Amendment to the Bank Secrecy Act RegulationsExemptions from the Requirement To Report Transactions in CurrencyPhase II

DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 103

RIN 1506-AA12

Amendment to the Bank Secrecy Act Regulations--Exemptions from

the Requirement To Report Transactions in Currency--Phase II

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Final rule.

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SUMMARY: This document contains a final rule that further reforms and

simplifies the process by which depository institutions may exempt

transactions of retail and other businesses from the requirement to

report transactions in currency in excess of $10,000, and restates

generally, to reflect such changes, the text of the Bank Secrecy Act

regulation requiring the reporting by financial institutions of

transactions in currency. The final rule, as issued by the Financial

Crimes Enforcement Network (``FinCEN''), constitutes a further step in

achieving 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: Effective date. October 21, 1998.

Applicability date. See Sec. 103.22(d)(11) of the final rule

contained in this document.

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director,

FinCEN, (703) 905-3930; Charles Klingman, Financial Institutions Policy

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

Cynthia L. Clark, Deputy Chief Counsel, and Albert R. Zarate, Attorney-

Advisor, Office of Chief Counsel, FinCEN, (703) 905-3590.

SUPPLEMENTARY INFORMATION:

[[Page 50148]]

I. Statutory Provisions

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

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

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

to issue regulations requiring financial institutions to keep records

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

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

counter-money laundering programs and compliance procedures.

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

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

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

delegated to the Director of FinCEN.

The reporting by financial institutions of transactions in currency

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

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

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

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

to require reports of domestic coin and currency transactions.

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

exemptions from the currency transaction reporting requirement were

added to 31 U.S.C. 5313 by the Money Laundering Suppression Act of 1994

(the ``Money Laundering Suppression Act''), Title IV of the Riegle

Community Development and Regulatory Improvement Act of 1994, Pub. L.

103-325 (September 23, 1994). 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

entities. The requirements of that subsection are at present reflected

in the terms of 31 CFR 103.22(h) (which is amended and redesignated as

31 CFR 103.22(d) by the final rule published in this document).

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 that

(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

(C) meets criteria which the Secretary determines are sufficient

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 subsection (e). 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 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. Finally, 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].

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. These

include the retention by banks of liability for making incorrect

exemption determinations, and 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 to

banks that grant exemptions). Finally, advances in technology have made

it less costly for some banks simply 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 prior 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

[[Page 50149]]

exemption under the prior administrative exemption system.1

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\1\ As noted below, transactions in currency between domestic

banks were 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'' were 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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II. Phase I--Final Rule

On September 8, 1997, a final rule revising paragraph (h) of 31 CFR

103.22 was published in the Federal Register. See 62 FR 47141. The

final rule modified (and as modified, superseded) an interim rule on

exemptions (collectively, ``Phase I'') that FinCEN published with

request for comments in April 1996. See 61 FR 18204. The Phase I final

rule exempted from the requirement to report transactions in currency

in excess of $10,000, transactions between banks 2 and (i)

other banks operating in the United States; (ii) government departments

and agencies, and entities that otherwise exercise governmental

authority; (iii) entities listed on certain national stock exchanges;

and (iv) certain subsidiaries of those listed entities.

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\2\ The Phase I interim and final rules, as well as the notice

of proposed rulemaking to which the final rule contained in this

document relates, used the term ``bank'' to define the class of

financial institutions to which the rules respectively applied. As

defined in 31 CFR 103.11(c), that term includes both commercial

banks and other classes of depository institutions at which the

language of 31 U.S.C. 5313 is directed. The final rule contained in

this document continues to use the term ``bank,'' rather than

depository institution.

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As FinCEN explained when the Phase I interim rule was published,

the transactions in currency of bank customers in those categories were

either required to be exempt from reporting by statute, were already

effectively exempt from reporting under the terms of 31 CFR Part 103,

or, in the case of listed entities and certain of their subsidiaries,

involved enterprises whose routine currency transaction reports are of

little or no value to law enforcement officials. Recognition of

exemption under the Phase I interim and final rules required simply the

filing of a single document identifying the exempt person and the

depository institution that exempts it. Transactions in currency, like

other transactions, remained subject to the requirement that banks

report suspicious transactions.

III. Phase II--Notice of Proposed Rulemaking

On the same day the Phase I final rule was published in the Federal

Register, FinCEN published a notice of proposed rulemaking (the

``Notice'') to further reform and simplify the process by which banks

may exempt, from the requirement to report transactions in currency in

excess of $10,000, transactions involving certain of their customers.

See 62 FR 47156. As FinCEN stated in the Notice, the objective of the

second stage reform (``Phase II'') was to provide, to the extent

possible, a blanket relief, similar to that contained in Phase I, for

those categories of business enterprise that could not easily be

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

regulatory and marketplace oversight that shape the environment of

publicly-held companies. To accomplish that goal, while still providing

federal authorities with the tools to monitor and prevent abuse, FinCEN

proposed a pared-down exemption system.

In the Notice, FinCEN specifically proposed the following changes:

(i) The addition of two new classes of exempt persons, non-listed

businesses and payroll customers; (ii) the addition of special

requirements governing the exemption of non-listed businesses and

payroll customers, namely, an initial projection of such exempt

person's annual currency needs and an annual filing listing the

aggregate currency deposits and withdrawals of such exempt person

during the preceding year; (iii) the addition of five new operating

rules governing the exemption of non-listed businesses and payroll

customers; (iv) the deletion of paragraphs (b) through (g) of present

section 103.22 (the ``prior'' administrative exemption system); (v) the

redesignation of paragraph (h) (reflecting the terms of the Phase I

final rule) of section 103.22 as paragraph (d) of that section; and

(vi) the addition of certain conforming changes to the redesignated

paragraph (d).

On November 28, 1997, FinCEN published a notice (the ``November

Extension'') in the Federal Register extending the comment period for

the Notice and soliciting additional comments on certain matters

relating to the Notice. See 62 FR 63298. The decision to extend the

comment period and the request for additional comments resulted from

discussions held at an open meeting to discuss the Notice on November

7, 1997.3

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\3\ FinCEN announced the public meeting in the Federal Register

on October 31, 1997. See 62 FR 58909.

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In the November Extension, FinCEN stated that, in light of the

comments made at the open meeting, it did not believe additional

comments concerning the proposed estimation and aggregate currency

reporting provisions were necessary. FinCEN did, however, indicate that

it was important that alternatives to those proposals be brought

forward by interested parties, and it specifically sought comments on

an alternative described in the November Extension. That alternative

would have required a bank, when designating a non-listed business or a

payroll customer as an exempt person, to (i) include on its initial

designation form a statement of the manner in which it applies its

``know-your-customer'' standards to customers whose currency

transactions it exempts from the currency transaction report

requirements, and (ii) certify in an annual renewal of exempt status

filing that during the preceding year there were no transactions

involving any accounts of the person at the bank that would have

required the filing of a suspicious activity report. FinCEN also sought

comments on the impact of changing the word ``shall'' to ``may'' in

proposed 103.22(d)(5)(v), to provide a bank with the option, but not

the necessity, of exempting a customer on a bank-wide basis. Lastly,

FinCEN repeated its request, made in the Notice, for comments relating

to the treatment for exemption purposes of currency deposits that

commingle funds derived from eligible business activities with funds

derived from ineligible business activities.

