[Federal Register Volume 60, Number 127 (Monday, July 3, 1995)]
[Proposed Rules]
[Pages 34481-34485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16250]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 211, and 225
[Regulations H, K, and Y; Docket No. R-0885]
Membership of State Banking Institutions in the Federal Reserve
System; International Banking Operations; Bank Holding Companies and
Change in Bank Control
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board of Governors of the Federal Reserve System (the
Board) is proposing to revise its regulations on reporting of
suspicious activities by the domestic and foreign banking organizations
supervised by the Federal Reserve, including the reporting of
suspicious financial transactions such as suspected violations of the
Bank Secrecy Act (BSA). As proposed, these rules implement a new
interagency suspicious activity referral process. The rules also reduce
substantially the burden on banking organizations in reporting
suspicious activities while enhancing access to such information by the
Federal law enforcement agencies, the Federal financial institutions
supervisory agencies and the Department of the Treasury.
DATES: Comments must be received on or before September 1, 1995.
ADDRESSES: Comments should refer to Docket No, R-0885, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th and Constitution Avenue, NW., Washington,
DC 20551. Comments also may be delivered to Room B-2222 of the Eccles
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard
station in the Eccles Building courtyard on 20th Street, NW (between
Constitution Avenue and C Street) at any time. Comments received will
be available for inspection in Room MP-500 of the Martin Building
between 9 a.m. and 5 p.m. weekdays, except as provided in 12 CFR 261.8
of the Board's rules regarding availability of information.
FOR FURTHER INFORMATION CONTACT: Herbert A. Biern, Deputy Associate
Director, Division of Banking Supervision and Regulation, (202) 452-
2620, or Richard A. Small, Special Counsel, Division of Banking
Supervision and Regulation, (202) 452-5235; for the hearing impaired
only contact Dorothea Thompson, Telecommunication Device for the Deaf,
(202) 452-3544, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Background
The Federal financial institutions supervisory agencies (the
Agencies) 1 and the Department of the Treasury (the Treasury)
2 are responsible for ensuring that financial institutions apprise
Federal law enforcement authorities of any known or suspected violation
of a Federal criminal statute and of any suspicious financial
transaction. Suspicious financial transactions, which will be the
subject of regulations and other guidance to be issued by the Treasury,
can include transactions that the banking organization suspects
involved funds derived from illicit activities, were conducted for the
purpose of hiding or disguising funds from illicit activity, in any way
violated the Federal money laundering statutes (18 U.S.C. 1956 and
1957), were potentially designed to evade the reporting or
recordkeeping requirements of the BSA (31 U.S.C. 5311 through 5330),
and transactions that the bank believes were suspicious for any other
reason.
\1\ The Federal financial institutions supervisory agencies are
the Board, the Office of the Comptroller of the Currency, the Office
of Thrift Supervision, the Federal Deposit Insurance Corporation,
and the National Credit Union Administration.
\2\ Through Treasury's Financial Crimes Enforcement Network
(FinCEN).
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Fraud, abusive insider transactions, check kiting schemes, money
[[Page 34482]]
laundering, and other crimes can pose serious threats to a financial
institution's continued viability and, if unchecked, can undermine the
public confidence in the nation's financial industry. The Agencies and
Federal law enforcement agencies need to receive timely and detailed
information regarding suspected criminal activity to determine whether
investigations, administrative actions, or criminal prosecutions are
warranted.
An interagency Bank Fraud Working Group (BFWG), consisting of
representatives from many Federal agencies, including the Agencies and
law enforcement agencies such as the U.S. Department of Justice and the
Federal Bureau of Investigation, was formed in 1984. The BFWG addresses
substantive issues, promotes cooperation among the Agencies and Federal
and state law enforcement agencies, and improves the Federal
government's response to white collar crime in financial institutions.
It is under the auspices of the BFWG that the revisions to these
regulations and the reporting requirements are being made.
Suspicious Activity Report
The Agencies have been working on a project to improve the criminal
referral process, to reduce the reporting burden on banking
organizations, and to eliminate confusion associated with the current
duplicative reporting of suspicious financial transactions in criminal
referral forms and currency transactions reports (CTRs).
Contemporaneously, the Treasury analyzed the need to implement the
procedures for reporting suspicious financial transactions by banks
following the enactment of the Annunzio-Wylie Anti-Money Laundering Act
of 1992. As a result of these reviews, the Agencies and Treasury
approved the development of a new referral process that includes
suspicious financial transaction reporting.
