[Federal Register Volume 60, Number 127 (Monday, July 3, 1995)]
[Proposed Rules]
[Pages 34481-34485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16250]



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FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 211, and 225

[Regulations H, K, and Y; Docket No. R-0885]


Membership of State Banking Institutions in the Federal Reserve 
System; International Banking Operations; Bank Holding Companies and 
Change in Bank Control

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System (the 
Board) is proposing to revise its regulations on reporting of 
suspicious activities by the domestic and foreign banking organizations 
supervised by the Federal Reserve, including the reporting of 
suspicious financial transactions such as suspected violations of the 
Bank Secrecy Act (BSA). As proposed, these rules implement a new 
interagency suspicious activity referral process. The rules also reduce 
substantially the burden on banking organizations in reporting 
suspicious activities while enhancing access to such information by the 
Federal law enforcement agencies, the Federal financial institutions 
supervisory agencies and the Department of the Treasury.

DATES: Comments must be received on or before September 1, 1995.

ADDRESSES: Comments should refer to Docket No, R-0885, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th and Constitution Avenue, NW., Washington, 
DC 20551. Comments also may be delivered to Room B-2222 of the Eccles 
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard 
station in the Eccles Building courtyard on 20th Street, NW (between 
Constitution Avenue and C Street) at any time. Comments received will 
be available for inspection in Room MP-500 of the Martin Building 
between 9 a.m. and 5 p.m. weekdays, except as provided in 12 CFR 261.8 
of the Board's rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Herbert A. Biern, Deputy Associate 
Director, Division of Banking Supervision and Regulation, (202) 452-
2620, or Richard A. Small, Special Counsel, Division of Banking 
Supervision and Regulation, (202) 452-5235; for the hearing impaired 
only contact Dorothea Thompson, Telecommunication Device for the Deaf, 
(202) 452-3544, Board of Governors of the Federal Reserve System, 20th 
Street and Constitution Avenue, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

    The Federal financial institutions supervisory agencies (the 
Agencies) 1 and the Department of the Treasury (the Treasury) 
2 are responsible for ensuring that financial institutions apprise 
Federal law enforcement authorities of any known or suspected violation 
of a Federal criminal statute and of any suspicious financial 
transaction. Suspicious financial transactions, which will be the 
subject of regulations and other guidance to be issued by the Treasury, 
can include transactions that the banking organization suspects 
involved funds derived from illicit activities, were conducted for the 
purpose of hiding or disguising funds from illicit activity, in any way 
violated the Federal money laundering statutes (18 U.S.C. 1956 and 
1957), were potentially designed to evade the reporting or 
recordkeeping requirements of the BSA (31 U.S.C. 5311 through 5330), 
and transactions that the bank believes were suspicious for any other 
reason.

    \1\ The Federal financial institutions supervisory agencies are 
the Board, the Office of the Comptroller of the Currency, the Office 
of Thrift Supervision, the Federal Deposit Insurance Corporation, 
and the National Credit Union Administration.
    \2\ Through Treasury's Financial Crimes Enforcement Network 
(FinCEN).
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    Fraud, abusive insider transactions, check kiting schemes, money 

[[Page 34482]]
    laundering, and other crimes can pose serious threats to a financial 
institution's continued viability and, if unchecked, can undermine the 
public confidence in the nation's financial industry. The Agencies and 
Federal law enforcement agencies need to receive timely and detailed 
information regarding suspected criminal activity to determine whether 
investigations, administrative actions, or criminal prosecutions are 
warranted.
    An interagency Bank Fraud Working Group (BFWG), consisting of 
representatives from many Federal agencies, including the Agencies and 
law enforcement agencies such as the U.S. Department of Justice and the 
Federal Bureau of Investigation, was formed in 1984. The BFWG addresses 
substantive issues, promotes cooperation among the Agencies and Federal 
and state law enforcement agencies, and improves the Federal 
government's response to white collar crime in financial institutions. 
It is under the auspices of the BFWG that the revisions to these 
regulations and the reporting requirements are being made.

