Amendment to the Bank Secrecy Act Regulations; Requirement To Report Suspicious Transactions

SUMMARY: This document contains a final rule requiring banks and other

depository institutions to report to the Department of the Treasury

under the Bank Secrecy Act any suspicious transactions relevant to

possible violations of federal law or regulation. The rule is adopted

by the Financial Crimes Enforcement Network (``FinCEN'') to implement

the authority granted to the Secretary of the Treasury by the Bank

Secrecy Act. The rule is a key to the creation of a new method for the

reporting by depository institutions, on a uniform ``Suspicious

Activity Report,'' of suspicious transactions and known or suspected

criminal violations; related rules have been or will be adopted by the

five federal financial supervisory agencies that examine and regulate

the safety and soundness of depository institutions.

EFFECTIVE DATE: April 1, 1996.

FOR FURTHER INFORMATION CONTACT: Pamela Johnson, Assistant Director,

Office of Financial Institutions Policy, FinCEN (703) 905-3920; Charles

Klingman, Office of Financial Institutions Policy, FinCEN (703) 905-

3920; Stephen R. Kroll, Legal Counsel, FinCEN (703) 905-3590; or Joseph

M. Myers, Attorney-Advisor, Office of Legal Counsel, FinCEN, at (703)

905-3590.

SUPPLEMENTARY INFORMATION:

I. Statutory Provisions

The Bank Secrecy Act, 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 the Bank

Secrecy Act has been delegated to the Director of FinCEN.

The provisions of 31 U.S.C. 5318(g) deal with the reporting of

suspicious transactions by financial institutions subject to the Bank

Secrecy Act and the protection from liability to customers of persons

who make such reports.\1\ Subsection (g)(1) states generally:

\1\ The authority to require reporting of suspicious

transactions was added to the Bank Secrecy Act by section 1517 of

the Annunzio-Wylie Anti-Money Laundering Act (``Annunzio-Wylie''),

Title XV of the Housing and Community Development Act of 1992, Pub.

L. 102-550; it was expanded by section 403 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, to require designation of

a single government recipient for reports of suspicious

transactions.

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The Secretary may require any financial institution, and any

director, officer, employee, or agent of any financial institution,

to report any suspicious transaction relevant to a possible

violation of law or regulation.

Subsection (g)(2) provides further:

A financial institution, and a director, officer, employee, or

agent of any financial institution, who voluntarily reports a

suspicious transaction, or that reports a suspicious transaction

pursuant to this section or any other authority, may not notify any

person involved in the transaction that the transaction has been

reported.

Subsection (g)(3) provides that neither a financial institution,

nor any director, officer, employee, or agent

that makes a disclosure of any possible violation of law or

regulation or a disclosure pursuant to this subsection or any other

authority . . . shall . . . be liable to any person under any law or

regulation of the United States or any constitution, law, or

regulation of any State or political subdivision thereof, for such

disclosure or for any failure to notify the person involved in the

transaction or any other person of such disclosure.

Finally, subsection (g)(4) requires the Secretary of the Treasury,

``to the extent practicable and appropriate,'' to designate ``a single

officer or agency of the United States to whom such reports shall be

made.'' This designation is not to preclude the authority of

supervisory agencies to require financial institutions to submit other

reports to the same agency ``under any other applicable provision of

law.'' 31 U.S.C. 5318(g)(4)(C). The designated agency is in turn

responsible for referring any report of a suspicious transaction to

``any appropriate law enforcement or supervisory agency.'' Id., at

subsection (g)(4)(B).

II. Notice of Proposed Rulemaking

On September 7, 1995, a notice of proposed rulemaking (the

``Notice''), under the authority contained in 31 U.S.C. 5318(g),

relating to the reporting of suspicious transactions by banks and other

depository institutions,\2\ was published in the Federal Register (60

FR 46,556). Like this final rule, the Notice was published in

coordination with the Board of Governors of the Federal Reserve System,

the Office of the Comptroller of the Currency, the Federal Deposit

Insurance Corporation, the Office of Thrift Supervision, and the

National Credit Union Administration (collectively, the ``Supervisory

Agencies''). An announcement that the time to comment on the Notice had

been extended until November 13, 1995, was published in the Federal

Register on October 13, 1995, 60 FR 53,316.

\2\ References to ``bank'' include not only commercial banks,

but also thrift institutions, credit unions, other types of

depository institutions, and certain other institutions. See 31 CFR

103.11(c) (defining ``bank'' for purposes of 31 CFR Part 103).

