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Inactive Financial Institution Letters


[Federal Register: September 8, 1997 (Volume 62, Number 173)]
[Rules and Regulations]
[Page 47141-47148]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se97-4]

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA11


Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations--Exemptions From the Requirement To Report
Transactions in Currency

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Final rule.

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SUMMARY: This document contains a final rule amending the Bank Secrecy
Act regulations. The amendment will eliminate 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. It will modify (and, as modified, will supersede), an interim
rule on the same subject, to reflect the comments that were requested
when the interim rule was published.
    There appears elsewhere in today's edition of the Federal Register
a notice of proposed rulemaking that would further modify the rules for
granting exemptions from the currency transaction report filing
requirements. The final rule and the notice of proposed rulemaking are
additional steps in a process intended to achieve the reduction set by
the Money Laundering Suppression Act of 1994 in the number of Bank
Secrecy Act currency transaction reports required to be filed annually
by depository institutions.

EFFECTIVE DATE: January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director,
FinCEN, (703) 905-3819; Charles Klingman, Financial Institutions Policy
Specialist, FinCEN, (703) 905-3602; Stephen R. Kroll, Legal Counsel,
Cynthia L. Clark, on detail to the Office of Legal Counsel, and Albert
R. Zarate, Attorney-Advisor, Office of Legal Counsel, FinCEN, (703)
905-3590.

SUPPLEMENTARY INFORMATION:

I. 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 coins 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 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). According to
subsection (d)(1), the Treasury must 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) requires the Treasury to publish at least
annually a list of entities whose currency transactions are exempt from
reporting under the mandatory rules. The companion provisions of 31
U.S.C. 5313(e) authorize the Secretary to permit a depository
institution to grant additional, discretionary, exemptions from the
currency transaction reporting requirements. 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. Subsection (g)
defines "depository institution" for purposes of the new exemption
provisions.
    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).\1\ The
administrative exemption procedures at which the statutory changes are
directed are found in 31 CFR 103.22 (b)-(g).
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    \1\ 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 * * * 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].
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    Several reasons have been given for the administrative exemption
system's lack of success in eliminating routine currency transactions
from operation of the Bank Secrecy Act rules. The first is the
retention by banks of liability for making incorrect exemption
determinations. The second is the complexity of the administrative
exemption procedures. Finally, advances in technology have made it less
expensive for some banks to report all currency transactions than to
incur the administrative costs and risks of exempting customers and
then administering the terms of particular exemptions properly.

II. The Interim Rule

    On April 24, 1996, an interim rule (the "Interim Rule") adding a
new paragraph (h) to the currency transaction reporting rules in 31 CFR
103.22 was published in the Federal Register. See 61 FR 18204. The
Interim Rule exempted, from the requirement to report transactions in
currency in excess of $10,000, transactions occurring after April 30,
1996, between banks \2\ and

[[Page 47142]]

