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Inactive Financial Institution Letters 


[Federal Register: April 24, 1996 (Volume 61, Number 80)]
[Rules and Regulations]               
[Page 18203-18211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]


[[Page 18203]]

_______________________________________________________________________

Part III

Department of the Treasury

______________________________________________________________________

31 CFR Part 103

Exemptions From the Requirement To Report Transactions in Currency and 
List of Entities Who Are Exempt; Interim Rule and Notice

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[[Page 18204]]

DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA10; 1506-AA11
 
Amendment to the Bank Secrecy Act Regulations--Exemptions From 
the Requirement To Report Transactions in Currency

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Interim rule with request for comments.

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SUMMARY: This document contains an interim rule eliminating the 
requirement to report transactions in currency in excess of $10,000, 
between depository institutions and certain classes of ``exempt 
persons'' defined in the rule. The interim rule applies to currency 
transactions occurring after April 30, 1996. It is adopted as a major 
step in reducing the burden imposed upon financial institutions by the 
Bank Secrecy Act and increasing the cost-effectiveness of the counter-
money laundering policies of the Department of the Treasury. The 
interim rule is part of a process to achieve the reduction set by the 
Money Laundering Suppression Act of 1994 in the number of currency 
transaction reports filed annually by depository institutions.

DATES: Effective date. The interim rule is effective May 1, 1996.
    Comment deadline. Comments must be received by August 1, 1996.
    Applicability. This interim rule applies to transactions in 
currency occurring after April 30, 1996.

ADDRESSES: Written comments should be submitted to: Office of 
Regulatory Policy and Enforcement, Financial Crimes Enforcement 
Network, Department of the Treasury, 2070 Chain Bridge Road, Vienna, 
Virginia 22182-2536, Attention: Interim CTR Exemption Rule.
    Submission of comments. An original and four copies of any comment 
must be submitted. All comments will be available for public inspection 
and copying, and no material in any such comments, including the name 
of any person submitting comments, will be recognized as confidential. 
Accordingly, material not intended to be disclosed to the public should 
not be submitted.
    Inspection of comments. Comments may be inspected at the Department 
of the Treasury between 10:00 a.m. and 4:00 p.m., in the Financial 
Crimes Enforcement Network (``FinCEN'') reading room, on the third 
floor of the Treasury Annex, 1500 Pennsylvania Avenue, N.W., 
Washington, D.C. 20220. Persons wishing to inspect the comments 
submitted should request an appointment by telephoning (202) 622-0400.

FOR FURTHER INFORMATION CONTACT: Pamela Johnson, Assistant Director, 
Office of Financial Institutions Policy, FinCEN, at (703) 905-3920; 
Charles Klingman, Office of Financial Institutions Policy, FinCEN, at 
(703) 905-3920; Stephen R. Kroll, Legal Counsel, FinCEN, at (703) 905-
3590; or Cynthia A. Langwiser, Office of Legal Counsel, FinCEN, at 
(703) 905-3590.

SUPPLEMENTARY INFORMATION:

I. Introduction

    This document adds, as an interim rule, a new paragraph (h) (the 
``Interim Rule'') to 31 CFR 103.22. The Interim Rule exempts, from the 
requirement for the reporting of transactions in currency in excess of 
$10,000, transactions occurring after April 30, 1996, between 
depository institutions 1 and certain classes of exempt persons 
defined in the Interim Rule. The Interim Rule is adopted to implement 
the terms of 31 U.S.C. 5313(d) (and related provisions of 31 U.S.C. 
5313 (f) and (g)), which were added to the Bank Secrecy Act by section 
402(a) of the Money Laundering Suppression Act of 1994 (the ``Money 
Laundering Suppression Act''), Title IV of the Riegle Community 
Development and Regulatory Improvement Act of 1994, Pub. L. 103-325 
(September 23, 1994).
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    \1\ As explained below, the text of the rule itself uses the 
term ``bank,'' which as defined in 31 CFR 103.11 (c) includes both 
banks and other classes of depository institutions.
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II. Background

A. Statutory Provisions

    The Bank Secrecy Act, Titles I and II of Pub. L. 91-508, as 
amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 
U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia, 
to issue regulations requiring financial institutions to keep records 
and file reports that are determined to have a high degree of 
usefulness in criminal, tax, and regulatory matters, and to implement 
counter-money laundering programs and compliance procedures. 
Regulations implementing Title II of the Bank Secrecy Act (codified at 
31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the 
Secretary to administer Title II of the Bank Secrecy Act has been 
delegated to the Director of FinCEN.
    The reporting by financial institutions of transactions in currency 
in excess of $10,000 has long been a major component of the Department 
of the Treasury's implementation of the Bank Secrecy Act. The reporting 
requirement is imposed by 31 CFR 103.22, a rule issued under the broad 
authority granted to the Secretary of the Treasury by 31 U.S.C. 5313(a) 
to require reports of domestic coin and currency transactions.
    Four new provisions (31 U.S.C. 5313 (d) through (g)) concerning 
exemptions were added to 31 U.S.C. 5313 by the Money Laundering 
Suppression Act. Subsection (d)(1) provides that the Secretary of the 
Treasury shall exempt a depository institution from the requirement to 
report currency transactions with respect to transactions between the 
depository institution and the following categories of entities:

    (A) Another depository institution.
    (B) A department or agency of the United States, any State, or 
any political subdivision of any State.
    (C) Any entity established under the laws of the United States, 
any State, or any political subdivision of any State, or under an 
interstate compact between 2 or more States, which exercises 
governmental authority on behalf of the United States or any such 
State or political subdivision.
    (D) Any business or category of business the reports on which 
have little or no value for law enforcement purposes.

