[Federal Register Volume 61, Number 80 (Wednesday, April 24, 1996)]
[Rules and Regulations]
[Pages 18204-18211]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9798]
[[Page 18203]]
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Part III
Department of the Treasury
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31 CFR Part 103
Exemptions From the Requirement To Report Transactions in Currency and
List of Entities Who Are Exempt; Interim Rule and Notice
Federal Register / Vol. 61, No. 80 / Wednesday, April 24, 1996 /
Rules and Regulations
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[[Page 18204]]
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA10; 1506-AA11
Amendment to the Bank Secrecy Act Regulations--Exemptions From
the Requirement To Report Transactions in Currency
AGENCY: Financial Crimes Enforcement Network, Treasury.
ACTION: Interim rule with request for comments.
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SUMMARY: This document contains an interim rule eliminating the
requirement to report transactions in currency in excess of $10,000,
between depository institutions and certain classes of ``exempt
persons'' defined in the rule. The interim rule applies to currency
transactions occurring after April 30, 1996. It is adopted as a major
step in reducing the burden imposed upon financial institutions by the
Bank Secrecy Act and increasing the cost-effectiveness of the counter-
money laundering policies of the Department of the Treasury. The
interim rule is part of a process to achieve the reduction set by the
Money Laundering Suppression Act of 1994 in the number of currency
transaction reports filed annually by depository institutions.
DATES: Effective date. The interim rule is effective May 1, 1996.
Comment deadline. Comments must be received by August 1, 1996.
Applicability. This interim rule applies to transactions in
currency occurring after April 30, 1996.
ADDRESSES: Written comments should be submitted to: Office of
Regulatory Policy and Enforcement, Financial Crimes Enforcement
Network, Department of the Treasury, 2070 Chain Bridge Road, Vienna,
Virginia 22182-2536, Attention: Interim CTR Exemption Rule.
Submission of comments. An original and four copies of any comment
must be submitted. All comments will be available for public inspection
and copying, and no material in any such comments, including the name
of any person submitting comments, will be recognized as confidential.
Accordingly, material not intended to be disclosed to the public should
not be submitted.
Inspection of comments. Comments may be inspected at the Department
of the Treasury between 10:00 a.m. and 4:00 p.m., in the Financial
Crimes Enforcement Network (``FinCEN'') reading room, on the third
floor of the Treasury Annex, 1500 Pennsylvania Avenue, N.W.,
Washington, D.C. 20220. Persons wishing to inspect the comments
submitted should request an appointment by telephoning (202) 622-0400.
FOR FURTHER INFORMATION CONTACT: Pamela Johnson, Assistant Director,
Office of Financial Institutions Policy, FinCEN, at (703) 905-3920;
Charles Klingman, Office of Financial Institutions Policy, FinCEN, at
(703) 905-3920; Stephen R. Kroll, Legal Counsel, FinCEN, at (703) 905-
3590; or Cynthia A. Langwiser, Office of Legal Counsel, FinCEN, at
(703) 905-3590.
SUPPLEMENTARY INFORMATION:
I. Introduction
This document adds, as an interim rule, a new paragraph (h) (the
``Interim Rule'') to 31 CFR 103.22. The Interim Rule exempts, from the
requirement for the reporting of transactions in currency in excess of
$10,000, transactions occurring after April 30, 1996, between
depository institutions 1 and certain classes of exempt persons
defined in the Interim Rule. The Interim Rule is adopted to implement
the terms of 31 U.S.C. 5313(d) (and related provisions of 31 U.S.C.
5313 (f) and (g)), which were added to the Bank Secrecy Act by section
402(a) of the Money Laundering Suppression Act of 1994 (the ``Money
Laundering Suppression Act''), Title IV of the Riegle Community
Development and Regulatory Improvement Act of 1994, Pub. L. 103-325
(September 23, 1994).
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\1\ As explained below, the text of the rule itself uses the
term ``bank,'' which as defined in 31 CFR 103.11 (c) includes both
banks and other classes of depository institutions.
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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 coin and currency transactions.
Four new provisions (31 U.S.C. 5313 (d) through (g)) concerning
exemptions were added to 31 U.S.C. 5313 by the Money Laundering
Suppression Act. Subsection (d)(1) provides that the Secretary of the
Treasury shall exempt a depository institution from the requirement to
report currency transactions with respect to transactions between the
depository institution and the following categories of entities:
(A) Another depository institution.
(B) A department or agency of the United States, any State, or
any political subdivision of any State.
(C) Any entity established under the laws of the United States,
any State, or any political subdivision of any State, or under an
interstate compact between 2 or more States, which exercises
governmental authority on behalf of the United States or any such
State or political subdivision.
(D) Any business or category of business the reports on which
have little or no value for law enforcement purposes.
Subsection (d)(2) states that:
The Secretary of the Treasury shall publish in the Federal
Register at such times as the Secretary determines to be appropriate
(but not less frequently than once each year) a list of all of the
entities whose transactions with a depository institution are exempt
under this subsection from the [currency transaction] reporting
requirements. * * *
The companion provisions of 31 U.S.C. 5313(e) authorize the Secretary
to permit a depository institution to grant additional, discretionary,
exemptions from currency transaction reporting. Subsection (f) places
limits on the liability of a depository institution in connection with
a transaction that has been exempted from reporting under either
subsection (d) or subsection (e) and provides for the coordination of
any exemption with other Bank Secrecy Act provisions, especially those
relating to the reporting of suspicious transactions. New subsection
(g) defines ``depository institution'' for purposes of the new
exemption provisions.