customers who fall into one of five classes of exempt persons:
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    \2\ The Interim Rule used the term bank to define the class of
financial institutions to which the Interim Rule applied. As defined
in 31 CFR 103.11(c), that term includes both commercial banks and
other classes of depository institutions at which the language of 31
U.S.C. 5313 is directed.
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    1. Banks, to the extent of their banking operations and
transactions within the United States; \3\
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    \3\ The broad definition of "United States" in section
103.11(nn) applies.
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    2. Departments and agencies of the United States and of states and
their political subdivisions;
    3. Any entity established under the laws of the United States \4\
or of any state or its political subdivisions, or under an interstate
compact, that exercises governmental authority on behalf of the United
States or any such state or political subdivision;
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    \4\ Again, the broad definition of "United States" applies.
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    4. "Listed corporations," that is, corporations whose common
stock is listed on the New York Stock Exchange or the American Stock
Exchange or has been designated as a Nasdaq National Market Security
listed on the Nasdaq Stock Market; \5\
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    \5\ The NASDAQ category did not include stock listed under the
separate "Nasdaq Small-Cap Issues" category.
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    5. Subsidiaries of listed corporations that are consolidated with
such corporations for federal income tax purposes.
    See 31 CFR 103.22(h)(2) (i)-(v). The first three categories of
exempt persons specified above are those to whom an exemption is
required to be granted by 31 U.S.C. 5313(d)(1) (A)-(C). The final two
categories are those entities who are exempted pursuant to the
authority contained in 31 U.S.C. 5313(d)(1)(D).
    To treat a customer as exempt under the Interim Rule, a bank must
file a single form (the same form now used by banks to report a
transaction in currency) that identifies the exempt person and the bank
involved and must generally take such steps to assure itself that a
person is an exempt person 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. Treatment of a customer as an
exempt person under the Interim Rule protects a bank generally from any
penalty for failure to file a currency transaction report with respect
to the exempt person's currency transactions, but it does not affect
the obligation of banks to file suspicious activity reports. Currency
transactions, like other transactions, between a bank and an exempt
person remain subject to the suspicious activity reporting requirements
of 31 CFR 103.21, as well as the suspicious activity reporting
requirements of the federal bank supervisory agencies. See also 12 CFR
21.11 (Office of the Comptroller of the Currency); 12 CFR 208.20
(Federal Reserve System); 12 CFR 353.3 (Federal Deposit Insurance
Corporation); 12 CFR 563.180 (Office of Thrift Supervision); 12 CFR
748.1 (National Credit Union Administration).
    Because the Interim Rule implemented certain provisions of the Bank
Secrecy Act and granted significant relief from existing regulatory
requirements, it was made effective on May 1, 1996, less than 30 days
after its publication date. The Interim Rule was, however, accompanied
by a request for comments on the Rule's terms.
    It appears that the Interim Rule did not immediately have the
intended effect of reducing the number of routine currency transactions
filed by depository institutions. This may have been attributable, at
least in part, to banks' reluctance to use the new exemption procedures
until the Interim Rule and proposals for the projected second stage of
currency transaction filing relief (as to which comments were solicited
by the preamble to the Interim Rule) were made final. Deferral of a
change in a bank's procedures would permit the automated systems on
which many institutions rely to be altered to take account of all the
revised currency transaction filing rules at one time. Unfamiliarity
with and uncertainty about the meaning of certain provisions of the
Interim Rule may also have initially retarded the Rule's use.\6\
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    \6\ FinCEN has already issued a notice, FinCEN Notice 97-1, to
deal with one such uncertainty. That notice makes clear that an
institution may decide, after August 15, 1996, that it wishes to
adopt the new exemption system for particular customers, even if it
did not do so, for existing customers, before that date, so long as
the necessary exemption identifications are filed within 30 days of
the first transaction in currency that is sought to be exempted
under the new exemption procedures.
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    Statistics based on the first half of this year indicate that banks
are making the transition to the new, streamlined exemption procedures
set forth in the Interim Rule. The number of CTR filings for each of
the months of February, March, April, May, and June of 1997 is less
than the number of filings for those same months in 1996. (FinCEN does
not yet have complete information concerning CTR filings for July
1997.) Thus, it appears that the Interim Rule is beginning to have some
effect on decreasing the number of CTR filings. FinCEN anticipates that
banks will continue to make the transition to the new exemption
procedures as they become better acquainted, and more comfortable, with
the terms of the new procedures. FinCEN also hopes that the
clarifications contained in this document will continue to aid in that
transition.

III. Summary of Comments and Revisions

A. Comments on the Notice--Overview

    FinCEN received fifty-eight written comments on the Interim Rule.
Of these, forty-four comments were submitted by banks or bank holding
companies, six by banking trade associations, four by credit unions,
one by a credit union trade association, and one each by a compliance
consulting firm, an accounting firm, and a law firm, each on its own
behalf.
    The commenters generally applauded FinCEN's efforts to improve the
exemption process. One bank commenter, for example, noted with approval
"the scope and aggressiveness of the Interim Rule" and found the Rule
"a major step in reducing the Bank Secrecy Act's burden on financial
institutions without compromising the BSA's effectiveness" because it
permitted banks to eliminate the cost of reporting "large
denomination, repetitive transactions with public entities and major
corporations engaged in legitimate retail activity." At the same time,
the commenters suggested a number of ways in which the Interim Rule
might be improved, and they raised several operating issues that banks
had encountered in applying the Interim Rule.
    Comments on the Interim Rule focused primarily on five subjects:
the definition of an exempt subsidiary of a listed corporation; other
aspects of the definition of exempt person; the time frame within which
a bank was permitted to designate an existing customer as an exempt
person; the need to clarify the relationship between the provisions of
paragraph (h) and the terms of the administrative exemption provisions
of 31 CFR 103.22(b)-(g); and the interplay between the Interim Rule and
previous regulatory guidance provided by the Department of the Treasury
with respect to the currency transaction reporting requirements. The
specifics of the comments and an explanation of resulting modifications
to paragraph (h) are outlined below.
    After full and careful consideration of all the comments, 31 CFR
103.22(h), as contained in the Interim Rule, is modified, and, as
modified, is adopted as a final rule.

B. Final Rule

    The format and substance of the final rule and the Interim Rule are
generally the same. The final rule reflects the

[[Page 47143]]