    Subsection (d)(2) states that:

    The Secretary of the Treasury shall publish in the Federal 
Register at such times as the Secretary determines to be appropriate 
(but not less frequently than once each year) a list of all of the 
entities whose transactions with a depository institution are exempt 
under this subsection from the [currency transaction] reporting 
requirements. * * *

The companion provisions of 31 U.S.C. 5313(e) authorize the Secretary 
to permit a depository institution to grant additional, discretionary, 
exemptions from currency transaction reporting. Subsection (f) places 
limits on the liability of a depository institution in connection with 
a transaction that has been exempted from reporting under either 
subsection (d) or subsection (e) and provides for the coordination of 
any exemption with other Bank Secrecy Act provisions, especially those 
relating to the reporting of suspicious transactions. New subsection 
(g) defines ``depository institution'' for purposes of the new 
exemption provisions.
    Section 402(b) of the Money Laundering Suppression Act states 
simply that in administering the new statutory exemption procedures:

the Secretary of the Treasury shall seek to reduce, within a 
reasonable period of time, the number of reports required to be 
filed in the aggregate by depository institutions pursuant to 
section 5313(a) of title 31 * * *

[[Page 18205]]

by at least 30 percent of the number filed during the year preceding 
[September 23, 1994,] the date of enactment of [the Money Laundering 
Suppression Act].

During the period September 24, 1993 through September 23, 1994, 
approximately 11.2 million currency transaction reports were filed. Of 
that number, approximately 10.9 million reports were filed by 
depository institutions. Thus the statute contemplates a reduction of 
at least approximately 3.3 million filings per annum.

B. Shortcomings of the Present Exemption System

    The enactment of 31 U.S.C. 5313 (d) through (g) reflects a 
Congressional intention to ``reform * * * the procedures for exempting 
transactions between depository institutions and their customers.'' See 
H.R. Rep. 103-652, 103d Cong., 2d Sess. 186 (August 2, 1994). The 
administrative exemption procedures at which the statutory changes are 
directed are found in 31 CFR 103.22(b)(2) and (c) through (f); those 
procedures have not succeeded in eliminating routine currency 
transactions by businesses from the operation of the currency 
transaction reporting requirement.
    Several reasons have been given for this lack of success. The first 
is the retention by banks of liability for making incorrect exemption 
determinations. The risk of potential liability is made more serious by 
the complexity of the administrative exemption procedures (which 
require banks, for example, to assign dollar limits to each exemption 
based on the amounts of currency projected to be needed for the 
customary conduct of the exempt customer's lawful business). Finally, 
advances in technology have made it less costly for some banks to 
report all currency transactions rather than to incur the 
administrative costs (and risks) of exempting customers and then 
administering the terms of particular exemptions properly.
    The problems created by the administrative exemption system include 
that system's failure to provide the Treasury with information needed 
for thoughtful administration of the Bank Secrecy Act. Although banks 
are required to maintain a centralized list of exempt customers and to 
make that list available upon request, see 31 CFR 103.22 (f) and (g), 
there is no way short of a bank-by-bank request for lists (with the 
time and cost such a request would entail both for banks and 
government) for Treasury to learn the extent to which routine 
transactions are effectively screened out of the system or (for that 
matter) the extent to which exemptions have been granted in situations 
in which they are not justified.
    In crafting the 1994 statutory provisions relating to mandatory and 
discretionary exemptions, Congress sought to alter the burden of 
liability and uncertainty that the administrative exemption system 
created. The statutory provisions embraced several categories of 
transactions that were either already partially exempt or plainly 
eligible for exemption under the administrative exemption system.2 
In addition, Congress authorized the Treasury to exempt under the 
mandatory rules, as indicated above, ``[a]ny business or category of 
business the reports on which have little or no value for law 
enforcement purposes.'' 31 U.S.C. 5313 (d)(1)(D).
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    \2\ Thus, as noted below, transactions in currency between 
domestic banks are already exempt from reporting, see 31 CFR 
103.22(b)(1)(ii), and ``[d]eposits or withdrawals, exchanges of 
currency or other payments and transfers by local or state 
governments, or the United States or any of its agencies or 
instrumentalities'' are one of the categories of transactions 
specifically described as eligible for exemption by banks. See 31 
CFR 103.22(b)(2)(iii).
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C. Objectives of the Interim Rule

