Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations-Exemptions from the Requirement to Report Transactions in Currency, 74010-74017 [E8-28858]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 73, Number 235 (Friday, December 5, 2008)]
[Rules and Regulations]
[Pages 74010-74017]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-28858]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA90


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Exemptions from the Requirement to Report 
Transactions in Currency

AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.

ACTION: Final rule.

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SUMMARY: FinCEN is issuing this final rule to amend the Bank Secrecy 
Act (BSA) regulation that allows depository institutions to exempt 
transactions of certain persons from the requirement to report 
transactions in currency in excess of $10,000. Modification of the 
exemption procedures is a part of the Department of the Treasury's 
continuing effort to increase the efficiency and effectiveness of its 
anti-money laundering and counter-terrorist financing policies.

DATES: Effective Date: January 5, 2009.

FOR FURTHER INFORMATION CONTACT: The FinCEN regulatory helpline at 
(800) 949-2732 and select Option 3.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Background

    The Bank Secrecy Act, Titles I and II of 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 and 5316-5332, authorizes the Secretary of the 
Treasury (``Secretary''), among other things, 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, 
regulatory and counter-terrorism matters, and to implement anti-money 
laundering programs and compliance procedures. The reporting by 
financial institutions of transactions in currency in excess of $10,000 
has long been a major component of the Department of the Treasury's 
implementation of the BSA. The reporting requirement is promulgated 
pursuant to 31 U.S.C. 5313(a) requiring reports of domestic coin and 
currency transactions. The regulations implementing the BSA appear at 
31 CFR part 103. The Secretary's authority to administer the BSA has 
been delegated to the Director of FinCEN.
    The Money Laundering Suppression Act of 1994 (MLSA) amended the BSA 
by establishing a system for exempting transactions by certain 
customers of depository institutions from currency transaction 
reporting.\1\ In general, the statutory exemption system, 31 U.S.C. 
5313(d) through (g), creates two types of exemptions.\2\ Under 31 
U.S.C. 5313(d) (sometimes called the ``mandatory exemption'' 
provision), the Secretary is required to provide depository 
institutions with the ability to exempt from the currency transaction 
reporting requirement transactions in currency between the depository 
institution and four specified categories of customers. The four 
specified categories of customers in the mandatory exemption provision 
are: (1) Another depository institution; (2) a department or agency of 
the United States, any State, or any political subdivision of any 
State; (3) any entity established under the laws of the United States, 
any State, or any political subdivision of any State, or under an 
interstate compact between

[[Page 74011]]

two or more States, which exercises governmental authority on behalf of 
the United States or any such State or political subdivision; and (4) 
any business or category of business the reports on which have little 
or no value for law enforcement purposes.
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    \1\ See section 402 of the Money Laundering Suppression Act of 
1994 (the ``Money Laundering Suppression Act''), Title IV of the 
Riegle Community Development and Regulatory Improvement Act of 1994, 
Public Law 103-325 (Sept. 23, 1994).
    \2\ The enactment of 31 U.S.C. 5313(d) through (g) reflected 
congressional intent to ``reform * * * the procedures for exempting 
transactions between depository institutions and their customers.'' 
See H.R. Rep. 103-652, 103d Cong., 2d Sess. 186 (Aug. 2, 1994).
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    Under 31 U.S.C. 5313(e) (sometimes called the ``discretionary 
exemption'' provision) the Secretary is authorized, but not required, 
to allow depository institutions to exempt from the currency 
transaction reporting requirement transactions in currency between it 
and a qualified business customer.\3\ A ``qualified business 
customer,'' for purposes of the discretionary exemption provision, is a 
business that:
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    \3\ For additional information about the terms of 31 U.S.C. 
5313(e)-(g), see 63 FR 50147, 50148 (Sept. 21, 1998).
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    (A) Maintains a transaction account (as defined in section 
19(b)(1)(C) of the Federal Reserve Act) at the depository institution;
    (B) frequently engages in transactions with the depository 
institution which are subject to the reporting requirements of 
subsection (a); and
    (C) meets criteria which the Secretary determines are sufficient to 
ensure that the purposes of [the BSA] are carried out without requiring 
a report with respect to such transactions.\4\
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    \4\ 31 U.S.C. 5313(e)(2).

The Secretary was required to establish by regulation the criteria for 
granting and maintaining an exemption for qualified business 
customers,\5\ as well as guidelines for depository institutions to 
follow in selecting customers for exemption.\6\ The BSA allowed for the 
guidelines including a description of the type of businesses for which 
no exemption would be granted under the discretionary exemption 
provision. The Secretary also was required to prescribe regulations 
that require an annual review of qualified business customers and 
require depository institutions to resubmit information about those 
customers with modifications if appropriate.\7\
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    \5\ See 31 U.S.C. 5313(e)(3).
    \6\ See 31 U.S.C. 5313(e)(4)(A).
    \7\ See 31 U.S.C. 5313(e)(5).
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B. Overview of the Current Regulatory Provisions To Exempt Certain 
Persons From Currency Transaction Reporting