Suspicious Activity Report

    The Agencies have been working on a project to improve the criminal 
referral process, to reduce the reporting burden on banking 
organizations, and to eliminate confusion associated with the current 
duplicative reporting of suspicious financial transactions in criminal 
referral forms and currency transactions reports (CTRs). 
Contemporaneously, the Treasury analyzed the need to implement the 
procedures for reporting suspicious financial transactions by banks 
following the enactment of the Annunzio-Wylie Anti-Money Laundering Act 
of 1992. As a result of these reviews, the Agencies and Treasury 
approved the development of a new referral process that includes 
suspicious financial transaction reporting.
    To implement the reporting process and to reduce unnecessary 
burdens associated with these various reporting requirements, the 
Agencies and FinCEN developed a new form for reporting known or 
suspected Federal criminal law violations and suspicious financial 
transactions. The new form is designated the Suspicious Activity Report 
(SAR). The new referral process and the SAR reduce the burden on 
financial institutions for reporting known or suspected violations and 
suspicious financial transactions. The Agencies anticipate that the new 
process will be instituted by October, 1995.

Proposal
    The Board proposes to revise 12 CFR Parts 208, 211, and 225 by 
updating the current rules governing the filing of criminal referral 
reports; expanding the rules pertinent to the activities of state 
member banks, bank holding companies and their nonbank subsidiaries, 
Edge and Agreement corporations, and the U.S. branches and agencies of 
foreign banks to cover suspicious financial transactions; implementing 
the new SAR; and eliminating overly burdensome reporting requirements. 
This action should improve reporting of known or suspected violations 
and suspicious financial transactions relating to financial 
institutions while providing uniform data for entry into a new 
interagency computer database. The Board expects that each of the other 
Agencies will be making substantially similar changes to their criminal 
referral rules contemporaneously.
    The principal proposed changes to the Board's current criminal 
referral reporting rules are discussed below. They include the 
following notable changes: (i) simplifying and shortening the referral 
form; (ii) raising the mandatory reporting thresholds for criminal 
offenses, thereby reducing banking organizations' reporting burdens; 
(iii) filing only one form with a single repository, rather than 
submitting multiple copies to several Federal law enforcement and 
banking agencies, thereby further reducing reporting burdens; and (iv) 
clarifying the criminal referral and suspicious financial transaction 
reporting requirements of the Agencies and Treasury associated with 
suspicious financial transactions, thereby eliminating confusion 
concerning the filing of referrals related to suspicious financial 
transactions of less than $10,000 and eliminating duplicative 
referrals.
    The proposal also involves the manner in which financial 
institutions file a SAR. In following the instructions on a SAR, 
banking organizations may file the referral form in several ways, 
including submitting an original form or a photocopy, and they may file 
a SAR by magnetic means, such as by a computer disk. In the future, the 
Board and the other Agencies anticipate that a banking organization 
will be able to file a SAR electronically.
    The Agencies, working with FinCEN, are developing computer software 
to assist financial institutions in preparing and filing SARs. The 
software will allow a banking organization to complete a SAR, to save 
the SAR on its computers, and to print a hard copy of the SAR for its 
own records. The computer software will also enable a financial 
institution to file a SAR using various forms of magnetic media, such 
as computer disk or magnetic tape. The Board will make the software 
available to all domestic and foreign banking organizations it 
supervises.
    The changes are being made to Sec. 208.20 of Regulation H of the 
Board (12 CFR 208.20) relating to the criminal referral reporting 
responsibilities of state member banks. Sections 211.8 and 211.24(f) of 
Regulation K of the Board and Sec. 225.4(f) of Regulation Y of the 
Board make Sec. 208.20 of Regulation H of the Board applicable to Edge 
and Agreement corporations, the U.S. branches and agencies of foreign 
banks (except a Federal branch or Federal agency or a state branch that 
is insured by the Federal Deposit Insurance Corporation), a 
representative office of a foreign bank, and bank holding companies and 
their nonbank subsidiaries, respectively. This means that the changes 
applicable to state member banks discussed below will also be 
applicable to the suspicious activity reporting responsibilities of all 
of the other domestic and foreign banking organizations supervised by 
the Federal Reserve, including bank holding companies, Edge 
corporations, and the U.S. branches and agencies of foreign banks. The 
only modifications being made to the current provisions of Secs. 211.8 
and 211.24(f) of Regulation K, and Sec. 225.4(f) of Regulation Y are 
changes to the name of form--from ``criminal referral form'' to a SAR--
and a change in the heading of Sec. 225.4(f) of Regulation Y to 
``Suspicious Activity Report'' from ``Criminal referral report.''