IV. Summary of Comments and Revisions

A. Comments on the Notice--Overview

FinCEN received 70 written responses to the Notice. Of these, 51

were submitted by banks or bank holding companies, 8 by financial

institution trade associations, 4 by credit unions, 2 by law firms, 2

by private individuals, and 1 by a compliance software designer.

Comments on the Notice focused primarily on the following proposed

provisions: (i) The projection and annual aggregate currency reporting

requirements (including possible alternatives); (ii) the twelve-month

waiting period governing the designation of non-listed businesses and

payroll customers as exempt persons; (iii) the operating rule making a

sole proprietorship eligible for exemption only to the extent of its

business (as opposed to personal) transactions; (iv) the operating rule

making certain businesses ineligible for designation as exempt persons

to the extent they engage in one or more listed ineligible business

activities; and (v) the limitation on exemption with respect to

[[Page 50150]]

transactions carried out by an exempt person as an agent for a third

party. Regarding the latter three provisions, commenters expressed

particular concern over the application of those provisions to

situations where their customers commingle funds derived from personal

transactions or ineligible business activities with eligible business

activities.

After full and careful consideration of all of the comments, 31 CFR

103.22 is revised to read as stated in the final rule.

B. Final Rule

The format of the final rule is generally consistent with the

Notice. The terms of the final rule, however, differ from the terms of

the Notice in the following significant respects:

Banks are not required to initially estimate and then

report annually the aggregate currency deposits and withdrawals of any

customer that is designated as a non-listed business or payroll

customer;

Banks are required to renew exemptions for non-listed

business and payroll customers every two years rather than every year;

Banks must maintain a system of monitoring the

transactions in currency of each exempt customer for any and all

reportable suspicious activity;

As part of the required biennial renewal, banks must

certify that they have complied with the requirement to maintain a

system of monitoring for reportable suspicious activity;

Banks may, but need not, treat all eligible accounts of a

person at a single institution as exempt;

Banks are not required to segregate funds derived from

non-business activities when exempting a transaction in currency of a

sole proprietorship; and

Banks may treat a business that engages in multiple

activities as a non-listed business so long as that business does not

engage primarily in one or more of those activities described in

paragraph (d)(6)(viii).

The changes adopted in the final rule are intended to improve,

clarify, and refine the rule's provisions in light of the objectives

for implementation of 31 U.S.C. 5313(d)-(g) that FinCEN outlined when

the Phase I interim rule was published. Those objectives are reducing

the burden of currency transaction reporting, requiring reporting only

of information that is of value to law enforcement and regulatory

authorities, and, perhaps most importantly, creating an exemption

system that is cost-effective and that works. See 61 FR 18205.

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 final rule completely restates section 103.22

so that its terms may be presented clearly.

For convenience, the redistribution of the provisions of prior

section 103.22 may be summarized as follows:

Distribution Table

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Prior 103.22 New 103.22

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

103.22(a)(1):

Sentences 1-2............................ Deleted in part; 103.22(b)(1).

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

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

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

103.22(a)(3)................................. Deleted in part; 103.22(b)(1), 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) 4............................... Deleted in part; 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), (vi)........................ 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)(4).

No provision................................. 103.22(d)(5)(i)-(ii).

103.22(h)(4)(i)-(iv)......................... 103.22(d)(6)(i)-(iv).

103.22(h)(4)(v).............................. 103.22(d)(6)(x).

No provision................................. 103.22(d)(6)(v)-(ix).

103.22(h)(5)................................. 103.22(d)(7).

103.22(h)(6)(i).............................. 103.22(d)(8)(i).

103.22(h)(6)(ii)............................. 103.22(d)(8)(ii).

103.22(h)(6)(iii)............................ 103.22(d)(8)(iii).

103.22(h)(7)................................. 103.22(d)(9)(i).

No provision................................. 103.22(d)(9)(ii).

103.22(h)(8)................................. 103.22(d)(10).

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

[[Page 50151]]

No provision................................. 103.22(d)(11).

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\4\ All references to paragraph (h) of section 103.22 are to the final rule that was published in the Federal

Register on September 8, 1997. See 62 FR 47141.

V. Section-by-Section Analysis

A. 103.22(a)--General

Paragraph (a) continues to describe generally the scope and

organization of restated Sec. 103.22. One commenter asked that FinCEN

add language to this paragraph indicating that banks are not required

to exempt certain transactions from the requirement to report

transactions in currency in excess of $10,000. FinCEN believes that

such a change is unnecessary; the last sentence of paragraph (a) (as

proposed and as adopted in the final rule) already refers to rules

``permitting'' banks to exempt certain transactions from the reporting

requirement.

B. 103.22(b)--Filing Obligations

Paragraph (b) continues to contain the blanket statement of the

obligation of financial institutions to report transactions in currency

in excess of $10,000, as well as a separate statement describing the

filing obligations of casinos.

Paragraph (b) also continues to state 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. As stated in

the Notice, this change from the administrative exemption system

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. FinCEN received no comment on this

change.

C. 103.22(c)--Aggregation

Paragraph (c) continues to restate the reporting rules applicable

to multiple branches of financial institutions and multiple

transactions of their customers. Those rules reflect, with one

exception relating to recordkeeping facilities, the terms of prior

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

change (discussed below) that permits affiliated banks to make a single

designation of each exempt person, the Notice proposed a change

clarifying 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. The only comment that FinCEN received

concerning recordkeeping facilities stated that the change would create

an excessive burden on large banks because such banks typically have

central recordkeeping facilities. Given the utility of treating a

recordkeeping facility as a financial institution, particularly in

cases in which affiliated banks make a single designation of exempt

person, and that the commenter did not explain how central

recordkeeping could lead to an excessive reporting burden on banks, the

proposal regarding recordkeeping facilities is adopted in the final

rule.

D. 103.22(d)--Transactions of Exempt Persons

1. General

Paragraph (d)(1) continues to state generally that, subject to the

limitation on exemption set forth in paragraph (d)(7), no bank is

required to file a currency transaction report otherwise required by

paragraph (b) with respect to any transaction in currency between an

exempt person and such bank.5 This paragraph also adopts the

language set forth in the Notice that states that a non-bank financial

institution need not file a currency transaction report with respect to

a transaction in currency between the institution and a commercial

bank. That provision is reflected in paragraph (b)(1)(iii) of prior

section 103.22.

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\5\ FinCEN anticipates that Internal Revenue Service Form 4789

(the form currently used to file a currency transaction report) may

be revised at some point to require that a bank check a box when it

files a currency transaction report with respect to a transaction

conducted by an exempt person. The purpose of such a requirement

would be to provide FinCEN with a more accurate estimate of the

number of currency transactions reports required to be filed under

the revised exemption system.

