[Federal Register Volume 62, Number 173 (Monday, September 8, 1997)]
[Rules and Regulations]
[Pages 47141-47148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23643]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA11


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, Treasury.

ACTION: Final rule.

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SUMMARY: This document contains a final rule amending the Bank Secrecy 
Act regulations. The amendment will eliminate the requirement to report 
transactions in currency in excess of $10,000 between depository 
institutions and certain classes of ``exempt persons'' defined in the 
rule. It will modify (and, as modified, will supersede), an interim 
rule on the same subject, to reflect the comments that were requested 
when the interim rule was published.
    There appears elsewhere in today's edition of the Federal Register 
a notice of proposed rulemaking that would further modify the rules for 
granting exemptions from the currency transaction report filing 
requirements. The final rule and the notice of proposed rulemaking are 
additional steps in a process intended to achieve the reduction set by 
the Money Laundering Suppression Act of 1994 in the number of Bank 
Secrecy Act currency transaction reports required to be filed annually 
by depository institutions.

EFFECTIVE DATE: January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director, 
FinCEN, (703) 905-3819; Charles Klingman, Financial Institutions Policy 
Specialist, FinCEN, (703) 905-3602; Stephen R. Kroll, Legal Counsel, 
Cynthia L. Clark, on detail to the Office of Legal Counsel, and Albert 
R. Zarate, Attorney-Advisor, Office of Legal Counsel, FinCEN, (703) 
905-3590.

SUPPLEMENTARY INFORMATION:

I. Statutory Provisions

    The Bank Secrecy Act, Titles I and II of Pub. L. 91-508, as 
amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 
U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia, 
to issue regulations requiring financial institutions to keep records 
and file reports that are determined to have a high degree of 
usefulness in criminal, tax, and regulatory matters, and to implement 
counter-money laundering programs and compliance procedures. 
Regulations implementing Title II of the Bank Secrecy Act (codified at 
31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the 
Secretary to administer Title II of the Bank Secrecy Act has been 
delegated to the Director of FinCEN.
    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 Bank Secrecy Act. The reporting 
requirement is imposed by 31 CFR 103.22, a rule issued under the broad 
authority granted to the Secretary of the Treasury by 31 U.S.C. 5313(a) 
to require reports of domestic coins and currency transactions.
    Four new provisions (31 U.S.C. 5313(d) through (g)) concerning 
exemptions were added to 31 U.S.C. 5313 by 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, Pub. L. 103-325 (September 23, 1994). According to 
subsection (d)(1), the Treasury must exempt a depository institution 
from the requirement to report currency transactions with respect to 
transactions between the depository institution and the following 
categories of entities:

    (A) Another depository institution.
    (B) A department or agency of the United States, any State, or 
any political subdivision of any State.
    (C) 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 2 or more States, which exercises 
governmental authority on behalf of the United States or any such 
State or political subdivision.
    (D) Any business or category of business the reports on which 
have little or no value for law enforcement purposes.

    Subsection (d)(2) requires the Treasury to publish at least 
annually a list of entities whose currency transactions are exempt from 
reporting under the mandatory rules. The companion provisions of 31 
U.S.C. 5313(e) authorize the Secretary to permit a depository 
institution to grant additional, discretionary, exemptions from the 
currency transaction reporting requirements. Subsection (f) places 
limits on the liability of a depository institution in connection with 
a transaction that has been exempted from reporting under either 
subsection (d) or subsection (e) and provides for the coordination of 
any exemption with other Bank Secrecy Act provisions, especially those 
relating to the reporting of suspicious transactions. Subsection (g) 
defines ``depository institution'' for purposes of the new exemption 
provisions.
    The enactment of 31 U.S.C. 5313 (d) through (g) reflects a 
congressional intention to ``reform * * * the procedures for exempting 
transactions between depository institutions and their customers.'' See 
H.R. Rep. 103-652, 103d Cong., 2d Sess. 186 (August 2, 1994).\1\ The 
administrative exemption procedures at which the statutory changes are 
directed are found in 31 CFR 103.22 (b)-(g).
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    \1\ Section 402(b) of the Money Laundering Suppression Act 
states simply that in administering the new statutory exemption 
procedures
    the Secretary of the Treasury shall seek to reduce, within a 
reasonable period of time, the number of reports required to be 
filed in the aggregate by depository institutions pursuant to 
section 5313(a) of title 31 * * * by at least 30 percent of the 
number filed during the year preceding [September 23, 1994,] the 
date of enactment of [the Money Laundering Suppression Act].
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    Several reasons have been given for the administrative exemption 
system's lack of success in eliminating routine currency transactions 
from operation of the Bank Secrecy Act rules. The first is the 
retention by banks of liability for making incorrect exemption 
determinations. The second is the complexity of the administrative 
exemption procedures. Finally, advances in technology have made it less 
expensive for some banks to report all currency transactions than to 
incur the administrative costs and risks of exempting customers and 
then administering the terms of particular exemptions properly.

II. The Interim Rule

    On April 24, 1996, an interim rule (the ``Interim Rule'') adding a 
new paragraph (h) to the currency transaction reporting rules in 31 CFR 
103.22 was published in the Federal Register. See 61 FR 18204. The 
Interim Rule exempted, from the requirement to report transactions in 
currency in excess of $10,000, transactions occurring after April 30, 
1996, between banks \2\ and

