Financial Crimes Enforcement Network; Proposed Amendments to the Bank Secrecy Act RegulationsExemptions From the Requirement to Report Transactions in CurrencyPhase II

Federal RegisterSep 8, 1997

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA12

Financial Crimes Enforcement Network; Proposed Amendments to the

Bank Secrecy Act Regulations--Exemptions From the Requirement to Report

Transactions in Currency--Phase II

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Financial Crimes Enforcement Network (``FinCEN'') is (i)

proposing rules to further reform and

[[Page 47157]]

simplify the process by which banks may exempt transactions of retail

and other businesses from the requirement to report transactions in

currency in excess of $10,000, and (ii) restating generally, to reflect

such changes, the text of the Bank Secrecy Act rule requiring the

reporting by financial institutions of transactions in currency. The

proposed changes would constitute a further step to achieve the

reduction set by the Money Laundering Suppression Act of 1994 in the

number of currency transaction reports required to be filed annually by

depository institutions, as part of a continuing program to reduce

unnecessary burdens imposed upon financial institutions by the Bank

Secrecy Act and increase the cost-effectiveness of the counter-money

laundering policies of the Department of the Treasury.

DATES: Written comments on all aspects of the proposal are welcome and

must be received on or before December 8, 1997.

ADDRESSES: Written comments should be submitted to: Financial Crimes

Enforcement Network, Department of the Treasury, 2070 Chain Bridge

Road, Vienna, VA 22182.

Attention: NPRM--CTR Exemptions, Phase II. Comments also may be

submitted by electronic mail to the following Internet address:

``[email protected]'' with the caption in the body of the

text, ``Attention: NPRM--CTR Exemptions, Phase II.'' For additional

instructions on the submission of comments, see SUPPLEMENTARY

INFORMATION under the heading ``Submission of Comments.''

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 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: Peter Djinis, Associate Director,

FinCEN, (703) 905-3819; Charles Klingman, Financial Institutions Policy

Specialist, FinCEN, (703) 905-3602; Stephen R. Kroll, Legal Counsel,

Cynthia L. Clark, on detail to the Office of Legal Counsel, and Albert

R. Zarate, Attorney-Advisor, Office of Legal Counsel, FinCEN, (703)

905-3590.

SUPPLEMENTARY INFORMATION:

I. Introduction

This document contains a proposed rule that would amend 31 CFR

103.22 to (i) reform and simplify the process by which depository

institutions 1 may exempt transactions involving retail and

other businesses from the requirement to report transactions in

currency in excess of $10,000, and (ii) restate generally, to reflect

the proposed changes to the administrative exemption system, the

general requirement for financial institutions to report transactions

in currency. The proposed changes are designed to implement the terms

of 31 U.S.C. 5313(e) (and related provisions of 31 U.S.C. 5313 (f) and

(g)), which were added to the Bank Secrecy Act by section 402(a) of the

Money Laundering Suppression Act of 1994 (the ``Money Laundering

Suppression Act''), Title IV of the Riegle Community Development and

Regulatory Improvement Act of 1994, Pub. L. 103-325 (September 23,

1994).

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\1\ As explained below, the text of the rule itself uses the

term ``bank,'' which, as defined in 31 CFR 103.11(c), includes both

banks and other classes of depository institutions.

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II. Background

A. Statutory Provisions

The Bank Secrecy Act, Titles I and II of Pub. L. 91-508, as

amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31

U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia,

to issue regulations requiring financial institutions to keep records

and file reports that are determined to have a high degree of

usefulness in criminal, tax, and regulatory matters, and to implement

counter-money laundering programs and compliance procedures.

Regulations implementing Title II of the Bank Secrecy Act (codified at

31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the

Secretary to administer Title II of the Bank Secrecy Act has been

delegated to the Director of FinCEN.

The reporting by financial institutions of transactions in currency

in excess of $10,000 has long been a major component of the Department

of the Treasury's implementation of the Bank Secrecy Act. The reporting

requirement is imposed by 31 CFR 103.22, a rule issued under the broad

authority granted to the Secretary of the Treasury by 31 U.S.C. 5313(a)

to require reports of domestic coins and currency transactions.