    The current exemption procedures, which are codified at 31 CFR 
103.22(d), were the result of a five-part rulemaking.\8\ The current 
exemption procedures apply to depository institution customers that 
fall within one of the classes of exempt persons described in 31 CFR 
103.22(d)(2)(i)-(vii), commonly referred to as ``Phase I'' and ``Phase 
II'' exemptions. Phase I eligible customers include: (i) Other banks 
\9\ operating in the United States; (ii) government departments and 
agencies; (iii) certain entities that exercise governmental authority; 
(iv) entities whose equity interests are listed on one of the major 
national stock exchanges; and (v) certain subsidiaries of entities 
whose equity interests are listed on one of the major national stock 
exchanges.\10\ Phase II eligible customers include: (i) ``non-listed 
businesses'' and (ii) ``payroll customers.'' A ``non-listed business'' 
is any other commercial enterprise that is not ineligible for exemption 
\11\ and that:
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    \8\ See 61 FR 18204 (Apr. 24, 1996), 62 FR 47141, 47156 (Sept. 
8, 1997), 62 FR 63298 (Nov. 28, 1997), 63 FR 50147 (September 21, 
1998), and 65 FR 46356 (July 28, 2000) (the rulemakings that 
comprise the current CTR exemption system).
    \9\ See 31 CFR 103.22 (definition of a bank, which includes 
other depository institutions).
    \10\ See 31 CFR 103.22(d)(2)(v) (definition of a subsidiary).
    \11\ See 31 CFR 103.22(d)(6)(vii) (lists those non-listed 
businesses that are ineligible for exemption).
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    (A) Has maintained a transaction account at the bank for at least 
12 months;
    (B) Frequently engages in transactions in currency with the bank in 
excess of $10,000; and
    (C) 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.\12\
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    \12\ 31 CFR 103.22(d)(2)(vi). (A non-listed business is an 
exempt person only ``[t]o the extent of its domestic operations.'')

A ``payroll customer,'' under 31 CFR 103.22(d)(2)(vii), is any other 
person (i.e., a person not otherwise covered under the exempt person 
definitions) that:
    (A) Has maintained a transaction account at the bank for at least 
12 months;
    (B) Operates a firm that regularly withdraws more than $10,000 in 
order to pay its United States employees in currency; and
    (C) 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.\13\
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    \13\ 31 CFR 103.22(d)(2)(vii).

A payroll customer is an exempt person ``[w]ith respect solely to 
withdrawals for payroll purposes.'' \14\
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    \14\ Id.
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Designating an Eligible Customer as Exempt and Other Requirements
    Currently, a depository institution exempting a customer must file 
a FinCEN Form 110, Designation of Exempt Person (``DOEP'') (``FinCEN 
Form 110'') within 30 days after the first transaction which the bank 
wishes to exempt with respect to the customer.\15\ For a Phase I 
customer, a depository institution must file the form only once and 
must conduct an annual review of the customer. For a Phase II customer, 
a depository institution must also conduct an annual review of the 
customer, and must biennially renew the customer's exemption by re-
filing the form, certifying that it has applied its system of 
monitoring the customer's transactions in currency for suspicious 
activity, and reporting any change in control of the customer.
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    \15\ See 31 CFR 103.22(d)(3)(i). FinCEN Form 110 replaced the 
previous designation form, Treasury Form TD F 90-22.53.
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C. The Government Accountability Office (GAO) Report

    The United States Government Accountability Office (GAO) issued a 
report (``the GAO Report'') this year that was helpful to FinCEN in 
identifying ways the current CTR exemption requirements could be 
improved.\16\ The GAO found that CTRs provide federal, state, and local 
law enforcement officials with ``unique and reliable information 
essential to a variety of efforts'' and that advances in technology 
have made information reported through CTRs that much more useful.\17\ 
In discussing the usefulness of CTRs, the GAO Report noted that the 
CTR, which captures information based on objective facts that determine 
its filing, and the SAR, which requires a financial institution to make 
a subjective determination of what is suspicious prior to its filing, 
are complementary sources of information for law enforcement.\18\ 
Finally, the GAO Report found that CTR requirements also are useful to 
law enforcement because they force criminals to act in ways that 
increase chances of detection as they attempt to avoid conducting 
reportable transactions.\19\
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    \16\ See ``Bank Secrecy Act: Increased Use of Exemption 
Provisions Could Reduce Currency Transaction Reporting While 
Maintaining Usefulness to Law Enforcement Efforts'' GAO-08-355 (GAO: 
Washington, D.C.: Feb. 21, 2008).
    \17\ See id. at 2.
    \18\ See id. at 17 and 19.
    \19\ See id at 23-24.
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    Recognizing both the value of CTR data and the need to improve the 
current CTR exemption regulatory requirements, the GAO Report made 
three main recommendations for changes to the current CTR exemption 
regulations: (1) Remove the regulatory requirement that depository 
institutions

[[Page 74012]]

file exemption forms, and annually review the supporting information, 
for banks, federal, state, and local government agencies, and entities 
exercising federal, state or local governmental authority; (2) remove 
the regulatory requirement that depository institutions biennially 
renew Phase II exemptions; and (3) permit depository institutions to 
exempt otherwise eligible non-listed customers who frequently engage in 
large cash transactions within a period of time shorter than 12 months.

II. Notice of Proposed Rulemaking

    The final rule contained in this document is based on the Notice of 
Proposed Rulemaking published in the Federal Register on April 24, 2008 
(``Notice'').\20\ With the intent of simplifying the CTR exemption 
process and taking into account the recommendations made in the GAO 
Report, the Notice proposed a number of changes to the current 
regulatory requirements that govern the CTR exemption process. In 
particular the Notice proposed: removing the initial designation and 
annual review requirements for Phase I customers that are depository 
institutions, governments, or those acting with governmental authority; 
removing the biennial filing requirement for Phase II exempt customers 
but retaining the requirement to report a customer's change in control 
once every two years; eliminating the waiting period for exempting 
otherwise eligible Phase II customers by adopting a risk-based approach 
to exempting those customers; and requiring depository institutions to 
report a revocation of an exemption for Phase I and Phase II customers. 
The Notice also proposed a number of technical edits.
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    \20\ See 73 FR 22101 (Apr. 24, 2008).
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III. Comments on the Notice--Overview and General Issues