following significant modifications to the Interim Rule:
    1. The definition of exempt person has been clarified to make clear
that banks are eligible to be treated as exempt persons because they
are banks, and then only with respect to their domestic operations; a
bank that is, or is a subsidiary of, a listed company does not for that
reason obtain a second ground for exemption;
    2. The definition of exempt person has been amended to treat as a
"listed entity" and entity, rather than just a corporation, whose
common stock or analogous equity interests are listed on an applicable
stock exchange;
    3. The definition of exempt person has been amended to include any
subsidiary of a listed entity that is organized under the laws of the
United States or a state and at least 51 percent of whose common stock
is owned by the listed entity as shown in a reasonably authenticated
corporate officer's certificate, a reasonably authenticated photocopy
of Internal Revenue Service Form 851 (Affiliation Schedule), or in the
Annual Report or Form 10-K that is filed by the listed entity with the
Securities and Exchange Commission;
    4. The definition of exempt person has been amended to make clear
that an exempt person includes a financial institution, other than a
bank, that is a listed entity or a subsidiary of a listed entity, but
only to the extent of such entity's domestic operations;
    5. The time frame for designating a customer as an exempt person
has been clarified to provide that a designation may be made, for any
customer, by the close of the 30-day period beginning after the day of
the first reportable transaction in currency with that person that is
sought to be exempted from reporting under the terms of paragraph (h);
    6. Examples of entities exercising governmental authority have been
added to the Interim Rule; and
    7. A paragraph has been added to make clear that, absent knowledge
of a loss of an exempt person's status as such, a bank satisfies its
obligations under paragraph (h) by verifying the continued status of
exempt persons at least annually.
    The changes adopted in the final rule are intended to improve,
clarify, and refine the rule's provisions in light of the objectives
FinCEN outlined when the Interim Rule was published. Those objectives
are reducing the burden of currency transaction reporting, requiring
reporting only of information that is of value to law enforcement and
regulatory authorities, and, perhaps most importantly, creating an
exemption system that is cost-effective and that works. See 61 FR
18205.

IV. Specific Comments and Explanation of Revisions

    A discussion of the significant comments on the Interim Rule
appears below. As noted, many of the comments raised questions about
the interaction between the terms of paragraph (h) and various
operating requirements of the administrative exemption system.

A. 31 CFR 103.22(h)(1)--Transactions in Currency of Exempt Persons With
Banks

    Paragraph (h)(1) states that general rule that no report is
required under 31 CFR 103.22(a)(1) with respect to any transaction in
currency between an exempt person and a bank. The only changes made to
this paragraph are ministerial: the phrase "currency transactions" in
the title of paragraph (h)(1) has been revised to read "transactions
in currency," and the phrases "occurring after April 30, 1996," in
the title of paragraph (h) and in the title of paragraph (h)(1), and
"that is conducted after April 30, 1996," at the end of paragraph
(h)(1), have been deleted as unnecessary in a final rule.\7\ For
consistency, the phrase "occurring after April 30, 1996" has also
been deleted as unnecessary in paragraph (a)(1).
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    \7\ Deletion of the reference to a specific date is not intended
in any way to alter the effective date of this change in the Bank
Secrecy Act regulations.
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    It should be noted that the exemption language of the final rule is
fundamentally different from that of the administrative exemption
system. Sections 103.22(a)(1) and 103.22(h)(1) state affirmatively that
the reporting requirements of the section do not apply to the
transactions described in paragraph (h). In contrast, the
administrative exemption provision, 31 CFR 103.22(b)(2), simply states
that a bank "may exempt" transactions described in that paragraph
from reporting. Although, as noted in the preamble to the Interim Rule,
see 61 FR 18206, the provisions of paragraph (h)(1) do not
affirmatively prohibit banks from continuing to report routine currency
transactions with exempt persons (and the requirement that exempt
persons be designated as such provides banks with operational
discretion to determine whether or not to recognize the new
provisions), banks that continue to report such routing transactions
are supplying the government with information that is not required
under the Bank Secrecy Act regulations.
1. Use of Word "Bank" Rather Than "Depository Institution"
    FinCEN received no comment on its use of the term "bank" instead
of "depository institution" to define the class of financial
institutions, subject to the Bank Secrecy Act, that are exempted from
the requirement to report transactions in currency by paragraph (h)(1),
and the final rule continues to use the former term. Although 31 U.S.C.
5313(d) refers to mandatory exemptions for certain transactions in
currency with "depository institutions," the broad definition of bank
contained in 31 CFR 103.11(c) appears to include all categories of
institutions included in the statutory "depository institution"
definition, so that a change in terminology was neither necessary nor
advisable (in view of the Bank Secrecy Act regulations' general use of
the work "bank" for the classes of institutions involved).
2. Coverage of all "Transactions in Currency"
    At least one commenter asked whether paragraph (h), intended to
exempt from reporting all "transactions in currency" between exempt
persons and banks, despite the fact that the administrative exemption
system rules of 31 CFR 103.22(b)(2) (i)-(ii) permit banks to exempt
from currency transactions reporting only deposits and withdrawals, of
currency from existing and specified accounts.\8\ The use of the
broader term is intentional, as paragraph (h) seeks to eliminate all
transactions in currency between exempt persons and banks from the
reporting rules of section 103.22 (subject to the limitation on
exemption for transactions carried out by an exempt person as an agent
for another person, as set forth in paragraph (h)(5)). As noted in more
detail below, however, the changes made to section 103.22 have no
impact on the requirement to report suspicious transactions under 31
CFR 103.21, and the fact that an exempt person wishes to conduct a
transaction other than a deposit or withdrawal, or a transaction that
does not involve an existing account with the bank involved, may merit
further investigation, and perhaps reporting, under the rules of
section 103.21.
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    \8\ Banks are permitted by 31 CFR 103.22(b)(2)(iii) to grant a
broader exemption for transactions by government agencies.
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3. Transactions by Exempt Persons With Financial Institutions Other
Than Banks
    At least one commenter  sought to broaden the scope of subsection (h)
to include transactions between exempt

[[Page 47144]]

persons and financial instituons other than banks. No such change has
been made. Although, as noted below, banks are permitted, in a change
from prior practice, to recognize "listed" non-bank financial
institutions as exempt persons, a general grant of automatic exemption
for all transactions in currency in excess of $10,000 between exempt
persons, on the one hand, and, for example, brokers and dealers in
securities, money transmitters, or currency exchange houses, on the
other, is neither within the Money Laundering Suppression Act statutory
mandate nor justified by the realities of the operation of those
businesses.

