[Federal Register: January 21, 2003 (Volume 68, Number 13)]
[Proposed Rules]
[Page 2716-2721]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ja03-20]
[[Page 2716]]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA37
Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations--Requirement That Mutual Funds Report
Suspicious Transactions
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains an amendment to the regulations
implementing the statute generally known as the Bank Secrecy Act. The
amendment would require mutual funds to report suspicious transactions
to the Department of the Treasury. The amendment constitutes a further
step in the creation of a comprehensive system for the reporting of
suspicious transactions by the major categories of financial
institutions operating in the United States, as a part of the counter-
money laundering program of the Department of the Treasury.
DATES: Written comments on all aspects of the notice of proposed
rulemaking are welcome and must be received on or before March 24,
2003.
ADDRESSES: Commenters are encouraged to submit comments by electronic
mail because paper mail in the Washington, DC, area may be delayed.
Comments submitted by electronic mail may be sent to
regcomments@fincen.treas.gov, with the caption, in the body of the
text, ``ATTN: NPRM--Suspicious Transaction Reporting--Mutual Funds.''
Comments also may be submitted by paper mail to FinCEN, P.O. Box 39,
Vienna, Virginia 22183-0039, ATTN: NPRM--Suspicious Transaction
Reporting--Mutual Funds. Comments should be sent by one method only.
For additional instructions on the submission of comments, see
SUPPLEMENTARY INFORMATION under the heading ``Submission of Comments.''
FOR FURTHER INFORMATION CONTACT: Office of Regulatory Programs, FinCEN,
(202) 354-6400; and Office of Chief Counsel, FinCEN, at (703) 905-3590
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Provisions
The Bank Secrecy Act \1\ 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, or in the
conduct of intelligence or counter-intelligence activities, to protect
against international terrorism, and to implement counter-money
laundering programs and compliance procedures.\2\ 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 the Bank Secrecy Act has been delegated to the Director of
FinCEN.
---------------------------------------------------------------------------
\1\ Public Law 91-508, as amended, codified at 12 U.S.C. 1829b,
12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5331.
\2\ Language expanding the scope of the Bank Secrecy Act to
intelligence or counter-intelligence activities to protect against
international terrorism was added by section 358 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001 (the
``USA Patriot Act''), Public Law 107-56.
---------------------------------------------------------------------------
With the enactment of 31 U.S.C. 5318(g) in 1992,\3\ Congress
authorized the Secretary of the Treasury to require financial
institutions to report suspicious transactions. As amended by the USA
Patriot Act, subsection (g)(1) states generally:
---------------------------------------------------------------------------
\3\ 31 U.S.C. 5318(g) was added to the Bank Secrecy Act by
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act (the
``Annunzio-Wylie Anti-Money Laundering Act''), title XV of the
Housing and Community Development Act of 1992, Public Law 102-550;
it was expanded by section 403 of the Money Laundering Suppression
Act of title IV of the Riegle Community Development and Regulatory
Improvement Act of 1994, Public Law 103-325, to require designation
of a single government recipient for reports of suspicious
transactions.
The Secretary may require any financial institution, and any
director, officer, employee, or agent of any financial institution,
to report any suspicious transaction relevant to a possible
---------------------------------------------------------------------------
violation of law or regulation.
Subsection (g)(2)(A) provides further:
If a financial institution or any director, officer, employee,
or agent of any financial institution, voluntarily or pursuant to
this section or any other authority, reports a suspicious
transaction to a government agency--
(i) The financial institution, director, officer, employee, or
agent may not notify any person involved in the transaction that the
transaction has been reported; and
(ii) No officer or employee of the Federal government or of any
State, local, tribal, or territorial government within the United
States, who has any knowledge that such report was made may disclose
to any person involved in the transaction that the transaction has
been reported, other than as necessary to fulfill the official
duties of such officer or employee.
Subsection (g)(3)(A) provides that neither a financial institution, nor
any director, officer, employee, or agent of any financial
institution--
That makes a voluntary disclosure of any possible violation of
law or regulation to a government agency or a makes a disclosure
pursuant to this subsection or any other authority * * * shall * * *
be liable to any person under any law or regulation of the United
States or any constitution, law or regulation of any State or
political subdivision of any State, or under any contract or other
legally enforceable agreement (including any arbitration agreement),
for such disclosure or for any failure to provide notice of such
disclosure to the person who is the subject of such disclosure or
any other person identified in the disclosure.
