FRB: Supervisory Letter SR 00-12 (SUP) on revised examination guidelines for the new procedures for financial institutions to exempt transactions of certain businesses from the requirement to report transactions in currency in excess of $10,000--July 5, 2000

		BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551
			DIVISION OF BANKING SUPERVISION AND REGULATION
			SR 00-12 (SUP) July 5, 2000

TO THE OFFICER IN CHARGE OF SUPERVISION
            AT EACH FEDERAL RESERVE BANK

SUBJECT:   Revised Examination Guidelines for the New Procedures for Financial Institutions to Exempt Transactions of Certain Businesses from the Requirement to Report Transactions in Currency in Excess of $10,000

                     As of July 1, 2000, new Treasury exemption procedures allowing financial institutions to exempt transactions of certain businesses from the requirement to report transactions in currency in excess of $10,000 (Currency Transaction Report (CTR)) become fully effective. After July 1, 2000, only exemptions granted pursuant to the new exemption procedures will be valid.
                     The requirement that financial institutions report currency transactions in excess of $10,000 by their customers is a cornerstone of the Bank Secrecy Act. The information provided on CTRs is often vital to law enforcement investigators. At the same time, the reporting requirement includes recurring transactions by legitimate cash intensive businesses that generally are of little interest to law enforcement. The adoption of the final rules that set forth the new exemption procedures, as described below, is an attempt to encourage financial institutions to take the necessary steps to significantly reduce repetitive currency reporting on these types of transactions.
                     The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) began the implementation of the new exemption rules with the publication of a final rule for "Phase I" exemptions in the Federal Register on September 8, 1997 (Attachment 1). This was followed by the publication of a final rule for "Phase II" exemptions in the Federal Register on September 21, 1998 (Attachment 2). Together, the final rules for Phase I and Phase II now form the new rules that must be followed for any exemptions from the CTR reporting requirements after July 1, 2000.¹
                     Under these new rules, transactions involving customers that fall within one of the classes of exempt persons defined by these rules may be exempt from CTR requirements. The new procedures eliminate the requirement that financial institutions determine whether the daily transactions of a customer exceed a predetermined exemption amount and also eliminate the requirement that financial institutions obtain signed exemption statements from each exempt customer. Under the new procedures, a financial institution seeking to exempt transactions of a customer, as defined in Phase I, from the CTR requirements need only make a one-time filing of a "Designation of Exempt Person" form that identifies the exempt customer and the exempting financial institution.² (Refer to Attachment 3.) For financial institutions seeking to exempt transactions of a customer, as defined in Phase II, from the CTR requirements, a "Designation of Exempt Person" form must be filed every two years. Under the new exemption procedures, a financial institution is not liable for the failure to file a CTR with respect to a transaction in currency by an exempted customer, unless the financial institution knowingly provides false or incomplete information or has reason to believe that the customer does not qualify as an exempt customer.
                     A financial institution must make the designation of exempt person within 30 days after the first otherwise reportable transaction has been exempted by the financial institution. A holding company or one of its subsidiaries may make a single designation of exemption on behalf of all of the holding company's bank and thrift subsidiaries so long as the designation lists each subsidiary to which the designation applies.
                     Under the new rules, an "exempted person" as defined in Phase I includes:

A bank to the extent of its domestic operations;³

A department or agency of the United States, of any State, or of any political subdivision of any State;

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;

Any entity, referred to in the regulations as a "listed business," 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); and

Any subsidiary, other than a bank, of any "listed business" that is organized under the laws of the United States or of any State and at least 51 per cent of whose common stock or analogous equity interest is owned by the listed entity.