    As indicated above, the Interim Rule is the first step in the use 
of section 402 of the Money Laundering Suppression Act to transform the 
Bank Secrecy Act provisions relating to currency transaction reporting. 
That transformation has four objectives.
    The first is to reduce the burden of currency transaction 
reporting. That reduction comes in part through the issuance of a 
blanket regulatory exemption covering transactions in currency between 
one depository institution and another within the United States and 
between depository institutions and government departments and agencies 
at all levels. But at least an equal (and likely a significantly 
greater) part of the reduction comes from the decision to treat as 
being of little interest to law enforcement transactions in currency 
between depository institutions and corporations whose common stock is 
listed on certain national stock exchanges.
    That decision reflects a second, related objective of the Interim 
Rule: to begin the process of limiting currency transaction reports to 
transactions for which the benefits of the reporting requirement (both 
providing usable information to enforcement officials and creating a 
deterrent against attempts to misuse the financial system) justify the 
costs of supplying the information to the Treasury. It is unlikely that 
reports of routine currency transactions for a company of sufficient 
size to be traded on a national securities exchange can be of 
significant use, by themselves, to law enforcement, regulatory, or tax 
authorities.
    The third objective is to focus the Bank Secrecy Act reporting 
system on transactions that signal matters of clear interest to law 
enforcement and regulatory authorities. In publishing the final rule 
relating to the reporting of suspicious transactions under the Bank 
Secrecy Act, Treasury stated ``its judgment that reporting of 
suspicious transactions in a timely fashion is a key component of the 
flexible and cost-efficient compliance system required to prevent the 
use of the nation's financial system for illegal purposes.'' See 61 FR 
4326, 4327 (February 5, 1996). The Interim Rule re-enforces the central 
importance of suspicious transaction reporting to Treasury's counter-
money laundering program; expanded suspicious transaction reporting 
forms a basis for steps to reduce sharply the extent to which routine 
currency transactions by ongoing businesses are required to be 
reported. Currency transactions, like non-currency transactions, are 
required to be reported under the terms of new 31 CFR 103.21, if they 
constitute suspicious transactions as defined in that section; nothing 
in the Interim Rule reduces or alters the obligations imposed by 31 CFR 
103.21. See 31 U.S.C. 5313(f)(2)(B).
    The relationship between required suspicious transaction reporting 
and expanded and simplified exemptions from routine currency 
transaction reporting is a strong one; each rule forms an integral part 
of the policy of the other. The substitution of suspicious transaction 
reporting for routine reporting of all currency transactions by exempt 
persons in effect defines what a routine transaction for an exempt 
person is. That is, a routine currency transaction, in the case of an 
exempt person, is a transaction that does not trigger the suspicious 
transaction reporting requirements, because the transaction does not, 
for example, give the bank a reason to suspect money laundering, a 
violation of a reporting requirement, or the absence of a business 
purpose. See 31 CFR 103.21(a)(2) (i)-(iii).
    The fourth objective of the Interim Rule is to create an exemption 
system that works. Thus choices have been made with an eye to achieving 
ease of administration and comprehensibility--the very factors whose 
absence hindered the prior administrative exemption process.

[[Page 18206]]

    FinCEN has attempted to craft a rule that will be easily understood 
by the banking professionals who must apply it. That meant painting 
with a broad brush; any general exemption rule will almost certainly 
include within its terms some results that are not optimal when viewed 
in isolation.
    FinCEN understands that the changeover to the new system will 
require an initial period of effort by both the Treasury and banking 
institutions; it is impossible to reduce the volume of currency 
transaction reports to the extent that the Interim Rule tries to do 
without creating some small degree of temporary inconvenience as the 
terms of the system change. FinCEN believes, however, that the 
transition period will be relatively short and that the new greatly 
streamlined exemption procedures, once in place, will be self-
sustaining and will produce a leaner, less burdensome, and more cost 
effective exemption system than now exists.
    FinCEN is eager to improve the terms of the rule as necessary to 
eliminate temporary incongruities. Comments on ways in which the rule 
could be improved in this regard are specifically invited.

D. Additional Relief Under Study

    The Interim Rule is the first result of FinCEN's work to put in 
place the new exemption system contemplated by the provisions of 31 
U.S.C. 5313 (d) through (g). The goal of FinCEN's work in this area, 
like the Congress' goal in shaping the Money Laundering Suppression Act 
provisions on exemptions, is to reduce the cost of Bank Secrecy Act 
compliance and to further a fundamental restructuring of the Bank 
Secrecy Act. The restructuring emphasizes cost-effective collection of 
only that information that is likely to benefit law enforcement and 
regulatory authorities.
    In solving the issues posed by implementation of the new statutory 
exemption rules, FinCEN has consulted regularly with banking industry 
representatives. For example, under the auspices of Bank Secrecy Act 
Advisory Group it convened a working session of bank officials to 
discuss possible structures for the new exemption system and the 
constraints that bank operating procedures posed for broad-scale relief 
from unnecessary currency transaction reporting.
    In this connection, FinCEN is aware that the Interim Rule and any 
final rule resulting therefrom may well affect the operation of large 
banks in urban areas more than the operation of smaller community-based 
institutions, if only because larger companies tend to do business with 
larger banks and because the Interim Rule does not simplify the 
exemption system with respect to transactions by privately held 
companies, large and small, whose banking history and business would 
also justify a simplified exemption system.
    Accordingly, FinCEN is working now on a notice of proposed 
rulemaking implementing the discretionary exemption authority contained 
in 31 U.S.C. 5313(e) and will at the appropriate time consult with the 
banking community in shaping proposals to implement that authority. 
Meanwhile, banks will still be able to maintain any exemptions properly 
granted under the current administrative system. Commenters on this 
Interim Rule are invited to include in their comments any suggestions 
on the projected second stage of the exemption effort.

III. Specific Provisions

A. 103.22(a). Reports of Currency Transactions

    A new sentence is added following the first sentence of paragraph 
(a) of 31 CFR 103.22 to provide a cross-reference in that paragraph to 
the provisions of new paragraph (h) added by the Interim Rule.