Finally, subsection (g)(4) requires the Secretary of the Treasury, ``to
the extent practicable and appropriate,'' to designate ``a single
officer or agency of the United States to whom such reports shall be
made.''\4\ The designated agency is in turn responsible for referring
any report of a suspicious transaction to ``any appropriate law
enforcement, supervisory agency, or United States intelligence agency
for use in the conduct of intelligence or counterintelligence
activities, including analysis, to protect against international
terrorism.'' \5\
---------------------------------------------------------------------------
\4\ This designation does not preclude the authority of
supervisory agencies to require financial institutions to submit
other reports to the same agency or another agency ``pursuant to any
applicable provision of law.'' 31 U.S.C. 5318(g)(4)(C).
\5\ 31 U.S.C. 5318(g)(4)(B).
---------------------------------------------------------------------------
B. Overview of Mutual Funds
The application of the proposed rule would be limited to investment
companies that are ``mutual funds,'' which are open-end management
investment companies as described in the Investment Company Act. Mutual
funds are by far the predominant type of investment company. In 2001,
approximately $7 trillion was invested in U.S. mutual funds,
representing more than 95 percent of the assets held by investment
companies regulated by the Securities and Exchange Commission
(``SEC'').\6\ Currently, more than 3000 active mutual funds are
registered with the SEC.\7\
---------------------------------------------------------------------------
\6\ The staff of the SEC estimates, based on filings with the
SEC, that as of December 2001, approximately $6.97 trillion was
invested in U.S. mutual funds (including $741 billion invested in
open-end management companies that fund variable life insurance and
variable annuity contracts, and $23 billion invested in open-end
management companies that are exchange-traded funds).
\7\ Approximately 1400 of these funds are ``series companies''
with an aggregate 7200 portfolios. A ``series company'' is a
registered investment company that issues two or more classes or
series of preferred or special stock, each of which is preferred
over all other classes or series with respect to assets specifically
allocated to that class or series. 17 CFR 270.18f-2. The assets
allocated to such a class or series are commonly known as a
``portfolio.'' The series or portfolios of a series company operate,
for many purposes, as separate investment companies.
---------------------------------------------------------------------------
[[Page 2717]]
A mutual fund is typically governed by a board of directors or
trustees, which is responsible for overseeing the management of the
fund's business affairs. Mutual funds are typically organized and
operated by an investment adviser responsible for the day-to-day
operations of the fund. In most cases, the investment adviser is a
separate and distinct legal entity from the investment company. The
investment adviser is primarily responsible for selecting portfolio
investments consistent with the objectives and policies stated in the
investment company's prospectus. The investment adviser or a third
party may provide administrative services to the fund. Mutual funds
also employ transfer agents to conduct recordkeeping and related
functions.\8\
---------------------------------------------------------------------------
\8\ Transfer agents maintain records of shareholder accounts,
calculate and disburse dividends, and prepare and mail shareholder
account statements, federal income tax information, and other
shareholder notices. Some transfer agents prepare and mail
statements confirming shareholder transactions and account balances,
and maintain customer service departments to respond to shareholder
inquiries.
---------------------------------------------------------------------------
A mutual fund offers its shares continuously and is required to
provide its shareholders the right to redeem at net asset value on a
daily basis.\9\ Most mutual funds sell their shares to investors
through broker-dealers, banks, and other financial intermediaries.\10\
Some funds are sold directly through affiliates of the fund itself. If
fund shares are sold through an intermediary, the intermediary may
maintain an omnibus account with the fund, in which case neither the
fund nor its transfer agent has direct contact with the shareholders.
The intermediary receives and processes individual investment and
redemption requests from its customers, and has access to individuals'
trading activity. Although neither the mutual fund nor its transfer
agent necessarily knows the identity of individual investors that hold
fund shares through a financial intermediary's omnibus account, the
intermediary does have access to that information, and may itself have
anti-money laundering responsibilities.\11\ A foreign broker-dealer
without independent anti-money laundering requirements may also
maintain omnibus accounts with the fund. This kind of omnibus account
falls within the definition of ``correspondent account'' under section
312 of the Act and as such is subject to due diligence and possibly
enhanced due diligence requirements under that section of the Act and
implementing regulations.\12\
---------------------------------------------------------------------------
\9\ Section 5(a) of the Investment Company Act defines an open-
end investment company as a management investment company that
issues or has outstanding any ``redeemable security.'' 15 U.S.C.
80a-5(a). A redeemable security entitles the holder to receive, upon
presentation to the issuer, the holder's approximate proportionate
share of the issuer's current net assets, or the cash such share
represents. 15 U.S.C. 80a-2(a)(32).
\10\ Mutual funds usually offer their shares to the public
through a principal underwriter, which is in most cases regulated as
a broker-dealer and is subject to rules promulgated by the National
Association of Securities Dealers, Inc. With respect to transactions
occurring after December 30, 2002, brokers and dealers in securities
are required to report suspicious transactions to the Treasury under
31 U.S.C. 5318(g). See 31 CFR 103.19 (suspicious transaction reports
by securities brokers or dealers).
