[Federal Register Volume 73, Number 80 (Thursday, April 24, 2008)]
[Proposed Rules]
[Pages 22101-22108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-8955]



[[Page 22101]]

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA90


Financial Crimes Enforcement Network; Proposed Amendments to the 
Bank Secrecy Act Regulations--Exemptions From the Requirement To Report 
Transactions in Currency; Comment Request

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

ACTION: Notice of proposed rulemaking and request for comments.

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

DATES: Written comments are welcome and must be received on or before 
June 23, 2008.

ADDRESSES: Those submitting comments are encouraged to do so via the 
Internet. Comments submitted via the Internet may be submitted at 
http://www.regulations.gov/search/index.jsp with the caption in the 
body of the text, ``Attention: Currency Transaction Report Exemptions 
Rule and Form Amendments.'' Comments may also be submitted by written 
mail to: Financial Crimes Enforcement Network, Department of the 
Treasury, P.O. Box 39, Vienna, VA 22183, Attention: Currency 
Transaction Report Exemptions Rule and Form Amendments. Please submit 
comments by one method only. All comments submitted in response to this 
notice of proposed rulemaking will become a matter of public record, 
therefore, you should submit only information that you wish to make 
available publicly.
    Inspection of comments: Comments may be inspected, between 10 a.m. 
and 4 p.m., in the FinCEN reading room in Vienna, VA. Persons wishing 
to inspect the comments submitted must request an appointment with the 
Disclosure Officer by telephoning (703) 905-5034 (Not a toll free 
call). In general, FinCEN will make all comments publicly available by 
posting them on http://www.regulations.gov.

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

SUPPLEMENTARY INFORMATION: 

I. Introduction

    Currency transaction reports (CTRs) provide unique, objective, and 
timely information that is highly useful to a growing number of 
federal, state, and local law enforcement agencies. For example, CTRs 
provide information that is often unavailable from other sources, such 
as information on a non-account holder who conducts a transaction in 
currency for more than $10,000. Criminal investigators have found CTR 
data particularly useful in identifying leads for further investigation 
and corroborating already gathered information. Law enforcement 
officials have noted that no other source of information enables them 
to ``map'' the financial links between members of a criminal 
organization as well as the CTR.\1\ Finally, recent advances in 
technology have enhanced law enforcement's ability to use CTR data in 
the development of pattern and trend analyses.
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    \1\ Bank Secrecy Act: Increased Use of Exemption Provisions 
Could Reduce Currency Transaction Reporting While Maintaining 
Usefulness to Law Enforcement Efforts, GAO-08-355 (GAO: Washington, 
D.C.: February 21, 2008).
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    While FinCEN values the broad utility that CTR data provides to law 
enforcement, FinCEN also is committed to improving the effectiveness 
and efficiency with which the BSA's regulatory regime is administered. 
FinCEN, therefore, welcomed a study of the current CTR exemption regime 
by the United States Government Accountability Office (GAO). FinCEN 
found the GAO's report entitled ``Bank Secrecy Act: Increased Use of 
Exemption Provisions Could Reduce Currency Transaction Reporting While 
Maintaining Usefulness to Law Enforcement Efforts'' (``the GAO 
Report'') helpful in identifying ways the CTR exemption requirements 
can be improved, thereby encouraging depository institutions to make 
full use of CTR exemptions.

II. Background

A. Statutory Provisions

    The Bank Secrecy Act, Titles I and II of Public Law 91-508, as 
amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 
U.S.C. 5311-5314 and 5316-5332, authorizes the Secretary of the 
Treasury (Secretary), among other things, to issue regulations 
requiring financial institutions to keep records and file reports that 
are determined to have a high degree of usefulness in criminal, tax, 
and regulatory matters, and to implement anti-money laundering programs 
and compliance procedures. The regulations implementing the BSA appear 
at 31 CFR Part 103. The Secretary's authority to administer the BSA has 
been delegated to the Director of FinCEN.
    The reporting by financial institutions of transactions in currency 
in excess of $10,000 has long been a major component of the Department 
of the Treasury's implementation of the BSA. The reporting requirement 
is promulgated pursuant to 31 U.S.C. 5313(a) requiring reports of 
domestic coin and currency transactions.
    The Money Laundering Suppression Act of 1994 (MLSA) amended the BSA 
by establishing a statutory system for exempting transactions by 
certain customers of depository institutions from currency transaction 
reporting.\2\ In general, the statutory exemption system, 31 U.S.C. 
5313(d) through (g), creates two types of exemptions. Under 31 U.S.C. 
5313(d) (sometimes called the ``mandatory exemption'' provision), the 
Secretary is required to provide depository institutions with the 
ability to exempt from the currency transaction reporting requirement 
transactions in currency between the depository institution and four 
specified categories of customers. The four specified categories of 
customers in the mandatory exemption provision are: (1) Another 
depository institution; (2) a department or agency of the United 
States, any State, or any political subdivision of any State; (3) any 
entity established under the laws of the United States, any State, or 
any political subdivision of any State, or under an interstate compact 
between two or more States, which exercises governmental authority on 
behalf of the United States or any such State or political subdivision; 
and (4) any business or category of business the reports on which have 
little or no value for law enforcement purposes.
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    \2\ See section 402 of the Money Laundering Suppression Act of 
1994 (the ``Money Laundering Suppression Act''), Title IV of the 
Riegle Community Development and Regulatory Improvement Act of 1994, 
Public Law 103-325 (September 23, 1994). The Money Laundering 
Suppression Act sought 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. The 
enactment of 31 U.S.C. 5313(d) through (g) reflected congressional 
intent to ``reform * * * the procedures for exempting transactions 
between depository institutions and their customers.'' See H.R. Rep. 
103-652, 103d Cong., 2d Sess. 186 (August 2, 1994).
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    Under 31 U.S.C. 5313(e) (sometimes called the ``discretionary 
exemption''