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At least one commenter suggested that FinCEN clarify, in light of,

inter alia, the Right to Financial Privacy Act, 12 USC 3413 et seq.,

that a bank must continue to file currency transaction reports for

particular customers otherwise eligible for treatment as exempt persons

if it elects not to use the reformed exemption system for those

customers. The retention in paragraph (d)(1) of the phrase ``otherwise

required by paragraph (b)'' is meant to convey that very point--namely,

that a bank is required to file a currency transaction report regarding

a transaction in currency in excess of $10,000 unless the bank follows

the procedures set forth in paragraph (d) for designating the customer

involved as an exempt person so that transactions by that customer are

exempt from the currency transaction reporting requirement.

2. Exempt Person

The final rule adopts the two classes of exempt person introduced

in the Notice--namely, non-listed businesses and payroll customers. In

addition, the final rule restates, with two minor technical changes,

the existing classes of exempt person (set forth in prior section

103.22(h)(2)). First, the phrase ``or analogous equity interest'' has

been added after the term ``common stock'' in paragraph (d)(2)(v) to

make clear that any subsidiary of any listed entity may be treated as

an exempt person, regardless of whether the subsidiary has adopted the

corporate form of business. Thus, any subsidiary of a listed entity may

be treated as an exempt person so long as 51 per cent of the

subsidiary's equity interest is owned by the listed entity. Second, the

terms of prior paragraph (h)(2)(vi), stating that in the case of non-

bank financial institutions, listed entities and their subsidiaries may

be treated as exempt persons only to the extent of their domestic

operations, have been incorporated into paragraphs (d)(2)(iv) and (v).

Paragraphs (d)(2)(vi) and (vii) continue to require that any

business must have been a bank customer for twelve months before it is

eligible for exemption as a non-listed business or a payroll customer.

Several commenters argued that this twelve-month period was excessive

(particularly compared to the two-month minimum period that has evolved

administratively under prior paragraphs (b)(2) and (d) of section

103.22) and would discourage customers from changing banks.

As stated in the Notice, the ten-month difference in time periods

is justified by the elimination of virtually all of the

[[Page 50152]]

other requirements of the prior administrative exemption system. Under

the reformed system, a bank will be able to exempt the transactions in

currency of a non-listed business or payroll customer simply by the

one-time filing of a form that identifies the exempt person and the

exempting bank, and by renewing that initial designation every two

years. Thus, banks no longer will be confined to exempting only those

transactions falling within certain ``permitted'' ranges. In addition,

banks will no longer be required to prepare and submit signed exempt

statements, or to maintain mandatory exemption lists. Given the removal

of these time-consuming procedures, coupled with the need to keep some

``tension'' in the liberalized exemption system so that it does not

become a vehicle for more efficient money laundering, FinCEN believes

that a ten-month difference is warranted.

The final rule also adopts in paragraph (d)(2)(vi), with one minor

change, the definition of a non-listed business set forth in the

Notice. The definition, based in large part on 31 U.S.C. 5313(e)(2),

confines permissible exemptions to bank customers located in the United

States that have transaction account relationships with the exempting

bank involving the recurring use of currency in amounts exceeding

$10,000. The term ``United States'' has been added to the clause after

the comma in paragraph (d)(2)(vi)(C), to make clear that a non-listed

business must be incorporated or organized under the laws of the United

States or a State, or must be registered as and eligible to do business

within the United States or a State. The term ``United States'' is

specifically defined in 31 CFR 103.11(nn) to include, among other

things, the District of Columbia and the Territories and Insular

Possessions of the United States.

The final rule also continues to track the structure described

above in the context of defining a payroll customer. Thus, paragraph

(d)(2)(vii) requires that any person must have been a bank customer for

at least twelve months before it is eligible for exemption as a payroll

customer, and limits such designation to bank customers who regularly

withdraw more than $10,000 to pay their United States employees. For

consistency with the preceding paragraph, and in response to at least

one comment that sought clarification of the term ``U.S. resident'' in

the Notice, paragraph (d)(2)(vii) has been changed to state that an

exemptible payroll customer must be incorporated or organized under the

laws of the United States or a State, or must be registered as and

eligible to do business within the United States or a State.

3. Initial Designation of Exempt Persons

Paragraph (d)(3) continues to state generally that, when initially

designating one of its customers as an exempt person, a bank must make

a one-time filing (using the form now used to file a currency

transaction report, until such time as FinCEN issues a form

specifically for this purpose) that identifies the exempt person and

the exempting bank. With respect to its bank customers who are

themselves banks, the exempting bank will have the option in the future

of filing its current list of bank customers in such a format and

manner as FinCEN may specify.

The Notice included a provision that would have required a bank,

when designating a non-listed business or payroll customer as an exempt

person, to include a projection of the exempt person's annual currency

deposits and withdrawals. Most commenters objected to this proposal.

According to these commenters, any projections of currency activity

would amount to ``little more than guesswork'' because banks do not

have in place the systems capable of tracking currency activity in this

manner. A few commenters also expressed apprehension over a bank

incurring liability if it should significantly underestimate the

currency activity of one of its customers.

Several commenters also expressed reservations about the

alternative that FinCEN outlined in the November Extension. That

alternative would have required a bank to describe the manner in which

it applies its ``know-your-customer'' standards to the tracking of

currency deposits of its commercial customers. At least one commenter

noted that this requirement would be superfluous, given that a bank's

exemption process and currency tracking system is reviewed in detail

during its BSA examination and that any application of a bank's know-

your-customer policy will be monitored by bank examiners in any event.

Based on these comments, and mindful of the goal to create a

reformed exemption system that is cost-effective and efficient, the

final rule includes neither a requirement that a bank include in its

initial designation a projection of its exempt customers' currency

activity, nor a requirement that the bank describe in that designation

the manner in which the bank applies its ``know-your-customer''

policies to exempt customers.

4. Annual Review

Paragraph (d)(4) makes explicit the requirement that a bank verify,

at least once each year, the status of all those entities it has

designated as exempt persons. This annual review requirement was

implicit in the terms of proposed paragraph (d)(7)(iii), which would

have required that, absent specific knowledge of any information that

would be grounds for revocation, a bank verify the status of those

entities it has designated as exempt persons only once each year.

FinCEN notes that this requirement to annually review customers

designated as exempt persons is reflected both in the terms of 31

U.S.C. 5313(e)(5) and in the administrative practice surrounding the

superseded exemption system.

Paragraph (d)(4) also states that a bank must review at least

annually the application to each account of a non-listed business or

payroll customer of the monitoring system required to be maintained by

paragraph (d)(9)(ii). This language has been added to help ensure that

the reformed system is not exploited by criminals as a more efficient

vehicle for money laundering.

5. Biennial Filing With Respect to Certain Exempt Persons

The Notice would have required banks, in the case of non-listed

businesses and payroll customers, to file annual updates containing a

statement of the exempt person's annual currency deposits and

withdrawals through all transaction accounts for the preceding year.

Many commenters argued adamantly against an annual aggregate

currency reporting requirement. Those commenters stressed that banks do

not have the automated systems in place to comply with such a

requirement, and that the cost of implementing such systems would be

unreasonably high. Many commenters also maintained that, rather than

comply with an annual aggregate currency reporting requirement, banks

would choose to continue to file currency transaction reports on

transactions involving exempt persons.