\11\ Broker-dealers in securities and futures commission
merchants are subject to the anti-money laundering compliance
requirements of the Bank Secrecy Act.
\12\ Pursuant to section 312, regulations have been proposed
that would require U.S. financial institutions offering
correspondent accounts to perform due diligence and, in appropriate
circumstances, enhanced due diligence on their correspondents. See
67 FR 37736 (May 30, 2002) and 67 FR 48348 (July 23, 2002).
---------------------------------------------------------------------------
C. Money Laundering Risks Associated with Mutual Funds
Mutual funds present real opportunities for money laundering. They
are widely held, easy to access, and can be redeemed quickly.\13\
Indeed, money market funds, which typically offer check writing
privileges, function much like bank checking accounts.\14\ But because
mutual funds rarely receive from or disburse to shareholders
significant amounts of currency, they are not as likely as other types
of financial institutions (e.g., banks) to be used during the initial
(or ``placement'') stage of the money laundering process.\15\ Money
laundering is more likely to occur through mutual funds at the later
stages of the money laundering process (the ``layering'' and
``integration'' stages).\16\
---------------------------------------------------------------------------
\13\ Section 22(e) of the Investment Company Act requires a
mutual fund to redeem the value of shares within seven days of
receiving a redemption request. 15 U.S.C. 80a-22(e).
\14\ See Investment Company Act Release No. 17589 (July 17,
1990) (55 FR 30240 (July 25, 1990)).
\15\ It is possible that some structuring schemes used in the
placement stage will involve monetary instruments such as money
orders, and that money launderers could attempt to use mutual funds
that accept this form of payment. Although the known experience of
depository institutions with significant money laundering is greater
than the known experience of mutual funds, this difference may
reflect the fact that criminal funds enter mutual funds at a later
stage in the laundering process, when those funds are less
immediately identifiable than at the placement stage. Past
investigative attention, however, has focused more intensively on
the ``placement'' stage of money laundering (especially the
suspicious placement into the financial system of large amounts of
currency) than on transfers or conversions of illicit funds once
they are already in the financial system.
\16\ ``Layering'' involves the distancing of illegal proceeds
from their criminal source through the creation of complex layers of
financial transactions. Money launderers could use mutual fund
accounts to layer their funds by, for example, sending and receiving
money and wiring it quickly through several accounts and multiple
institutions, or by redeeming fund shares purchased with illegal
proceeds and then reinvesting the proceeds received in anther fund.
Layering could also involve purchasing funds in the name of a
fictitious corporation or an entity designed to conceal the true
owners. Mutual funds could also be used to integrate illicit income
into legitimate assets. ``Integration'' occurs when illegal proceeds
appear to have been derived from a legitimate source.
---------------------------------------------------------------------------
The proposed rule contained in this document is just one of several
steps taken by the Department of the Treasury to address
comprehensively the risk of money laundering through mutual funds. In
April 2002, FinCEN issued an interim final rule requiring mutual funds
to develop and implement an anti-money laundering program to prevent
them from being used to launder money or finance terrorist activities,
which includes achieving and monitoring compliance with the applicable
requirements of the Bank Secrecy Act and the Department of the
Treasury's implementing regulations.\17\ In July 2002, the Department
of the Treasury and the SEC jointly issued a proposed regulation to
require mutual funds to implement reasonable procedures to (1) verify
the identity of any person seeking to open an account, to the extent
reasonable and practicable, (2) maintain records of the information
used to verify the person's identity, and (3) determine whether the
person appears on any lists of known or suspected terrorists or
terrorist organizations provided to investment companies by any
government agency.\18\
---------------------------------------------------------------------------
\17\ See 76 FR 21117 (April 29, 2002).
\18\ See 67 FR 48318 (July 23, 2002). Under the proposed rule, a
mutual fund may contractually delegate the implementation and
operation of its customer identification program to a service
provider such as a transfer agent although the mutual fund would
continue to be responsible for its compliance with applicable
requirements.
---------------------------------------------------------------------------
This notice of proposed rulemaking follows other recent actions
that expand the application of requirements that financial institutions
report suspicious transactions. For example, since April 1996, rules
issued by FinCEN under the authority contained in 31 U.S.C. 5318(g)
have required banks, thrifts, and other banking organizations to report
suspicious transactions.\19\ In collaboration with FinCEN, the federal
bank supervisors concurrently issued suspicious transaction reporting
rules
[[Page 2718]]
under their own authority.\20\ The bank supervisory agency rules apply
to banks, bank holding companies, and non-depository institution
affiliates and subsidiaries of banks and bank holding companies. Money
services businesses have been required to report suspicious
transactions to the Department of the Treasury since the beginning of
2002. In July 2002, FinCEN took a further step in the creation of a
comprehensive system for the reporting of suspicious transactions by
the major categories of financial institutions operating in the United
States, by requiring brokers and dealers in securities to report
suspicious transactions.\21\ In October 2002, FinCEN issued a final
rule requiring casinos to report suspicious transactions. The proposed
rule contained in this document would extend this requirement to mutual
funds. Suspicious transaction reporting by mutual funds can provide
highly useful information in law enforcement and regulatory
investigations and proceedings, and in the conduct of intelligence
activities to protect against international terrorism.\22\
---------------------------------------------------------------------------
\19\ See 31 CFR 103.18 (requiring banks, thrifts, and other
banking organizations to report suspicious transactions).
