Exemptions: Real Developments At Last

The Financial Crimes Enforcement Network ("FinCEN") has published an interim rule on exemptions with a request for comments. This amounts to a temporary regulation that is open for comment. Depending on the comments that FinCEN receives, the rule may be revised later this year.

Comments are due by August 1, 1996. Because of the effort FinCEN is making to get an exemption process into place, we don't expect to see an extension of this comment deadline.

What is exempt
This temporary regulation adds a new Paragraph (h) to 31 CFR 103.22. This new paragraph contains the entire rule on defining exemptions and the procedure for exemptions. The new rule defines an exempt person. The interim rule identifies certain types of transactions, companies and government entities that are exemptible.

Transactions between domestic banks are exempt. This exemption is limited to transactions between banks within the United States. Government agencies are exempt. This category includes state and local government entities as well as federal government entities. In addition to government departments and agencies, the rule exempts entities "exercising governmental authority." Finally, "listed companies" are exempt as are their subsidiaries if the subsidiary files a consolidated tax return with the parent corporation.

Determining exempt status
Exempt companies must meet several tests. First, they must be a corporation. The incorporation test is straightforward: the company must have a corporate charter. Do not get clever and turn to the IRS rules to decide whether a company is incorporated; look only to the company's corporate charter.

Second, they must be "listed companies," on one of several designated stock exchanges. A company must be listed on the New York Stock Exchange, the American Stock Exchange, or Nasdaq Stock Exchange. This does not include companies listed on the Emerging Company Marketplace of the American Stock Exchange or a Nasdaq Small-Cap Issues listing. Moreover, foreign companies are not exempt.

Banks must then use the rule's definition to compare to their customer base and identify which of their customers are exempt persons and file with FinCEN.

The bank will have to determine the status of government entities before exempting them. Your state and local government offices should be able to provide you with good sources of information for this purpose. For example, a government directory should list the departments, agencies and services of the local government. It also may be useful to obtain a copy of the government's annual budget. Although this is a huge document, it is available to the public and would provide a clear basis for concluding that an agency or service is a part of the government. Usually, governments prepare summary budgets that may contain enough information for you to identify and confirm government agencies. Contact the office of the mayor or the office of the chief administrator (manager or executive) to obtain copies. To establish the ownership and identity of publicly traded corporations and their subsidiaries, you may need to use several methods. First, the company should be able to produce evidence of its incorporation. You can also look to the public filings with the SEC as a reliable source of information about the publicly traded company. These filings are now available on the Internet.

Subsidiaries of publicly traded companies will be more difficult to determine. The SEC filings may not clearly establish the status of the subsidiary that is your customer. You will need to conduct careful research to determine the subsidiary's status. Information may be available through on-line research services. If your bank does not subscribe to these, your public library probably does. The library will also have directories that may support your research.

Exemption procedures
The new exemption procedure is fairly straightforward. For each company that the bank wishes to indentify as exempt, the bank simply files a completed CTR showing a 0 balance and a brief statement on line 36. FinCEN will create an exempt list from these CTR filings. That single filing of a 0-balance CTR establishes an exemption for as long as the company or government entity retains its exemptible status. You will need to periodically review your list and determine that all of the entities on the list retain their exempt status. In addition, you still need to monitor the accounts for any suspicious activity.

CTR Filings not prohibited
The rule establishes "mandatory" exemptions. However, under the Interim Rule, a bank may continue to file CTRs on a company that is exemptible under the new procedure. At this point, Treasury is relying on the impact of the new rule to reduce the CTR filings. This summer will be a test. Your bank's performance and cooperation will probably have an impact on whether this permission is carried into the final rule. It is desirable to have this cushion of protection to cover a company that your procedures could overlook.

Comments
FinCEN needs and wants your comments. In particular, share any ideas, concerns, or questions that you have about how to implement this interim rule. The particularly sensitive topic is how to identify companies to exempt. Any suggestions that you have for that process are important to share. If you send a comment letter, note that FinCEN has asked that you submit an original and four copies. Not only does FinCEN work with a limited budget (saving taxpayers' money), it must also quickly distribute comments to several officers. Your compliance with their request helps to ensure that your comments get to all the places you want to reach.

ACTION STEPS

Develop a list of all state and local governments in your market area. Obtain directories or annual budgets from them for use in identifying government accounts and entities exercising "governmental authority." (Remember, you can also use these directories to identify government accounts that you would like to have in the bank.)
Review methods for determining whether a company is publicly traded. Determine what resources are available to you. This research may be a good project for a student intern!
Set up a system for keeping records on the entities for which you filed a 0-balance CTR and create a new exempt list.
Notify affected staff, especially tellers, customer service staff, and branch managers of the new exemption process.
Draft and submit comments to FinCEN on the interim rule. Be sure to discuss how you expect to identify companies eligible for exemption.