October 29, 2020 Reading Time: 4 minutes
dollar, financial crimes

Two government financial regulators, the Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve (“Fed”), have jointly proposed a major change to money laundering rules. Up until now, U.S. regulators have deemed that financial institutions needn’t bother collecting and storing customer information for any fund transfer below $3,000. Now the two agencies want to reduce this threshold to $250, subjecting a much wider swath of international money transfers to regulatory information gathering requirements.

In their letter, FinCEN and the Fed point out that a $250 threshold would provide law enforcement with more data for catching criminals. They are probably right about that. However, the agencies’ cost-benefit calculation omits the burdens of reduced privacy and greater financial exclusion. These are important costs. They shouldn’t be ignored.

The recordkeeping and travel rules

The FinCEN/Fed proposal applies to the recordkeeping and travel rules, both of which have been in place since 1996. 

The recordkeeping rule requires that banks like Wells Fargo or money service businesses like Western Union ask customers for a government ID in order to record their name and address. They must also collect information about the beneficiary. All of this data must then be stored by the financial institution for five years.

As for the travel rule, it requires that this personal information “travel” along with the payment. Specifically, it requires that the originating financial institution transmits the customer name and address along with the payment to the destination financial institution. 

The idea behind both rules is to preserve a paper trail so that law enforcement can check for money laundering violations, terrorist financing, and fraud. However, U.S. regulators have set an exemption, or threshold, to reduce the nuisance factor faced by financial institutions and the public. Any transfer below $3,000 isn’t deemed worth the effort and is therefore exempt from recordkeeping and travel rule requirements.   

Up until now, the U.S.’s $3,000 threshold for the travel rule has been relatively high (i.e. permissive) compared to the rest of the world. The Financial Action Task Force (FATF), an intra-governmental panel that issues money-laundering guidelines, suggests a maximum threshold of $1,000/€1,000. The European Union has adopted a €1,000 line in the sand. But FinCEN and the Fed want to go beyond this. Their proposed threshold of $250 would shift the U.S. from being one of the world’s most permissive nations to the least permissive nation.

Note that the proposed rule would not apply to transfers from one U.S. institution or location to another U.S. institution. They would only apply to transfers that involve a foreign entity. So a transfer of $700 from a Western Union branch in New York to one in L.A. would be exempt from full customer information divulgence, but a $700 transfer from the New York branch to a Western Union office in Mexico would now qualify.

Criminal structuring

The two agencies have good reasons for wanting to reduce the $3,000 threshold. When faced with ceilings and transaction limits, criminals will “structure,” or break up, their payments to avoid these limits. So rather than make a single $5,000 Western Union transfer and trigger Western Union’s $3,000 due diligence requirements, a fraudster might do two $2,500 transfers, each at a different location or on a different day, and thus avoid divulging their personal information.

In its proposal letter, FinCEN points to an analysis it conducted of 1.29 million suspicious fund transmittals made between 2016 and 2019. They found that the median dollar value of these transfers was $255. Because $255 is far below $3,000, most of these transfers would not have triggered customer due diligence or come under the travel rule, thus depriving law enforcement agencies of leads. At the proposed $250 threshold, many of these suspicious transfers would now be linked to customer information.

Costs and benefits

FinCEN and the Fed have made an effort in their letter to compute the costs and benefits of the proposed rule. They estimate that the extra data-gathering burden on banks and money service businesses would amount to 3,315,844 hours. At a cost of $24 per hour, the total burden sums up to $79.58 million.

The agencies then juxtapose this $79.58 million cost against the benefits of stopping a terrorist attack. If an attack were to impose $30 billion in damages on American society, then the proposed rule need only reduce the annual probability of a major attack by 0.26% per year to justify itself. 

Terrorism financing isn’t the only financial crime that increased information requirements might address. Fraud, sanctions evasion, and proliferation financing would also be reduced.

But the two agencies’ cost-benefit analysis comes up flat. The extra burden that financial institutions face in administering a $250 threshold is certainly an important cost, but it isn’t the only one. Another key cost is the foregone privacy of all law-abiding Americans whose information, formerly private, will now be collected, stored, and sent to foreign destinations. This personal data may be leaked, hacked, or exposed in a way that might hurt them.

The other big cost that FinCEN and the Fed ignore is the effect that a lower threshold will have on financial inclusion. Many people living in the U.S. have been pushed to the periphery of the financial system because they lack official identification like a Social Security number. These individuals have been able to send funds using money service businesses without having to show identification, as long as the amount sent fell below $3,000. But a $250 threshold would subject many of these individuals to identification requirements. This could force them to use riskier and more expensive options like sending cash by mail or cryptocurrencies.

For its part, the FATF has recognized the role that money service businesses play in including the disadvantaged and vulnerable. In its list of recommendations, FATF suggests that countries should only reduce thresholds after having taken into account the “risk of driving transactions underground and the importance of financial inclusion.” FinCEN and the Fed don’t seem to have taken FATF’s counsel to heart.

Now, it could very well be that the benefits of reducing the threshold from $3,000 to $250 exceed the costs, defined as the sum of the administrative expenses, lost privacy, and increased financial exclusion. But all of these costs must be included in the final calculation. Not just some of them. As it is, FinCEN and the Fed have not done a sound accounting for their proposal.

J.P. Koning


J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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