To implement the reporting process and to reduce unnecessary
burdens associated with these various reporting requirements, the
Agencies and FinCEN developed a new form for reporting known or
suspected Federal criminal law violations and suspicious financial
transactions. The new form is designated the Suspicious Activity Report
(SAR). The new referral process and the SAR reduce the burden on
financial institutions for reporting known or suspected violations and
suspicious financial transactions. The Agencies anticipate that the new
process will be instituted by October, 1995.
Proposal
The Board proposes to revise 12 CFR Parts 208, 211, and 225 by
updating the current rules governing the filing of criminal referral
reports; expanding the rules pertinent to the activities of state
member banks, bank holding companies and their nonbank subsidiaries,
Edge and Agreement corporations, and the U.S. branches and agencies of
foreign banks to cover suspicious financial transactions; implementing
the new SAR; and eliminating overly burdensome reporting requirements.
This action should improve reporting of known or suspected violations
and suspicious financial transactions relating to financial
institutions while providing uniform data for entry into a new
interagency computer database. The Board expects that each of the other
Agencies will be making substantially similar changes to their criminal
referral rules contemporaneously.
The principal proposed changes to the Board's current criminal
referral reporting rules are discussed below. They include the
following notable changes: (i) simplifying and shortening the referral
form; (ii) raising the mandatory reporting thresholds for criminal
offenses, thereby reducing banking organizations' reporting burdens;
(iii) filing only one form with a single repository, rather than
submitting multiple copies to several Federal law enforcement and
banking agencies, thereby further reducing reporting burdens; and (iv)
clarifying the criminal referral and suspicious financial transaction
reporting requirements of the Agencies and Treasury associated with
suspicious financial transactions, thereby eliminating confusion
concerning the filing of referrals related to suspicious financial
transactions of less than $10,000 and eliminating duplicative
referrals.
The proposal also involves the manner in which financial
institutions file a SAR. In following the instructions on a SAR,
banking organizations may file the referral form in several ways,
including submitting an original form or a photocopy, and they may file
a SAR by magnetic means, such as by a computer disk. In the future, the
Board and the other Agencies anticipate that a banking organization
will be able to file a SAR electronically.
The Agencies, working with FinCEN, are developing computer software
to assist financial institutions in preparing and filing SARs. The
software will allow a banking organization to complete a SAR, to save
the SAR on its computers, and to print a hard copy of the SAR for its
own records. The computer software will also enable a financial
institution to file a SAR using various forms of magnetic media, such
as computer disk or magnetic tape. The Board will make the software
available to all domestic and foreign banking organizations it
supervises.
The changes are being made to Sec. 208.20 of Regulation H of the
Board (12 CFR 208.20) relating to the criminal referral reporting
responsibilities of state member banks. Sections 211.8 and 211.24(f) of
Regulation K of the Board and Sec. 225.4(f) of Regulation Y of the
Board make Sec. 208.20 of Regulation H of the Board applicable to Edge
and Agreement corporations, the U.S. branches and agencies of foreign
banks (except a Federal branch or Federal agency or a state branch that
is insured by the Federal Deposit Insurance Corporation), a
representative office of a foreign bank, and bank holding companies and
their nonbank subsidiaries, respectively. This means that the changes
applicable to state member banks discussed below will also be
applicable to the suspicious activity reporting responsibilities of all
of the other domestic and foreign banking organizations supervised by
the Federal Reserve, including bank holding companies, Edge
corporations, and the U.S. branches and agencies of foreign banks. The
only modifications being made to the current provisions of Secs. 211.8
and 211.24(f) of Regulation K, and Sec. 225.4(f) of Regulation Y are
changes to the name of form--from ``criminal referral form'' to a SAR--
and a change in the heading of Sec. 225.4(f) of Regulation Y to
``Suspicious Activity Report'' from ``Criminal referral report.''
