[Federal Register Volume 63, Number 182 (Monday, September 21, 1998)]
[Rules and Regulations]
[Pages 50147-50159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24969]


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DEPARTMENT OF THE TREASURY

Financial Crimes Enforcement Network

31 CFR Part 103

RIN 1506-AA12


Amendment to the Bank Secrecy Act Regulations--Exemptions from 
the Requirement To Report Transactions in Currency--Phase II

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Final rule.

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SUMMARY: This document contains a final rule that further reforms and 
simplifies the process by which depository institutions may exempt 
transactions of retail and other businesses from the requirement to 
report transactions in currency in excess of $10,000, and restates 
generally, to reflect such changes, the text of the Bank Secrecy Act 
regulation requiring the reporting by financial institutions of 
transactions in currency. The final rule, as issued by the Financial 
Crimes Enforcement Network (``FinCEN''), constitutes a further step in 
achieving the reduction set by the Money Laundering Suppression Act of 
1994 in the number of currency transaction reports required to be filed 
annually by depository institutions, as part of a continuing program to 
reduce unnecessary burdens imposed upon financial institutions by the 
Bank Secrecy Act and increase the cost-effectiveness of the counter-
money laundering policies of the Department of the Treasury.

DATES: Effective date. October 21, 1998.
    Applicability date. See Sec. 103.22(d)(11) of the final rule 
contained in this document.

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director, 
FinCEN, (703) 905-3930; Charles Klingman, Financial Institutions Policy 
Specialist, FinCEN, (703) 905-3602; Stephen R. Kroll, Chief Counsel, 
Cynthia L. Clark, Deputy Chief Counsel, and Albert R. Zarate, Attorney-
Advisor, Office of Chief Counsel, FinCEN, (703) 905-3590.

SUPPLEMENTARY INFORMATION:

[[Page 50148]]

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 coin and currency transactions.
    Four new provisions (31 U.S.C. 5313(d) through (g)) concerning 
exemptions from the currency transaction reporting requirement 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). 31 U.S.C. 5313(d) provides that the 
Secretary of the Treasury shall exempt a depository institution from 
the requirement to report currency transactions with respect to 
transactions between the depository institution and four categories of 
entities. The requirements of that subsection are at present reflected 
in the terms of 31 CFR 103.22(h) (which is amended and redesignated as 
31 CFR 103.22(d) by the final rule published in this document).
    31 U.S.C. 5313(e) authorizes the Secretary of the Treasury to 
exempt a depository institution from the requirement to report 
transactions in currency between a depository institution and a 
qualified business customer of the institution. Subsection (e)(2) 
defines a ``qualified business customer'' as a business that

    (A) maintains a transaction account (as defined in section 
19(b)(1)(C) of the 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 this subchapter are carried out 
without requiring a report with respect to such transactions.

    Subsection (e)(3) provides that the Secretary of the Treasury shall 
establish, by regulation, the criteria for granting and maintaining an 
exemption under subsection (e)(1).
    Subsection (e)(4)(A) provides that the Secretary of the Treasury 
shall establish guidelines for depository institutions to follow in 
selecting customers for an exemption under subsection (e). Under 
subsection (e)(4)(B), those guidelines may include a description of the 
type of businesses for which no exemption will be granted under this 
subsection.
    Subsection (e)(5) provides that the Secretary of the Treasury shall 
prescribe regulations requiring each depository institution to

    (A) review, at least once each year, the qualified business 
customers of such institution with respect to whom an exemption has 
been granted under this subsection; and
    (B) upon the completion of such review, resubmit information 
about such customers, with such modifications as the institution 
determines to be appropriate, to the Secretary for the Secretary's 
approval.

    Subsection (e)(6) states that during the two-year period beginning 
on the date of enactment of the Money Laundering Suppression Act, the 
discretionary exemption rules shall be applied by the Secretary of the 
Treasury on the basis of such criteria as the Secretary determines to 
be appropriate to achieve an orderly implementation of the requirements 
of this subsection.
    Subsection (f) places limits on the liability of a depository 
institution in connection with a transaction that has been exempted 
from reporting under either 31 U.S.C. 5313 (d) or (e) and provides for 
the coordination of any exemption with other Bank Secrecy Act 
provisions, especially those relating to the reporting of suspicious 
transactions. Finally, subsection (g) defines ``depository 
institution'' for purposes of the new exemption provisions.
    Section 402(b) of the Money Laundering Suppression Act states 
simply that in administering the new statutory exemption provisions:

    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].

    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). The 
administrative exemption procedures at which the statutory changes are 
directed are found in 31 CFR 103.22(b)(2) and (c) through (f); those 
procedures have not succeeded in eliminating the reporting of routine 
currency transactions by businesses.
    Several reasons have been given for this lack of success. These 
include the retention by banks of liability for making incorrect 
exemption determinations, and the complexity of the administrative 
exemption procedures (which require banks, for example, to assign 
dollar limits to each exemption based on the amounts of currency 
projected to be needed for the customary conduct of the exempt 
customer's lawful business, and which increase the risk of liability to 
banks that grant exemptions). Finally, advances in technology have made 
it less costly for some banks simply to report all currency 
transactions rather than to incur the administrative costs (and risks) 
of exempting customers and then administering the terms of particular 
exemptions properly.
    The problems created by the prior administrative exemption system 
also include that system's failure to provide the Treasury with 
information needed for thoughtful administration of the Bank Secrecy 
Act. Although banks are required to maintain a centralized list of 
exempt customers and to make that list available upon request, see 31 
CFR 103.22(f) and (g), there is no way short of a bank-by-bank request 
for lists (with the time and cost such a request would entail both for 
banks and government) for Treasury to learn the extent to which routine 
transactions are effectively screened out of the system or (for that 
matter) the extent to which exemptions have been granted in situations 
in which they are not justified.
    In crafting the 1994 statutory provisions relating to mandatory and 
discretionary exemptions, Congress sought to alter the burden of 
liability and uncertainty that the administrative exemption system 
created. The statutory provisions embraced several categories of 
transactions that were either already partially exempt or plainly 
eligible for

[[Page 50149]]

exemption under the prior administrative exemption system.1
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    \1\ As noted below, transactions in currency between domestic 
banks were already exempt from reporting, see 31 CFR 
103.22(b)(1)(ii), and ``[d]eposits or withdrawals, exchanges of 
currency or other payments and transfers by local or state 
governments, or the United States or any of its agencies or 
instrumentalities'' were one of the categories of transactions 
specifically described as eligible for exemption by banks. See 31 
CFR 103.22(b)(2)(iii).
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II. Phase I--Final Rule

    On September 8, 1997, a final rule revising paragraph (h) of 31 CFR 
103.22 was published in the Federal Register. See 62 FR 47141. The 
final rule modified (and as modified, superseded) an interim rule on 
exemptions (collectively, ``Phase I'') that FinCEN published with 
request for comments in April 1996. See 61 FR 18204. The Phase I final 
rule exempted from the requirement to report transactions in currency 
in excess of $10,000, transactions between banks 2 and (i) 
other banks operating in the United States; (ii) government departments 
and agencies, and entities that otherwise exercise governmental 
authority; (iii) entities listed on certain national stock exchanges; 
and (iv) certain subsidiaries of those listed entities.
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    \2\ The Phase I interim and final rules, as well as the notice 
of proposed rulemaking to which the final rule contained in this 
document relates, used the term ``bank'' to define the class of 
financial institutions to which the rules respectively 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. The final rule contained in 
this document continues to use the term ``bank,'' rather than 
depository institution.
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    As FinCEN explained when the Phase I interim rule was published, 
the transactions in currency of bank customers in those categories were 
either required to be exempt from reporting by statute, were already 
effectively exempt from reporting under the terms of 31 CFR Part 103, 
or, in the case of listed entities and certain of their subsidiaries, 
involved enterprises whose routine currency transaction reports are of 
little or no value to law enforcement officials. Recognition of 
exemption under the Phase I interim and final rules required simply the 
filing of a single document identifying the exempt person and the 
depository institution that exempts it. Transactions in currency, like 
other transactions, remained subject to the requirement that banks 
report suspicious transactions.