Section 402(b) of the Money Laundering Suppression Act states
simply that in administering the new statutory exemption procedures:
the Secretary of the Treasury shall seek to reduce, within a
reasonable period of time, the number of reports required to be
filed in the aggregate by depository institutions pursuant to
section 5313(a) of title 31 * * *
[[Page 18205]]
by at least 30 percent of the number filed during the year preceding
[September 23, 1994,] the date of enactment of [the Money Laundering
Suppression Act].
During the period September 24, 1993 through September 23, 1994,
approximately 11.2 million currency transaction reports were filed. Of
that number, approximately 10.9 million reports were filed by
depository institutions. Thus the statute contemplates a reduction of
at least approximately 3.3 million filings per annum.
B. Shortcomings of the Present Exemption System
The enactment of 31 U.S.C. 5313 (d) through (g) reflects a
Congressional intention to ``reform * * * the procedures for exempting
transactions between depository institutions and their customers.'' See
H.R. Rep. 103-652, 103d Cong., 2d Sess. 186 (August 2, 1994). The
administrative exemption procedures at which the statutory changes are
directed are found in 31 CFR 103.22(b)(2) and (c) through (f); those
procedures have not succeeded in eliminating routine currency
transactions by businesses from the operation of the currency
transaction reporting requirement.
Several reasons have been given for this lack of success. The first
is the retention by banks of liability for making incorrect exemption
determinations. The risk of potential liability is made more serious by
the complexity of the administrative exemption procedures (which
require banks, for example, to assign dollar limits to each exemption
based on the amounts of currency projected to be needed for the
customary conduct of the exempt customer's lawful business). Finally,
advances in technology have made it less costly for some banks to
report all currency transactions rather than to incur the
administrative costs (and risks) of exempting customers and then
administering the terms of particular exemptions properly.
The problems created by the administrative exemption system include
that system's failure to provide the Treasury with information needed
for thoughtful administration of the Bank Secrecy Act. Although banks
are required to maintain a centralized list of exempt customers and to
make that list available upon request, see 31 CFR 103.22 (f) and (g),
there is no way short of a bank-by-bank request for lists (with the
time and cost such a request would entail both for banks and
government) for Treasury to learn the extent to which routine
transactions are effectively screened out of the system or (for that
matter) the extent to which exemptions have been granted in situations
in which they are not justified.
In crafting the 1994 statutory provisions relating to mandatory and
discretionary exemptions, Congress sought to alter the burden of
liability and uncertainty that the administrative exemption system
created. The statutory provisions embraced several categories of
transactions that were either already partially exempt or plainly
eligible for exemption under the administrative exemption system.2
In addition, Congress authorized the Treasury to exempt under the
mandatory rules, as indicated above, ``[a]ny business or category of
business the reports on which have little or no value for law
enforcement purposes.'' 31 U.S.C. 5313 (d)(1)(D).
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\2\ Thus, as noted below, transactions in currency between
domestic banks are already exempt from reporting, see 31 CFR
103.22(b)(1)(ii), and ``[d]eposits or withdrawals, exchanges of
currency or other payments and transfers by local or state
governments, or the United States or any of its agencies or
instrumentalities'' are one of the categories of transactions
specifically described as eligible for exemption by banks. See 31
CFR 103.22(b)(2)(iii).
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C. Objectives of the Interim Rule
As indicated above, the Interim Rule is the first step in the use
of section 402 of the Money Laundering Suppression Act to transform the
Bank Secrecy Act provisions relating to currency transaction reporting.
That transformation has four objectives.
The first is to reduce the burden of currency transaction
reporting. That reduction comes in part through the issuance of a
blanket regulatory exemption covering transactions in currency between
one depository institution and another within the United States and
between depository institutions and government departments and agencies
at all levels. But at least an equal (and likely a significantly
greater) part of the reduction comes from the decision to treat as
being of little interest to law enforcement transactions in currency
between depository institutions and corporations whose common stock is
listed on certain national stock exchanges.
That decision reflects a second, related objective of the Interim
Rule: to begin the process of limiting currency transaction reports to
transactions for which the benefits of the reporting requirement (both
providing usable information to enforcement officials and creating a
deterrent against attempts to misuse the financial system) justify the
costs of supplying the information to the Treasury. It is unlikely that
reports of routine currency transactions for a company of sufficient
size to be traded on a national securities exchange can be of
significant use, by themselves, to law enforcement, regulatory, or tax
authorities.