[[Page 47142]]

customers who fall into one of five classes of exempt persons:
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    \2\ The Interim Rule used the term bank to define the class of 
financial institutions to which the Interim Rule applied. As defined 
in 31 CFR 103.11(c), that term includes both commercial banks and 
other classes of depository institutions at which the language of 31 
U.S.C. 5313 is directed.
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    1. Banks, to the extent of their banking operations and 
transactions within the United States; \3\
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    \3\ The broad definition of ``United States'' in section 
103.11(nn) applies.
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    2. Departments and agencies of the United States and of states and 
their political subdivisions;
    3. Any entity established under the laws of the United States \4\ 
or of any state or its political subdivisions, or under an interstate 
compact, that exercises governmental authority on behalf of the United 
States or any such state or political subdivision;
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    \4\ Again, the broad definition of ``United States'' applies.
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    4. ``Listed corporations,'' that is, corporations whose common 
stock is listed on the New York Stock Exchange or the American Stock 
Exchange or has been designated as a Nasdaq National Market Security 
listed on the Nasdaq Stock Market; \5\
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    \5\ The NASDAQ category did not include stock listed under the 
separate ``Nasdaq Small-Cap Issues'' category.
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    5. Subsidiaries of listed corporations that are consolidated with 
such corporations for federal income tax purposes.
    See 31 CFR 103.22(h)(2) (i)-(v). The first three categories of 
exempt persons specified above are those to whom an exemption is 
required to be granted by 31 U.S.C. 5313(d)(1) (A)-(C). The final two 
categories are those entities who are exempted pursuant to the 
authority contained in 31 U.S.C. 5313(d)(1)(D).
    To treat a customer as exempt under the Interim Rule, a bank must 
file a single form (the same form now used by banks to report a 
transaction in currency) that identifies the exempt person and the bank 
involved and must generally take such steps to assure itself that a 
person is an exempt person 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. Treatment of a customer as an 
exempt person under the Interim Rule protects a bank generally from any 
penalty for failure to file a currency transaction report with respect 
to the exempt person's currency transactions, but it does not affect 
the obligation of banks to file suspicious activity reports. Currency 
transactions, like other transactions, between a bank and an exempt 
person remain subject to the suspicious activity reporting requirements 
of 31 CFR 103.21, as well as the suspicious activity reporting 
requirements of the federal bank supervisory agencies. See also 12 CFR 
21.11 (Office of the Comptroller of the Currency); 12 CFR 208.20 
(Federal Reserve System); 12 CFR 353.3 (Federal Deposit Insurance 
Corporation); 12 CFR 563.180 (Office of Thrift Supervision); 12 CFR 
748.1 (National Credit Union Administration).
    Because the Interim Rule implemented certain provisions of the Bank 
Secrecy Act and granted significant relief from existing regulatory 
requirements, it was made effective on May 1, 1996, less than 30 days 
after its publication date. The Interim Rule was, however, accompanied 
by a request for comments on the Rule's terms.
    It appears that the Interim Rule did not immediately have the 
intended effect of reducing the number of routine currency transactions 
filed by depository institutions. This may have been attributable, at 
least in part, to banks' reluctance to use the new exemption procedures 
until the Interim Rule and proposals for the projected second stage of 
currency transaction filing relief (as to which comments were solicited 
by the preamble to the Interim Rule) were made final. Deferral of a 
change in a bank's procedures would permit the automated systems on 
which many institutions rely to be altered to take account of all the 
revised currency transaction filing rules at one time. Unfamiliarity 
with and uncertainty about the meaning of certain provisions of the 
Interim Rule may also have initially retarded the Rule's use.\6\
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    \6\ FinCEN has already issued a notice, FinCEN Notice 97-1, to 
deal with one such uncertainty. That notice makes clear that an 
institution may decide, after August 15, 1996, that it wishes to 
adopt the new exemption system for particular customers, even if it 
did not do so, for existing customers, before that date, so long as 
the necessary exemption identifications are filed within 30 days of 
the first transaction in currency that is sought to be exempted 
under the new exemption procedures.
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    Statistics based on the first half of this year indicate that banks 
are making the transition to the new, streamlined exemption procedures 
set forth in the Interim Rule. The number of CTR filings for each of 
the months of February, March, April, May, and June of 1997 is less 
than the number of filings for those same months in 1996. (FinCEN does 
not yet have complete information concerning CTR filings for July 
1997.) Thus, it appears that the Interim Rule is beginning to have some 
effect on decreasing the number of CTR filings. FinCEN anticipates that 
banks will continue to make the transition to the new exemption 
procedures as they become better acquainted, and more comfortable, with 
the terms of the new procedures. FinCEN also hopes that the 
clarifications contained in this document will continue to aid in that 
transition.

III. Summary of Comments and Revisions

A. Comments on the Notice--Overview

    FinCEN received fifty-eight written comments on the Interim Rule. 
Of these, forty-four comments were submitted by banks or bank holding 
companies, six by banking trade associations, four by credit unions, 
one by a credit union trade association, and one each by a compliance 
consulting firm, an accounting firm, and a law firm, each on its own 
behalf.
    The commenters generally applauded FinCEN's efforts to improve the 
exemption process. One bank commenter, for example, noted with approval 
``the scope and aggressiveness of the Interim Rule'' and found the Rule 
``a major step in reducing the Bank Secrecy Act's burden on financial 
institutions without compromising the BSA's effectiveness'' because it 
permitted banks to eliminate the cost of reporting ``large 
denomination, repetitive transactions with public entities and major 
corporations engaged in legitimate retail activity.'' At the same time, 
the commenters suggested a number of ways in which the Interim Rule 
might be improved, and they raised several operating issues that banks 
had encountered in applying the Interim Rule.
    Comments on the Interim Rule focused primarily on five subjects: 
the definition of an exempt subsidiary of a listed corporation; other 
aspects of the definition of exempt person; the time frame within which 
a bank was permitted to designate an existing customer as an exempt 
person; the need to clarify the relationship between the provisions of 
paragraph (h) and the terms of the administrative exemption provisions 
of 31 CFR 103.22(b)-(g); and the interplay between the Interim Rule and 
previous regulatory guidance provided by the Department of the Treasury 
with respect to the currency transaction reporting requirements. The 
specifics of the comments and an explanation of resulting modifications 
to paragraph (h) are outlined below.
    After full and careful consideration of all the comments, 31 CFR 
103.22(h), as contained in the Interim Rule, is modified, and, as 
modified, is adopted as a final rule.

