October 23, 2012 –
FinCEN issues guidance for filing SARs on activities related to third-party payment processors

The Financial Crimes Enforcement Network (“FinCEN”) has recently issued an advisory to provide guidance to financial institutions when filing Suspicious Activity Reports (“SARs”) on activities related to non-bank third-party payment processors.

Payment processors are financial institution customers that provide payment processing services to merchants and other business entities. Payment processors use their own deposit accounts at a financial institution to process such transactions and sometimes establish deposit accounts at the financial institution in the names of their merchant clients.

According to FinCEN, payment processors present a risk to the payment system by making it vulnerable to money laundering, identity theft, fraud schemes and illicit transactions.

Many payment processors provide legitimate payment transactions for reputable clients. However, the risk profile of such entities can vary significantly depending on the composition of their customer base. The FinCEN advisory provides a number of examples of suspicious activity that is often associated with payment processors engaged in improper or illegal conduct.

Financial institutions providing services to payment processors should update their anti-money laundering program to ensure that it considers the risks that payment processors present. Furthermore, financial institutions should determine, to the extent possible, whether external investigations or legal actions are pending against a payment processor or its owners or operators. Financial institutions should also determine whether payment processors have obtained all necessary state licenses, registrations and approvals.

Financial institutions may be required to file SARs if they know, suspect, or have reason to suspect that a payment processor has conducted a transaction involving funds derived from illegal activity. Financial institutions may also be required to file a SAR when they know, suspect, or have reason to suspect that a payment processor has attempted to disguise funds derived from illegal activity, or has attempted to engage in transactions designed to evade Bank Secrecy Act regulations or that lack a legitimate business or apparent lawful purpose.

Finally, the advisory requests that, when reporting suspicious activity, financial institutions:

(i) check the appropriate box on the SAR form to indicate the type of suspicious activity, and
(ii) include the term “payment processor” in both the narrative portion and the subject occupation portions of the SAR.

Read a complete copy of the advisory: Risk associated with third-party payment processors (Department of the Treasury, Financial Crimes Enforcement Network, 10/22/12).