The third objective is to focus the Bank Secrecy Act reporting
system on transactions that signal matters of clear interest to law
enforcement and regulatory authorities. In publishing the final rule
relating to the reporting of suspicious transactions under the Bank
Secrecy Act, Treasury stated ``its judgment that reporting of
suspicious transactions in a timely fashion is a key component of the
flexible and cost-efficient compliance system required to prevent the
use of the nation's financial system for illegal purposes.'' See 61 FR
4326, 4327 (February 5, 1996). The Interim Rule re-enforces the central
importance of suspicious transaction reporting to Treasury's counter-
money laundering program; expanded suspicious transaction reporting
forms a basis for steps to reduce sharply the extent to which routine
currency transactions by ongoing businesses are required to be
reported. Currency transactions, like non-currency transactions, are
required to be reported under the terms of new 31 CFR 103.21, if they
constitute suspicious transactions as defined in that section; nothing
in the Interim Rule reduces or alters the obligations imposed by 31 CFR
103.21. See 31 U.S.C. 5313(f)(2)(B).
The relationship between required suspicious transaction reporting
and expanded and simplified exemptions from routine currency
transaction reporting is a strong one; each rule forms an integral part
of the policy of the other. The substitution of suspicious transaction
reporting for routine reporting of all currency transactions by exempt
persons in effect defines what a routine transaction for an exempt
person is. That is, a routine currency transaction, in the case of an
exempt person, is a transaction that does not trigger the suspicious
transaction reporting requirements, because the transaction does not,
for example, give the bank a reason to suspect money laundering, a
violation of a reporting requirement, or the absence of a business
purpose. See 31 CFR 103.21(a)(2) (i)-(iii).
The fourth objective of the Interim Rule is to create an exemption
system that works. Thus choices have been made with an eye to achieving
ease of administration and comprehensibility--the very factors whose
absence hindered the prior administrative exemption process.
[[Page 18206]]
FinCEN has attempted to craft a rule that will be easily understood
by the banking professionals who must apply it. That meant painting
with a broad brush; any general exemption rule will almost certainly
include within its terms some results that are not optimal when viewed
in isolation.
FinCEN understands that the changeover to the new system will
require an initial period of effort by both the Treasury and banking
institutions; it is impossible to reduce the volume of currency
transaction reports to the extent that the Interim Rule tries to do
without creating some small degree of temporary inconvenience as the
terms of the system change. FinCEN believes, however, that the
transition period will be relatively short and that the new greatly
streamlined exemption procedures, once in place, will be self-
sustaining and will produce a leaner, less burdensome, and more cost
effective exemption system than now exists.
FinCEN is eager to improve the terms of the rule as necessary to
eliminate temporary incongruities. Comments on ways in which the rule
could be improved in this regard are specifically invited.
D. Additional Relief Under Study
The Interim Rule is the first result of FinCEN's work to put in
place the new exemption system contemplated by the provisions of 31
U.S.C. 5313 (d) through (g). The goal of FinCEN's work in this area,
like the Congress' goal in shaping the Money Laundering Suppression Act
provisions on exemptions, is to reduce the cost of Bank Secrecy Act
compliance and to further a fundamental restructuring of the Bank
Secrecy Act. The restructuring emphasizes cost-effective collection of
only that information that is likely to benefit law enforcement and
regulatory authorities.
In solving the issues posed by implementation of the new statutory
exemption rules, FinCEN has consulted regularly with banking industry
representatives. For example, under the auspices of Bank Secrecy Act
Advisory Group it convened a working session of bank officials to
discuss possible structures for the new exemption system and the
constraints that bank operating procedures posed for broad-scale relief
from unnecessary currency transaction reporting.
In this connection, FinCEN is aware that the Interim Rule and any
final rule resulting therefrom may well affect the operation of large
banks in urban areas more than the operation of smaller community-based
institutions, if only because larger companies tend to do business with
larger banks and because the Interim Rule does not simplify the
exemption system with respect to transactions by privately held
companies, large and small, whose banking history and business would
also justify a simplified exemption system.
Accordingly, FinCEN is working now on a notice of proposed
rulemaking implementing the discretionary exemption authority contained
in 31 U.S.C. 5313(e) and will at the appropriate time consult with the
banking community in shaping proposals to implement that authority.
Meanwhile, banks will still be able to maintain any exemptions properly
granted under the current administrative system. Commenters on this
Interim Rule are invited to include in their comments any suggestions
on the projected second stage of the exemption effort.
III. Specific Provisions
A. 103.22(a). Reports of Currency Transactions
A new sentence is added following the first sentence of paragraph
(a) of 31 CFR 103.22 to provide a cross-reference in that paragraph to
the provisions of new paragraph (h) added by the Interim Rule.
B. 103.22(h)(1). Currency Transactions of Exempt Persons With Banks
Occurring After April 30, 1996
Paragraph (h)(1) states the general effect of the Interim Rule.
That is, simply and directly: no currency transaction report is
required to be filed by a bank for a transaction in currency by an
exempt person occurring after April 30, 1996.
The Interim Rule uses the term ``bank'' rather than ``depository
institution'' to define the class of financial institutions to which
the Interim Rule applies. Although 31 U.S.C. 5313(d) speaks of
exemptions for transactions with ``depository institutions'' (as the
latter term is defined in 31 U.S.C. 5313(g)), FinCEN believes that the
broad definition of bank contained in 31 CFR 301.11(c) includes all of
the categories of institutions included in the statutory ``depository
institution'' definition; because the term ``bank'' is familiar to bank
officials who work with the Bank Secrecy Act, substitution of a new
term whose effect is the same does not appear either necessary or
advisable.
The Interim Rule applies only to transactions between exempt
persons and banks, to reflect the terms of 31 U.S.C. 5313(d); it does
not apply to transactions between exempt persons and financial
institutions other than banks. Comments are invited about whether the
rule should extend to transactions with such other classes of financial
institutions.