B. 103.22(h)(1). Currency Transactions of Exempt Persons With Banks 
Occurring After April 30, 1996

    Paragraph (h)(1) states the general effect of the Interim Rule. 
That is, simply and directly: no currency transaction report is 
required to be filed by a bank for a transaction in currency by an 
exempt person occurring after April 30, 1996.
    The Interim Rule uses the term ``bank'' rather than ``depository 
institution'' to define the class of financial institutions to which 
the Interim Rule applies. Although 31 U.S.C. 5313(d) speaks of 
exemptions for transactions with ``depository institutions'' (as the 
latter term is defined in 31 U.S.C. 5313(g)), FinCEN believes that the 
broad definition of bank contained in 31 CFR 301.11(c) includes all of 
the categories of institutions included in the statutory ``depository 
institution'' definition; because the term ``bank'' is familiar to bank 
officials who work with the Bank Secrecy Act, substitution of a new 
term whose effect is the same does not appear either necessary or 
advisable.
    The Interim Rule applies only to transactions between exempt 
persons and banks, to reflect the terms of 31 U.S.C. 5313(d); it does 
not apply to transactions between exempt persons and financial 
institutions other than banks. Comments are invited about whether the 
rule should extend to transactions with such other classes of financial 
institutions.
    Although 31 U.S.C. 5313(d) speaks of ``mandatory'' exemptions, the 
Interim Rule does not affirmatively prohibit banks from continuing to 
report routine currency transactions with exempt persons. Treasury 
believes that the incentives created by the Interim Rule are, as 
Congress intended them to be, sufficiently great to lead banks to take 
advantage of the new exemption system to a far greater extent than they 
took advantage of the prior administrative exemption system.
    The Interim Rule, however, is not simply a regulatory relief 
measure. As indicated above, it is part of a fundamental restructuring 
of the Bank Secrecy Act's administration. Treasury hopes and expects 
that banks will be willing to undertake the one-time effort necessary 
to make the new, substantially different system work.

C. 103.22(h)(2). Exempt Person

    Under the Interim Rule, the crucial exemption determinant is 
whether a particular entity is an ``exempt person.'' That term is 
defined in new paragraph (h)(2).
    The first three categories of exempt persons specified in paragraph 
(h)(2) are those to whom exemption is required to be granted by 31 
U.S.C. 5313(d)(1)(A)-(C).3
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    \3\ The language of 31 U.S.C. 5313(d)(1)(A)-(C) is quoted in 
section IIA of this Supplementary Information section, above.
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    Banks. The first category of exempt person is banks themselves, 
with the result that transactions between banks will not require 
reporting. In most cases, no reporting is required at present for such 
transactions; 31 CFR 103.22(b)(1)(ii) states flatly that the currency 
transaction reporting requirement does not ``require reports * * * of 
transactions between domestic banks.'' The definition is limited to 
banking operations and transactions within the United States. Thus a 
transfer of currency by a bank inside the United States to a bank 
outside the United States is not exempt under the Interim Rule.
Departments and Agencies of the United States and of States and Their 
Political Subdivisions
    The second category of exempt person includes departments and 
agencies of the United States, of any state, and of any political 
subdivision of any state.

[[Page 18207]]

The definition of ``United States'' used in 31 CFR 103.11 includes not 
only the states but also the District of Columbia and the various 
territories and insular possessions of the United States. See 31 CFR 
103.11(nn); as of August 1, 1996, the definition will also include the 
Indian lands. See 61 FR 7054, 7056 (February 23, 1996). Thus 
departments and agencies of the governments of these areas are also 
classified as exempt persons under the definition.
Entities Exercising Governmental Authority
    The third category of exempt person includes any entity established 
under the laws of the United States 4, of any state, or of any 
political subdivision of any state, or under an interstate compact 
between two or more states, that exercises governmental authority on 
behalf of the United States or any such state or political subdivision. 
Operating rules for making determinations about the governmental 
entities are included in paragraph (h)(4), discussed below.
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    \4\ Again, the broad definition of ``United States'' applies.
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Listed Corporations
    The fourth category of person subject to mandatory exemption under 
31 U.S.C. 5313(d) is ``any business or category of business the reports 
on which have little or no value for law enforcement purposes.'' 
Treasury is making use of that provision to treat as an exempt person 
any corporation whose common stock (i) is listed on the New York Stock 
Exchange or the American Stock Exchange (but not including stock listed 
on the Emerging Company Marketplace of the American Stock Exchange), or 
(ii) has been designated as a Nasdaq National Market Security listed on 
the Nasdaq Stock Market (but not including stock listed under the 
separate ``Nasdaq Small-Cap Issues'' category). For convenience, this 
class of exempt persons is referred to in this discussion as ``listed 
corporations.''
    The ``listed corporation'' formulation has been adopted for several 
reasons. First, Treasury believes that the formulation is a convenient 
and accurate way of describing many, if not most, large-scale 
enterprises that make extensive routine use of currency in their normal 
business operations. Second, the list of corporations described in the 
formulation is readily available and is published in general 
circulation newspapers each morning. Finally, the scale of enterprises 
listed on the nation's largest securities exchanges, and the variety of 
internal and external controls to which they are subject--whether as a 
matter of market discipline or government regulation--make their use 
for the sort of money laundering or tax evasion marked by anomalous 
transactions in currency, or that could be detected by a simple 
examination of currency transaction reports, sufficiently unlikely that 
the benefits of a uniform formulation far exceed the apparent risks of 
such a formulation. This is especially true because of the continuing 
applicability of the suspicious transaction reporting rules to all 
(non-currency and currency) transactions between listed corporations 
and banks.
    The determination whether a company is a corporation for purposes 
of the Interim Rule depends solely upon the formal manner of its 
organization; if the company has a corporate charter, it is a 
corporation, and if it does not, it is not a corporation, for purposes 
of the Interim Rule. The sort of ``corporate equivalence'' analysis 
required, for example, for certain purposes to determine an entity's 
status under the Internal Revenue Code is neither called for nor 
permitted by the Interim Rule.5
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    \5\ Again, there may be a limited group of entities, listed on 
the national securities exchanges but organized abroad, for which 
such a distinction raises issues of interpretation that cannot be 
dealt with effectively in the Interim Rule. Guidance is requested on 
whether such issues exist and, if so, how they should be resolved.
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    At present the Interim Rule applies only to corporations, even 
though Treasury understands that the equity interests of some 
partnerships and business trusts are also listed on the named 
securities exchanges. Comments are invited as to whether the definition 
of exempt person should be extended to all persons whose equity 
interests are so listed.
Consolidated Subsidiaries of Listed Corporations
    Many, if not most, listed corporations include groups of subsidiary 
operating corporations whose treatment under the Interim Rule raises 
significant issues. Such subsidiaries are not named in stock exchange 
listings, but the policy of the statute and Interim Rule cannot be 
effectively implemented without the inclusion of such subsidiaries in 
the exempt person category.
    That fact raises an issue of what might be called the ``burden'' of 
reducing regulatory burden. Many definitions of parent-subsidiary 
relationship are quite technical and of importance only to legal, 
accounting, and investment specialists; even definitions phrased only 
in terms of stock ownership often devolve into questions of direct or 
indirect stock ownership that can be extremely difficult to resolve.
    In that context, mindful of the need to provide as simple a 
formulation as possible, the Interim Rule treats as a subsidiary any 
corporation that files a consolidated income tax return with a listed 
corporation. The choice of this standard was not any easy one; its 
chief rationale is that the fact of consolidation (as opposed to, say, 
eligibility for consolidation) is relatively easy to determine by 
asking corporate customers (and by asking corporate officials to ask 
their tax or accounting departments if necessary).
    Franchisees of listed corporations (or of their subsidiaries) are 
not included within the definition of exempt person, unless such 
franchisees are independently exempt as listed corporations or listed 
corporation subsidiaries. A local corporation that holds a McDonald's 
franchise, for example, is not an exempt person simply because 
McDonald's Corporation is a listed corporation; a McDonald's outlet 
owned by McDonald's Corporation directly, on the other hand, would be 
an exempt person, because McDonald's Corporation's common stock is 
listed on the New York Stock Exchange.
    Still, the definition is not optimal. It introduces a note of 
complexity into the Interim Rule, and Internal Revenue Service 
(``IRS'') statistics indicate that at best only 70 to 80 percent of the 
companies eligible to file consolidated income tax returns with their 
parent companies actually do so. The success of the Interim Rule in 
reducing the volume of currency transaction reports will depend in part 
upon the effectiveness and acceptance of the definition of subsidiary 
company, and comments are encouraged about the appropriateness of the 
definition. FinCEN would especially welcome ideas about other 
formulations, based upon sound banking practice, that bank employees 
would find easy to apply and that would accomplish the goals of the 
Interim Rule more effectively than a definition based upon 
consolidation for income tax filing purposes.