\20\ See 12 CFR 21.11 (issued by the Office of the Comptroller
of the Currency); 12 CFR 208.62 (issued by the Board of Governors of
the Federal Reserve System); 12 CFR 353.3 (issued by the Federal
Deposit Insurance Corporation); 12 CFR 563.180 (issued by the Office
of Thrift Supervision); 12 CFR 748.1 (issued by the National Credit
Union Administration).
\21\ See 67 FR 44048 (July 1, 2002).
\22\ See 31 U.S.C. 5311 (stating purpose of the reporting
authority under the Bank Secrecy Act).
---------------------------------------------------------------------------
II. Specific Provisions
A. 103.15(a)--Reports by Mutual Funds of Suspicious Transactions
Section 103.15(a) contains the rules setting forth the obligation
of mutual funds to report suspicious transactions that are conducted or
attempted by, at, or through a mutual fund and involve or aggregate at
least $5,000 in funds or other assets. It is important to recognize
that the obligation to report a transaction under this rule and 31
U.S.C. 5318(g) would apply whether or not the transaction involves
currency.\23\ Treasury is aware that the use of currency by mutual
funds is rare.
---------------------------------------------------------------------------
\23\ Many currency transactions are not indicative of money
laundering or other violations of law, a fact recognized both by
Congress, in authorizing reform of the currency transaction
reporting system, and by FinCEN, in issuing rules to implement that
system (see 31 U.S.C. 5313(d) and 31 CFR 103.22(d), 63 FR 50147
(September 21, 1998)). Many non-currency transactions, (for example,
fund transfers) can indicate illicit activity, especially in light
of the breadth of the statutes that make money laundering a crime.
See 18 U.S.C. 1956 and 1957.
---------------------------------------------------------------------------
The obligation extends to transactions conducted or attempted by,
at, or through, the mutual fund. However, paragraph (a) also contains
language designed to encourage the reporting of transactions that
appear relevant to violations of law or regulation, even in cases in
which the rule does not explicitly so require (for example, in the case
of a transaction falling below the $5,000 threshold in the rule).
Section 103.15(a) contains the general statement of the obligation
to file reports. To clarify that the proposed rule creates a reporting
requirement that is uniform with that for other financial institutions,
the language of the reporting obligation incorporates language from the
suspicious activity reporting rules applicable to other financial
institutions, such as banks, casinos, and money services businesses,
requiring the reporting of ``any suspicious transaction relevant to a
possible violation of law or regulation.'' Furthermore, a mutual fund
may also report ``any suspicious transaction that it believes is
relevant to a possible violation of any law or regulation but whose
reporting is not required'' by the proposed rule. For example, a mutual
fund may report a suspected violation of law that involves less than
$5,000. Such voluntary reporting would be subject to the same
protection from liability as mandatory reporting, pursuant to 31 U.S.C.
5318(g)(3).
The proposed rule requires reporting by mutual funds, but not by
affiliated persons of mutual funds. Some affiliates, such as broker-
dealers, are subject to their own reporting rule. Others may be subject
to future rules.
Mutual funds typically conduct many operations through separate
entities, which may or may not be affiliated persons of the mutual
fund. Personnel of these separate entities may be in the best position
to perform the reporting obligation. It is permissible for a mutual
fund to contractually delegate performance of the reporting obligation
to another affiliated or unaffiliated service provider, such as a
transfer agent. The mutual fund, however, remains responsible for
assuring compliance with the rule, and must actively monitor the
procedures for reporting suspicious transactions.
Section 103.15 (a)(2) specifies that the proposed rule requires the
reporting of suspicious transactions that involve or aggregate at least
$5,000 in funds or other assets. The suspicious transaction reporting
rules, however, are not intended to operate (and indeed cannot properly
operate) in a mechanical fashion. Rather, the suspicious transaction
reporting requirements are intended to function in such a way as to
have financial institutions evaluate customer activity and
relationships for money laundering risks.\24\
---------------------------------------------------------------------------
\24\ Thus, for example, transactions involving investments by
the pension fund of a publicly traded corporation, even though
involving a large dollar amount, would likely require a more limited
scrutiny than less typical transactions such as those involving
customers who wish to use currency or money orders to purchase
mutual fund shares, even though the dollar amounts in those latter
cases may be relatively small.
