[Federal Register Volume 68, Number 13 (Tuesday, January 21, 2003)]
[Proposed Rules]
[Pages 2716-2721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1174]



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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA37


Financial Crimes Enforcement Network; Amendment to the Bank 
Secrecy Act Regulations--Requirement That Mutual Funds Report 
Suspicious Transactions

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains an amendment to the regulations 
implementing the statute generally known as the Bank Secrecy Act. The 
amendment would require mutual funds to report suspicious transactions 
to the Department of the Treasury. The amendment constitutes a further 
step in the creation of a comprehensive system for the reporting of 
suspicious transactions by the major categories of financial 
institutions operating in the United States, as a part of the counter-
money laundering program of the Department of the Treasury.

DATES: Written comments on all aspects of the notice of proposed 
rulemaking are welcome and must be received on or before March 24, 
2003.

ADDRESSES: Commenters are encouraged to submit comments by electronic 
mail because paper mail in the Washington, DC, area may be delayed. 
Comments submitted by electronic mail may be sent to 
[email protected], with the caption, in the body of the 
text, ``ATTN: NPRM--Suspicious Transaction Reporting--Mutual Funds.'' 
Comments also may be submitted by paper mail to FinCEN, P.O. Box 39, 
Vienna, Virginia 22183-0039, ATTN: NPRM--Suspicious Transaction 
Reporting--Mutual Funds. Comments should be sent by one method only. 
For additional instructions on the submission of comments, see 
SUPPLEMENTARY INFORMATION under the heading ``Submission of Comments.''

FOR FURTHER INFORMATION CONTACT: Office of Regulatory Programs, FinCEN, 
(202) 354-6400; and Office of Chief Counsel, FinCEN, at (703) 905-3590 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Provisions

    The Bank Secrecy Act \1\ 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, or in the 
conduct of intelligence or counter-intelligence activities, to protect 
against international terrorism, and to implement counter-money 
laundering programs and compliance procedures.\2\ 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 the Bank Secrecy Act has been delegated to the Director of 
FinCEN.
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    \1\ Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 
12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5331.
    \2\ Language expanding the scope of the Bank Secrecy Act to 
intelligence or counter-intelligence activities to protect against 
international terrorism was added by section 358 of the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001 (the 
``USA Patriot Act''), Public Law 107-56.
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    With the enactment of 31 U.S.C. 5318(g) in 1992,\3\ Congress 
authorized the Secretary of the Treasury to require financial 
institutions to report suspicious transactions. As amended by the USA 
Patriot Act, subsection (g)(1) states generally:
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    \3\ 31 U.S.C. 5318(g) was added to the Bank Secrecy Act by 
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act (the 
``Annunzio-Wylie Anti-Money Laundering Act''), title XV of the 
Housing and Community Development Act of 1992, Public Law 102-550; 
it was expanded by section 403 of the Money Laundering Suppression 
Act of title IV of the Riegle Community Development and Regulatory 
Improvement Act of 1994, Public Law 103-325, to require designation 
of a single government recipient for reports of suspicious 
transactions.

    The Secretary may require any financial institution, and any 
director, officer, employee, or agent of any financial institution, 
to report any suspicious transaction relevant to a possible 
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violation of law or regulation.

Subsection (g)(2)(A) provides further:

    If a financial institution or any director, officer, employee, 
or agent of any financial institution, voluntarily or pursuant to 
this section or any other authority, reports a suspicious 
transaction to a government agency--
    (i) The financial institution, director, officer, employee, or 
agent may not notify any person involved in the transaction that the 
transaction has been reported; and
    (ii) No officer or employee of the Federal government or of any 
State, local, tribal, or territorial government within the United 
States, who has any knowledge that such report was made may disclose 
to any person involved in the transaction that the transaction has 
been reported, other than as necessary to fulfill the official 
duties of such officer or employee.

Subsection (g)(3)(A) provides that neither a financial institution, nor 
any director, officer, employee, or agent of any financial 
institution--

    That makes a voluntary disclosure of any possible violation of 
law or regulation to a government agency or a makes a disclosure 
pursuant to this subsection or any other authority * * * shall * * * 
be liable to any person under any law or regulation of the United 
States or any constitution, law or regulation of any State or 
political subdivision of any State, or under any contract or other 
legally enforceable agreement (including any arbitration agreement), 
for such disclosure or for any failure to provide notice of such 
disclosure to the person who is the subject of such disclosure or 
any other person identified in the disclosure.