Four new provisions (31 U.S.C. 5313 (d) through (g)) concerning

exemptions were added to 31 U.S.C. 5313 by the Money Laundering

Suppression Act. 31 U.S.C. 5313(d) 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 four categories of bank customer. The

requirements of that subsection are reflected in the terms of 31 CFR

103.22(h), which became effective, as an interim rule (the ``Interim

Rule''), with respect to transactions in currency after April 30, 1996,

see 61 FR 18204 (April 24, 1996), and is being published as a final

rule elsewhere in today's edition of the Federal Register. 2

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\2\ Although the Interim Rule is today being amended and

reissued as a final rule, it is referred to in this document as the

Interim Rule for ease of reference.

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31 U.S.C. 5313(e) authorizes the Secretary of the Treasury to

exempt a depository institution from the requirement to report

transactions in currency between a depository institution and a

qualified business customer of the institution. Subsection (e)(2)

defines a ``qualified business customer'' as a business which

(A) Maintains a transaction account (as defined in section

19(b)(1)(C) of the Act) at the depository institution;

(B) Frequently engages in transactions with the depository

institution which are subject to the reporting requirements of

subsection (a); and

to ensure that the purposes of this subchapter are carried out

without requiring a report with respect to such transactions.

Subsection (e)(3) provides that the Secretary of the Treasury shall

establish, by regulation, the criteria for granting and maintaining an

exemption under subsection (e)(1).

Subsection (e)(4)(A) provides that the Secretary of the Treasury

shall establish guidelines for depository institutions to follow in

selecting customers for an exemption under this subsection. Under

subsection (e)(4)(B), those guidelines may include a description of the

type of businesses for which no exemption will be granted under this

subsection.

Subsection (e)(5) provides that the Secretary of the Treasury shall

prescribe regulations requiring each depository institution to

(A) Review, at least once each year, the qualified business

customers of such institution with respect to whom an exemption has

been granted under this subsection; and

(B) Upon the completion of such review, resubmit information

about such customers, with such modifications as the institution

determines to be appropriate, to the Secretary for the Secretary's

approval.

Subsection (e)(6) states that during the two-year period beginning

on the date of enactment of the Money Laundering Suppression Act, the

discretionary

[[Page 47158]]

exemption rules shall be applied by the Secretary of the Treasury on

the basis of such criteria as the Secretary determines to be

appropriate to achieve an orderly implementation of the requirements of

this subsection. Subsection (f) places limits on the liability of a

depository institution in connection with a transaction that has been

exempted from reporting under either 31 U.S.C. 5313(d) or (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 provisions:

the Secretary of the Treasury shall seek to reduce, within a

reasonable period of time, the number of reports required to be

filed in the aggregate by depository institutions pursuant to

section 5313(a) of title 31 * * * by at least 30 percent of the

number filed during the year preceding [September 23, 1994,] the

date of enactment of [the Money Laundering Suppression Act].

B. Shortcomings of the Administrative 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 the reporting of routine

currency transactions by businesses.

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 second is 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, and which increase the risk of liability

for the bank). 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 also

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.3

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\3\ Thus, as noted below, transactions in currency between

domestic banks are already exempt from reporting, see 31 CFR

103.22(b)(1)(ii), and ``[d]eposits or withdrawals, exchanges of

currency or other payments and transfers by local or state

governments, or the United States or any of its agencies or

instrumentalities'' are one of the categories of transactions

specifically described as eligible for exemption by banks. See 31

CFR 103.22(b)(2)(iii).

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C. Objectives of Proposed Changes

The changes proposed in this document represent the next 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. 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 compliance with, 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. See 61 FR 18205.