---------------------------------------------------------------------------
Section 103.15(a)(2) specifies four categories of transactions that
require reporting if the mutual fund knows, suspects, or has reason to
suspect that any such category applies to a transaction, or a pattern
of transactions of which the transaction is a part. The ``knows,
suspects, or has reason to suspect'' standard incorporates a concept of
due diligence in the reporting requirement.
The first category, described in proposed section 103.15(a)(2)(i),
includes transactions involving funds derived from illegal activity, or
intended or conducted in order to hide or disguise funds derived from
such illegal activity as part of a plan to violate or evade any federal
law or regulation or to avoid any transaction reporting requirement
under federal law or regulation. The second category, described in
section 103.15(a)(2)(ii), includes transactions designed, whether
through structuring or other means, to evade the requirements of the
Bank Secrecy Act. The third category, described in section
103.15(a)(2)(iii), includes transactions that appear to serve no
business or apparent lawful purposes, and for which the mutual fund
knows of no reasonable explanation after examining the available facts
relating to the transaction and the parties. The fourth category,
described in section 103.15(a)(2)(iv), includes any other transactions
that involve the use of the mutual fund to facilitate criminal
activity.\25\
---------------------------------------------------------------------------
\25\ The fourth reporting category has been added to the
suspicious activity reporting rules promulgated since the passage of
the USA Patriot Act to make it clear that the requirement to report
suspicious activity encompasses the reporting of transactions in
which legally derived funds are used for criminal activity, such as
the financing of terrorism.
---------------------------------------------------------------------------
A mutual fund must base its determination as to whether a report is
required on all the facts and circumstances relating to the transaction
and the customer of the mutual fund in question.\26\ Different fact
patterns will
[[Page 2719]]
require different types of judgments. In some cases, the facts of the
transaction may indicate the need to report. For example, the fact that
a customer refuses to provide information necessary for the mutual fund
to make reports or keep records required by this part or other
regulations, provides information that the mutual fund determines to be
false, or seeks to change or cancel a transaction after such person is
informed of information verification or recordkeeping requirements
relevant to the transactions, would indicate that a Suspicious Activity
Report (``SAR-SF'') \27\ should be filed.\28\ In other situations,
determining whether a transaction is suspicious within the meaning of
the rule may require a more involved judgment. Transactions that raise
the need for such judgment may include, for example, (i) transmission
or receipt of funds transfers without normal identifying information,
or in a manner that indicates an attempt to disguise or hide the
country of origin or destination, or the identity of the customer
sending the funds, or the beneficiary to which the funds are sent; or
(ii) repeated use of a mutual fund as a temporary resting place for
funds from multiple sources without a clear business purpose. The
judgments involved will also extend to whether the facts and
circumstances and the institution's knowledge of its customer provide a
reasonable explanation for the transaction that removes it from the
suspicious category.
---------------------------------------------------------------------------
\26\ In the case of a transaction conducted through an omnibus
account maintained by an intermediary, a mutual fund may not know,
suspect, or have reason to suspect that the transaction is one for
which reporting would be required, because a fund typically has
little or no information about individual customers represented in
an omnibus account. Omnibus accounts are, however, usually
maintained by a person, such as a broker-dealer, that has a
reporting obligation. The omnibus account holder (i.e., the
financial intermediary) is itself a customer of the mutual fund for
purposes of the proposed rule.
\27\ The term ``SF'' is an abbreviation for ``Securities and
Futures Industry,'' the form that will be used for reporting by
members of the securities and futures industry. See 67 FR 50751
(August 5, 2002).
\28\ As section 103.15(d) of the proposed rule makes clear, the
mutual fund must not notify the customer that it intends to file or
has filed a suspicious transaction report with respect to the
customer's activity.
---------------------------------------------------------------------------
The means of commerce and the techniques of money launderers are
continually evolving, and there is no way to provide an exhaustive list
of suspicious transactions. FinCEN intends to continue its dialogue
with mutual funds about the manner in which a combination of government
guidance, training programs, and government-industry information
exchange can smooth the way for operation of the new suspicious
activity reporting system in as flexible and cost-efficient a way as
possible.
Individual mutual funds are frequently part of a complex of related
funds, and it is possible that more than one mutual fund would be
obligated to report the same transaction. Section 103.15(a)(3) of the
proposed rule would permit all of the mutual funds involved in a
particular transaction to file a single report as long as the report
contains all relevant facts. Moreover, a person such as a broker-dealer
that is a service provider to the fund may have a separate suspicious
activity reporting obligation with regard to the same transaction. The
proposed rule would permit the mutual fund's report to satisfy that
person's reporting obligation as well. Thus, a service provider to
which multiple mutual funds have contractually delegated their
reporting obligation may file a single report on behalf of itself and
all of the funds involved in the same transaction or series of
transactions.