III. Phase II--Notice of Proposed Rulemaking

    On the same day the Phase I final rule was published in the Federal 
Register, FinCEN published a notice of proposed rulemaking (the 
``Notice'') to further reform and simplify the process by which banks 
may exempt, from the requirement to report transactions in currency in 
excess of $10,000, transactions involving certain of their customers. 
See 62 FR 47156. As FinCEN stated in the Notice, the objective of the 
second stage reform (``Phase II'') was to provide, to the extent 
possible, a blanket relief, similar to that contained in Phase I, for 
those categories of business enterprise that could not easily be 
described in a single phrase and that were not subject to the sorts of 
regulatory and marketplace oversight that shape the environment of 
publicly-held companies. To accomplish that goal, while still providing 
federal authorities with the tools to monitor and prevent abuse, FinCEN 
proposed a pared-down exemption system.
    In the Notice, FinCEN specifically proposed the following changes: 
(i) The addition of two new classes of exempt persons, non-listed 
businesses and payroll customers; (ii) the addition of special 
requirements governing the exemption of non-listed businesses and 
payroll customers, namely, an initial projection of such exempt 
person's annual currency needs and an annual filing listing the 
aggregate currency deposits and withdrawals of such exempt person 
during the preceding year; (iii) the addition of five new operating 
rules governing the exemption of non-listed businesses and payroll 
customers; (iv) the deletion of paragraphs (b) through (g) of present 
section 103.22 (the ``prior'' administrative exemption system); (v) the 
redesignation of paragraph (h) (reflecting the terms of the Phase I 
final rule) of section 103.22 as paragraph (d) of that section; and 
(vi) the addition of certain conforming changes to the redesignated 
paragraph (d).
    On November 28, 1997, FinCEN published a notice (the ``November 
Extension'') in the Federal Register extending the comment period for 
the Notice and soliciting additional comments on certain matters 
relating to the Notice. See 62 FR 63298. The decision to extend the 
comment period and the request for additional comments resulted from 
discussions held at an open meeting to discuss the Notice on November 
7, 1997.3
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    \3\ FinCEN announced the public meeting in the Federal Register 
on October 31, 1997. See 62 FR 58909.
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    In the November Extension, FinCEN stated that, in light of the 
comments made at the open meeting, it did not believe additional 
comments concerning the proposed estimation and aggregate currency 
reporting provisions were necessary. FinCEN did, however, indicate that 
it was important that alternatives to those proposals be brought 
forward by interested parties, and it specifically sought comments on 
an alternative described in the November Extension. That alternative 
would have required a bank, when designating a non-listed business or a 
payroll customer as an exempt person, to (i) include on its initial 
designation form a statement of the manner in which it applies its 
``know-your-customer'' standards to customers whose currency 
transactions it exempts from the currency transaction report 
requirements, and (ii) certify in an annual renewal of exempt status 
filing that during the preceding year there were no transactions 
involving any accounts of the person at the bank that would have 
required the filing of a suspicious activity report. FinCEN also sought 
comments on the impact of changing the word ``shall'' to ``may'' in 
proposed 103.22(d)(5)(v), to provide a bank with the option, but not 
the necessity, of exempting a customer on a bank-wide basis. Lastly, 
FinCEN repeated its request, made in the Notice, for comments relating 
to the treatment for exemption purposes of currency deposits that 
commingle funds derived from eligible business activities with funds 
derived from ineligible business activities.

IV. Summary of Comments and Revisions

A. Comments on the Notice--Overview

    FinCEN received 70 written responses to the Notice. Of these, 51 
were submitted by banks or bank holding companies, 8 by financial 
institution trade associations, 4 by credit unions, 2 by law firms, 2 
by private individuals, and 1 by a compliance software designer.
    Comments on the Notice focused primarily on the following proposed 
provisions: (i) The projection and annual aggregate currency reporting 
requirements (including possible alternatives); (ii) the twelve-month 
waiting period governing the designation of non-listed businesses and 
payroll customers as exempt persons; (iii) the operating rule making a 
sole proprietorship eligible for exemption only to the extent of its 
business (as opposed to personal) transactions; (iv) the operating rule 
making certain businesses ineligible for designation as exempt persons 
to the extent they engage in one or more listed ineligible business 
activities; and (v) the limitation on exemption with respect to

[[Page 50150]]

transactions carried out by an exempt person as an agent for a third 
party. Regarding the latter three provisions, commenters expressed 
particular concern over the application of those provisions to 
situations where their customers commingle funds derived from personal 
transactions or ineligible business activities with eligible business 
activities.
    After full and careful consideration of all of the comments, 31 CFR 
103.22 is revised to read as stated in the final rule.

B. Final Rule

    The format of the final rule is generally consistent with the 
Notice. The terms of the final rule, however, differ from the terms of 
the Notice in the following significant respects:
     Banks are not required to initially estimate and then 
report annually the aggregate currency deposits and withdrawals of any 
customer that is designated as a non-listed business or payroll 
customer;
     Banks are required to renew exemptions for non-listed 
business and payroll customers every two years rather than every year;
     Banks must maintain a system of monitoring the 
transactions in currency of each exempt customer for any and all 
reportable suspicious activity;
     As part of the required biennial renewal, banks must 
certify that they have complied with the requirement to maintain a 
system of monitoring for reportable suspicious activity;
     Banks may, but need not, treat all eligible accounts of a 
person at a single institution as exempt;
     Banks are not required to segregate funds derived from 
non-business activities when exempting a transaction in currency of a 
sole proprietorship; and
     Banks may treat a business that engages in multiple 
activities as a non-listed business so long as that business does not 
engage primarily in one or more of those activities described in 
paragraph (d)(6)(viii).
    The changes adopted in the final rule are intended to improve, 
clarify, and refine the rule's provisions in light of the objectives 
for implementation of 31 U.S.C. 5313(d)-(g) that FinCEN outlined when 
the Phase I 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.
    Eliminating the administrative exemption system in section 103.22 
requires the deletion of the bulk of that section, paragraphs (b)-(g). 
Because that is so, and because the structure and many of the rules of 
section 103.22(h) also apply to the proposed reformed exemption system 
for other customers, the final rule completely restates section 103.22 
so that its terms may be presented clearly.
    For convenience, the redistribution of the provisions of prior 
section 103.22 may be summarized as follows:

