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86-80 Proposed Changes to the Financial Recordkeeping and Reporting of Currency and Foreign Transactions

TO: All NASD Members and Other Interested Persons

EXECUTIVE SUMMARY

The Department of the Treasury is soliciting comments on proposed amendments to the implementing regulations of the Bank Secrecy Act. Also known as the Currency and Foreign Transactions Reporting Act of 1970, these regulations govern the payment, receipt or transfer of currency or other monetary instruments; the export or import of currency or monetary instruments out of or into the United States; and certain foreign financial transactions and accounts. The proposed amendments include changes to the financial recordkeeping and reporting required of broker-dealers with regard to such transactions.

BACKGROUND

The Currency and Foreign Transactions Reporting Act of 1970 (the Currency Act) was enacted as a means of requiring certain financial institutions, including broker-dealers, to create records of currency transactions that may be useful in criminal, tax or other regulatory investigations. The Currency Act authorizes the Treasury Department to implement and administer the Act's reporting and recordkeeping requirements. With respect to broker-dealers, however, the Treasury Department delegated its responsibility to the SEC. In order to assure compliance and effective oversight by the self-regulatory organizations, the SEC adopted Rule 17a-8 under the Exchange Act.

SEC Rule 17a-8, which became effective on January 18, 1982, requires broker-dealers to file reports and make and preserve records pursuant to the Currency Act and the regulations adopted thereunder. Moreover, in accordance with other SEC recordkeeping rules (see SEC Rule 17a-3(a)(l)), the SEC has taken the position that broker-dealers are required to make and retain their records in a manner that identifies the receipt and disbursement of currency in connection with securities transactions.

SUMMARY OF PROPOSED AMENDMENTS

The proposed amendments address a number of issues. Changes affecting the activities of broker-dealers are highlighted below.

1. Multiple, same-day currency transactions. The Treasury Department proposes to codify an instruction on Form 4789, the Currency Transaction Report, that currently requires broker-dealers to report multiple, same-day transactions in currency by or on behalf of any person that total more than $10,000, if they are aware of them. This does not impose any new burden on broker-dealers to adopt systems to reveal the existence of multiple, same-day transactions.
2. Cash purchases of monetary instruments. A second proposal may or may not be applicable to broker-dealers depending upon whether their business activities include cash purchases of monetary instruments. If applicable, broker-dealers would be required to obtain and keep a report from each purchaser of a monetary instrument, such as a money order or traveler's check, where the purchase involves a transaction in currency of more than $3,000. The purchaser would be required to sign the report and to certify whether or not other cash purchases were made during that same business day with the same or any other financial institution where the aggregate value of all purchases exceeded $10,000.
Broker-dealers would be required to treat any affirmative certification, or a refusal or a failure to file a full and complete report, as a reportable transaction and to file a Currency Transaction Report. If a purchaser misrepresents either the existence or aggregate amount of the transactions, broker-dealers would have no duty to report unless they have actual knowledge of the transactions.
3. Time periods for filing report. The Treasury Department is proposing to standardize the time periods for filing reports. All reports previously subject to filing within 30 days would now be filed within 15 days of the reportable event or a request for the report from regulatory authorities.
4. Verification of customer identification. The Treasury Department has noted from its reviews of Form 4789, the Currency Transaction Report, that some financial institutions fail to obtain proper identification of customers. The Treasury Department believes that in the past accounts have been opened for individuals based on inadequate identifications and then the signature cards for these accounts have been relied on as a means of satisfying the identification requirement.
To correct this situation, the Treasury Department is proposing that verification of identity be made by examination of a document, other than an account signature card, that is normally acceptable when cashing checks (e.g., a driver's license or credit card). Statements such as "know customer" are not sufficient for purposes of identification.
5. Recordkeeping requirements for extensions of credit. This proposal would change broker-dealers' recordkeeping requirements to extensions of credit exceeding $10,000 instead of $5,000.
6. Recordkeeping requirements for incoming transactions. This proposal would extend broker-dealers' recordkeeping requirements to include incoming as well as outgoing transactions with persons, accounts or places outside the United States, which involve the transfer of currency, monetary instruments, funds, checks, investment securities or credit in amounts exceeding $10,000. It would also include transactions that are later cancelled or not completed for any reason.
7. Recordkeeping requirements for certain purchases of monetary instruments. In conjunction with the proposed requirement to report certain purchases of monetary instruments, broker-dealers would be required to keep records regarding the sale of monetary instruments, such as money orders and traveler's checks, that exceed $3,000. Multiple purchases that result in either cash in or cash out totalling more than $3,000 during one business day would be treated as a single purchase if the broker-dealer is aware that they are by or on behalf of one person.
8. Taxpayer identification numbers. Currently, broker-dealers need to maintain the taxpayer identification number of each person opening, or having an interest in, an account and who either resides, is a citizen of, or does business in the United States. In the case of a non-resident alien, the broker-dealer must also record the person's passport number or a description of some other government document used to verify identity.
The Treasury Department is proposing to replace the lengthy exemption provision currently in the regulations with simpler requirements. Under the proposed amendment, if a broker-dealer is unable to secure the taxpayer identification number, it will not be a violation if the broker-dealer (i) has made a reasonable effort to secure the number, and (ii) maintains a list containing the names, permanent addresses and account numbers, where applicable, of those persons from whom it has been unable to secure numbers and makes this information available to regulatory authorities upon request.