[[Page 22102]]

provision) the Secretary is authorized, but not required, to allow 
depository institutions to exempt from the currency transaction 
reporting requirement transactions in currency between it and a 
qualified business customer.\3\ A ``qualified business customer,'' for 
purposes of the discretionary exemption provision, is a business that:
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    \3\ For additional information about the terms of 31 U.S.C. 
5313(e)-(g), see 63 Fed. Reg. 50147, 50148 (September 21, 1998).

    (A) Maintains a transaction account (as defined in section 
19(b)(1)(C) of the Federal Reserve Act) at the depository 
institution; (B) frequently engages in transactions with the 
depository institution which are subject to the reporting 
requirements of subsection (a); and (C) meets criteria which the 
Secretary determines are sufficient to ensure that the purposes of 
[the BSA] are carried out without requiring a report with respect to 
such transactions.\4\
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    \4\ 31 U.S.C. 5313(e)(2).

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

    The current exemption procedures, which are codified at 31 CFR 
103.22(d), were the result of a five-part rulemaking.\8\ The current 
exemption procedures apply to depository institution customers that 
fall within one of the classes of exempt persons described in 31 CFR 
103.22(d)(2)(i)-(vii), commonly referred to as ``Phase I'' and ``Phase 
II'' exemptions.
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    \8\ See 61 FR 18204 (April 24, 1996), 62 FR 47141, 47156 
(September 8, 1997), 62 FR 63298 (November 28, 1997), 63 FR 50147 
(September 21, 1998), and 65 FR 46356 (July 28, 2000) (the 
rulemakings that comprise the current CTR exemption system).
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    Phase I eligible customers include: (i) Other banks \9\ operating 
in the United States; (ii) Government departments and agencies; (iii) 
Certain entities that exercise governmental authority; (iv) Entities 
whose equity interests are listed on one of the major national stock 
exchanges; and (v) Certain subsidiaries of entities whose equity 
interests are listed on one of the major national stock exchanges.\10\ 
Phase II eligible customers include: (i) ``Non-listed businesses'' and 
(ii) ``Payroll customers.''
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    \9\ See 31 CFR 103.22 (definition of a bank, which includes 
other depository institutions).
    \10\ See 31 CFR 103.22(d)(2)(v) (definition of a subsidiary).
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Phase II Eligible Customers: Non-Listed Businesses and Payroll 
Customers
    A ``non-listed business'' is any other commercial enterprise that 
is not ineligible for exemption \11\ and that:
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    \11\ Non-listed businesses that are ineligible for exemption are 
businesses engaged primarily in one or more of the following 
activities: Serving as financial institutions or agents of financial 
institutions of any type; purchasing or selling to customers motor 
vehicles of any kind, vessels, aircraft, farm equipment or mobile 
homes; practicing law, accountancy, or medicine; auctioning of 
goods; chartering or operating ships, buses, or aircraft; gaming of 
any kind (other than licensed pari-mutuel 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. See 31 CFR 103.22(d)(6)(vii).
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    (A) Has maintained a transaction account at the bank for at least 
12 months;
    (B) Frequently engages in transactions in currency with the bank in 
excess of $10,000; and
    (C) Is incorporated or organized under the laws of the United 
States or a State, or is registered as and eligible to do business 
within the United States or a State.\12\
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    \12\ 31 CFR 103.22(d)(2)(vi).
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    Such an enterprise is an exempt person only ``[t]o the extent of 
its domestic operations.'' \13\ The addition of non-listed businesses 
as a category of exempt person was intended to make transactions of all 
established depository institution customers (other than ineligible 
companies) not otherwise included within the scope of the mandatory 
exemption provision, including sole proprietorships, eligible for the 
current exemption procedures.
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    \13\ Id.
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    A ``payroll customer,'' under 31 CFR 103.22(d)(2)(vii), is any 
other person (i.e., a person not otherwise covered under the exempt 
person definitions) that:
    (A) Has maintained a transaction account at the bank for at least 
12 months;
    (B) Operates a firm that regularly withdraws more than $10,000 in 
order to pay its United States employees in currency; and
    (C) Is incorporated or organized under the laws of the United 
States or a State, or is registered as and eligible to do business 
within the United States or a State.\14\
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    \14\ 31 CFR 103.22(d)(2)(vii).
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    A payroll customer is an exempt person ``[w]ith respect solely to 
withdrawals for payroll purposes.'' \15\
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    \15\ Id.
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Designating an Eligible Customer as Exempt and Other Requirements
    Currently, a depository institution exempting a customer must file 
a FinCEN Form 110, Designation of Exempt Person (DOEP) (``FinCEN Form 
110'') within 30 days after the first transaction which the bank wishes 
to exempt with respect to the customer.\16\ For a Phase I customer, a 
depository institution must file the form only once and must conduct an 
annual review of the customer. For a Phase II customer, a depository 
institution must also conduct an annual review of the customer, and 
must biennially renew the customer's exemption by refiling the form, 
certifying that it has applied its system of monitoring the customer's 
transactions in currency for suspicious activity, and reporting any 
change in control of the customer.
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    \16\ See 31 CFR 103.22(d)(3)(i). FinCEN Form 110 replaced the 
previous designation form, Treasury Form TD F 90-22.53.
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C. Objectives of Proposed Changes