Although 31 U.S.C. 5313(d) speaks of ``mandatory'' exemptions, the
Interim Rule does not affirmatively prohibit banks from continuing to
report routine currency transactions with exempt persons. Treasury
believes that the incentives created by the Interim Rule are, as
Congress intended them to be, sufficiently great to lead banks to take
advantage of the new exemption system to a far greater extent than they
took advantage of the prior administrative exemption system.
The Interim Rule, however, is not simply a regulatory relief
measure. As indicated above, it is part of a fundamental restructuring
of the Bank Secrecy Act's administration. Treasury hopes and expects
that banks will be willing to undertake the one-time effort necessary
to make the new, substantially different system work.
C. 103.22(h)(2). Exempt Person
Under the Interim Rule, the crucial exemption determinant is
whether a particular entity is an ``exempt person.'' That term is
defined in new paragraph (h)(2).
The first three categories of exempt persons specified in paragraph
(h)(2) are those to whom exemption is required to be granted by 31
U.S.C. 5313(d)(1)(A)-(C).3
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\3\ The language of 31 U.S.C. 5313(d)(1)(A)-(C) is quoted in
section IIA of this Supplementary Information section, above.
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Banks. The first category of exempt person is banks themselves,
with the result that transactions between banks will not require
reporting. In most cases, no reporting is required at present for such
transactions; 31 CFR 103.22(b)(1)(ii) states flatly that the currency
transaction reporting requirement does not ``require reports * * * of
transactions between domestic banks.'' The definition is limited to
banking operations and transactions within the United States. Thus a
transfer of currency by a bank inside the United States to a bank
outside the United States is not exempt under the Interim Rule.
Departments and Agencies of the United States and of States and Their
Political Subdivisions
The second category of exempt person includes departments and
agencies of the United States, of any state, and of any political
subdivision of any state.
[[Page 18207]]
The definition of ``United States'' used in 31 CFR 103.11 includes not
only the states but also the District of Columbia and the various
territories and insular possessions of the United States. See 31 CFR
103.11(nn); as of August 1, 1996, the definition will also include the
Indian lands. See 61 FR 7054, 7056 (February 23, 1996). Thus
departments and agencies of the governments of these areas are also
classified as exempt persons under the definition.
Entities Exercising Governmental Authority
The third category of exempt person includes any entity established
under the laws of the United States 4, of any state, or of any
political subdivision of any state, or under an interstate compact
between two or more states, that exercises governmental authority on
behalf of the United States or any such state or political subdivision.
Operating rules for making determinations about the governmental
entities are included in paragraph (h)(4), discussed below.
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\4\ Again, the broad definition of ``United States'' applies.
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Listed Corporations
The fourth category of person subject to mandatory exemption under
31 U.S.C. 5313(d) is ``any business or category of business the reports
on which have little or no value for law enforcement purposes.''
Treasury is making use of that provision to treat as an exempt person
any corporation whose common stock (i) is listed on the New York Stock
Exchange or the American Stock Exchange (but not including stock listed
on the Emerging Company Marketplace of the American Stock Exchange), or
(ii) has been designated as a Nasdaq National Market Security listed on
the Nasdaq Stock Market (but not including stock listed under the
separate ``Nasdaq Small-Cap Issues'' category). For convenience, this
class of exempt persons is referred to in this discussion as ``listed
corporations.''
The ``listed corporation'' formulation has been adopted for several
reasons. First, Treasury believes that the formulation is a convenient
and accurate way of describing many, if not most, large-scale
enterprises that make extensive routine use of currency in their normal
business operations. Second, the list of corporations described in the
formulation is readily available and is published in general
circulation newspapers each morning. Finally, the scale of enterprises
listed on the nation's largest securities exchanges, and the variety of
internal and external controls to which they are subject--whether as a
matter of market discipline or government regulation--make their use
for the sort of money laundering or tax evasion marked by anomalous
transactions in currency, or that could be detected by a simple
examination of currency transaction reports, sufficiently unlikely that
the benefits of a uniform formulation far exceed the apparent risks of
such a formulation. This is especially true because of the continuing
applicability of the suspicious transaction reporting rules to all
(non-currency and currency) transactions between listed corporations
and banks.
The determination whether a company is a corporation for purposes
of the Interim Rule depends solely upon the formal manner of its
organization; if the company has a corporate charter, it is a
corporation, and if it does not, it is not a corporation, for purposes
of the Interim Rule. The sort of ``corporate equivalence'' analysis
required, for example, for certain purposes to determine an entity's
status under the Internal Revenue Code is neither called for nor
permitted by the Interim Rule.5
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\5\ Again, there may be a limited group of entities, listed on
the national securities exchanges but organized abroad, for which
such a distinction raises issues of interpretation that cannot be
dealt with effectively in the Interim Rule. Guidance is requested on
whether such issues exist and, if so, how they should be resolved.
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At present the Interim Rule applies only to corporations, even
though Treasury understands that the equity interests of some
partnerships and business trusts are also listed on the named
securities exchanges. Comments are invited as to whether the definition
of exempt person should be extended to all persons whose equity
interests are so listed.