Section 208.20(a) Purpose
The proposal clarifies the scope of the current rule. Under the
proposal, the SAR replaces the various criminal referral forms that the
Agencies currently require banking organizations to file. Also a state
member bank or other type of financial institution files a SAR instead
of a currency transaction report (CTR) to report a suspicious financial
transaction involving less than $10,000 in currency.3
\3\ The BSA requires all financial institutions to file CTRs in
accordance with the Treasury's implementing regulations (31 CFR Part
103). Part 103 requires a bank to file a CTR whenever a currency
transaction exceeds $10,000. If a currency transaction exceeds
$10,000 and is suspicious, the state member bank, under these new
requirements, will file both a CTR (reporting the currency
transaction) and a SAR (reporting the suspicious criminal aspect of
the transaction). If a currency transaction equals or is below
$10,000 but is suspicious, the bank will only file a SAR.
[[Page 34483]]
Combining suspicious financial transaction reporting and criminal
referral reporting should reduce confusion, increase the accuracy and
efficiency of reporting, and reduce the burden on financial
institutions in reporting known or suspected violations, including
suspicious financial transactions.
Section 208.20(b) Definitions
In addition to the current definition of ``institution-affiliated
party'' set forth at 12 CFR 208.20(b), the proposed Sec. 208.20(b)
defines the following terms: ``FinCEN'' and ``SAR.'' The definitions
should make the rule easier to interpret and apply.
Section Sec. 208.20(c) Reports Required
Proposed Sec. 208.20(c), which replaces the current subsection,
clarifies and expands the provision that requires a state member bank
to file a SAR. This provision raises the dollar thresholds that trigger
a filing requirement. It also modifies the scope of events that a state
member bank must report by requiring that a bank file a SAR to report a
suspicious financial transaction.
Under the current rule, the Board requires a state member bank to
file a criminal referral form with many different Federal agencies. The
proposal, which replaces all other requirements for filing criminal and
suspicious financial transaction referrals, requires a bank to file
only a single SAR at one location, rather than the multiple copies of
the criminal referral form that must now be filed with various Federal
agencies.
Under proposed Sec. 208.20(c), a state member bank effectively
files a SAR with all appropriate Federal law enforcement agencies by
sending a single copy of the SAR to FinCEN, whose address will be
printed on the SAR.
FinCEN will input the information contained on the SARs into a
newly created database that FinCEN will maintain. This process meets
the regulatory requirement that a banking organization refer any known
or suspected criminal violation to the various Federal law enforcement
agencies. The database will enhance Federal law enforcement and bank
supervisory agencies' ability to track, investigate, and prosecute,
criminally, civilly, and administratively, individuals and entities
suspected of violating Federal criminal law.
This change ensures that all SARs are placed in the database at
FinCEN and that the information is made available on computer to the
appropriate law enforcement and supervisory agencies as quickly as
possible. This change will reduce the filing burdens of banking
organizations.
The proposal modifies current Sec. 208.20(c)(2), which requires
reporting of known or suspected criminal activity when a state member
bank has a substantial basis for identifying a non-insider suspect
where bank funds or other assets involve or aggregate $1,000 or more.
Proposed Sec. 208.20(c)(2) raises the reporting threshold to $5,000,
thereby reducing the reporting burden on banking organizations.
The proposal also modifies current Sec. 208.20(c)(3), which
requires a state member bank to report any known or suspected criminal
violation involving $5,000 or more where the bank has no substantial
basis for identifying a suspect. Specifically, proposed
Sec. 208.20(c)(3) raises the dollar reporting threshold from $5,000 to
$25,000, thereby reducing further the reporting burden on banking
organizations.
Proposed Sec. 208.20(c)(4) requires a state member bank to report
any financial transaction, regardless of the dollar amount, that: (i)
the bank suspects involved funds derived from illicit activity, was
conducted for the purpose of hiding or disguising funds from illicit
activity, or in any way violated Federal money laundering statutes (18
U.S.C. 1956 and 1957); (ii) the bank suspects was potentially designed
to evade the reporting or recordkeeping requirements of the BSA (31
U.S.C. 5311 through 5330); or (iii) the bank believes to be suspicious
for any reason.
Section 208.20(d) Time for Reporting
Proposed Sec. 208.20(d) sets forth the time requirements a state
member bank must meet when filing a SAR. The proposal clarifies the
reporting requirement in the event a suspect or group of suspects is
not immediately identified. It does not substantively change the
current requirements.
Section 208.20(e) Reporting to State and Local Authorities
No changes are being proposed to the current Sec. 208.20(e).
Section 208.20(f) Exceptions
No changes are being made to the current Sec. 208.20(f).