Because this notice builds upon the provisions of the Interim Rule,

its scope and intention must be considered against the background of

the Interim Rule, whose terms are now found in 31 CFR 103.22(h). That

rule creates a streamlined exemption procedure eliminating from

reporting transactions in currency between banks and (i) other banks

operating in the United States; (ii) government departments and

agencies, and entities that exercise governmental authority; (iii)

companies listed on certain national stock exchanges; and (iv) certain

subsidiaries of those listed companies. As FinCEN explained when the

Interim Rule was published, the currency transactions of bank customers

in those categories are either required to be exempt from reporting by

statute, were already effectively exempt from reporting under the terms

of 31 CFR 103 or, in the case of listed companies and certain of their

subsidiaries, are enterprises whose routine currency transaction

reports are of little or no value to law enforcement officials.

The task of this second stage reform of the exemption system is to

provide a similar blanket relief, to the extent possible, to those

categories of business enterprise of all sizes that cannot easily be

described in a single phrase and that are not subject to the sorts of

regulatory and market place oversight that shape the environment of

public companies. In accomplishing that task, FinCEN has attempted to

pare down the existing exemption system, while still providing federal

authorities with the tools to monitor and prevent abuse of the reformed

exemption system.

III. Specific Provisions

A. Overview

Eliminating the administrative exemption system in section 103.22

requires the deletion of the bulk of that section, paragraphs (b)-(g).

Because that is so, and because the structure and many of the rules of

section 103.22(h) also apply to the proposed reformed exemption system

for other customers, the proposed rule completely restates section

103.22 so that its terms may be presented clearly. With two

exceptions--the treatment of the Postal Service and the treatment of

recordkeeping facilities of a financial institution 4--the

restatement does not involve any change to, or an intention to open for

comment, the terms of section 103.22 that do not relate to exemptions

from the requirement to report transactions in currency. Certain

provisions that have not been changed

[[Page 47159]]

have been moved for housekeeping purposes.

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\4\ Language has been added in proposed new paragraph (b),

explicitly stating that the general obligation to report

transactions in currency in excess of $10,000 does not apply to

payments or transfers made solely in connection with the purchase of

postage or philatelic products from the Postal Service. Language

also has been added in proposed new paragraph (c), providing that a

financial institution includes all of its domestic branch offices,

and any recordkeeping facility for those offices, for purposes of

the requirement to report transactions in currency.

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As discussed in more detail below, the changes proposed to be made

by the rule are:

Deletion of present paragraphs (b)-(g) of section 103.22;

Redesignation of paragraph (h) of section 103.22 (the

Interim Rule) as proposed new paragraph (d) in section 103.22;

Addition of two new classes of ``exempt persons,'' namely,

non-listed businesses and payroll customers, in proposed new paragraphs

(d)(2)(vi) and (vii) of section 103.22;

Addition of designation and annual filing rules for the

exemption of non-listed companies and payroll customers, in proposed

new paragraphs (d)(3)(iii) and (d)(4)(ii) of section 103.22;

Addition of operating rules governing the exemption of

non-listed businesses and payroll customers, in proposed new paragraphs

(d)(5)(v)-(ix) of section 103.22; and

Certain conforming changes to the structure of proposed

new paragraph (d) (old section 103.22(h)).

For convenience, the proposed redistribution of the provisions of

present section 103.22 may be summarized as follows:

Distribution Table

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Present 103.22 Proposed 103.22

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No provision........................................... 103.22(a).

103.22(a)(1):

Sentences 1-2........................................ 103.22(b)(1).

Sentences 3-4........................................ 103.22(c)(2).

103.22(a)(2)(i)-(ii)................................... 103.22(b)(2).

103.22(a)(2)(iii)...................................... 103.22(c)(3).

103.22(a)(3)........................................... Deleted in part; 103.22(c)(2).

103.22(a)(4)........................................... 103.22(c)(1).

103.22(b).............................................. Deleted, except 103.22(b)(1)(iii) and 103.22(b)(2)(iv).

103.22(b)(1)(iii)...................................... 103.22(d)(1).

103.22(b)(2)(iv)....................................... 103.22(d)(2)(vii).

103.22(c).............................................. Deleted.

103.22(d).............................................. Deleted.

103.22(e).............................................. Deleted.

103.22(f).............................................. Deleted.

103.22(g).............................................. Deleted.