Consolidated Subsidiaries of Listed Corporations
Many, if not most, listed corporations include groups of subsidiary
operating corporations whose treatment under the Interim Rule raises
significant issues. Such subsidiaries are not named in stock exchange
listings, but the policy of the statute and Interim Rule cannot be
effectively implemented without the inclusion of such subsidiaries in
the exempt person category.
That fact raises an issue of what might be called the ``burden'' of
reducing regulatory burden. Many definitions of parent-subsidiary
relationship are quite technical and of importance only to legal,
accounting, and investment specialists; even definitions phrased only
in terms of stock ownership often devolve into questions of direct or
indirect stock ownership that can be extremely difficult to resolve.
In that context, mindful of the need to provide as simple a
formulation as possible, the Interim Rule treats as a subsidiary any
corporation that files a consolidated income tax return with a listed
corporation. The choice of this standard was not any easy one; its
chief rationale is that the fact of consolidation (as opposed to, say,
eligibility for consolidation) is relatively easy to determine by
asking corporate customers (and by asking corporate officials to ask
their tax or accounting departments if necessary).
Franchisees of listed corporations (or of their subsidiaries) are
not included within the definition of exempt person, unless such
franchisees are independently exempt as listed corporations or listed
corporation subsidiaries. A local corporation that holds a McDonald's
franchise, for example, is not an exempt person simply because
McDonald's Corporation is a listed corporation; a McDonald's outlet
owned by McDonald's Corporation directly, on the other hand, would be
an exempt person, because McDonald's Corporation's common stock is
listed on the New York Stock Exchange.
Still, the definition is not optimal. It introduces a note of
complexity into the Interim Rule, and Internal Revenue Service
(``IRS'') statistics indicate that at best only 70 to 80 percent of the
companies eligible to file consolidated income tax returns with their
parent companies actually do so. The success of the Interim Rule in
reducing the volume of currency transaction reports will depend in part
upon the effectiveness and acceptance of the definition of subsidiary
company, and comments are encouraged about the appropriateness of the
definition. FinCEN would especially welcome ideas about other
formulations, based upon sound banking practice, that bank employees
would find easy to apply and that would accomplish the goals of the
Interim Rule more effectively than a definition based upon
consolidation for income tax filing purposes.
D. 103.22(h)(3). Designation of Exempt Persons
The Interim Rule imposes one condition on a bank's exemption of
currency transactions of a customer who satisfies the definition of
exempt person. That condition is that a single form be filed
designating the exempt person and the bank that recognizes it as such.
The designation is to be made by a bank by filing for each exempt
person a single Internal Revenue Service
[[Page 18208]]
Form 4789 (the form now used by banks and others to report a
transaction in currency) that is marked (in the Form's line 36) to
indicate its purpose and that provides identifying information about
the exempt person and bank involved.
The designation requirement must be satisfied, for existing
customers, on or before August 15, 1996. The requirement is a condition
subsequent; that is, a bank may recognize a customer as an exempt
person on April 30, and stop filing currency transaction reports as
permitted by the Interim Rule, even though it does not satisfy the
designation requirement for the customer until August 15, 1996.
The designation of new customers as exempt persons must be made no
later than 30 days following the first transaction in currency in
excess of $10,000 between a bank and the new customer. (Because persons
may become new customers during the period April 30-August 15, 1996, a
new customer to whom the 30 day designation rule applies is,
technically, a customer who satisfies the exempt person definition and
who becomes a customer, or who seeks to engage in its first transaction
in currency, after July 15, 1996.)
Under the Interim Rule, each bank that deals with an exempt person
must satisfy the designation requirement. FinCEN hopes to be able to
use the results of the designation filings to compile a list of exempt
persons that can itself be published in the Federal Register, as
contemplated by 31 U.S.C. 5313(d)(2), in place of the shorter
descriptive notice of exempt persons that is published
contemporaneously with the publication of the Interim Rule. The
designation filings will also be used to review the effectiveness of
the Interim Rule (and of any final rule that is derived from it) and
the extent to which its terms are understood and used by banks.
E. 103.22(h)(4). Operating Rules for Applying Definition of Exempt
Person
The Interim Rule contains several provisions that are designed to
assist banks in applying the definition of ``exempt person.''
1. General Rule
As indicated above, every effort has been made to craft a rule that
is as simple to understand and to administer as its broad objective
will permit. Application of the Interim Rule requires instead that
banks simply make one or more determinations about the status of
particular customers. The rule does not specify detailed procedures for
making or documenting the determinations required. (Indeed, one defect
of the administrative exemption system was its need for detailed
procedural steps for authorizing exemptions. See 31 CFR 103.22(d).)
Instead, paragraph (h)(4)(i) explains that banks are expected to
perform the same degree of due diligence in determining whether a
customer is an exempt person (and documenting that determination) that
a reasonable and prudent bank would perform in the conduct of its own
business in avoiding losses from fraud or misstatement. In other words,
FinCEN's objective is to leave it to bankers, who have already designed
business procedures and protocols to deal with similar problems, to
adapt their present procedures to achieve the results sought by the
Interim Rule.