Several commenters also voiced their dissatisfaction with the

alternative that FinCEN outlined in the November Extension. That

alternative would have required a bank to certify that, during the

preceding year, there was no transaction involving any accounts of the

exempt person at the bank that would have required the bank to file a

suspicious transaction report with respect to that person under 31 CFR

103.21. At least one commenter

[[Page 50153]]

expressed the fear that this certification would be viewed as a

warranty that no suspicious activity occurred, and that banks would be

unwilling to risk civil or criminal liability by making such a

statement.

In response to these comments, FinCEN has deleted the provision

requiring annual statements of the aggregate currency deposits and

withdrawals of non-listed businesses and payroll customers. Instead of

requiring annual currency statements, the final rule requires simply

that banks maintain a system of monitoring the transactions in currency

of non-listed businesses and payroll customers for suspicious activity,

see paragraph (d)(9)(ii), and renew the exempt status of those

customers every two years. See paragraph (d)(5)(ii). As part of that

biennial renewal, banks must certify that their system of monitoring

the transactions in currency of such exempt persons for suspicious

activity has been applied as necessary, but at least annually, to the

account of the exempt person to whom the biennial renewal applies. See

id.

The filing required by paragraph (d)(5) need only be made once

every two years. While the terms of 31 U.S.C. 5313(e)(5) contemplate an

annual review, the statute does not explicitly set a time for the

filing of updated information garnered as a result of that review. In

light of at least a few comments suggesting that banks be required to

file updated information less frequently than once a year, the final

rule requires banks to renew exemption status every two years.

The date on which renewals must be filed also has changed from the

Notice. At least one commenter suggested that the proposed date of

February 28 be changed because it coincides with the time period in

which banks must make other regulatory filings. The final rule

therefore adopts the date of March 15 as the date on which biennial

renewals must be filed.

Consistent with the Notice, paragraph (d)(5) states that biennial

renewals also must include information about any change in control of

the exempt person of which the bank knows or should know based on its

records. At least one commenter contended that the ``should know''

standard essentially requires a bank to review constantly the

information it possesses on each of its exempt customers, and therefore

would unreasonably burden large banks where there are potentially many

points of contact between the customer and the bank.

That the ``should know'' standard requires a bank to exercise some

degree of due diligence when renewing the exempt status of one of its

customers is wholly intentional. This concept of due diligence is

entirely consistent with the language set forth in the Phase I final

rule, which states that a bank must, when applying the terms of the

reformed exemption system, take such steps that a reasonable and

prudent bank would take and document to protect itself from loan or

other fraud or loss based on misidentification of a person's status.

Indeed, as one commenter noted, ``no institution would exempt a

customer, either under the new or old system, without first engaging in

extensive due diligence.'' Thus, the final rule requires biennial

renewals to include information concerning a change in control of which

a bank knows or should know based on its records.

6. Operating Rules

The final rule adopts, with a few modifications, the five operating

rules introduced in the Notice relating to the Phase II rules.

a. Paragraph (d)(6)(v) states that a bank may aggregate all

customer accounts to apply the exemption provisions to that customer.

In response to several comments, the word ``shall'' in the Notice has

been changed to ``may,'' to provide a bank with the option of exempting

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

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

$10,000. To ensure consistency in the treatment of their exempt

customers by banks, a sentence has been added in the final rule that

makes clear that if a bank elects to treat all transaction accounts of

a customer as a single account, the bank must continue to treat the

accounts as a single account for Bank Secrecy Act purposes thereafter.

b. Paragraph (d)(6)(vi) permits affiliated banks to make a single

designation of an exempt person, that will apply to all accounts of the

person at all banks within the affiliated group. The language in the

Notice pertaining to projected and annual currency transaction activity

has been deleted.

c. Paragraph (d)(6)(vii) states that sole proprietorships may be

treated as either non-listed businesses or payroll customers if they

otherwise meet the requirements for treatment as such exempt persons.

The Notice included provisions that would have made certain accounts of

a sole proprietorship ineligible for exemption to the extent they are

``personal'' accounts, or otherwise commingle personal and business

funds. Several commenters argued against these limitations, stating

that it would be difficult, if not impossible, for banks to distinguish

between personal and business-related transactions in currency. Again,

mindful of the goal to create a reformed exemption system that works,

and given that banks are under an obligation to report suspicious

activity concerning the transactions in currency of their exempt

customers, including sole proprietorships, the final rule does not

include a provision that would require banks to track commingled funds.

However, it should be noted that only ``commercial accounts'' are

eligible; nothing in the final rule permits the exemption of a sole

proprietor's personal bank accounts.

d. Paragraph (d)(6)(viii) lists those businesses that may not be

exempted under the reformed exemption system as non-listed companies

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

customer definition). The Notice sought comments on the treatment of

businesses with multiple activities of which one is an activity for

which an exemption is barred. In addition, both the Notice and the

November Extension solicited comments on the advisability of requiring

multiple-activity businesses to segregate funds derived from eligible

business activity from those derived from ineligible business activity,

in order to be eligible for treatment as an exempt person.

Several commenters suggested that a multiple-activity business

should be eligible for treatment as an exempt person because a contrary

rule would make many of its customers ineligible for treatment as

exempt persons, in particular grocery stores. According to those

commenters, such multiple-activity businesses, as a matter of common

practice, commingle funds derived from different activities, and would

not pay the cost of maintaining multiple accounts in order to avail

themselves of the advantages of the reformed exemption system.

In light of these comments, the final rule simply states that a

business that engages in multiple business activities may be treated as

a non-listed business so long as that business does not engage

primarily in one or more of those activities described in paragraph

(d)(6)(viii)--i.e., no more than 50% of its gross revenues is derived

from ineligible business activity. FinCEN believes that this change

will benefit banks by providing them with a bright-line test (the same

one, FinCEN notes, that has evolved around the administrative practice

surrounding the prior exemption system) for determining

[[Page 50154]]

whether to treat multi-activity businesses as exemptible non-listed

businesses. To further facilitate the use of the reformed exemption

system, the final rule does not include a provision that would require

a multiple-activity business to segregate commingled funds to be

eligible for treatment as an exempt person.

e. Paragraph (d)(6)(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). As stated in the

Notice, 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). Paragraph (d)(6)(ix) also provides, consistent with the

Notice, 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.

FinCEN received several comments requesting that the definition of

a transaction account be broadened. Because the terms of 31 U.S.C.

5313(e)(2)(A) specifically define a transaction account by reference to

12 U.S.C. 461(b)(1)(C), the final rule adopts the definition of a

transaction account set forth in the Notice. Should the above

definition of a transaction account prove too difficult to apply,

FinCEN will entertain requests for administrative relief from the

application of that definition.

7. Limitation on Exemption

Paragraph (d)(7) carries over the terms of prior paragraph

103.22(h)(5) and states that the exemption from reporting contained in

paragraph (d)(1) does not apply to a transaction carried out by an

exempt person as an agent of another person who is the beneficial owner

of the funds that are the subject of a transaction in

currency.6 With regard to exempt customers acting as agents

for third parties, a few commenters noted that it was common practice

for those customers to commingle the funds derived from their agent

activities with those funds derived from their other business

activities. Because of the difficulty in distinguishing between the two

kinds of funds, FinCEN was asked not to adopt a rule that would require

customers to segregate funds derived from agent activities to be

eligible for treatment as an exempt person.