    It is FinCEN's intent to simplify the current requirements for 
depository institutions to exempt their eligible customers from CTR 
reporting by proposing changes to the current regulatory requirements 
to comport with the GAO Report recommendations.
GAO Report Findings and Recommendations
    The GAO in its report found that CTRs provide federal, state, and 
local law enforcement officials with ``unique and reliable information 
essential to a variety of efforts.'' \17\ Advances in technology have 
made information reported through CTRs that much more useful. Further, 
in discussing the usefulness of CTRs, the GAO Report contrasted the 
CTR, which captures information based on objective facts that determine 
its filing, with the SAR, which requires a financial institution to 
make a subjective determination of what is suspicious prior to its 
filing.\18\ The information gleaned from those two types of reports is 
very different in nature and is useful to law enforcement in 
complementary ways. For example, the GAO Report noted that law 
enforcement agencies often consult CTR

[[Page 22103]]

data to obtain more detailed information after reviewing SARs.\19\
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    \17\ Supra note 1, at 2.
    \18\ See supra note 1, at 17.
    \19\ Id. at 19.
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    CTR requirements are also useful to law enforcement because they 
force criminals to act in ways that increase chances of detection as 
they attempt to avoid conducting reportable transactions.\20\ While the 
GAO Report found that it can be difficult for law enforcement to link 
CTRs to specific outcomes, it also is generally difficult for 
depository institutions to quantify the costs of meeting CTR 
requirements, in large part because the same processes and staff are 
used to fulfill other responsibilities of the financial institution.
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    \20\ Id.
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    Recognizing both the value of CTR data and the need to improve the 
current CTR exemption regulatory requirements, the GAO Report made 
three main recommendations that FinCEN proposes in this Notice: (1) 
Remove the regulatory requirement that depository institutions 
biennially renew Phase II exemptions; (2) remove the regulatory 
requirement that depository institutions file exemption forms, and 
annually review the supporting information, for banks, federal, state, 
and local government agencies, and entities exercising federal, state 
or local governmental authority; and (3) permit depository institutions 
to exempt otherwise eligible non-listed customers who frequently engage 
in large cash transactions within a period of time shorter than 12 
months.

III. Section-by-Section Analysis

    The proposed rule would implement the GAO Report's recommendations 
by eliminating the biennial filing requirement; eliminating the 
requirement to file exemptions forms on, and annually review the 
supporting information for, exempt customers that are depository 
institutions, Federal, State and local government agencies, and 
entities exercising governmental authority; and eliminating the 12-
month time period for which customers may be exempted as Phase II 
customers, in favor of a risk-based approach. In addition, the proposed 
rule would eliminate the transitional rule in the current regulations 
as no longer necessary, renumber the paragraphs under Sec.  103.22(d) 
accordingly, and make other technical corrections as noted below.

A. Sec.  103.22(d)(1)--General

    FinCEN proposes to amend 31 CFR 103.22(d)(1) to change the cross 
references in this paragraph to reflect proposals in this notice that 
if adopted would result in the paragraphs of section 103.22(d) being 
re-numbered.

B. Sec.  103.22(d)(2)(iv) Exempt Person--Listed Entities

    FinCEN proposes to amend 31 CFR 103.22(d)(2)(iv) by correcting the 
name of a NASDAQ Stock Market listing referenced in the regulation from 
its prior name, the NASDAQ Small Cap Issues, to its current name, the 
NASDAQ Capital Markets Companies listing.

C. Sec.  103.22(d)(2)(vi) Exempt Person--Non-Listed Entities

    FinCEN proposes to amend 31 CFR 103.22(d)(2)(vi) by changing a 
cross reference in this paragraph to reflect proposals in this notice 
that if adopted would result in the paragraphs of section 103.22(d) 
being re-numbered.