                     Under the new Treasury rules, a business that is not an "exempted person" under Phase I, because it does not meet the definition of a "listed business," may be an "exempted person" as defined in Phase II as a "non-listed business" or payroll customer. A non-listed business is defined as an enterprise that: (i) has maintained a transaction account at a bank for at least 12 months; (ii) frequently engages in transactions in currency in excess of $10,000; and (iii) does business in the United States. Similarly, a payroll customer is defined as a person that: (i) has maintained a transaction account at a bank for at least 12 months; (ii) regularly withdraws more than $10,000 in order to pay its United States employees in currency; and (iii) does business in the United States. In addition, 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 per year is derived from one or more of the business activities that are ineligible to be exempted (e.g., a grocery store that devotes only part of its business to cashing checks on behalf of its customers would be eligible for treatment as a non-listed business). Ineligible business activities are:⁴

Serving as financial institutions or agent for financial institutions of any type;

The 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;

The auctioning of goods;

Chartering or operation of ships, buses, or aircraft;

Pawn brokerage;

Gaming of any kind (other than licensed pari-mutuel betting at race tracks);

Investment advisory services or investment banking services;

Real estate brokerage;

Title insurance and real estate closings;

Trade union activities; and

Any other activity that may, from time to time, be specified by FinCEN.

                     The obligation to identify and report, consistent with existing regulations, suspicious or criminal activity is not diminished by the new exemption rules. For those customers whose transactions will be exempted under the new rules, financial institutions are still required to have programs in place that allow for the identification and timely reporting of suspicious and criminal activity. In addition, for non-listed businesses and payroll customers (Phase II), financial institutions must evidence that they have established and are maintaining a monitoring system that is reasonably designed to detect, for each account of those customers, those transactions in currency that would require the financial institutions to file a Suspicious Activity Report. Further, the financial institutions must certify every two years that they have applied, at least annually, such monitoring systems to each account of those exempted customers.
                     In exempting customers under the new exemption procedures, a financial institution must take such steps that a reasonable and prudent financial institution would take in other instances, such as protecting itself from loan or other fraud based on a misidentification of a person's status, to assure itself that the customer meets the definition of an "exempt person." Financial institutions should document the basis for decisions to exempt customers from the CTR requirements and maintain such documents for five years. Financial institutions should review their exemption determinations and verify the continued accuracy of the information regarding their exempted customers at least once a year.
                     While the new exemption procedures have significantly simplified the exemption process, should reduce the burden to financial institutions and, if used, will reduce the number of CTR filings, the exemption procedures are not mandatory. Financial institutions may choose to continue to file a CTR for each transaction in currency in excess of $10,000 instead of adopting the new exemption procedures.
                     The attached examination procedures revise the current examination procedures in the Bank Secrecy Act Examination Manual with regard to the review of the exemption process. (Refer to Attachment 4.) These revised procedures should be used for any Bank Secrecy Act examination conducted after July 1, 2000. Reserve Banks should distribute this letter and attachments to financial institutions under their jurisdictions.
                     Should you have any questions regarding the attached, please contact Ms. Pamela Johnson, Senior Anti-Money Laundering Coordinator, Special Investigations Section, Division of Banking Supervision and Regulation at (202) 728-5829. Additional information concerning exemptions as well as copies of the attachments may be found at FinCEN's general website at: http://www.treas.gov/fincen/index.html.

Richard Spillenkothen
Director
Attachments

Attachment 1 - final rule for "Phase I" exemptions

Attachment 2 - final rule for "Phase II" exemptions

Attachment 3 (102 KB PDF) - "Designation of Exempt Person" form

Attachment 4 (8 KB PDF) - Examination procedures

Notes:
1.   The new exemption procedure rules can be found at 31 CFR 103.22(d).   Return to text
2.  The "Designation of Exempt Person" form is Treasury form "TD F 90-22.53," a copy of which is attached.  Return to text
3.   A "Designation of Exempt Person" form is not required to exempt transactions with a Federal Reserve Bank.  Return to text
4.   However, such a business may be treated as an exempt person if it meets the definition of another class of exempt person. For example, a casino that has stock listed on the New York Stock Exchange may be exempted under Phase I, even though gaming is an ineligible business for purposes of exemptions.  Return to text

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