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

\6\ FinCEN indicated that it would consider additional comments

on this subject when it issued the Phase I final rule. See 62 FR

47141, 47146.

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

Given these comments, the final rule does not require that an

exempt person segregate agent-derived funds to be eligible for

treatment as an exempt person. However, the language of paragraph

(d)(7)(relating to transactions carried out by an exempt person as an

agent for another), has not been deleted. The exemption procedures will

apply only to transactions conducted for the account of the exempt

person, not for the account of a third party who is not otherwise an

exempt person. See 31 U.S.C. 5313(f)(1)(B) and paragraph (d)(8)(ii) of

the final rule.

It should be noted that a bank customer that commingles funds from,

e.g., the sale of money orders or of goods sold on consignment, with

its normal business receipts, for deposit purposes into its own general

account engages in a transaction that is exempt or not depending upon

the customer's own status, regardless of the fact that a portion of the

funds are subject to a potential equitable or other lien by a third

party (the issuer of the money orders or the consignor of the goods) if

the customer does not pay an amount equal to the money order or

consignment sales proceeds over to the issuer or consignor. If instead,

the business selling the money orders or consigned goods deposits the

funds directly into an account opened by the money order issuer or the

goods' consignor, the eligibility of the transaction for exemption

would depend upon the status of the issuer or consignor.

8. Limitation on Liability

Paragraph (d)(8)(i) generally states, consistent with the Notice,

that once a bank has complied with the requirements of paragraph (d),

it is protected from any penalty for failure to file a currency

transaction report concerning a transaction in currency by an exempt

person.

Paragraph (d)(8)(ii) states that subject to the specific terms of

paragraph (d), and absent any specific knowledge of any information

indicating that a customer no longer meets the requirements of an

exempt person, a bank satisfies the requirements of paragraph (d) if it

continues to treat that customer as an exempt person until the date of

that customer's next periodic review. This language is meant to

harmonize the requirement, contained in paragraph (d)(4), that banks

review the status of their exempt customers at least once a year, with

the provisions relating to the revocation of a customer's exempt status

that are set forth at paragraph (d)(10).

9. Obligations to File Suspicious Activity Reports and Maintain a

System to Monitor Transactions in Currency

Paragraph 103.22(d)(9)(i) states that the reformed exemption system

does not create any exemption from, or have any negative effect at all

on, the requirement that banks file suspicious transaction reports with

respect to transactions that satisfy the requirements of the rules of

FinCEN (31 CFR 103.21), the federal bank supervisory agencies, or both,

relating to suspicious activity reporting. See 12 CFR 21.11 (Office of

the Comptroller of the Currency); 12 CFR 208.20 (Federal Reserve

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

563.180 (Office of Thrift Supervision); 12 CFR 748.1 (National Credit

Union Administration). Indeed, as pointed out in the notice of proposed

rulemaking, the operation of a coordinated and uniform suspicious

transaction reporting system is a basis for the revision and

simplification of the exemption rules contained in this final rule. In

the context of the revised CTR exemption system, the indicia of

suspicious activity can include both specific transactions and overall

transaction volume substantially inconsistent with the sort in which

the particular customer normally would be expected to engage. Thus, as

stated in the text of the rule itself, anomalous transaction trends or

patterns (such as a sharp increase from one year to the next in the

gross total of currency transactions made by an exempt person) may

trigger the obligations of a bank under section 103.21.

Paragraph (d)(9)(ii) has been added to make explicit that the

continuing obligation to file suspicious activity reports (where

appropriate) necessarily requires a bank to establish and maintain a

monitoring system for non-listed business and payroll customers that is

reasonably designed to detect those transactions in currency that would

require a bank to file a suspicious transaction report with respect to

an exempt person.7 FinCEN purposely has not attempted to

describe the exact contours of an acceptable monitoring system. Because

the situation of each bank and each customer are different, FinCEN

believes that mandating a uniform monitoring system would be ill-

advised. From FinCEN's perspective, a monitoring system meets the

requirements of paragraph (d)(9)(ii) if it

[[Page 50155]]

is reasonably designed to detect, for each exempt account, those

transactions in currency that would require a bank to file a suspicious

transaction report.

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

\7\ The Bank Secrecy Act provides Treasury with the authority

to condition the grant of discretionary exemptions. See 31 U.S.C.

5313(e).

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

The adoption of the monitoring system requirement is intended to

advance the objectives of creating an exemption system that is simple

and as cost-effective as possible, while still keeping some tension in

the liberalized system. FinCEN believes that an increased emphasis on

suspicious activity reporting with respect to transactions in currency

of exempt persons should provide that needed tension. FinCEN further

notes that maintaining a monitoring system reasonably designed to

detect suspicious activity, and certifying compliance with that

requirement, should not pose additional burdens on banks, because they

remain subject in any event to the requirement to file reports of

suspicious activity with respect to any transaction they exempt from

the requirement to file currency transaction reports under the reformed

exemption system. As explained above, the statement of the requirement

to maintain a specific currency transaction monitoring program for

accounts of exempt persons is limited to accounts of non-listed

businesses and payroll customers, the classes of exempt persons with

respect to which annual review requirements are specifically imposed by

the final rule. However, banks are required to report suspicious

transactions, including transactions in currency, in the accounts of

all exempt persons (as in all other accounts) and paragraph

(d)(9)(ii)'s more detailed specification does not by implication lessen

the suspicious transaction reporting obligations or procedures of banks

generally under paragraph (d)(9)(i) and 31 CFR 103.21.

10. Revocation

Paragraph (d)(10) states that the status of an exempt person

automatically ceases, without any action by the Department of the

Treasury, when an entity ceases to be listed on the applicable stock

exchange or a subsidiary of a listed entity ceases to have at least 51

per cent of its common stock or analogous equity interest owned by a

listed entity. The phrase ``analogous equity interest'' has been added

to reflect the change made to the definition of an exempt subsidiary

set forth in paragraph (d)(2)(v).

11. Transitional Rule

Paragraph 103.22(d)(11) states the transitional rules governing the

use of the reformed exemption system. A few commenters requested that

FinCEN provide ample time for banks to move from the prior

administrative exemption system to the reformed system, particularly

given that banks will need some time to address year 2000 computer

issues. In light of these comments, the transition period stated in the

Notice--that, in effect, provides banks until the end of the calendar

year 1999 to make the transition to the reformed system--has been

extended in the final rule to July 1, 2000. Provided that banks comply

with the transition period set forth in the final rule, they may treat

a customer as exempt under either the prior administrative exemption

rules or the reformed exemption procedures set forth in paragraph

103.22(d) (so long as they do so consistently) during the transitional

period.

V. Executive Order 12866

The Department of the Treasury has determined that this final rule

is not a significant regulatory action under Executive Order 12866.

VI. 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 final rule provides

the most cost-effective and least burdensome alternative to achieve the

objectives of the rule.