B. 31 CFR 103.22(h)(2)--Definition of Exempt Person

    Paragraph (h)(2) continues to contain the definition of those
classes of "exempt persons" whose transactions in currency with banks
are exempt from reporting under the final rule.
1. Banks
    The Interim Rule defines an exempt person to include a bank, to the
extent of the bank's domestic operations. One commenter asserted that
the treatment of banks as exempt persons "to the extent of their
domestic operations" is less broad than the present exemption provided
for banks by section 103.22(b)(1)(ii). However the language of
paragraph (h)(2)(i) is simply a restatement of the language of section
103.22(b)(1)(ii), when the latter definition is read together with the
definition of "domestic" in section 103.11(k).
    The final rule revises paragraphs (h)(2)(iv) and (h)(2)(v) to make
clear that a bank is eligible to be treated as an exempt person only
with respect to its domestic operations; a bank that is a listed entity
or a subsidiary of a listed entity does not for that reason obtain a
second ground for exemption.
2. Subsidiaries or Affiliates of Banks
    At least one commenter asked whether the exempt person definition
included subsidiaries or affiliates of banks (so that a transaction in
currency between a bank subsidiary and a second bank would be exempt
from reporting in the same manner as a transaction between the
subsidiary's bank parent and the second bank.) The bank Secrecy Act
regulations do not generally treat bank subsidiaries as falling within
the definition of bank for purposes of the regulations, and until that
basic concept is re-evaluated, it is premature to extend automatic
relief for currency transaction reporting purposes to non-bank
subsidiaries and affiliates of banks.
3. Government Entities
    Paragraph (h)(2)(ii), which treats various federal, state, and
local government departments and agencies as exempt persons, is
unchanged.
    Several commenters asked about the status of tribal governments and
tribal enterprises under paragraph (h). The definition of "United
States" in section 103.11(nn) includes "the Indian lands (as that
term is defined in the Indian Gaming Regulatory Act)," \9\ so that
tribal governments are eligible to be exempt persons under paragraph
(h); whether particular enterprises conducted on tribal lands, for
example tribal casinos, are themselves exempt depends upon the manner
in which they are organized and operated. Thus, a tribal casino that is
operated as a department of a tribal government would generally qualify
as an exempt person, but an independently operated management company
for such a casino, or a corporation of which the tribe was a
shareholder, would likely not so qualify. While FinCEN would be pleased
to provide further guidance on that question on the basis of the facts
of a particular situation, it is not feasible on the current state of
the record do so in the Bank Secrecy Act regulations themselves.
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    \9\ The term Indian Gaming Regulatory Act is itself defined in
Sec. 103.11(rr).
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    One commenter argued that the definition of government agency in
paragraph (h)(2)(ii) would exclude exemption for agencies of the
District of Columbia. That is not the result of the definition, since
the definition of "United States" in section 103.11(nn) includes the
District of Columbia.
4. Entities That Exercise Governmental Authority
    Paragraph (h)(2)(iii), which treats as exempt persons entities
established by federal, state, or local governments, or by interstate
compact, that exercise governmental authority, also is unchanged.
5. Listed Entities
    The Interim Rule defines an exempt person to include corporations
listed on national securities exchanges. Several commenters suggested
that the definition of exempt person be broadened to include
partnerships and other non-corporations listed on those exchanges. One
commenter pointed out that the rationale FinCEN gave for exempting
listed corporations--i.e., 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, make their use for money
laundering sufficiently unlikely to permit relaxation of the current
transaction reporting rules--applies to any listed entity regardless of
its form. After consideration of such comments, Treasury has amended
the Interim Rule to expand the definition of an exempt person in
paragraph (h)(2)(iv) to include any entity listed on an applicable
national securities exchange.
    A number of commenters cited the difficulty of determining whether
a customer was listed on one of the three cited stock exchanges or was
a subsidiary of a company so listed. As noted in the preamble to the
Interim Rule, it is impossible to reduce the volume of currency
transaction reports to the extent that the Interim Rule tries to do
without creating some temporary inconvenience as the terms of the
system change. The determinations required are straightforward and are
to be based on easily available information, especially for financial
professionals. FinCEN continues to believe that the degree of effort
involved in researching whether a company's stock is listed as a
national stock exchange, or whether a corporation is a subsidiary of a
public company, is well within the scope of what a prudent bank should
know about its customers and their activities.
    There is no limit on the "listed entity" definition based on the
nature of a particular company's business. Thus, for example, a listed
company that is a gaming enterprise or that issues traveler's checks or
money orders or engages in a money remittance business as a principal
is not for that reason denied exempt status. See, however, the
limitation on exemption for transactions carried out by an exempt
person as an agent for another person, as set forth in paragraph
(h)(5).
6. Subsidiaries of Listed Entities
    The Interim Rule treats as an "exempt" subsidiary any subsidiary
that is included in the consolidated federal income tax return of a
listed corporation. FinCEN sought alternative formulations that bank
employees would find easy to apply and that would accomplish the goals
of the Interim Rule more effectively than the consolidated return
formulation. At least one commenter stated that an entity that is
listed as a subsidiary on a listed entity's SEC report 10K or an annual
report should be considered an exempt person. After consideration of
these comments, FinCEN has amended the definition of an exempt
subsidiary to include any subsidiary that is organized under the laws
of the United States or of any state and at least 51 per