B. Final Rule

    The format and substance of the final rule and the Interim Rule are 
generally the same. The final rule reflects the

[[Page 47143]]

following significant modifications to the Interim Rule:
    1. The definition of exempt person has been clarified to make clear 
that banks are eligible to be treated as exempt persons because they 
are banks, and then only with respect to their domestic operations; a 
bank that is, or is a subsidiary of, a listed company does not for that 
reason obtain a second ground for exemption;
    2. The definition of exempt person has been amended to treat as a 
``listed entity'' and entity, rather than just a corporation, whose 
common stock or analogous equity interests are listed on an applicable 
stock exchange;
    3. The definition of exempt person has been amended to include any 
subsidiary of a listed entity that is organized under the laws of the 
United States or a state and at least 51 percent of whose common stock 
is owned by the listed entity as shown in a reasonably authenticated 
corporate officer's certificate, a reasonably authenticated photocopy 
of Internal Revenue Service Form 851 (Affiliation Schedule), or in the 
Annual Report or Form 10-K that is filed by the listed entity with the 
Securities and Exchange Commission;
    4. The definition of exempt person has been amended to make clear 
that an exempt person includes a financial institution, other than a 
bank, that is a listed entity or a subsidiary of a listed entity, but 
only to the extent of such entity's domestic operations;
    5. The time frame for designating a customer as an exempt person 
has been clarified to provide that a designation may be made, for any 
customer, by the close of the 30-day period beginning after the day of 
the first reportable transaction in currency with that person that is 
sought to be exempted from reporting under the terms of paragraph (h);
    6. Examples of entities exercising governmental authority have been 
added to the Interim Rule; and
    7. A paragraph has been added to make clear that, absent knowledge 
of a loss of an exempt person's status as such, a bank satisfies its 
obligations under paragraph (h) by verifying the continued status of 
exempt persons at least annually.
    The changes adopted in the final rule are intended to improve, 
clarify, and refine the rule's provisions in light of the objectives 
FinCEN outlined when the Interim Rule was published. Those objectives 
are reducing the burden of currency transaction reporting, requiring 
reporting only of information that is of value to law enforcement and 
regulatory authorities, and, perhaps most importantly, creating an 
exemption system that is cost-effective and that works. See 61 FR 
18205.

IV. Specific Comments and Explanation of Revisions

    A discussion of the significant comments on the Interim Rule 
appears below. As noted, many of the comments raised questions about 
the interaction between the terms of paragraph (h) and various 
operating requirements of the administrative exemption system.

A. 31 CFR 103.22(h)(1)--Transactions in Currency of Exempt Persons With 
Banks

    Paragraph (h)(1) states that general rule that no report is 
required under 31 CFR 103.22(a)(1) with respect to any transaction in 
currency between an exempt person and a bank. The only changes made to 
this paragraph are ministerial: the phrase ``currency transactions'' in 
the title of paragraph (h)(1) has been revised to read ``transactions 
in currency,'' and the phrases ``occurring after April 30, 1996,'' in 
the title of paragraph (h) and in the title of paragraph (h)(1), and 
``that is conducted after April 30, 1996,'' at the end of paragraph 
(h)(1), have been deleted as unnecessary in a final rule.\7\ For 
consistency, the phrase ``occurring after April 30, 1996'' has also 
been deleted as unnecessary in paragraph (a)(1).
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    \7\ Deletion of the reference to a specific date is not intended 
in any way to alter the effective date of this change in the Bank 
Secrecy Act regulations.
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    It should be noted that the exemption language of the final rule is 
fundamentally different from that of the administrative exemption 
system. Sections 103.22(a)(1) and 103.22(h)(1) state affirmatively that 
the reporting requirements of the section do not apply to the 
transactions described in paragraph (h). In contrast, the 
administrative exemption provision, 31 CFR 103.22(b)(2), simply states 
that a bank ``may exempt'' transactions described in that paragraph 
from reporting. Although, as noted in the preamble to the Interim Rule, 
see 61 FR 18206, the provisions of paragraph (h)(1) do not 
affirmatively prohibit banks from continuing to report routine currency 
transactions with exempt persons (and the requirement that exempt 
persons be designated as such provides banks with operational 
discretion to determine whether or not to recognize the new 
provisions), banks that continue to report such routing transactions 
are supplying the government with information that is not required 
under the Bank Secrecy Act regulations.
1. Use of Word ``Bank'' Rather Than ``Depository Institution''
    FinCEN received no comment on its use of the term ``bank'' instead 
of ``depository institution'' to define the class of financial 
institutions, subject to the Bank Secrecy Act, that are exempted from 
the requirement to report transactions in currency by paragraph (h)(1), 
and the final rule continues to use the former term. Although 31 U.S.C. 
5313(d) refers to mandatory exemptions for certain transactions in 
currency with ``depository institutions,'' the broad definition of bank 
contained in 31 CFR 103.11(c) appears to include all categories of 
institutions included in the statutory ``depository institution'' 
definition, so that a change in terminology was neither necessary nor 
advisable (in view of the Bank Secrecy Act regulations' general use of 
the work ``bank'' for the classes of institutions involved).
2. Coverage of all ``Transactions in Currency''
    At least one commenter asked whether paragraph (h), intended to 
exempt from reporting all ``transactions in currency'' between exempt 
persons and banks, despite the fact that the administrative exemption 
system rules of 31 CFR 103.22(b)(2) (i)-(ii) permit banks to exempt 
from currency transactions reporting only deposits and withdrawals, of 
currency from existing and specified accounts.\8\ The use of the 
broader term is intentional, as paragraph (h) seeks to elimate all 
transactions in currency between exempt persons and banks from the 
reporting rules of section 103.22 (subject to the limitation on 
exemption for transactions carried out by an exempt person as an agent 
for another person, as set forth in paragraph (h)(5)). As noted in more 
detail below, however, the changes made to section 103.22 have no 
impact on the requirement to report suspicious transactions under 31 
CFR 103.21, and the fact that an exempt person wishes to conduct a 
transaction other than a deposit or withdrawal, or a transaction that 
does not involve an existing account with the bank involved, may merit 
further investigation, and perhaps reporting, under the rules of 
section 103.21.
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    \8\ Banks are permitted by 31 CFR 103.22(b)(2)(iii) to grant a 
broader exemption for transactions by government agencies.
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3. Transactions by Exempt Persons With Financial Institutions Other 
Than Banks
    At least one commeter sought to broaden the scope of subsection (h) 
to include transactions between exempt

[[Page 47144]]

persons and financial instituons other than banks. No such change has 
been made. Although, as noted below, banks are permitted, in a change 
from prior practice, to recognize ``listed'' non-bank financial 
institutions as exempt persons, a general grant of automatic exemption 
for all transactions in currency in excess of $10,000 between exempt 
persons, on the one hand, and, for example, brokers and dealers in 
securities, money transmitters, or currency exchange houses, on the 
other, is neither within the Money Laundering Suppression Act statutory 
mandate nor justified by the realities of the operation of those 
businesses.