103.22(h)(1) 5......................................... 103.22(d)(1).

103.22(h)(2) (i)-(iii)................................. 103.22(d)(2) (i)-(iii).

103.22(h)(2) (iv), (vi)................................ 103.22(d)(2)(iv).

103.22(h)(2)(v)........................................ 103.22(d)(2)(v).

No provision........................................... 103.22(d)(2)(vi).

No provision........................................... 103.22(d)(2)(vii).

103.22(h)(3) (i)-(ii).................................. 103.22(d)(3)(i).

103.22(h)(3)(iii)...................................... 103.22(d)(3)(ii).

103.22(h)(3)(iv)....................................... 103.22(d)(3)(i).

No provision........................................... 103.22(d)(3)(iii).

No provision........................................... 103.22(d)(4) (i)-(ii).

103.22(h)(4) (i)-(iv).................................. 103.22(d)(5) (i)-(iv).

103.22(h)(4)(v)........................................ 103.22(d)(5)(x).

No provision........................................... 103.22(d)(5) (v)-(ix).

103.22(h)(5)........................................... 103.22(d)(6).

103.22(h)(6)(i)........................................ 103.22(d)(7)(i).

103.22(h)(6)(ii)....................................... 103.22(d)(7)(iii).

103.22(h)(6)(iii)...................................... 103.22(d)(7)(iv).

No provision........................................... 103.22(d)(7)(ii).

103.22(h)(7)........................................... 103.22(d)(8).

103.22(h)(8)........................................... 103.22(d)(9).

103.22(h)(9)........................................... Deleted.

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B. 103.22(a) General

Paragraph (a) describes generally the scope and organization of

proposed restated section 103.22. The reporting obligations of

financial institutions are restated in proposed paragraph (b). The

rules covering aggregation for reporting purposes--i.e., rules relating

to multiple branches of financial institutions and multiple

transactions conducted by their customers--previously found in the

third and fourth sentences of section 103.22(a)(1) and section

103.22(a)(4), are restated in proposed paragraph (c). The rules

governing exemption by banks of transactions with certain customers, as

noted, now appear in a single paragraph (d).

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\5\ All references to paragraph (h) of section 103.22 are to the

final rule that appears elsewhere in today's edition of the Federal

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C. 103.22(b) Filing Obligations

Proposed paragraph (b) contains the blanket statement of the

obligation of financial institutions to report transactions in currency

in excess of $10,000. As is the case in the present rule, a separate

statement is made of the obligations of casinos.

The only change in reporting obligations that appears in proposed

paragraph (b) relates to the Postal Service. The proposed paragraph

makes it clear that the general obligation to report transactions in

currency in excess of $10,000 does not apply to payments or transfers

made solely in connection

[[Page 47160]]

with the purchase of postage or philatelic products from the Postal

Service; the change reflects a proposed amendment to the treatment of

the Postal Service, for purposes of the Bank Secrecy Act, that was

published as part of a set of proposed rules relating to money services

businesses (``MSBs) on May 21, 1997. See 62 FR 27890.

Comments are specifically requested on the interplay between the

ineligible businesses listed in proposed paragraph (d)(5)(viii) and the

proposed definitions of MSBs set forth in the proposed rules that were

published in the Federal Register on May 21, 1997. FinCEN recognizes

that the application of the two sets of proposed rules (exemptions and

MSBs) may present special difficulties in the case of, for example,

grocery stores that also sell money services products. FinCEN,

therefore, would welcome suggestions regarding ways of preventing the

application of the proposed definition of money services businesses to

a portion of those grocery stores' business activities from

disqualifying such stores from consideration as exempt persons for non-

money services businesses activities. FinCEN also would welcome

comments on ways to shorten the list of ineligible businesses, given

the money services businesses registration and the annual aggregate

currency reporting requirement.