                                               Distribution Table                                               
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                 Prior 103.22                                              New 103.22                           
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No provision.................................  103.22(a).                                                       
103.22(a)(1):                                                                                                   
    Sentences 1-2............................  Deleted in part; 103.22(b)(1).                                   
    Sentences 3-4............................  103.22(c)(2).                                                    
103.22(a)(2)(i)-(ii).........................  103.22(b)(2)(i)-(ii).                                            
103.22(a)(2)(iii)............................  103.22(c)(3).                                                    
103.22(a)(3).................................  Deleted in part; 103.22(b)(1), 103.22(c)(2).                     
103.22(a)(4).................................  103.22(c)(1).                                                    
103.22(b)....................................  Deleted, except 103.22(b)(1)(iii) and 103.22(b)(2)(iv).          
103.22(b)(1)(iii)............................  103.22(d)(1).                                                    
103.22(b)(2)(iv).............................  103.22(d)(2)(vii).                                               
103.22(c)....................................  Deleted.                                                         
103.22(d)....................................  Deleted.                                                         
103.22(e)....................................  Deleted.                                                         
103.22(f)....................................  Deleted.                                                         
103.22(g)....................................  Deleted.                                                         
103.22(h)(1) 4...............................  Deleted in part; 103.22(d)(1).                                   
103.22(h)(2)(i)-(iii)........................  103.22(d)(2)(i)-(iii).                                           
103.22(h)(2)(iv), (vi).......................  103.22(d)(2)(iv).                                                
103.22(h)(2)(v), (vi)........................  103.22(d)(2)(v).                                                 
No provision.................................  103.22(d)(2)(vi).                                                
No provision.................................  103.22(d)(2)(vii).                                               
103.22(h)(3)(i)-(ii).........................  103.22(d)(3)(i).                                                 
103.22(h)(3)(iii)............................  103.22(d)(3)(ii).                                                
103.22(h)(3)(iv).............................  103.22(d)(3)(i).                                                 
No provision.................................  103.22(d)(4).                                                    
No provision.................................  103.22(d)(5)(i)-(ii).                                            
103.22(h)(4)(i)-(iv).........................  103.22(d)(6)(i)-(iv).                                            
103.22(h)(4)(v)..............................  103.22(d)(6)(x).                                                 
No provision.................................  103.22(d)(6)(v)-(ix).                                            
103.22(h)(5).................................  103.22(d)(7).                                                    
103.22(h)(6)(i)..............................  103.22(d)(8)(i).                                                 
103.22(h)(6)(ii).............................  103.22(d)(8)(ii).                                                
103.22(h)(6)(iii)............................  103.22(d)(8)(iii).                                               
103.22(h)(7).................................  103.22(d)(9)(i).                                                 
No provision.................................  103.22(d)(9)(ii).                                                
103.22(h)(8).................................  103.22(d)(10).                                                   
103.22(h)(9).................................  Deleted.                                                         

[[Page 50151]]

                                                                                                                
No provision.................................  103.22(d)(11).                                                   
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\4\ All references to paragraph (h) of section 103.22 are to the final rule that was published in the Federal   
  Register on September 8, 1997. See 62 FR 47141.                                                               

V. Section-by-Section Analysis

A. 103.22(a)--General

    Paragraph (a) continues to describe generally the scope and 
organization of restated Sec. 103.22. One commenter asked that FinCEN 
add language to this paragraph indicating that banks are not required 
to exempt certain transactions from the requirement to report 
transactions in currency in excess of $10,000. FinCEN believes that 
such a change is unnecessary; the last sentence of paragraph (a) (as 
proposed and as adopted in the final rule) already refers to rules 
``permitting'' banks to exempt certain transactions from the reporting 
requirement.

B. 103.22(b)--Filing Obligations

    Paragraph (b) continues to contain the blanket statement of the 
obligation of financial institutions to report transactions in currency 
in excess of $10,000, as well as a separate statement describing the 
filing obligations of casinos.
    Paragraph (b) also continues to state that the general obligation 
to report transactions in currency in excess of $10,000 does not apply 
to payments or transfers made solely in connection with the purchase of 
postage or philatelic products from the Postal Service. As stated in 
the Notice, this change from the administrative exemption system 
reflects a proposed amendment to the treatment of the Postal Service, 
for purposes of the Bank Secrecy Act, that was published as part of a 
set of proposed rules relating to money services businesses (``MSBs'') 
on May 21, 1997. See 62 FR 27890. FinCEN received no comment on this 
change.

C. 103.22(c)--Aggregation

    Paragraph (c) continues to restate the reporting rules applicable 
to multiple branches of financial institutions and multiple 
transactions of their customers. Those rules reflect, with one 
exception relating to recordkeeping facilities, the terms of prior 
paragraphs (a)(1) and (a)(4) of section 103.22. As an analogue to a 
change (discussed below) that permits affiliated banks to make a single 
designation of each exempt person, the Notice proposed a change 
clarifying that for purposes of the currency transaction reporting 
requirements, a financial institution includes not only all domestic 
branch offices, but also any recordkeeping facility, wherever located, 
that contains records relating to the transactions of the institution's 
domestic branch offices. The only comment that FinCEN received 
concerning recordkeeping facilities stated that the change would create 
an excessive burden on large banks because such banks typically have 
central recordkeeping facilities. Given the utility of treating a 
recordkeeping facility as a financial institution, particularly in 
cases in which affiliated banks make a single designation of exempt 
person, and that the commenter did not explain how central 
recordkeeping could lead to an excessive reporting burden on banks, the 
proposal regarding recordkeeping facilities is adopted in the final 
rule.

D. 103.22(d)--Transactions of Exempt Persons

1. General
    Paragraph (d)(1) continues to state generally that, subject to the 
limitation on exemption set forth in paragraph (d)(7), no bank is 
required to file a currency transaction report otherwise required by 
paragraph (b) with respect to any transaction in currency between an 
exempt person and such bank.5 This paragraph also adopts the 
language set forth in the Notice that states that a non-bank financial 
institution need not file a currency transaction report with respect to 
a transaction in currency between the institution and a commercial 
bank. That provision is reflected in paragraph (b)(1)(iii) of prior 
section 103.22.
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    \5\ FinCEN anticipates that Internal Revenue Service Form 4789 
(the form currently used to file a currency transaction report) may 
be revised at some point to require that a bank check a box when it 
files a currency transaction report with respect to a transaction 
conducted by an exempt person. The purpose of such a requirement 
would be to provide FinCEN with a more accurate estimate of the 
number of currency transactions reports required to be filed under 
the revised exemption system.
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    At least one commenter suggested that FinCEN clarify, in light of, 
inter alia, the Right to Financial Privacy Act, 12 USC 3413 et seq., 
that a bank must continue to file currency transaction reports for 
particular customers otherwise eligible for treatment as exempt persons 
if it elects not to use the reformed exemption system for those 
customers. The retention in paragraph (d)(1) of the phrase ``otherwise 
required by paragraph (b)'' is meant to convey that very point--namely, 
that a bank is required to file a currency transaction report regarding 
a transaction in currency in excess of $10,000 unless the bank follows 
the procedures set forth in paragraph (d) for designating the customer 
involved as an exempt person so that transactions by that customer are 
exempt from the currency transaction reporting requirement.
2. Exempt Person
    The final rule adopts the two classes of exempt person introduced 
in the Notice--namely, non-listed businesses and payroll customers. In 
addition, the final rule restates, with two minor technical changes, 
the existing classes of exempt person (set forth in prior section 
103.22(h)(2)). First, the phrase ``or analogous equity interest'' has 
been added after the term ``common stock'' in paragraph (d)(2)(v) to 
make clear that any subsidiary of any listed entity may be treated as 
an exempt person, regardless of whether the subsidiary has adopted the 
corporate form of business. Thus, any subsidiary of a listed entity may 
be treated as an exempt person so long as 51 per cent of the 
subsidiary's equity interest is owned by the listed entity. Second, the 
terms of prior paragraph (h)(2)(vi), stating that in the case of non-
bank financial institutions, listed entities and their subsidiaries may 
be treated as exempt persons only to the extent of their domestic 
operations, have been incorporated into paragraphs (d)(2)(iv) and (v).
    Paragraphs (d)(2)(vi) and (vii) continue to require that any 
business must have been a bank customer for twelve months before it is 
eligible for exemption as a non-listed business or a payroll customer. 
Several commenters argued that this twelve-month period was excessive 
(particularly compared to the two-month minimum period that has evolved 
administratively under prior paragraphs (b)(2) and (d) of section 
103.22) and would discourage customers from changing banks.
    As stated in the Notice, the ten-month difference in time periods 
is justified by the elimination of virtually all of the