    The comment period for the Notice ended on June 23, 2008. We 
received a total of 37 comment letters.\21\ Of these, 19 were submitted 
by banks, five by credit unions, seven by industry associations, and 
two by individuals.\22\ Generally, commenters were supportive of the 
proposals to eliminate the filing of a DOEP form and the annual review 
requirement for Phase I customers that are banks, government agencies, 
and entities exercising government authority. Some commenters suggested 
extending those proposals to the entire category of Phase I customers, 
which also includes public companies listed on a major stock exchange 
and their subsidiaries. Most commenters were supportive of removing the 
biennial filing requirement for Phase II exempt customers, but were not 
supportive of having to monitor for and report to FinCEN a change in 
control for those customers. Most banks that commented on the Phase II 
proposals also were not supportive of adopting only a risk-based 
analysis in lieu of the current twelve-month waiting period, though 
some credit unions were slightly more supportive of the proposal 
because of its potential to give depository institutions more 
flexibility in using the exemption process. Almost all commenters 
supported the current definition of ``frequently'' as meaning engaging 
in eight or more large currency transactions per year,\23\ but many 
requested that FinCEN permit depository institutions to prorate that 
number if the waiting period for Phase II was made shorter. Finally, 
some commenters supported making filing a revocation mandatory, some 
did not think filing a revocation was overly burdensome but thought 
filing a revocation should remain voluntary, and others objected to the 
revocation requirement, which they viewed as being unnecessary and 
duplicative because they would begin filing CTRs again on customers 
they no longer exempt.
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    \21\ All comments to the Notice are available for public viewing 
at www.regulations.gov.
    \22\ One comment was blank and three were identical comments 
submitted by the same bank.
    \23\ See FinCEN's ``Guidance on Interpreting `Frequently' Found 
in the Criteria for Exempting a `Non-Listed Business' Under 31 CFR 
103.22(d)(2)(vi)(B)'' (Nov. 2002).
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IV. Section-by-Section Analysis

A. Removing the Initial Designation and Annual Review Requirements for 
Certain Phase I Customers

    FinCEN proposed to amend Sec.  103.22 by (1) removing the 
requirement that depository institutions file an initial DOEP form 
(FinCEN Form 110) for Phase I eligible customers that are depository 
institutions, federal, state, or local governments, or entities 
exercising governmental authority; \24\ and (2) removing the 
requirement that depository institutions conduct an annual review of 
the continued eligibility of those customers.\25\ FinCEN proposed these 
amendments to further simplify the process of exempting these Phase I 
customers, because CTRs filed on them are not likely to be highly 
useful to law enforcement, and because those entities are unlikely to 
change the characteristics that made them eligible for exemption at the 
time of their initial designation.\26\ All of the comments received 
regarding these two proposals were supportive. As a result, the final 
rule adopts these proposals without change.
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    \24\ See 31 CFR 103.22(d)(3)(ii). See also 31 CFR 
103.22(d)(6)(ii) (Operating rules that illustrate what types of 
entities normally exercise governmental authority).
    \25\ See 31 CFR 103.22(d)(4).
    \26\ FinCEN estimates that this rule will result in an 
additional 5,000 exemptions. Based on an analysis of CTR filings in 
2007, FinCEN identified approximately 90,000 CTRs filed on 5,000 
separate depository institutions. As a result of the revisions 
contained in the final rule, specifically the elimination of the 
requirements to file a designation of exempt person form and conduct 
an annual review on depository institutions, FinCEN expects that an 
exemption will be exercised for these 5,000 institutions. The actual 
number of exemptions is likely to exceed this level given the 
current estimate does not include additional exemptions for non-
depository institutions, such as non-listed businesses.
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    Some commenters noted that most of the cost of using these Phase I 
exemptions results from the practice of creating additional files, 
separate from the files kept to demonstrate compliance with other BSA 
requirements, such as the customer identification program (``CIP'') 
\27\ and the anti-money laundering (``AML'') program \28\ requirements. 
While depository institutions will no longer be required to make an 
initial designation of exemption for these Phase I customers, 
depository institutions should take the same steps to assure themselves 
of the customer's initial eligibility for exemption, and to document 
the basis of its conclusions, that a reasonable and prudent bank would 
take to protect itself from loan or other fraud or loss based on 
misidentification of a person's status.\29\ If a bank is able to 
determine a customer's eligibility for an exemption in the course of 
complying with its other BSA obligations, such as the requirement to 
maintain a Customer Identification Program (``CIP''), then the bank may 
make notations within its other BSA documentation, and need not 
maintain additional, separate documentation for the sole purpose of 
complying with the Phase I or Phase II exemption requirements. Also, 
while depository institutions must still comply with their SAR 
reporting obligations should any of their Phase I customers engage in 
suspicious activity, they are not required to review and confirm the 
continued exemption eligibility of Phase I customers that are banks, 
government agencies, or entities exercising governmental authorities.
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    \27\ See 31 CFR 103.121.
    \28\ See 31 CFR 103.120.
    \29\ See re-designated 31 CFR 103.22(d)(5)(i).

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[[Page 74013]]

Extending Proposals to Phase I Eligible Listed Public Companies and 
Their Subsidiaries
    Some commenters requested that the proposals to remove the initial 
designation and annual review requirements for certain Phase I 
customers be extended to include Phase I eligible customers that are 
listed public companies and their subsidiaries. In the Notice, FinCEN 
did not extend these proposals to those Phase I customers that are 
listed public companies or their subsidiaries, because, unlike other 
Phase I entities, it is more likely that these customers may lose their 
exempt status because they no longer are publicly-traded companies. For 
example, one commenter noted a recent trend of some U.S. public 
companies being reorganized as private companies, which results in 
those entities no longer being subject to Securities and Exchange 
Commission (SEC) reporting requirements. Not having to comply with SEC 
reporting requirements results in private companies providing far less 
public information, and therefore being subject to much less scrutiny. 
FinCEN does not believe that confirming once a year that an exempt 
business continues to be a listed public company is unduly burdensome. 
Although it is true, as one commenter suggested, that a previously 
listed public company that has reorganized as a private company may be 
eligible for exemption as a Phase II non-listed business, it is also 
true that such a private company could be engaging in an ineligible 
line of business and thus potentially may be ineligible for exemption 
as a non-listed business.\30\ Accordingly, FinCEN will not at this time 
be extending the removal of the initial designation of exemption or 
annual review requirements to listed public companies and their 
subsidiaries.
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    \30\ See 31 CFR 103.22(d)(6)(viii) (list of ineligible 
businesses).
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B. Waiting Period Required to Consider Phase II Entities for Exemption

