CUNA Regulatory Comment Call

May 6, 2008

EXECUTIVE SUMMARY

• FinCEN is proposing to amend requirements under the Bank Secrecy Act (BSA) by simplifying certain aspects of the CTR exemption process.

• FinCEN Form 110 would no longer be required to be completed for certain eligible customers/ members that are depository institutions, federal, state, or local governments or entities exercising governmental authority.

• An annual review of information supporting the listed eligible customers/ members would also no longer be required.

• FinCEN is proposing to permit depository institutions to exempt otherwise eligible Phase II customers/ members within a period of time shorter than 12 months by either enabling the institution to make a risk-based determination or by reducing the required length of time from 12 months to two months. Phase II customers/ members are businesses and payroll customers/ members that meet certain requirements

• The proposal would add a requirement that when a depository institution designates a Phase II eligible customer for exemption, it must conduct a risk-based assessment of the customer’s transactional activity.

• Depository institutions would no longer be required to file biennially a designation of exempt person (FinCEN Form 110) for Phase II customers/ members. However, they would be required to notify FinCEN of any change in control such as a Phase II customer that it knows of, or should know of on the basis of its records.

• FinCEN is also proposing to mandate that depository institutions report any revocations of exempt status.

• Please submit your comments to CUNA by June 6, 2008. Comments are due to the FinCEN by June 23, 2008

Please feel free to send your comments to CUNA SVP & Deputy General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the proposed rule.

BACKGROUND

The Bank Secrecy Act (BSA) regulations require that each financial institution, including every credit union, file a Currency Transaction Report (CTR) of each transaction involving currency (cash) of more than $10,000.

The BSA regulations created two categories of "exempt" status, Phase I and Phase II, so that transactions of certain individuals that are not likely to aid officials in potential criminal activity do not have to be reported. As a result, if an “exempt person” initiates a currency transaction in excess of $10, 000, the credit union does not have to file a CTR.

Phase I eligible entities include:

• credit unions/banks;
• governmental departments or agencies;
• certain entities that exercise governmental authority¹ and
• Certain entities and their subsidiaries whose equity interests are listed on one of the major national stock exchanges;

Phase II designees are “non-listed businesses” in a commercial enterprise that are not specifically designated as ineligible for exemption. It also includes “payroll customers/ members” that have maintained a transaction account with the institution for at least 12 months and are incorporated or organized under state or federal law, or is registered and eligible to do business within the U.S. or a State. Additionally, a non-listed business must frequently engage in cash transactions of over $10,000 with the institution. A “payroll customer” must operate a firm that regularly withdraws more than $10,000 in order to pay is U.S. employees.

Currently, a depository institution exempting an individual must file a Designation of Exempt Person (FinCEN Form 110) and must conduct an annual review of the member. Credit unions must also conduct an annual review of Phase II members, but must also biennially renew the members’ exemption by re-filing the form, certifying that it has applied its monitoring system of the member’s cash transactions for suspicious activity and reporting any change in control of the member.

DISCUSSION OF PROPOSAL

Based on a report of the current CTR exemption system by the Government Accountability Office (GAO) entitled, “Bank Secrecy Act: Increased Use of Exemption Provisions Could Reduce Currency Transaction Reporting While Maintaining Usefulness to Law Enforcement Efforts” (GAO Report), FinCEN is proposing to simplify the current requirements for exemption of CTR reporting.

FinCEN is proposing two alternatives to amend the current requirement that the eligible person be an accountholder for at least 12 months before becoming eligible for a Phase II exemption and is seeking comment on these alternatives.

The first alternative would replace this requirement with a risk-based determination made by the depository institution. This option would allow a credit union to decide when it has a sufficient history with its members to treat them as exempt persons. The second alternative would require a prescribed length of time to pass before an initial designation of exemption could be filed, but it would be reduced from the current 12 months to two months.

The proposal would add a requirement that when designating a Phase II eligible member for exemption, the institution must conduct a risk-based assessment of the transactional activity of that customer to form a reasonable belief that the customer has a legitimate business purpose for conducting frequent cash transactions. Factors that the institution might consider about the customer would include the amount of time an account has been opened, its past relationship with the institution, specific pertinent characteristics of its business model, the type of business and where the business is operating.

Depository institutions would no longer be required to file biennially a designation of exempt person (Form 110) for the Phase II customers/ members. However, they would be required 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. They would do this by filing an amended Form 110 by March 15 of the calendar year following every second year in which the institution knew (or should have known) of the change in control.

FinCEN is also proposing to remove the requirement that depository institutions file an initial designation of exempt persons form (FinCEN Form 110) for Phase I eligible customers/ members that are depository institutions, federal, state, or local governments or entities exercising governmental authority.

Depository institutions would still be required to ensure that a Phase I customer is an exempt person and would be required to document the basis for their conclusions as required under the BSA regulations. Additionally, institutions are still required to comply with suspicious activity reporting obligations should any Phase I customers/ members engage in suspicious activity.

Additionally, depository institutions would no longer be required to conduct an annual review of the information supporting the designation of most types of Phase I customers/ members. Note that an annual review and verification is still required for Phase II customers/ members and the non-listed Phase I customers/ members, such as public companies.

FinCEN is also proposing to require that depository institutions report any revocations of exempt status. Filing a notice of revocation, which is currently voluntary, would be required by the close of the 30 calendar day period beginning after the day of the first reported cash transaction.

1. Do you support replacing the 12-month account history with a risk-based determination or a two month account history requirement?
   
   a. Risk-Based determination _____
   b. Two-month account history requirement _____
   
   Please explain.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
2. If you prefer to keep a length of time requirement before becoming eligible for a Phase II exemption, do you believe two months is sufficient time?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
3. Do you support the proposed requirement to conduct a risk-based assessment of transactional activity when designating a Phase II eligible member?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
4. The proposal suggests several factors that an institution might consider when conducting its risk-based assessment.
   
   Do you agree with these factors?
   
   a. Yes _____
   b. No _____
   
   Are there any factors you believe should be removed or added?
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
5. Do you agree with the requirement to file a revocation of exemption when no longer exempting a member?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
6. When there is a change of control of a Phase II exempt member, do you support renewing the information once every two years, or filing the information within 30 days of becoming aware or the change?
   
   a. Renewing information every two years _____
   b. Filing information within 30 days _____
   
   Please explain.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
7. Do you believe these changes would encourage you to establish more exemptions from CTR reporting?
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   
8. Please provide any other changes you believe would make CTR reporting more efficient.
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

   ---

   
   
   

Copyright © 2009 - Credit Union National Association, Inc.