Alert September 08, 2009

FinCEN Issues Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements

The Financial Crimes Enforcement Network (“FinCEN”) issued guidance (the “Guidance”) regarding the rules which permit banks to treat certain customers as exempt from currency transaction report (“CTRs”) requirements.  The Guidance provides background and responds to frequently asked questions regarding FinCEN’s December 2008 amendments to the CTR exemption rules (the “2008 Amendments”), which were described in the December 9, 2008 Alert.

In its background section, the Guidance notes that the changes to the CTR rule’s exemption requirements were prompted by a 2008 General Accountability Office Report that recommended amendments to ease banks’ reporting burden while maintaining law enforcement efforts.  The background section also sets forth an overview of the 2008 Amendments’ key substantive changes and provides a chart outlining the exemption requirements for each category of eligible customer.

The Guidance responds to frequently asked questions regarding the following issues:

  • Timing of Risk-Based Determination.  Under the 2008 Amendments, a bank may designate an eligible nonpublic company or payroll customer as exempt in less than two months if the bank conducts a risk-based analysis on the legitimacy of the customer’s transactions.  The Guidance provides representative examples of customers where designation as exempt in less than two months may be appropriate:  (1) returning customers that reopen a previously maintained exempt transaction account and (2) customers whose exempt status has changed (e.g., a publicly listed company that goes private).  FinCEN notes that, in each of the examples, there is some factor that enables that bank’s level of knowledge to exceed what is typical for a new customer being considered for an exemption.
  • Frequency of Transactions.  The 2008 Amendments lowered the threshold for exempting nonpublic businesses conducting “frequent” large cash transactions from eight transactions per year to five.  The Guidance clarifies that a bank cannot exempt such a customer prior to the two month mark if the customer has not yet conducted five transactions involving $10,000 or more in currency.  The risk-based approach provides banks with flexibility with respect to the timing of an exemption designation, but each of the other exemption requirements must be met as required by the CTR rules.
  • Corporate Structure and Reorganization.  The Guidance responds to several questions regarding the impact of corporate structure and/or reorganization on a customer’s eligibility for exemption.  First, the Guidance explains that a bank must reevaluate whether a customer that was previously a listed public company remains eligible for exemption under the rules’ criteria for nonpublic companies if the company is reorganized as a private company.  In addition, the Guidance clarifies that the exemption available to certain subsidiaries of public companies does not apply to franchises or other affiliated entities when the listed company does not have a 51% or greater ownership interest in the franchise or other affiliated entity, even if the franchise operates under the same name as the public company.  The Guidance also specifies that, using a risk-based approach, a bank must consider evidence of a customer’s business restructuring as part of its annual review or ongoing customer due diligence to determine whether the restructuring makes the customer ineligible for exemption or makes the bank’s designation of exempt person (“DOEP”) form regarding the customer inaccurate or incomplete.
  • Customers No Longer Eligible for Exemption.  The Guidance explains that if a bank, during its annual review of a listed business or eligible nonpublic company or payroll customer, discovers that the customer no longer meets all criteria to remain exempt, the bank should document its determination of ineligibility and cease to treat the customer as exempt.  While future large cash transactions by the customer must be reported, the bank does not need to back file CTRs regarding transactions by a previously eligible customer if the customer is later found to be ineligible by the bank in a timely annual review.
  • Suspicious Activity of an Exempt Customer.  In response to a question regarding whether a customer that has been the subject of a Suspicious Activity Report (“SAR”) remains eligible for exemption from CTR filings, the Guidance states that a bank is not required to stop treating the customer as exempt solely based on the fact that the SAR was filed.  The Guidance explains that the decision to treat a customer as exempt should be made in accordance with the bank’s risk-based anti-money laundering policies, procedures, and controls.
  • Exemptible Transaction Accounts.  The Guidance specifies that the 2008 Amendments did not change the CTR rules’ requirement that eligible nonpublic companies and payroll customers are exempt “only with respect to transactions conducted through its exemptible accounts.”  In determining whether a transaction qualifies for exemption, FinCEN explains that banks generally may consider whether a transaction results in a line item entry into the customer’s transaction account statement.  For example, if a convenience store customer that the bank treats as an exempt nonpublic company uses more than $10,000 in currency to obtain a cashier’s check from the bank, the bank must file a CTR if the transaction is processed through the bank’s general ledger account.  On the other hand, the bank does not need to file a CTR if the transaction is processed through a deposit to and debit from the convenience store’s transaction account. 
The Guidance also responds to questions regarding (a) how banks should complete the DOEP form, which has not been updated since the 2008 Amendments were updated; (b) whether a bank must formally revoke a DOEP filing regarding a customer that is no longer exempt; and (c) the scope of businesses that are ineligible for exemption because they are engaged in “the practice of medicine.”