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[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.

---------------------------------------------------------------------------


 

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).

---------------------------------------------------------------------------


 

\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).

---------------------------------------------------------------------------


 

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.

---------------------------------------------------------------------------


 

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.

---------------------------------------------------------------------------


 

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