D. Sec. Sec.  103.22(d)(2)(vi)(A) and (vii)(A) Exempt Person--Length of 
Time Required To Consider Phase II Entities for Exemption

    FinCEN proposes to amend 31 CFR 103.22(d)(2)(vi)(A) and (vii)(A) by 
removing any prescribed amount of time before a depository institution 
may consider a non-listed business or payroll customer for exemption, 
and instead enabling a depository institution to make a risk-based 
determination as to when it has a sufficient history with such 
customers before treating them as an exempt person. FinCEN solicits 
comment on an alternative proposal in which, instead of adopting a 
risk-based approach, FinCEN would maintain a reference to the length of 
time required to consider Phase II entities for exemption, but reduce 
it from twelve months to two months.
    The GAO Report recommended that FinCEN permit depository 
institutions to exempt otherwise eligible Phase II customers who 
frequently \21\ engage in large cash transactions without having to 
wait for the current 12-month period because many depository 
institution respondents surveyed for the GAO Report indicated that the 
time-consuming nature of the biennial renewal, along with the costs 
associated with biennial renewals, made using the Phase II exemptions 
less advantageous. FinCEN supports changing the current regulatory 
requirements to conform to this recommendation.
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    \21\ See FinCEN's ``Guidance on Interpreting `Frequently' Found 
in the Criteria for Exempting a `Non-Listed Business' Under 31 CFR 
103.22(d)(2)(vi)(B)'' (November 2002).
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    In 1998, FinCEN specified a twelve month waiting period for Phase 
II exemptions largely in response to law enforcement concerns about 
establishing an overly lax exemption system.\22\ The exemption 
requirements in place prior to 1998 had allowed the designation of 
eligible non-listed and payroll customers after only two months, though 
other complex requirements also had to be met.\23\ At that time, FinCEN 
concurred with law enforcement that requiring a twelve month time 
period was not unreasonable, given that it was greatly simplifying the 
exemption requirements then in place.\24\
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    \22\ See 31 CFR 103(d)(2)(vi)(A). See also 62 FR 47161 
(September 8, 1997) (``The need for some `counterweight' in the 
liberalized system was raised forcefully with FinCEN by federal law 
enforcement officials during formulation of the proposed rule. 
Enforcement officials are concerned that necessary easing of the 
burdens of unnecessary currency transaction reporting not have the 
unintended effect of opening up avenues for more efficient money 
laundering.'').
    \23\ See Id. Some requirements under the administrative 
exemption system included: only transactions falling within certain 
``permitted'' ranges could be exempted, banks were required to 
prepare and submit signed exemption statements, or banks were 
required to maintain mandatory exemption lists.
    \24\ See 63 FR 50151 (September 21, 1998) (``As stated in the 
Notice, the ten-month difference in time periods is justified by the 
elimination of virtually all of the other requirements of the prior 
administrative exemption system.'').
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    Much has changed in the regulatory landscape articulated in the BSA 
and its implementing regulations since 1998 when almost all of what 
constitutes the current CTR exemption regime became effective. With the 
enactment of the USA PATRIOT Act and subsequent, related changes to the 
implementing regulations of the BSA, depository institutions became 
subject to additional requirements, like the customer identification 
program (CIP) requirements,\25\ which must include risk-based 
procedures for verifying the identity of a customer. As a result, 
depository institutions have had to gather more information about their 
customers at account opening and have become increasingly adept at 
applying a risk-based analysis as they comply with BSA requirements.
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    \25\ 31 CFR 103.121(b)(2).
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    Taking into consideration all of the changes that have been made to 
the BSA and its implementing regulations, FinCEN believes adopting a 
risk-based approach to the amount of time that is needed before an 
initial designation of exemption may be filed for Phase II eligible 
customers is now appropriate. FinCEN also proposes for comment, in the 
alternative, an amendment that would require depository institutions to 
wait two months before making the initial designation.

[[Page 22104]]

E. Sec.  103.22(d)(3)(i)--General

    FinCEN proposes to amend 31 CFR 103.22(d)(3)(i) by making specific 
reference to a depository institution's need to use FinCEN Form 110 
\26\ when designating an exempt person, removing text that references 
the exemption requirements that existed prior to 1998, and re-stating 
that a designation must be made within 30 calendar days of the 
reportable transaction in currency.
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    \26\ FinCEN intends to make changes to Form 110 and its 
instructions as necessary to reflect the changes proposed to 31 CFR 
103.22(d) after the proposal is finalized.
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F. Sec.  103.22(d)(3)(ii)--Special Rules