Section 208.20(a)  Purpose

    The proposal clarifies the scope of the current rule. Under the 
proposal, the SAR replaces the various criminal referral forms that the 
Agencies currently require banking organizations to file. Also a state 
member bank or other type of financial institution files a SAR instead 
of a currency transaction report (CTR) to report a suspicious financial 
transaction involving less than $10,000 in currency.3

    \3\ The BSA requires all financial institutions to file CTRs in 
accordance with the Treasury's implementing regulations (31 CFR Part 
103). Part 103 requires a bank to file a CTR whenever a currency 
transaction exceeds $10,000. If a currency transaction exceeds 
$10,000 and is suspicious, the state member bank, under these new 
requirements, will file both a CTR (reporting the currency 
transaction) and a SAR (reporting the suspicious criminal aspect of 
the transaction). If a currency transaction equals or is below 
$10,000 but is suspicious, the bank will only file a SAR.

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    Combining suspicious financial transaction reporting and criminal 
referral reporting should reduce confusion, increase the accuracy and 
efficiency of reporting, and reduce the burden on financial 
institutions in reporting known or suspected violations, including 
suspicious financial transactions.

Section 208.20(b)  Definitions

    In addition to the current definition of ``institution-affiliated 
party'' set forth at 12 CFR 208.20(b), the proposed Sec. 208.20(b) 
defines the following terms: ``FinCEN'' and ``SAR.'' The definitions 
should make the rule easier to interpret and apply.

Section Sec. 208.20(c)  Reports Required

    Proposed Sec. 208.20(c), which replaces the current subsection, 
clarifies and expands the provision that requires a state member bank 
to file a SAR. This provision raises the dollar thresholds that trigger 
a filing requirement. It also modifies the scope of events that a state 
member bank must report by requiring that a bank file a SAR to report a 
suspicious financial transaction.
    Under the current rule, the Board requires a state member bank to 
file a criminal referral form with many different Federal agencies. The 
proposal, which replaces all other requirements for filing criminal and 
suspicious financial transaction referrals, requires a bank to file 
only a single SAR at one location, rather than the multiple copies of 
the criminal referral form that must now be filed with various Federal 
agencies.
    Under proposed Sec. 208.20(c), a state member bank effectively 
files a SAR with all appropriate Federal law enforcement agencies by 
sending a single copy of the SAR to FinCEN, whose address will be 
printed on the SAR.
    FinCEN will input the information contained on the SARs into a 
newly created database that FinCEN will maintain. This process meets 
the regulatory requirement that a banking organization refer any known 
or suspected criminal violation to the various Federal law enforcement 
agencies. The database will enhance Federal law enforcement and bank 
supervisory agencies' ability to track, investigate, and prosecute, 
criminally, civilly, and administratively, individuals and entities 
suspected of violating Federal criminal law.
    This change ensures that all SARs are placed in the database at 
FinCEN and that the information is made available on computer to the 
appropriate law enforcement and supervisory agencies as quickly as 
possible. This change will reduce the filing burdens of banking 
organizations.
    The proposal modifies current Sec. 208.20(c)(2), which requires 
reporting of known or suspected criminal activity when a state member 
bank has a substantial basis for identifying a non-insider suspect 
where bank funds or other assets involve or aggregate $1,000 or more. 
Proposed Sec. 208.20(c)(2) raises the reporting threshold to $5,000, 
thereby reducing the reporting burden on banking organizations.
    The proposal also modifies current Sec. 208.20(c)(3), which 
requires a state member bank to report any known or suspected criminal 
violation involving $5,000 or more where the bank has no substantial 
basis for identifying a suspect. Specifically, proposed 
Sec. 208.20(c)(3) raises the dollar reporting threshold from $5,000 to 
$25,000, thereby reducing further the reporting burden on banking 
organizations.
    Proposed Sec. 208.20(c)(4) requires a state member bank to report 
any financial transaction, regardless of the dollar amount, that: (i) 
the bank suspects involved funds derived from illicit activity, was 
conducted for the purpose of hiding or disguising funds from illicit 
activity, or in any way violated Federal money laundering statutes (18 
U.S.C. 1956 and 1957); (ii) the bank suspects was potentially designed 
to evade the reporting or recordkeeping requirements of the BSA (31 
U.S.C. 5311 through 5330); or (iii) the bank believes to be suspicious 
for any reason.

Section 208.20(d)  Time for Reporting

    Proposed Sec. 208.20(d) sets forth the time requirements a state 
member bank must meet when filing a SAR. The proposal clarifies the 
reporting requirement in the event a suspect or group of suspects is 
not immediately identified. It does not substantively change the 
current requirements.

