The first installment of the long-awaited enhancements to the Currency Transaction Reporting (CTR) exemption procedures was announced by the Treasury Department on April 17, 1996. (Fed. Reg., Vol 61, No. 80, April 24, 1996, pages 18204-18211.) The new exemption process became final in 1997. It significantly increases the scope of exemptions from the CTR filing requirements.
The CTR Exemptions Rule focuses on the definition of an "exempt person" and allows (but does not require) banks to exempt currency transactions in excess of $10,000 from the reporting process if they involve any of the following "exempt persons":
- Another bank in the United States.
- Any department or agency of any federal, state or local government, any political subdivision and any entities exercising governmental authority (including the District of Columbia, U.S. territories and possessions, and various tribal government authorities).
- Any "listed corporation" whose stock is traded on the New York Stock Exchange; the American Stock Exchange (excluding stock listed on the Emerging Company Marketplace of the American Stock Exchange); is designated as a NASDAQ National Market Security listed on the NASDAQ Stock Market (excluding stock issued under the separate NASDAQ Small-Cap Issues heading); and
- Any consolidated subsidiary of a listed corporation that files combined federal income tax returns. (Although the CTR Exemptions Rule applies only to corporations, the Treasury has solicited comments on whether the equity interests of some partnerships and business trusts listed on the named securities exchanges should also qualify for this exemption.)
The CTR Exemptions Rule applies only to transactions between "exempt persons" and banks; it does not affect exemptions granted by the bank to eligible customers which are not other banks, government agencies or listed corporations. (31 CFR 1020.315(b)(1)-(5).) Moreover, the CTR Exemptions Rule does not allow nonbank financial institutions to utilize this new exemption procedure.
How To Determine Whether a Customer Qualifies as an "Exempt Person"
A bank must first determine whether its customer qualifies as an "exempt person." Banks are required to perform the same degree of due diligence in making and documenting such a determination as a reasonable and prudent bank would take to protect itself from loss due to fraud or misstatement. The documentation used to reflect the basis for a determination that a customer qualifies as an "exempt person," however, need not be elaborate. A simple memorandum to file from the party who makes the determination (often the Bank Secrecy Act (BSA) compliance officer), reflecting the reason(s) for the determination, often will be sufficient. For instance, a memorandum with regard to a well known governmental agency which states: "XYZ agency is well known in the community as a governmental agency" and which is dated and signed, may suffice.
The CTR Exemptions Rule provides some guidance for bankers trying to determine whether their customers qualify as "exempt persons":
Banks in the United States
Transactions between banks which are both located in the United States will not require reporting under the new exemption process. (In most cases, no reporting is required currently for such transactions, insofar as transactions between most banks in the United States are deemed to be "excepted transactions.") Banks should note, however, that a transfer of currency by a bank inside the United States to a bank outside the United States is not exempt under the CTR Exemptions Rule (just as such a transfer is not exempt under the current exemption system).
Government Departments, Agencies, Political Subdivisions and Other Governmental Authorities
A bank may treat an entity as a government department or agency which qualifies as an "exempt person" if the name of the entity "reasonably indicates" it is such an entity, or if it is known generally in the community to be such an entity. The CTR Exemptions Rule acknowledges the use by banks of such an "eyeball test" as acceptable to determine the status of a customer as a government department, agency or instrumentality.
As additional guidance in determining whether a government entity qualifies as an "exempt person," the CTR Exemptions Rule advises that an entity "generally exercises" such governmental authority only if it has one or more of the following powers:
- the power to tax;
- the power to exercise the authority of eminent domain; or
- the power to exercise police powers with respect to matters within its jurisdiction.
Third parties who perform services for a governmental agency (also known as governmental contractors) do not qualify as "exempt persons" under this section. For example, if the activities of port authorities or toll collection agencies are performed by a non-governmental agent as a third party contractor, the agent would not qualify as an "exempt person" unless it is independently exempt as a "listed corporation."
Listed Corporations and Subsidiaries
To determine whether a business qualifies as a "listed corporation," the bank may rely upon any New York, American or NASDAQ stock market listing published in a newspaper of general circulation, such as the Wall Street Journal.
If the bank does not know whether a subsidiary of a listed corporation qualifies as an "exempt person" due to the filing of a consolidated tax return, it may rely upon any reasonably authenticated photocopy of Internal Revenue Form 851 (or its equivalent for the appropriate tax year) or other reasonably authenticated information, such as an officer's certificate, relating to the subsidiary's filing status.
If in doubt, a bank may ask the subsidiary whether it filed a consolidated income tax return with a listed corporation, and, if necessary, suggest that the subsidiary's officials ask their tax or accounting departments. Franchisees of listed corporations or of their subsidiaries, however, are not included within the definition of an "exempt person," unless the franchisees are independently exempt as listed corporations or listed corporation subsidiaries.
How To Designate an "Exempt Person"
To take advantage of the new exemption provisions, the bank must file a single Internal Revenue Service Form 4789 ("Designating Form 4789") in which it designates its customer as a qualifying "exempt person." Line 36 of the Designating Form 4789 must be marked to reflect that the purpose of the form is the "Designation of Exempt Person," and Part 1, Section A, and Part III must be fully completed.
This designation requirement applies regardless of whether the customer who qualifies as an "exempt person" has previously been treated as exempt from the standard Form 4789 large currency report ("CTR") reporting requirements.
The CTR Exemptions Rule specifies various time frames for filing the Forms designating "exempt customers":
- For customers who qualified as "exempt persons" and who have done large currency transactions, banks had until August 15, 1996 to file a Designating Form 4789. This 100-plus day transition period allowed banks time to perform the required due diligence and file forms on their entire qualifying customer base, especially those who are exempt under current procedures.