    FinCEN proposes to amend 31 CFR 103.22(d)(3)(ii) by removing the 
requirement that depository institutions file an initial designation of 
exempt persons by using FinCEN Form 110 for Phase I eligible customers 
that are depository institutions, federal, state, or local governments, 
or entities exercising governmental authority.\27\
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    \27\ See 31 CFR 103.22(d)(6)(ii) (Operating rules that 
illustrate what types of entities normally exercise governmental 
authority).
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    The GAO Report recommended that FinCEN eliminate the requirement 
for depository institutions to file an exemption form for those Phase I 
customers described above because CTRs filed on those entities would be 
of little value to law enforcement. The GAO report noted that the GAO's 
analysis of FinCEN data showed that in 2006 alone, almost 87,000 CTRs 
were filed on over 2,900 depository institutions and nearly 24,000 CTRs 
were filed on 2,000 government entities.\28\
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    \28\ Supra note 1, at 50.
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    FinCEN supports the GAO Report recommendation and agrees that CTRs 
filed on depository institutions, government agencies, and entities 
exercising governmental authority, are not likely to be highly useful 
to law enforcement. In addition, depository institutions would still be 
required to comply with their SAR reporting obligations should any of 
their Phase I customers engage in suspicious activity. It is FinCEN's 
intent to continue to simplify the CTR exemption process while ensuring 
that law enforcement receives information that is highly useful to its 
efforts. Proposing this change to the regulatory requirements to 
eliminate the requirement to file exemption forms on these Phase I 
customers is in line with both of these goals.\29\
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    \29\ Even though FinCEN Form 110 would not be required to be 
filed for these Phase I customers, a depository institution will 
continue to be required to take such steps to assure itself that the 
Phase I customer is an exempt person and to document the basis of 
its conclusions 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. See 31 CFR 103.22(d)(6)(i).
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    FinCEN also proposes to amend 31 CFR 103.22(d)(3)(ii) to reflect 
that transactions in currency with any of the twelve Federal Reserve 
Banks would continue to be exempt from the requirement to file an 
exemption form.

G. Sec.  103.22(d)(3)(iii)--Special Procedures

    FinCEN proposes to add 31 CFR 103.22(d)(3)(iii). That new paragraph 
would add a requirement that when designating an eligible non-listed or 
payroll customer for exemption, the depository institution conduct a 
risk-based assessment of the transactional activity of that customer. 
Under a risk-based approach, the amount of time an account has been 
opened would be one of many factors that a depository institution might 
consider when forming a reasonable belief that the customer it seeks to 
designate for exemption has a legitimate business purpose for 
conducting frequent transactions in currency. Other factors might 
possibly include, but are not limited to: Whether the depository 
institution had a past relationship with the customer; certain specific 
characteristics of the customer's business model that may be pertinent, 
the types of business in which the customer engages, and where the 
business is operating.
    The risk-based analysis requirement proposed in this notice should 
be read as a separate, specific rule of paragraph (d), and is not meant 
to supersede the operating rules of existing 31 CFR 103.22(d)(6)(i) 
subject to paragraph (d).

H. Sec.  103.22(d)(4)--Annual Review

    FinCEN proposes to amend 31 CFR 103.22(d)(4) by removing the 
requirement that depository institutions conduct an annual review of 
the information supporting certain exempt Phase I eligible customers, 
namely banks, government agencies, and entities exercising governmental 
authority. The GAO Report recommended removing the regulatory 
requirement that depository institutions conduct an annual review of 
certain exempt Phase I eligible customers because these entities are 
unlikely to change the characteristics that made them eligible for 
exemption at their initial designation. The GAO Report also contrasted 
these Phase I eligible customers to other Phase I and Phase II 
customers, such as public companies, which are more likely to 
reorganize or enter new lines of business. Accordingly, FinCEN proposes 
changing the current regulatory requirements for exempting the Phase I 
eligible customers identified by the GAO report that are unlikely to 
change their characteristics that made them eligible for initial 
designation, but notes that depository institutions must still review 
and verify exempt status for Phase II customers annually, as is 
required by the BSA and its implementing regulations.\30\ Further, 
while they are separate and distinct requirements, conducting the 
annual review required for Phase II customers will likely provide 
depository institutions with important information helpful to complying 
with the SAR reporting obligation and the AML program requirement.
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    \30\ 31 U.S.C. Sec.  5313(5)(A). See also 31 CFR Sec.  
103.22(d)(4).
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    FinCEN also proposes to amend 31 CFR 103.22(d)(4) by requiring 
depository institutions to notify FinCEN of any change in control of a 
Phase II customer that it knows of, or should know of on the basis of 
its records. Notification would occur through the filing of an amended 
FinCEN Form 110 by March 15 of the calendar year following every second 
year in which the bank knew or should have known of the change in 
control. Complying with the requirement to annually review and verify 
the exempt status of a Phase II customer should help depository 
institutions determine whether they must file information regarding a 
change in control of an exempt person. The requirement to file change 
of control information is a requirement articulated in FinCEN's 
regulations that interpret the BSA, and is not a new requirement.\31\ 
This proposal is made in concert with other proposals in this notice 
that conform to the GAO Report recommendation that FinCEN remove the 
regulatory requirement that depository institutions biennially renew 
Phase II exemptions. Accordingly, FinCEN is proposing that depository 
institutions only need file a renewal form in the event that there has 
been a change in control for an exempted Phase II customer during 
recurring two year reporting periods. FinCEN also solicits comment on 
whether information about change in control of a Phase II customer 
should be reported within 30 days of any change in control that the

[[Page 22105]]

depository institution knows of, or should know of, based on its 
records.
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    \31\ U.S.C. 5313(e)(5)(B) (requiring depository institutions to 
resubmit information on customers pertaining to modifications of 
those customers). See also 31 CFR 103.22(d)(5)(ii).
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I. Current Sec.  103.22(d)(5) Biennial Filing