VII. Regulatory Flexibility Act

FinCEN certifies that this 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. By adding two new classes of customers, non-listed

businesses and payroll customers, to the list of exempt persons, the

final rule represents a significant decrease in the reporting burden

imposed on all depository institutions. FinCEN anticipates that the

addition of these two new classes of exempt persons can contribute to

at least a 2 million reduction in the number of currency transaction

reports filed annually, and a cost reduction to depository institutions

of $16 million. Further, the requirements placed upon depository

institutions under the reformed exemption system, as laid out in the

final rule, represent a substantial net decrease in the burdens

associated with the prior exemption process. For example, depository

institutions will no longer be required to prepare and submit signed

exemption statements, or to maintain customer exempt lists. Under the

reformed system, a depository institution will be able to exempt the

transactions in currency of an exempt person simply by the one-time

filing of a currency transaction report form that identifies the exempt

customer and the exempting depository institution, and, in the case of

non-listed businesses and payroll customers, renewing the exempt status

of its exempt customers every two years.

VIII. 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 final rule, if used by banks, can

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: 1506-0004.

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.

[[Page 50156]]

Estimate of Total Other Annual Costs to Respondents: None.

Type of Review: Extension.

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 part 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 final rule will 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: 1506-0009.

Description of Respondents: All banks.

Estimated Number of Respondents: 19,000.

Frequency: As required.

Estimate of Burden: Recordkeeping average of 2 hours per

respondent.

Estimate of Total Annual Burden on Respondents: Recordkeeping

burden estimate = 38,000 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

$760,000.

Estimate of Total Other Annual Costs to Respondents: None.

Type of Request: Extension.

List of Subjects in 31 CFR Part 103

Administrative practice and procedure, Authority delegations

(Government agencies), Banks and banking, Currency, Foreign banking,

Foreign currencies, Gambling, Investigations, Law enforcement,

Penalties, Reporting and recordkeeping requirements, Securities, Taxes.

Amendment

For the reasons set forth above in the preamble, 31 CFR part 103 is

amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND

FOREIGN TRANSACTIONS

1. The authority citation for part 103 continues to read as

follows:

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

2. Section 103.22 is revised to read as follows:

Sec. 103.22 Reports of transactions in currency.

(a) General. This section sets forth the rules for the reporting by

financial institutions of transactions in currency. The reporting

obligations themselves are stated in paragraph (b) of this section. The

reporting rules relating to aggregation are stated in paragraph (c) of

this section. Rules permitting banks to exempt certain transactions

from the reporting obligations appear in paragraph (d) of this section.

(b) Filing obligations--(1) Financial institutions other than

casinos. Each financial institution other than a casino shall file a

report of each deposit, withdrawal, exchange of currency or other

payment or transfer, by, through, or to such financial institution

which involves a transaction in currency of more than $10,000, except

as otherwise provided in this secction. In the case of the Postal

Service, the obligation contained in the preceding sentence shall not

apply to payments or transfers made solely in connection with the

purchase of postage or philatelic products.

(2) Casinos. Each casino shall file a report of each transaction in

currency, involving either cash in or cash out, of more than $10,000.

(i) Transactions in currency involving cash in include, but are not

limited to:

(A) Purchases of chips, tokens, and plaques;

(B) Front money deposits;

(C) Safekeeping deposits;

(D) Payments on any form of credit, including markers and counter

checks;

(E) Bets of currency;

(F) Currency received by a casino for transmittal of funds through

wire transfer for a customer;

(G) Purchases of a casino's check; and

(H) Exchanges of currency for currency, including foreign currency.

(ii) Transactions in currency involving cash out include, but are

not limited to:

(A) Redemptions of chips, tokens, and plaques;

(B) Front money withdrawals;

(C) Safekeeping withdrawals;

(D) Advances on any form of credit, including markers and counter

checks;

(E) Payments on bets, including slot jackpots;

(F) Payments by a casino to a customer based on receipt of funds

through wire transfer for credit to a customer;

(G) Cashing of checks or other negotiable instruments;

(H) Exchanges of currency for currency, including foreign currency;

and

(I) Reimbursements for customers' travel and entertainment expenses

by the casino.

(c) Aggregation--(1) Multiple branches. A financial institution

includes all of its domestic branch offices, and any recordkeeping

facility, wherever located, that contains records relating to the

transactions of the institution's domestic offices, for purposes of

this section's reporting requirements.

(2) Multiple transactions--general. In the case of financial

institutions other than casinos, for purposes of this section, multiple

currency transactions shall be treated as a single transaction if the

financial institution has knowledge that they are by or on behalf of

any person and result in either cash in or cash out totaling more than

$10,000 during any one business day (or in the case of the Postal

Service, any one day). Deposits made at night or over a weekend or

holiday shall be treated as if received on the next business day

following the deposit.

(3) Multiple transactions--casinos. In the case of a casino,

multiple currency transactions shall be treated as a single transaction

if the casino has knowledge that they are by or on behalf of any person

and result in either cash in or cash out totaling more than $10,000

during any gaming day. For purposes of this paragraph (c)(3), a casino

shall be deemed to have the knowledge described in the preceding

sentence, if: any sole proprietor, partner, officer, director, or

employee of the casino, acting within the scope of his or her

employment, has knowledge that such multiple currency transactions have

occurred, including knowledge from examining the books, records, logs,

information retained on magnetic disk, tape or other machine-readable

media, or in any manual system, and similar documents and information,

which the casino maintains pursuant to any law or regulation or within

the ordinary course of its business, and which contain information that

such multiple currency transactions have occurred.

(d) Transactions of exempt persons--(1) General. No bank is

required to file a report otherwise required by paragraph (b) of this

section with respect to any transaction in currency between an exempt

person and such bank, or, to the extent provided in paragraph

(d)(6)(vi) of this section, between such exempt person and other banks

affiliated with such bank. In addition, a non-bank financial

institution is not required to file a report

[[Page 50157]]

otherwise required by paragraph (b) of this section with respect to a

transaction in currency between the institution and a commercial bank.

(A limitation on the exemption described in this paragraph (d)(1) is

set forth in paragraph (d)(7) of this section.)

(2) Exempt person. For purposes of this section, an exempt person

is:

(i) A bank, to the extent of such bank's domestic operations;

(ii) A department or agency of the United States, of any State, or

of any political subdivision of any State;

(iii) Any entity established under the laws of the United States,

of any State, or of any political subdivision of any State, or under an

interstate compact between two or more States, that exercises

governmental authority on behalf of the United States or any such State

or political subdivision;

(iv) Any entity, other than a bank, whose common stock or analogous

equity interests are listed on the New York Stock Exchange or the

American Stock Exchange or whose common stock or analogous equity

interests have been designated as a Nasdaq National Market Security

listed on the Nasdaq Stock Market (except stock or interests listed

under the separate ``Nasdaq Small-Cap Issues'' heading), provided that,

for purposes of this paragraph (d)(2)(iv), a person that is a financial

institution, other than a bank, is an exempt person only to the extent

of its domestic operations;

(v) Any subsidiary, other than a bank, of any entity described in

paragraph (d)(2)(iv) of this section (a ``listed entity'') that is

organized under the laws of the United States or of any State and at

least 51 percent of whose common stock or analogous equity interest is

owned by the listed entity, provided that, for purposes of this

paragraph (d)(2)(v), a person that is a financial institution, other

than a bank, is an exempt person only to the extent of its domestic

operations;

(vi) To the extent of its domestic operations, any other commercial

enterprise (for purposes of this paragraph (d), a ``non-listed

business''), other than an enterprise specified in paragraph

(d)(6)(viii) of this section, that:

(A) Has maintained a transaction account at the bank for at least

12 months;

(B) Frequently engages in transactions in currency with the bank in

excess of $10,000; and

(C) Is incorporated or organized under the laws of the United

States or a State, or is registered as and eligible to do business

within the United States or a State; or

(vii) With respect solely to withdrawals for payroll purposes from

existing transaction accounts, any other person (for purposes of this

paragraph (d), a ``payroll customer'') that:

(A) Has maintained a transaction account at the bank for at least

12 months;

(B) Operates a firm that regularly withdraws more than $10,000 in

order to pay its United States employees in currency; and

(C) Is incorporated or organized under the laws of the United

States or a State, or is registered as and eligible to do business

within the United States or a State.