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The final rule is a key to the creation of a single reporting form,

filing point, and data base for all reports of suspicious activity made

by depository institutions. (The background of the new system is

explained in greater detail in the Notice, see 60 FR at 46557-46558

(September 7, 1995).) The sifiling point not only eliminates the need

for multiple copies but also permits magnetic filing of reports by most

institutions capable of and accustomed to making such filings with the

Internal Revenue Service. Finally, the single data base will permit

rapid dissemination of reports to appropriate law enforcement agencies,

more thorough analysis and tracking of those reports, and, in time, the

provision to the financial community of information about trends and

patterns gleaned from the information reported.

Each Supervisory Agency involved has issued or shortly will issue a

final rule requiring reporting under its respective authority. The

final rules have been conformed to one another, so that a bank will

file a suspicious activity report in satisfaction of both the rules of

FinCEN and the rules of the applicable Supervisory Agency or Agencies.

A significant group of activities are required to be reported both

under the authority of 31 U.S.C. 5318(g) and under the Supervisory

Agencies' own administrative requirements, but a single filing will

suffice to comply with all requirements.

As indicated above, this final rule becomes effective on April 1,

1996, as do the final rules issued by the Supervisory Agencies.

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III. Explanation of Revisions and Summary of Comments

A. Comments on the Notice--Overview

FinCEN received 30 written comments on the Notice. Of these, 14

comments were submitted by banks or bank holding companies, seven by

banking trade associations, one by a credit union, three by credit

union trade associations, three by non-bank financial institutions, one

by an ad hoc association of non-bank financial institutions, and one by

a practicing attorney on his own behalf.

The commenters generally applauded the decision to reduce reporting

burdens on banks and eliminate the confusion caused by duplicate filing

requirements. They also supported efforts to enhance the use of the

information submitted by banks about suspicious transactions and noted

favorably Treasury's general efforts to work with the financial sector

to fashion reasonable and cost-effective rules to prevent money

laundering.

Commenters expressed a variety of concerns relating to five

subjects. Four of the subjects--the definition of ``transaction''

(especially the treatment of safe deposit box use), the time for filing

of suspicious activity reports, the nature of the records required to

be retained by institutions in connection with particular suspicious

activity reports and the manner and time period for their retention,

and the confidentiality rules for such reports--concerned the

operational details of the rule outlined in the Notice. The specifics

of the comments are outlined below; suggestions made in the comments on

those subjects have been adopted in large part.

The fifth subject addressed in the comments was the appropriateness

of the proposed definition of suspicious transaction itself, especially

the provisions of proposed 31 CFR 103.21(a)(2)(iii), which would

require reporting generally of transactions that appear to have no

business purpose and for which the reporting institution knew of no

reasonable explanation. This provision has been retained, with

revision, in the final rule. Specific comments on the provision are

also discussed below.

After consideration of all the comments, 31 CFR 103.21, proposed in

the Notice, is adopted as revised herein.

B. The Final Rule

While the final rule reflects numerous modifications in response to

the comments received on the Notice, the format and substance of the

final rule are generally consistent with the rule proposed in the

Notice. The changes adopted are intended to improve, clarify, and

refine the provisions of the proposed rule that required such

modifications, without fundamentally altering the basic policies

described in the Notice and reflected in the proposed rule.

The Notice outlined the importance of the reporting of suspicious

transactions to Treasury's anti-money laundering and anti-financial

crime programs. See 60 FR at 46,558-59 (September 7, 1995). Treasury is

reconfirming, in issuing the final rule, 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. The same

judgment underlies Treasury's initiatives to sharply reduce the extent

to which ordinary currency transactions are required to be reported

with respect to ongoing businesses with a significant business history.

Reporting of suspicious transactions is also required by the emerging

international consensus defining the most effective methods for

fighting international organized crime.

IV. Section-by-Section Analysis

A. 31 CFR 103.11--Definitions

1. 31 CFR 103.11 (qq)--FinCEN. The definition of FinCEN is adopted

without change.

2. 31 CFR 103.11(ii)--Transaction. The Notice proposed to replace

the definition of ``transaction in currency'' in the Bank Secrecy Act

regulations with a definition of ``transaction'' that reflected the

definition of transaction in 18 U.S.C. 1956 (laundering of monetary

instruments). The Notice specifically requested comments on the

treatment of the use of safe deposit boxes that would result from the

proposed change and noted that the proposal was not intended to vary

the substance of the requirement to report currency transactions under

31 CFR 103.22, other than in the case of deposits of cash in safe

deposit boxes.

a. Appropriateness of New Definition Generally. One group of

commenters questioned the appropriateness generally of the adoption for

this rule of a definition of transaction based on the definition in the

money laundering statute. Those commenters noted that ``Congress

drafted this statutory definition broadly in order to criminalize every

conceivable type of criminally-derived property [sic] but not with the

expectation that it would be used as the basis for imposing a positive

reporting obligation on financial institutions.'' They asserted that

``[s]uch a definition simply would not be workable for financial

institutions that must comply with regulatory requirements.''