Finally, subsection (g)(4) requires the Secretary of the Treasury, ``to 
the extent practicable and appropriate,'' to designate ``a single 
officer or agency of the United States to whom such reports shall be 
made.''\4\ The designated agency is in turn responsible for referring 
any report of a suspicious transaction to ``any appropriate law 
enforcement, supervisory agency, or United States intelligence agency 
for use in the conduct of intelligence or counterintelligence 
activities, including analysis, to protect against international 
terrorism.'' \5\
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    \4\ This designation does not preclude the authority of 
supervisory agencies to require financial institutions to submit 
other reports to the same agency or another agency ``pursuant to any 
applicable provision of law.'' 31 U.S.C. 5318(g)(4)(C).
    \5\ 31 U.S.C. 5318(g)(4)(B).
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B. Overview of Mutual Funds

    The application of the proposed rule would be limited to investment 
companies that are ``mutual funds,'' which are open-end management 
investment companies as described in the Investment Company Act. Mutual 
funds are by far the predominant type of investment company. In 2001, 
approximately $7 trillion was invested in U.S. mutual funds, 
representing more than 95 percent of the assets held by investment 
companies regulated by the Securities and Exchange Commission 
(``SEC'').\6\ Currently, more than 3000 active mutual funds are 
registered with the SEC.\7\
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    \6\ The staff of the SEC estimates, based on filings with the 
SEC, that as of December 2001, approximately $6.97 trillion was 
invested in U.S. mutual funds (including $741 billion invested in 
open-end management companies that fund variable life insurance and 
variable annuity contracts, and $23 billion invested in open-end 
management companies that are exchange-traded funds).
    \7\ Approximately 1400 of these funds are ``series companies'' 
with an aggregate 7200 portfolios. A ``series company'' is a 
registered investment company that issues two or more classes or 
series of preferred or special stock, each of which is preferred 
over all other classes or series with respect to assets specifically 
allocated to that class or series. 17 CFR 270.18f-2. The assets 
allocated to such a class or series are commonly known as a 
``portfolio.'' The series or portfolios of a series company operate, 
for many purposes, as separate investment companies.

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    A mutual fund is typically governed by a board of directors or 
trustees, which is responsible for overseeing the management of the 
fund's business affairs. Mutual funds are typically organized and 
operated by an investment adviser responsible for the day-to-day 
operations of the fund. In most cases, the investment adviser is a 
separate and distinct legal entity from the investment company. The 
investment adviser is primarily responsible for selecting portfolio 
investments consistent with the objectives and policies stated in the 
investment company's prospectus. The investment adviser or a third 
party may provide administrative services to the fund. Mutual funds 
also employ transfer agents to conduct recordkeeping and related 
functions.\8\
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    \8\ Transfer agents maintain records of shareholder accounts, 
calculate and disburse dividends, and prepare and mail shareholder 
account statements, federal income tax information, and other 
shareholder notices. Some transfer agents prepare and mail 
statements confirming shareholder transactions and account balances, 
and maintain customer service departments to respond to shareholder 
inquiries.
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    A mutual fund offers its shares continuously and is required to 
provide its shareholders the right to redeem at net asset value on a 
daily basis.\9\ Most mutual funds sell their shares to investors 
through broker-dealers, banks, and other financial intermediaries.\10\ 
Some funds are sold directly through affiliates of the fund itself. If 
fund shares are sold through an intermediary, the intermediary may 
maintain an omnibus account with the fund, in which case neither the 
fund nor its transfer agent has direct contact with the shareholders. 
The intermediary receives and processes individual investment and 
redemption requests from its customers, and has access to individuals' 
trading activity. Although neither the mutual fund nor its transfer 
agent necessarily knows the identity of individual investors that hold 
fund shares through a financial intermediary's omnibus account, the 
intermediary does have access to that information, and may itself have 
anti-money laundering responsibilities.\11\ A foreign broker-dealer 
without independent anti-money laundering requirements may also 
maintain omnibus accounts with the fund. This kind of omnibus account 
falls within the definition of ``correspondent account'' under section 
312 of the Act and as such is subject to due diligence and possibly 
enhanced due diligence requirements under that section of the Act and 
implementing regulations.\12\
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    \9\ Section 5(a) of the Investment Company Act defines an open-
end investment company as a management investment company that 
issues or has outstanding any ``redeemable security.'' 15 U.S.C. 
80a-5(a). A redeemable security entitles the holder to receive, upon 
presentation to the issuer, the holder's approximate proportionate 
share of the issuer's current net assets, or the cash such share 
represents. 15 U.S.C. 80a-2(a)(32).
    \10\ Mutual funds usually offer their shares to the public 
through a principal underwriter, which is in most cases regulated as 
a broker-dealer and is subject to rules promulgated by the National 
Association of Securities Dealers, Inc. With respect to transactions 
occurring after December 30, 2002, brokers and dealers in securities 
are required to report suspicious transactions to the Treasury under 
31 U.S.C. 5318(g). See 31 CFR 103.19 (suspicious transaction reports 
by securities brokers or dealers).
    \11\ Broker-dealers in securities and futures commission 
merchants are subject to the anti-money laundering compliance 
requirements of the Bank Secrecy Act.
    \12\ Pursuant to section 312, regulations have been proposed 
that would require U.S. financial institutions offering 
correspondent accounts to perform due diligence and, in appropriate 
circumstances, enhanced due diligence on their correspondents. See 
67 FR 37736 (May 30, 2002) and 67 FR 48348 (July 23, 2002).
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C. Money Laundering Risks Associated with Mutual Funds