    FinCEN proposed amending paragraphs 31 CFR 103.22(d)(2)(vi)(A) and 
(vii)(A), and paragraph 31 CFR 103.22(d)(3)(iii), to remove any 
prescribed amount of time before a depository institution may consider 
a non-listed business or payroll customer for exemption, and instead 
enabling a depository institution to make a risk-based determination. 
FinCEN also solicited comment on an alternative proposal in which, 
instead of adopting a risk-based approach, FinCEN would maintain a 
reference to the length of time required to consider Phase II entities 
for exemption, but reduce it from twelve months to two months. Most 
commenters, especially banks and larger depository institutions, warned 
FinCEN that if only a risk-based approach were adopted, many depository 
institutions would no longer use Phase II exemptions because the costs 
associated with conducting and documenting a subjective risk-based 
analysis would far outweigh the cost of filing CTRs for those 
customers. A few of these commenters, though, suggested that in limited 
circumstances the flexibility of being able to exempt such a customer 
after conducting a risk-based analysis might be helpful.\31\ Some 
credit union commenters were slightly more receptive to the proposal to 
adopt a risk-based requirement for Phase II exemptions, but also were 
apprehensive about the subjective nature of such a requirement. Most 
comments supported and preferred the proposal to shorten the waiting 
period for Phase II exemptions to two months, a few commenters 
suggested adopting both proposals in a hybrid approach, and some argued 
that they would not consider exempting a customer after so short a time 
frame as two months.
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    \31\ Examples given by commenters included instances when a 
customer previously exempt under Phase I becomes ineligible under 
Phase I and the customer has not yet maintained an account with the 
institution for the prescribed waiting period to be eligible for 
Phase II exemption, or when a former customer that was previously 
exempted under the Phase II requirements by the institution reopens 
their transaction account.
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    FinCEN noted in the Notice that much has changed in the regulatory 
landscape since 1998 when the twelve month waiting period was finalized 
for Phase II exemptions, and made special note of the additional 
requirements that depository institutions became subject to under the 
BSA and its implementing regulations with the enactment of the USA 
PATRIOT Act.\32\ For example, FinCEN recognizes that depository 
institutions have had to gather more information about their customers 
at account opening as a result of requirements like the CIP 
requirements,\33\ which must include risk-based procedures for 
verifying the identity of a customer, and that in general, depository 
institutions have become increasingly adept and sophisticated at 
complying with BSA requirements. In the Notice, FinCEN also articulated 
its intent to simplify the current exemption system, not to make 
complying with the regulatory requirements for exemptions more 
difficult and costly.\34\ As a result, FinCEN believes adopting a 
hybrid approach that permits depository institutions to exempt an 
otherwise eligible Phase II customer after two months, or prior to the 
passing of two months' time if the institution conducts a risk-based 
analysis of the customer that allows the institution to form and 
document a reasonable belief that the customer has a legitimate 
business purpose for conducting frequent large cash transactions, is 
now appropriate. Depository institutions should note that the risk-
based analysis option should be read as a separate, specific rule of 
paragraph (d), and is not meant to supersede the operating rules of 
existing 31 CFR 103.22(d)(6)(i) subject to paragraph (d). In addition, 
nothing in this final rule is intended to in any way relieve or reduce 
the obligations of the SAR requirement.\35\
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    \32\ See 73 FR 22103 (April 24, 2008). The CIP requirement for 
depository institutions was implemented as a result of amendments 
made to the BSA with the enactment of the USA PATRIOT Act.
    \33\ 31 CFR 103.121(b)(2).
    \34\ See supra note 31 at 22102.
    \35\ See 63 FR 50155 (Sept. 21, 1998) (``FinCEN further notes 
that maintaining a monitoring system reasonably designed to detect 
suspicious activity * * * should not pose additional burdens on 
banks, because they remain subject in any event to the requirement 
to file reports of suspicious activity * * *''). See also 31 CFR 
103.18 (bank SAR rule).
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    The reasonableness standard for initial designation for Phase II 
exemption prior to two months and the reasonable standard in the 
operating rules in paragraph (d) are similar standards, but as they 
apply to different circumstances, they necessarily result in banks 
having to conduct different levels of review of their customers to meet 
those similar standards. If the waiting period has not yet been met and 
as a result, the bank has less time to observe the normal pattern of 
transaction activity that a customer engages in and to gain a knowledge 
of that customer, the depository institution must conduct a risk-based 
analysis to form a reasonable belief that the customer has a legitimate 
business purpose for conducting large currency transactions. That 
analysis may involve a greater level of review of that customer than 
under the reasonable and prudent standard, depending upon the 
depository institution's assessment of the risks associated with that 
customer.
Conducting a Risk-Based Analysis
    When conducting a risk-based analysis to determine the Phase II 
exemption eligibility of a customer, the depository institution should 
form a reasonable belief that the customer has a legitimate business 
purpose for conducting frequent transactions in currency. Factors the 
depository