B. 103.15(b)--Filing Procedures
Section 103.15(b) sets forth the filing procedures to be followed
by mutual funds making reports of suspicious transactions. Within 30
days after a mutual fund becomes aware of a suspicious transaction, the
fund must report the transaction by completing a SAR-SF, collecting and
maintaining supporting documentation, and filing the SAR-SF in a
central location, to be determined by FinCEN. The SAR-SF will resemble
the SAR used by banks to report suspicious transactions, and a draft
form will be made available for comment by publication in the Federal
Register.
If the mutual fund does not identify a suspect on the date of the
initial detection, the mutual fund may delay filing a SAR-SF for an
additional 30 days, but may not delay filing more than 60 days after
the date of such initial detection. In situations involving violations
that require immediate attention, such as terrorist financing or
ongoing money laundering schemes, the mutual fund should telephone the
appropriate law enforcement authority and the SEC in addition to filing
a SAR-SF.
C. 103.15(c)--Retention of Records
Section 103.15(c) provides that filing mutual funds must maintain
copies of SAR-SFs and the original related documentation for a period
of five years from the date of filing. As indicated above, supporting
documentation is to be made available to FinCEN, the SEC, and other
appropriate law enforcement and regulatory authorities on request.
D. 103.15(d)--Confidentiality of Reports
Section 103.15(d) reflects the statutory bar against the disclosure
of information filed in, or the fact of filing, a suspicious activity
report (whether the report is required by the proposed rule or is filed
voluntarily). See 31 U.S.C. 5318(g)(2). Thus, the paragraph
specifically prohibits persons filing SAR-SFs from making any
disclosure, except to law enforcement and regulatory agencies, about
either the reports themselves or supporting documentation.
This paragraph does not prohibit mutual funds from discussing with
each other (or with service providers that are involved in the
transaction, such as their investment advisers, transfer agents,
principal underwriters, and broker-dealers) for purposes of section
103.15(a)(3), suspicious activity involving a transaction with which
the mutual funds have been involved, or the determination of which
mutual fund will file a SAR-SF in such a case.
E. 103.15(e)--Limitation of Liability
Section 5318(g) of title 31, as amended by the USA Patriot Act,
provides protection from liability for making reports of suspicious
transactions, and for failures to disclose the fact of such reporting
to persons involved in such transactions. The safe harbor provision of
31 U.S.C. 5318(g) clearly protects any financial institution from civil
liability for reporting suspicious activity.\29\ Section 351 of the USA
Patriot Act clarifies that the safe harbor applies also to the
voluntary reporting of suspicious transactions, and section 103.15(e)
of the proposed rule reflects this clarification.
---------------------------------------------------------------------------
\29\ See Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2nd Cir.
1999) (stating that in enacting 31 U.S.C. 5318(g), Congress
``broadly and unambiguously provide[d] * * * immunity from any law
(except the federal Constitution) for any statement made in a SAR by
anyone connected to a financial institution'').
---------------------------------------------------------------------------
It must be noted that, while the proposed rule reiterates and
clarifies the broad protection from liability for making reports and
for failures to disclose the fact of such reporting that is contained
in the statutory safe harbor provision, the regulatory provisions do
not extend the scope of either the statutory prohibition or the
statutory protection. Inclusion of safe harbor language in the proposal
is in no way intended to suggest that the safe harbor can override the
non-disclosure provisions of the law and regulations. The prohibition
on disclosure (other than as required by the proposed rule) applies
regardless of any protection from liability.
[[Page 2720]]
F. 103.15(f)--Examinations and Enforcement
Section 103.15(f) notes that the Department of the Treasury or its
delegate will examine compliance with the obligation to report
suspicious transactions, and provides that failure to comply with the
rule may constitute a violation of the Bank Secrecy Act and the Bank
Secrecy Act regulations. In examining any particular failure to report
a transaction as required by this section, FinCEN and the SEC may take
into account the relationship between the particular failure to report
and the adequacy of the implementation and operation of a mutual fund's
compliance procedures.
G. 103.15(g)--Effective Date
Finally, section 103.15(g) provides that compliance with the new
suspicious activity reporting rule would be required by a date 180 days
after the date on which the final regulations discussed in this notice
of proposed rulemaking are published in the Federal Register.
III. Submission of Comments
FinCEN invites comment on all aspects of the proposed regulation.
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. Comments may be inspected, between 10 a.m. and 4 p.m., in
the FinCEN reading room in Washington, DC. Persons wishing to inspect
the comments submitted must request an appointment by telephoning (202)
354-6400.