An assessment of compliance with the terms of the Interim Rule will
focus not on whether a bank necessarily makes every judgment perfectly,
but on whether it takes the steps a reasonable and prudent banker would
take to create systems to apply the Interim Rule's terms. Such an
approach is a corollary to the limitations on liability set by 31
U.S.C. 5318(f)(1) and repeated in paragraph (h)(6) of the Interim Rule;
under the liability limitations a bank remains subject to penalties if,
inter alia, it has a reason to believe that a particular customer or
transaction does not meet the criteria established for the granting of
an exemption.
2. Government Status
Paragraph (h)(4)(ii) permits a bank to determine the status of a
customer as a government department, agency, or instrumentality based
on its name or community knowledge, much like the so-called ``eyeball
test,'' cf. Treas. Reg. Sec. 1.6049-4(c)(1)(ii), for the determination
of exempt recipient status for the purposes of information reporting
and withholding with respect to interest payments under applicable
provisions of the Internal Revenue Code.
The determination whether an entity exercises ``governmental
authority'' is unfortunately not amenable to such a simple test, and
the second sentence of paragraph (h)(4)(ii) states a general definition
of governmental authority for use by banks.
3. Status as Listed Corporation
Paragraph (h)(4)(iii) permits a bank to rely on any New York,
American, or Nasdaq Stock Market listing published in a newspaper of
general circulation. Such listings are easily identified. For example,
in the Wall Street Journal, which is published and distributed
nationally, the listings are entitled, respectively, ``NEW YORK STOCK
EXCHANGE COMPOSITE TRANSACTIONS,'' ``AMERICAN STOCK EXCHANGE COMPOSITE
TRANSACTIONS,'' AND ``NASDAQ NATIONAL MARKET ISSUES.'' Because such
listings often make use of the trading symbols (abbreviated company
names) for each stock, banks may also rely on any commonly accepted or
published stock symbol guide in reviewing the newspaper listings to
determine if the listings include their customers.
4. Consolidated Return Status
The treatment of a corporation as an exempt person because it is
included in the consolidated income tax return of a listed corporation
presents one of the more difficult issues of administration in the
Interim Rule. The corporations included on any consolidated return are
required to be shown on Internal Revenue Service Form 851 (Affiliation
Schedule) filed with the return; a bank may rely upon any reasonably
authenticated photocopy of Form 851 (or the equivalent thereof for the
appropriate tax year) in determining the status of a particular
corporation, or it may rely upon any other reasonably authenticated
information (for example, an officer's certificate) relating to a
corporation's filing status.
F. 103.22(h)(5). Limitation on Exemption
The exemption for transactions by an exempt person applies only
with respect to transactions involving that person's own funds. The
exemption does not apply to situations in which an exempt person is
engaging in a transaction as an agent on behalf of another, beneficial
owner of currency. (If the principal for whom the agent is acting is
itself an exempt person, the exempt status of the principal is what
causes the transaction to be exempt.) In other words, an exempt person
cannot lend its status, for a fee or otherwise, to another person's
transactions.
G. 103.22(h)(6). Effect of Exemption; Limitation on Liability
The designation requirement applies equally to exempt persons who
have previously been the subject of bank-initiated exemptions under the
administrative exemption system as it does to other customers.
Once a bank has complied with the terms of the Interim Rule, it is
generally protected, by 31 U.S.C. 5313(f) and paragraph (h)(6) of the
Interim Rule, from any penalty for failure to file a currency
transaction report with respect to a currency transaction by an exempt
person. The protection does not apply if
[[Page 18209]]
the bank knowingly files false or incomplete information relating to
the exempt person (for example on an designation filing) or with
respect to the transaction (for example on a suspicious activity
report). The protection also does not apply if the bank has reason to
believe at the time the exemption is granted that the customer does not
satisfy the definition of exempt person or if the transaction is not a
transaction of the exempt person.
It is anticipated that the Interim Rule will supersede the
administrative exemption system with respect to categories of exempt
persons named in the Interim Rule, 60 days after a final rule based on
the Interim Rule is published. At that time, transactions in currency
with exempt persons after April 30, 1996 will be exempt from reporting
by banks only to the extent that the new terms are satisfied.
H. 103.22(h)(7). Obligation To File Suspicious Activity Reports, etc.
The provisions of the Interim Rule create an exemption only with
respect to the currency transaction reporting requirement. The Interim
Rule does not create any exemption, and in fact has no effect of any
kind, on the requirement that banks file suspicious activity reports
with respect to transactions, including currency and non-currency
transactions, that satisfy the requirements of the rules of FinCEN and
the federal bank supervisory agencies relating to suspicious activity
reporting.6 (Indeed, as indicated above, the reduction in currency
transaction report volume reflects in part Treasury policy to rely to
the greatest extent possible on reports of truly suspicious activity.)
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\6\ See 61 FR 4326, 4332, 4338 (February 5, 1996) (FinCEN,
Office of the Comptroller of the Currency and Federal Reserve
Board); 61 FR 6095, 6100 (February 16, 1996) (Federal Deposit
Insurance Corporation and Office of Thrift Supervision); and 61 FR
11526 (March 21, 1996) (National Credit Union Administration).
