What Will Phase II Exemptions Really Save?

The rule is out, and it looks fairly straightforward. It is certainly worlds better than the proposal had been. But how good is it? In spite of the improvements, banks will still have to decide whether the Phase II exemption process is worth it. To do that, compare the cost of filing CTRs with the cost or savings of implementing Phase II.

The first question is how much does it really cost the bank to file CTRs? Richard Insley has run an estimate that is worth considering. Consider, he figures, that there are approximately 245 business days in a year. Assuming that most Phase II customers will not have daily cash transactions that trigger CTR filings, how many CTRs would you file on each customer per year?

Then look at the cost of filing the CTR. When you evaluate this, look at the cost for each customer. A well-known, regular mom-and-pop store may be a relatively easy filing whereas preparing the CTR on other customers may involve more work.

Insley suggests the following assumptions. With the 245 business days per year, and 52 weeks, you will file on the "mom and pop" store well below 100 times in a given year. That means filing one or two CTRs each week. Since most of the CTRs are filed on Mondays - i.e. weekly - let's assume that there are 52 filings on mom and pop.

Now assume that preparing and filing each CTR costs you about $5.00. This means that the cost of filing for that mom and pop store that is eligible for Phase II exemptions is about $260.00. To come up with the correct number, you will have to consider the actual cost for your bank.

The costs of preparing a CTR will vary significantly depending on the extent to which the process is automated or staff-intensive. With staff participation, each CTR gets more expensive as time gets devoted to the process. However, with automation, each CTR reduces the per-CTR cost.

Now compare this cost with the cost of preparing and maintaining a Phase II exemption. Again, estimate what it will cost you to identify the eligible accounts, review their activity, disseminate the list, and train staff to use it. Then factor in the cost of the biennial review. Also take into account the ways you will identify changes in ownership that would trigger a review of the exempt status. Finally, factor in the likelihood of success of each method. Only you can decide what method - exemptions or CTRs - will work best in your bank. That depends on your staff, your procedures, your business and your customers.

Biennial Renewals.
You're going to need a process for biennial reviews in order to renew exemptions. The regulation will permit you to review customers half as often as the old annual review. But you will need a method for tracking and scheduling the review process.

One of the requirements for the Phase II exemption is that the bank identify and report any change in ownership. For listed companies, this is relatively easy to do. Someone has the assignment of periodically cruising the SEC site on the Web and looking up your exempt companies.

However, for mom and pop businesses, your most likely indicator will be any changes in the name of the business or authorized signers on the account. You will have to set up a method for tracking this. Essentially, it means that someone in the branch should notify the BSA officer whenever there is a signature card change on a Phase II account.

Multiple businesses.
Businesses with multiple activities may be exempted unless it does not engage "primarily" in a non-exemptible activity. This is defined as earning more than 50% of gross revenues from non-exemptible activities.

The bank's problem will be determining this revenue flow. There are not guidelines - yet - on how the bank should make this determination. A safe rule of thumb would be to refrain from exempting a business that derives any revenues from non-exemptible activities.

ACTION STEPS

Take a close look at your phase II customers. Estimate how many CTRs the bank would file (last year's numbers should be an indicator) if the company were not exempt.
Review your CTR filing process from top to bottom - including how transactions are identified, the aggregation process, and CTR preparation, including checking and filing the actual CTR
Consider how the biennial review process would work in your bank.
Review the signature card process, with particular attention to changes in authorized signers. Look for a way to build in notification to the BSA officer.
Review (or develop) Know Your Customer procedures. Consider whether and how the bank should determine the percentage revenues a business customer receives from different lines of business.