Question & Answer

Question: We have a customer who owns a small business. Every week he comes in at least twice, sometimes more often, and deposits checks into his personal account that are payable to his business. He has a business account with us too, but he just sorts out some of the checks to each account. We know what he is doing. Are we responsible to tell the IRS?

Name withheld
We have a customer who uses cash paid as rent to purchase cashier's checks payable to her mortgage companies. When we suggested that she could just deposit the cash into her account and write a check to the mortgage companies herself, she told us she didn't want the funds to show in her account. Should we report this to the IRS?

Name withheld
We are having a big discussion as to whether we can cash checks payable to corporations and/or companies. Can you comment on this, please?

Name withheld

Answer: All of the above questions that have come into our offices are related-they all have to do with tax evasion.

Once again, we went to the Office of Financial Enforcement (OFE) for answers.

The biggest problem perceived by the financial institutions in reporting the types of activities illustrated above is the Right to Financial Privacy Act (RFPA). Having read of court awarded sums because of a violation of RFPA, financial institution officers are reluctant to volunteer information about their customers, even when they know that what is happening is wrong. The Security and Compliance Officers from the financial institutions who called with the problems illustrated above wanted to file a Criminal Referral Form (CRF), and they wanted to call the IRS but were afraid to do so.

Carlos Correa, Assistant Director for Regulations and Rulings of OFE came back to us with this response. "The Criminal Referral Form has been around a long time-even though most of the references lately have been in connection with money laundering. If you look at the regulation governing the CRF, you will find the following:

"Pursuant to their respective enabling statutes, these agencies are responsible for ensuring that financial institutions apprise federal law enforcement authorities of any violation or suspected violation of a criminal statute."

Under the Annunzio-Wylie Act, the financial institution has safe harbor for such reporting. Federal Law (31 U.S.C. 5314 (g) 3) provides that financial institutions, and their directors, officers, employees and agents, that disclose, in good faith, possible violations of law in connection with the preparation of criminal referral forms "shall not be liable to any person under any law or regulation of the United States or any constitution, law or regulation of any State or political subdivision thereof, for such disclosure or for any failure to notify the person involved in the transaction or any other person of such disclosure." The law also prohibits you from informing the person that a CRF has been filed. The court cases involving the RFPA took place before the Annunzio-Wylie Act was passed. Financial institutions now have safe harbor for such reporting.

Copyright © 1994 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 4, No. 11, 6/94