Non-bank customer enters branch and presents $3500 cash to pay on their mortgage loan with our subsidiary mortgage company. Since the payment has to be sent to that company via interoffice mail for processing, the teller converts the cash to an official check and presents the non-bank customer a receipt. Does this qualify as a "cash purchase" under MIL recordkeeping?

Yes

I disagree. It is your internal process that is causing that $3500 to be converted to check. The person didn't come in, requesting the purchase of a cashier's check. The transaction is a loan payment of $3500 cash. Figure out a way to put it into your teller system so that you can cut a check where the bank is the purchaser but also so that your AML software can track it and forget the MIL.

Let's say you went to file a SAR down the road and pulled records of this activity. Unless you had the memory of an elephant, you would see these cash transactions as monetary instrument purchases and not loan payments as they were. Then what's the narrative going to look like? I think it would be skewed.

Just my humble opinion.