[[Page 47145]]

cent of whose common stock is owned by the listed entity. Evidence of
such ownership may be shown by any of the ways listed in paragraph
(h)(4)(iv), including reliance upon a listed entity's Annual Report or
Form 10-K, filed in each case by the listed entity with the Securities
and Exchange Commission.\10\
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    \10\ Several commenters suggested that non-profit corporations
generally be added to the list of exempt persons. FinCEN does not
believe that a blanket provision of this sort would be workable or
in keeping with the balance of objectives outlined in 31 U.S.C. 5313
(d)-(g), given the variety of organizations that can claim non-
profit status.
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7. Financial Institutions Other Than Banks
    New paragraph (h)(2)(vi), which relates to financial institutions
other than banks, has been added to the Interim Rule. This new
paragraph clarifies that non-bank financial institutions that are, or
are subsidiaries of, listed entities, are exempt persons only to the
extent of their domestic operations.

C. 31 CFR 103.22(h)(3)--Designation of Exempt Person

    Paragraph (h)(3) sets forth the procedures for designating an
exempt person. A few commenters sought clarification of the time frame
in which a bank could designate an exempt person. At least one
commenter stated that the Interim Rule could be interpreted as
precluding a bank from designating an existing customer as an exempt
person after August 15, 1996. After consideration of such comments,
FinCEN has amended the Interim Rule, in accord with FinCEN Notice 97-1,
to make clear that a bank can designate any customer as an exempt
person by the close of the 30-day period beginning after the day of the
first reportable transaction in currency with that person that is
sought to be exempted from reporting under the terms of paragraph (h).
    At least one commenter also requested that FinCEN amend the Interim
Rule to allow banks, when designating exempt persons, to file a list of
its domestic bank customers instead of filing a form that identifies
such a customer as an exempt person. As set forth in new paragraph
(h)(3)(iii), a bank, when designating an exempt person, may either file
an Internal Revenue Form 4789 in which line 36 is marked appropriately
or filed, in such a format and manner as FinCEN may specify, a current
list of its domestic bank customers.
    At least one commenter further suggested that it would be efficient
for banks simply to file designations for all their government
customers (as well as their bank customers), regardless of whether
those customers engage in transactions in excess of $10,000. FinCEN
will consider making such a change to paragraph (h) for government
entities at an appropriate time in the future.