    Mutual funds present real opportunities for money laundering. They 
are widely held, easy to access, and can be redeemed quickly.\13\ 
Indeed, money market funds, which typically offer check writing 
privileges, function much like bank checking accounts.\14\ But because 
mutual funds rarely receive from or disburse to shareholders 
significant amounts of currency, they are not as likely as other types 
of financial institutions (e.g., banks) to be used during the initial 
(or ``placement'') stage of the money laundering process.\15\ Money 
laundering is more likely to occur through mutual funds at the later 
stages of the money laundering process (the ``layering'' and 
``integration'' stages).\16\
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    \13\ Section 22(e) of the Investment Company Act requires a 
mutual fund to redeem the value of shares within seven days of 
receiving a redemption request. 15 U.S.C. 80a-22(e).
    \14\ See Investment Company Act Release No. 17589 (July 17, 
1990) (55 FR 30240 (July 25, 1990)).
    \15\ It is possible that some structuring schemes used in the 
placement stage will involve monetary instruments such as money 
orders, and that money launderers could attempt to use mutual funds 
that accept this form of payment. Although the known experience of 
depository institutions with significant money laundering is greater 
than the known experience of mutual funds, this difference may 
reflect the fact that criminal funds enter mutual funds at a later 
stage in the laundering process, when those funds are less 
immediately identifiable than at the placement stage. Past 
investigative attention, however, has focused more intensively on 
the ``placement'' stage of money laundering (especially the 
suspicious placement into the financial system of large amounts of 
currency) than on transfers or conversions of illicit funds once 
they are already in the financial system.
    \16\ ``Layering'' involves the distancing of illegal proceeds 
from their criminal source through the creation of complex layers of 
financial transactions. Money launderers could use mutual fund 
accounts to layer their funds by, for example, sending and receiving 
money and wiring it quickly through several accounts and multiple 
institutions, or by redeeming fund shares purchased with illegal 
proceeds and then reinvesting the proceeds received in anther fund. 
Layering could also involve purchasing funds in the name of a 
fictitious corporation or an entity designed to conceal the true 
owners. Mutual funds could also be used to integrate illicit income 
into legitimate assets. ``Integration'' occurs when illegal proceeds 
appear to have been derived from a legitimate source.
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    The proposed rule contained in this document is just one of several 
steps taken by the Department of the Treasury to address 
comprehensively the risk of money laundering through mutual funds. In 
April 2002, FinCEN issued an interim final rule requiring mutual funds 
to develop and implement an anti-money laundering program to prevent 
them from being used to launder money or finance terrorist activities, 
which includes achieving and monitoring compliance with the applicable 
requirements of the Bank Secrecy Act and the Department of the 
Treasury's implementing regulations.\17\ In July 2002, the Department 
of the Treasury and the SEC jointly issued a proposed regulation to 
require mutual funds to implement reasonable procedures to (1) verify 
the identity of any person seeking to open an account, to the extent 
reasonable and practicable, (2) maintain records of the information 
used to verify the person's identity, and (3) determine whether the 
person appears on any lists of known or suspected terrorists or 
terrorist organizations provided to investment companies by any 
government agency.\18\
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    \17\ See 76 FR 21117 (April 29, 2002).
    \18\ See 67 FR 48318 (July 23, 2002). Under the proposed rule, a 
mutual fund may contractually delegate the implementation and 
operation of its customer identification program to a service 
provider such as a transfer agent although the mutual fund would 
continue to be responsible for its compliance with applicable 
requirements.
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    This notice of proposed rulemaking follows other recent actions 
that expand the application of requirements that financial institutions 
report suspicious transactions. For example, since April 1996, rules 
issued by FinCEN under the authority contained in 31 U.S.C. 5318(g) 
have required banks, thrifts, and other banking organizations to report 
suspicious transactions.\19\ In collaboration with FinCEN, the federal 
bank supervisors concurrently issued suspicious transaction reporting 
rules

