Bank Secrecy Act |
Currency Transaction
Reporting Exemptions—Overview
Objective. Assess the bank’s compliance with statutory and regulatory requirements for exemptions from the currency transaction reporting requirements.
U.S. Treasury regulations have historically recognized that the routine reporting of some types of large currency transactions does not necessarily aid law enforcement authorities and may place unreasonable burdens on banks. Consequently, a bank may exempt certain types of customers from currency transaction reporting.
The Money Laundering Suppression Act of 1994 (MLSA) established a two-phase exemption process. Under Phase I exemptions, transactions in currency by banks, governmental departments or agencies, and public or listed companies and their subsidiaries are exempt from reporting. Under Phase II exemptions, transactions in currency by smaller businesses that meet specific criteria laid out in FinCEN’s regulations may be exempted from reporting. To exempt a customer from CTR reporting, a bank must file a Designation of Exempt Person form (FinCEN Form 110).
Phase I CTR Exemptions (31 CFR 103.22(d)(2)(i)–(v))
FinCEN’s rule identifies five categories of Phase I exempt persons:
- A bank, to the extent of its domestic operations.
- A federal, state, or local government agency or department.
- Any entity exercising governmental authority within the United States.
- Any entity (other than a bank) whose common stock is listed on the New York, American, or NASDAQ stock exchanges (with some exceptions).
- Any subsidiary (other than a bank) of any "listed entity" that is organized under U.S. law and at least 51 percent of whose common stock is owned by the listed entity.
Filing Time Frames
Banks must file a one-time Designation of Exempt Person form to exempt a Phase I entity from currency transaction reporting. The exemption of a Phase I entity covers all transactions in currency with the exempted entity, not only transactions in currency conducted through an account. The form must be filed with the Internal Revenue Service (IRS) within 30 days after the first transaction in currency that the bank wishes to exempt.
Annual Review
The information supporting each designation of a Phase I exempt person must be reviewed and verified by the bank at least once per year. Annual reports, stock quotes from newspapers, or other information, such as electronic media could be used to document the review.
Phase II CTR Exemptions (31 CFR 103.22(d)(2) (vi)–(vii))
A business that does not fall into any of the Phase I categories may still be exempted under the Phase II exemptions if it qualifies as either a "non-listed business" or as a "payroll customer."
Non-Listed Businesses
A "non-listed business" is defined as a commercial enterprise to the extent of its domestic operations and only with respect to transactions conducted through its exemptible accounts and that (i) has maintained a transaction account at the exempting bank for at least 12 months, (ii) frequently77 engages in transactions in currency with the bank in excess of $10,000, and (iii) is incorporated or organized under the laws of the United States or a state, or is registered as and eligible to do business within the United States or a state.
Ineligible Businesses
Certain businesses are ineligible for treatment as an exempt non-listed business (31 CFR 103.22(d)(6)(viii)). An ineligible business is defined as a business engaged primarily in one or more of the following specified activities:
- Serving as a financial institution or as agents for a financial institution of any type.
- Purchasing or selling motor vehicles of any kind, vessels, aircraft, farm equipment, or mobile homes.
- Practicing law, accounting, or medicine.
- Auctioning of goods.
- Chartering or operation of ships, buses, or aircraft.
- Operating a pawn brokerage.
- Engaging in gaming of any kind (other than licensed pari-mutuel betting at race tracks).
- Engaging in investment advisory services or investment banking services.
- Operating a real estate brokerage.
- Operating in title insurance activities and real estate closings.
- Engaging in trade union activities.
- Engaging in any other activity that may, from time to time, be specified by FinCEN.
A business that engages in multiple business activities may qualify for an exemption as a non-listed business as long as no more than 50 percent of its gross revenues per year78 are derived from one or more of the ineligible business activities listed in the rule.
Payroll Customers
A "payroll customer" is defined solely with respect to withdrawals for payroll purposes from existing exemptible accounts and as a person who: (i) has maintained a transaction account at the bank for at least 12 months; (ii) operates a firm that regularly withdraws more than $10,000 in order to pay its U.S. employees in currency; and (iii) is incorporated or organized under the laws of the United States or a state, or is registered as and is eligible to do business within the United States or a state.
Filing Time Frames
After a bank has decided to exempt a Phase II customer, the bank must file an initial Designation of Exempt Person form (FinCEN Form 110) within 30 days after the first customer transaction the bank wishes to exempt.
Annual Review
The information supporting each designation of a Phase II exempt person must be reviewed and verified by the bank at least once per year. The bank should document the annual review. Moreover, consistent with this annual review, a bank must review and verify at least once each year that management monitors these Phase II accounts for suspicious transactions.
Biennial Renewals
Additionally, for Phase II customers, the form must be refiled every two years, on or before March 15, as part of the biennial renewal process. Under the biennial renewal process applicable to Phase II customers, a bank must include the following information on the biennial renewal: (i) any change in control of the exempt person known to the bank (or for which the bank has reason to know) and (ii) a certification that the bank has applied its suspicious activity monitoring system to transactions in currency of the exempt person as necessary, but at least annually.
Safe Harbor for Failure to File CTRs
The rules (31 CFR 103.22(d)(8)) provide a safe harbor that a bank is not liable for the failure to file a CTR for a transaction in currency by an exempt person, unless the bank knowingly provides false or incomplete information or has reason to believe that the customer does not qualify as an exempt customer. In the absence of any specific knowledge or information indicating that a customer no longer meets the requirements of an exempt person, the bank is entitled to a safe harbor from civil penalties to the extent it continues to treat that customer as an exempt customer until the date of the customer’s annual review.
Effect on Other Regulatory Requirements
The exemption procedures do not have any effect on the requirement that banks file SARs. For example, the fact that a customer is an exempt person has no effect on a bank’s obligation to retain records of funds transfers by that person, or to retain records in connection with the sale of monetary instruments to that person.
If a bank has improperly exempted accounts, the examiner may require management to revoke the exemption. In any case, the bank should begin filing CTRs and should contact the Internal Revenue Service (IRS) Enterprise Computing Center – Detroit (formerly the Detroit Computing Center)79 to request a determination on whether the backfiling of unreported currency transactions is necessary.
Additional information about the currency transaction exemption process can be found on FinCEN’s web site at www.fincen.gov.