D. 103.22(h)(3). Designation of Exempt Persons

    The Interim Rule imposes one condition on a bank's exemption of 
currency transactions of a customer who satisfies the definition of 
exempt person. That condition is that a single form be filed 
designating the exempt person and the bank that recognizes it as such. 
The designation is to be made by a bank by filing for each exempt 
person a single Internal Revenue Service

[[Page 18208]]

Form 4789 (the form now used by banks and others to report a 
transaction in currency) that is marked (in the Form's line 36) to 
indicate its purpose and that provides identifying information about 
the exempt person and bank involved.
    The designation requirement must be satisfied, for existing 
customers, on or before August 15, 1996. The requirement is a condition 
subsequent; that is, a bank may recognize a customer as an exempt 
person on April 30, and stop filing currency transaction reports as 
permitted by the Interim Rule, even though it does not satisfy the 
designation requirement for the customer until August 15, 1996.
    The designation of new customers as exempt persons must be made no 
later than 30 days following the first transaction in currency in 
excess of $10,000 between a bank and the new customer. (Because persons 
may become new customers during the period April 30-August 15, 1996, a 
new customer to whom the 30 day designation rule applies is, 
technically, a customer who satisfies the exempt person definition and 
who becomes a customer, or who seeks to engage in its first transaction 
in currency, after July 15, 1996.)
    Under the Interim Rule, each bank that deals with an exempt person 
must satisfy the designation requirement. FinCEN hopes to be able to 
use the results of the designation filings to compile a list of exempt 
persons that can itself be published in the Federal Register, as 
contemplated by 31 U.S.C. 5313(d)(2), in place of the shorter 
descriptive notice of exempt persons that is published 
contemporaneously with the publication of the Interim Rule. The 
designation filings will also be used to review the effectiveness of 
the Interim Rule (and of any final rule that is derived from it) and 
the extent to which its terms are understood and used by banks.