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under their own authority.\20\ The bank supervisory agency rules apply 
to banks, bank holding companies, and non-depository institution 
affiliates and subsidiaries of banks and bank holding companies. Money 
services businesses have been required to report suspicious 
transactions to the Department of the Treasury since the beginning of 
2002. In July 2002, FinCEN took a further step in the creation of a 
comprehensive system for the reporting of suspicious transactions by 
the major categories of financial institutions operating in the United 
States, by requiring brokers and dealers in securities to report 
suspicious transactions.\21\ In October 2002, FinCEN issued a final 
rule requiring casinos to report suspicious transactions. The proposed 
rule contained in this document would extend this requirement to mutual 
funds. Suspicious transaction reporting by mutual funds can provide 
highly useful information in law enforcement and regulatory 
investigations and proceedings, and in the conduct of intelligence 
activities to protect against international terrorism.\22\
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    \19\ See 31 CFR 103.18 (requiring banks, thrifts, and other 
banking organizations to report suspicious transactions).
    \20\ See 12 CFR 21.11 (issued by the Office of the Comptroller 
of the Currency); 12 CFR 208.62 (issued by the Board of Governors of 
the Federal Reserve System); 12 CFR 353.3 (issued by the Federal 
Deposit Insurance Corporation); 12 CFR 563.180 (issued by the Office 
of Thrift Supervision); 12 CFR 748.1 (issued by the National Credit 
Union Administration).
    \21\ See 67 FR 44048 (July 1, 2002).
    \22\ See 31 U.S.C. 5311 (stating purpose of the reporting 
authority under the Bank Secrecy Act).
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II. Specific Provisions

A. 103.15(a)--Reports by Mutual Funds of Suspicious Transactions

    Section 103.15(a) contains the rules setting forth the obligation 
of mutual funds to report suspicious transactions that are conducted or 
attempted by, at, or through a mutual fund and involve or aggregate at 
least $5,000 in funds or other assets. It is important to recognize 
that the obligation to report a transaction under this rule and 31 
U.S.C. 5318(g) would apply whether or not the transaction involves 
currency.\23\ Treasury is aware that the use of currency by mutual 
funds is rare.
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    \23\ Many currency transactions are not indicative of money 
laundering or other violations of law, a fact recognized both by 
Congress, in authorizing reform of the currency transaction 
reporting system, and by FinCEN, in issuing rules to implement that 
system (see 31 U.S.C. 5313(d) and 31 CFR 103.22(d), 63 FR 50147 
(September 21, 1998)). Many non-currency transactions, (for example, 
fund transfers) can indicate illicit activity, especially in light 
of the breadth of the statutes that make money laundering a crime. 
See 18 U.S.C. 1956 and 1957.
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    The obligation extends to transactions conducted or attempted by, 
at, or through, the mutual fund. However, paragraph (a) also contains 
language designed to encourage the reporting of transactions that 
appear relevant to violations of law or regulation, even in cases in 
which the rule does not explicitly so require (for example, in the case 
of a transaction falling below the $5,000 threshold in the rule).
    Section 103.15(a) contains the general statement of the obligation 
to file reports. To clarify that the proposed rule creates a reporting 
requirement that is uniform with that for other financial institutions, 
the language of the reporting obligation incorporates language from the 
suspicious activity reporting rules applicable to other financial 
institutions, such as banks, casinos, and money services businesses, 
requiring the reporting of ``any suspicious transaction relevant to a 
possible violation of law or regulation.'' Furthermore, a mutual fund 
may also report ``any suspicious transaction that it believes is 
relevant to a possible violation of any law or regulation but whose 
reporting is not required'' by the proposed rule. For example, a mutual 
fund may report a suspected violation of law that involves less than 
$5,000. Such voluntary reporting would be subject to the same 
protection from liability as mandatory reporting, pursuant to 31 U.S.C. 
5318(g)(3).
    The proposed rule requires reporting by mutual funds, but not by 
affiliated persons of mutual funds. Some affiliates, such as broker-
dealers, are subject to their own reporting rule. Others may be subject 
to future rules.
    Mutual funds typically conduct many operations through separate 
entities, which may or may not be affiliated persons of the mutual 
fund. Personnel of these separate entities may be in the best position 
to perform the reporting obligation. It is permissible for a mutual 
fund to contractually delegate performance of the reporting obligation 
to another affiliated or unaffiliated service provider, such as a 
transfer agent. The mutual fund, however, remains responsible for 
assuring compliance with the rule, and must actively monitor the 
procedures for reporting suspicious transactions.
    Section 103.15 (a)(2) specifies that the proposed rule requires the 
reporting of suspicious transactions that involve or aggregate at least 
$5,000 in funds or other assets. The suspicious transaction reporting 
rules, however, are not intended to operate (and indeed cannot properly 
operate) in a mechanical fashion. Rather, the suspicious transaction 
reporting requirements are intended to function in such a way as to 
have financial institutions evaluate customer activity and 
relationships for money laundering risks.\24\
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    \24\ Thus, for example, transactions involving investments by 
the pension fund of a publicly traded corporation, even though 
involving a large dollar amount, would likely require a more limited 
scrutiny than less typical transactions such as those involving 
customers who wish to use currency or money orders to purchase 
mutual fund shares, even though the dollar amounts in those latter 
cases may be relatively small.
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    Section 103.15(a)(2) specifies four categories of transactions that 
require reporting if the mutual fund knows, suspects, or has reason to 
suspect that any such category applies to a transaction, or a pattern 
of transactions of which the transaction is a part. The ``knows, 
suspects, or has reason to suspect'' standard incorporates a concept of 
due diligence in the reporting requirement.
    The first category, described in proposed section 103.15(a)(2)(i), 
includes transactions involving funds derived from illegal activity, or 
intended or conducted in order to hide or disguise funds derived from 
such illegal activity as part of a plan to violate or evade any federal 
law or regulation or to avoid any transaction reporting requirement 
under federal law or regulation. The second category, described in 
section 103.15(a)(2)(ii), includes transactions designed, whether 
through structuring or other means, to evade the requirements of the 
Bank Secrecy Act. The third category, described in section 
103.15(a)(2)(iii), includes transactions that appear to serve no 
business or apparent lawful purposes, and for which the mutual fund 
knows of no reasonable explanation after examining the available facts 
relating to the transaction and the parties. The fourth category, 
described in section 103.15(a)(2)(iv), includes any other transactions 
that involve the use of the mutual fund to facilitate criminal 
activity.\25\
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    \25\ The fourth reporting category has been added to the 
suspicious activity reporting rules promulgated since the passage of 
the USA Patriot Act to make it clear that the requirement to report 
suspicious activity encompasses the reporting of transactions in 
which legally derived funds are used for criminal activity, such as 
the financing of terrorism.
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    A mutual fund must base its determination as to whether a report is 
required on all the facts and circumstances relating to the transaction 
and the customer of the mutual fund in question.\26\ Different fact 
patterns will