* * * *

A copy of the release containing all proposed changes is attached for your review. All members and other parties interested in commenting on the amendments should direct their comments on or before November 24, 1986, to:

Jonathan J. Rusch, Acting Director
Office of Financial Enforcement
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Room 1458
Washington, D.C. 20220

Questions concerning this notice may be directed to Susan Lang, NASD Surveillance Department, at (202) 728-6969.

Sincerely,

John E. Pinto, Jr.
Senior Vice President
Compliance

Attachment

DEPARTMENT OF THE TREASURY

31 CFR Part 103

Amendments to Implementing Regulations; the Bank Secrecy Act

AGENCY: Office of the Secretary,Treasury.

ACTION: Proposed rule.

SUMMARY: The Bank Secrecy Act, Pub. L. No. 91-508 (permanently codified at 12 U.S.C. 1829b, 12 U.S.C. 1951 et seq. and at 31 U.S.C. 5311 et seq.), empowers the Secretary of the Treasury to require financial institutions to keep records and file reports that the Secretary determines have a high degree of usefulness in criminal, tax and regulatory matters. At present, Treasury regulations implementing the Act require a variety of financial institutions to file reports of large currency transactions. The Secretary also can direct designated institutions to file reports regarding specified transactions with foreign financial agencies. Financial institutions also are required to maintain records necessary to trace transactions through the nation's banking system.

The Department's experience in enforcing the Act in recent years has indicated that the following proposed substantive regulatory changes are needed to strengthen enforcement of the Act. In particular, recent judicial decisions, such as United States v. Anzalone, 766 F.2d 676 (1st Cir. 1985), have drawn attention to the fact that the regulations may be inadequate to sustain prosecutions for failing to report transactions that have been structured to evade the current reporting requirements. In light of cases such as Anzalone, the Department of Justice believes that certain changes to the currency transaction reporting requirements are needed to expand the coverage of the Act to ensure the collection of needed information, and to strengthen enforcement of the Act

DATE: Comments must be received on or before November 24, 1986.

ADDRESS: Address written comments to Jonathan J. Rusch, Acting Director, Office of Financial Enforcement, Office of the Assistant Secretary (Enforcement), Department of the Treasury, Room 1458,1500 Pennsylvania Ave., NW., Washington, DC 20220.

FOR FURTHER INFORMATION CONTACT: Linda Noonan, Attorney Advisor, Office of the Assistant General Counsel (Enforcement), Department of the Treasury, Room 2000,1500 Pennsylvania Ave., NW., Washington, DC 20220 (202/ 566-2941).

