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Why Not Exempt Registered MSBs?

Could you expand upon the implications of having cash-intensive retailers (i.e. grocery stores) who are registered with FinCEN as MSBs? It just came to our attention that because they're an MSB they cannot be exempted, nor can we exempt the grocery store portion of their business and continue to file on the MSB portion unless they're operated under separate TINs. If that's the case, a bank would often need to file a daily CTR, further clogging FinCEN's database. This seems like a regulatory policy that's contrary to the intention of the CTR process. Do we really want 260 more CTRs in the system for a legitimate business? Shouldn't the fact that they've registered with FinCEN make them legitimate and exemptable? Am I missing something? What solutions do you see to such a situation? I suspect many banks are struggling with this emerging issue and would welcome your guidance.

Answer by John Burnett: I'd suggest you check your sources for much of what you've said, although the end result may not change.

Phase II exemptions can be made for businesses such as you describe, provided that they qualify. That means the revenue from the portions of the business (the MSB portion) that are on the "prohibited list of activities" cannot exceed half of total revenues of the business. The operation of the business under two TINs doesn't enter into this decision -- you need to look at the total entity.

Considering the high visibility of MSBs as high-risk customer types, and the very high presence of AML programs on the regulatory radar screen, a bank should weigh the costs of verifying a customer's exemption eligibility and completing regular reviews of the that eligibility, plus the risks of regulatory criticism and penalties against the costs and inconvenience of filing CTRs (most of which are duplicates of one another except for dollar amount and date), before exempting any customer, and most particularly an MSB.

I would not even think about clogging FinCEN's database. The bank needs to look out first for itself, and let FinCEN take care of itself. If regulators, FinCEN and congress are truly concerned about the numbers of CTRs being filed, they can come up with a workable exemption system and get all parties "on board" the streamlining effort. Given the politics of such a move, I'm not sanguine about its chances.If you read this answer as suggesting that I think exempting MSBs is a risky proposition at best, I've made my point successfully.


Answer by Ken Golliher: If an MSB derives all of its gross income from "MSB activities" it cannot be exempted. If it derives more than 50% of its gross income from otherwise exemptible activities; e.g. selling groceries, you can exempt it. The issues are: 1)What would your gain in efficiency be? and 2)What is the liklihood of confusing the examiner?

Since it's an MSB, you will be bringing every single element of your AML program to bear on its activities whether you exempt it or not. All the exemption will get you is freedom from filing CTRs. You may find that if you were actually filing CTRs it would be easier to monitor the business.

As for the examination staff, rest assured that an exempt MSB is going to seem like an oxymoron. If they do their homework, they will reach the conclusion that it is permissible, but my opinion is they will be very uncomfortable with the idea. The "tension" between Treasury's longstanding desire for exemptions and the regulatory agencies' even more ancient desire for things to write about is simply a feature of the regulatory framework - you do not want to be the poster child caught in the middle.

Richard Insley has spent years offering the theory that a high maintenance exemption is a waste of time and an unjustifiable assumption of regulatory risk. To a large extent, he has converted me to the theory.


Answer by Richard Insley: Exemptions have been a bipolar compliance disorder since their inception. Every decade we swing from euphoria to depression and pessimism.

Banks assume (without running the numbers) that Phase II exemptions save money. When you factor in the time needed to carry out the necessary due diligence and recurring maintenance--not to mention the time hassling with examiners--the cost of the exemption can be higher than the cost of doing cookie cutter CTRs. Aside from the cost, exemptions are an unnecessary lightning rod attracting enforcement action.

First published on 12/6/04

First published on 12/06/2004

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