1) The U.C.C.
2) U.C.C. Article 4(a)
3) Federal Reserve Board Regulation E
§ 205.6 Liability of consumer for unauthorized transfers.
4) Federal Reserve Board Regulation Z
§ 226.12 Special credit card provisions.
5) Money Laudering History
The Bank Secrecy Act of 1970
The Money Laundering Control Act of 1986
The Money Laundering Suppression Act of 1994
6) Money Laundering's Future
Know your customer
by Kevin Holst
1) The U.C.C.- The Uniform Commercial Code, particularly Articles 3 and 4, regulate payment system legislation. They generally focus on non-electronic transfers of money, but are the best link to be drawn from the past. Under Article 3, no person is liable on an instrument unless his signature or that of a representative appears on the instrument, or unless he subsequently ratifies. In this system the recipient assumes most of the burden in the case of a forged document. Article 3 also establishes the principals of negotiability, where protection permits negotiable instruments to be accepted in trade without detailed inquiry into the business transaction that gave rise to the instrument.
[Note that under recent legislation, digital signatures count as signatures, so presumably ecash note that were digitally signed would fit this rule. DF]
2) U.C.C. Article 4(a)- This section of the Uniform Commercial Code deals with electronic transfers. It addresses the problem of not knowing with certainty the identity of the person on the other end of the transaction. It provides that an unauthorized signature may be depended on when there are satisfactory prearranged procedures that have been followed for identification. This stepped away from the paper based world of Article 3, and allowed some security in the digital world. This exception does not currently apply to most consumer payments, so any further legislation on digital cash would have to specifically reference 4(a).
3) Federal Reserve Board Regulation E- Reg E establishes the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer services and of financial institutions that offer these services. It shifts the burden of proof to the financial institution to show that the transaction was authorized.
12 CFR 205.6
§ 205.6 Liability of consumer for unauthorized transfers.
(a) Conditions for liability. A consumer may be held liable, within the limitations described in paragraph (b) of this section, for an unauthorized electronic fund transfer involving the consumer's account only if the financial institution has provided the disclosures required by § 205.7(b)(1), (2), and (3). If the unauthorized transfer involved an access device, it must be an accepted access device and the financial institution must have provided a means to identify the consumer to whom it was issued.
(b) Limitations on amount of liability. A consumer's liability for an unauthorized electronic fund transfer or a series of related unauthorized transfers shall be determined as follows:
(1) Timely notice given. If the consumer notifies the financial institution within two business days after learning of the loss or theft of the access device, the consumer's liability shall not exceed the lesser of $ 50 or the amount of unauthorized transfers that occur before notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the financial institution within two business days after learning of the loss or theft of the access device, the consumer's liability shall not exceed the lesser of $ 500 or the sum of:
(i) $ 50 or the amount of unauthorized transfers that occur within the two business days, whichever is less; and
(ii) The amount of unauthorized transfers that occur after the close of two business days and before notice to the institution, provided the institution establishes that these transfers would not have occurred had the consumer notified the institution within that two-day period.
(3) Periodic statement; timely notice not given. A consumer must report an unauthorized electronic fund transfer that appears on a periodic statement within 60 days of the financial institution's transmittal of the statement to avoid liability for subsequent transfers. If the consumer fails to do so, the consumer's liability shall not exceed the amount of the unauthorized transfers that occur after the close of the 60 days and before notice to the institution, and that the institution establishes would not have occurred had the consumer notified the institution within the 60-day period. When an access device is involved in the unauthorized transfer, the consumer may be liable for other amounts set forth in paragraphs (b)(1) or (b)(2) of this section, as applicable.
(4) Extension of time limits. If the consumer's delay in notifying the financial institution was due to extenuating circumstances, the institution shall extend the times specified above to a reasonable period.
(5) Notice to financial institution. (i) Notice to a financial institution is given when a consumer takes steps reasonably necessary to provide the institution with the pertinent information, whether or not a particular employee or agent of the institution actually receives the information.
(ii) The consumer may notify the institution in person, by telephone, or in writing.
(iii) Written notice is considered given at the time the consumer mails the notice or delivers it for transmission to the institution by any other usual means. Notice may be considered constructively given when the institution becomes a
ware of circumstances leading to
the reasonable belief that an unauthorized transfer to or from the
consumer's account has been or may be made.
(6) Liability under state law or agreement. If state law or an agreement between the consumer and the financial institution imposes less liability than is provided by this section, the consumer's liability shall not exceed the amount imposed under the state law or agreement.