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require different types of judgments. In some cases, the facts of the 
transaction may indicate the need to report. For example, the fact that 
a customer refuses to provide information necessary for the mutual fund 
to make reports or keep records required by this part or other 
regulations, provides information that the mutual fund determines to be 
false, or seeks to change or cancel a transaction after such person is 
informed of information verification or recordkeeping requirements 
relevant to the transactions, would indicate that a Suspicious Activity 
Report (``SAR-SF'') \27\ should be filed.\28\ In other situations, 
determining whether a transaction is suspicious within the meaning of 
the rule may require a more involved judgment. Transactions that raise 
the need for such judgment may include, for example, (i) transmission 
or receipt of funds transfers without normal identifying information, 
or in a manner that indicates an attempt to disguise or hide the 
country of origin or destination, or the identity of the customer 
sending the funds, or the beneficiary to which the funds are sent; or 
(ii) repeated use of a mutual fund as a temporary resting place for 
funds from multiple sources without a clear business purpose. The 
judgments involved will also extend to whether the facts and 
circumstances and the institution's knowledge of its customer provide a 
reasonable explanation for the transaction that removes it from the 
suspicious category.
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    \26\ In the case of a transaction conducted through an omnibus 
account maintained by an intermediary, a mutual fund may not know, 
suspect, or have reason to suspect that the transaction is one for 
which reporting would be required, because a fund typically has 
little or no information about individual customers represented in 
an omnibus account. Omnibus accounts are, however, usually 
maintained by a person, such as a broker-dealer, that has a 
reporting obligation. The omnibus account holder (i.e., the 
financial intermediary) is itself a customer of the mutual fund for 
purposes of the proposed rule.
    \27\ The term ``SF'' is an abbreviation for ``Securities and 
Futures Industry,'' the form that will be used for reporting by 
members of the securities and futures industry. See 67 FR 50751 
(August 5, 2002).
    \28\ As section 103.15(d) of the proposed rule makes clear, the 
mutual fund must not notify the customer that it intends to file or 
has filed a suspicious transaction report with respect to the 
customer's activity.
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    The means of commerce and the techniques of money launderers are 
continually evolving, and there is no way to provide an exhaustive list 
of suspicious transactions. FinCEN intends to continue its dialogue 
with mutual funds about the manner in which a combination of government 
guidance, training programs, and government-industry information 
exchange can smooth the way for operation of the new suspicious 
activity reporting system in as flexible and cost-efficient a way as 
possible.
    Individual mutual funds are frequently part of a complex of related 
funds, and it is possible that more than one mutual fund would be 
obligated to report the same transaction. Section 103.15(a)(3) of the 
proposed rule would permit all of the mutual funds involved in a 
particular transaction to file a single report as long as the report 
contains all relevant facts. Moreover, a person such as a broker-dealer 
that is a service provider to the fund may have a separate suspicious 
activity reporting obligation with regard to the same transaction. The 
proposed rule would permit the mutual fund's report to satisfy that 
person's reporting obligation as well. Thus, a service provider to 
which multiple mutual funds have contractually delegated their 
reporting obligation may file a single report on behalf of itself and 
all of the funds involved in the same transaction or series of 
transactions.