(3) Initial designation of exempt persons--(i) General. A bank must

designate each exempt person with which it engages in transactions in

currency by the close of the 30-day period beginning after the day of

the first reportable transaction in currency with that person sought to

be exempted from reporting under the terms of this paragraph (d).

Except where the person sought to be exempted is another bank as

described in paragraph (d)(2)(i) of this section, designation by a bank

of an exempt person shall be made by a single filing of Internal

Revenue Service Form 4789, in which line 36 is marked ``Designation of

Exempt Person'' and items 2-14 (Part I, Section A) and items 37-49

(Part III) are completed, or by filing any form specifically designated

by FinCEN for this purpose. The designation must be made separately by

each bank that treats the person in question as an exempt person,

except as provided in paragraph (d)(6)(vi) of this section. The

designation requirements of this paragraph (d)(3) apply whether or not

the particular exempt person to be designated has previously been

treated as exempt from the reporting requirements of prior

Sec. 103.22(a) under the rules contained in 31 CFR 103.22(a) through

(g), as in effect on October 20, 1998 (see 31 CFR Parts 0 to 199

revised as of July 1, 1998). A special transitional rule, which extends

the time for initial designation for customers that have been

previously treated as exempt under such prior rules, is contained in

paragraph (d)(11) of this section.

(ii) Special rules for banks. When designating another bank as an

exempt person, a bank must either make the filing required by paragraph

(d)(3)(i) of this section or file, in such a format and manner as

FinCEN may specify, a current list of its domestic bank customers. In

the event that a bank files its current list of domestic bank

customers, the bank must make the filing as described in paragraph

(d)(3)(i) of this section for each bank that is a new customer and for

which an exemption is sought under this paragraph (d).

(4) Annual review. The information supporting each designation of

an exempt person, and the application to each account of an exempt

person described in paragraphs (d)(2)(vi) or (d)(2)(vii) of this

section of the monitoring system required to be maintained by paragraph

(d)(9)(ii) of this section, must be reviewed and verified at least once

each year.

(5) Biennial filing with respect to certain exempt persons--(i)

General. A biennial filing, as described in paragraph (d)(5)(ii) of

this section, is required for continuation of the treatment as an

exempt person of a customer described in paragraph (d)(2)(vi) or (vii)

of this section. No biennial filing is required for continuation of the

treatment as an exempt person of a customer described in paragraphs

(d)(2)(i) through (v) of this section.

(ii) Non-listed businesses and payroll customers. The designation

of a non-listed business or a payroll customer as an exempt person must

be renewed biennially, beginning on March 15 of the second calendar

year following the year in which the first designation of such customer

as an exempt person is made, and every other March 15 thereafter, on

such form as FinCEN shall specify. Biennial renewals must include a

statement certifying that the bank's system of monitoring the

transactions in currency of an exempt person for suspicious activity,

required to be maintained by paragraph (d)(9)(ii) of this section, has

been applied as necessary, but at least annually, to the account of the

exempt person to whom the biennial renewal applies. Biennial renewals

also must include information about any change in control of the exempt

person involved of which the bank knows (or should know on the basis of

its records).

(6) Operating rules--(i) General rule. Subject to the specific

rules of this paragraph (d), a bank must take such steps to assure

itself that a person is an exempt person (within the meaning of the

applicable provision of paragraph (d)(2) of this section), to document

the basis for its conclusions, and document its compliance, with the

terms of this paragraph (d), that a reasonable and prudent bank would

take and document to protect itself from loan or other fraud or loss

based on misidentification of a person's status, and in the case of the

monitoring system requirement set forth in paragraph (d)(9)(ii) of this

section, such steps that a reasonable and prudent bank would take and

document

[[Page 50158]]

to identify suspicious transactions as required by paragraph (d)(9)(ii)

of this section.

(ii) Governmental departments and agencies. A bank may treat a

person as a governmental department, agency, or entity if the name of

such person reasonably indicates that it is described in paragraph

(d)(2)(ii) or (d)(2)(iii) of this section, or if such person is known

generally in the community to be a State, the District of Columbia, a

tribal government, a Territory or Insular Possession of the United

States, or a political subdivision or a wholly-owned agency or

instrumentality of any of the foregoing. An entity generally exercises

governmental authority on behalf of the United States, a State, or a

political subdivision, for purposes of paragraph (d)(2)(iii) of this

section, only if its authorities include one or more of the powers to

tax, to exercise the authority of eminent domain, or to exercise police

powers with respect to matters within its jurisdiction. Examples of

entities that exercise governmental authority include, but are not

limited to, the New Jersey Turnpike Authority and the Port Authority of

New York and New Jersey.

(iii) Stock exchange listings. In determining whether a person is

described in paragraph (d)(2)(iv) of this section, a bank may rely on

any New York, American or Nasdaq Stock Market listing published in a

newspaper of general circulation, on any commonly accepted or published

stock symbol guide, on any information contained in the Securities and

Exchange Commission ``Edgar'' System, or on any information contained

on an Internet World-Wide Web site or sites maintained by the New York

Stock Exchange, the American Stock Exchange, or the National

Association of Securities Dealers.

(iv) Listed company subsidiaries. In determining whether a person

is described in paragraph (d)(2)(v) of this section, a bank may rely

upon:

(A) Any reasonably authenticated corporate officer's certificate;

(B) Any reasonably authenticated photocopy of Internal Revenue

Service Form 851 (Affiliation Schedule) or the equivalent thereof for

the appropriate tax year; or

(C) A person's Annual Report or Form 10-K, as filed in each case

with the Securities and Exchange Commission.

(v) Aggregated accounts. In determining the qualification of a

customer as an exempt person, a bank may treat all transaction accounts

of the customer as a single account. If a bank elects to treat all

transaction accounts of a customer as a single account, the bank must

continue to treat such accounts consistently as a single account for

purposes of determining the qualification of the customer as an exempt

person.

(vi) Affiliated banks. The designation required by paragraph (d)(3)

of this section may be made by a parent bank holding company or one of

its bank subsidiaries on behalf of all bank subsidiaries of the holding

company, so long as the designation lists each bank subsidiary to which

the designation shall apply.