B. 31 CFR 103.22(h)(2)--Definition of Exempt Person

    Paragraph (h)(2) continues to contain the definition of those 
classes of ``exempt persons'' whose transactions in currency with banks 
are exempt from reporting under the final rule.
1. Banks
    The Interim Rule defines an exempt person to include a bank, to the 
extent of the bank's domestic operations. One commenter asserted that 
the treatment of banks as exempt persons ``to the extent of their 
domestic operations'' is less broad than the present exemption provided 
for banks by section 103.22(b)(1)(ii). However the language of 
paragraph (h)(2)(i) is simply a restatement of the language of section 
103.22(b)(1)(ii), when the latter definition is read together with the 
definition of ``domestic'' in section 103.11(k).
    The final rule revises paragraphs (h)(2)(iv) and (h)(2)(v) to make 
clear that a bank is eligible to be treated as an exempt person only 
with respect to its domestic operations; a bank that is a listed entity 
or a subsidiary of a listed entity does not for that reason obtain a 
second ground for exemption.
2. Subsidiaries or Affiliates of Banks
    At least one commenter asked whether the exempt person definition 
included subsidiaries or affiliates of banks (so that a transaction in 
currency between a bank subsidiary and a second bank would be exempt 
from reporting in the same manner as a transaction between the 
subsidiary's bank parent and the second bank.) The bank Secrecy Act 
regulations do not generally treat bank subsidiaries as falling within 
the definition of bank for purposes of the regulations, and until that 
basic concept is re-evaluated, it is premature to extend automatic 
relief for currency transaction reporting purposes to non-bank 
subsidiaries and affiliates of banks.
3. Government Entities
    Paragraph (h)(2)(ii), which treats various federal, state, and 
local government departments and agencies as exempt persons, is 
unchanged.
    Several commenters asked about the status of tribal governments and 
tribal enterprises under paragraph (h). The definition of ``United 
States'' in section 103.11(nn) includes ``the Indian lands (as that 
term is defined in the Indian Gaming Regulatory Act),'' \9\ so that 
tribal governments are eligible to be exempt persons under paragraph 
(h); whether particular enterprises conducted on tribal lands, for 
example tribal casinos, are themselves exempt depends upon the manner 
in which they are organized and operated. Thus, a tribal casino that is 
operated as a department of a tribal government would generally qualify 
as an exempt person, but an independently operated management company 
for such a casino, or a corporation of which the tribe was a 
shareholder, would likely not so qualify. While FinCEN would be pleased 
to provide further guidance on that question on the basis of the facts 
of a particular situation, it is not feasible on the current state of 
the record do so in the Bank Secrecy Act regulations themselves.
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    \9\ The term Indian Gaming Regulatory Act is itself defined in 
Sec. 103.11(rr).
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    One commenter argued that the definition of government agency in 
paragraph (h)(2)(ii) would exclude exemption for agencies of the 
District of Columbia. That is not the result of the definition, since 
the definition of ``United States'' in section 103.11(nn) includes the 
District of Columbia.
4. Entities That Exercise Governmental Authority
    Paragraph (h)(2)(iii), which treats as exempt persons entities 
established by federal, state, or local governments, or by interstate 
compact, that exercise governmental authority, also is unchanged.
5. Listed Entities
    The Interim Rule defines an exempt person to include corporations 
listed on national securities exchanges. Several commenters suggested 
that the definition of exempt person be broadened to include 
partnerships and other non-corporations listed on those exchanges. One 
commenter pointed out that the rationale FinCEN gave for exempting 
listed corporations--i.e., the scale of enterprises listed on the 
nation's largest securities exchanges, and the variety of internal and 
external controls to which they are subject, make their use for money 
laundering sufficiently unlikely to permit relaxation of the current 
transaction reporting rules--applies to any listed entity regardless of 
its form. After consideration of such comments, Treasury has amended 
the Interim Rule to expand the definition of an exempt person in 
paragraph (h)(2)(iv) to include any entity listed on an applicable 
national securities exchange.
    A number of commenters cited the difficulty of determining whether 
a customer was listed on one of the three cited stock exchanges or was 
a subsidiary of a company so listed. As noted in the preamble to the 
Interim Rule, it is impossible to reduce the volume of currency 
transaction reports to the extent that the Interim Rule tries to do 
without creating some temporary inconvenience as the terms of the 
system change. The determinations required are straightforward and are 
to be based on easily available information, especially for financial 
professionals. FinCEN continues to believe that the degree of effort 
involved in researching whether a company's stock is listed as a 
national stock exchange, or whether a corporation is a subsidiary of a 
public company, is well within the scope of what a prudent bank should 
know about its customers and their activities.
    There is no limit on the ``listed entity'' definition based on the 
nature of a particular company's business. Thus, for example, a listed 
company that is a gaming enterprise or that issues traveler's checks or 
money orders or engages in a money remittance business as a principal 
is not for that reason denied exempt status. See, however, the 
limitation on exemption for transactions carried out by an exempt 
person as an agent for another person, as set forth in paragraph 
(h)(5).
6. Subsidiaries of Listed Entities
    The Interim Rule treats as an ``exempt'' subsidiary any subsidiary 
that is included in the consolidated federal income tax return of a 
listed corporation. FinCEN sought alternative formulations that bank 
employees would find easy to apply and that would accomplish the goals 
of the Interim Rule more effectively than the consolidated return 
formulation. At least one commenter stated that an entity that is 
listed as a subsidiary on a listed entity's SEC report 10K or an annual 
report should be considered an exempt person. After consideration of 
these comments, FinCEN has amended the definition of an exempt 
subsidiary to include any subsidiary that is organized under the laws 
of the United States or of any state and at least 51 per