D. 31 CFR 103.22(h)(4)--Operating Rules for Designating Exempt Persons

    Paragraph (h)(4) continues to state general operating rules for
designating exempt persons. Changes to the details of the operating
rules are outlined below.
1. General Standard
    A number of commenters asked for greater specificity about the
manner in which the determination that a customer is an exempt person
should be made and documented. Specific questions included, for
example, whether a bank was required to keep an "exemption list" of
exempt persons, whether a signed customer statement was required for
each exempt person, whether paper copies of filings designating exempt
persons should be maintained by a bank, and how long records relevant
to the exemption determination must be retained.
    The language of paragraph (h)(4)(i) has been revised to make
explicit the general requirement, implicit in the original language,
that a bank must document, in the manner that a reasonable and prudent
bank would do, its determination that a customer is eligible to be
treated as an exempt person, in compliance with the terms of paragraph
(h). A new paragraph (h)(4)(v), discussed below, has been added to deal
specifically with record retention.
    FinCEN believes that specific additional language is unnecessary
and would be contrary to the spirit of the changes in the currency
transaction filing rules that FinCEN is working with the banking
industry to make. Because the situation of each bank is different, any
uniform set of rules can only stifle creativity and efficiency in
building whatever record an individual bank's situation and
determinations warrant. Thus, for example, it would certainly be
prudent for a bank to maintain, or to be able to retrieve, in a central
location a list of the customers that it treats as exempt persons; but
whether the list is separately maintained, or simply retrievable from
general records upon need, is a matter for each bank to determine.
Similarly many institutions, as a general rule, retain copies of
documents filed with the Treasury Department; however, whether forms
filed magnetically must be converted into paper copies for examination
purposes is a matter that should be decided in accordance with general
bank policies, rather than in a universal regulatory document.
    As in other situations, FinCEN believes that too much attention has
in the past been paid to mechanical compliance with particular "check
list" requirements, rather than to the spirit of compliance and the
monitoring necessary effectively to deter or detect money laundering at
the nation's financial institutions. Thus, it hesitates, in attempting
to re-engineer the currency transaction reporting system, to recreate
the defects of the system being replaced. FinCEN intends to communicate
the policy determinations behind the changes in the rules to the
federal financial institution supervisory agencies, whose authority
includes the authority to examine for compliance with Bank Secrecy Act
requirements, to assure, insofar as possible, that the expectations of
compliance examiners are in accord with the terms and spirit of the new
rules.
    At least one commenter suggested that FinCEN should bear the burden
of listing all the entities falling within the classes of exempt
persons set forth in paragraph (h)(2). This suggestion has not been
adopted in the final rule. The list requirement is a flexible one and
is amply met by reliance on publicly-available sources. For FinCEN to
publish a list of particular exempt customer ab initio would amount to
a licensing requirement that would neither be efficient nor feasible.
    At the same time, as indicated in the preamble to the Interim Rule,
see 61 FR 18208, FinCEN is exploring the possibility of producing a
nationwide list of exempt persons from filed designations. FinCEN also
is exploring the possibility of linking its own Web Site to those of
the national securities exchanges.
2. Governmental Entities
    A few commenters requested that FinCEN provide examples of those
entities established under U.S., state, or local law, under an
interstate compact, that exercise governmental authority. A sentence
has been added to paragraph (h)(4)(ii) to cite the New Jersey Turnpike
Authority and the Port Authority of New York and New Jersey as examples
of entities that exercise governmental authority.
3. Listing Information
    Language has been added to paragraph (h)(4)(iii) to make it clear
that a bank may rely, in determining whether a company is a listed
company,

[[Page 47146]]

on information available from the "Edgar" electronic information
system maintained by the Securities and Exchange Commission (http://
www.sec.gov/edgarhp.htm), and on information contained in the Web Sites
maintained by the New York Stock Exchange ((http://www.nyse.com), the
American Stock Exchange (http://www.amex.com), and the National
Association of Securities Dealers (http://www.nasdaq.com).
4. Subsidiary Status
    Paragraph (h)(4)(iv) has been amended to provide banks with the
additional options, when determining whether a person is exempt as a
subsidiary of a listed entity, of relying upon the listed entity's
Annual Report or Form 10-K (filed with the Securities and Exchange
Commission) for designation of the listed entity's subsidiaries.
5. Records Maintenance
    New paragraph (h)(4)(v) has been added to the Interim Rule to make
clear that records maintained by a bank to document its administration
of the rules of this paragraph (h) must be maintained in accordance
with the terms of 31 CFR 103.38, which, inter alia, requires that
records be maintained for a period of five years.

E. 31 CFR 103.22(h)(5)--Limitation on Exemption

    Paragraph (h)(5) states that the exemption from reporting contained
in paragraph (h)(1) does not apply to a transaction carried out by an
exempt person as an agent of another person who is the beneficial owner
of the funds that are the subject of a transaction in currency. At
least one commenter requested that FinCEN eliminate this limitation.
This requested change has not been adopted in the final rule. Such a
change would allow an exempt person to lend its status to any person's
transactions, thereby circumventing the purposes of carefully defining
the classes of exempt persons.
    At least one commenter noted a difficulty involved in tracking
deposits from large grocery stores, because some of the deposits
involved may be monies sent to holding accounts for money order or
traveler's check companies for which the grocery stores act as agent.
Although FinCEN recognizes that distinguishing between the two (or
more) sources of deposits represents an additional effort, it believes
that the holding accounts are ultimately relatively easy to distinguish
from the store's own operating accounts and do not commingle operating
funds and funds used to pay for money service products sold by grocery
stores as agents for other concerns. To the extent that the industry
still finds that the limitation set forth in paragraph (h)(5) will
result in unnecessary inconvenience, FinCEN will consider additional
comments on this subject when it considers comments to the notice of
proposed rulemaking on exemptions that appears elsewhere in today's
edition of the Federal Register.