[[Page 50152]]

other requirements of the prior administrative exemption system. Under 
the reformed system, a bank will be able to exempt the transactions in 
currency of a non-listed business or payroll customer simply by the 
one-time filing of a form that identifies the exempt person and the 
exempting bank, and by renewing that initial designation every two 
years. Thus, banks no longer will be confined to exempting only those 
transactions falling within certain ``permitted'' ranges. In addition, 
banks will no longer be required to prepare and submit signed exempt 
statements, or to maintain mandatory exemption lists. Given the removal 
of these time-consuming procedures, coupled with the need to keep some 
``tension'' in the liberalized exemption system so that it does not 
become a vehicle for more efficient money laundering, FinCEN believes 
that a ten-month difference is warranted.
    The final rule also adopts in paragraph (d)(2)(vi), with one minor 
change, the definition of a non-listed business set forth in the 
Notice. The definition, based in large part on 31 U.S.C. 5313(e)(2), 
confines permissible exemptions to bank customers located in the United 
States that have transaction account relationships with the exempting 
bank involving the recurring use of currency in amounts exceeding 
$10,000. The term ``United States'' has been added to the clause after 
the comma in paragraph (d)(2)(vi)(C), to make clear that a non-listed 
business must be incorporated or organized under the laws of the United 
States or a State, or must be registered as and eligible to do business 
within the United States or a State. The term ``United States'' is 
specifically defined in 31 CFR 103.11(nn) to include, among other 
things, the District of Columbia and the Territories and Insular 
Possessions of the United States.
    The final rule also continues to track the structure described 
above in the context of defining a payroll customer. Thus, paragraph 
(d)(2)(vii) requires that any person must have been a bank customer for 
at least twelve months before it is eligible for exemption as a payroll 
customer, and limits such designation to bank customers who regularly 
withdraw more than $10,000 to pay their United States employees. For 
consistency with the preceding paragraph, and in response to at least 
one comment that sought clarification of the term ``U.S. resident'' in 
the Notice, paragraph (d)(2)(vii) has been changed to state that an 
exemptible payroll customer must be incorporated or organized under the 
laws of the United States or a State, or must be registered as and 
eligible to do business within the United States or a State.
3. Initial Designation of Exempt Persons
    Paragraph (d)(3) continues to state generally that, when initially 
designating one of its customers as an exempt person, a bank must make 
a one-time filing (using the form now used to file a currency 
transaction report, until such time as FinCEN issues a form 
specifically for this purpose) that identifies the exempt person and 
the exempting bank. With respect to its bank customers who are 
themselves banks, the exempting bank will have the option in the future 
of filing its current list of bank customers in such a format and 
manner as FinCEN may specify.
    The Notice included a provision that would have required a bank, 
when designating a non-listed business or payroll customer as an exempt 
person, to include a projection of the exempt person's annual currency 
deposits and withdrawals. Most commenters objected to this proposal. 
According to these commenters, any projections of currency activity 
would amount to ``little more than guesswork'' because banks do not 
have in place the systems capable of tracking currency activity in this 
manner. A few commenters also expressed apprehension over a bank 
incurring liability if it should significantly underestimate the 
currency activity of one of its customers.
    Several commenters also expressed reservations about the 
alternative that FinCEN outlined in the November Extension. That 
alternative would have required a bank to describe the manner in which 
it applies its ``know-your-customer'' standards to the tracking of 
currency deposits of its commercial customers. At least one commenter 
noted that this requirement would be superfluous, given that a bank's 
exemption process and currency tracking system is reviewed in detail 
during its BSA examination and that any application of a bank's know-
your-customer policy will be monitored by bank examiners in any event.
    Based on these comments, and mindful of the goal to create a 
reformed exemption system that is cost-effective and efficient, the 
final rule includes neither a requirement that a bank include in its 
initial designation a projection of its exempt customers' currency 
activity, nor a requirement that the bank describe in that designation 
the manner in which the bank applies its ``know-your-customer'' 
policies to exempt customers.
4. Annual Review
    Paragraph (d)(4) makes explicit the requirement that a bank verify, 
at least once each year, the status of all those entities it has 
designated as exempt persons. This annual review requirement was 
implicit in the terms of proposed paragraph (d)(7)(iii), which would 
have required that, absent specific knowledge of any information that 
would be grounds for revocation, a bank verify the status of those 
entities it has designated as exempt persons only once each year. 
FinCEN notes that this requirement to annually review customers 
designated as exempt persons is reflected both in the terms of 31 
U.S.C. 5313(e)(5) and in the administrative practice surrounding the 
superseded exemption system.
    Paragraph (d)(4) also states that a bank must review at least 
annually the application to each account of a non-listed business or 
payroll customer of the monitoring system required to be maintained by 
paragraph (d)(9)(ii). This language has been added to help ensure that 
the reformed system is not exploited by criminals as a more efficient 
vehicle for money laundering.
5. Biennial Filing With Respect to Certain Exempt Persons
    The Notice would have required banks, in the case of non-listed 
businesses and payroll customers, to file annual updates containing a 
statement of the exempt person's annual currency deposits and 
withdrawals through all transaction accounts for the preceding year.
    Many commenters argued adamantly against an annual aggregate 
currency reporting requirement. Those commenters stressed that banks do 
not have the automated systems in place to comply with such a 
requirement, and that the cost of implementing such systems would be 
unreasonably high. Many commenters also maintained that, rather than 
comply with an annual aggregate currency reporting requirement, banks 
would choose to continue to file currency transaction reports on 
transactions involving exempt persons.
    Several commenters also voiced their dissatisfaction with the 
alternative that FinCEN outlined in the November Extension. That 
alternative would have required a bank to certify that, during the 
preceding year, there was no transaction involving any accounts of the 
exempt person at the bank that would have required the bank to file a 
suspicious transaction report with respect to that person under 31 CFR 
103.21. At least one commenter

[[Page 50153]]

