Funds Transfers: Records of and Verification Procedures
In January of 1995, the Federal Reserve Board and the Treasury Department issued Bank Secrecy Act regulations that require financial institutions to keep records and follow verification procedures on certain funds transfers. Institutions must comply with the new regulations starting May 28, 1996. This section will first describe the sorts of transactions subject to the regulations. Next, it will list the record-keeping requirements. Finally, it will review the verification procedures.
The Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury has issued a set of questions and answers concerning these requirements. [FinCEN Advisory, Vol. 1, Issue 3] The questions and answers do not do much more than paraphrase the rules described below, but you might find them helpful. They address a few situations that might cause confusion. The document is available on the Internet by going to the FinCEN web site, http://www.fincen.gov, and clicking on the “Publications” tab, then clicking on “Advisories/Bulletins/Rulings/Fact Sheets” and look for Advisory, Vol. 1, Issue 3. You can also request the document in writing from FinCEN, Office of Communications, 2070 Chain Bridge Road, Suite 200, Vienna, VA 22182, or by fax at 1-703-905-3885.
Transactions subject to the requirements
The requirements apply to “funds transfers” and “transmittals of funds.” A funds transfer occurs when an “originator” sends a “payment order” to the originator’s financial institution, instructing that financial institution to transfer money to a “beneficiary.” [31 CFR 1010.100(f)] A transmittal of funds is essentially the same thing, but the regulations use “transmittal of funds” when a financial institution other than a bank, savings association, or credit union is involved. [31 CFR 1010.100(ddd)]
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X, a debtor, wants to pay an obligation owed to Y. Instead of delivering to Y a negotiable instrument such as a check or some other writing such as a credit card slip that enables Y to obtain payment from a bank, X transmits an instruction to X’s bank to credit a sum of money to the bank account of Y.
In most cases, X’s bank and Y’s bank are different banks. X’s bank may carry out X’s instruction by instructing Y’s bank to credit Y’s account in the amount that X requested. The instruction that X issues to its bank is a “payment order.” X is the “sender” of the payment order and X’s bank is the “receiving bank” with respect to X’s order. Y is the “beneficiary” of X’s order.
When X’s bank issues an instruction to Y’s bank to carry out X’s payment order, X’s bank “executes” X’s order. The instruction of X’s bank to Y’s bank is also a payment order. With respect to that order, X’s bank is the sender, Y’s bank is the receiving bank, and Y is the beneficiary.
The entire series of transactions by which X pays Y is known as the “funds transfer.” With respect to the funds transfer, X is the “originator,” X’s bank is the “originator’s bank,” Y is the “beneficiary,” and Y’s bank is the “beneficiary’s bank.” In more complex transactions there are one or more additional banks known as “intermediary banks” between X’s bank and Y’s bank. In the funds transfer the instruction contained in the payment order of X to its bank is carried out by a series of payment orders by each bank in the transmission chain to the next bank in the chain until Y’s bank receives a payment order to make the credit to Y’s account.
Five groups of funds transfers are exempt from the requirements, however.
First, funds transfers of less than $3,000 are exempt. [31 CFR 1020.410(a)]
Second, funds transfers governed by the Electronic Funds Transfer Act (EFTA) are exempt. (The EFTA governs “electronic funds transfers” into or out of accounts that “consumers” hold.)
Third, funds transfers that go through an automated clearing house, an automated teller machine, or a point-of-sale system are exempt.
- A bank;
- A wholly-owned domestic subsidiary of a bank chartered in the U.S.;
- A broker or dealer in securities;
- A wholly-owned domestic subsidiary of a broker or dealer in securities;
- The United States;
- A state or local government; or
- A federal, state, or local government agency or instrumentality.
Fifth, if both the originator and the beneficiary are the same person and the originator’s bank and the beneficiary’s bank are the same bank, the funds transfer is exempt. [31 CFR 1020.410(a)]
Record-keeping requirements
Originator’s banks
- The name and address of the originator.
- The amount of the payment order.
- The execution date of the payment order. (The execution date is the date on which the originator’s bank “executes” the originator’s instructions by issuing its own payment order. See the example at the beginning of this funds transfer section.)
- Any payment instructions received from the originator with the payment order.
- The identity of the beneficiary’s bank.
- As many of the following as are received with the payment
order:
- The name and address of the beneficiary.
- The account number of the beneficiary.
- Any other specific identifier of the beneficiary.
(For Fedwire transfers, an institution only needs to collect one of the three bulleted items until the institution converts to the expanded Fedwire format.)