B. 103.15(b)--Filing Procedures

    Section 103.15(b) sets forth the filing procedures to be followed 
by mutual funds making reports of suspicious transactions. Within 30 
days after a mutual fund becomes aware of a suspicious transaction, the 
fund must report the transaction by completing a SAR-SF, collecting and 
maintaining supporting documentation, and filing the SAR-SF in a 
central location, to be determined by FinCEN. The SAR-SF will resemble 
the SAR used by banks to report suspicious transactions, and a draft 
form will be made available for comment by publication in the Federal 
Register.
    If the mutual fund does not identify a suspect on the date of the 
initial detection, the mutual fund may delay filing a SAR-SF for an 
additional 30 days, but may not delay filing more than 60 days after 
the date of such initial detection. In situations involving violations 
that require immediate attention, such as terrorist financing or 
ongoing money laundering schemes, the mutual fund should telephone the 
appropriate law enforcement authority and the SEC in addition to filing 
a SAR-SF.

C. 103.15(c)--Retention of Records

    Section 103.15(c) provides that filing mutual funds must maintain 
copies of SAR-SFs and the original related documentation for a period 
of five years from the date of filing. As indicated above, supporting 
documentation is to be made available to FinCEN, the SEC, and other 
appropriate law enforcement and regulatory authorities on request.

D. 103.15(d)--Confidentiality of Reports

    Section 103.15(d) reflects the statutory bar against the disclosure 
of information filed in, or the fact of filing, a suspicious activity 
report (whether the report is required by the proposed rule or is filed 
voluntarily). See 31 U.S.C. 5318(g)(2). Thus, the paragraph 
specifically prohibits persons filing SAR-SFs from making any 
disclosure, except to law enforcement and regulatory agencies, about 
either the reports themselves or supporting documentation.
    This paragraph does not prohibit mutual funds from discussing with 
each other (or with service providers that are involved in the 
transaction, such as their investment advisers, transfer agents, 
principal underwriters, and broker-dealers) for purposes of section 
103.15(a)(3), suspicious activity involving a transaction with which 
the mutual funds have been involved, or the determination of which 
mutual fund will file a SAR-SF in such a case.

E. 103.15(e)--Limitation of Liability

    Section 5318(g) of title 31, as amended by the USA Patriot Act, 
provides protection from liability for making reports of suspicious 
transactions, and for failures to disclose the fact of such reporting 
to persons involved in such transactions. The safe harbor provision of 
31 U.S.C. 5318(g) clearly protects any financial institution from civil 
liability for reporting suspicious activity.\29\ Section 351 of the USA 
Patriot Act clarifies that the safe harbor applies also to the 
voluntary reporting of suspicious transactions, and section 103.15(e) 
of the proposed rule reflects this clarification.
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    \29\ See Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2nd Cir. 
1999) (stating that in enacting 31 U.S.C. 5318(g), Congress 
``broadly and unambiguously provide[d] * * * immunity from any law 
(except the federal Constitution) for any statement made in a SAR by 
anyone connected to a financial institution'').
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    It must be noted that, while the proposed rule reiterates and 
clarifies the broad protection from liability for making reports and 
for failures to disclose the fact of such reporting that is contained 
in the statutory safe harbor provision, the regulatory provisions do 
not extend the scope of either the statutory prohibition or the 
statutory protection. Inclusion of safe harbor language in the proposal 
is in no way intended to suggest that the safe harbor can override the 
non-disclosure provisions of the law and regulations. The prohibition 
on disclosure (other than as required by the proposed rule) applies 
regardless of any protection from liability.

[[Page 2720]]

F. 103.15(f)--Examinations and Enforcement

    Section 103.15(f) notes that the Department of the Treasury or its 
delegate will examine compliance with the obligation to report 
suspicious transactions, and provides that failure to comply with the 
rule may constitute a violation of the Bank Secrecy Act and the Bank 
Secrecy Act regulations. In examining any particular failure to report 
a transaction as required by this section, FinCEN and the SEC may take 
into account the relationship between the particular failure to report 
and the adequacy of the implementation and operation of a mutual fund's 
compliance procedures.

G. 103.15(g)--Effective Date

    Finally, section 103.15(g) provides that compliance with the new 
suspicious activity reporting rule would be required by a date 180 days 
after the date on which the final regulations discussed in this notice 
of proposed rulemaking are published in the Federal Register.

III. Submission of Comments

    FinCEN invites comment on all aspects of the proposed regulation. 
All comments will be available for public inspection and copying, and 
no material in any such comments, including the name of any person 
submitting comments, will be recognized as confidential. Accordingly, 
material not intended to be disclosed to the public should not be 
submitted. Comments may be inspected, between 10 a.m. and 4 p.m., in 
the FinCEN reading room in Washington, DC. Persons wishing to inspect 
the comments submitted must request an appointment by telephoning (202) 
354-6400.