[[Page 47145]]

cent of whose common stock is owned by the listed entity. Evidence of 
such ownership may be shown by any of the ways listed in paragraph 
(h)(4)(iv), including reliance upon a listed entity's Annual Report or 
Form 10-K, filed in each case by the listed entity with the Securities 
and Exchange Commission.\10\
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    \10\ Several commenters suggested that non-profit corporations 
generally be added to the list of exempt persons. FinCEN does not 
believe that a blanket provision of this sort would be workable or 
in keeping with the balance of objectives outlined in 31 U.S.C. 5313 
(d)-(g), given the variety of organizations that can claim non-
profit status.
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7. Financial Institutions Other Than Banks
    New paragraph (h)(2)(vi), which relates to financial institutions 
other than banks, has been added to the Interim Rule. This new 
paragraph clarifies that non-bank financial institutions that are, or 
are subsidiaries of, listed entities, are exempt persons only to the 
extent of their domestic operations.

C. 31 CFR 103.22(h)(3)--Designation of Exempt Person

    Paragraph (h)(3) sets forth the procedures for designating an 
exempt person. A few commenters sought clarification of the time frame 
in which a bank could designate an exempt person. At least one 
commenter stated that the Interim Rule could be interpreted as 
precluding a bank from designating an existing customer as an exempt 
person after August 15, 1996. After consideration of such comments, 
FinCEN has amended the Interim Rule, in accord with FinCEN Notice 97-1, 
to make clear that a bank can designate any customer as an exempt 
person by the close of the 30-day period beginning after the day of the 
first reportable transaction in currency with that person that is 
sought to be exempted from reporting under the terms of paragraph (h).
    At least one commenter also requested that FinCEN amend the Interim 
Rule to allow banks, when designating exempt persons, to file a list of 
its domestic bank customers instead of filing a form that identifies 
such a customer as an exempt person. As set forth in new paragraph 
(h)(3)(iii), a bank, when designating an exempt person, may either file 
an Internal Revenue Form 4789 in which line 36 is marked appropriately 
or filed, in such a format and manner as FinCEN may specify, a current 
list of its domestic bank customers.
    At least one commenter further suggested that it would be efficient 
for banks simply to file designations for all their government 
customers (as well as their bank customers), regardless of whether 
those customers engage in transactions in excess of $10,000. FinCEN 
will consider making such a change to paragraph (h) for government 
entities at an appropriate time in the future.

D. 31 CFR 103.22(h)(4)--Operating Rules for Designating Exempt Persons

    Paragraph (h)(4) continues to state general operating rules for 
designating exempt persons. Changes to the details of the operating 
rules are outlined below.
1. General Standard
    A number of commenters asked for greater specificity about the 
manner in which the determination that a customer is an exempt person 
should be made and documented. Specific questions included, for 
example, whether a bank was required to keep an ``exemption list'' of 
exempt persons, whether a signed customer statement was required for 
each exempt person, whether paper copies of filings designating exempt 
persons should be maintained by a bank, and how long records relevant 
to the exemption determination must be retained.
    The language of paragraph (h)(4)(i) has been revised to make 
explicit the general requirement, implicit in the original language, 
that a bank must document, in the manner that a reasonable and prudent 
bank would do, its determination that a customer is eligible to be 
treated as an exempt person, in compliance with the terms of paragraph 
(h). A new paragraph (h)(4)(v), discussed below, has been added to deal 
specifically with record retention.
    FinCEN believes that specific additional language is unnecessary 
and would be contrary to the spirit of the changes in the currency 
transaction filing rules that FinCEN is working with the banking 
industry to make. Because the situation of each bank is different, any 
uniform set of rules can only stifle creativity and efficiency in 
building whatever record an individual bank's situation and 
determinations warrant. Thus, for example, it would certainly be 
prudent for a bank to maintain, or to be able to retrieve, in a central 
location a list of the customers that it treats as exempt persons; but 
whether the list is separately maintained, or simply retrievable from 
general records upon need, is a matter for each bank to determine. 
Similarly many institutions, as a general rule, retain copies of 
documents filed with the Treasury Department; however, whether forms 
filed magnetically must be converted into paper copies for examination 
purposes is a matter that should be decided in accordance with general 
bank policies, rather than in a universal regulatory document.
    As in other situations, FinCEN believes that too much attention has 
in the past been paid to mechanical compliance with particular ``check 
list'' requirements, rather than to the spirit of compliance and the 
monitoring necessary effectively to deter or detect money laundering at 
the nation's financial institutions. Thus, it hesitates, in attempting 
to re-engineer the currency transaction reporting system, to recreate 
the defects of the system being replaced. FinCEN intends to communicate 
the policy determinations behind the changes in the rules to the 
federal financial institution supervisory agencies, whose authority 
includes the authority to examine for compliance with Bank Secrecy Act 
requirements, to assure, insofar as possible, that the expectations of 
compliance examiners are in accord with the terms and spirit of the new 
rules.
    At least one commenter suggested that FinCEN should bear the burden 
of listing all the entities falling within the classes of exempt 
persons set forth in paragraph (h)(2). This suggestion has not been 
adopted in the final rule. The list requirement is a flexible one and 
is amply met by reliance on publicly-available sources. For FinCEN to 
publish a list of particular exempt customer ab initio would amount to 
a licensing requirement that would neither be efficient nor feasible.
    At the same time, as indicated in the preamble to the Interim Rule, 
see 61 FR 18208, FinCEN is exploring the possibility of producing a 
nationwide list of exempt persons from filed designations. FinCEN also 
is exploring the possibility of linking its own Web Site to those of 
the national securities exchanges.
2. Governmental Entities
    A few commenters requested that FinCEN provide examples of those 
entities established under U.S., state, or local law, under an 
interstate compact, that exercise governmental authority. A sentence 
has been added to paragraph (h)(4)(ii) to cite the New Jersey Turnpike 
Authority and the Port Authority of New York and New Jersey as examples 
of entities that exercise governmental authority.
3. Listing Information
    Language has been added to paragraph (h)(4)(iii) to make it clear 
that a bank may rely, in determining whether a company is a listed 
company,