[[Page 74014]]

institution might consider in order to form a reasonable belief 
include, but are not limited to: whether the depository institution had 
a past relationship with the customer, certain specific characteristics 
of the customer's business model that may be pertinent, the types of 
business in which the customer engages, and where the business is 
operating. Exempting an otherwise eligible Phase II customer prior to 
two months' time may be particularly appropriate when, for example: a 
returning customer reopens a previously maintained exempt transaction 
account with the institution; a customer that would now be eligible for 
Phase II exemption but under the current regulations was previously not 
eligible because the customer had conducted fewer than eight, but at 
least five, large cash transactions; or, when a customer that was a 
publicly listed company or a subsidiary becomes ineligible for 
exemption under Phase I, but may be designated for exemption under 
Phase II.
Defining ``Frequently''
    The BSA definition of those customers commonly referred to as Phase 
II customers requires that they ``frequently'' engage in transactions 
subject to the CTR requirement.\36\ In the Notice, FinCEN requested 
comments on whether its guidance interpreting ``frequently'' as eight 
or more large cash transactions per year is still reasonable.\37\ 
Almost all commenters were supportive of interpreting ``frequently'' as 
eight or more transactions per year, and many commenters requested that 
if FinCEN made the waiting period for Phase II exemption eligibility 
shorter, that depository institutions be permitted to pro-rate the 
number of transactions that an otherwise eligible Phase II customer 
must engage in before the depository institution could designate the 
customer for exemption.
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    \36\ See 31 U.S.C. 5313(e)(2)(B). See also 31 CFR 
103.22(d)(2)(vi) (definition of a non-listed business) and 31 CFR 
103.22(d)(2)(vii) (definition of a payroll customer).
    \37\ See FinCEN's ``Guidance on Interpreting `Frequently' Found 
in the Criteria for Exempting a `Non-Listed Business' Under 31 CFR 
103.22(d)(2)(vi)(B)'' (Nov. 2002).
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    FinCEN does not believe that prorating the number of transactions 
in the current guidance is appropriate. Only one or two large, 
reportable cash transactions are not likely to give a depository 
institution enough of a transactional history of a customer to 
determine that the customer will be frequently engaging in large cash 
transactions. FinCEN does believe, however, that changing its current 
guidance interpreting ``frequently'' to recommending five or more 
transactions per year \38\ is now appropriate because the waiting 
period for exempting an otherwise eligible Phase II customer is being 
greatly shortened and it is FinCEN's intent to simplify the exemption 
process and encourage an increased use of exemptions. As a result, 
depository institutions may designate an otherwise eligible customer 
for Phase II exemption after the customer has within a year conducted 
five or more reportable cash transactions. In addition to having 
conducted at least five or more reportable cash transactions within a 
year, the customer must have maintained a transaction account for two 
months, or the depository institution may conduct a risk based analysis 
of the customer's eligibility for Phase II exemption. For example, if 
the customer does not conduct five reportable cash transactions until 
it has maintained an account for three months, the depository 
institution would not be able to exempt that customer until that time. 
Further, a seasonal customer that conducts large cash transactions only 
during one part of the year would satisfy the ``frequently'' 
requirement after it had conducted five or more reportable cash 
transactions within one year, regardless of whether those transactions 
were conducted during the time period when the customer conducts 
transactions with the most frequency.
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    \38\ For the purposes of this guidance, a year is defined as any 
consecutive twelve month period.
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    Finally, some commenters asked for clarification regarding whether 
the customer must continue to satisfy the ``frequently'' requirement 
every year after initial designation to retain its exempt status. 
FinCEN wishes to clarify that to retain eligibility for a Phase II 
exemption, a customer must have actually conducted at least five 
reportable cash transactions in each full year following the customer's 
initial designation. For example, if a depository institution discovers 
during the annual review of a Phase II exempt customer that the 
customer had conducted only four reportable cash transactions during 
the year under review, the depository institution going forward may no 
longer treat the customer as exempt until the customer conducts at 
least five reportable cash transactions in an ensuing year and is 
otherwise eligible for exemption. The depository institution, however, 
is not required to back file CTRs with respect to a designated Phase II 
customer that had met the eligibility requirements in a preceding year, 
but was subsequently found not to have conducted five or more 
transactions in the year under review.

C. Removing the Biennial Filing Requirement for Phase II Exempt 
Customers

    FinCEN proposed removing paragraph Sec.  103.22(d)(5) to eliminate 
the requirement that depository institutions biennially file a 
designation of exempt person for non-listed and payroll customers. In 
concert with this proposal, FinCEN also proposed amending paragraph 31 
CFR 103.22(d)(4) to continue requiring depository institutions to 
notify FinCEN of any change in control of a Phase II customer, and 
redesignated paragraph 31 CFR 103.22(d)(9) to require depository 
institutions to report to FinCEN a decision to revoke the designation 
of an otherwise eligible customer for exemption. Commenters were 
supportive of the proposal to remove the biennial filing requirement, 
and as a result, FinCEN is adopting it in this final rule without 
change.\39\ Commenters also requested that FinCEN remove the annual 
review requirement for Phase II exempt entities. The annual review of 
Phase II entities is required by the statutory language of the BSA.\40\
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    \39\ While depository institutions will no longer need to 
certify with biennial renewal that the bank's SAR monitoring system 
had been properly applied to the currency transactions in currency 
of an exempt person, this in no way is meant to modify the SAR 
requirement.
    \40\ See 31 U.S.C. 5313(e)(5).
---------------------------------------------------------------------------

    Finally, one commenter also requested guidance on the applicability 
of the requirements in this final rule to those customers that had been 
designated for Phase II exemption under the exemption rules currently 
in place. As of the effective date of this final rule, the requirements 
in the final rule are applicable to all exempt customers and depository 
institutions will no longer be required to comply with those 
requirements that have been removed from Sec.  103.22(d). For example, 
a depository institution that had designated a customer for Phase II 
exemption under Sec.  103.22(d) prior to its amendment by this final 
rule, would remain subject to the requirement to conduct an annual 
review of the customer on a yearly basis, but, upon the effective date 
of the final rule, would no longer be required to submit a biennial 
renewal for that customer.\41\
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    \41\ Similarly, for Phase I exemptions of depository 
institutions, federal, state, or local governments, or entities 
exercising governmental authority made under the prior rule, no 
annual review will be required upon the effective date of this final 
rule.