expressed the fear that this certification would be viewed as a 
warranty that no suspicious activity occurred, and that banks would be 
unwilling to risk civil or criminal liability by making such a 
statement.
    In response to these comments, FinCEN has deleted the provision 
requiring annual statements of the aggregate currency deposits and 
withdrawals of non-listed businesses and payroll customers. Instead of 
requiring annual currency statements, the final rule requires simply 
that banks maintain a system of monitoring the transactions in currency 
of non-listed businesses and payroll customers for suspicious activity, 
see paragraph (d)(9)(ii), and renew the exempt status of those 
customers every two years. See paragraph (d)(5)(ii). As part of that 
biennial renewal, banks must certify that their system of monitoring 
the transactions in currency of such exempt persons for suspicious 
activity has been applied as necessary, but at least annually, to the 
account of the exempt person to whom the biennial renewal applies. See 
id.
    The filing required by paragraph (d)(5) need only be made once 
every two years. While the terms of 31 U.S.C. 5313(e)(5) contemplate an 
annual review, the statute does not explicitly set a time for the 
filing of updated information garnered as a result of that review. In 
light of at least a few comments suggesting that banks be required to 
file updated information less frequently than once a year, the final 
rule requires banks to renew exemption status every two years.
    The date on which renewals must be filed also has changed from the 
Notice. At least one commenter suggested that the proposed date of 
February 28 be changed because it coincides with the time period in 
which banks must make other regulatory filings. The final rule 
therefore adopts the date of March 15 as the date on which biennial 
renewals must be filed.
    Consistent with the Notice, paragraph (d)(5) states that biennial 
renewals also must include information about any change in control of 
the exempt person of which the bank knows or should know based on its 
records. At least one commenter contended that the ``should know'' 
standard essentially requires a bank to review constantly the 
information it possesses on each of its exempt customers, and therefore 
would unreasonably burden large banks where there are potentially many 
points of contact between the customer and the bank.
    That the ``should know'' standard requires a bank to exercise some 
degree of due diligence when renewing the exempt status of one of its 
customers is wholly intentional. This concept of due diligence is 
entirely consistent with the language set forth in the Phase I final 
rule, which states that a bank must, when applying the terms of the 
reformed exemption system, take such steps 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. 
Indeed, as one commenter noted, ``no institution would exempt a 
customer, either under the new or old system, without first engaging in 
extensive due diligence.'' Thus, the final rule requires biennial 
renewals to include information concerning a change in control of which 
a bank knows or should know based on its records.
6. Operating Rules
    The final rule adopts, with a few modifications, the five operating 
rules introduced in the Notice relating to the Phase II rules.
    a. Paragraph (d)(6)(v) states that a bank may aggregate all 
customer accounts to apply the exemption provisions to that customer. 
In response to several comments, the word ``shall'' in the Notice has 
been changed to ``may,'' to provide a bank with the option of exempting 
a customer on a bank-wide basis and counting all accounts to determine, 
for example, whether a customer's cash withdrawals or deposits exceed 
$10,000. To ensure consistency in the treatment of their exempt 
customers by banks, a sentence has been added in the final rule that 
makes clear that if a bank elects to treat all transaction accounts of 
a customer as a single account, the bank must continue to treat the 
accounts as a single account for Bank Secrecy Act purposes thereafter.
    b. Paragraph (d)(6)(vi) permits affiliated banks to make a single 
designation of an exempt person, that will apply to all accounts of the 
person at all banks within the affiliated group. The language in the 
Notice pertaining to projected and annual currency transaction activity 
has been deleted.
    c. Paragraph (d)(6)(vii) states that sole proprietorships may be 
treated as either non-listed businesses or payroll customers if they 
otherwise meet the requirements for treatment as such exempt persons. 
The Notice included provisions that would have made certain accounts of 
a sole proprietorship ineligible for exemption to the extent they are 
``personal'' accounts, or otherwise commingle personal and business 
funds. Several commenters argued against these limitations, stating 
that it would be difficult, if not impossible, for banks to distinguish 
between personal and business-related transactions in currency. Again, 
mindful of the goal to create a reformed exemption system that works, 
and given that banks are under an obligation to report suspicious 
activity concerning the transactions in currency of their exempt 
customers, including sole proprietorships, the final rule does not 
include a provision that would require banks to track commingled funds. 
However, it should be noted that only ``commercial accounts'' are 
eligible; nothing in the final rule permits the exemption of a sole 
proprietor's personal bank accounts.
    d. Paragraph (d)(6)(viii) lists those businesses that may not be 
exempted under the reformed exemption system as non-listed companies 
(although they may qualify for exemption under the more limited payroll 
customer definition). The Notice sought comments on the treatment of 
businesses with multiple activities of which one is an activity for 
which an exemption is barred. In addition, both the Notice and the 
November Extension solicited comments on the advisability of requiring 
multiple-activity businesses to segregate funds derived from eligible 
business activity from those derived from ineligible business activity, 
in order to be eligible for treatment as an exempt person.
    Several commenters suggested that a multiple-activity business 
should be eligible for treatment as an exempt person because a contrary 
rule would make many of its customers ineligible for treatment as 
exempt persons, in particular grocery stores. According to those 
commenters, such multiple-activity businesses, as a matter of common 
practice, commingle funds derived from different activities, and would 
not pay the cost of maintaining multiple accounts in order to avail 
themselves of the advantages of the reformed exemption system.
    In light of these comments, the final rule simply states that a 
business that engages in multiple business activities may be treated as 
a non-listed business so long as that business does not engage 
primarily in one or more of those activities described in paragraph 
(d)(6)(viii)--i.e., no more than 50% of its gross revenues is derived 
from ineligible business activity. FinCEN believes that this change 
will benefit banks by providing them with a bright-line test (the same 
one, FinCEN notes, that has evolved around the administrative practice 
surrounding the prior exemption system) for determining

[[Page 50154]]

whether to treat multi-activity businesses as exemptible non-listed 
businesses. To further facilitate the use of the reformed exemption 
system, the final rule does not include a provision that would require 
a multiple-activity business to segregate commingled funds to be 
eligible for treatment as an exempt person.
    e. Paragraph (d)(6)(ix) defines a transaction account for purposes 
of proposed paragraph (d) as any account described in section 
19(b)(1)(C) of the Act, 12 U.S.C. 461(b)(1)(C). As stated in the 
Notice, this definition does not include any other accounts not 
described in 12 U.S.C. 461(b)(1)(C), such as money market accounts. 
Thus, the definition of a transaction account in the proposed rule is 
narrower than the definition of the same term that is set forth at 31 
CFR 103.11(hh). Paragraph (d)(6)(ix) also provides, consistent with the 
Notice, that a person may be exempt either as a non-listed business or 
as a payroll customer only to the extent of such person's transaction 
accounts.
    FinCEN received several comments requesting that the definition of 
a transaction account be broadened. Because the terms of 31 U.S.C. 
5313(e)(2)(A) specifically define a transaction account by reference to 
12 U.S.C. 461(b)(1)(C), the final rule adopts the definition of a 
transaction account set forth in the Notice. Should the above 
definition of a transaction account prove too difficult to apply, 
FinCEN will entertain requests for administrative relief from the 
application of that definition.
7. Limitation on Exemption
    Paragraph (d)(7) carries over the terms of prior paragraph 
103.22(h)(5) and states that the exemption from reporting contained in 
paragraph (d)(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.6 With regard to exempt customers acting as agents 
for third parties, a few commenters noted that it was common practice 
for those customers to commingle the funds derived from their agent 
activities with those funds derived from their other business 
activities. Because of the difficulty in distinguishing between the two 
kinds of funds, FinCEN was asked not to adopt a rule that would require 
customers to segregate funds derived from agent activities to be 
eligible for treatment as an exempt person.
---------------------------------------------------------------------------

    \6\ FinCEN indicated that it would consider additional comments 
on this subject when it issued the Phase I final rule. See 62 FR 
47141, 47146.
---------------------------------------------------------------------------

