The Wall Street Journal reported today that FinCEN has issued a confidential report asserting that over 50 specific credit unions have increased vulnerability to potential money laundering. The article notes that this focus on smaller institutions is consistent with a statement made earlier this year by FinCEN’s Deputy Director, Jamal El-Hindi, regarding FinCEN’s concern that as larger banks crack down on high-risk transactions, the accountholders seeking to engage in high-risk transactions are moving to smaller depository institutions.

This report of increased FinCEN scrutiny of credit unions is consistent with what we have been hearing from our smaller banking clients.  These banks have reported to us that regulators have grown increasingly strict and aggressive in their assessments of anti-money laundering programs at even the most traditional community banks.

This focus on smaller depository institutions poses three significant threats to FinTech companies:

• First, the policy of enhancing anti-money laundering scrutiny of smaller depository institutions likely will also apply to smaller FinTech companies that are subject to regulation as money services businesses, such as virtual currency exchanges.
• Second, FinCEN’s concern that accountholders seeking to engage in riskier transactions are moving away from large, traditional banks to smaller financial institutions may lead them to broadly interpret the definition of “money services business” to include more FinTech companies.
• Third, as FinCEN and banking regulators apply greater scrutiny to banks’ anti-money laundering programs and impose ever increasing penalties for violations of the Bank Secrecy Act, banks will increasingly refuse to open accounts for FinTech companies that engage in novel forms of financial transactions. Handling any account that makes a regulatory examiner nervous can be costly, even if the account does not pose a significant risk of money laundering. To avoid this cost, many banks are already refusing to process transactions for certain FinTech companies, such as virtual currency companies and payment processors.