Section 208.20(e)  Reporting to State and Local Authorities

    No changes are being proposed to the current Sec. 208.20(e).

Section 208.20(f)  Exceptions

    No changes are being made to the current Sec. 208.20(f).

Section 208.20(g)  Retention of Records

    Current Sec. 208.20(g) requires a state member bank to retain a 
copy of the criminal referral form and the original of any related 
documentation relating to a referral for a period of 10 years from the 
date of the report. No changes are being made to this requirement. The 
proposal clarifies the requirement that banking organizations make all 
supporting documentation available to appropriate law enforcement 
agencies upon request. This approach ensures that Federal law 
enforcement agencies and the Agencies, upon request, have access to any 
documentation necessary to prosecute a violation or pursue an 
administrative action by requiring financial institutions to identify 
and preserve underlying documentation for 10 years and treat such 
underlying documentation as having been filed with the SAR.

Section 208.20(h)  Notification of the Board of Directors

    Current Sec. 208.20(h) requires notification regarding the filing 
of a SAR to a state member bank's board of directors by the bank's 
management. To reduce burdens on the boards of directors of state 
member banks, especially those large banks that file many SARs, the 
proposal recognizes that the required notification may be made to a 
committee of the board.

Section 208.20(i)  Compliance

    Current Sec. 208.20(i) is headed ``Penalty''. The heading of the 
subsection is changed to reflect better the range of informal and 
formal supervisory actions that the Board can take to address 
suspicious activity reporting deficiencies.

Section 208.20(j)  Confidentiality of SARs

    The Board proposes to add a new subsection relating to the 
confidentiality of a SAR. Proposed Sec. 208.20(j) states that a SAR and 
the information contained in a SAR are confidential, and that a state 
member bank should decline to produce a SAR citing applicable law 
(e.g., 31 U.S.C. 5318(g)) and the provisions of Sec. 208.20 of 
Regulation H of the Board.

Comments

    The Board invites public comment on all aspects of this proposal.

Regulatory Flexibility Act

    Because this proposal is designed to reduce the burden on financial 
institutions for reporting suspicious financial transactions, the Board 
certifies that this proposed regulation will not have a significant 
financial impact on a substantial number of small banks or other small 
entities.
Paperwork Reduction Act

    In accordance with Section 3507 of the Paperwork Reduction Act of 
1980, the suspicious activity report regulation was approved under 
authority delegated 

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to the Board by the Office of Management and Budget. The Board has 
determined that the proposed regulations may reduce the burden on 
reporting institutions through the use of a simplified, shorter form, 
the filing of one form only, the raising of reporting thresholds, and 
the elimination of the submission of supporting documentation with a 
referral, as well as by the Board's provision to banking organizations 
of computer software to prepare the form. The estimated average burden 
associated with the collection of information contained in a SAR is 
approximately .6 hours per respondent. The burden per respondent will 
vary depending on the nature of the suspicious activity being reported.
    Comments concerning the accuracy of this burden estimate should be 
directed to Mary M. McLaughlin, Division of Research and Statistics, 
Mail Stop 97, Federal Reserve Board, 20th Street and Constitution 
Avenue, N.W., Washington, D.C. 20551.

Executive Order 12291

    The Board has determined that this proposed regulation is not a 
``major rule'' and therefore does not require a regulatory impact 
analysis.

List of Subjects

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 225

    Administrative practice and procedures, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.
    For the reasons set out in the preamble, Parts 208, 211, and 225 of 
chapter II of title 12 of the Code of Federal Regulations is proposed 
to be amended to read as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for 12 CFR part 208 continues to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 
781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.