4) Federal Reserve Board Regulation Z- Regulation Z governs credit card transactions, including the issuance and liabilities of both parties. Of particular interest to the digital cash debate is the unauthorized use, which may apply if the monetary supply shifts away from the federal government to place responsibility in the hands of those legitimizing the currency.
12 CFR 226.12
§ 226.12 Special credit card provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a credit card is to be used, including business, commercial, or agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for the card; or
(2) As a renewal of, or substitute for, an accepted credit card.
For purposes of this section, accepted credit card means any credit card that a cardholder has requested or applied for and received, or has signed, used, or authorized another person to use to obtain credit. Any credit card issued as a renewal or substitute in accordance with this paragraph becomes an accepted credit card when received by the cardholder.
(b) Liability of cardholder for unauthorized use -- (1) Limitation on amount. The liability of a cardholder for unauthorized use of a credit card shall not exceed the lesser of $ 50 or the amount of money, property, labor, or services obtained by the unauthorized use before notification to the card issuer under paragraph (b)(3) of this section.
Unauthorized use means the use of a credit card by a person, other than the cardholder, who does not have actual, implied, or apparent authority for such use, and from which the cardholder receives no benefit.
(2) Conditions of liability. A cardholder shall be liable for unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice of the cardholder's maximum potential liability and of means by which the card issuer may be notified of loss or theft of the card. The notice shall state that the cardholder's liability shall not exceed $ 50 (or any lesser amount) and that the cardholder may give oral or written notification, and shall describe a means of notification (for example, a telephone number, an address, or both); and
Adequate notice means a printed notice to a cardholder that sets forth clearly the pertinent facts so that the cardholder may reasonably be expected to have noticed it and understood its meaning. The notice may be given by any means reasonably assuring receipt by the cardholder.
(iii) The card issuer has provided a means to identify the cardholder on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is given when steps have been taken as may be reasonably required in the ordinary course of business to provide the card issuer with the pertinent information about the loss, theft, or possible unauthorized use of a credit card, regardless of whether any particular officer, employee, or agent of the card issuer does, in fact, receive the information. Notification may be given, at the option of the person giving it, in person, by telephone, or in writing. Notification in writing is considered given at the time of receipt or, whether or not received, at the expiration of the time ordinarily required for transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If state law or an agreement between a cardholder and the card issuer imposes lesser liability than that provided in this paragraph, the lesser liability shall govern.
(5) Business use of credit cards. If 10 or more credit cards are issued by one card issuer for use by the employees of an organization, this section does not prohibit the card issuer and the organization from agreeing to liability for unauthorized use without regard to this section. However, liability for unauthorized use may be imposed on an employee of the organization, by either the card issuer or the organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card issuer -- (1) General rule. When a person who honors a credit card fails to resolve satisfactorily a dispute as to property or services purchased with the credit card in a consumer credit transaction, the cardholder may assert against the card issuer all claims (other than tort claims) and defenses arising out of the transaction and relating to the failure to resolve the dispute. The cardholder may withhold payment up to the amount of credit outstanding for the property or services that gave rise to the dispute and any finance or other charges imposed on that amount.
This paragraph does not apply to the use of a check guarantee card or a debit card in connection with an overdraft credit plan, or to a check guarantee card used in connection with cash advance checks.
The amount of the claim or defense that the cardholder may assert shall not exceed the amount of credit outstanding for the disputed transaction at the time the cardholder first notifies the card issuer or the person honoring the credit card of the existence of the claim or defense. To determine the amount of credit outstanding for purposes of this section, payments and other credits shall be applied to: (1) Late charges in the order of entry to the account; then to (2) finance charges in the order of entry to the account; and then to (3) any other debits in the order of entry to the account. If more than one item is included in a single extension of credit, credits are to be distributed pro rata according to prices and applicable taxes.
(2) Adverse credit reports prohibited. If, in accordance with paragraph (c)(1) of this section, the cardholder withholds payment of the amount of credit outstanding for the disputed transaction, the card issuer shall not report that amount as delinquent until the dispute is settled or judgment is rendered.
(3) Limitations. The rights stated in paragraphs (c)(1) and (2) of this section apply only if:
(i) The cardholder has made a good faith attempt to resolve the dispute with the person honoring the credit card; and
(ii) The amount of credit extended to obtain the property or services that result in the assertion of the claim or defense by the cardholder exceeds $ 50, and the disputed transaction occurred in the same state as the cardholder's current designated address or, if not within the same state, within 100 miles from that address.