IV. Regulatory Flexibility Act
FinCEN certifies that this proposed regulation would not have a
significant economic impact on a substantial number of small entities.
Investment companies, regardless of their size, are currently subject
to the Bank Secrecy Act. Procedures currently in place at mutual funds
to comply with existing Bank Secrecy Act rules should help mutual funds
to identify suspicious transactions. In addition, the limited use of
currency to purchase mutual fund shares will likely reduce the number
of suspicious activity reports required to be filed. Finally, certain
small mutual funds may have an established and limited customer base
whose transactions are well known to the fund.
V. Executive Order 12866
The Department of the Treasury has determined that this proposed
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, Public Law
104-4 (Unfunded Mandates Act), 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 proposal provides
the most cost-effective and least burdensome alternative to achieve the
objectives of the rule.
VII. Paperwork Reduction Act
The collection of information contained in this proposed rule is
being submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of information should be sent
(preferably by fax (202-395-6974)) to Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Office
of Management and Budget, Paperwork Reduction Project (1506),
Washington, DC 20503 (or by the Internet to jlackeyj@omb.eop.gov), with
a copy to FinCEN by mail or the Internet at the addresses previously
specified. Comments on the collection of information should be received
by March 24, 2003. In accordance with the requirements of the Paperwork
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing
regulations, 5 CFR 1320, the following information is presented to
assist those persons wishing to comment on the information collection.
FinCEN anticipates that this proposed rule, if adopted as proposed,
would result in the annual filing of a total of 3,000 suspicious
activity reports by mutual funds. This result is an estimate based on
the estimated number of respondents under the rule.
Description of Respondents: Mutual funds as defined in 31 CFR
103.15(a).
Estimated Number of Respondents: 3,000.
Frequency: As required.
Estimate of Burden: The reporting burden of 31 CFR 103.15 will be
reflected in the burden of the form used by mutual funds to report
suspicious transactions. The recordkeeping burden of 31 CFR 103.15 is
estimated as an average of 3 hours per form, which includes internal
review of records to determine whether the activity requires reporting.
Estimated Total Annual Recordkeeping Burden: 9,000 hours.
FinCEN specifically invites comments on: (a) Whether the proposed
recordkeeping requirement is necessary for the proper performance of
the mission of FinCEN, and whether the information shall have practical
utility; (b) the accuracy of FinCEN's estimate of the burden of the
proposed recordkeeping requirement; (c) ways to enhance the quality,
utility, and clarity of the information required to be maintained; (d)
ways to minimize the burden of the recordkeeping requirement, including
through the use of automated collection techniques or other forms of
information technology; and (e) estimates of capital or start-up costs
and costs of operation, maintenance, and purchase of services to
maintain the information.
In addition the Paperwork Reduction Act of 1995 requires agencies
to estimate the total annual cost burden to respondents or
recordkeepers resulting from the collection of information. Thus,
FinCEN also specifically requests comments to assist with this
estimate. In connection with this, FinCEN requests commenters to
identify any additional costs associated with the completion of the
form. These comments on costs should be divided into two parts: (1) Any
additional costs associated with reporting; and (2) any additional
costs associated with recordkeeping.
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(government agencies), Securities, Currency, Investigations, Law
enforcement, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
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. 5311-5314
and 5316-5332; title III, secs. 312, 313, 314, 319, 352, Pub. L.
107-56, 115 Stat. 307.
[[Page 2721]]
Sec. 103.15 [Redesignated as Sec. 103.12]
2. In subpart B, redesignating Sec. 103.15 as Sec. 103.12.
3. In subpart B, add new Sec. 103.15 to read as follows:
Sec. 103.15 Reports by mutual funds of suspicious transactions.
(a) General. (1) Every investment company (as defined in section 3
of the Investment Company Act of 1940 (15 U.S.C. 80a-2) (``Investment
Company Act'') that is an open-end company (as defined in section 5 of
the Investment Company Act (15 U.S.C. 80a-5)) and that is registered,
or is required to register, with the Securities and Exchange Commission
pursuant to that Act (for purposes of this section, a ``mutual fund''),
shall file with FinCEN, to the extent and in the manner required by
this section, a report of any suspicious transaction relevant to a
possible violation of law or regulation. A mutual fund may also file
with FinCEN a report of any suspicious transaction that it believes is
relevant to the possible violation of any law or regulation but whose
reporting is not required by this section. Filing a report of a
suspicious transaction does not relieve a mutual fund from the
responsibility of complying with any other reporting requirements
imposed by the Securities and Exchange Commission.