[[Page 47146]]

on information available from the ``Edgar'' electronic information 
system maintained by the Securities and Exchange Commission (http://
www.sec.gov/edgarhp.htm), and on information contained in the Web Sites 
maintained by the New York Stock Exchange ((http://www.nyse.com), the 
American Stock Exchange (http://www.amex.com), and the National 
Association of Securities Dealers (http://www.nasdaq.com).
4. Subsidiary Status
    Paragraph (h)(4)(iv) has been amended to provide banks with the 
additional options, when determining whether a person is exempt as a 
subsidiary of a listed entity, of relying upon the listed entity's 
Annual Report or Form 10-K (filed with the Securities and Exchange 
Commission) for designation of the listed entity's subsidiaries.
5. Records Maintenance
    New paragraph (h)(4)(v) has been added to the Interim Rule to make 
clear that records maintained by a bank to document its administration 
of the rules of this paragraph (h) must be maintained in accordance 
with the terms of 31 CFR 103.38, which, inter alia, requires that 
records be maintained for a period of five years.

E. 31 CFR 103.22(h)(5)--Limitation on Exemption

    Paragraph (h)(5) states that the exemption from reporting contained 
in paragraph (h)(1) does not apply to a transaction carried out by an 
exempt person as an agent of another person who is the beneficial owner 
of the funds that are the subject of a transaction in currency. At 
least one commenter requested that FinCEN eliminate this limitation. 
This requested change has not been adopted in the final rule. Such a 
change would allow an exempt person to lend its status to any person's 
transactions, thereby circumventing the purposes of carefully defining 
the classes of exempt persons.
    At least one commenter noted a difficulty involved in tracking 
deposits from large grocery stores, because some of the deposits 
involved may be monies sent to holding accounts for money order or 
traveler's check companies for which the grocery stores act as agent. 
Although FinCEN recognizes that distinguishing between the two (or 
more) sources of deposits represents an additional effort, it believes 
that the holding accounts are ultimately relatively easy to distinguish 
from the store's own operating accounts and do not commingle operating 
funds and funds used to pay for money service products sold by grocery 
stores as agents for other concerns. To the extent that the industry 
still finds that the limitation set forth in paragraph (h)(5) will 
result in unnecessary inconvenience, FinCEN will consider additional 
comments on this subject when it considers comments to the notice of 
proposed rulemaking on exemptions that appears elsewhere in today's 
edition of the Federal Register.

F. 31 CFR 103.22(h)(6)--Effect of Exemption: Limitation on Liability

    Paragraph (h)(6) continues to state the general rule that once a 
bank has complied with the terms of paragraph (h), it is protected from 
any penalty for failure to file a currency transaction report 
concerning a transaction in currency by an exempt person. The language 
set forth in paragraph (h)(6)(i) of the Interim Rule has been deleted 
in the final rule; the issue of when a bank must designate customers it 
has previously treated as exempt, is addressed in the notice of 
proposed rulemaking regarding exemptions.
    At least one commenter expressed the concern that the ``automatic 
revocation'' provisions of paragraph (h)(8), in effect, force banks to 
maintain a constant vigil of the status of entities they have 
designated as exempt persons. New paragraph (h)(6)(ii) has been added 
to clarify that, absent specific knowledge of any information that 
would be grounds for revocation, a bank is required to verify the 
status of those entities it has designated as exempt persons only once 
each year.
    A bank may, at present, elect to treat a person as exempt under 
either the administrative exemption system rules of sections 103.22(b)-
(g) or the rules of section 103.22(h). As outlined in the Interim Rule, 
and as confirmed above, the exemption procedures for each system are 
independent of the other. Thus, if a bank treats a person as exempt 
under the new exemption procedures set forth in paragraph (h), it need 
not place that person on its exempt list under the administrative 
exemption system rules, see sections 103.22(b)-(g), but, conversely, 
the fact that a person is on an exemption list (whether it is a bank, a 
government entity, or a listed company), does not eliminate the 
obligation of a bank that wants to adopt the new system from filing the 
single form designating the customer as an exempt person.
    The limitation on liability set forth in paragraph (h)(6) does not 
apply if a bank chooses to exempt a person on a basis as provided by 
the administrative exemption system. One comment found this result 
slightly puzzling, since the Interim Rule is clearly designed to 
designate those entities whose routine transactions is currency with 
banks are of little or no law enforcement value. However, even the 
Interim Rule involves some trade-off in policy outcomes, and the proper 
designation of exempt persons, to provide the Department of the 
Treasury with a list of exempt entities, is an important part of the 
overall system of which the Interim Rule is a component. The statutory 
liability limitation of 31 U.S.C. 5313(f) does not extend to banks that 
continue to use the administrative exemption system during the pendency 
of the rulemaking that would reform that system.
    One commenter on the Interim Rule argued that ``the process of 
exempting a business and the liability for same should be primarily 
borne by the customer and FinCEN.'' That is neither the scheme of the 
Bank Secrecy Act nor of this rule, and such an approach would place the 
Treasury Department, in effect, directly on the banking floor in 
dealing with a bank's customers. The final rule, like the notice of 
proposed rulemaking also issued today, is an effort to work with the 
banking industry to fashion an effective and workable exemption system.