Section 208.20(g) Retention of Records
Current Sec. 208.20(g) requires a state member bank to retain a
copy of the criminal referral form and the original of any related
documentation relating to a referral for a period of 10 years from the
date of the report. No changes are being made to this requirement. The
proposal clarifies the requirement that banking organizations make all
supporting documentation available to appropriate law enforcement
agencies upon request. This approach ensures that Federal law
enforcement agencies and the Agencies, upon request, have access to any
documentation necessary to prosecute a violation or pursue an
administrative action by requiring financial institutions to identify
and preserve underlying documentation for 10 years and treat such
underlying documentation as having been filed with the SAR.
Section 208.20(h) Notification of the Board of Directors
Current Sec. 208.20(h) requires notification regarding the filing
of a SAR to a state member bank's board of directors by the bank's
management. To reduce burdens on the boards of directors of state
member banks, especially those large banks that file many SARs, the
proposal recognizes that the required notification may be made to a
committee of the board.
Section 208.20(i) Compliance
Current Sec. 208.20(i) is headed ``Penalty''. The heading of the
subsection is changed to reflect better the range of informal and
formal supervisory actions that the Board can take to address
suspicious activity reporting deficiencies.
Section 208.20(j) Confidentiality of SARs
The Board proposes to add a new subsection relating to the
confidentiality of a SAR. Proposed Sec. 208.20(j) states that a SAR and
the information contained in a SAR are confidential, and that a state
member bank should decline to produce a SAR citing applicable law
(e.g., 31 U.S.C. 5318(g)) and the provisions of Sec. 208.20 of
Regulation H of the Board.
Comments
The Board invites public comment on all aspects of this proposal.
Regulatory Flexibility Act
Because this proposal is designed to reduce the burden on financial
institutions for reporting suspicious financial transactions, the Board
certifies that this proposed regulation will not have a significant
financial impact on a substantial number of small banks or other small
entities.
Paperwork Reduction Act
In accordance with Section 3507 of the Paperwork Reduction Act of
1980, the suspicious activity report regulation was approved under
authority delegated
[[Page 34484]]
to the Board by the Office of Management and Budget. The Board has
determined that the proposed regulations may reduce the burden on
reporting institutions through the use of a simplified, shorter form,
the filing of one form only, the raising of reporting thresholds, and
the elimination of the submission of supporting documentation with a
referral, as well as by the Board's provision to banking organizations
of computer software to prepare the form. The estimated average burden
associated with the collection of information contained in a SAR is
approximately .6 hours per respondent. The burden per respondent will
vary depending on the nature of the suspicious activity being reported.
Comments concerning the accuracy of this burden estimate should be
directed to Mary M. McLaughlin, Division of Research and Statistics,
Mail Stop 97, Federal Reserve Board, 20th Street and Constitution
Avenue, N.W., Washington, D.C. 20551.
Executive Order 12291
The Board has determined that this proposed regulation is not a
``major rule'' and therefore does not require a regulatory impact
analysis.
List of Subjects
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
12 CFR Part 225
Administrative practice and procedures, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, Parts 208, 211, and 225 of
chapter II of title 12 of the Code of Federal Regulations is proposed
to be amended to read as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for 12 CFR part 208 continues to read as
follows:
Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g),
781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.
2. Section 208.20 is revised to read as follows:
Sec. 208.20 Suspicious Activity Reports.
(a) Purpose. This section ensures that a state member bank files a
Suspicious Activity Report when it detects a known or suspected
violation of Federal law or suspicious financial transaction. This
section applies to all state member banks.
(b) Definitions. For the purposes of this section:
(1) FinCEN means the Financial Crimes Enforcement Network of the
Department of the Treasury.
(2) Institution-affiliated party means any institution-affiliated
party as that term is defined in Sections 3(u) and 8(b)(3) and (4) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(u) and 1818(b)(3) and
(4)).
(3) SAR means a Suspicious Activity Report form proscribed by the
Board.
(c) SARs required. A state member bank shall file a SAR with the
appropriate Federal law enforcement agencies and the Department of the
Treasury and in accordance with the form's instructions, by sending a
completed SAR to FinCEN in the following circumstances:
(1) Whenever the state member bank detects any known or suspected
Federal criminal violation, or pattern of criminal violations,
committed against the bank or involving a transaction conducted through
the bank, where the bank has a substantial basis for identifying one of
its directors, officers, employees, agents, or other institution-
affiliated parties as having committed or aided in the commission of a
criminal act regardless of the amount involved in the violation.