D. 103.22(c) Aggregation

Proposed new paragraph (c) restates the reporting rules applicable

to multiple branches of financial institutions and multiple

transactions of their customers. Those rules now appear in paragraphs

(a)(1) and (a)(4) of section 103.22. As an analogue to a change,

discussed below, that will permit affiliated banks to make a single

designation of each exempt person, one change is proposed to the rules

relating to aggregation. That change would add language to make it

clear that for purposes of the currency transaction reporting

requirements, a financial institution includes not only all domestic

branch offices, but also any recordkeeping facility, wherever located,

that contains records relating to the transactions of the institution's

domestic branch offices.

E. 103.22(d) Transactions of Exempt Persons

1. General

As noted above, proposed paragraph (d) of section 103.22 is a

restatement and further amendment of the exemption system provided in

paragraph (h) of section 103.22. That paragraph was drafted not only to

provide the first stage of regulatory relief contemplated by the Money

Laundering Suppression Act amendments to 31 U.S.C. 5313, but also to

provide a structure into which the terms of the second stage of relief

would conveniently fit.

2. New Classes of Exempt Person

Proposed paragraphs (d)(2) (vi) and (vii) introduce two new classes

of exempt persons, ``non-listed businesses'' and ``payroll customers.''

Non-listed businesses. The definition of non-listed business is an

attempt to summarize, in a single sentence, all commercial enterprises

with a recurring need to deal with currency that are not listed

companies or their subsidiaries. Thus, every enterprise that might have

been eligible for either a ``unilateral'' or ``special'' exemption

under the superseded exemption system (and that is not already treated

as an exempt person by the Interim Rule) will now become eligible for

exemption under the terms of the new rule, by banks themselves, if such

person has been a bank customer for 12 months. There will be no

provision for applications to the Detroit Computing Center or elsewhere

for authority to recognize an exemption for a particular customer.

Transactions by certain customers, listed in proposed paragraph

(d)(5)(viii), remain ineligible for exemption.

Proposed paragraph (d)(2)(vi)(A) requires that any business must

have been a bank customer for 12 months before it is eligible for

exemption as a non-listed business. That period is 10 months longer

than the present 60 day minimum period specified in the administrative

practice that has grown up around section 103.22(b) (2) and (d). The

difference is justified, in FinCEN's view, by the elimination of

virtually all of the other requirements of the present system.

The limitations on the scope of the non-listed business definition,

contained in proposed new paragraphs (d)(2)(vi)(B)-(C), are

straightforward. They confine permissible exemptions to bank customers

with transaction account relationships with the exempting bank and

recurring use of currency, as required by 31 U.S.C. 5313(e)(2).

Payroll Customer. The definition of payroll customer reflects, for

the most part, the terms of present paragraph 103.22(b)(2)(iv), and

tracks the format proposed above when defining a non-listed business.

Proposed paragraph (d)(2)(vii)(A) requires that any person must have

been a bank customer for at least 12 months before it is eligible for

exemption as a payroll customer. Proposed new paragraphs

(d)(2)(vii)(B)-(C) further confine permissible exemptions to bank

customers who regularly withdraw more than $10,000 to pay their United

States employees in currency and are United States residents.

3. Special Requirements for Exemption of Non-Listed Businesses and

Payroll Customers.

There are three special requirements for the recognition of the

exemption of non-listed businesses and payroll customers as exempt

persons:

Filing of an ``Designation of Exempt Person'' form (as in

the case of all other classes of exempt persons);

Inclusion on the designation form of a projection of the

exempt person's annual currency needs; and

An annual filing confirming continuation of the exempt

person's status as such, listing the aggregate currency deposited and

withdrawn by the person during the year in question and any changes of

which the bank knows (or should know on the basis of its records) in

the ownership or control of the exempt person.

Before briefly discussing the latter two requirements, it is

appropriate to note what the proposed rule would eliminate from the

administrative exemption system. There would no longer be any cash

limits or ``permitted ranges'' for exempt transactions; a customer that

is exempt is, simply, exempt for all purposes, with respect to the

currency transaction reporting requirement (although not with respect

to the suspicious transaction reporting or other Bank Secrecy Act

requirements). There is also no longer any requirement for submission

and signature of exemption statements, or for a mandatory exemption

list. (The operating rules of paragraph (d)(5), noted below, make

further changes in the exemption system in areas for which banks have

long requested relief.)