SUPPLEMENTARY INFORMATION:

Background

The following amendments are made to strengthen enforcement of the Bank Secrecy Act and to make clarifications to the existing regulations, as noted:

(1) Expand the definition of "bank" to include Edge Act corporations: An "Edge" or "Agreement" corporation, as defined by 12 U.S.C. 611 et seq., is a corporation organized in the United States for the purpose of engaging in international or foreign banking, or other foreign financial operations; such institutions are supervised by the Board of Governors of the Federal Reserve System. This amendment to expand coverage of the regulations to include these entities is justified by the rapidly expanding roles played by such financial entities in the banking system and the need to maintain a comprehensive scheme of reporting and recordkeeping requirements. See regulatory proposal #2.
(2) Add a new definition of "common carrier": This new definition is intended to clarify the reporting responsibilities for currency and monetary instruments that are transported into or out of the United States. See regulatory proposal #2.
(3) Revise the definition of "financial institution" in light of recent case law, and to include certain selling agents of traveler's checks, money orders and similar instruments: This revision modifies the definition to comport with recent case law defining financial institutions for Bank Secrecy Act purposes. It also expands the definitions of "financial institution" to include certain selling agents of certain monetary instruments and all transmitters of funds. Coverage of these additional entities is justified by the rapidly expanding roles played by such financial institutions in the banking system and the need to maintain a comprehensive scheme of reporting and recordkeeping requirements. See regulatory proposal #2.
(4) Clarify and expand the definition of "monetary instruments" to include promissory notes, checks made out to fictitious payees and certain other types of checks: These substantive changes are warranted by enforcement experience, which indicates that casino markers, certain cashier's checks and checks made out to fictitious payees are being used for money laundering, but arguably are not subject to current reporting requirements. Other amendments to the definition are intended to clarify the regulations. See regulatory proposal #2.
(5) Add a new definition for "transaction account" and insert it in place of the deleted term "demand deposit account" wherever it appears in the Part: This new term combines currently covered demand deposit accounts with recently developed money market and NOW accounts, which have many of the same characteristics as demand deposit accounts. See regulatory proposals #2 & 3.
(6) Add a new definition for "business day". This amendment provides that die term "business day" for banks means banking day. See regulatory proposal #2.
(7) Clarify that financial institutions must report multiple, same-day currency transactions of which they are aware that total more than $10,000: This amendment codifies the CTR Form 4789 instruction that currently requires financial institutions to report multiple, same-day transactions of which they are aware that are by or on behalf of any person and total more than $10,000. H does not impose any new burden on financial institutions to adopt systems to reveal the existence of multiple, same- day transactions. See regulatory proposal #4.
(8) Require financial institutions to report cash purchases exceeding $3,000 of monetary instruments, such as cashier's checks, money orders or traveler's checks, where the aggregate of all such same-day purchase exceeds $10,000: The Department of Justice is concerned that unreported money laundering is being conducted through "smurfing" organizations that employ numerous agents to launder large amounts of cash by conducting repetitive transactions with numerous financial institutions, each involving less than $10,000 in currency. Treasury has found that unreported money laundering is being conducted through the use of various negotiable instruments, especially cashier's checks. For example, "smurfs" use multiple, same- day cash purchases of cashier's checks to convert large amounts of cash into a more compact form without currently triggering the filing of a report with the Treasury Department of leaving an audit trail that investigators can readily detect. The Department of Justice recommends this regulatory approach, which addresses the problem of reporting aggregate transactions by placing a certification requirement on the individual conducting the transactions. If an individual misrepresents to the financial institution either the existence or aggregate amount of the transactions, the financial institution will have no duty to report unless it has actual knowledge of the transactions. Such a misrepresentation would, however, be a criminal offense on the part of the individual responsible for it. See regulatory proposal #4.
(9) Require banks to obtain signed statements from their customers attesting to the basis for their exemption from the currency transaction reporting requirements: Recent enforcement experience suggests that many banks are not paying sufficient attention to compliance with the requirements for granting reporting exemptions pursuant to the authority set out in § 103.22. This amendment seeks to ensure that banks are more diligent in controlling their exempt lists while, at the same time, making customers accountable for their representations to banks that justify such reporting exemptions. See regulatory proposal #4.
(10) Permit banks to exempt from the currency transaction reporting requirement deposits by certain public utilities and commercial passenger carriers: This proposed amendment to the exemption procedure would permit banks to exempt cash deposits by certain public utilities and commercial passenger carriers. See regulatory proposal #4.