Treasury believes there is a necessary relationship between the

anti-money laundering statute and the Bank Secrecy Act. The extent to

which banks should be required to track or monitor certain sorts of

transactions will also be addressed in the know-your-customer rules

expected to be proposed later this year. Moreover, the ``transaction''

definition in the federal money laundering statute is already

necessarily embraced in the existing criminal referral rules.

b. Treatment of Safe Deposit Boxes. The Notice had specifically

requested comment on the decision to include use of a safe deposit box

in the definition of transaction. The Notice explained that the

definition was included to reflect the fact that in appropriate cases

use of a safe deposit box may constitute a transaction under 18 U.S.C.

1956, following that statute's amendment to reverse the decision in

United States v. Bell, 936 F.2d 337 (7th Cir. 1991).

Commenters strongly felt that a blanket inclusion of safe deposit

box transactions within the ambit of the rule was inadvisable,

potentially contrary to state law, and in any event contrary to a long

established banking practice that a customer's use of a safe deposit

box was a private transaction in which bank employees studiously sought

not to interfere. After consideration of the comments, FinCEN has

excluded use of a safe deposit box from the transaction definition.

Based on present experience, the risk of the use of a safe deposit box

by itself as part of a money laundering or similar offense is

sufficiently rare that a rule mandating blanket changes in long-

established banking practices is uncalled for. At the same time, a

transaction that involved both the use of a safe deposit box and a use

of other banking facilities would be included in the transaction

definition to the extent it involved such other facilities. (Of course,

use of a safe deposit box by a customer that came to a bank's

attention, for example, when a box was entered by a bank pursuant to

accepted procedures, would be a candidate for the voluntary reporting

contemplated by the second sentence of section 103.21(a).)

c. Definition of Transaction in Currency. Several commenters

requested that the definition of ``transaction in currency'' be

retained in 31 CFR 103.11, in order to avoid confusion in the

administration of the currency transaction reporting requirement. That

definition has been

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retained, solely for purposes of the reporting rule in 31 CFR 103.22.

d. Investment Securities. One commenter pointed out that the

proposed definition failed to take account of the fact that the Bank

Secrecy Act definition of monetary instrument, unlike the 18 U.S.C.

1956 definition, includes only bearer instruments. The final rule adds

the term ``investment security'' to the definition of transaction, as a

cross reference to the definition of investment security in 31 CFR

103.11(t).

B. 31 CFR 103.21--Reports of Suspicious Transactions

1. 31 CFR 103.21(a). Subsection (a) contains the general statement

of the obligation to file a suspicious activity report, and a general

definition of the term ``suspicious transaction.'' The obligation

extends only to transactions conducted or attempted by, at, or through

a bank; transactions are reportable under this rule and 31 U.S.C.

5318(g) whether or not they involve currency.

Paragraph (a)(1) states, in its first sentence, that section 103.21

implements the regulatory authority granted to the Secretary of the

Treasury by 31 U.S.C. 5318(g). Language has been added to the sentence

to make it clear that the reporting of transactions ``relevant to a

possible violation of law or regulation'' is required only to the

extent specified in the rule. A second sentence has been added to

encourage the reporting of transactions as so relevant, even in cases

in which the rule does not explicitly so require, for example in the

case of use of a safe deposit box or with respect to a transaction

below the $5,000 threshold added to the rule, as discussed below. As

also discussed below, such a voluntary report (that is, the report of a

suspicious transaction relevant to a possible violation of law or

regulation, in circumstances not required by the rule) is fully covered

by the rules relating to non-disclosure and protection against

liability specified in 31 U.S.C. 5318 (g)(2) and (g)(3) and in 31 CFR

103.21(e) (added by the final rule).

The proposed rule designated three classes of transactions as

requiring reporting. The first class, described in subparagraph

(a)(2)(i), includes transactions either involving funds derived from

illegal activity or intended or conducted in order to hide or disguise

funds or assets derived from illegal activity. The second class,

described in subparagraph (a)(2)(ii), involves transactions designed to

evade the requirements of the Bank Secrecy Act. The third class,

described in subparagraph (a)(2)(iii), involves transactions that

appear to have no business purpose or that vary so substantially from

normal commercial activities or activities appropriate for the

particular customer or class of customer as to have no reasonable

explanation.

Commenters raised a number of questions about the terms of the

proposed definition in paragraph (a)(2). First, they sought to limit

the terms in which knowledge would be ascribed to a bank by questioning

a standard that called for reporting when a bank ``knows, suspects, or

has reason to suspect'' that a transaction requires reporting. The use

of the term is intended to introduce a concept of due diligence into

the reporting procedures. As part of the general conforming of the

rules of FinCEN and the Supervisory Agencies, the same standards have

been adopted by each agency.