- For customers who qualify as "exempt persons," who have engaged in currency transactions in excess of $10,000, but for whom the bank did not file a Designating Form 4789 by August 15, 1996, the bank may still designate such customers by choosing any date on which the customer has done such a large currency transaction, and then filing a Designating Form 4789 within 30 days of the transaction date utilized on the form.
- For new customers who qualify as "exempt persons," the bank may designate such customers by choosing any date on which the customer performs a transaction in currency in excess of $10,000 and then filing Designating Form 4789 within 30 days of the transaction date which is stated on the Form.
Limitations on the Exemption
The exemption for transactions with an "exempt person" applies only to transactions involving that person's own funds. It does not apply to transactions performed by an exempt person on behalf of another beneficial owner of currency. In other words, an "exempt person" cannot lend its exempt status, for a fee or otherwise, to another person's transactions. For example, this limitation would apply to a bank, which is otherwise an exempt person, if the bank were acting in its capacity as a trustee for others.
Banks should note that this new exemption procedure provides a safe harbor. (31 CFR 1020.315(e)(10)(g)). This is in contrast to the current exemption procedures under which a bank is potentially liable if it files incomplete or false CTRs or fails to take any of the actions required for an exemption (for instance, it fails to keep a record of each exemption granted and the reason for it on a centralized list, fails to determine appropriate exemption limits, etc.). Once an eligible entity is properly qualified under the new exemption procedure as an "exempt person," the bank will not have liability for failure to file a Form 4789 on such a party for subsequent large currency transactions, subject only to satisfaction of the monitoring and Suspicious Activity Report requirements.
The safe harbor does not apply, however, if the bank:
- Knowingly files false or incomplete information with respect to the exempt person (e.g., on a Designating Form 4789) or with respect to the transaction (e.g., on a Suspicious Activity Report);
- Has reason to believe at the time the exemption is granted that the customer or transaction does not meet the criteria established for the granting of an exemption; or
- Has reason to believe the transaction is being performed by an exempt person on behalf of someone else.
Revocation of Designation
The status of any entity as an "exempt person" may be revoked by the Treasury by written notice. Written notice may be given by publication in the Federal Register, which means that the Treasury has no obligation to give the bank direct notice of such change. Moreover, in the event a corporation ceases to be listed on the applicable stock exchange, or a subsidiary of a listed corporation ceases to be included in a consolidated federal income tax return, then the status of the corporation as an "exempt person" is revoked without any action on the part of the Treasury.
Monitoring Exemptions and Updating Documentation
The CTR Exemptions Rule does not specify what actions a bank must take on an ongoing basis to ensure that customers who have been designated as "exempt persons" continue to qualify as such. In fact, the Treasury is interested in receiving suggestions from the banking community in terms of monitoring procedures and time frames which would be reasonable and not unduly burdensome. It is expected that, in any event, an annual review of the qualifications of "exempt persons" will be sufficient for regulatory purposes.
Suspicious Activity Reports and Other BSA Recordkeeping and Reporting Duties
The CTR Exemptions Rule makes it clear that it does not relieve the bank of its obligation to file a Suspicious Activity Report with respect to any transaction which calls for such a report, including, but not limited to, any transaction in currency, nor does it relieve a bank of any other reporting or recordkeeping obligation imposed under the BSA laws and regulations.
What Can Happen to the Bank If It Fails To Take Advantage of These New Exemption Procedures
Although the CTR Exemptions Rule does not mandate the use of this, or any exemption process, a failure to file designations on the bank's customers who qualify as "exempt persons" could result in its losing its ability to exempt such customers until such a filing is actually made, as the Treasury has indicated it intends to provide in the Final Rule that this new exemption procedure will be the only way a bank may exempt any of the parties who qualify as "exempt persons." In other words, the Final Rule is expected to provide that 60 days after its publication any bank that wishes to exempt another bank in the United States, a governmental entity, or a major "listed" corporation may only use this new designation procedure to do so. Banks will no longer have the option of qualifying such entities for exemptions under the current procedures. Of course, the current exemption procedures will remain available for other customers of the bank.
Although it may take a bank some "up front" time to determine which of its customers qualify as "exempt persons" under the new procedures and to complete and file Designating Form 4789 to designate these customers as "exempt persons," once this is done, the bank need not continue to file CTRs on such parties, nor take all the actions currently required for exempt lists. Some of the larger banks have estimated that the new procedures may result in a decrease in their CTR filings of up to 70%, and given that the cost of filing a single CTR has been estimated at $22.00, utilizing these new procedures could result in substantial savings to a bank. Smaller banks are also likely to achieve significant savings in both costs and time by utilizing the new exemption process.
Additional Relief Under Study by the Treasury
The Treasury hopes to use the results of the designation filings to compile a list of exempt persons for publication in the Federal Register, and to help it review the effectiveness of the CTR Exemptions Rule (and any final rule derived from it). The Treasury is also working on an enhancement to discretionary exemptions for privately held companies, large and small, whose banking history and business would justify a simplified exemption system.
This CTR Exemptions Rule is a positive step toward relieving some of the regulatory burden imposed on banks due to the Bank Secrecy Act. Although the Rule is not perfect (for example, determining whether an entity has filed a consolidated tax return can be a very difficult process), banks can still take advantage of the new procedure to exempt customers who qualify, and can rely on the safe harbor to protect them from later claims of wrongdoing. Some banks who have refused to utilize the current exemption procedure (and instead simply filed CTRs on all qualifying transactions) are using this new procedure and finding it to be worth their time and effort. Most importantly, banks and bankers can use this new exemption procedure to help them conserve their costs and resources.