G. 31 CFR 103.22(h)(7)--Obligation to File Suspicious Activity Reports, 
Etc

    No changes were made to this paragraph. Paragraph (h)(7) continues 
to state that the new exemption procedures set forth in paragraph (h) 
do not create any exemption, or have any effect at all, on the 
requirement that banks file suspicious activity reports with respect to 
transactions that satisfy the requirements of the rules of FinCEN, 31 
CFR 103.21, and the federal bank supervisory agencies relating to 
suspicious activity reporting. Similarly, a customer's status under 
paragraph (h) has no impact on other Bank Secrecy Act requirements 
relating to record retention or reporting. Thus, for example, the fact 
that a customer is an exempt person for purposes of the currency 
transaction reporting rules has no effect on the obligation of a bank 
to retain records of funds transfers by such person, to the extent 
required by 31 CFR 103.33(e), or to retain records in connection with 
an issuance or sale of bank or cashier's checks, money orders or 
traveler's checks to such person, as required by 31 CFR 103.29.

H. 31 CFR 103.22(h)(8)--Revocation

    Paragraph (h)(8) continues to provide that the status of an exempt 
person automatically ceases, without any action

[[Page 47147]]

or notice by the Department of the Treasury, when an entity ceases to 
be listed on the applicable stock exchange or a subsidiary of a listed 
entity ceases to have at least 51 per cent of its common stock owned by 
a listed entity. Paragraph (h)(8) explicitly refers back to the 
limitation on liability set forth in paragraph (h)(6)(ii), to make 
clear that absent specific knowledge that would be grounds for 
revocation, a bank is required to verify the status of those entities 
it has designated as exempt persons only once each year.

I. 31 CFR 103.22(h)(9)--Transitional Rule

    New paragraph (h)(9) states the transitional rule for applying new 
paragraph (h)(2)(vi). The rule provides that during the period ending 
May 1, 1998, no penalty will be imposed on a bank that treats as an 
exempt person a non-bank financial institution, to an extent beyond 
that institution's domestic operations, that is a listed entity or a 
subsidiary of a listed entity.

V. Regulatory Matters

A. Executive Order 12866

    The Department of the Treasury has determined that this final rule 
is not a significant regulatory action under Executive Order 12866.

B. Unfunded Mandates Act of 1995 Statement

    Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded 
Mandates Act''), Pub. L. 104-4 (March 22, 1995), requires that an 
agency prepare a budgetary impact statement before promulgating a rule 
that includes a federal mandate that may result in expenditure by 
state, local and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year. If a budgetary 
impact statement is required, section 202 of the Unfunded Mandates Act 
also requires an agency to designate and consider a reasonable number 
of regulatory alternatives before promulgating a rule. FinCEN has 
determined that it is not required to prepare a written statement under 
section 202 and has concluded that on balance this final rule provides 
the most cost-effective and least burdensome alternative to achieve the 
objectives of the rule.

C. Regulatory Flexibility Act

    The provisions of the Regulatory Flexibility Act relating to an 
initial and final regulatory flexibility analysis (5 U.S.C. 604) are 
not applicable to this final rule because the agency was not required 
to publish a notice of proposed rulemaking under 5 U.S.C. 553 or any 
other law.

D. Paperwork Reduction Act

    By expanding the applicable exemptions from an information 
collection that has been reviewed and approved by the Office of 
Management and Budget (OMB) under control number 1505-0063, the final 
rule significantly reduces the existing burden of information 
collection under 31 CFR 103.22. Thus, although the final rule advances 
the purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501, et 
seq., and its implementing regulations, 5 CFR Part 1320, the Paperwork 
Reduction Act does not require FinCEN to follow any particular 
procedures in connection with the promulgation of the final rule.

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.

Amendment

    For the reasons set forth above in the preamble, the interim rule 
amending 31 CFR Part 103, which was published at 61 FR 18204 on April 
24, 1996, is adopted as a final rule with the following changes:

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

    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. 5311-5330.

    2. Section 103.22 is amended by revising the second sentence in 
paragraph (a)(1) and by revising paragraph (h) to read as follows:


Sec. 103.22   Reports of currency transactions.

    (a)(1) * * * Transactions in currency by exempt persons with banks 
are not subject to this requirement to the extent provided in paragraph 
(h) of this section. * * *
* * * * *
    (h) No filing required by banks for transactions by exempt persons.
    (1) Transactions in currency of exempt person with banks. 
Notwithstanding the provisions of paragraph (a)(1) of the section, no 
bank is required to file a report otherwise required by that section, 
with respect to any transaction in currency between an exempt person 
and a bank.
    (2) Exempt person. For purposes of this section, an exempt person 
is:
    (i) A bank, to the extent of such bank's domestic operations;
    (ii) A department or agency of the United States, of any state, or 
of any political subdivision of any state;
    (iii) Any entity established under the laws of the United States, 
of any state, or of any political subdivision of any state, or under an 
interstate compact between two or more states, that exercises 
governmental authority on behalf of the United States or any such state 
or political subdivision;
    (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 Small-Cap Issues'' heading);
    (v) Any subsidiary, other than a bank, of any entity described in 
paragraph (h)(2)(iv) of this section (a ``listed entity'') that is 
organized under the laws of the United States or of any state and at 
least 51 per cent of whose common stock is owned by the listed entity; 
and
    (vi) Notwithstanding paragraphs (h)(2)(iv) and (h)(2)(v) of this 
section, any financial institution other than a bank, that is an entity 
described in paragraph (h)(2)(iv) or (h)(2)(v) of this section, to the 
extent to such financial institution's domestic operations.
    (3) Designation of exempt persons. (i) A bank must designate each 
exempt person with whom it engages in transactions in currency by the 
close of the 30-day period beginning after the day of the first 
reportable transaction in currency with that person that is sought to 
be exempted from reporting under the terms of paragraph (h) of this 
section.
    (ii) Except where the person sought to be exempted is another bank 
as described in paragraph (h)(2)(i) of this section, designation of an 
exempt person shall be made by a single filing of Internal Revenue 
Service Form 4789, in which line 36 is marked ``Designation of Exempt 
Person'' and items 2-14 (Part I, Section A) and items 37-49 (Part III) 
are completed, or by filing any form specifically designated by FinCEN 
for this purpose. The designation must be made separately by each bank 
that treats the person in question as an exempt person.
    (iii) When designating another bank as an exempt person, a bank 
must make either the filing as described in