    2. Section 208.20 is revised to read as follows:
Sec. 208.20  Suspicious Activity Reports.

    (a) Purpose. This section ensures that a state member bank files a 
Suspicious Activity Report when it detects a known or suspected 
violation of Federal law or suspicious financial transaction. This 
section applies to all state member banks.
    (b) Definitions. For the purposes of this section:
    (1) FinCEN means the Financial Crimes Enforcement Network of the 
Department of the Treasury.
    (2) Institution-affiliated party means any institution-affiliated 
party as that term is defined in Sections 3(u) and 8(b)(3) and (4) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(u) and 1818(b)(3) and 
(4)).
    (3) SAR means a Suspicious Activity Report form proscribed by the 
Board.
    (c) SARs required. A state member bank shall file a SAR with the 
appropriate Federal law enforcement agencies and the Department of the 
Treasury and in accordance with the form's instructions, by sending a 
completed SAR to FinCEN in the following circumstances:
    (1) Whenever the state member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, 
committed against the bank or involving a transaction conducted through 
the bank, where the bank has a substantial basis for identifying one of 
its directors, officers, employees, agents, or other institution-
affiliated parties as having committed or aided in the commission of a 
criminal act regardless of the amount involved in the violation.
    (2) Whenever the state member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, 
committed against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $5,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, and that the bank has a substantial basis for identifying 
a possible suspect or group of suspects.
    (3) Whenever the state member bank detects any known or suspected 
Federal criminal violation, or pattern of criminal violations, 
committed against the bank or involving a transaction or transactions 
conducted through the bank and involving or aggregating $25,000 or more 
in funds or other assets, where the bank believes that it was either an 
actual or potential victim of a criminal violation, or series of 
criminal violations, or that the bank was used to facilitate a criminal 
transaction, even though there is no basis for identifying a possible 
suspect or group of suspects.
    (4) Whenever the state member bank detects any financial 
transaction conducted, or attempted, at the bank involving funds 
derived from illicit activity or for the purpose of hiding or 
disguising funds from illicit activities, or for the possible violation 
or evasion of the Bank Secrecy Act reporting and/or recordkeeping 
requirements, even if there is no substantial basis for identifying a 
possible suspect or group of suspects. A suspicious activity report 
must be filed for all instances where money laundering is suspected or 
where the bank believes that the transaction was suspicious for any 
reason, regardless of the identification of a potential suspect or 
group of suspects or the amount involved in the violation.
    (d) Time for reporting. A state member bank is required to file a 
SAR no later than 30 calendar days after the date of initial detection 
of the possible, known or suspected criminal violation or series of 
criminal violations. If no suspect was identified on the date of 
detection of the incident triggering the filing, a state member bank 
may delay filing a SAR for an additional 30 calendar days after the 
identification of the suspect. In no case shall reporting be delayed 
more than 60 calendar days after the date of the loss or the possible 
known or suspected criminal violation or series of criminal violations. 
In situations involving violations requiring immediate attention, such 
as when a reportable violation is on-going, the financial institution 
shall immediately notify, by telephone, the appropriate law enforcement 
authority in addition to filing a timely SAR.
    (e) Reports to state and local authorities. State member banks are 
encouraged to file a copy of the SAR with state and local law 
enforcement agencies where appropriate.
    (f) Exceptions. (1) A state member bank need not file a SAR for a 
robbery or burglary committed or attempted that is reported to 
appropriate law enforcement authorities.
    (2) A state member bank need not file a SAR for lost, missing, 
counterfeit, or stolen securities if it files a report pursuant to the 
reporting requirements of 17 CFR 240.17f-1.
    (g) Retention of records. A state member bank shall maintain a copy 
of 

[[Page 34485]]
any SAR filed and the original of any related documentation for a 
period of 10 years from the date of filing the SAR. A state member bank 
must make all supporting documentation available to appropriate law 
enforcement agencies upon request. Supporting documentation shall be 
identified and treated as filed with the SAR.
    (h) Notification to board of directors. The management of a state 
member bank shall promptly notify its board of directors, or a 
committee thereof, of any report filed pursuant to this section.
    (i) Compliance. Failure to file a SAR in accordance with this 
section and the form's instructions may subject the state member bank, 
its directors, officers, employees, agents, or other institution-
affiliated parties to supervisory action.
    (j) Confidentiality of SARs. SARs are confidential. Any person 
subpoenaed or otherwise requested to disclose a SAR or the information 
contained in a SAR shall decline to produce the information citing this 
section, applicable law (e.g., 31 U.S.C. 5318(g)), or both.

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for part 211 is revised to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 1843 et 
seq., 3100 et seq., 3901 et seq.


Secs. 211.8 and 211.24  [Amended]

    2. In Secs. 211.8 and 211.24(f) remove the words ``criminal 
referral form'' and add, in their place, the words ``suspicious 
activity report''.

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for 12 CFR part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.


Sec. 225.4  [Amended]

    2. In Sec. 225.4 the heading of paragraph (f) is revised to read 
``Suspicious Activity Report.''.
    3. In Sec. 225.4(f) remove the words ``criminal referral form'' and 
add, in their place, the words ``suspicious activity report''.

    By order of the Board of Governors of the Federal Reserve 
System, June 28, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-16250 Filed 6-30-95; 8:45 am]
BILLING CODE 6210-01-P