Second, the Notice asked for the industry's position as to whether

monetary thresholds should be created for reporting Bank Secrecy Act

and money laundering violations. Many commenters sought the addition of

a threshold for reporting transactions, while several other commenters

argued against thresholds. FinCEN has determined to add a $5,000

threshold to the reporting rule, so that reports are now required only

for a transaction (or, as explained below, a series of transactions)

that involve at least that amount in funds or assets and that otherwise

satisfy the terms of the rule. Adoption of this threshold is intended

to reduce the burden of reporting and to conform the treatment of money

laundering and related transactions to that of other situations in

which reporting is required by the Supervisory Agencies. As a

concomitant to the creation of a threshold, language has been added to

make it clear that related transactions ``aggregating'' $5,000 or more

may be reportable.

Several commenters also objected to the requiring of reports of

``attempted'' transactions, on the ground that an attempted transaction

may neither be sufficiently obvious to draw a bank's attention nor to

generate the sorts of records necessary to complete the report. FinCEN

recognizes that these situations may arise and that the standards

applied to reporting of attempts must necessarily be somewhat more

flexible than those requiring reporting of completed transactions.

However, the reporting of ``attempts'' has been required in the

criminal referral reports that have evolved into the suspicious

activity report, and the requirement to report attempts has been

retained in the final rule.

The proposed rule required reporting of transactions conducted or

attempted ``by, at, or through, or otherwise involving'' a bank.

Several commenters objected to the inclusion in the rule of the words

``otherwise involving'' because their meaning was unclear and provided

insufficient guidance for bank officials. The phrase has been deleted.

2. Subparagraph (a)(2)(i). Several commenters questioned whether

the requirement to report transactions involving funds derived from

illegal activity that are conducted in order to hide or disguise funds

or assets derived from illegal activity extended to all illegal

activity or only to activity that was illegal under federal law.

Language has been added to specify plainly that only activity that is

in violation of federal law or regulation is covered by the

requirement. Such a limitation does not, of course, make violation of

state law irrelevant, especially in the many cases under 18 U.S.C.

1956, 1957 or 1960 in which violations of state law can serve as a

predicate for a federal offense.

3. Subparagraph (a)(2)(ii). No comments were directed specifically

toward subparagraph (a)(2)(ii), and that subparagraph is unchanged,

except for a revised reference to the Bank Secrecy Act.

4. Subparagraph (a)(2)(iii). As proposed in the Notice,

subparagraph (a)(2)(iii) required reporting of a transaction if:

the transaction appears to have no business purpose, the transaction

varies from the normal methods of financial commerce, or the

transaction is not the sort in which the particular customer or

class of customer would normally be expected to engage, and, in each

case, the bank knows of no reasonable explanation for the

transaction.

Although a number of commenters opposed the reporting of transactions

that could not definitively be linked to wrongdoing, FinCEN believes

that a suspicious transaction reporting rule appropriately can and

indeed must include a requirement for the reporting of transactions

that vary so substantially from normal practice that they legitimately

can and should raise suspicions of possible illegality. Unlike many

criminal acts, money laundering involves the taking of apparently

lawful steps--opening bank accounts, wiring funds, or investing or

reinvesting assets--for an unlawful purpose. A skillful money launderer

will often split the movement of funds between several institutions so

that no one institution can have a complete picture of the transactions

or funds movement

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involved. Although a number of commenters objected to the standard,

others viewed the standard as a workable compromise between the

competing needs of enforcement and the financial system and, in one

case, as consistent with the advice and training already given to line

staff at the commenter's money center bank.

In addition, as indicated in the Notice, subparagraph (a)(2)(iii)

recognizes the emerging international consensus that efforts to deter,

substantially reduce, and eventually eradicate money laundering are

greatly assisted by the reporting of suspicious transactions by banks.

The require-ments of this section comply with the recommendations

adopted by multilateral organizations in which the United States is an

active participant, including the Financial Action Task Force of G-7

nations and the Organization of American States, and are consistent

with the European Community's directive on preventing money laundering

through financial institutions.

Although the basic standard has been retained, a number of changes

have been made in response to specific comments on the Notice. First,

the structure of the paragraph (a)(2) now makes it clear that all three

subparagraphs in the suspicious transaction definition are qualified by

the standard that the bank must ``know, suspect, or have reason to

suspect'' that the reportable events have occurred. Second, the

description of transactions that ``vary from the normal methods of

financial commerce'' has been deleted because the phrase provided

insufficient guidance to reporting institutions and was comprehended to

the extent relevant by the ``no business purpose'' language of the

preceding clause. Third, the specification of transactions in which the

``class of customer'' involved would not be expected to engage has been

deleted, in response to concerns that the language unintentionally

created a need for comparisons among groups of customers based on their

personal characteristics. Fourth, the language has been altered to

require reporting of transactions that appear to have no business ``or

apparent lawful purpose''; the exception for transactions for which the

bank knows of a reasonable explanation has been clarified to specify

that knowledge of such an explanation requires an examination by the

bank of the available facts, including factors such as the background

and possible purpose of the transaction.