    FinCEN proposes removing paragraph Sec.  103.22(d)(5) to eliminate 
the requirement that depository institutions biennially file a 
designation of exempt person for non-listed and payroll customers. The 
GAO Report recommended removing the regulatory requirement that 
depository institutions biennially file a designation of exempt person 
for Phase II customers because it did not appear to provide any 
additional benefit and because eliminating the requirement might 
encourage institutions that had not exempted Phase II customers to do 
so. FinCEN, as part of its efforts to improve the efficiency and 
effectiveness of the BSA regime, encourages depository institutions to 
avail themselves of Phase II exemptions, and as a result, is proposing 
to adopt this recommendation. If the requirement to biennially file a 
designation for Phase II customers is removed, depository institutions 
would no longer need to certify that the bank's system of monitoring 
the transactions in currency of an exempt person for suspicious 
activity had been applied as necessary in order to continue treating a 
Phase II customer as exempt. FinCEN notes that this is in no way meant 
to modify the suspicious activity reporting requirement, but recognizes 
that removing this requirement may encourage more depository 
institutions to exempt Phase II eligible customers. Finally, as 
discussed above, depository institutions must still file change of 
control information with FinCEN on exempt persons as is required by the 
BSA implementing regulations.\32\
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    \32\ Id.
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J. Redesignated Sec.  103.22(d)(5)(i), (iii) and (viii) Operating 
Rules--Cross References & Stock Exchange Listings

    FinCEN proposes to amend redesignated 31 CFR 103.22(d)(5)(i) and 
(viii) to change cross references in these paragraphs to reflect 
proposals in this notice that if adopted would result in the paragraphs 
of section103.22 being re-numbered.
    FinCEN also proposes amending redesignated 31 CFR 103.22(d)(5)(iii) 
by changing a reference to the National Association of Securities 
Dealers to the NASDAQ, to reflect correctly the name of the entity that 
contains information on its Web site that is useful to complying with 
Phase I exemption requirements. FinCEN also proposes making other minor 
technical edits, like changing ``Edgar'' to ``EDGAR'' and ``Nasdaq'' to 
``NASDAQ'', to reflect correctly that those names are acronyms.

K. Redesignated Sec.  103.22(d)(7)(i) and (ii)--Limitation on Liability

    FinCEN proposes to amend redesignated 31 CFR 103.22(d)(7)(ii) to 
change a cross reference in this paragraph to reflect proposals in this 
notice that if adopted would result in the paragraphs of section 103.22 
being re-numbered, and to correspond to changes made in another section 
of this proposed rule that remove the requirement that depository 
institutions conduct an annual review of certain exempt customers.

L. Redesignated Sec.  103.22(d)(8)--Obligations To File Suspicious 
Activity Reports and Maintain a Monitoring System

    FinCEN proposes to amend redesignated 31 CFR 103.22(d)(8)(i) and 
(ii) to correct cross references made in those paragraphs to the 
suspicious activity reporting rule in 31 CFR Part 103 applicable to 
banks.

M. Redesignated Sec.  103.22(d)(9)--Revocation

    FinCEN proposes to amend redesignated 31 CFR 103.22(d)(9) to 
require that depository institutions report to FinCEN a decision to no 
longer treat a previously exempted, and an otherwise eligible customer 
for exemption, for continued treatment as an exempt person. Currently, 
it is voluntary for depository institutions to file a revocation of 
exemption with FinCEN. Notice of revocation would be filed with FinCEN 
by the close of the 30 calendar day period beginning after the day of 
the first transaction in currency with that person that has been 
reported.
    FinCEN also proposes to amend redesignated 31 CFR 103.22(d)(9) to 
change a cross reference in this paragraph to reflect proposals in this 
notice that if adopted would result in the paragraphs of section 103.22 
being re-numbered.

IV. Request for Comment

    All comments submitted in response to this notice will become a 
matter of public record. FinCEN welcomes written comment on all aspects 
of the proposed rule, and we especially encourage comments on the 
following issues:

A. Removing the Regulatory Requirement That Depository Institutions 
File Exemption Forms, and Annually Review the Supporting Information 
for Banks, Federal, State, and Local Government Agencies, and Entities 
Exercising Federal, State, or Local Governmental Authority

     Will this proposal encourage depository institutions to 
avail themselves of Phase I exemptions for customers who are depository 
institutions, federal, state, and local government agencies, and 
entities exercising federal, state or local governmental authority, and 
if not, why?

B. Removing the Regulatory Requirement That Depository Institutions 
Biennially Renew Phase II Exemptions

     With the removal of the biennial requirement to renew a 
designation for certain eligible Phase I and Phase II customers, should 
depository institutions be required to file a revocation of exemption 
if they choose to no longer exempt an otherwise eligible customer?
     Should depository institutions be required to renew 
information regarding a change of control of a Phase II exempt customer 
once every two years, or should the requirement be that modified and 
updated change of control information must be filed within 30 days of 
the depository institution becoming aware of the change?
     Will this proposal encourage depository institutions to 
avail themselves of Phase II exemptions, and if not, why?

