Exemptions

Introduction

Prior to April 1996, the CTR regulations approached exemptions in the following way: Transactions with a number of entities were automatically exempt, entities such as Federal Reserve Banks, Federal Home Loan Banks, other domestic banks, etc. In addition, deposits and withdrawals from certain accounts could be treated as exempt. These were accounts held by established depositors who were U.S. residents and who operated certain retail-type businesses or sports arenas, race tracks, bars, etc., plus certain other types of accounts.

Under these rules, institutions had to monitor the dollar amount of currency transactions to ensure they were typical for the exempted customer. The customer had to sign an exemption statement. Institutions had to maintain an exemption list and promptly provide information and records to appropriate government officials on request.

All of these rules were found in 31 CFR 103.22, Subsections (b) - (g). In April of 1996, FinCEN added a new Subsection (h) with an alternative method for exempting customers. The new Subsection (h) allowed exemptions for all transactions (not just deposits or withdrawals from an account) with an “exempt person.” The term exempt person included some entities already included in the (b) - (g) rules, such as other banks and government agencies and departments. But the term also included two new categories: entities listed on a major stock exchange (“listed entities”) and certain subsidiaries of listed entities. Under Subsection (h), the institution had to file a CTR designating a person as exempt and take steps to ensure that the person actually qualified as an exempt person. But Subsection (h) did not require monitoring of amounts, exemption statements, or exemption lists.

Again, Subsection (h) was an alternative to the (b) - (g) rules. Institutions could continue to exempt accounts under the (b) - (g) rules and ignore Subsection (h) if they chose, but Subsection (h) was thought to be less of a compliance burden.

In September 1998, FinCEN published new exemption regulations. FinCEN did three things with the new regulations: First, they eliminated nearly all of the (b) - (g) rules. Second, they added two new types of exempt persons to the Subsection (h) rules [“non-listed business” and “payroll customers”—though payroll customers could be exempted under the old (b) - (g) rules]. And third, they rearranged all of Section 22, with all of the exemption rules now appearing in Subsection (d).

The effective date of these amendments was October 21, 1998. An institution could start to use the new exemption categories on or after that date, and no account could be newly exempted under the old (b) - (g) rules on or after that date. In other words, no accounts opened on or after October 21, 1998, could be exempted under the (b) - (g) rules, nor could any accounts that preexisted the effective date be treated as exempt under the (b) - (g) rules unless they were so treated on October 20, 1998. [31 CFR 103.22(d)(11)(i)]

If the institution had accounts that, as of October 20, 1998, the institution treated as exempt under the old (b) - (g) rules, the institution could continue to treat the accounts as exempt until June 30, 2000. On or before June 30, 2000, however, the institution had to decide whether the account holder was an exempt person under the new Subsection (d) rules. When the institution decided, it could no longer treat the account as exempt under the old (b) - (g) rules and had to either treat the account holder as an exempt person under the new rules or not, depending on the institution’s determination. While it was treating the account as exempt under the (b) - (g) rules, the institution was subject to all the (b) - (g) rules, such as monitoring transaction amounts, requiring an exemption statement from the customer, and maintaining an exemption list. [31 CFR 103.22(d)(11)(ii and iii)]

Because the old Subsection (b) - (g) rules are no longer in force, the discussion below will focus on the new Subsection (d) rules. To confuse matters even further, FinCEN, in March of 2011, moved all of its regulations from 31 CFR Part 103 to 31 CFR Part X. This means that all of the exemption rules discussed below can now be found at 31 CFR 1020.315.

Exception Rules

General rules applicable to all categories of exempt person

In order to treat an entity as an “exempt person,” you must “designate” the person within 30 days following the first transaction in currency between you and the exempt person that you seek to exempt. You make the designation by filing electronically with FinCEN.

You can exempt certain entities, however, without filing. This is true for any of the twelve Federal Reserve Banks and any entity listed in items 1, 2, or 3 above (namely, banks, government agencies, and government-authorized entities). In other words, the filing requirement applies only to listed entities, subsidiaries of listed entities, nonlisted businesses, and payroll customers.