IV. Regulatory Flexibility Act

    FinCEN certifies that this proposed regulation would not have a 
significant economic impact on a substantial number of small entities. 
Investment companies, regardless of their size, are currently subject 
to the Bank Secrecy Act. Procedures currently in place at mutual funds 
to comply with existing Bank Secrecy Act rules should help mutual funds 
to identify suspicious transactions. In addition, the limited use of 
currency to purchase mutual fund shares will likely reduce the number 
of suspicious activity reports required to be filed. Finally, certain 
small mutual funds may have an established and limited customer base 
whose transactions are well known to the fund.

V. Executive Order 12866

    The Department of the Treasury has determined that this proposed 
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, Public Law 
104-4 (Unfunded Mandates Act), 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 proposal provides 
the most cost-effective and least burdensome alternative to achieve the 
objectives of the rule.

VII. Paperwork Reduction Act

    The collection of information contained in this proposed rule is 
being submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent 
(preferably by fax (202-395-6974)) to Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, Office 
of Management and Budget, Paperwork Reduction Project (1506), 
Washington, DC 20503 (or by the Internet to [email protected]), with 
a copy to FinCEN by mail or the Internet at the addresses previously 
specified. Comments on the collection of information should be received 
by March 24, 2003. In accordance with the requirements of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A), and its implementing 
regulations, 5 CFR 1320, the following information is presented to 
assist those persons wishing to comment on the information collection.
    FinCEN anticipates that this proposed rule, if adopted as proposed, 
would result in the annual filing of a total of 3,000 suspicious 
activity reports by mutual funds. This result is an estimate based on 
the estimated number of respondents under the rule.
    Description of Respondents: Mutual funds as defined in 31 CFR 
103.15(a).
    Estimated Number of Respondents: 3,000.
    Frequency: As required.
    Estimate of Burden: The reporting burden of 31 CFR 103.15 will be 
reflected in the burden of the form used by mutual funds to report 
suspicious transactions. The recordkeeping burden of 31 CFR 103.15 is 
estimated as an average of 3 hours per form, which includes internal 
review of records to determine whether the activity requires reporting.
    Estimated Total Annual Recordkeeping Burden: 9,000 hours.
    FinCEN specifically invites comments on: (a) Whether the proposed 
recordkeeping requirement is necessary for the proper performance of 
the mission of FinCEN, and whether the information shall have practical 
utility; (b) the accuracy of FinCEN's estimate of the burden of the 
proposed recordkeeping requirement; (c) ways to enhance the quality, 
utility, and clarity of the information required to be maintained; (d) 
ways to minimize the burden of the recordkeeping requirement, including 
through the use of automated collection techniques or other forms of 
information technology; and (e) estimates of capital or start-up costs 
and costs of operation, maintenance, and purchase of services to 
maintain the information.
    In addition the Paperwork Reduction Act of 1995 requires agencies 
to estimate the total annual cost burden to respondents or 
recordkeepers resulting from the collection of information. Thus, 
FinCEN also specifically requests comments to assist with this 
estimate. In connection with this, FinCEN requests commenters to 
identify any additional costs associated with the completion of the 
form. These comments on costs should be divided into two parts: (1) Any 
additional costs associated with reporting; and (2) any additional 
costs associated with recordkeeping.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(government agencies), Securities, Currency, Investigations, Law 
enforcement, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    1. The authority citation for part 103 continues to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, secs. 312, 313, 314, 319, 352, Pub. L. 
107-56, 115 Stat. 307.

[[Page 2721]]

Sec.  103.15  [Redesignated as Sec.  103.12]

    2. In subpart B, redesignating Sec.  103.15 as Sec.  103.12.
    3. In subpart B, add new Sec.  103.15 to read as follows:


Sec.  103.15  Reports by mutual funds of suspicious transactions.