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[[Page 74015]]

Change in Control
    The NPRM retained the requirement to file change of control 
information that originally appeared in the 1998 rulemaking on the CTR 
exemption system.\42\ Most commenters, however, were not supportive of 
having to continue to report change in control information to FinCEN. 
Almost all commenters who addressed this issue expressed great 
confusion about what constitutes a change in control. While reporting a 
change in control is currently accomplished by checking a box on FinCEN 
Form 110 to report that some change has occurred without providing any 
additional information about the change, many commenters suggested that 
continuing to require this information, either once every two years or 
on an ongoing basis, would necessitate a level of account monitoring 
that would make using Phase II exemptions too costly.
---------------------------------------------------------------------------

    \42\ See 31 CFR 103.22(d)(5)(ii). See also 63 FR 50153 (Sept. 
21, 1998).
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    In light of these comments and FinCEN's own research on the utility 
of this information, the final rule will no longer require the 
reporting of change in control information as part of the CTR exemption 
system. The former requirement to report change in control was derived 
from 31 U.S.C. 5313(e)(5)(B), which directs Treasury to issue 
regulations requiring banks to resubmit information on customers 
pertaining to modification of those customers. Pursuant to the broad 
authority contained in 31 U.S.C. 5318(a)(6), FinCEN may grant an 
exemption from the requirement in section 5313(e)(5)(B). FinCEN 
believes an exemption is appropriate here because of the limited 
utility in reporting change in control by checking a box on FinCEN Form 
110.

D. Requiring Reporting of Revocation

    Most commenters stated that reporting a revocation of an otherwise 
exempt eligible customer would not be an undue burden, but some 
questioned the usefulness of the information and requested that 
reporting a revocation remain voluntary. In light of these comments and 
FinCEN's own research on the utility of this information, at this time 
FinCEN is not making the reporting of a revocation mandatory in the 
final rule. Depository institutions are reminded, though, that if an 
exemption is revoked because during the annual review of the 
eligibility of a customer the institution detects suspicious activity, 
the suspicious activity reporting (SAR) requirement must be met.\43\
---------------------------------------------------------------------------

    \43\ See 31 CFR 103.22(d)(9).
---------------------------------------------------------------------------

E. Limitation on Liability

    Except for certain technical edits highlighted in the next 
paragraph, FinCEN is making no changes to the provisions of the CTR 
exemption rule that limit liability for banks that do not file CTRs in 
reliance upon the exemption rule. Thus banks will continue to have a 
safe harbor from liability unless the bank knowingly files false or 
incomplete information or has reason to believe that the customer does 
not meet exemption criteria or that the transaction is not a 
transaction of an exempt person. Moreover, the limitation on liability 
provisions will continue to provide a safe harbor to banks when 
exempting exempt customers for which an annual review must be 
conducted, applicable between the time of initial designation and the 
completion of each subsequent annual review, in the absence of specific 
knowledge that the customer no longer meets the requirements for 
exemption.

F. Technical Edits

    In the Notice, FinCEN proposed making a number of technical edits. 
All of the comments made regarding the technical edits made in the 
Notice were supportive of those proposed changes. As a result, FinCEN 
is adopting the following proposals:
     Amending paragraphs 31 CFR 103.22(d)(1), 31 CFR 
103.22(d)(2)(vi), 31 CFR 103.22(d)(5)(i) and (viii), 31 CFR 
103.22(d)(7)(ii), 31 CFR 103.22(d)(8)(i) and (ii), and 31 CFR 
103.22(d)(9) to change cross references;
     Amending paragraphs 31 CFR 103.22(d)(2)(iv) and 
redesignated 31 CFR 103.22(d)(5)(iii) to correctly reflect the name of 
the NASDAQ Capital Markets Companies listing, the NASDAQ and the EDGAR 
system;
     Amending 31 CFR 103.22(d)(3)(i) by making a specific 
reference to FinCEN Form 110, removing text that references the 
exemption requirements that existed prior to 1998, and re-stating that 
a designation must be made within 30 calendar days of the reportable 
transaction in currency the institution wishes to exempt;
     Amending 31 CFR 103.22(d)(3)(ii) to reflect that 
transactions in currency with any of the twelve Federal Reserve Banks 
continue to be exempt from the requirement to file an exemption form; 
and
     Amending redesignated 31 CFR 103.22(d)(7)(ii) to 
correspond to changes made regarding the annual review requirement for 
certain Phase I customers.

V. Revision of FinCEN Form 110

    To assist depository institutions in completing the DOEP, FinCEN 
Form 110,\44\ FinCEN is providing the following guidance for items 
affected by this final rule.
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    \44\ FinCEN Form 110 is available for review on FinCEN's Web 
site at https://www.fincen.gov/forms/fin110_dep.pdf.
---------------------------------------------------------------------------

     Depository institutions should disregard any references to 
biennial renewals that appear on the face of FinCEN Form 110 
(specifically, Part I, Item 1b, ``Biennial renewal''; Part II, Item 11; 
Part III, Item 19, second sentence; and Part V), as well as in the 
instructions to the form (specifically in the second paragraph under 
the heading ``When and where to file''; the second sentence under the 
heading ``Specific Instructions'' that begins, ``Additionally, with 
regard to non-listed businesses. * * *''); and the instruction to Item 
11 under the heading ``Exempt Person Information.''
     Depository institutions should disregard Part II, Item 
10a, ``Bank'' and ``Government agency/Government authority.''

VI. Regulatory Matters

A. Executive Order 12866

    This rule is a significant regulatory action for purposes of 
Executive Order 12866, ``Regulatory Planning and Review,'' as amended, 
and has been reviewed by the Office of Management and Budget.

B. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (March 22, 1995) (``Unfunded Mandates Act''), requires that an 
agency prepare a budgetary impact statement before promulgating a rule 
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 the rule provides the most cost-effective and least burdensome 
alternative to achieve the objectives of the rule.

