Compliance Blog

Hello friends, my name is Keith Schostag and I am a new regulatory compliance counsel at NAFCU. This is my first blog post and I’d like to talk about saving you time.

A member walks into a credit union…and makes a transaction of over $10,000. If you thought that went from joke to horror, you probably know 31 C.F.R. 1010.311 requires a financial institution to file a currency transaction report for each transaction of more than $10,000 by, through, or to a financial institution. For some members $10,000 is a low bar and a credit union could find itself drowning in reports. Fortunately, Uncle Sam has your back. Under 31 C.F.R. 1020.315, a financial institution can exempt transactions from certain entities if certain conditions are met. The FFIEC BSA/AML Manual breaks down the entities eligible for a CTR exemption into two groups, Phase I and Phase II entities.

Phase I Entities

Phase I entities can be found in Section 1020.315(b)(1)-(5). The FFIEC Manual summarizes and provides the following list of Phase I entities:

1.       “A bank, to the extent of its domestic operations.

2.       A federal, state, or local government agency or department.

3.       Any entity established under federal, state, or local laws and exercising governmental authority on behalf of the United States or a state or local government.

4.       The domestic operations of any entity (other than a bank) whose common stock or analogous equity interests are listed on the New York Stock Exchange or the NYSE American or have been designated as a NASDAQ National Market Security listed on the NASDAQ Stock Market, with some exceptions (“listed entity”).

5.       The domestic operations of any subsidiary (other than a bank) of any listed entity that is organized under U.S. law and at least 51 percent of whose common stock or analogous equity interest is owned by the listed entity.”

Phase II Entities

The second category, Phase II exempt persons, can be found in Section 1020.315(b)(6)-(7). These entities include non-listed businesses and payroll customers designated by a credit union as exempt. A credit union may designate a non-listed business or payroll customer as exempt if:

1.       It has maintained a transaction account at the credit union for more than two months;

2.       Frequently conducts transactions in excess of $10,000 with the credit union or, for a payroll customer, withdraws more than $10,000 to pay its U.S. employees; and

3.       Is incorporated or organized under the laws of the United States or a state or is registered as and eligible to do business within the United States or a state. 

Credit unions may want to note that if the non-listed business or payroll customer has not maintained a transaction account for two months, Section 1020.315(c)(2)(ii) permits a credit union to designate a non-listed business or payroll customer as exempt if:

“the bank conducts and documents a risk-based assessment of the customer and forms a reasonable belief that the customer has a legitimate business purpose for conducting frequent transactions in currency.”

It is important to note that Section 1020.315(b)(6)-(7) requires that a business maintain a “transaction account.” Loans or other account types do not count towards the two-month period.

Ineligible Businesses

Once a credit union has determined that a member may qualify to be designated as exempt, it should review Section 1020.315(e)(8) to ensure that the member is not an ineligible business. The FFIEC Manual provides the following summary:

“An ineligible business is defined as a business engaged primarily in one or more of the following specified activities:

·       Serving as a financial institution or as agents for a financial institution of any type.

·       Purchasing or selling motor vehicles of any kind, vessels, aircraft, farm equipment, or mobile homes.

·       Practicing law, accounting, or medicine.

·       Auctioning of goods.

·       Chartering or operation of ships, buses, or aircraft.

·       Operating a pawn brokerage.

·       Engaging in gaming of any kind (other than licensed pari-mutuel betting at race tracks).

·       Engaging in investment advisory services or investment banking services.

·       Operating a real estate brokerage.

·       Operating in title insurance activities and real estate closings.

·       Engaging in trade union activities.

·       Engaging in any other activity that may, from time to time, be specified by FinCEN, such as marijuana-related businesses.”

For businesses that engage in multiple types of activities, including some of the above ineligible activities, the FFIEC Manual states:

“A business that engages in multiple business activities may qualify for an exemption as a non-listed business as long as no more than 50 percent of gross revenues are derived from one or more of the ineligible business activities listed in the regulation.”

Based on the above text, if a business engages in some of the ineligible business activities listed in Section 1020.315(e)(8) it may still be eligible to be designated as exempt if it derives less than 50% of its yearly gross revenue from those ineligible activities.

Other

Credit unions should keep in mind that there are other limitations and requirements for CTR exemptions such as excluding foreign operations from the exemption or requiring a credit union to designate a business as exempt and conduct annual reviews. Further information and requirements regarding CTR exemptions can be found in the FFIEC BSA/AML Manual and Regulation. If your credit union is looking into CTR exemptions, the Manual is a great place to start.