    Given these comments, the final rule does not require that an 
exempt person segregate agent-derived funds to be eligible for 
treatment as an exempt person. However, the language of paragraph 
(d)(7)(relating to transactions carried out by an exempt person as an 
agent for another), has not been deleted. The exemption procedures will 
apply only to transactions conducted for the account of the exempt 
person, not for the account of a third party who is not otherwise an 
exempt person. See 31 U.S.C. 5313(f)(1)(B) and paragraph (d)(8)(ii) of 
the final rule.
    It should be noted that a bank customer that commingles funds from, 
e.g., the sale of money orders or of goods sold on consignment, with 
its normal business receipts, for deposit purposes into its own general 
account engages in a transaction that is exempt or not depending upon 
the customer's own status, regardless of the fact that a portion of the 
funds are subject to a potential equitable or other lien by a third 
party (the issuer of the money orders or the consignor of the goods) if 
the customer does not pay an amount equal to the money order or 
consignment sales proceeds over to the issuer or consignor. If instead, 
the business selling the money orders or consigned goods deposits the 
funds directly into an account opened by the money order issuer or the 
goods' consignor, the eligibility of the transaction for exemption 
would depend upon the status of the issuer or consignor.
8. Limitation on Liability
    Paragraph (d)(8)(i) generally states, consistent with the Notice, 
that once a bank has complied with the requirements of paragraph (d), 
it is protected from any penalty for failure to file a currency 
transaction report concerning a transaction in currency by an exempt 
person.
    Paragraph (d)(8)(ii) states that subject to the specific terms of 
paragraph (d), and absent any specific knowledge of any information 
indicating that a customer no longer meets the requirements of an 
exempt person, a bank satisfies the requirements of paragraph (d) if it 
continues to treat that customer as an exempt person until the date of 
that customer's next periodic review. This language is meant to 
harmonize the requirement, contained in paragraph (d)(4), that banks 
review the status of their exempt customers at least once a year, with 
the provisions relating to the revocation of a customer's exempt status 
that are set forth at paragraph (d)(10).
9. Obligations to File Suspicious Activity Reports and Maintain a 
System to Monitor Transactions in Currency
    Paragraph 103.22(d)(9)(i) states that the reformed exemption system 
does not create any exemption from, or have any negative effect at all 
on, the requirement that banks file suspicious transaction reports with 
respect to transactions that satisfy the requirements of the rules of 
FinCEN (31 CFR 103.21), the federal bank supervisory agencies, or both, 
relating to suspicious activity reporting. See 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). Indeed, as pointed out in the notice of proposed 
rulemaking, the operation of a coordinated and uniform suspicious 
transaction reporting system is a basis for the revision and 
simplification of the exemption rules contained in this final rule. In 
the context of the revised CTR exemption system, the indicia of 
suspicious activity can include both specific transactions and overall 
transaction volume substantially inconsistent with the sort in which 
the particular customer normally would be expected to engage. Thus, as 
stated in the text of the rule itself, anomalous transaction trends or 
patterns (such as a sharp increase from one year to the next in the 
gross total of currency transactions made by an exempt person) may 
trigger the obligations of a bank under section 103.21.
    Paragraph (d)(9)(ii) has been added to make explicit that the 
continuing obligation to file suspicious activity reports (where 
appropriate) necessarily requires a bank to establish and maintain a 
monitoring system for non-listed business and payroll customers that is 
reasonably designed to detect those transactions in currency that would 
require a bank to file a suspicious transaction report with respect to 
an exempt person.7 FinCEN purposely has not attempted to 
describe the exact contours of an acceptable monitoring system. Because 
the situation of each bank and each customer are different, FinCEN 
believes that mandating a uniform monitoring system would be ill-
advised. From FinCEN's perspective, a monitoring system meets the 
requirements of paragraph (d)(9)(ii) if it

[[Page 50155]]

is reasonably designed to detect, for each exempt account, those 
transactions in currency that would require a bank to file a suspicious 
transaction report.
---------------------------------------------------------------------------

    \7\  The Bank Secrecy Act provides Treasury with the authority 
to condition the grant of discretionary exemptions. See 31 U.S.C. 
5313(e).
---------------------------------------------------------------------------

    The adoption of the monitoring system requirement is intended to 
advance the objectives of creating an exemption system that is simple 
and as cost-effective as possible, while still keeping some tension in 
the liberalized system. FinCEN believes that an increased emphasis on 
suspicious activity reporting with respect to transactions in currency 
of exempt persons should provide that needed tension. FinCEN further 
notes that maintaining a monitoring system reasonably designed to 
detect suspicious activity, and certifying compliance with that 
requirement, should not pose additional burdens on banks, because they 
remain subject in any event to the requirement to file reports of 
suspicious activity with respect to any transaction they exempt from 
the requirement to file currency transaction reports under the reformed 
exemption system. As explained above, the statement of the requirement 
to maintain a specific currency transaction monitoring program for 
accounts of exempt persons is limited to accounts of non-listed 
businesses and payroll customers, the classes of exempt persons with 
respect to which annual review requirements are specifically imposed by 
the final rule. However, banks are required to report suspicious 
transactions, including transactions in currency, in the accounts of 
all exempt persons (as in all other accounts) and paragraph 
(d)(9)(ii)'s more detailed specification does not by implication lessen 
the suspicious transaction reporting obligations or procedures of banks 
generally under paragraph (d)(9)(i) and 31 CFR 103.21.
10. Revocation
    Paragraph (d)(10) states that the status of an exempt person 
automatically ceases, without any action 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 or analogous equity interest owned by a 
listed entity. The phrase ``analogous equity interest'' has been added 
to reflect the change made to the definition of an exempt subsidiary 
set forth in paragraph (d)(2)(v).
11. Transitional Rule
    Paragraph 103.22(d)(11) states the transitional rules governing the 
use of the reformed exemption system. A few commenters requested that 
FinCEN provide ample time for banks to move from the prior 
administrative exemption system to the reformed system, particularly 
given that banks will need some time to address year 2000 computer 
issues. In light of these comments, the transition period stated in the 
Notice--that, in effect, provides banks until the end of the calendar 
year 1999 to make the transition to the reformed system--has been 
extended in the final rule to July 1, 2000. Provided that banks comply 
with the transition period set forth in the final rule, they may treat 
a customer as exempt under either the prior administrative exemption 
rules or the reformed exemption procedures set forth in paragraph 
103.22(d) (so long as they do so consistently) during the transitional 
period.

V. Executive Order 12866

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

VI. 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 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 this final rule provides 
the most cost-effective and least burdensome alternative to achieve the 
objectives of the rule.

VII. Regulatory Flexibility Act

    FinCEN certifies that this amendment to the regulations 
implementing the Bank Secrecy Act will not have a significant, adverse 
financial impact on a substantial number of small depository 
institutions. By adding two new classes of customers, non-listed 
businesses and payroll customers, to the list of exempt persons, the 
final rule represents a significant decrease in the reporting burden 
imposed on all depository institutions. FinCEN anticipates that the 
addition of these two new classes of exempt persons can contribute to 
at least a 2 million reduction in the number of currency transaction 
reports filed annually, and a cost reduction to depository institutions 
of $16 million. Further, the requirements placed upon depository 
institutions under the reformed exemption system, as laid out in the 
final rule, represent a substantial net decrease in the burdens 
associated with the prior exemption process. For example, depository 
institutions will no longer be required to prepare and submit signed 
exemption statements, or to maintain customer exempt lists. Under the 
reformed system, a depository institution will be able to exempt the 
transactions in currency of an exempt person simply by the one-time 
filing of a currency transaction report form that identifies the exempt 
customer and the exempting depository institution, and, in the case of 
non-listed businesses and payroll customers, renewing the exempt status 
of its exempt customers every two years.

VIII. Paperwork Reduction Act

    In accordance with requirements of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501, et seq., and its implementing regulations, 5 CFR 
part 1320, the following information concerning the collection of 
information on Internal Revenue Service Form 4789 is presented to 
assist those persons wishing to comment on the information collection.
    FinCEN anticipates that this final rule, if used by banks, can 
result in at least a 2 million reduction in the number of currency 
transaction reports required to be filed annually, and a cost reduction 
to banks of $16 million. FinCEN believes that these estimated 
reductions are reasonable, and probably conservative.
    Title: Currency Transaction Report.
    OMB Number: 1506-0004.
    Description of Respondents: All financial institutions, except 
casinos.
    Estimated Number of Respondents: 250,000.
    Frequency: As required.
    Estimate of Burden: Reporting average of 19 minutes per response; 
recordkeeping average of 5 minutes per response.
    Estimate of Total Annual Burden on Respondents: 10,000,000 
responses. Reporting burden estimate = 3,166,667 hours; recordkeeping 
burden estimate = 833,333 hours. Estimated combined total of 4,000,000 
hours.
    Estimate of Total Annual Cost to Respondents for Hour Burdens: 
Based on $20 per hour, the total cost to the public is estimated to be 
$80,000,000.