It remains true, as indicated in the Notice, that determinations as

to whether a report is required must be based on all the facts and

circumstances relating to the transaction and bank customer in

question. Different fact patterns will require different types of

judgments. In some cases, the facts of the transaction may clearly

indicate the need to report. For example, continued payments or

withdrawals of currency in amounts each beneath the currency

transaction reporting threshold applicable under 31 CFR 103.22, or

multiple exchanges of small denominations of currency into large

denominations of currency, can indicate that a customer is involved in

suspicious activity. Similarly, the fact that a customer refuses to

provide information necessary for the bank to make reports or keep

records required by this Part or other regulations, provides

information that a bank determines to be false, or seeks to change or

cancel the transaction after such person is informed of reporting

requirements relevant to the transaction or of the bank's intent to

file reports with respect to the transaction, would all indicate that a

Suspicious Activity Report (``SAR'') should be filed.

In other situations a more involved judgment may need to be made

whether a transaction is suspicious within the meaning of the rule.

Transactions that raise the need for such judgments may include, for

example, (i) funds transfers, payments or withdrawals that are not

commensurate with the stated business or other activity of the person

conducting the transaction or on whose behalf the transaction is

conducted; (ii) transmission or receipt of funds transfers without

normal identifying information or in a manner that indicates an attempt

to disguise or hide the country of origin or destination or the

identity of the customer sending the funds or of the beneficiary to

whom the funds are sent; or (iii) repeated use of an account as a

temporary resting place for funds from multiple sources without a clear

business purpose therefor. The judgments involved will also extend to

whether the facts and circumstances and the institution's knowledge of

its customer provide a reasonable explanation for the transaction that

removes it from the suspicious category.

5. 31 CFR 103.21(b). Subsection (b) sets forth the filing

procedures to be followed by banks making reports of suspicious

transactions. Reports are to be made within 30 calendar days of the

initial detection of the suspicious transaction, by completing a SAR

and filing it in a central location, to be determined by FinCEN. An

additional 30 days is permitted in order to enable a bank to identify a

suspect, but in no event may a SAR be filed after 60 days after the

initial detection of the reportable transaction. The general timing

rule has been changed so that the period for filing runs not from the

date of the transaction being reported, but from the date of the

``initial detection'' of facts that may constitute a basis for the

filing of a SAR; in many cases the two dates will be the same, but in

others, where the transaction is detected by the bank's compliance

screening systems, the dates may differ. If the bank's own internal

investigation is still ongoing when filing is required the form filed

may so indicate, but the form must nonetheless be filed within the

periods specified in the rule. FinCEN recognizes that it is always

difficult to apply general timing rules to every possible situation in

which reporting may be required or reportable activity detected, and it

believes that the change made in the rule adequately balances the need

to recognize the crucial importance of bank screening systems and to

provide clear deadlines for reporting. FinCEN is prepared to consider

further changes in the timing rules if experience dictates a need

therefor, but it also believes that timely reporting is essential.

Several commenters requested that a change be made in the

requirement in the Notice that banks provide immediate telephone notice

of ongoing violations to ``the'' appropriate law enforcement agency (in

addition to filing the form as required). As requested, the language

has been revised to require notice to ``an'' appropriate law

enforcement agency.

The new filing procedures represent a significant improvement over

the procedures currently followed by banks filing criminal referral

forms. There is no longer any requirement to file multiple copies of

forms with multiple agencies, and no requirement to file supporting

documentation with the SAR itself.

6. 31 CFR 103.21(c). Subsection (c) continues in effect the

longstanding exception from the obligation to file in the case of a

robbery or burglary that is otherwise reported to appropriate law

enforcement authorities. In response to a comment, the second

longstanding exception contained in the rules of the Supervisory

Agencies for reports of stolen securities has also been repeated in

this rule. Treasury and the Supervisory Agencies recognize that bank

robbery and burglary require the immediate attention of the appropriate

police authorities, and are not the types of crimes about which this

regulation is directly concerned.

7. 31 CFR 103.21(d). Subsection (d) states the obligation of filing

banks to maintain copies of SARs and their

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supporting documentation following the date of filing. This provision

is intended to relieve banks of the need physically to transmit

supporting documentation previously required to be filed with criminal

referral reports without altering the utility or availability of the

supporting documentation to the Supervisory Agencies or law enforcement

agencies as needed. The supporting documentation is a part of the SAR

and is held by the bank (in effect as agent for the Supervisory

Agencies and FinCEN), to avoid requiring often significant masses of

paper immediately to be transmitted to investigators or examiners.

