purposes of identifying criminal activities. Although authorized by the Patriot Act, this raises interesting questions about the economic incentives for participation as well as privacy concerns for customers. See Lalita Clozel, In the Name of Security, Banks Share Information, Wall Street Journal, June 19, 2018, https://www.wsj.com/articles/in-the-name-of-security-banks-share- information-1529460061 g. Cryptocurrencies can prove disruptive to the effectiveness of government policies in this environment, too. (See infra.) 4. Regulating Payment Networks: Money Services Businesses. Outside of more heavily regulated banks and related financial institutions, other businesses are involved in transmitting cash, often without physically moving it. Traditional approaches include those like Western Union, which relies upon consumer trust in the institution to move money to remote locations. Money orders, which are sold by Western Union and the USPS, provide another alternative route that differs from a check. Regulatory frameworks for these providers are necessary to ensure that they do not become used to circumvent the constraints otherwise provided in the traditional banking and payments environment. See generally Jacqueline Allen

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