C. Permitting Depository Institutions To Exempt Otherwise Eligible 
Phase II Customers Who Frequently Engage in Large Cash Transactions 
Within a Period of Time Shorter Than 12 Months

    FinCEN has proposed two alternatives to simplify the current 
requirement that depository institutions have a customer for at least 
12 months before that customer becomes eligible for a Phase II 
exemption.
     Is it preferable to adopt a regulatory requirement that 
depository institutions only conduct a risk-based analysis of an 
otherwise eligible Phase II customer with no prescribed amount of time 
before a depository institution would be permitted to file an initial 
designation of exemption? Or, is it preferable to adopt a generally 
recommended minimum amount of time before an initial designation of 
exemption could be filed?
     If those commenting prefer that FinCEN state a generally 
recommended

[[Page 22106]]

minimum amount of time that should pass before a depository institution 
exempts a Phase II customer, is two months an appropriate amount of 
time? Why?
     FinCEN currently defines ``frequently'' as eight or more 
reportable transactions per annum in guidance that interprets the 
regulatory requirements for Phase II exemption procedures. Given the 
proposed changes in this notice, is eight still an appropriate number 
of reportable transactions to deem a customer eligible for exemption?
     Will this proposal encourage depository institutions to 
avail themselves of Phase II exemptions, and if not, why?

V. Regulatory Matters

A. Executive Order 12866

    It has been determined that this proposed rule is not a significant 
regulatory action for purposes of Executive Order 12866. Accordingly, a 
regulatory impact analysis is not required.

B. Unfunded Mandates Act of 1995 Statement

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

C. Regulatory Flexibility Act

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

D. Paperwork Reduction Act

    The collection of information 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)) 
under OMB control number 1506-0012. Comments on the collection of 
information should be sent (preferably by fax (202-395-6974)) to the 
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 e-mail to 
[email protected]), with a copy to FinCEN by mail or by 
Internet submission at the addresses previously specified. Comments on 
the collection of information should be received by June 23, 2008. 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 
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. The 
collection of information in this proposed rule is in 31 CFR 103.22.
    Description of Affected Financial Institutions: Banks as defined in 
31 CFR 103.11(c).
    Estimated Number of Affected Financial Institutions: 19,000.
    Estimated Average Annual Burden Hours per Affected Financial 
Institution: The estimated average burden associated with the 
collection of information in this proposed rule is one hour 
recordkeeping and 30 minutes per response per affected financial 
institution.
    Estimated Total Annual Burden: 97,500 hours.
    FinCEN specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, including whether the information shall have 
practical utility; (b) the accuracy of FinCEN's estimate of the burden 
of the proposed collection of information; (c) ways to enhance the 
quality, utility, and clarity of the information required to be 
maintained; (d) ways to minimize the burden of the required collection 
of information, 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.
    The information collection in 31 CFR 103.22(d)(5)(i) has previously 
been reviewed and approved by OMB under control number 1506-0009. Under 
the Paperwork Reduction Act, an agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it displays a valid OMB control number.

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 
proposed to be amended as follows:

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

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

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

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


Sec.  103.22  Reports of transactions in currency.

* * * * *

[[Page 22107]]