Thus, identi-fication of supporting documentation must be made at the

time the SAR is filed, and such supporting documentation is deemed

filed with a SAR in accordance with this paragraph of the final rule;

as such, FinCEN, the Supervisory Agencies, and law enforcement

authorities need not make their access requests through subpoena or

other legal processes.

Several significant changes requested by commenters in the record

retention requirements have been made. First, the time for which

retention is required has been reduced from 10 years to five years (the

general period for record retention required under the Bank Secrecy

Act); a provision authorizing FinCEN to permit earlier destruction has

been deleted as unnecessary in light of the reduction of the retention

period to five years generally. Second, the wording has been changed to

permit record retention in either paper form or in accordance with the

bank's general recordkeeping procedures, even if those procedures call

for record maintenance in electronic rather than paper form. FinCEN

recognizes that a bank will not always have custody of the originals of

documents and that some documents will not exist at the bank in paper

form. In those cases, preservation of the best available evidentiary

documents (for example, computer disks or photocopies) should be

acceptable. This has been reflected in the final rule by changing the

reference to original documents to ``original document or business

record equivalents.''

The Notice referred both to documents ``supporting'' and documents

``related'' to the SAR. Many commenters found this dual reference

confusing. FinCEN believes that the use of the word ``supporting'' is

more precise and limits the scope of the information which must be

retained to that which would be useful in explaining the terms of and

parties to any suspicious transaction reported on a SAR. It is

anticipated that banks will use their judgment in determining the

information to be retained in light of the purposes of the reporting

requirement. It is impossible to catalogue the precise types of

information covered by this requirement, as the nature of the

documentation that will ``support'' the determination embodied in a SAR

necessarily depends upon the facts of a particular case.

8. 31 CFR 103.21(e). Subsection (e) incorporates the terms of 31

U.S.C. 5318 (g)(2) and (g)(3). This subsection thus specifically

prohibits those filing SARs from making any disclosure, except to

authorized law enforcement and regulatory agencies, about either the

reports themselves, the information contained therein, or the

supporting documentation (in the latter case if the supporting

documentation indicates in any way that it is related to a SAR). This

subsection thus also restates the broad protection from liability for

making reports of suspicious transactions, and for failures to disclose

the fact of such reporting, contained in the statute. As pointed out in

the Notice, the regulatory provisions do not extend the scope of either

the statutory prohibition or the statutory protection; however, because

Treasury recognizes the importance of these statutory provisions to the

overall effort to encourage meaningful reports of suspicious

transactions, they are described in the regulation in order to remind

compliance officers and others of their existence. The terms of

subsection (e) have been revised to clarify that the protection of the

statute, as well as the statutory prohibition against disclosures of

filing, extends to voluntary reports of suspicious activity as well as

those reports required by the final rule.

A number of commenters sought guidance about whether the statutory

prohibitions against disclosure extended to subpoenas from third

parties in civil litigation. FinCEN believes that the nondisclosure

provisions of the statute extend to requests via subpoenas seeking

SARs; as noted, the nondisclosure rule does not apply to supporting

documentation, so long as no material in the supporting documentation

produced in response to a subpoena or other process indicates its

relationship to a SAR. The final rule adds a requirement that requests

for a SAR or the information contained therein should be reported to

FinCEN. (Under the rules of the Supervisory Agencies, reporting of such

requests to those Agencies is also required.)

9. 31 CFR 103.21(f). Subsection (f) notes that compliance with the

obligation to report suspicious transactions will be audited, and

provides that failure to comply with the rule may constitute a

violation of the Bank Secrecy Act and the Bank Secrecy Act regulations.

The substitution of the word ``may'' for the word ``shall'' is intended

to indicate that the decision whether a failure to report a transaction

in fact constitutes a Bank Secrecy Act violation will necessarily

depend upon the facts of each situation. FinCEN anticipates that in

general the area for inquiry in the case of failure to report will

center upon both the facts of the particular failure and what the

failure indicates about the bank's compliance systems and attention to

the Bank Secrecy Act rules generally.

The Notice also stated that compliance with the obligation to

report suspicious transactions would have no direct bearing on a bank's

potential exposure under the criminal provisions of Title 18 of the

U.S. Code. One commenter argued that any such statement was a bar to

cooperation and urged the Department of the Treasury and the Justice

Department to create safe harbors from criminal liability in cases in

which SARs are filed.

The sentence questioned by the commenter was intended simply as a

reminder that the language of the ``safe harbor'' provisions of 31

U.S.C. 5318(g) does not by its terms protect against criminal

prosecutions. The sentence has been deleted in response to the comment,

but its deletion in no way alters the scope of the statute.

