Federal Financial Institutions Examination Council FFIEC.gov

7/30/2019 Federal Financial Institutions Examination Council FFIEC.gov

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Federal Financial Institutions Examination CouncilFFIEC.GovCurrency Transaction Reporting ExemptionsOverview (can pawn brokerage beexempt?) http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_019.htmSaturday, April 27, 2013

3:36 AM

Bank Secrecy ActAnti-MoneyLaunderingExaminationManual

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Currency TransactionReporting ExemptionsOverviewObjective.Assess the banks compliance with statutory and regulatoryrequirements 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 enforcementauthorities and may place unreasonable burdens on banks. Consequently, a bankmay exempt certain types of customers from currency transactionreporting.The Money Laundering Suppression Act of 1994 (MLSA) established a two-phaseexemption process. Under Phase I exemptions, transactions in currency by banks,governmental departments or agencies, and listed public companies and theirsubsidiaries are exempt from reporting. Under Phase II exemptions, transactions incurrency by smaller businesses that meet specific criteria laid out in FinCENsregulations may be exempted from reporting.On December 5, 2008, FinCEN issued amendments to the rules governing CTRexemptions.78 The amendments, among other things, removed the initial

designation and annual review requirements for certain Phase I customers, thebiennial filing requirement for Phase II exempt customers, and eliminated thewaiting period for exempting otherwise eligible Phase II customers by adopting arisk-based approach to exempting those customers. The following discussionreflects the updated regulatory requirements.Phase I CTR Exemptions (31 CFR 103.22(d)(2)(i)(v))FinCENs 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 UnitedStates.

Any entity (other than a bank) whose common stock or analogousequity interests are listed on the New York Stock Exchange or theAmerican Stock Exchange or have been designated as a NASDAQNational Market Security listed on the NASDAQ Stock Market (withsome exceptions).

Any subsidiary (other than a bank) of any "listed entity" that isorganized under U.S. law and at least 51 percent of whose commonstock or analogous equity interest is owned by the listed entity.
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Filing Time FramesBanks must file a one-time Designation of Exempt Person form (FinCEN Form 110)to exempt each eligible listed public company or eligible subsidiary from currencytransaction reporting. The form must be filed with the IRS within 30 days after thefirst transaction in currency that the bank wishes to exempt.

Banks do not need to file a Designation of Exempt Person form for Phase I-eligiblecustomers that are banks, federal, state, or local governments, or entities exercisinggovernmental authority. Nevertheless, a bank should take the same steps to assureitself of a customers initial eligibility for exemption, and document the basis for theconclusion, that a reasonable and prudent bank would take to protect itself fromloan or other fraud or loss based on misidentification of a persons status.Exemption of a Phase I entity covers all transactions in currency with the exemptedentity, not only transactions in currency conducted through an account.Annual ReviewThe information supporting each designation of a Phase I-exempt listed publiccompany or subsidiary must be reviewed and verified by the bank at least once peryear. Annual reports, stock quotes from newspapers, or other information, such as

electronic media could be used to document the review. Banks do not need toconfirm the continued exemption eligibility of Phase I customers that are banks,government agencies, or entities exercising governmental authority.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 beexempted under the Phase II exemptions if it qualifies as either a "non-listedbusiness" or as a "payroll customer."Non-Listed BusinessesA "non-listed business" is defined as a commercial enterprise to the extent of itsdomestic operations and only with respect to transactions conducted through itsexemptible accounts and that (i) has maintained a transaction account at theexempting bank for at least two months or prior to the passing of two months time

if the bank undertakes a risk-based analysis of that customer that allows it to formand document a reasonable belief that the customer has a legitimate businesspurpose for conducting frequent large currency transactions; (ii) frequently 79engages in transactions in currency with the bank in excess of $10,000; and (iii) isincorporated or organized under the laws of the United States or a state, or isregistered as and eligible to do business within the United States or a state.Ineligible BusinessesCertain businesses are ineligible for treatment as an exempt non-listed business (31 CFR 103.22(d)(5)(viii)). An ineligible business isdefined as a business engaged primarily in one or more of thefollowing specified activities:

Serving as a financial institution or as agents for a financialinstitution 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.
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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, bespecified by FinCEN.

A business that engages in multiple business activities may qualifyfor an exemption as a non-listed business as long as no more than50 percent of its gross revenues per year80 are derived from one ormore of the ineligible business activities listed in the rule.

A bank must consider and maintain materials and other supportinginformation that allow it to substantiate that the decision to exemptthe customer from currency transaction reporting was based upon areasonable determination that the customer derives no more than50 percent of its annual gross revenues from ineligible businessactivities. Such a reasonable determination should be based uponits understanding of the nature of the customers business, thepurpose of the customers accounts, and the actual or anticipatedactivity in those accounts.81

Payroll Customers

A "payroll customer" is defined solely with respect to withdrawals for payrollpurposes from existing exemptible accounts and as a person who: (i) hasmaintained a transaction account at the bank for at least two months or prior to thepassing of two months time if the bank undertakes a risk-based analysis of thatcustomer that allows it to form and document a reasonable belief that the customerhas a legitimate business purpose for conducting frequent large currencytransactions; (ii) operates a firm that regularly withdraws more than $10,000 inorder to pay its U.S. employees in currency; and (iii) is incorporated or organizedunder the laws of the United States or a state, or is registered as and is eligible todo business within the United States or a state.Filing Time FramesAfter a bank has decided to exempt a Phase II customer, the bank must file a

Designation of Exempt Person form with the IRS within 30 days after the firsttransaction in currency that the bank plans to exempt.Annual ReviewThe information supporting each designation of a Phase II exempt person must bereviewed and verified by the bank at least once per year. The bank shoulddocument the annual review. Moreover, consistent with this annual review, a bankmust review and verify at least once each year that management monitors thesePhase II accounts for suspicious transactions.
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Safe Harbor for Failure to File CTRsThe rules (31 CFR 103.22(d)(7)) provide a safe harbor that a bank is not liable forthe failure to file a CTR for a transaction in currency by an exempt person, unlessthe bank knowingly provides false or incomplete information or has reason to

believe that the customer does not qualify as an exempt customer. In the absenceof any specific knowledge or information indicating that a customer no longer meetsthe requirements of an exempt person, the bank is entitled to a safe harbor fromcivil penalties to the extent it continues to treat that customer as an exemptcustomer until the date of the customers annual review.

Effect on Other Regulatory RequirementsThe exemption procedures do not have any effect on the requirement that banksfile SARs or on other recordkeeping requirements. For example, the fact that acustomer is an exempt person has no effect on a banks obligation to retain recordsof funds transfers by that person, or to retain records in connection with the sale ofmonetary instruments to that person.

If a bank has improperly exempted accounts, it may formally revoke the exemptionby filing FinCEN Form 110 and checking the "Exemption Revoked" box or informallyrevoke the exemption by filing CTRs on the customer. In either case, the bankshould begin filing CTRs and should contact the IRS Enterprise Computing Center Detroit (formerly the Detroit Computing Center)82 to request a determination onwhether the backfiling of unreported currency transactions is necessary.Additional information about the currency transaction exemption process can befound on FinCENs Web site at www.fincen.gov.Backward |Table of Contents |ForwardPasted from
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