(11) Clarify the prohibition on exempting automobile, boat and airplane dealerships: This proposed amendment makes clear that no motor vehicle dealership may be exempted from the currency reporting requirements. This includes, but is not limited to, motorcycle, recreational vehicle, and farm equipment dealers. See regulatory proposal #4.
(12) Revise the procedures for filing all reports and for recording foreign financial accounts: This amendment updates and clarifies the procedures for filing all reports, and for keeping records of interests in foreign financial accounts. All reports previously subject to filing within 30 days would be filed within 15 days of the reportable event or the request for the report, whichever is applicable. See regulatory proposals #5, 6&8.
(13) Require that customer identification be verified by document examination: This amendment addresses a compliance problem Treasury has identified with financial institutions that report insufficient information on Forms 4789 to show proper identification of customers. Many financial institutions have opened bank accounts for individuals based on inadequate identifications, and then have relied on the signature cards for those accounts to satisfy the current identification requirement. This-amendment requires financial institutions to exercise no less care in identifying the individuals conducting reportable transactions than they do when identifying noBdepositors cashing checks. Signature cards alone would not satisfy the identification requirement. This regulation would make the instruction for the completion of item 12 on the existing Currency Transaction Report partially obsolete. See regulatory proposal #7.
(14) Limit financial institution recordkeeping requirements to extensions of credit exceeding $10,000 instead of $5,000: This amendment modifies recordkeeping requirements to eliminate recordkeeping that is no longer justified by the usefulness of the information retained. See regulatory proposal #9.
(15) Expand financial institution recordkeeping requirements to include incoming as well as outgoing transactions with persons, accounts or places outside the United States: This amendment responds to increasingly sophisticated international financial schemes, and simply requires that recordkeeping cover incoming as well as outgoing transactions, including transactions that are later cancelled or not completed for any reason. See regulatory proposal #9.
(16) Require records to be kept on certain purchases of more than $3,000 in monetary instruments: In concert with the proposed reporting requirement for monetary instrument purchases, this recordkeeping requirement would ensure that information in addition to that provided on the reports would be retained as part of the normal business records of the financial institution. Such information would provide a paper trail that would be available to investigators pursuant to traditional forms of legal process. See regulatory proposal #9.
(17) Revise additional recordkeeping requirements for banks, casinos and brokers or dealers in securities to simplify the procedures for recording taxpayer identification numbers, and require those financial institutions to keep lists of all persons from whom taxpayer identification numbers have not been obtained: This amendment replaces the current lengthy exemption provisions in §§103.34,103.35 and 103.36 regarding taxpayer identification numbers with a simpler requirement in § 103.38(c) that a list be maintained of all persons from whom a taxpayer identification number is not obtained. This procedure also is incorporated in the new additional recordkeeping requirements for foreign currency exchanges. See regulatory proposals #10,12,13,14, & 15.
(18) Clarify that additional recordkeeping requirements for banks include deposit slips and credit tickets: This amendment to the additional recordkeeping requirement for banks makes clear that deposit slips and credit tickets should be retained as part of the paper trail already required by § 103.34 to be recorded and that such records must stipulate whether transactions involve currency. See regulatory proposal #11.
(19) Require foreign currency dealers to keep certain additional records: Treasury's enforcement experience indicates that foreign currency dealers are an increasingly important component of sophisticated money laundering and tax evasion schemes. The rapid evolution of international financial activity in recent years makes the imposition of recordkeeping requirements on foreign currency dealers appropriate at this time. Foreign currency dealers currently are subject to little or no oversight other than under the Bank Secrecy Act. These recordkeeping requirements serve to place foreign currency dealers on a par with brokers or dealers in securities, casinos and banks in retaining additional records that the Secretary finds have a high degree of usefulness in criminal, tax and regulatory matters. See regulatory proposal #14.
(20) Establish a uniform minimum retention period for transaction account records: Under present regulations, bank records required to reconstruct deposits to demand deposit accounts can be destroyed two years after the transaction. These records normally consist of deposit slips, proof tapes, copies of checks deposited, and related records. Since deposits reflect income, these types of records are the most important bank records for documenting unreported income in, for example, a criminal tax investigation. However, the constraints placed on the Department by the two-year retention period make it extremely difficult to document violations for more than one year with deposit records. Since tax and related financial crimes may not be discovered until several years after they occur, the deposit records needed to reconstruct income often may be destroyed before the investigation starts. Without records to reconstruct income, an investigation may not be initiated or may have to be discontinued. This proposed amendment to the record retention period would alleviate this problem and standardize the retention requirement for all records covered under the Act. See regulatory proposal #15.
(21) Clarify the overall Bank Secrecy

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