E. 103.22(h)(4). Operating Rules for Applying Definition of Exempt 
Person

    The Interim Rule contains several provisions that are designed to 
assist banks in applying the definition of ``exempt person.''
1. General Rule
    As indicated above, every effort has been made to craft a rule that 
is as simple to understand and to administer as its broad objective 
will permit. Application of the Interim Rule requires instead that 
banks simply make one or more determinations about the status of 
particular customers. The rule does not specify detailed procedures for 
making or documenting the determinations required. (Indeed, one defect 
of the administrative exemption system was its need for detailed 
procedural steps for authorizing exemptions. See 31 CFR 103.22(d).) 
Instead, paragraph (h)(4)(i) explains that banks are expected to 
perform the same degree of due diligence in determining whether a 
customer is an exempt person (and documenting that determination) that 
a reasonable and prudent bank would perform in the conduct of its own 
business in avoiding losses from fraud or misstatement. In other words, 
FinCEN's objective is to leave it to bankers, who have already designed 
business procedures and protocols to deal with similar problems, to 
adapt their present procedures to achieve the results sought by the 
Interim Rule.
    An assessment of compliance with the terms of the Interim Rule will 
focus not on whether a bank necessarily makes every judgment perfectly, 
but on whether it takes the steps a reasonable and prudent banker would 
take to create systems to apply the Interim Rule's terms. Such an 
approach is a corollary to the limitations on liability set by 31 
U.S.C. 5318(f)(1) and repeated in paragraph (h)(6) of the Interim Rule; 
under the liability limitations a bank remains subject to penalties if, 
inter alia, it has a reason to believe that a particular customer or 
transaction does not meet the criteria established for the granting of 
an exemption.
2. Government Status
    Paragraph (h)(4)(ii) permits a bank to determine the status of a 
customer as a government department, agency, or instrumentality based 
on its name or community knowledge, much like the so-called ``eyeball 
test,'' cf. Treas. Reg. Sec. 1.6049-4(c)(1)(ii), for the determination 
of exempt recipient status for the purposes of information reporting 
and withholding with respect to interest payments under applicable 
provisions of the Internal Revenue Code.
    The determination whether an entity exercises ``governmental 
authority'' is unfortunately not amenable to such a simple test, and 
the second sentence of paragraph (h)(4)(ii) states a general definition 
of governmental authority for use by banks.
3. Status as Listed Corporation
    Paragraph (h)(4)(iii) permits a bank to rely on any New York, 
American, or Nasdaq Stock Market listing published in a newspaper of 
general circulation. Such listings are easily identified. For example, 
in the Wall Street Journal, which is published and distributed 
nationally, the listings are entitled, respectively, ``NEW YORK STOCK 
EXCHANGE COMPOSITE TRANSACTIONS,'' ``AMERICAN STOCK EXCHANGE COMPOSITE 
TRANSACTIONS,'' AND ``NASDAQ NATIONAL MARKET ISSUES.'' Because such 
listings often make use of the trading symbols (abbreviated company 
names) for each stock, banks may also rely on any commonly accepted or 
published stock symbol guide in reviewing the newspaper listings to 
determine if the listings include their customers.
4. Consolidated Return Status
    The treatment of a corporation as an exempt person because it is 
included in the consolidated income tax return of a listed corporation 
presents one of the more difficult issues of administration in the 
Interim Rule. The corporations included on any consolidated return are 
required to be shown on Internal Revenue Service Form 851 (Affiliation 
Schedule) filed with the return; a bank may rely upon any reasonably 
authenticated photocopy of Form 851 (or the equivalent thereof for the 
appropriate tax year) in determining the status of a particular 
corporation, or it may rely upon any other reasonably authenticated 
information (for example, an officer's certificate) relating to a 
corporation's filing status.

F. 103.22(h)(5). Limitation on Exemption

    The exemption for transactions by an exempt person applies only 
with respect to transactions involving that person's own funds. The 
exemption does not apply to situations in which an exempt person is 
engaging in a transaction as an agent on behalf of another, beneficial 
owner of currency. (If the principal for whom the agent is acting is 
itself an exempt person, the exempt status of the principal is what 
causes the transaction to be exempt.) In other words, an exempt person 
cannot lend its status, for a fee or otherwise, to another person's 
transactions.

G. 103.22(h)(6). Effect of Exemption; Limitation on Liability

    The designation requirement applies equally to exempt persons who 
have previously been the subject of bank-initiated exemptions under the 
administrative exemption system as it does to other customers.
    Once a bank has complied with the terms of the Interim Rule, it is 
generally protected, by 31 U.S.C. 5313(f) and paragraph (h)(6) of the 
Interim Rule, from any penalty for failure to file a currency 
transaction report with respect to a currency transaction by an exempt 
person. The protection does not apply if

[[Page 18209]]

the bank knowingly files false or incomplete information relating to 
the exempt person (for example on an designation filing) or with 
respect to the transaction (for example on a suspicious activity 
report). The protection also does not apply if the bank has reason to 
believe at the time the exemption is granted that the customer does not 
satisfy the definition of exempt person or if the transaction is not a 
transaction of the exempt person.
    It is anticipated that the Interim Rule will supersede the 
administrative exemption system with respect to categories of exempt 
persons named in the Interim Rule, 60 days after a final rule based on 
the Interim Rule is published. At that time, transactions in currency 
with exempt persons after April 30, 1996 will be exempt from reporting 
by banks only to the extent that the new terms are satisfied.

H. 103.22(h)(7). Obligation To File Suspicious Activity Reports, etc.

    The provisions of the Interim Rule create an exemption only with 
respect to the currency transaction reporting requirement. The Interim 
Rule does not create any exemption, and in fact has no effect of any 
kind, on the requirement that banks file suspicious activity reports 
with respect to transactions, including currency and non-currency 
transactions, that satisfy the requirements of the rules of FinCEN and 
the federal bank supervisory agencies relating to suspicious activity 
reporting.6 (Indeed, as indicated above, the reduction in currency 
transaction report volume reflects in part Treasury policy to rely to 
the greatest extent possible on reports of truly suspicious activity.)
---------------------------------------------------------------------------

    \6\ See 61 FR 4326, 4332, 4338 (February 5, 1996) (FinCEN, 
Office of the Comptroller of the Currency and Federal Reserve 
Board); 61 FR 6095, 6100 (February 16, 1996) (Federal Deposit 
Insurance Corporation and Office of Thrift Supervision); and 61 FR 
11526 (March 21, 1996) (National Credit Union Administration).
---------------------------------------------------------------------------

    For example, multiple exchanges of small denominations of currency 
into large denominations of currency or currency transactions that are 
not (or whose amounts are not) commensurate with the stated business or 
other activity of the exempt person conducting the transaction, or on 
whose behalf the transaction is conducted, may indicate the need to 
file suspicious activity reports with respect to transactions in 
currency. Similarly a sudden need for currency by a business that never 
before had such a need can form a basis for the determination that a 
suspicious activity report is due. In all cases, whether such a report 
is required is governed by the rules of 31 CFR 103.21, rules on whose 
application the Interim Rule has no effect.