The purpose of the extensive changes made to the exemption system

by the proposed rule--following upon the changes already made to that

system by the Interim Rule--is to make it as simple and cost-effective

as possible for banks to eliminate the burdens of currency transaction

reporting for legitimate customers. Any simplified system can

potentially be manipulated by criminals seeking to hide the movement of

illegally-obtained currency, despite the best efforts of conscientious

bank officials. The proposed requirement that banks initially estimate,

and then report annually, the gross totals of currency

[[Page 47161]]

transactions of exempted non-listed customers is designed simply to

prevent such unlawful manipulation of the greatly liberalized and

simplified exemption system.6 Even under that simplified

system, banks would remain subject to the suspicious activity reporting

requirements of 31 CFR 103.21, as well as similar reporting

requirements imposed by federal bank supervisory agencies. See also 12

CFR 21.11 (Office of the Comptroller of the Currency); 12 CFR 208.20

(Federal Reserve System); 12 CFR 353.3 (Federal Deposit Insurance

Corporation); 12 CFR 563.180 (Office of Thrift Supervision); 12 CFR

748.1 (National Credit Union Division). Thus, for example, a sharp

increase from one year to the next in the gross total of currency

transactions of its exempted customers, may trigger the obligation of a

bank to file a suspicious activity report.

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\6\ The customer statement and dollar limitation provisions that

the proposed rule would eliminate were designed--however

imperfectly--to limit manipulation of the exemption procedures then

in force.

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The need for some ``counterweight'' in the liberalized system was

raised forcefully with FinCEN by federal law enforcement officials

during formulation of the proposed rule. Enforcement officials are

concerned that necessary easing of the burdens of unnecessary currency

transaction reporting not have the unintended effect of opening up

avenues for more efficient money laundering. Such avenues could exist

if the new rules made it possible for criminals to siphon illegally-

obtained currency into the daily currency deposits of small businesses

in amounts that would not individually attract attention but that in

the aggregate produce a steady flow of laundered funds into the banking

system.7 The possibility becomes more serious in the case of

businesses that maintain accounts at multiple banks, no one of which

has a complete picture of the business's currency transaction history

or banking needs.

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\7\ Cash intensive money services business--e.g., currency

exchanges--have been identified in a number of investigations as

affording just such an opportunity for money launderers, a fact that

contributes to the exclusion of money services businesses from

eligibility for treatment as non-listed businesses eligible for

exemption.

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That the administrative exemption system's attempt to prevent

criminals from hiding within the folds of the exemption system has

proved both ineffective and burdensome does not eliminate the need to

build cost-effective barriers to abuse into the liberalized system. A

simple annual reporting rule has many benefits in this regard.

At the same time, FinCEN is aware that a requirement for cumulation

and annual reporting of gross currency transactions may go beyond the

data processing capabilities of some bank systems. More important, it

is aware of the need to reach a thoughtful balance between

liberalization and anti-abuse provisions if the changed exemption

system is to accomplish its paramount objective of providing a cost-

effective way to eliminate unnecessary filings from the currency

transactions reporting system. Thus, it invites suggestions about

alternate ways to structure anti-manipulation provisions. In that

connection, commenters are asked to consider the following

alternatives:

1. Annual Reporting in Ranges of Value. There is no requirement

that annual cumulative currency transaction totals be absolutely

precise. It would be sufficient if the annual reporting, and initial

correlative estimation of business cash needs, be made in ranges, and

the rule could so state. Thus, for example, totals might simply be

reported in $25,000, $50,000, or even $100,000 increments in order to

accomplish the purposes of cumulation. Such a change would eliminate

the concern and cost of pinpoint recordkeeping in this instance.

2. Reporting of Running Totals, rather than Annual Cumulation.

Running totals might be reported on other than an annual basis, so that

government computers could perform the necessary cumulation. A bank

that normally deleted in currency ledgers at the end of each calendar

quarter, for example, might then electronically transfer the necessary

data to FinCEN without having to build a new system, or new storage

capacity to accommodate annual recordkeeping.