    (a) General. (1) Every investment company (as defined in section 3 
of the Investment Company Act of 1940 (15 U.S.C. 80a-2) (``Investment 
Company Act'') that is an open-end company (as defined in section 5 of 
the Investment Company Act (15 U.S.C. 80a-5)) and that is registered, 
or is required to register, with the Securities and Exchange Commission 
pursuant to that Act (for purposes of this section, a ``mutual fund''), 
shall file with FinCEN, to the extent and in the manner required by 
this section, a report of any suspicious transaction relevant to a 
possible violation of law or regulation. A mutual fund may also file 
with FinCEN a report of any suspicious transaction that it believes is 
relevant to the possible violation of any law or regulation but whose 
reporting is not required by this section. Filing a report of a 
suspicious transaction does not relieve a mutual fund from the 
responsibility of complying with any other reporting requirements 
imposed by the Securities and Exchange Commission.
    (2) A transaction requires reporting under the terms of this 
section if it is conducted or attempted by, at, or through a mutual 
fund, it involves or aggregates funds or other assets of at least 
$5,000, and the mutual fund knows, suspects, or has reason to suspect 
that the transaction (or a pattern of transactions of which the 
transaction is a part):
    (i) Involves funds derived from illegal activity or is intended or 
conducted in order to hide or disguise funds or assets derived from 
illegal activity (including, without limitation, the ownership, nature, 
source, location, or control of such funds or assets) as part of a plan 
to violate or evade any federal law or regulation or to avoid any 
transaction reporting requirement under federal law or regulation;
    (ii) Is designed, whether through structuring or other means, to 
evade any requirements of this part or any other regulations 
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended, 
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332;
    (iii) Has no business or apparent lawful purpose or is not the sort 
in which the particular customer would normally be expected to engage, 
and the mutual fund knows of no reasonable explanation for the 
transaction after examining the available facts, including the 
background and possible purpose of the transaction; or
    (iv) Involves use of the mutual fund to facilitate criminal 
activity.
    (3) The obligation to identify and properly and timely to report a 
suspicious transaction rests with each mutual fund involved in the 
transaction, provided that no more than one report is required to be 
filed by the mutual funds involved in a particular transaction or any 
other person obligated to report the transaction, so long as the report 
filed contains all relevant facts.
    (b) Filing procedures--(1) What to file. A suspicious transaction 
shall be reported by completing a Suspicious Activity Report--
Investment Companies (``SAR-SF''), and collecting and maintaining 
supporting documentation as required by paragraph (c) of this section.
    (2) Where to file. The SAR-SF shall be filed with FinCEN in a 
central location, to be determined by FinCEN as indicated in the 
instructions to the SAR-SF.
    (3) When to file. A SAR-SF shall be filed no later than 30 calendar 
days after the date of the initial detection by the reporting mutual 
fund of facts that may constitute a basis for filing a SAR-SF under 
this section. If no suspect is identified on the date of such initial 
detection, a mutual fund may delay filing a SAR-SF for an additional 30 
calendar days to identify a suspect, but in no case shall reporting be 
delayed more than 60 calendar days after the date of such initial 
detection. In situations involving violations that require immediate 
attention, such as terrorist financing or ongoing money laundering 
schemes, mutual funds are encouraged to immediately notify by telephone 
an appropriate law enforcement authority in addition to filing timely a 
SAR-SF. Mutual funds wishing voluntarily to report suspicious 
transactions that may relate to terrorist activity may call FinCEN's 
Financial Institutions Hotline at 1-866-556-3974 in addition to filing 
timely a SAR-SF if required by this section. The mutual fund may also, 
but is not required to, contact the Securities and Exchange Commission 
to report in such situations.
    (c) Retention of records. A mutual fund shall maintain a copy of 
any SAR-SF filed and the original (or business record equivalent) of 
any supporting documentation for a period of five years from the date 
of filing the SAR-SF. Supporting documentation shall be identified as 
such and maintained by the mutual fund, and shall be deemed to have 
been filed with the SAR-SF. The mutual fund shall make all supporting 
documentation available to FinCEN, any other appropriate law 
enforcement agencies, or federal or state securities regulators upon 
request.
    (d) Confidentiality of reports. No mutual fund, and no director, 
officer, employee, or agent of any mutual fund, who reports a 
suspicious transaction under this part, may notify any person involved 
in the transaction that the transaction has been reported, except to 
the extent permitted by paragraph (a)(3) of this section. Thus, any 
person subpoenaed or otherwise required to disclose a SAR-SF or the 
information contained in a SAR-SF, except where such disclosure is 
requested by FinCEN, the Securities and Exchange Commission, or another 
appropriate law enforcement or regulatory agency, shall decline to 
produce the SAR-SF or to provide any information that would disclose 
that a SAR-SF has been prepared or filed, citing this paragraph (d) and 
31 U.S.C. 5318(g)(2), and shall notify FinCEN of any such request and 
its response thereto.
    (e) Limitation of liability. A mutual fund, and any director, 
trustee, officer, employee, or agent of any mutual fund, who makes a 
report of any possible violation of law or regulation pursuant to this 
section or any other authority (whether such report is required or is 
made voluntarily) shall not be liable to any person under any law or 
regulation of the United States (or otherwise to the extent also 
provided in 31 U.S.C. 5318(g)(3)) for any disclosure contained in, or 
for failure to disclose the fact of, such report.
    (f) Examinations and enforcement. Compliance with this section 
shall be examined by the Department of the Treasury, through FinCEN or 
its delegees, under the terms of the Bank Secrecy Act. Failure to 
satisfy the requirements of this section may constitute a violation of 
the reporting rules of the Bank Secrecy Act and of this part.
    (g) Effective date. This section applies to transactions occurring 
180 days after the date on which the final regulations discussed in 
this notice of proposed rulemaking are published in the Federal 
Register.

    Dated: January 14, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-1174 Filed 1-17-03; 8:45 am]
BILLING CODE 4810-02-P