I. 103.22(h)(8). Revocation

    The Interim Rule makes clear that the status of an exempt person as 
such may be revoked at any time by the Treasury Department. Revocation 
will be prospective in all cases except those to which the protections 
of liability conferred by 31 U.S.C. 5313(f) and 31 CFR 103.22(h)(6) do 
not apply.

IV. Regulatory Matters

A. Executive Order 12866

    The Department of the Treasury has determined that this interim 
rule is not a significant regulatory action under Executive Order 
12866.

B. Unfunded Mandates Act of 1995 Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded 
Mandates Act''), Pub. L. 104-4 (March 22, 1995), requires that an 
agency prepare a budgetary impact statement before promulgating a rule 
that includes a federal mandate that may result in expenditure by 
state, local and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year. If a budgetary 
impact statement is required, section 202 of the Unfunded Mandates Act 
also requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule. FinCEN has 
determined that it is not required to prepare a written statement under 
section 202 and has concluded that on balance this interim rule 
provides the most cost-effective and least burdensome alternative to 
achieve the objectives of the rule.

C. Administrative Procedure Act

    Because the Interim Rule implements the statute and grants 
significant relief from existing regulatory requirements, it is found 
to be impracticable to comply with notice and public procedure under 5 
U.S.C. 553(b). Because the Interim Rule grants exemptions to current 
requirements, it may be made effective before 30 days have passed after 
its publication date. See 5 U.S.C. 553(d).

D. Regulatory Flexibility Act

    The provisions of the Regulatory Flexibility Act relating to an 
initial and final regulatory flexibility analysis (5 U.S.C. 604) are 
not applicable to this Interim Rule because the agency was not required 
to publish a notice of proposed rulemaking under 5 U.S.C. 553 or any 
other law.

E. Paperwork Reduction Act

    This Interim Rule is being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
By expanding the applicable exemptions from an information collection 
that has been reviewed and approved by the Office of Management and 
Budget (OMB) under control number 1505-0063, the Interim Rule 
significantly reduces the existing burden of information collection 
under 31 CFR 103.22. Thus, although the Interim Rule advances the 
purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501, et 
seq., and its implementing regulations, 5 CFR Part 1320, the Paperwork 
Reduction Act does not require FinCEN to follow any particular 
procedures in connection with the promulgation of the Interim Rule.

F. Compliance With 5 U.S.C. 801

    Prior to the date of publication of this document in the Federal 
Register, FinCEN will have submitted to each House of the Congress and 
to the Comptroller General the information required to be submitted or 
made available with respect to the Interim Rule by the provisions of 5 
U.S.C. 801 (a)(1)(A) and (a)(1)(B).

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Banks, banking, Currency, Foreign Banking, 
Foreign currencies, Gambling, Investigations, Law enforcement, 
Penalties, Reporting and recordkeeping requirements, Securities, Taxes.

Amendment

    For the reasons set forth above in the preamble, 31 CFR Part 103 is 
amended as set forth below:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

    1. The authority citation for Part 103 continues to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5330.

    2. Section 103.22 is amended by adding a new sentence immediately 
following the first sentence in paragraph (a)(1) and by adding a new 
paragraph (h) to read as follows:


Sec. 103.22  Reports of currency transactions.

    (a)(1) * * * Transactions in currency by exempt persons with banks 
occurring after April 30, 1996, are not subject to

[[Page 18210]]