3. Limited Annual Reporting. Cumulation requirements might be

limited to businesses of certain sizes or types.

In considering approaches other than cumulative currency

transaction totals, commenters should be aware that a primary purpose

of the proposed rule's anti-manipulation provisions is to limit the

amount of judgment banks must make about the meaning of variations in a

customer's currency transaction totals. While significant spikes or

variations in simple total volume could well implicate the suspicious

transaction reporting rules in appropriate cases, the anti-abuse

purpose of the cumulative reporting requirement (or any substitute that

might be adopted) is to create a buttress or second line of support for

the bank's own efforts and to avoid placing all of the pressure for

preventing abuses of the currency transaction reporting exemptions on

bank officials themselves.

The success of the proposed liberalization of the currency

transaction reporting exemption rules in practice will depend in part

upon the receptiveness to the new procedures taken by federal bank

examiners. FinCEN is planning a program to familiarize examiners with

both the letter and the spirit of the new rules, and it would

appreciate comments on the sorts of issues that should be raised with

examiners during the course of that program.

4. New Operating Rules. Six new operating rules are proposed to be

added to further simplify the exemption process.

a. Proposed paragraph (d)(5)(v) requires the bank to aggregate all

customer accounts to apply the exemption provisions to that customer.

Thus, the bank is obligated, under the proposed rule, to exempt a

customer on a bank-wide basis and to count all accounts to determine,

for example, whether a customer's cash withdrawals or deposits exceed

$10,000. Thus, exemptions will no longer be determined on an account by

account basis, but rather on a bank-wide basis. Generally, FinCEN

believes that each customer possesses its own Employee Identification

Number (``EIN''); thus, this proposed rule does not cover customer

accounts with multiple EINs. Comments are welcomed on this topic.

b. Proposed paragraph (d)(5)(vi) will permit affiliated banks to

make a single designation of exempt person, that will apply to all

accounts at all banks within the affiliated group; annual currency

transaction totals, for the moment at least, will still have to be

computed on a bank-by-bank basis.

c. Proposed paragraph (d)(5)(vii) will permit sole proprietors to

continue to be eligible for exemption, so long as personal and business

funds are not commingled in the same accounts. FinCEN invites comments

on whether this prohibition against commingling will be burdensome for

banks to implement.

d. Proposed paragraph (d)(5)(viii) contains a list of businesses

that may not be exempted under the new rules as non-listed companies

(although they may qualify for exemption under the more limited payroll

customer definition, for the purposes permitted by that definition). A

limitation of this kind on the new procedures is explicitly

contemplated by the terms of 31 U.S.C. 5313(e)(4)(B); the businesses

described are essentially the same as the groups of businesses that are

not permitted to be

[[Page 47162]]

granted an exemption under the present system.

The proposed rule is, at present, silent about the treatment of

businesses with multiple activities of which one is an activity for

which an exemption is barred. FinCEN solicits comments on ways to deal

with that issue.

e. Proposed paragraph (d)(5)(ix) defines a transaction account for

purposes of proposed paragraph (d) as any account described in section

19(b)(1)(C) of the Act, 12 U.S.C. 461(b)(1)(C). This definition does

not include any other accounts not described in 12 U.S.C. 461(b)(1)(C),

such as money market accounts. Thus, the definition of a transaction

account in the proposed rule is narrower than the definition of the

same term that is set forth at 31 CFR 103.11(hh). Proposed paragraph

(d)(5)(ix) also provides that a person may be exempt either as a non-

listed business or as a payroll customer only to the extent of such

person's transaction accounts.

f. Proposed paragraph (d)(5)(x) defines an established depositor

for purposes of proposed paragraph (d) of this section as any person

that has maintained a transaction account at the bank for at least 12

months. This definition is consistent with proposed paragraph

(d)(2)(vi)(A), which requires that a business maintain a transaction

account at the bank for at least 12 months before it may be exempted as

a non-listed business.

Submission of Comments

An original and four copies of any comment (except those sent

electronically) 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.