F. 31 CFR 103.22(h)(6)--Effect of Exemption: Limitation on Liability

    Paragraph (h)(6) continues to state the general rule that once a
bank has complied with the terms of paragraph (h), it is protected from
any penalty for failure to file a currency transaction report
concerning a transaction in currency by an exempt person. The language
set forth in paragraph (h)(6)(i) of the Interim Rule has been deleted
in the final rule; the issue of when a bank must designate customers it
has previously treated as exempt, is addressed in the notice of
proposed rulemaking regarding exemptions.
    At least one commenter expressed the concern that the "automatic
revocation" provisions of paragraph (h)(8), in effect, force banks to
maintain a constant vigil of the status of entities they have
designated as exempt persons. New paragraph (h)(6)(ii) has been added
to clarify that, absent specific knowledge of any information that
would be grounds for revocation, a bank is required to verify the
status of those entities it has designated as exempt persons only once
each year.
    A bank may, at present, elect to treat a person as exempt under
either the administrative exemption system rules of sections 103.22(b)-
(g) or the rules of section 103.22(h). As outlined in the Interim Rule,
and as confirmed above, the exemption procedures for each system are
independent of the other. Thus, if a bank treats a person as exempt
under the new exemption procedures set forth in paragraph (h), it need
not place that person on its exempt list under the administrative
exemption system rules, see sections 103.22(b)-(g), but, conversely,
the fact that a person is on an exemption list (whether it is a bank, a
government entity, or a listed company), does not eliminate the
obligation of a bank that wants to adopt the new system from filing the
single form designating the customer as an exempt person.
    The limitation on liability set forth in paragraph (h)(6) does not
apply if a bank chooses to exempt a person on a basis as provided by
the administrative exemption system. One comment found this result
slightly puzzling, since the Interim Rule is clearly designed to
designate those entities whose routine transactions is currency with
banks are of little or no law enforcement value. However, even the
Interim Rule involves some trade-off in policy outcomes, and the proper
designation of exempt persons, to provide the Department of the
Treasury with a list of exempt entities, is an important part of the
overall system of which the Interim Rule is a component. The statutory
liability limitation of 31 U.S.C. 5313(f) does not extend to banks that
continue to use the administrative exemption system during the pendency
of the rulemaking that would reform that system.
    One commenter on the Interim Rule argued that "the process of
exempting a business and the liability for same should be primarily
borne by the customer and FinCEN." That is neither the scheme of the
Bank Secrecy Act nor of this rule, and such an approach would place the
Treasury Department, in effect, directly on the banking floor in
dealing with a bank's customers. The final rule, like the notice of
proposed rulemaking also issued today, is an effort to work with the
banking industry to fashion an effective and workable exemption system.

G. 31 CFR 103.22(h)(7)--Obligation to File Suspicious Activity Reports,
Etc

    No changes were made to this paragraph. Paragraph (h)(7) continues
to state that the new exemption procedures set forth in paragraph (h)
do not create any exemption, or have any effect at all, on the
requirement that banks file suspicious activity reports with respect to
transactions that satisfy the requirements of the rules of FinCEN, 31
CFR 103.21, and the federal bank supervisory agencies relating to
suspicious activity reporting. Similarly, a customer's status under
paragraph (h) has no impact on other Bank Secrecy Act requirements
relating to record retention or reporting. Thus, for example, the fact
that a customer is an exempt person for purposes of the currency
transaction reporting rules has no effect on the obligation of a bank
to retain records of funds transfers by such person, to the extent
required by 31 CFR 103.33(e), or to retain records in connection with
an issuance or sale of bank or cashier's checks, money orders or
traveler's checks to such person, as required by 31 CFR 103.29.

H. 31 CFR 103.22(h)(8)--Revocation

    Paragraph (h)(8) continues to provide that the status of an exempt
person automatically ceases, without any action

[[Page 47147]]

or notice by the Department of the Treasury, when an entity ceases to
be listed on the applicable stock exchange or a subsidiary of a listed
entity ceases to have at least 51 per cent of its common stock owned by
a listed entity. Paragraph (h)(8) explicitly refers back to the
limitation on liability set forth in paragraph (h)(6)(ii), to make
clear that absent specific knowledge that would be grounds for
revocation, a bank is required to verify the status of those entities
it has designated as exempt persons only once each year.

I. 31 CFR 103.22(h)(9)--Transitional Rule

    New paragraph (h)(9) states the transitional rule for applying new
paragraph (h)(2)(vi). The rule provides that during the period ending
May 1, 1998, no penalty will be imposed on a bank that treats as an
exempt person a non-bank financial institution, to an extent beyond
that institution's domestic operations, that is a listed entity or a
subsidiary of a listed entity.

V. Regulatory Matters

A. Executive Order 12866

    The Department of the Treasury has determined that this final 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 designate 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 final rule provides
the most cost-effective and least burdensome alternative to achieve the
objectives of the rule.

C. 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 final rule because the agency was not required
to publish a notice of proposed rulemaking under 5 U.S.C. 553 or any
other law.

D. Paperwork Reduction Act

    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 final
rule significantly reduces the existing burden of information
collection under 31 CFR 103.22. Thus, although the final 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 final rule.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations
(Government agencies), Banks and 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, the interim rule
amending 31 CFR Part 103, which was published at 61 FR 18204 on April
24, 1996, is adopted as a final rule with the following changes:

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 revising the second sentence in
paragraph (a)(1) and by revising paragraph (h) to read as follows:

Sec. 103.22   Reports of currency transactions.