[[Page 50156]]

    Estimate of Total Other Annual Costs to Respondents: None.
    Type of Review: Extension.
    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, 44 U.S.C. 3501 et seq., and its implementing regulations, 5 
CFR part 1320, the following information concerning the collection of 
information as required by 31 CFR 103.22 is presented to assist those 
persons wishing to comment on the information collection.
    FinCEN anticipates that this final rule will result in a reduction 
in hours spent complying with exemption requirements of 350,000 hours, 
and a reduction in cost to banks of $7,500,000. This is a conservative 
estimate, based on comments and discussions with banking industry 
representatives of the cost of complying with the administrative 
exemption system requirements.
    Title: Currency transaction reporting exemption recordkeeping (31 
CFR 103.22).
    OMB Number: 1506-0009.
    Description of Respondents: All banks.
    Estimated Number of Respondents: 19,000.
    Frequency: As required.
    Estimate of Burden: Recordkeeping average of 2 hours per 
respondent.
    Estimate of Total Annual Burden on Respondents: Recordkeeping 
burden estimate = 38,000 hours.
    Estimate of Total Annual Cost to Respondents for Hour Burdens: 
Based on $20 per hour, the total cost to the public is estimated to be 
$760,000.
    Estimate of Total Other Annual Costs to Respondents: None.
    Type of Request: Extension.

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, 31 CFR part 103 is 
amended as follows:

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 revised to read as follows:


Sec. 103.22  Reports of transactions in currency.

    (a) General. This section sets forth the rules for the reporting by 
financial institutions of transactions in currency. The reporting 
obligations themselves are stated in paragraph (b) of this section. The 
reporting rules relating to aggregation are stated in paragraph (c) of 
this section. Rules permitting banks to exempt certain transactions 
from the reporting obligations appear in paragraph (d) of this section.
    (b) Filing obligations--(1) Financial institutions other than 
casinos. Each financial institution other than a casino shall file a 
report of each deposit, withdrawal, exchange of currency or other 
payment or transfer, by, through, or to such financial institution 
which involves a transaction in currency of more than $10,000, except 
as otherwise provided in this secction. In the case of the Postal 
Service, the obligation contained in the preceding sentence shall not 
apply to payments or transfers made solely in connection with the 
purchase of postage or philatelic products.
    (2) Casinos. Each casino shall file a report of each transaction in 
currency, involving either cash in or cash out, of more than $10,000.
    (i) Transactions in currency involving cash in include, but are not 
limited to:
    (A) Purchases of chips, tokens, and plaques;
    (B) Front money deposits;
    (C) Safekeeping deposits;
    (D) Payments on any form of credit, including markers and counter 
checks;
    (E) Bets of currency;
    (F) Currency received by a casino for transmittal of funds through 
wire transfer for a customer;
    (G) Purchases of a casino's check; and
    (H) Exchanges of currency for currency, including foreign currency.
    (ii) Transactions in currency involving cash out include, but are 
not limited to:
    (A) Redemptions of chips, tokens, and plaques;
    (B) Front money withdrawals;
    (C) Safekeeping withdrawals;
    (D) Advances on any form of credit, including markers and counter 
checks;
    (E) Payments on bets, including slot jackpots;
    (F) Payments by a casino to a customer based on receipt of funds 
through wire transfer for credit to a customer;
    (G) Cashing of checks or other negotiable instruments;
    (H) Exchanges of currency for currency, including foreign currency; 
and
    (I) Reimbursements for customers' travel and entertainment expenses 
by the casino.
    (c) Aggregation--(1) Multiple branches. A financial institution 
includes all of its domestic branch offices, and any recordkeeping 
facility, wherever located, that contains records relating to the 
transactions of the institution's domestic offices, for purposes of 
this section's reporting requirements.
    (2) Multiple transactions--general. In the case of financial 
institutions other than casinos, for purposes of this section, multiple 
currency transactions shall be treated as a single transaction if the 
financial institution has knowledge that they are by or on behalf of 
any person and result in either cash in or cash out totaling more than 
$10,000 during any one business day (or in the case of the Postal 
Service, any one day). Deposits made at night or over a weekend or 
holiday shall be treated as if received on the next business day 
following the deposit.
    (3) Multiple transactions--casinos. In the case of a casino, 
multiple currency transactions shall be treated as a single transaction 
if the casino has knowledge that they are by or on behalf of any person 
and result in either cash in or cash out totaling more than $10,000 
during any gaming day. For purposes of this paragraph (c)(3), a casino 
shall be deemed to have the knowledge described in the preceding 
sentence, if: any sole proprietor, partner, officer, director, or 
employee of the casino, acting within the scope of his or her 
employment, has knowledge that such multiple currency transactions have 
occurred, including knowledge from examining the books, records, logs, 
information retained on magnetic disk, tape or other machine-readable 
media, or in any manual system, and similar documents and information, 
which the casino maintains pursuant to any law or regulation or within 
the ordinary course of its business, and which contain information that 
such multiple currency transactions have occurred.
    (d) Transactions of exempt persons--(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)(6)(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

[[Page 50157]]

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)(7) of this section.)
    (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), provided that, 
for purposes of this paragraph (d)(2)(iv), a person that is a financial 
institution, other than a bank, is an exempt person only to the extent 
of its domestic operations;
    (v) Any subsidiary, other than a bank, of any entity described in 
paragraph (d)(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 percent of whose common stock or analogous equity interest is 
owned by the listed entity, provided that, for purposes of this 
paragraph (d)(2)(v), a person that is a financial institution, other 
than a bank, is an exempt person only to the extent of its domestic 
operations;
    (vi) To the extent of its domestic operations, any other commercial 
enterprise (for purposes of this paragraph (d), a ``non-listed 
business''), other than an enterprise specified in paragraph 
(d)(6)(viii) of this section, that:
    (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; or
    (vii) With respect solely to withdrawals for payroll purposes from 
existing transaction accounts, any other person (for purposes of this 
paragraph (d), a ``payroll customer'') 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.
    (3) Initial designation of exempt persons--(i) General. A bank must 
designate each exempt person with which 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 sought to 
be exempted from reporting under the terms of this paragraph (d). 
Except where the person sought to be exempted is another bank as 
described in paragraph (d)(2)(i) of this section, designation by a bank 
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, 
except as provided in paragraph (d)(6)(vi) of this section. The 
designation requirements of this paragraph (d)(3) apply whether or not 
the particular exempt person to be designated has previously been 
treated as exempt from the reporting requirements of prior 
Sec. 103.22(a) under the rules contained in 31 CFR 103.22(a) through 
(g), as in effect on October 20, 1998 (see 31 CFR Parts 0 to 199 
revised as of July 1, 1998). A special transitional rule, which extends 
the time for initial designation for customers that have been 
previously treated as exempt under such prior rules, is contained in 
paragraph (d)(11) of this section.
    (ii) Special rules for banks. When designating another bank as an 
exempt person, a bank must either make the filing required by paragraph 
(d)(3)(i) 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 
(d)(3)(i) of this section for each bank that is a new customer and for 
which an exemption is sought under this paragraph (d).
    (4) Annual review. The information supporting each designation of 
an exempt person, and the application to each account of an exempt 
person described in paragraphs (d)(2)(vi) or (d)(2)(vii) of this 
section of the monitoring system required to be maintained by paragraph 
(d)(9)(ii) of this section, must be reviewed and verified at least once 
each year.
    (5) Biennial filing with respect to certain exempt persons--(i) 
General. A biennial filing, as described in paragraph (d)(5)(ii) of 
this section, is required for continuation of the treatment as an 
exempt person of a customer described in paragraph (d)(2)(vi) or (vii) 
of this section. No biennial filing is required for continuation of the 
treatment as an exempt person of a customer described in paragraphs 
(d)(2)(i) through (v) of this section.
    (ii) Non-listed businesses and payroll customers. The designation 
of a non-listed business or a payroll customer as an exempt person must 
be renewed biennially, beginning on March 15 of the second calendar 
year following the year in which the first designation of such customer 
as an exempt person is made, and every other March 15 thereafter, on 
such form as FinCEN shall specify. Biennial renewals must include a 
statement certifying that the bank's system of monitoring the 
transactions in currency of an exempt person for suspicious activity, 
required to be maintained by paragraph (d)(9)(ii) of this section, has 
been applied as necessary, but at least annually, to the account of the 
exempt person to whom the biennial renewal applies. Biennial renewals 
also must include information about any change in control of the exempt 
person involved of which the bank knows (or should know on the basis of 
its records).
    (6) 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)(9)(ii) of this 
section, such steps that a reasonable and prudent bank would take and 
document