Proposed Effective Date

The amendments to 31 CFR Part 103 contained in this notice of

proposed rulemaking will become effective 30 days following the

publication in the Federal Register of the final rule to which this

notice of proposed rulemaking relates.

Executive Order 12866

The Department of the Treasury has determined that this proposed

rule is not a significant regulatory action under Executive Order

12866.

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 notice of proposed

rulemaking provides the most cost-effective and least burdensome

alternative to achieve the objectives of the rule.

Regulatory Flexibility Act

FinCEN certifies that this proposed amendment to the regulations

implementing the Bank Secrecy Act will not have a significant, adverse

financial impact on a substantial number of small depository

institutions.

Paperwork Reduction Act

In accordance with requirements of the Paperwork Reduction Act of

1995, 44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR

Part 1320, the following information concerning the collection of

information on Internal Revenue Service Form 4789 is presented to

assist those persons wishing to comment on the information collection.

FinCEN anticipates that this proposed rule, if made effective as

proposed, would result in at least a 2 million reduction in the number

of currency transaction reports required to be filed annually, and a

cost reduction to banks of $16 million. FinCEN believes that these

estimated reductions are reasonable, and probably conservative.

Title: Currency Transaction Report.

OMB Number: 1506-0005.

Description of Respondents: All financial institutions, except

casinos.

Estimated Number of Respondents: 250,000.

Frequency: As required.

Estimate of Burden: Reporting average of 19 minutes per response;

recordkeeping average of 5 minutes per response.

Estimate of Total Annual Burden on Respondents: 10,000,000

responses. Reporting burden estimate = 3,166,667 hours; recordkeeping

burden estimate = 833,333 hours. Estimated combined total of 4,000,000

hours.

Estimate of Total Annual Cost to Respondents for Hour Burdens:

Based on $20 per hour, the total cost to the public is estimated to be

$80,000,000.

Estimate of Total Other Annual Costs to Respondents: None.

Type of Review: Extension.

FinCEN specifically invites comments on the following subjects: (a)

whether the proposed collection of information is necessary for the

proper performance of the mission of FinCEN, including whether the

information shall have practical utility; (b) the accuracy of FinCEN's

estimate of the burden of the proposed collection of information; (c)

ways to enhance the quality, utility, and clarity of the information to

be collected; and (d) ways to minimize the burden of the collection of

information on respondents, including through the use of automated

collection techniques or other forms of information technology.

In addition, the Paperwork Reduction Act of 1995 requires agencies

to estimate the total annual cost burden to respondents or

recordkeepers resulting from the collection of information. Thus,

FinCEN also specifically requests comments to assist with this

estimate. In this connection, FinCEN requests commenters to identify

any additional costs associated with the completion of the form. These

comments on costs should be divided into two parts: (1) any additional

costs associated with reporting; and (2) any additional costs

associated with recordkeeping.

In accordance with the requirements of the Paperwork Reduction Act

of 1995, 44 U.S.C. 3501 et seq., and its implementing regulations, 5

CFR 1320, the following information concerning the collection of

information as required by 31 CFR 103.22 is presented to assist those

persons wishing to comment on the information collection.

FinCEN anticipates that this proposed rule, if enacted as proposed,

would result in a reduction in hours spent complying with exemption

requirements of 350,000 hours, and a reduction in cost to banks of

$7,500,000. This is a conservative estimate, based on comments and

discussions with banking industry representatives of the cost of

complying with the administrative exemption system requirements.

Title: Currency transaction reporting exemption recordkeeping (31

CFR 103.22).

OMB Number: 1506-0006.

Description of Respondents: All banks.

[[Page 47163]]

Estimated Number of Respondents: 19,000.

Frequency: As required.

Estimate of Burden: Recordkeeping average of 2 hours per response.

Estimate of Total Annual Burden on Respondents: 25,000.

Recordkeeping burden estimate = 50,000 hours.

Estimate of Total Annual Cost to Respondents for Hour Burdens:

Based on $20 per hour, the total cost to the public is estimated to be

$1,000,000.

Estimate of Total Other Annual Costs to Respondents: None.

Type of Request: Extension.