A bank must perform an annual review of any exemption it grants by way of filing (listed entities, subsidiaries of listed entities, nonlisted businesses, and payroll customers). This annual review is to determine whether a person subject to the exemption continues to be eligible for it.

A parent bank holding company or one of its bank subsidiaries may make a designation on behalf of all bank subsidiaries of the holding company, so long as the designation lists each bank subsidiary to which the designation will apply.

You must be relatively certain that the “exempt person” is actually one of the entities listed above before making the designation. The standard is that you take the same steps, make the same documentation that a reasonable and prudent institution would take to protect itself from loan or fraud loss based on misidentification, and to document its conclusion. For government entities, you can generally rely on the entity’s name or the fact that it is generally known in the community as a government agency. For listed entities, you can rely on any New York Stock Exchange, American Stock Exchange, or NASDAQ Stock Market listing in a newspaper or stock symbol guide or any information contained on the Securities and Exchange Commission “Edgar” System or on any information contained in an Internet World Wide Web site or sites maintained by the New York Stock Exchange, the American Stock Exchange, or the National Association of Securities Dealers. For subsidiaries, you may rely upon any reasonably authenticated corporate officer’s certificate, any reasonably authenticated photocopy of Internal Revenue Service Form 851 or the equivalent for the appropriate tax year, or the person’s Annual Report or Form 10-K as filed in each case with the Securities and Exchange Commission.

The Treasury Department (through FinCEN) can revoke the exempt status of an entity by giving notice in the Federal Register. You are required to verify the status of exempt entities only once per year unless you have specific knowledge of information that would warrant a revocation of exempt status.

You lose the exemption’s protection if you knowingly file false or incomplete information with respect to a transaction or the customer engaging in the transaction. The same is true if you have reason to believe at the time the exemption is granted that the customer does not meet the criteria for treatment as an exempt person or that the transaction is not a transaction of the exempt person.

If you choose not to treat as exempt a person who meets the requirements for being exempt, you are subject to all the rules governing the filing of reports, such as the requirement that the report be accurate and complete. Finally, exempting an entity under Subsection (d) does not excuse you from filing a report on suspicious activity as required by other regulations. We deal with suspicious activity reporting later in this chapter.

Monitoring system applicable only to “nonlisted businesses” and “payroll customers”

The Treasury is particularly concerned about these exempt persons. The concern is that these entities might be the most vulnerable to being used to illegally launder money. Because of this concern, The regulation has a few extra rules that apply only to these exemptions.

First, you must have a monitoring system in place designed to detect transactions with a nonlisted business or payroll customer that would require a report under the federal suspicious transaction regulations. (We deal with suspicious transaction requirements in the next section of this chapter, “Reporting Suspicious Activities.”) The system must be reasonably designed to detect for each account of a nonlisted business or payroll customer those transactions in currency involving such account that would require a bank to file a suspicious transaction report.

[See the Federal Register for September 21, 1998, at page 50154.]

In another part of the regulation, FinCEN says that, with respect to the monitoring system, the institution must take such steps that “a reasonable and prudent bank would take and document to identify suspicious transactions….”

Once your monitoring system is in place, you must subject it to an annual review and verification.

Second, recall that in order to qualify as an exempt person, a nonlisted business must frequently engage in transactions in currency with the bank in excess of $10,000. A payroll customer, in order to qualify as an exempt person, must regularly withdraw more than $10,000 in order to pay its United States employees in currency. The regulation gives the bank the option of aggregating the customer’s deposits and withdrawals to or from all “exemptible” accounts at the bank for purposes of determining whether the customer qualifies as a nonlisted business or a payroll customer. If the bank opts to do so, it must continue to do so for purposes of determining the qualification of the customer as a nonlisted business or a payroll customer. Again, an exemptible account is any transaction account (as defined in Reg D, 12 CFR 204) or a commercial-purpose money market deposit account (also as defined in Reg D, 12 CFR 204).