    (d) * * *
    (1) General. No bank is required to file a report otherwise 
required by paragraph (b) of this section with respect to any 
transaction in currency between an exempt person and such bank, or, to 
the extent provided in paragraph (d)(5)(vi) of this section, between 
such exempt person and other banks affiliated with such bank. In 
addition, a non-bank financial institution is not required to file a 
report otherwise required by paragraph (b) of this section with respect 
to a transaction in currency between the institution and a commercial 
bank. (A limitation on the exemption described in this paragraph (d)(1) 
is set forth in paragraph (d)(6) of this section.)
* * * * *
    (2) * * *
    (iv) Any entity, other than a bank, whose common stock or analogous 
equity interests are listed on the New York Stock Exchange or the 
American Stock Exchange or whose common stock or analogous equity 
interests have been designated as a NASDAQ National Market Security 
listed on the NASDAQ Stock Market (except stock or interests listed 
under the separate ``NASDAQ Capital Markets Companies'' heading), 
provided that, for purposes of this paragraph (d)(2)(iv), a person that 
is a financial institution, other than a bank, is an exempt person only 
to the extent of its domestic operations;
* * * * *
    (vi) To the extent of its domestic operations and only with respect 
to transactions conducted through its exemptible accounts, any other 
commercial enterprise (for purposes of this paragraph (d), a ``non-
listed business''), other than an enterprise specified in paragraph 
(d)(5)(viii) of this section, that:
    (A) Maintains a transaction account, as defined in paragraph 
(d)(5)(ix) of this section, at the bank;
* * * * *
    (vii) * * *
    (A) Maintains a transaction account, as defined in paragraph 
(d)(5)(ix) of this section, at the bank;
* * * * *
    (3) Designation of certain exempt persons--(i) General. Except as 
provided in paragraph (d)(3)(ii) of this section, a bank must designate 
an exempt person by filing a FinCEN Form 110. Such designation must 
occur by the close of the 30-calendar day period beginning after the 
day of the first reportable transaction in currency with that person 
sought to be exempted from reporting under the terms of this paragraph 
(d). The designation must be made separately by each bank that treats 
the customer as an exempt person, except as provided in paragraph 
(d)(5)(vi) of this section.
    (ii) Special rules. A bank is not required to file a FinCEN Form 
110 with respect to the transfer of currency to or from:
    (A) Any of the twelve Federal Reserve Banks; or
    (B) Any exempt person as described in paragraphs (d)(2)(i) to (iii) 
of this section.
    (iii) Special procedures. A bank must base a decision to designate 
a non-listed business or a payroll customer, as described in paragraphs 
(d)(2)(vi) and (vii), as an exempt person on its own risk-based 
assessment of the customer and its pattern of currency transaction 
activity. The bank must form a reasonable belief that the non-listed 
business or payroll customer it seeks to designate for exemption has a 
legitimate business purpose for conducting frequent transactions in 
currency.
    (4) Annual review. The information supporting each designation of 
an exempt person described in paragraphs (d)(2)(iv) to (vii), and the 
application of the monitoring system required to be maintained by 
paragraph (d)(8)(ii) of this section to each account of an exempt 
person described in paragraphs (d)(2)(vi) or (d)(2)(vii) of this 
section, must be reviewed and verified at least once each year. 
Information about any change in control of an exempt person as 
described in paragraphs (d)(2)(vi) or (vii) of this section that the 
bank knows, or should know on the basis of its records, must be 
reported on FinCEN Form 110 by March 15 of the second calendar year 
following the year in which the bank knew or should have known of the 
change in control.
* * * * *
    (5) Operating rules--(i) General rule. Subject to the specific 
rules of this paragraph (d), a bank must take such steps to assure 
itself that a person is an exempt person (within the meaning of the 
applicable provision of paragraph (d)(2) of this section), to document 
the basis for its conclusions, and document its compliance, with the 
terms of this paragraph (d), that a reasonable and prudent bank would 
take and document to protect itself from loan or other fraud or loss 
based on misidentification of a person's status, and in the case of the 
monitoring system requirement set forth in paragraph (d)(8)(ii) of this 
section, such steps that a reasonable and prudent bank would take and 
document to identify suspicious transactions as required by paragraph 
(d)(8)(ii) of this section.
* * * * *
    (iii) Stock exchange listings. In determining whether a person is 
described in paragraph (d)(2)(iv) of this section, a bank may rely on 
any New York, American or NASDAQ Stock Market listing published in a 
newspaper of general circulation, on any commonly accepted or published 
stock symbol guide, on any information contained in the Securities and 
Exchange Commission ``EDGAR'' System, or on any information contained 
on an Internet site or sites maintained by the New York Stock Exchange, 
the American Stock Exchange, or the NASDAQ.
* * * * *
    (viii) * * * A business that engages in multiple business 
activities may be treated as a non-listed business so long as no more 
than 50% of its gross revenues is derived from one or more of the 
ineligible business activities listed in this paragraph (d)(5)(viii).
* * * * *
    (7) * * *
    (ii) Subject to the specific terms of this paragraph (d), and 
absent any specific knowledge of information indicating that a customer 
no longer meets the requirements of an exempt person, a bank satisfies 
the requirements of this paragraph (d) to the extent it continues to 
treat that customer as an exempt person until the date of that 
customer's next required periodic review, which as required by 
paragraph (d)(4) of this section for an exempt person described in 
paragraph (d)(2)(iv) to (vii) of this section, shall occur no less than 
once each year.
* * * * *
    (8) Obligations to file suspicious activity reports and maintain 
system for monitoring transactions in currency. (i) Nothing in this 
paragraph (d) relieves a bank of the obligation, or reduces in any way 
such bank's obligation, to file a report required by Sec.  103.18 with 
respect to any transaction, including any transaction in currency that 
a bank knows, suspects, or has reason to suspect is a transaction or 
attempted transaction that is described in Sec.  103.18(a)(2)(i), (ii), 
or (iii), or relieves a bank or any reporting obligation 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

[[Page 22108]]

transactions trends or patterns, may trigger the obligation of a bank 
under Sec.  103.18.
    (ii) * * * The statement in the preceding sentence with respect to 
accounts of non-listed business and payroll customers does not limit 
the obligation of banks generally to take the steps necessary to 
satisfy the terms of paragraph (d)(8)(i) of this section and section 
103.18 with respect to all exempt persons.
    (9) Revocation. A depository institution must notify FinCEN of its 
decision to no longer treat the transactions of an otherwise eligible 
customer as exempt from the currency transaction reporting requirement 
by filing FinCEN Form 110 by the close of the 30 calendar day period 
beginning after the day of the first transaction in currency with that 
person that has been reported. Without any action on the part of the 
Treasury Department and subject to the limitation on liability 
contained in paragraph (d)(7)(ii) of this section:
* * * * *

    Dated: April 21, 2008.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
 [FR Doc. E8-8955 Filed 4-23-08; 8:45 am]
BILLING CODE 4810-02-P