    (a)(1) * * * Transactions in currency by exempt persons with banks
are not subject to this requirement to the extent provided in paragraph
(h) of this section. * * *
* * * * *
    (h) No filing required by banks for transactions by exempt persons.
    (1) Transactions in currency of exempt person with banks.
Notwithstanding the provisions of paragraph (a)(1) of the section, no
bank is required to file a report otherwise required by that section,
with respect to any transaction in currency between an exempt person
and a bank.
    (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 entity, other than a bank, whose common stock or analogous
equity interests are listed on the New York Stock Exchange or the
American Stock Exchange or whose common stock or analogous equity
interests have been designated as a Nasdaq National Market Security
listed on the Nasdaq Stock Market (except stock or interests listed
under the separate "Nasdaq Small-Cap Issues" heading);
    (v) Any subsidiary, other than a bank, of any entity described in
paragraph (h)(2)(iv) of this section (a "listed entity") that is
organized under the laws of the United States or of any state and at
least 51 per cent of whose common stock is owned by the listed entity;
and
    (vi) Notwithstanding paragraphs (h)(2)(iv) and (h)(2)(v) of this
section, any financial institution other than a bank, that is an entity
described in paragraph (h)(2)(iv) or (h)(2)(v) of this section, to the
extent to such financial institution's domestic operations.
    (3) Designation of exempt persons. (i) A bank must designate each
exempt person with whom it engages in transactions in currency by the
close of the 30-day period beginning after the day of the first
reportable transaction in currency with that person that is sought to
be exempted from reporting under the terms of paragraph (h) of this
section.
    (ii) Except where the person sought to be exempted is another bank
as described in paragraph (h)(2)(i) of this section, 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, or by filing any form specifically designated by FinCEN
for this purpose. The designation must be made separately by each bank
that treats the person in question as an exempt person.
    (iii) When designating another bank as an exempt person, a bank
must make either the filing as described in

[[Page 47148]]

paragraph (h)(3)(ii) of this section or file, in such a format and
manner as FinCEN may specify, a current list of its domestic bank
customers. In the event that a bank files its current list of domestic
bank customers, the bank must make the filing as described in paragraph
(h)(3)(ii) of this section for each bank that is a new customer and for
which an exemption is sought under this paragraph (h).
    (iv) The designation requirements set forth in this paragraph
(h)(3) apply whether or not the particular exempt person to be
designated has previously been treated as exempt from the reporting
requirements of section 103.22(a) 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), and to
document the basis for its conclusions and its compliance with the
terms of this paragraph (h), that a reasonable and prudent bank would
take and document 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. Examples of entities that exercise governmental authority
include, but are not limited to, the New Jersey Turnpike Authority and
the Port Authority of New York and New Jersey.
    (iii) In determining whether a person is described in paragraph
(h)(2)(iv) of this section, a bank may rely on any New York, American
or Nasdaq Stock Market listing published in a newspaper of general
circulation, or any commonly accepted or published stock symbol guide,
on any information contained on the Securities and Exchange Commission
"Edgar" System, or on any information contained in an Internet World-
Wide Web site or sites maintained by the New York Stock Exchange, the
American Stock Exchange, or the National Association of Securities
Dealers.
    (iv) In determining whether a person is described in paragraph
(h)(2)(v) of this section, a bank may rely upon:
    (A) Any reasonably authenticated corporate officer's certificate;
    (B) Any reasonably authenticated photocopy of Internal Revenue
Service Form 851 (Affiliation Schedule) or the equivalent thereof for
the appropriate tax year; or
    (C) A person's Annual Report or Form 10-K, as filed in each case
with the Securities and Exchange Commission.
    (v) The records maintained by a bank to document its compliance
with and administration of the rules of this paragraph (h) shall be
kept in accordance with the provisions of section 103.38.
    (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) No bank shall
be subject to penalty under this part for failure to file a report
required by section 103.22(a) with respect to a transaction in currency
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 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.
    (ii) Absent specific knowledge of any information that would be
grounds for revocation as provided in paragraph (h)(8) of this section,
a bank is required to verify the status of those entities it has
designated as exempt persons only once each year.
    (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 to
treat a person described in paragraph (h)(2) as exempt from the
reporting requirements of section 103.22(a) on a basis other than as
provided in this paragraph (h) shall remain subject 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 section 103.21
with respect to any transaction, including any transaction in currency,
or relieves a bank of any reporting or recordkeeping obligation imposed
by this Part (except the obligation to report transactions in currency
pursuant to 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 FinCEN by written notice, which
may be provided by publication in the Federal Register in appropriate
situation, on such terms as are specified in such notice. Without any
action on the part of the Treasury Department and subject to the
limitation on liability set forth in paragraph (h)(6)(ii) of this
section:
    (i) The status of an entity as an exempt person under paragraph
(h)(2)(iv) of this section ceases once such entity 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 have at
least 51 per cent of its common stock owned by a listed entity.
    (9) Transitional rule. No penalty will be imposed for the failure
to apply paragraph (h)(2)(vi) of this section, if a bank treats a
person described in paragraph (h)(2)(iv) or (h)(2)(v) of this section
as an exempt person during the period ending May 1, 1998.

    Dated: August 27, 1997.
Stanley E. Morris,
Director, Financial Crimes Enforcement Network.
[FR Doc. 97-23643 Filed 9-5-97; 8:45 am]
BILLING CODE 4820-03-M
Last Updated 11/10/2011 communications@fdic.gov