(2) A transaction requires reporting under the terms of this
section if it is conducted or attempted by, at, or through a mutual
fund, it involves or aggregates funds or other assets of at least
$5,000, and the mutual fund knows, suspects, or has reason to suspect
that the transaction (or a pattern of transactions of which the
transaction is a part):
(i) Involves funds derived from illegal activity or is intended or
conducted in order to hide or disguise funds or assets derived from
illegal activity (including, without limitation, the ownership, nature,
source, location, or control of such funds or assets) as part of a plan
to violate or evade any federal law or regulation or to avoid any
transaction reporting requirement under federal law or regulation;
(ii) Is designed, whether through structuring or other means, to
evade any requirements of this part or any other regulations
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended,
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332;
(iii) Has no business or apparent lawful purpose or is not the sort
in which the particular customer would normally be expected to engage,
and the mutual fund knows of no reasonable explanation for the
transaction after examining the available facts, including the
background and possible purpose of the transaction; or
(iv) Involves use of the mutual fund to facilitate criminal
activity.
(3) The obligation to identify and properly and timely to report a
suspicious transaction rests with each mutual fund involved in the
transaction, provided that no more than one report is required to be
filed by the mutual funds involved in a particular transaction or any
other person obligated to report the transaction, so long as the report
filed contains all relevant facts.
(b) Filing procedures--(1) What to file. A suspicious transaction
shall be reported by completing a Suspicious Activity Report--
Investment Companies (``SAR-SF''), and collecting and maintaining
supporting documentation as required by paragraph (c) of this section.
(2) Where to file. The SAR-SF shall be filed with FinCEN in a
central location, to be determined by FinCEN as indicated in the
instructions to the SAR-SF.
(3) When to file. A SAR-SF shall be filed no later than 30 calendar
days after the date of the initial detection by the reporting mutual
fund of facts that may constitute a basis for filing a SAR-SF under
this section. If no suspect is identified on the date of such initial
detection, a mutual fund may delay filing a SAR-SF for an additional 30
calendar days to identify a suspect, but in no case shall reporting be
delayed more than 60 calendar days after the date of such initial
detection. In situations involving violations that require immediate
attention, such as terrorist financing or ongoing money laundering
schemes, mutual funds are encouraged to immediately notify by telephone
an appropriate law enforcement authority in addition to filing timely a
SAR-SF. Mutual funds wishing voluntarily to report suspicious
transactions that may relate to terrorist activity may call FinCEN's
Financial Institutions Hotline at 1-866-556-3974 in addition to filing
timely a SAR-SF if required by this section. The mutual fund may also,
but is not required to, contact the Securities and Exchange Commission
to report in such situations.
(c) Retention of records. A mutual fund shall maintain a copy of
any SAR-SF filed and the original (or business record equivalent) of
any supporting documentation for a period of five years from the date
of filing the SAR-SF. Supporting documentation shall be identified as
such and maintained by the mutual fund, and shall be deemed to have
been filed with the SAR-SF. The mutual fund shall make all supporting
documentation available to FinCEN, any other appropriate law
enforcement agencies, or federal or state securities regulators upon
request.
(d) Confidentiality of reports. No mutual fund, and no director,
officer, employee, or agent of any mutual fund, who reports a
suspicious transaction under this part, may notify any person involved
in the transaction that the transaction has been reported, except to
the extent permitted by paragraph (a)(3) of this section. Thus, any
person subpoenaed or otherwise required to disclose a SAR-SF or the
information contained in a SAR-SF, except where such disclosure is
requested by FinCEN, the Securities and Exchange Commission, or another
appropriate law enforcement or regulatory agency, shall decline to
produce the SAR-SF or to provide any information that would disclose
that a SAR-SF has been prepared or filed, citing this paragraph (d) and
31 U.S.C. 5318(g)(2), and shall notify FinCEN of any such request and
its response thereto.
(e) Limitation of liability. A mutual fund, and any director,
trustee, officer, employee, or agent of any mutual fund, who makes a
report of any possible violation of law or regulation pursuant to this
section or any other authority (whether such report is required or is
made voluntarily) shall not be liable to any person under any law or
regulation of the United States (or otherwise to the extent also
provided in 31 U.S.C. 5318(g)(3)) for any disclosure contained in, or
for failure to disclose the fact of, such report.
(f) Examinations and enforcement. Compliance with this section
shall be examined by the Department of the Treasury, through FinCEN or
its delegees, under the terms of the Bank Secrecy Act. Failure to
satisfy the requirements of this section may constitute a violation of
the reporting rules of the Bank Secrecy Act and of this part.
(g) Effective date. This section applies to transactions occurring
180 days after the date on which the final regulations discussed in
this notice of proposed rulemaking are published in the Federal
Register.
Dated: January 14, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-1174 Filed 1-17-03; 8:45 am]
BILLING CODE 4810-02-P