Payment processors in the United States must adhere to stringent Anti-Money Laundering (AML) regulations to ensure they are not inadvertently facilitating money laundering, terrorist financing, or other financial crimes. These regulations are primarily derived from the Bank Secrecy Act (BSA) and the USA PATRIOT Act, and are enforced by the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). Below is a comprehensive breakdown of these requirements:
1. Registration with FinCEN
Payment processors that transmit, convert, or store money fall under the regulatory definition of Money Services Businesses (MSBs) and are required to register with FinCEN. The registration process includes:
- MSB Classification: Payment processors that provide services such as facilitating payments, transferring funds between parties, or converting digital assets (like cryptocurrencies) into fiat currency, fall into this category. Examples include PayPal, Stripe, and crypto-exchange platforms.
- Timely Registration: MSBs must register with FinCEN within 180 days of starting operations and renew their registration every two years.
- Exemptions: Some businesses may qualify for an exemption if they are strictly intermediaries for merchants and not directly involved in moving funds between customers.
2. Customer Due Diligence (CDD) and Know Your Customer (KYC)
Customer Due Diligence (CDD) is a critical component of the AML program. Payment processors must implement a Know Your Customer (KYC) process to:
- Collect Basic Information: This includes the customer’s full name, date of birth, address, and taxpayer identification number.
- Verification of Identity: Achieved through documentary verification (e.g., passports, driver’s licenses) or non-documentary means.
- Beneficial Ownership: For businesses, payment processors must identify and verify the beneficial owners who control a significant portion of the entity, per FinCEN’s CDD Rule (since 2018).
- Enhanced Due Diligence (EDD): For high-risk customers, such as politically exposed persons (PEPs) or those from high-risk jurisdictions, more stringent checks are required.
Example: A payment processor onboarding a corporate client from a high-risk jurisdiction will likely need to perform EDD.
3. Suspicious Activity Reporting (SAR)
Payment processors are obligated to file a Suspicious Activity Report (SAR) with FinCEN when they detect any unusual or potentially illicit activity.
- Threshold for Reporting: A SAR must be filed if a transaction involves at least $5,000 and appears suspicious.
- Examples of Suspicious Activity: Large, unexplained transactions, structured payments, or customers refusing to provide KYC documentation.
- Filing Timeline: SARs must be filed within 30 days of detecting suspicious activity.
4. Currency Transaction Reporting (CTR)
The Currency Transaction Report (CTR) must be filed for transactions over $10,000 in cash within 24 hours.
- Linked Transactions: Multiple smaller transactions to avoid the $10,000 threshold must also be reported via a CTR.
- Filing Deadline: CTRs must be filed with FinCEN within 15 days of the transaction date.
Example: A customer making multiple deposits just under $10,000 might be attempting to evade reporting.
5. AML Program Requirement
All payment processors must implement a robust AML program tailored to their specific risks, which includes:
- Written Policies and Procedures: To ensure compliance with AML laws.
- Internal Controls: Systems to monitor transactions and conduct regular risk assessments.
- Employee Training: Regular training on AML compliance and suspicious activity detection.
- Independent Audits: Periodic audits to test the effectiveness of the AML program.
- Designation of a Compliance Officer: A senior-level employee must oversee the program.
6. Recordkeeping Requirements
Payment processors must retain records of customer information, CTRs, SARs, and other relevant documentation for at least five years.
7. Monitoring and Auditing
Payment processors must continuously monitor customer activity for suspicious patterns and perform regular audits to ensure their AML procedures are effective.
- Transaction Monitoring: Automated systems to flag high-risk activities.
- Ongoing Auditing: Independent audits to identify gaps in the AML program.
8. Sanctions Compliance
Payment processors must comply with sanctions imposed by the Office of Foreign Assets Control (OFAC), checking their customers and transactions against the Specially Designated Nationals (SDN) list.
- Dynamic Screening: Regular screening processes to avoid potential violations.
Example: If a payment processor processes a transaction for an entity on the SDN list, they could face significant penalties.
9. Penalties for Non-Compliance
Non-compliance with AML regulations can result in severe penalties, including:
- Fines: Ranging from thousands to millions of dollars, depending on the severity of the violation.
- Criminal Liability: Company executives may face personal liability, including fines or imprisonment.
- Loss of Business License: Non-compliant processors may lose their licenses.
10. Emerging Trends: Virtual Currencies and New Payment Technologies
With the rise of digital currencies and blockchain-based systems, AML regulations now cover new types of payment processors.
- Cryptocurrency Compliance: Cryptocurrency payment processors must adhere to the same AML requirements as traditional MSBs.
- New Technology, New Risks: Payment processors using peer-to-peer apps, DeFi platforms, or digital wallets must adopt innovative monitoring tools.
Example: In 2021, the U.S. Treasury Department emphasized that virtual currency exchanges are considered MSBs and must register with FinCEN.
By adhering to these AML practices, payment processors play a vital role in preventing financial system misuse and maintaining the integrity of the broader financial network.