[[Page 74016]]

C. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), 
FinCEN certifies that this final regulation likely will not have a 
significant economic impact on a substantial number of small entities. 
The regulatory changes in this final rule likely will reduce the 
requirements for exempting certain persons from the currency 
transaction reporting requirements of the BSA and should reduce the 
obligations associated with complying with those regulatory 
requirements for financial institutions of all sizes. Accordingly, a 
regulatory flexibility analysis is not required.

D. Paperwork Reduction Act

    The collection of information burden contained in this rule has 
been approved by the Office of Management and Budget (``OMB'') in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
(``Paperwork Reduction Act'') under control number 1506-0012. Based on 
comments received, this final rule reduces the burden hours associated 
with this information collection (the Form) that had been previously 
pre-approved. Treasury submitted the final rule to the OMB for review 
in accordance with 44 U.S.C. 3507(d), and OMB has approved again the 
collection of information requirements in today's rule, again under 
control number 1506-0012. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid control number assigned by OMB.
    The regulatory requirement related to the collection of designation 
of exempt person information that is revised in this final rule is in 
31 CFR 103.22(d). If a depository institution voluntarily designates a 
customer for exemption, the depository institution is required to 
provide this information,\45\ which will be used by law enforcement 
agencies in the enforcement of criminal and regulatory laws. The likely 
recordkeepers are businesses.
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    \45\ See 31 U.S.C. 5313. See also 31 CFR 103.22(d).
---------------------------------------------------------------------------

    The reporting burden of designating an eligible customer as an 
exempt person was reflected in the burden estimates contained in the 
Federal Register notice to renew without change the DOEP form, FinCEN 
Form 110 (See 73 FR 12250), which is used to report a designation to 
FinCEN.\46\ This figure was one hour and thirty minutes. Based on 
comments received and on FinCEN's own evaluation of the anticipated 
result of decreasing burden by removing additional regulatory 
requirements in this final rule than were proposed in the Notice, this 
number will be reduced to forty minutes recordkeeping and thirty 
minutes form completion for each filing, for a total of one hour and 
ten minutes per filing (a decrease of 20 minutes).
---------------------------------------------------------------------------

    \46\ See 73 FR 12250 (Mar. 6, 2008).
---------------------------------------------------------------------------

    A comment to the Notice provided estimates of the amount of time 
involved in exempting customers. The commenter estimated that it took 7 
hours for a Phase I exemption and 7.8 hours for a Phase II exemption, 
but the commenter's estimates took into account requirements that are 
being eliminated by this final rule. Based on the new requirements in 
the final rule, FinCEN believes a more accurate estimate for complying 
with the rule, completing the form and maintaining the associated rule 
and form recordkeeping is a total of 3 hours 10 minutes per response 
(30 minutes form completion and two hours forty minutes recordkeeping).
    Based on the number of DOEPs currently being filed by depository 
institutions, FinCEN estimates that the final rule will result in an 
annual filing of a total of 65,000 DOEP forms by affected depository 
institutions. Some comments to the Notice suggested that the number of 
DOEPs filed would not increase as a result of the regulatory changes 
proposed, while others suggested that more DOEPs would be filed as a 
result of the regulatory changes in the Notice. Based on all of the 
above information, the total burden for this rule is 205,833 hours. 
FinCEN will monitor the filing of DOEPs under the final rule in order 
to determine whether this number should be further revised.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Banks and banking, Currency, Foreign banking, 
Foreign currencies, Gambling, Investigations, Law enforcement, 
Penalties, Reporting and recordkeeping requirements, Securities, Taxes.

Authority and Issuance

0
For the reasons set forth above, FinCEN is amending 31 CFR Part 103 as 
follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

0
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, sec. 314, Pub. L. 107-56, 115 Stat. 307.


0
2. Amend Sec.  103.22 by:
0
a. Revising paragraph (d)(1);
0
b. Revising paragraph (d)(2)(iv);
0
c. Revising the introductory text of paragraph (d)(2)(vi);
0
d. Revising paragraph (d)(2)(vi)(A);
0
e. Revising paragraph (d)(2)(vii)(A);
0
f. Revising paragraph (d)(3);
0
g. Revising paragraph (d)(4);
0
h. Removing paragraphs (d)(5) and (d)(11);
0
i. Redesignating paragraph (d)(6) as (d)(5); (d)(7) as (d)(6); (d)(8) 
as (d)(7); (d)(9) as (d)(8); and (d)(10) as (d)(9).
0
j. Revising redesignated paragraph (d)(5)(i);
0
k. Revising redesignated paragraph (d)(5)(iii);
0
l. Revising the last sentence of redesignated paragraph (d)(5)(viii);
0
m. Revising redesignated paragraph (d)(7)(ii);
0
n. Revising redesignated paragraph (d)(8)(i);
0
o. Revising the last sentence of redesignated paragraph (d)(8)(ii); and
0
p. Revising the introductory text of redesignated paragraph (d)(9).
    The amended regulation reads as follows:


Sec.  103.22  Reports of transactions in currency.