Finally, a mistaken reference to Title 15 of the Code of Federal

Regulations has been deleted.

C. Other Comments

1. Closing Accounts. FinCEN invited comment concerning the guidance

that is appropriate in connection with a bank's decision, after filing

a report concerning a particular customer, whether to terminate its

relationship with that customer. Treasury continues to believe that

unless instructed by an authorized official in writing, this is a

decision which must be made by the financial institution.

2. Non-Bank Financial Institutions. Several comments were filed on

behalf of non-bank financial institutions concerned that the rules

embodied in the Notice would be extended to such institutions. Those

comments were considered to the extent relevant to the Notice and will

be held for consideration when rules are proposed governing such

institutions.

V. Regulatory Flexibility Act.

FinCEN certifies that this regulation will not have a significant

financial

[[Page 4331]]

impact on a substantial number of small depository institutions.

VI. Paperwork Reduction Act

The collection of information contained in this rule has been

reviewed by the Office of Management and Budget (OMB) in accordance

with the Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d).

The collection of information requirements in this rule are found

in 31 CFR 103.21, as issued in final form herein. This information is

mandatory and is necessary to inform appropriate law enforcement and

bank supervisory agencies of suspicious transactions involving or that

take place at or through depository institutions. Information collected

hereunder is confidential, see 31 U.S.C. 5318(g), and may be used by

FinCEN, the federal financial institution regulatory agencies, federal

law enforcement agencies and, where appropriate, state law enforcement

and bank supervisory agencies. The respondent recordkeepers are for-

profit financial institutions, including small businesses.

FinCEN may not conduct or sponsor, and an organization is not

required to respond to, this information collection unless it displays

a currently valid OMB control number. The OMB control number is 1506-

0001.

No comments specifically addressing the hour burden for filing the

SAR were received.

FinCEN estimates that there will be 15,000 responses from banks

subject to the Bank Secrecy Act.

The revisions made to the final rule from the proposed rule

published in the Notice simplify the submission of the reporting form

and shorten the records retention period. However, the same amount of

information will be collected under the final rule as under the

proposed rule published in the Notice. The burden per respondent varies

depending on the nature of the suspicious transaction being reported.

FinCEN estimates that the average annual burden for reporting and

recordkeeping per response will be 1 hour. Thus, FinCEN estimates the

total annual hour burden to be 15,000 hours. However, this burden will

not result in additional cost to the public because the same

information is required to be filed by one or more of the Supervisory

Agencies, and a single filing will satisfy all filing requirements.

Comments regarding the burden estimate, or any aspect of this

collection of information, including suggestions for reducing the

burden, should be sent to Office of Regulatory Policy and Enforcement,

FinCEN, and to the Office of Management and Budget, Paperwork Reduction

Project (7100-0212), Washington, D.C. 20503.

VII. Executive Order 12866

The Department of the Treasury has determined that this rule is not

a significant regulatory action under Executive Order 12866.

VIII. Unfunded Mandates Act of 1995 Statement

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4 (Unfunded Mandates Act), 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 rule provides the

most cost-effective and least burdensome alternative to achieve the

objectives of the rule.

List of Subjects in 31 CFR Part 103

Administrative practice and procedure, Authority delegations

(Government agencies), Banks, banking, Currency, Investigations, Law

enforcement, Reporting and recordkeeping requirements.

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 is revised to read as

follows:

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

2. Section 103.11 as amended at 60 FR 228 and 44144 effective April

1, 1996, is further amended by revising paragraph (ii) and adding

paragraph (qq) to read as follows:

Sec. 103.11 Meaning of terms.

* * * * *

(ii) Transaction. (1) Except as provided in paragraph (ii)(2) of

this section, transaction means a purchase, sale, loan, pledge, gift,

transfer, delivery or other disposition, and with respect to a

financial institution includes a deposit, withdrawal, transfer between

accounts, exchange of currency, loan, extension of credit, purchase or

sale of any stock, bond, certificate of deposit, or other investment

security or monetary instrument, or any other payment, transfer, or

delivery by, through, or to a financial institution, by whatever means

effected.

(2) For purposes of Sec. 103.22, and other provisions of this part

relating solely to the report required by that section, the term

``transaction in currency'' shall mean a transaction involving the

physical transfer of currency from one person to another. A transaction

which is a transfer of funds by means of bank check, bank draft, wire

transfer, or other written order, and which does not include the

physical transfer of currency, is not a transaction in currency for

this purpose.

* * * * *

(qq) FinCEN. FinCEN means the Financial Crimes Enforcement Network,

an office within the Office of the Under Secretary (Enforcement) of the

Department of the Treasury.