[[Page 47148]]

paragraph (h)(3)(ii) of this section or file, in such a format and 
manner as FinCEN may specify, a current list of its domestic bank 
customers. In the event that a bank files its current list of domestic 
bank customers, the bank must make the filing as described in paragraph 
(h)(3)(ii) of this section for each bank that is a new customer and for 
which an exemption is sought under this paragraph (h).
    (iv) The designation requirements set forth in this paragraph 
(h)(3) apply whether or not the particular exempt person to be 
designated has previously been treated as exempt from the reporting 
requirements of section 103.22(a) under the rules contained in 
paragraph (b) or (e) of this section.
    (4) Operating rules for designating exempt persons. (i) Subject to 
the specific rules of this paragraph (h), a bank must take such steps 
to assure itself that a person is an exempt person (within the meaning 
of applicable provisions of paragraph (h)(2) of this section), and to 
document the basis for its conclusions and its compliance with the 
terms of this paragraph (h), 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.
    (ii) A bank may treat a person as a governmental department, 
agency, or entity if the name of such person reasonably indicates that 
it is described in paragraph (h)(2)(ii) or (h)(2)(iii) of this section, 
or if such person is known generally in the community to be a State, 
the District of Columbia, a tribal government, a Territory or Insular 
Possession of the United States, or a political subdivision or a 
wholly-owned agency or instrumentality of any of the foregoing. An 
entity generally exercises governmental authority on behalf of the 
United States, a State, or a political subdivision, for purposes of 
paragraph (h)(2)(iii) of this section, only if its authorities include 
one or more of the powers to tax, to exercise the authority of eminent 
domain, or to exercise police powers with respect to matters within its 
jurisdiction. Examples of entities that exercise governmental authority 
include, but are not limited to, the New Jersey Turnpike Authority and 
the Port Authority of New York and New Jersey.
    (iii) In determining whether a person is described in paragraph 
(h)(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, or any commonly accepted or published stock symbol guide, 
on any information contained on the Securities and Exchange Commission 
``Edgar'' System, or on any information contained in an Internet World-
Wide Web site or sites maintained by the New York Stock Exchange, the 
American Stock Exchange, or the National Association of Securities 
Dealers.
    (iv) In determining whether a person is described in paragraph 
(h)(2)(v) of this section, a bank may rely upon:
    (A) Any reasonably authenticated corporate officer's certificate;
    (B) Any reasonably authenticated photocopy of Internal Revenue 
Service Form 851 (Affiliation Schedule) or the equivalent thereof for 
the appropriate tax year; or
    (C) A person's Annual Report or Form 10-K, as filed in each case 
with the Securities and Exchange Commission.
    (v) The records maintained by a bank to document its compliance 
with and administration of the rules of this paragraph (h) shall be 
kept in accordance with the provisions of section 103.38.
    (5) Limitation on exemption. A transaction carried out by an exempt 
person as an agent for another person who is the beneficial owner of 
the funds that are the subject of a transaction in currency is not 
subject to the exemption from reporting contained in paragraph (h)(1) 
of this section.
    (6) Effect of exemption; limitation on liability. (i) No bank shall 
be subject to penalty under this part for failure to file a report 
required by section 103.22(a) with respect to a transaction in currency 
by an exempt person with respect to which the requirements of this 
paragraph (h) have been satisfied, unless the bank:
    (A) Knowingly files false or incomplete information with respect to 
the transaction or the customer engaging in the transaction; or
    (B) Has reason to believe that the customer does not meet the 
criteria established by this paragraph (h) for treatment of the 
transactor as an exempt person or that the transaction is not a 
transaction of the exempt person.
    (ii) Absent specific knowledge of any information that would be 
grounds for revocation as provided in paragraph (h)(8) of this section, 
a bank is required to verify the status of those entities it has 
designated as exempt persons only once each year.
    (iii) A bank that files a report with respect to a currency 
transaction by an exempt person rather than treating such person as 
exempt shall remain subject, with respect to each such report, to the 
rules for filing reports, and the penalties for filing false or 
incomplete reports that are applicable to reporting of transactions in 
currency by persons other than exempt persons. A bank that continues to 
treat a person described in paragraph (h)(2) as exempt from the 
reporting requirements of section 103.22(a) on a basis other than as 
provided in this paragraph (h) shall remain subject to the rules 
governing an exemption on such other basis and to the penalties for 
failing to comply with the rules governing such other exemption.
    (7) Obligation to file suspicious activity reports, etc. Nothing in 
this paragraph (h) relieves a bank of the obligation, or alters in any 
way such bank's obligation, to file a report required by section 103.21 
with respect to any transaction, including any transaction in currency, 
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 (h)).
    (8) Revocation. The status of any person as an exempt person under 
this paragraph (h) may be revoked by FinCEN by written notice, which 
may be provided by publication in the Federal Register in appropriate 
situation, on such terms as are specified in such notice. Without any 
action on the part of the Treasury Department and subject to the 
limitation on liability set forth in paragraph (h)(6)(ii) of this 
section:
    (i) The status of an entity as an exempt person under paragraph 
(h)(2)(iv) of this section ceases once such entity ceases to be listed 
on the applicable stock exchange; and
    (ii) The status of a subsidiary as an exempt person under paragraph 
(h)(2)(v) of this section ceases once such subsidiary ceases to have at 
least 51 per cent of its common stock owned by a listed entity.
    (9) Transitional rule. No penalty will be imposed for the failure 
to apply paragraph (h)(2)(vi) of this section, if a bank treats a 
person described in paragraph (h)(2)(iv) or (h)(2)(v) of this section 
as an exempt person during the period ending May 1, 1998.

    Dated: August 27, 1997.
Stanley E. Morris,
Director, Financial Crimes Enforcement Network.
[FR Doc. 97-23643 Filed 9-5-97; 8:45 am]
BILLING CODE 4820-03-M