(vii) Sole proprietorships. A sole proprietorship may be treated as

a non-listed business if it otherwise meets the requirements of

paragraph (d)(2)(vi) of this section, as applicable. In addition, a

sole proprietorship may be treated as a payroll customer if it

otherwise meets the requirements of paragraph (d)(2)(vii) of this

section, as applicable.

(viii) Ineligible businesses. A business engaged primarily in one

or more of the following activities may not be treated as a non-listed

business for purposes of this paragraph (d): serving as financial

institutions or agents of financial institutions of any type; purchase

or sale to customers of motor vehicles of any kind, vessels, aircraft,

farm equipment or mobile homes; the practice of law, accountancy, or

medicine; auctioning of goods; chartering or operation of ships, buses,

or aircraft; gaming of any kind (other than licensed parimutuel betting

at race tracks); investment advisory services or investment banking

services; real estate brokerage; pawn brokerage; title insurance and

real estate closing; trade union activities; and any other activities

that may be specified by FinCEN. A business that engages in multiple

business activities may be treated as a non-listed business so long as

no more than 50% of its gross revenues is derived from one or more of

the ineligible business activities listed in this paragraph

(d)(6)(viii).

(ix) Transaction account. A transaction account, for purposes of

paragraph (d) of this section, is any account described in section

19(b)(1)(C) of the Federal Reserve Act, 12 U.S.C. 461(b)(1)(C). For

purposes of paragraphs (d)(2)(vi) and (d)(2)(vii) of this section, a

person is an exempt person only to the extent of such person's eligible

transaction accounts.

(x) Documentation. The records maintained by a bank to document its

compliance with and administration of the rules of this paragraph (d)

shall be maintained in accordance with the provisions of Sec. 103.38.

(7) Limitation on exemption. A transaction carried out by an exempt

person as an agent for another person who is the beneficial owner of

the funds that are the subject of a transaction in currency is not

subject to the exemption from reporting contained in paragraph (d)(1)

of this section.

(8) Limitation on liability. (i) No bank shall be subject to

penalty under this part for failure to file a report required by

paragraph (b) of this section with respect to a transaction in currency

by an exempt person with respect to which the requirements of this

paragraph (d) have been satisfied, unless the bank:

(A) Knowingly files false or incomplete information with respect to

the transaction or the customer engaging in the transaction; or

(B) Has reason to believe that the customer does not meet the

criteria established by this paragraph (d) for treatment of the

transactor as an exempt person or that the transaction is not a

transaction of the exempt person.

(ii) Subject to the specific terms of this paragraph (d), and

absent any specific knowledge of information indicating that a customer

no longer meets the requirements of an exempt person, a bank satisfies

the requirements of this paragraph (d) to the extent it continues to

treat that customer as an exempt person until the date of that

customer's next periodic review, which, as required by paragraph (d)(4)

of this section, shall occur no less than once each year.

(iii) A bank that files a report with respect to a currency

transaction by an exempt person rather than treating such person as

exempt shall remain subject, with respect to each such report, to the

rules for filing reports, and the penalties for filing false or

incomplete reports that are applicable to reporting of transactions in

currency by persons other than exempt persons.

(9) Obligations to file suspicious activity reports and maintain

system for monitoring transactions in currency. (i) Nothing in this

paragraph (d) relieves a bank of the obligation, or reduces in any way

such bank's obligation, to file a report required by Sec. 103.21 with

respect to any transaction, including any transaction in currency that

a bank knows, suspects, or has reason to suspect is a transaction or

attempted transaction that is described in Sec. 103.21(a)(2)(i), (ii),

or (iii), or relieves a bank of any reporting or recordkeeping

obligation imposed by this part (except the obligation to report

transactions in currency pursuant to this section to the extent

provided in this paragraph (d)). Thus, for example, a sharp increase

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

made by an exempt customer, or similarly anomalous transaction trends

or

[[Page 50159]]

patterns, may trigger the obligations of a bank under Sec. 103.21.

(ii) Consistent with its annual review obligations under paragraph

(d)(4)of this section, a bank shall establish and maintain a monitoring

system that is reasonably designed to detect, for each account of a

non-listed business or payroll customer, those transactions in currency

involving such account that would require a bank to file a suspicious

transaction report. The statement in the preceding sentence with

respect to accounts of non-listed and payroll customers does not limit

the obligation of banks generally to take the steps necessary to

satisfy the terms of paragraph (d)(9)(i) of this section and

Sec. 103.21 with respect to all exempt persons.

(10) Revocation. The status of any person as an exempt person under

this paragraph (d) may be revoked by FinCEN by written notice, which

may be provided by publication in the Federal Register in appropriate

situations, on such terms as are specified in such notice. Without any

action on the part of the Treasury Department and subject to the

limitation on liability contained in paragraph (d)(8)(ii) of this

section:

(i) The status of an entity as an exempt person under paragraph

(d)(2)(iv) of this section ceases once such entity ceases to be listed

on the applicable stock exchange; and

(ii) The status of a subsidiary as an exempt person under paragraph

(d)(2)(v) of this section ceases once such subsidiary ceases to have at

least 51 per cent of its common stock or analogous equity interest

owned by a listed entity.

(11) Transitional rule. (i) No accounts may be newly granted an

exemption or placed on an exempt list on or after October 21, 1998,

under the rules contained in 31 CFR 103.22(b) through (g), as in effect

on October 20, 1998 (see 31 CFR Parts 0 to 199 revised as of July 1,

1998).

(ii) If a bank properly treated an account (a ``previously exempted

account'') as exempt on October 20, 1998 under the rules contained in

31 CFR 103.22(b) through (g), as in effect on October 20, 1998 (see 31

CFR Parts 0 to 199 revised as of July 1, 1998), it may continue to

treat such account as exempt under such prior rules with respect to

transactions in currency occurring on or before June 30, 2000, provided

that it does so consistently until the earlier of June 30, 2000, and

the date on which the bank makes the designation or the determination

described in paragraph (d)(11)(iii) of this section. A bank that

continues to treat a previously exempted account as exempt under the

prior rules, and for the period, specified in the preceding sentence,

shall remain subject to such prior rules, and to the penalties for

failing to comply therewith, with respect to transactions in currency

occurring during such period.

(iii) A bank must, on or before July 1, 2000, either designate the

holder of a previously exempted account as an exempt person under

paragraph (d)(2) of this section or determine that it may not or will

not treat such holder as an exempt person under paragraph (d)(2) of

this section (so that it will be required to make reports under

paragraph (a) of this section with respect to transactions in currency

by such person occurring on or after the date of determination, but no

later than July 1, 2000). A bank that initially does not designate the

holder of a previously exempted account as an exempt person for periods

beginning after June 30, 2000, may later make such a designation, to

the extent otherwise permitted to do so by this paragraph (d), for

periods after the effective date of such designation.

Approved by the Office of Management and Budget under control number

1506-0009.)

Dated: September 14, 1998.

William F. Baity,

Acting Director,

Financial Crimes Enforcement Network.

[FR Doc. 98-24969 Filed 9-18-98; 8:45 am]

BILLING CODE 4820-03-P