* * * * *
    (d) * * *
    (1) General. No bank is required to file a report otherwise 
required by paragraph (b) of this section with respect to any 
transaction in currency between an exempt person and such bank, or, to 
the extent provided in paragraph (d)(5)(vi) of this section, between 
such exempt person and other banks affiliated with such bank. In 
addition, a non-bank financial institution is not required to file a 
report otherwise required by paragraph (b) of this section with respect 
to a transaction in currency between the institution and a commercial 
bank. (A limitation on the exemption described in this paragraph (d)(1) 
is set forth in paragraph (d)(6) of this section.)
    (2) * * *
    (iv) Any entity, 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 Capital Markets Companies'' heading), 
provided that, for purposes of this paragraph (d)(2)(iv), a person that 
is a financial institution, other than a bank,

[[Page 74017]]

is an exempt person only to the extent of its domestic operations;
* * * * *
    (vi) To the extent of its domestic operations and only with respect 
to transactions conducted through its exemptible accounts, any other 
commercial enterprise (for purposes of this paragraph (d), a ``non-
listed business''), other than an enterprise specified in paragraph 
(d)(5)(viii) of this section, that:
    (A) Maintains a transaction account, as defined in paragraph 
(d)(5)(ix) of this section, at the bank for at least two months, except 
as provided in paragraph (d)(3)(ii)(B) of this section;
* * * * *
    (vii) * * *
    (vii) * * *
    (A) Maintains a transaction account, as defined in paragraph 
(d)(5)(ix) of this section, at the bank for at least two months, except 
as provided in paragraph (d)(3)(ii)(B) of this section;
* * * * *
    (3) Designation of certain exempt persons--(i) General. Except as 
provided in paragraph (d)(3)(ii) of this section, a bank must designate 
an exempt person by filing FinCEN Form 110. Such designation must occur 
by the close of the 30-calendar day period beginning after the day of 
the first reportable transaction in currency with that person sought to 
be exempted from reporting under the terms of this paragraph (d). The 
designation must be made separately by each bank that treats the 
customer as an exempt person, except as provided in paragraph 
(d)(5)(vi) of this section.
    (ii) Special rules.--(A) A bank is not required to file a FinCEN 
Form 110 with respect to the transfer of currency to or from:
    (1) Any of the twelve Federal Reserve Banks; or
    (2) Any exempt person as described in paragraphs (d)(2)(i) to (iii) 
of this section.
    (B) Notwithstanding subparagraphs (d)(2)(vi)(A) and (d)(2)(vii)(A) 
of this section, and if the requirements under this paragraph (d) of 
this section are otherwise satisfied, a bank may designate a non-listed 
business or a payroll customer, as described in paragraphs (d)(2)(vi) 
and (vii) of this section, as an exempt person before the customer has 
maintained a transaction account at the bank for at least two months if 
the bank conducts and documents a risk-based assessment of the customer 
and forms a reasonable belief that the customer has a legitimate 
business purpose for conducting frequent transactions in currency.
    (4) Annual review. At least once each year, a bank must review the 
eligibility of an exempt person described in paragraphs (d)(2)(iv) to 
(vii) of this section to determine whether such person remains eligible 
for an exemption. As part of its annual review, a bank must review the 
application of the monitoring system required to be maintained by 
paragraph (d)(8)(ii) of this section to each existing account of an 
exempt person described in paragraphs (d)(2)(vi) or (d)(2)(vii) of this 
section.
    (5) Operating rules--(i) General rule. Subject to the specific 
rules of this paragraph (d), a bank must take such steps to assure 
itself that a person is an exempt person (within the meaning of the 
applicable provision of paragraph (d)(2) of this section), to document 
the basis for its conclusions, and document its compliance, with the 
terms of this paragraph (d), that a reasonable and prudent bank would 
take and document to protect itself from loan or other fraud or loss 
based on misidentification of a person's status, and in the case of the 
monitoring system requirement set forth in paragraph (d)(8)(ii) of this 
section, such steps that a reasonable and prudent bank would take and 
document to identify suspicious transactions as required by paragraph 
(d)(8)(ii) of this section.
* * * * *
    (iii) Stock exchange listings. In determining whether a person is 
described in paragraph (d)(2)(iv) of this section, a bank may rely on 
any New York, American, or NASDAQ Stock Market listing published in a 
newspaper of general circulation, on any commonly accepted or published 
stock symbol guide, on any information contained in the Securities and 
Exchange Commission ``EDGAR'' System, or on any information contained 
on an Internet site or sites maintained by the New York Stock Exchange, 
the American Stock Exchange, or the NASDAQ.
* * * * *
    (viii) * * * 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 are derived from one or more of the 
ineligible business activities listed in this paragraph (d)(5)(viii).
* * * * *
    (7) * * *
    (ii) Subject to the specific terms of this paragraph (d), and 
absent any specific knowledge of information indicating that a customer 
no longer meets the requirements of an exempt person, a bank satisfies 
the requirements of this paragraph (d) to the extent it continues to 
treat that customer as an exempt person until the completion of that 
customer's next required periodic review, which as required by 
paragraph (d)(4) of this section for an exempt person described in 
paragraph (d)(2)(iv) to (vii) of this section, shall occur no less than 
once each year.
* * * * *
    (8) Obligations to file suspicious activity reports and maintain 
system for monitoring transactions in currency. (i) Nothing in this 
paragraph (d) relieves a bank of the obligation, or reduces in any way 
such bank's obligation, to file a report required by Sec.  103.18 with 
respect to any transaction, including any transaction in currency that 
a bank knows, suspects, or has reason to suspect is a transaction or 
attempted transaction that is described in Sec.  103.18(a)(2)(i), (ii), 
or (iii), or relieves a bank of any reporting or recordkeeping 
obligation imposed by this part (except the obligation to report 
transactions in currency pursuant to this section to the extent 
provided in this paragraph (d)). Thus, for example, a sharp increase 
from one year to the next in the gross total of currency transactions 
made by an exempt customer, or similarly anomalous transactions trends 
or patterns, may trigger the obligation of a bank under Sec.  103.18.
    (ii) * * * The statement in the preceding sentence with respect to 
accounts of non-listed business and payroll customers does not limit 
the obligation of banks generally to take the steps necessary to 
satisfy the terms of paragraph (d)(8)(i) of this section and Sec.  
103.18 with respect to all exempt persons.
    (9) Revocation. Without any action on the part of the Department of 
the Treasury and subject to the limitation on liability contained in 
paragraph (d)(7)(ii) of this section:
* * * * *

    Dated: December 2, 2008.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. E8-28858 Filed 12-4-08; 8:45 am]
BILLING CODE 4810-02-P