Jun 08 2009 Brett Wolf
The Financial Crimes Enforcement Network has issued a Notice of Proposed Rulemaking aimed at amending 31 CFR 103 to define mutual funds as "financial institutions" and thereby "streamline" their Bank Secrecy Act obligations. While mutual funds are currently required to have anti-money laundering and customer identification programs, and must report suspicious activity, FinCEN thus far has not defined them as "financial institutions".
"If adopted, this proposal will bring the mutual fund industry into greater conformity with the rest of the financial industry," James Freis, Jr, FinCEN director, said when announcing the NPRM (PDF).
As financial institutions, some compliance obligations faced by mutual funds would change. For instance, they would no longer be required to file so-called Forms 8300, which are reserved for "trades and businesses", when accepting more than $10,000. Instead they would be required to file currency transaction reports under 31 CFR 103.22.
There are differences between these reporting regimes. Under the CTR rule, a financial institution must treat multiple transactions as a single transaction if it knows the transactions are conducted by or on behalf of the same person. Unlike Forms 8300, however, CTRs are required only when accepting cash, not negotiable instruments such as money orders.
"Because mutual funds rarely receive from or disburse to shareholders significant amounts of currency, FinCEN believes they are not as likely as depository institutions to be used during the initial 'placement' stage of the money laundering process," the NPRM states.
The 'Travel Rule'
But, as financial institutions, mutual funds would be subject to "requirements regarding the creation and retention of records for transmittals of funds, and the requirement to transmit information on these transactions to other financial institutions in the payment chain". These requirements are commonly referred to as the "Travel Rule".
FinCEN's proposed amendment would also subject mutual funds to requirements on the creation and retention of records for extensions of credit and cross-border transfers of currency, monetary instruments, checks, investment securities, and credit at 31 CFR 103.33. Such records must be kept for five years pursuant to 31 CFR 103.38.
"FinCEN believes that the requirements of 31 CFR 103.33 and 31 CFR 103.38 would have a de minimis impact on mutual funds and their transfer agents," the NPRM states.
A spokeswoman for the Investment Company Institute, a national association of US investment companies, told Complinet that the ICI has not yet had time to fully analyze FinCEN's proposal. Still, she added that the proposal "seems to be along the lines of one of our suggested approaches, and so we look forward to reviewing it more closely".
"We have long pointed out some of the practical difficulties with Form 8300, and we have encouraged Treasury to look for ways to improve the cash transaction reporting regime without diminishing the quality or quantity of useful information reported," she said.
The deadline for comments on FinCEN's NPRM is September 3.