(2) Whenever the state member bank detects any known or suspected
Federal criminal violation, or pattern of criminal violations,
committed against the bank or involving a transaction or transactions
conducted through the bank and involving or aggregating $5,000 or more
in funds or other assets, where the bank believes that it was either an
actual or potential victim of a criminal violation, or series of
criminal violations, or that the bank was used to facilitate a criminal
transaction, and that the bank has a substantial basis for identifying
a possible suspect or group of suspects.
(3) Whenever the state member bank detects any known or suspected
Federal criminal violation, or pattern of criminal violations,
committed against the bank or involving a transaction or transactions
conducted through the bank and involving or aggregating $25,000 or more
in funds or other assets, where the bank believes that it was either an
actual or potential victim of a criminal violation, or series of
criminal violations, or that the bank was used to facilitate a criminal
transaction, even though there is no basis for identifying a possible
suspect or group of suspects.
(4) Whenever the state member bank detects any financial
transaction conducted, or attempted, at the bank involving funds
derived from illicit activity or for the purpose of hiding or
disguising funds from illicit activities, or for the possible violation
or evasion of the Bank Secrecy Act reporting and/or recordkeeping
requirements, even if there is no substantial basis for identifying a
possible suspect or group of suspects. A suspicious activity report
must be filed for all instances where money laundering is suspected or
where the bank believes that the transaction was suspicious for any
reason, regardless of the identification of a potential suspect or
group of suspects or the amount involved in the violation.
(d) Time for reporting. A state member bank is required to file a
SAR no later than 30 calendar days after the date of initial detection
of the possible, known or suspected criminal violation or series of
criminal violations. If no suspect was identified on the date of
detection of the incident triggering the filing, a state member bank
may delay filing a SAR for an additional 30 calendar days after the
identification of the suspect. In no case shall reporting be delayed
more than 60 calendar days after the date of the loss or the possible
known or suspected criminal violation or series of criminal violations.
In situations involving violations requiring immediate attention, such
as when a reportable violation is on-going, the financial institution
shall immediately notify, by telephone, the appropriate law enforcement
authority in addition to filing a timely SAR.
(e) Reports to state and local authorities. State member banks are
encouraged to file a copy of the SAR with state and local law
enforcement agencies where appropriate.
(f) Exceptions. (1) A state member bank need not file a SAR for a
robbery or burglary committed or attempted that is reported to
appropriate law enforcement authorities.
(2) A state member bank need not file a SAR for lost, missing,
counterfeit, or stolen securities if it files a report pursuant to the
reporting requirements of 17 CFR 240.17f-1.
(g) Retention of records. A state member bank shall maintain a copy
of
[[Page 34485]]
any SAR filed and the original of any related documentation for a
period of 10 years from the date of filing the SAR. A state member bank
must make all supporting documentation available to appropriate law
enforcement agencies upon request. Supporting documentation shall be
identified and treated as filed with the SAR.
(h) Notification to board of directors. The management of a state
member bank shall promptly notify its board of directors, or a
committee thereof, of any report filed pursuant to this section.
(i) Compliance. Failure to file a SAR in accordance with this
section and the form's instructions may subject the state member bank,
its directors, officers, employees, agents, or other institution-
affiliated parties to supervisory action.
(j) Confidentiality of SARs. SARs are confidential. Any person
subpoenaed or otherwise requested to disclose a SAR or the information
contained in a SAR shall decline to produce the information citing this
section, applicable law (e.g., 31 U.S.C. 5318(g)), or both.
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for part 211 is revised to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 1843 et
seq., 3100 et seq., 3901 et seq.
Secs. 211.8 and 211.24 [Amended]
2. In Secs. 211.8 and 211.24(f) remove the words ``criminal
referral form'' and add, in their place, the words ``suspicious
activity report''.
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for 12 CFR part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
Sec. 225.4 [Amended]
2. In Sec. 225.4 the heading of paragraph (f) is revised to read
``Suspicious Activity Report.''.
3. In Sec. 225.4(f) remove the words ``criminal referral form'' and
add, in their place, the words ``suspicious activity report''.
By order of the Board of Governors of the Federal Reserve
System, June 28, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-16250 Filed 6-30-95; 8:45 am]
BILLING CODE 6210-01-P
