Exemption Lists: First?Consider The Risk
Exempting Accounts Can Be Hazardous To Your Financial Institution's Health
Is it cost effective to exempt a customer?
Will it make an impact on service quality?
Is it worth the risk?
If cash deposits over $10,000 are being made into an account that is eligible to be exempt, the financial institution is encouraged by the Internal Revenue Service to maintain an "exempt" list. They would have us believe this is a good thing to do.
The three questions above need to be taken into consideration, however, before deciding to exempt an account.
When teaching bankers about the Bank Secrecy Act, Richard Insley, VP and Compliance Officer for Signet Banking Corp. in Richmond, VA, creates a rather eye-opening overview of the facts and costs involved in exempting accounts, or routinely filing Currency Transaction Reports (CTRs).
First, he points out that "everyone" likes exemptions, because it's less hassle. We know all of our "good customers" who are exempt, and we want to give them outstanding service. So we may be tempted to disregard things like penalties.
However, IF IT IS AN IMPROPER EXEMPTION a little simple arithmetic illustrates a serious matter. There are roughly 250 business days per year. Failure to file ONE CTR carries a potential penalty of between $25,000 and $100,000-depending on the size of the currency transaction that went unreported for more than 15 days. For one account/ one transaction per day , that's a potential penalty ranging from $6.25 million to $25 million per year!
No Filing-No Cost?
Of course you may be thinking, "Well, at least we're saving money because if we don't have to file CTRs, there's no cost."
Except for other financial institutions, no customer can be granted an exemption that is unlimited in amount. There must be an upper limit that is "commensurate with the customary conduct of the lawful domestic business of the customer."
How do you find that out?
First you must review the account's transaction history for a period of at least 60 days prior to setting an exemption. Then, you also should know your customer's business pattern and potential well enough to conclude that the exempted amounts of cash are legitimate. The process is very similar to a credit review performed for problem loans.
After all the above is done, you still have to police the account in some manner to assure the deposits or withdrawals do not exceed the limits set by the exemption. If they do, you'll have to file a CTR in spite of the exempt status of the account.
Sit down and determine exactly what it costs to do all of this-the number of hours spent annually gathering and evaluating account history and customer data, and the hours spent annually reviewing the account for exceeding exemption amounts (if you don't have computer capability to do this). Multiply those hours by the hourly pay for the person doing the research. Now add to that figure the cost of filing on those days when the deposit or withdrawal went over the limit.
Also add at least a minimal amount for miscellaneous costs for such things as training and audit.
Now go to the other side and determine exactly what it costs to fill out the CTR for each over $10,000 cash transaction. Multiply the annual number of CTR filings you would do if the customer was eligible, but was not exempt.
Richard used as his example a Fast Food Restaurant with an exemption request for Monday only. If they were to be exempt, he figured 8 hours to gather and evaluate account history and customer data at $20 per hour ($160 total). There were 3 days during that quarter when the cash transaction exceeded the exemption limit or a possible 12 times a year that CTR's would have to be filed anyway. At $6 each (an estimate) for each CTR, that's an additional $72. He added $50 miscellaneous annual costs for training, audit, etc., giving him a total of $282 annual cost of the "Exempt" option.
He then figured costs for the "File" option. He reviewed the account for 62 business days. (The EXEMPTION HANDBOOK requires a minimum of 42 days) There were 11 days when the currency transactions were over $10,000. He again estimated $6 to file each CTR. At this level of activity, he would have had to fill out 44 CTRs annually at a cost of $6 each, or $264 total annual cost for the "File" option. In this case it costs the financial institution less to file ($264) for each over $10,000 deposit than to exempt the customer ($282).
On the other hand, when the same exercise was applied to a hotel account that made over $10,000 deposits every day, the "File" option showed 55 days out of the 62 when a CTR would have been necessary, (222 days annually) at a cost of $666.
If the account was exempt, it would have been necessary to file 12 CTRs on days when the exemption amount was exceeded, at a cost of $72, added to the now fixed cost of $160 + $50 for the gathering and evaluating of account history and customer data. This translated to a total annual cost on the "Exempt" option of $282.00-clearly less cost than the $666 for filing for each deposit.
What's the impact on Customer Service?
It may be unreasonable to out-of-hand do away with all exemptions. If the account is a large one, the customer a long-time depositor, the business booming (and legitimate), filing for every over-$10,000 transaction may be a major inconvenience to your customer. If the customer or their agent is delayed frequently by the filing of the CTR when the deposit is made, you will want to take a hard look at comparing risk and cost against customer service. Of course, if the deposit is normally made in the night drop, there is no need to exempt the account.
There are the three major areas, then, that you'll want to check before exempting an account-cost, service quality, and risk. The most important consideration, however, is risk.
If the exemption meets the requirements and is allowable, there can be a justified comparison for cost effectiveness. But consider the risk. Do your exemptions save enough money to justify the increased risk of violations and related penalties?
Remember that $6.25 million to $25 million penalty? Keep in mind those possible fines are per account/ per transaction. A bank in Maryland recently put three accounts on their exempt list that were ineligible. By the time Treasury finished with them, they paid a fine of $950,000. What would a fine of this magnitude do to your institution?
Do you want to exempt accounts? Certainly consider the cost. And consider the impact on customer service.
But first, consider the risk.
Richard Insley's Formula for Exemption Cost Consideration
- "File" Option
A Business days reviewed ________
B Days when cash transactions are over $10,000 ________
C Cost per CTR (Time x compensation) ________
D Total number of CTRs per year (B divided by A x 250) ________
E Total annual cost of "File" Option (C x D) ________
- "Exempt" Option
A Number of hours spent annually gathering and evaluating account history and customer data ________
B Hourly compensation rate of exemption administrator ________
C Total compensation cost of evaluation (A x B)
D Days when cash transactions exceed exemption limit ________
E Total number of "over limit" CTRs per year (D divided by 1A x 250) ________
F Total annual cost of filing "over limit" CTRs (D x E) ________
G Miscellaneous annual costs related to one exemption (training, audit, review daily transactions, etc.) ________
H Total annual cost of "Exempt" Option (C + F + G) ________
Now?Factor in RISK
The financial industry filed over 7 million Currency Transaction Reports in 1992. If there were no exempt accounts, the IRS estimates there would be over 21 million CTRs filed in a year by financial institutions.
Copyright © 1993 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 3, No. 12, 5/93
First published on 05/01/1993