The limitations stated in paragraph (c)(3)(ii) of this section shall not apply when the person honoring the credit card: (1) Is the same person as the card issuer; (2) is controlled by the card issuer directly or indirectly; (3) is under the direct or indirect control of a third person that also directly or indirectly controls the card issuer; (4) controls the card issuer directly or indirectly; (5) is a franchised dealer in the card issuer's products or services; or (6) has obtained the order for the disputed transaction through a mail solicitation made or participated in by the card issuer.
(d) Offsets by card issuer prohibited. (1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder's indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card issuer acting under state or Federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder's credit card debt from a deposit account held with the card issuer (subject to the limitations in § 226.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1) When a creditor other than the card issuer accepts the return of property or forgives a debt for services that is to be reflected as a credit to the consumer's credit card account, that creditor shall, within 7 business days from accepting the return or forgiving the debt, transmit a credit statement to the card issuer through the card issuer's normal channels for credit statements.
(2) The card issuer shall, within 3 business days from receipt of a credit statement, credit the consumer's account with the amount of the refund.
(3) If a creditor other than a card issuer routinely gives cash refunds to consumers paying in cash, the creditor shall also give credit or cash refunds to consumers using credit cards, unless it discloses at the time the transaction is consummated that credit or cash refunds for returns are not given. This section does not require refunds for returns nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract or otherwise:
(1) Prohibit any person who honors a credit card from offering a discount to a consumer to induce the consumer to pay by cash, check, or similar means rather than by use of a credit card or its underlying account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to open or maintain any account or obtain any other service not essential to the operation of the credit card plan from the card issuer or any other person, as a condition of participation in a credit card plan. If maintenance of an account for clearing purposes is determined to be essential to the operation of the credit card plan, it may be required only if no service charges or minimum balance requirements are imposed.
(g) Relation to Electronic Fund Transfer Act and Regulation E. For guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12 CFR part 205) applies in instances involving both credit and electronic fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a) regarding issuance and liability for unauthorized use. On matters other than issuance and liability, this section applies to the credit aspects of combined credit/electronic fund transfer transactions, as applicable.
5) Money Laudering History-
The Bank Secrecy Act of 1970 (BSA) "imposes record keeping and reporting requirements on financial institutions in order to supply law enforcement with evidence of financial transactions." It basically sets up a required “paper trial” to assist in the prosecution of tax evaders or other criminals. The Money Laundering Control Act of 1986 precludes circumvention of the BSA requirements by creating criminal liability for individuals who conduct monetary transactions knowing, or with reason to know, that the proceeds involved were obtained from unlawful activity. Increasing the liability, both criminally and civilly can often serve as a deterrence. The Money Laundering Suppression Act of 1994 (MLSA), which amended the BSA, mandates a liberalization of the "rules for exemption of transactions from the currency transaction reporting requirement, in an effort to reduce the number of Currency Transaction Report (CTR) forms filed by at least 30%." Additionally, the MLSA allows the Department of Treasury to determine which agency will be the sole entity to receive reports of suspicious transactions from financial institutions. And finally, the MLSA requires "all money transmitting businesses" to register with the Treasury.
6) Money Laundering’s Future
The 105th Congress attempted to add foreign banking institutions to current money laundering laws, but was unsuccessful due to opposition from the International Banking Community. They felt that the extension of US law that would subject "any foreign bank doing business in the United States to the full range of record keeping requirements currently imposed under the Bank Secrecy Act, Federal Deposit Insurance Act, and Title I of Public Law 508, with respect to its transactions in U.S. dollars." would cause undue hardship on non-United States customers of the bank trying to do business in US dollars. No word on how this would be applied to money that did not belong to the US.
Another proposal is the Know Your Customer regulations, which would require banking institutions to know their customer’s activities and report any deviations which seem suspicious. Many banks already have such systems in place, but these regulations would set a common standard for financial institutions. This proposal would greatly reduce the ability of criminals to launder money, but would again, be at the cost of added loss of privacy.
Useful websites on money laundering include;
Future laws regarding digital cash will be dependent on how “anonymous” the federal government allows digital cash to be. Currently, both banking institutions and credit card companies are governed by certain rules that require them to report to both customers and the government certain aspects of their business. The liability is carefully placed, with partial accountability placed on the consumer and partial accountability on the financial provider to insure that both parties have an interest in keeping the environment safe for advance technologies. For example, the credit card company has the burden of proving the transaction took place before they can recover from the customer. A similar requirement for the providers of a digital cash would greatly reduce fraud, but would also put privacy at risk. The federal government protects banks and their customers from unfortunate circumstances in exchange for the banks providing certain information about large cash transactions. As with many other issues, security comes with the decrease in privacy. What balance will the public want, and which is best for them? This is the question future lawmakers will be forced to answer.