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Final Tier II
Exemption Rules Released
On September 21, 1998, FinCEN published the Tier II Exemption rules for Bank Secrecy. The news is good. The new rule is practical, do-able, and is based on existing bank compliance programs. It is also based on the assumption that banks will continue to maintain effective BSA compliance programs, including "Know Your Customer."
Compliance with the new rule may begin as early as October 21, 1998. Compliance will be mandatory - and the old exemption process gone - on July 1, 2000. That gives banks six months to implement this after dealing with Y2K.
Tier I
The relatively simple and clear process of exempting customers listed on a stock exchange remains in place. The final rule makes one modification that broadens the effect of the rule. Effective October 21, the rule includes "analogous equity interest" to the required ownership interest of a listed company in a subsidiary.
This addition is intended to permit exemption of subsidiaries of listed companies whether or not the subsidiary is incorporated. As long as the listed parent company owns at least 51% of the stock or analogous equity interest in the subsidiary, the subsidiary can be included in the parent's exemption.
Tier II
The new Tier II exemptions are remarkably broad and flexible. The liberal scope of this rule is the direct result of effective bank compliance programs and some hard lobbying by John Byrne and others.
Beginning on October 21, 1998, banks may exempt businesses or payroll customers by filing a form that identifies the exempt person and the exempting bank. Unless and until FinCEN issues a form specifically designed for exemptions, banks should use the CTR.
These Tier II exemptions would be renewed every two years. Ranges and transaction limits are gone. FinCEN also totally threw out the idea of reporting annual aggregate cash for the previous year and guesstimates for the coming year.
The new exemption rule would allow banks to file a list exempting any business or payroll customer that has been a customer of the bank for at least one year. This is a longer customer time requirement than the previous rule and is the only real "price tag" for the new rule. It is designed to build "some tension" into the system, given the broad exemption permission. In short, it means that a company moving to a new bank to launder cash would have to wait at least a year before beginning the laundering transactions. By that time, the bank should have an established pattern of the company's normal cash transactions, including seasonal patterns, and be able to identify through its internal monitoring programs any suspicious changes in the company's transactions.
Who is exemptible? Exemptions are available only for bank customers located in the U.S. that have transaction account relationships with the bank involving recurring currency transactions in excess of &10,000.
Updating The List
Your exemption list is good for two years. Then the bank must review it and refile it. The filings are due by March 15 of the appropriate year. FinCEN postponed this from February 28 to avoid coinciding with HMDA and CRA reporting requirements. However, the first quarter of most years will be devoted to regulatory filings and this list should fit right in.
Suspicious Activity
The success of this Tier II system relies totally on the alertness of each bank to suspicious activity. Your suspicious activity monitoring is more important than ever. Identify it and report it. Exemptions extend to CTRs only. SARs should be filed regardless of the exemption status of the customer. In other words, no one is exempt from suspicion and related SAR filing.
Compliance Programs
The generous nature of this new rule is based entirely on the industry's assurances that it has effective compliance programs in place. This rule should not be taken as a signal that CTR compliance is less important. Quite the opposite: this rule relies on effective compliance programs. To keep this rule, banks must continue to maintain compliance programs that include aggregation of cash deposits, review of reports including CTR and SAR filings, independent audits, and training.
ACTION STEPS
- Review your Tier I exemption list (or begin the process for the first time). Identify and add any subsidiaries for which the listed exempt company owns at least 51% of the equity.
- Brief your BSA team on the coming changes. Ask them to keep their eyes open to identify potential customers for the exempt list.
- Add to the work that your customer service reps do. Have them (or someone in operations) maintain a list of new accounts by date that will be eligible for exemption. Plan to review those lists each month to identify new eligible companies.
- This is also a good time to review your BSA compliance program. Check all the components and make sure they are working.
- Mark your electronic calendars now for two years ahead, or make a note in December to remind yourself of this filing requirement when you get a new calendar. Something that you do every other year can be easy to forget.
Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 13 & 14, 10/98
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