[[Page 50158]]

to identify suspicious transactions as required by paragraph (d)(9)(ii) 
of this section.
    (ii) Governmental departments and agencies. 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 
(d)(2)(ii) or (d)(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 (d)(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) 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 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) Listed company subsidiaries. In determining whether a person 
is described in paragraph (d)(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) Aggregated accounts. In determining the qualification of a 
customer as an exempt person, a bank may treat all transaction accounts 
of the customer as a single account. If a bank elects to treat all 
transaction accounts of a customer as a single account, the bank must 
continue to treat such accounts consistently as a single account for 
purposes of determining the qualification of the customer as an exempt 
person.
    (vi) Affiliated banks. The designation required by paragraph (d)(3) 
of this section may be made by a parent bank holding company or one of 
its bank subsidiaries on behalf of all bank subsidiaries of the holding 
company, so long as the designation lists each bank subsidiary to which 
the designation shall apply.
    (vii) Sole proprietorships. A sole proprietorship may be treated as 
a non-listed business if it otherwise meets the requirements of 
paragraph (d)(2)(vi) of this section, as applicable. In addition, a 
sole proprietorship may be treated as a payroll customer if it 
otherwise meets the requirements of paragraph (d)(2)(vii) of this 
section, as applicable.
    (viii) Ineligible businesses. A business engaged primarily in one 
or more of the following activities may not be treated as a non-listed 
business for purposes of this paragraph (d): serving as financial 
institutions or agents of financial institutions of any type; purchase 
or sale to customers of motor vehicles of any kind, vessels, aircraft, 
farm equipment or mobile homes; the practice of law, accountancy, or 
medicine; auctioning of goods; chartering or operation of ships, buses, 
or aircraft; gaming of any kind (other than licensed parimutuel betting 
at race tracks); investment advisory services or investment banking 
services; real estate brokerage; pawn brokerage; title insurance and 
real estate closing; trade union activities; and any other activities 
that may be specified by FinCEN. 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 is derived from one or more of 
the ineligible business activities listed in this paragraph 
(d)(6)(viii).
    (ix) Transaction account. A transaction account, for purposes of 
paragraph (d) of this section, is any account described in section 
19(b)(1)(C) of the Federal Reserve Act, 12 U.S.C. 461(b)(1)(C). For 
purposes of paragraphs (d)(2)(vi) and (d)(2)(vii) of this section, a 
person is an exempt person only to the extent of such person's eligible 
transaction accounts.
    (x) Documentation. The records maintained by a bank to document its 
compliance with and administration of the rules of this paragraph (d) 
shall be maintained in accordance with the provisions of Sec. 103.38.
    (7) 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 (d)(1) 
of this section.
    (8) Limitation on liability. (i) No bank shall be subject to 
penalty under this part for failure to file a report required by 
paragraph (b) of this section with respect to a transaction in currency 
by an exempt person with respect to which the requirements of this 
paragraph (d) 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 (d) for treatment of the 
transactor as an exempt person or that the transaction is not a 
transaction of the exempt person.
    (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 date of that 
customer's next periodic review, which, as required by paragraph (d)(4) 
of this section, shall occur no less than 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.
    (9) 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. 103.21 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. 103.21(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 transaction trends 
or

[[Page 50159]]

patterns, may trigger the obligations of a bank under Sec. 103.21.
    (ii) Consistent with its annual review obligations under paragraph 
(d)(4)of this section, a bank shall establish and maintain a monitoring 
system that is reasonably designed to detect, for each account of a 
non-listed business or payroll customer, those transactions in currency 
involving such account that would require a bank to file a suspicious 
transaction report. The statement in the preceding sentence with 
respect to accounts of non-listed and payroll customers does not limit 
the obligation of banks generally to take the steps necessary to 
satisfy the terms of paragraph (d)(9)(i) of this section and 
Sec. 103.21 with respect to all exempt persons.
    (10) Revocation. The status of any person as an exempt person under 
this paragraph (d) may be revoked by FinCEN by written notice, which 
may be provided by publication in the Federal Register in appropriate 
situations, 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 contained in paragraph (d)(8)(ii) of this 
section:
    (i) The status of an entity as an exempt person under paragraph 
(d)(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 
(d)(2)(v) of this section ceases once such subsidiary ceases to have at 
least 51 per cent of its common stock or analogous equity interest 
owned by a listed entity.
    (11) Transitional rule. (i) No accounts may be newly granted an 
exemption or placed on an exempt list on or after October 21, 1998, 
under the rules contained in 31 CFR 103.22(b) through (g), as in effect 
on October 20, 1998 (see 31 CFR Parts 0 to 199 revised as of July 1, 
1998).
    (ii) If a bank properly treated an account (a ``previously exempted 
account'') as exempt on October 20, 1998 under the rules contained in 
31 CFR 103.22(b) through (g), as in effect on October 20, 1998 (see 31 
CFR Parts 0 to 199 revised as of July 1, 1998), it may continue to 
treat such account as exempt under such prior rules with respect to 
transactions in currency occurring on or before June 30, 2000, provided 
that it does so consistently until the earlier of June 30, 2000, and 
the date on which the bank makes the designation or the determination 
described in paragraph (d)(11)(iii) of this section. A bank that 
continues to treat a previously exempted account as exempt under the 
prior rules, and for the period, specified in the preceding sentence, 
shall remain subject to such prior rules, and to the penalties for 
failing to comply therewith, with respect to transactions in currency 
occurring during such period.
    (iii) A bank must, on or before July 1, 2000, either designate the 
holder of a previously exempted account as an exempt person under 
paragraph (d)(2) of this section or determine that it may not or will 
not treat such holder as an exempt person under paragraph (d)(2) of 
this section (so that it will be required to make reports under 
paragraph (a) of this section with respect to transactions in currency 
by such person occurring on or after the date of determination, but no 
later than July 1, 2000). A bank that initially does not designate the 
holder of a previously exempted account as an exempt person for periods 
beginning after June 30, 2000, may later make such a designation, to 
the extent otherwise permitted to do so by this paragraph (d), for 
periods after the effective date of such designation.

Approved by the Office of Management and Budget under control number 
1506-0009.)

    Dated: September 14, 1998.
William F. Baity,
Acting Director,
Financial Crimes Enforcement Network.
[FR Doc. 98-24969 Filed 9-18-98; 8:45 am]
BILLING CODE 4820-03-P