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For example, multiple exchanges of small denominations of currency
into large denominations of currency or currency transactions that are
not (or whose amounts are not) commensurate with the stated business or
other activity of the exempt person conducting the transaction, or on
whose behalf the transaction is conducted, may indicate the need to
file suspicious activity reports with respect to transactions in
currency. Similarly a sudden need for currency by a business that never
before had such a need can form a basis for the determination that a
suspicious activity report is due. In all cases, whether such a report
is required is governed by the rules of 31 CFR 103.21, rules on whose
application the Interim Rule has no effect.
I. 103.22(h)(8). Revocation
The Interim Rule makes clear that the status of an exempt person as
such may be revoked at any time by the Treasury Department. Revocation
will be prospective in all cases except those to which the protections
of liability conferred by 31 U.S.C. 5313(f) and 31 CFR 103.22(h)(6) do
not apply.
IV. Regulatory Matters
A. Executive Order 12866
The Department of the Treasury has determined that this interim
rule is not a significant regulatory action under Executive Order
12866.
B. Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded
Mandates Act''), Pub. L. 104-4 (March 22, 1995), requires that an
agency prepare a budgetary impact statement before promulgating a rule
that includes a federal mandate that may result in expenditure by
state, local and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 202 of the Unfunded Mandates Act
also requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule. FinCEN has
determined that it is not required to prepare a written statement under
section 202 and has concluded that on balance this interim rule
provides the most cost-effective and least burdensome alternative to
achieve the objectives of the rule.
C. Administrative Procedure Act
Because the Interim Rule implements the statute and grants
significant relief from existing regulatory requirements, it is found
to be impracticable to comply with notice and public procedure under 5
U.S.C. 553(b). Because the Interim Rule grants exemptions to current
requirements, it may be made effective before 30 days have passed after
its publication date. See 5 U.S.C. 553(d).
D. Regulatory Flexibility Act
The provisions of the Regulatory Flexibility Act relating to an
initial and final regulatory flexibility analysis (5 U.S.C. 604) are
not applicable to this Interim Rule because the agency was not required
to publish a notice of proposed rulemaking under 5 U.S.C. 553 or any
other law.
E. Paperwork Reduction Act
This Interim Rule is being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
By expanding the applicable exemptions from an information collection
that has been reviewed and approved by the Office of Management and
Budget (OMB) under control number 1505-0063, the Interim Rule
significantly reduces the existing burden of information collection
under 31 CFR 103.22. Thus, although the Interim Rule advances the
purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501, et
seq., and its implementing regulations, 5 CFR Part 1320, the Paperwork
Reduction Act does not require FinCEN to follow any particular
procedures in connection with the promulgation of the Interim Rule.
F. Compliance With 5 U.S.C. 801
Prior to the date of publication of this document in the Federal
Register, FinCEN will have submitted to each House of the Congress and
to the Comptroller General the information required to be submitted or
made available with respect to the Interim Rule by the provisions of 5
U.S.C. 801 (a)(1)(A) and (a)(1)(B).
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Banks, banking, Currency, Foreign Banking,
Foreign currencies, Gambling, Investigations, Law enforcement,
Penalties, Reporting and recordkeeping requirements, Securities, Taxes.
Amendment
For the reasons set forth above in the preamble, 31 CFR Part 103 is
amended as set forth below:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
1. The authority citation for Part 103 continues to read as
follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5330.
2. Section 103.22 is amended by adding a new sentence immediately
following the first sentence in paragraph (a)(1) and by adding a new
paragraph (h) to read as follows:
Sec. 103.22 Reports of currency transactions.
(a)(1) * * * Transactions in currency by exempt persons with banks
occurring after April 30, 1996, are not subject to
[[Page 18210]]
this requirement to the extent provided in paragraph (h) of this
section. * * *
* * * * *
(h) No filing required by banks for transactions by exempt persons
occurring after April 30, 1996. (1) Currency transactions of exempt
persons with banks occurring after April 30, 1996. Notwithstanding the
provisions of paragraph (a)(1) of this section, no bank is required to
file a report otherwise required by paragraph (a)(1) of this section,
with respect to any transaction in currency between an exempt person
and a bank that is conducted after April 30, 1996.
(2) Exempt person. For purposes of this section, an exempt person
is:
(i) A bank, to the extent of such bank's domestic operations;
(ii) A department or agency of the United States, of any state, or
of any political subdivision of any state;
(iii) Any entity established under the laws of the United States,
of any state, or of any political subdivision of any state, or under an
interstate compact between two or more states, that exercises
governmental authority on behalf of the United States or any such state
or political subdivision;
(iv) Any corporation whose common stock is listed on the New York
Stock Exchange or the American Stock Exchange (except stock listed on
the Emerging Company Marketplace of the American Stock Exchange) or
whose common stock has been designated as a Nasdaq National Market
Security listed on the Nasdaq Stock Market (except stock listed under
the separate ``Nasdaq Small-Cap Issues'' heading); and
(v) Any subsidiary of any corporation described in paragraph
(h)(2)(iv) of this section whose federal income tax return is filed as
part of a consolidated federal income tax return with such corporation,
pursuant to section 1501 of the Internal Revenue Code and the
regulations promulgated thereunder, for the calendar year 1995 or for
its last fiscal year ending before April 15, 1996.
(3) Designation of exempt persons. (i) A bank must designate each
exempt person with whom it engages in transactions in currency, on or
before the later of August 15, 1996, and the date 30 days following the
first transaction in currency between such bank and such exempt person
that occurs after April 30, 1996.
