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Jim Bedsole, CRCM, CBA, CFSA
Opinions expressed are my own, and do not necessarily reflect those of my employer.
As to the SAR filing issue: If the loan is to be secured by collectible US currency, that would seem to be legitimate and definitely wouldn't provoke me to a SAR filing. If the loan is proposed to be secured by currency in general circulation, that creates some serious operational concerns such as how the security interest will be perfected, where and how the bank will hold the collateral, etc. It also raises some questions that should be asked of the borrower and loan officer as to why this transaction is desired. Only if all of the questions run up against a brick wall would I advocate that a SAR filing might be in order. But as Richard says, proceed with caution on this.
I suspect, though, that your lender and borrower are wanting to secure the loan by collectible items of US currency from your original post.
[This message has been edited by jbedsole (edited 06-21-2001).]
First, I have a dim recollection that the Secret Service regulates many aspects of currency. Apparently the use of currency is thought to be a presidential issue -- perhaps because much of the currency has presidents on it. However, that is where the rules are that prohibit reproducing images of currency. There may also be rules on storing currency in safe deposit boxes. Hoarding currency is definitely not good for the economy because it restricts the ability of the Fed to manage the currency flow.
As for the suspicious aspects of this deal, I have to ask why someone with enough currency to cover the deal would want a loan instead. Since currency and not a residence would be the security, there are no tax advantages here. But someone could move the proceeds of the check much more easily than the cash itself. I vote for filing the SAR. Unless the currency is rare and collectable, I can't think of a legitimate reason to do this.
In this case the borrower has a collection of US currency with a face value of x. It may be the only asset the borrower has available to use as collateral. Not wanting to "spend the collection", using it as collateral will keep it intact, and provide the funds needed for what ever.
The bank issue is not so much as if its legitmate to use the collection as collateral, but does the borrower really own the collection, and have the right to pledge it as collateral. Putting the collection into safekeeping with enough safeguards to insure that the borrower cannot indicate something is missing is another issue.
Another potential legal problem is if the borrower goes into default on the loan and the collateral is used to pay off the loan, does the bank use the face amount of the cash, or its supposed value. The borrower could file legal action contesting how the bank disposed of the collateral which ever method is used.
All in all, unless there is a real mitigating circumstance, its best for the bank to stick with the standard deposit accounts as collateral.
Silver certificates and US notes in mint condition are certainly collectible, but also serve as legal tender.
Section 103.22(b)(1) states: "Each financial institution other than a casino shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency." A pledge of collateral is not one of the events listed in this section, and there's no provision for reporting pledges of collateral on the 4789. Should the borrower default and allow the collateral to be applied to the loan, then a transaction will occur and a CTR would be necessary.
As 'DN' indicates, there are legitimate reasons why people hoard cash and may wish to use it as collateral. The classic case is a spouse who is planning a sudden change in marital status. This customer should not be reported on a SAR! Doing so may expose the bank to liability under RFPA because the bank acted without making reasonable attempts to rule out criminality.
[This message has been edited by Richard Insley (edited 06-21-2001).]
[This message has been edited by Richard Insley (edited 06-21-2001).]
OCC warned in advisory bulletin 90-5 that cash collateral might be seized in a forfeiture if a bank knew or reasonably should have known that the cash was derived from illegal activity.
There are several bulletins related to cash collateral on the OCC web site http://www.occ.treas.gov/bullst99.htm
Search for “Cash Collateral”