this requirement to the extent provided in paragraph (h) of this 
section. * * *
* * * * *
    (h) No filing required by banks for transactions by exempt persons 
occurring after April 30, 1996. (1) Currency transactions of exempt 
persons with banks occurring after April 30, 1996. Notwithstanding the 
provisions of paragraph (a)(1) of this section, no bank is required to 
file a report otherwise required by paragraph (a)(1) of this section, 
with respect to any transaction in currency between an exempt person 
and a bank that is conducted after April 30, 1996.
    (2) Exempt person. For purposes of this section, an exempt person 
is:
    (i) A bank, to the extent of such bank's domestic operations;
    (ii) A department or agency of the United States, of any state, or 
of any political subdivision of any state;
    (iii) Any entity established under the laws of the United States, 
of any state, or of any political subdivision of any state, or under an 
interstate compact between two or more states, that exercises 
governmental authority on behalf of the United States or any such state 
or political subdivision;
    (iv) Any corporation whose common stock is listed on the New York 
Stock Exchange or the American Stock Exchange (except stock listed on 
the Emerging Company Marketplace of the American Stock Exchange) or 
whose common stock has been designated as a Nasdaq National Market 
Security listed on the Nasdaq Stock Market (except stock listed under 
the separate ``Nasdaq Small-Cap Issues'' heading); and
    (v) Any subsidiary of any corporation described in paragraph 
(h)(2)(iv) of this section whose federal income tax return is filed as 
part of a consolidated federal income tax return with such corporation, 
pursuant to section 1501 of the Internal Revenue Code and the 
regulations promulgated thereunder, for the calendar year 1995 or for 
its last fiscal year ending before April 15, 1996.
    (3) Designation of exempt persons. (i) A bank must designate each 
exempt person with whom it engages in transactions in currency, on or 
before the later of August 15, 1996, and the date 30 days following the 
first transaction in currency between such bank and such exempt person 
that occurs after April 30, 1996.
    (ii) Designation of an exempt person shall be made by a single 
filing of Internal Revenue Service Form 4789, in which line 36 is 
marked ``Designation of Exempt Person'' and items 2-14 (Part I, Section 
A) and items 37-49 (Part III) are completed. The designation must be 
made separately by each bank that treats the person in question as an 
exempt person. (For availability, see 26 CFR 601.602.)
    (iii) This designation requirement applies whether or not the 
particular exempt person to be designated has previously been treated 
as exempt from the reporting requirements of paragraph (a) of this 
section under the rules contained in paragraph (b) or (e) of this 
section.
    (4) Operating rules for designating exempt persons. (i) Subject to 
the specific rules of this paragraph (h), a bank must take such steps 
to assure itself that a person is an exempt person (within the meaning 
of applicable provisions of paragraph (h)(2) of this section) that a 
reasonable and prudent bank would take to protect itself from loan or 
other fraud or loss based on misidentification of a person's status.
    (ii) A bank may treat a person as a governmental department, 
agency, or entity if the name of such person reasonably indicates that 
it is described in paragraph (h)(2)(ii) or (h)(2)(iii) of this section, 
or if such person is known generally in the community to be a State, 
the District of Columbia, a tribal government, a Territory or Insular 
Possession of the United States, or a political subdivision or a 
wholly-owned agency or instrumentality of any of the foregoing. An 
entity generally exercises governmental authority on behalf of the 
United States, a State, or a political subdivision, for purposes of 
paragraph (h)(2)(iii) of this section, only if its authorities include 
one or more of the powers to tax, to exercise the authority of eminent 
domain, or to exercise police powers with respect to matters within its 
jurisdiction.
    (iii) In determining whether a person is described in paragraph 
(h)(2)(iv) of this section, a bank may rely on any New York Stock 
Exchange, American Stock Exchange, or Nasdaq Stock Market listing 
published in a newspaper of general circulation and on any commonly 
accepted or published stock symbol guide.
    (iv) In determining whether a person is described in paragraph 
(h)(2)(v) of this section, a bank may rely upon any reasonably 
authenticated corporate officer's certificate or any reasonably 
authenticated photocopy of Internal Revenue Service Form 851 
(Affiliation Schedule) or the equivalent thereof for the appropriate 
tax year.
    (5) Limitation on exemption. A transaction carried out by an exempt 
person as an agent for another person who is the beneficial owner of 
the funds that are the subject of a transaction in currency is not 
subject to the exemption from reporting contained in paragraph (h)(1) 
of this section.
    (6) Effect of exemption; limitation on liability. (i) FinCEN may in 
the future determine by amendment to this part that the exemption 
contained in this paragraph (h) shall be the only basis for exempting 
persons described in paragraph (h)(2) of this section from the 
reporting requirements of paragraph (a) of this section.
    (ii) No bank shall be subject to penalty under this part for 
failure to file a report required by paragraph (a) of this section with 
respect to a currency transaction by an exempt person with respect to 
which the requirements of this paragraph (h) have been satisfied, 
unless the bank:
    (A) Knowingly files false or incomplete information with respect to 
the transaction or the customer engaging in the transaction; or
    (B) Has reason to believe at the time the exemption is granted that 
the customer does not meet the criteria established by this paragraph 
(h) for treatment of the transactor as an exempt person or that the 
transaction is not a transaction of the exempt person.
    (iii) A bank that files a report with respect to a currency 
transaction by an exempt person rather than treating such person as 
exempt shall remain subject with respect to each such report to the 
rules for filing reports, and the penalties for filing false or 
incomplete reports, that are applicable to reporting of transactions in 
currency by persons other than exempt persons. A bank that continues 
for the period permitted by paragraph (h)(6)(i) of this section to 
treat a person described in paragraph (h)(2) of this section as exempt 
from the reporting requirements of paragraph (a) of this section on a 
basis other than as provided in this paragraph (h) shall remain subject 
in full to the rules governing an exemption on such other basis and to 
the penalties for failing to comply with the rules governing such other 
exemption.
    (7) Obligation to file suspicious activity reports, etc. Nothing in 
this paragraph (h) relieves a bank of the obligation, or alters in any 
way such bank's obligation, to file a report required by Sec. 103.21 
with respect to any transaction, including, without limitation, any 
transaction in currency, or relieves a bank of any other reporting or 
recordkeeping obligation imposed by this part (except the obligation to 
report transactions in currency pursuant to paragraph (a) of this 
section to the extent provided in this paragraph (h)).
    (8) Revocation. The status of any person as an exempt person under 
this paragraph (h) may be revoked by

[[Page 18211]]

FinCEN by written notice, which may be provided by publication in the 
Federal Register in appropriate situations, on such terms as are 
specified in such notice. In addition, and without any action on the 
part of the Treasury Department:
    (i) The status of a corporation as an exempt person pursuant to 
paragraph (h)(2)(iv) of this section ceases once such corporation 
ceases to be listed on the applicable stock exchange; and
    (ii) The status of a subsidiary as an exempt person under paragraph 
(h)(2)(v) of this section ceases once such subsidiary ceases to be 
included in a consolidated federal income tax return of a person 
described in paragraph (h)(2)(iv) of this section.
* * * * *
    Dated: April 16, 1996.
Stanley E. Morris,
Director, Financial Crimes Enforcement Network.
[FR Doc. 96-9798 Filed 4-23-96; 8:45 am]
BILLING CODE 4820-03-P




Last Updated 04/16/1996 communications@fdic.gov