(ii) Designation of an exempt person shall be made by a single
filing of Internal Revenue Service Form 4789, in which line 36 is
marked ``Designation of Exempt Person'' and items 2-14 (Part I, Section
A) and items 37-49 (Part III) are completed. The designation must be
made separately by each bank that treats the person in question as an
exempt person. (For availability, see 26 CFR 601.602.)
(iii) This designation requirement applies whether or not the
particular exempt person to be designated has previously been treated
as exempt from the reporting requirements of paragraph (a) of this
section under the rules contained in paragraph (b) or (e) of this
section.
(4) Operating rules for designating exempt persons. (i) Subject to
the specific rules of this paragraph (h), a bank must take such steps
to assure itself that a person is an exempt person (within the meaning
of applicable provisions of paragraph (h)(2) of this section) that a
reasonable and prudent bank would take to protect itself from loan or
other fraud or loss based on misidentification of a person's status.
(ii) A bank may treat a person as a governmental department,
agency, or entity if the name of such person reasonably indicates that
it is described in paragraph (h)(2)(ii) or (h)(2)(iii) of this section,
or if such person is known generally in the community to be a State,
the District of Columbia, a tribal government, a Territory or Insular
Possession of the United States, or a political subdivision or a
wholly-owned agency or instrumentality of any of the foregoing. An
entity generally exercises governmental authority on behalf of the
United States, a State, or a political subdivision, for purposes of
paragraph (h)(2)(iii) of this section, only if its authorities include
one or more of the powers to tax, to exercise the authority of eminent
domain, or to exercise police powers with respect to matters within its
jurisdiction.
(iii) In determining whether a person is described in paragraph
(h)(2)(iv) of this section, a bank may rely on any New York Stock
Exchange, American Stock Exchange, or Nasdaq Stock Market listing
published in a newspaper of general circulation and on any commonly
accepted or published stock symbol guide.
(iv) In determining whether a person is described in paragraph
(h)(2)(v) of this section, a bank may rely upon any reasonably
authenticated corporate officer's certificate or any reasonably
authenticated photocopy of Internal Revenue Service Form 851
(Affiliation Schedule) or the equivalent thereof for the appropriate
tax year.
(5) Limitation on exemption. A transaction carried out by an exempt
person as an agent for another person who is the beneficial owner of
the funds that are the subject of a transaction in currency is not
subject to the exemption from reporting contained in paragraph (h)(1)
of this section.
(6) Effect of exemption; limitation on liability. (i) FinCEN may in
the future determine by amendment to this part that the exemption
contained in this paragraph (h) shall be the only basis for exempting
persons described in paragraph (h)(2) of this section from the
reporting requirements of paragraph (a) of this section.
(ii) No bank shall be subject to penalty under this part for
failure to file a report required by paragraph (a) of this section with
respect to a currency transaction by an exempt person with respect to
which the requirements of this paragraph (h) have been satisfied,
unless the bank:
(A) Knowingly files false or incomplete information with respect to
the transaction or the customer engaging in the transaction; or
(B) Has reason to believe at the time the exemption is granted that
the customer does not meet the criteria established by this paragraph
(h) for treatment of the transactor as an exempt person or that the
transaction is not a transaction of the exempt person.
(iii) A bank that files a report with respect to a currency
transaction by an exempt person rather than treating such person as
exempt shall remain subject with respect to each such report to the
rules for filing reports, and the penalties for filing false or
incomplete reports, that are applicable to reporting of transactions in
currency by persons other than exempt persons. A bank that continues
for the period permitted by paragraph (h)(6)(i) of this section to
treat a person described in paragraph (h)(2) of this section as exempt
from the reporting requirements of paragraph (a) of this section on a
basis other than as provided in this paragraph (h) shall remain subject
in full to the rules governing an exemption on such other basis and to
the penalties for failing to comply with the rules governing such other
exemption.
(7) Obligation to file suspicious activity reports, etc. Nothing in
this paragraph (h) relieves a bank of the obligation, or alters in any
way such bank's obligation, to file a report required by Sec. 103.21
with respect to any transaction, including, without limitation, any
transaction in currency, or relieves a bank of any other reporting or
recordkeeping obligation imposed by this part (except the obligation to
report transactions in currency pursuant to paragraph (a) of this
section to the extent provided in this paragraph (h)).
(8) Revocation. The status of any person as an exempt person under
this paragraph (h) may be revoked by
[[Page 18211]]
FinCEN by written notice, which may be provided by publication in the
Federal Register in appropriate situations, on such terms as are
specified in such notice. In addition, and without any action on the
part of the Treasury Department:
(i) The status of a corporation as an exempt person pursuant to
paragraph (h)(2)(iv) of this section ceases once such corporation
ceases to be listed on the applicable stock exchange; and
(ii) The status of a subsidiary as an exempt person under paragraph
(h)(2)(v) of this section ceases once such subsidiary ceases to be
included in a consolidated federal income tax return of a person
described in paragraph (h)(2)(iv) of this section.
* * * * *
Dated: April 16, 1996.
Stanley E. Morris,
Director, Financial Crimes Enforcement Network.
[FR Doc. 96-9798 Filed 4-23-96; 8:45 am]
BILLING CODE 4820-03-P