Originator’s banks may either retain the original payment order or record the required information by microfilm, other copy, or electronic record. [31 CFR 1020.410(a)]
Incidentally, a separate regulation, known as the “travel rule,” requires originator’s banks and intermediary banks to include largely the same information in their own payment orders when executing payment orders they have received. This requirement was also effective May 28, 1996. See the January 3, 1995, Federal Register, beginning at page 234. For a description of the travel rule, see the chapter in this manual on Article 4A of the Uniform Commercial Code, Wholesale Funds Transfers (Appendix).
Intermediary and beneficiary’s banks
These banks only need to retain a record of the payment orders they receive. This can take the form of the original payment order, a copy (e.g., microfilm), or an electronic record. [31 CFR 1020.410(a)]
Verification procedures
These procedures require institutions to verify the identities of the originator and the beneficiary. The requirements apply to originator’s banks and beneficiary’s banks. Since intermediary banks do not have contact with the originator or beneficiary, intermediary banks have no verification procedures to follow.
Originator’s banks
An originator’s bank must follow verification procedures only if it receives a payment order from an originator who is not an established customer of the institution. [31 CFR 1020.410(a)] (The assumption is that you will have already followed verification procedures in doing prior business with an established customer.)
In-person payment orders. [31 CFR 1020.410(a)] If someone makes a payment order in person, the originator’s bank must verify the identity of the person placing it before accepting it. The bank does this by examining a document (other than a bank signature card) that is normally acceptable by financial institutions as a means of identification when cashing checks for persons other than established customers. It is preferable to examine a document that contains the person’s name, address, and photograph. For an alien or a non-U.S. resident, the institution can verify identity by passport, alien identification card, or other official document evidencing nationality or residence.
If the originator’s bank accepts the payment order, it must record the person’s name and address, the type of identification reviewed, the number of the identification document (e.g., driver’s license), as well as the person’s TIN (or alien identification number or passport number and country of issuance) or a notation that the number was not available. Furthermore, if the originator’s bank “has knowledge” that the person making the payment order is doing so on behalf of someone else, the bank must record the true originator’s TIN (or alien identification number or passport number and country of issuance), if known by the person placing the order, or a notation that the number was not available.
Payment orders not made in person. [31 CFR 1020.410(a)] If the originator does not make the payment order in person, the originator’s bank must record the name and address of the person placing the payment order, the person’s TIN (or alien identification number or passport number and country of issuance) or a notation that the number was not available, and the method of payment (for example, check or credit card transaction). Again, if the originator’s bank “has knowledge” that the person making the payment order is doing so on behalf of someone else, the bank must record the true originator’s TIN (or alien identification number or passport number and country of issuance), if known by the person placing the order, or a notation that the number was not available.
Beneficiary’s banks
Like originator’s banks, a beneficiary’s bank must follow verification procedures only if it receives a payment order for a beneficiary who is not an established customer.
In-person deliveries. [31 CFR 1020.410(a)] If the bank delivers the proceeds in person (such as by cash over the counter), the bank must verify the identity of the person receiving the proceeds. The bank does this in the same way originator’s banks verify identity (described above). The bank must also record the person’s name and address, the type of identification reviewed, and the number of the identification document (e.g., driver’s license), as well as the person’s TIN (or alien identification number or passport number and country of issuance) or a notation that such number was not available. If the bank “has knowledge” that the person receiving the payment order is doing so on behalf of someone else, the bank must also record the true beneficiary’s name and address, that person’s TIN (or alien number, etc.), if known by the person receiving the proceeds, or a notation that the number was not available.
Deliveries not made in person. [31 CFR 1020.410(a)] If the beneficiary’s bank does not deliver the proceeds in person, the bank must retain a copy of the check or other instrument used to make the payment (or the information from the instrument), plus the name and address of the person to whom it was sent.
A final note
In April of 1996, the agencies changed rules we described in this section. The changes cleared up a complication with international funds transfers. Under the previous regulations, the originator’s bank was the first U.S. bank, and the beneficiary’s bank was the last U.S. bank, to receive a payment order in a given funds transfer. If, in the transfer chain, a foreign institution was between the U.S. bank and either the originator or the beneficiary, the U.S. bank could not record required originator or beneficiary information or follow required verification procedures. The revisions changed the definitions so that the originator’s and beneficiary’s bank are, respectively, the first and last institutions to receive payment orders in a funds transfer, regardless of whether they are inside the U.S. or not. The April 1996 revisions also delayed the effective dates of the rules from April 1, 1996, to May 28, 1996.