Sec. 103.21 [Redesignated as Sec. 103.20]

3. Section 103.21 is redesignated as Sec. 103.20.

4. New Sec. 103.21 is added to read as follows:

Sec. 103.21 Reports by banks of suspicious transactions.

(a) General. (1) Every bank shall file with the Treasury

Department, to the extent and in the manner required by this section, a

report of any suspicious transaction relevant to a possible violation

of law or regulation. A bank may also file with the Treasury Department

by using the Suspicious Activity Report specified in paragraph (b)(1)

of this section or otherwise, a report of any suspicious transaction

that it believes is relevant to the possible violation of any law or

regulation but whose reporting is not required by this section.

(2) A transaction requires reporting under the terms of this

section if it is conducted or attempted by, at, or through the bank, it

involves or aggregates at least $5,000 in funds or other assets, and

the bank knows, suspects, or has reason to suspect that:

(i) The transaction involves funds derived from illegal activities

or is intended or conducted in order to hide or disguise funds or

assets derived from illegal activities (including, without limitation,

the ownership, nature, source, location, or control of such

[[Page 4332]]

funds or assets) as part of a plan to violate or evade any federal law

or regulation or to avoid any transaction reporting requirement under

federal law or regulation;

(ii) The transaction is designed to evade any requirements of this

part or of any other regulations promulgated under the Bank Secrecy

Act, 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; or

(iii) The transaction has no business or apparent lawful purpose or

is not the sort in which the particular customer would normally be

expected to engage, and the bank knows of no reasonable explanation for

the transaction after examining the available facts, including the

background and possible purpose of the transaction.

(b) Filing procedures--(1) What to file. A suspicious transaction

shall be reported by completing a Suspicious Activity Report (``SAR''),

and collecting and maintaining supporting documentation as required by

paragraph (d) of this section.

(2) Where to file. The SAR shall be filed with FinCEN in a central

location, to be determined by FinCEN, as indicated in the instructions

to the SAR.

(3) When to file. A bank is required to file a SAR no later than 30

calendar days after the date of initial detection by the bank of facts

that may constitute a basis for filing a SAR. If no suspect was

identified on the date of the detection of the incident requiring the

filing, a bank may delay filing a SAR for an additional 30 calendar

days to identify a suspect. In no case shall reporting be delayed more

than 60 calendar days after the date of initial detection of a

reportable transaction. In situations involving violations that require

immediate attention, such as, for example, ongoing money laundering

schemes, the bank shall immediately notify, by telephone, an

appropriate law enforcement authority in addition to filing timely a

SAR.

(c) Exceptions. A bank is not required to file a SAR for a robbery

or burglary committed or attempted that is reported to appropriate law

enforcement authorities, or for lost, missing, counterfeit, or stolen

securities with respect to which the bank files a report pursuant to

the reporting requirements of 17 CFR 240.17f-1.

(d) Retention of records. A bank shall maintain a copy of any SAR

filed and the original or business record equivalent of any supporting

documentation for a period of five years from the date of filing the

SAR. Supporting documentation shall be identified, and maintained by

the bank as such, and shall be deemed to have been filed with the SAR.

A bank shall make all supporting documentation available to FinCEN and

any appropriate law enforcement agencies or bank supervisory agencies

upon request.

(e) Confidentiality of reports; limitation of liability. No bank or

other financial institution, and no director, officer, employee, or

agent of any bank or other financial institution, who reports a

suspicious transaction under this part, may notify any person involved

in the transaction that the transaction has been reported. Thus, any

person subpoenaed or otherwise requested to disclose a SAR or the

information contained in a SAR, except where such disclosure is

requested by FinCEN or an appropriate law enforcement or bank

supervisory agency, shall decline to produce the SAR or to provide any

information that would disclose that a SAR has been prepared or filed,

citing this paragraph (e) and 31 U.S.C. 5318(g)(2), and shall notify

FinCEN of any such request and its response thereto. A bank, and any

director, officer, employee, or agent of such bank, that makes a report

pursuant to this section (whether such report is required by this

section or is made voluntarily) shall be protected from liability for

any disclosure contained in, or for failure to disclosure the fact of

such report, or both, to the full extent provided by 31 U.S.C.

5318(g)(3).

(f) Compliance. Compliance with this section shall be audited by

the Department of the Treasury, through FinCEN or its delegees under

the terms of the Bank Secrecy Act. Failure to satisfy the requirements

of this section shall be a violation of the reporting rules of the Bank

Secrecy Act and of this part. Such failure may also violate provisions

of Title 12 of the Code of Federal Regulations.

Dated: January 30, 1996.

Stanley E. Morris,

Director, Financial Crimes Enforcement Network.

[FR Doc. 96-2272 Filed 2-2-96; 8:45 am]

BILLING CODE 4820-03-P