IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 26. Anti-Money Laundering

Section 5. Bank Secrecy Act History and Law

4.26.5  Bank Secrecy Act History and Law

4.26.5.1  (01-01-2003)
Overview

  1. This section presents the history of anti-money laundering law and a discussion of its important concepts. It provides a brief history of the legislation, regulations and case law, which have developed around the Federal Anti-Money Laundering Program under the Bank Secrecy Act (BSA). A timeline of important laws, cases and regulations appears as an exhibit in this section.

4.26.5.2  (01-01-2003)
History of the Bank Secrecy Act

  1. On October 26, 1970, in response to increasing reports of people bringing bags full of currency of doubtful origin into banks for deposit, Congress passed the Currency and Foreign Transactions Reporting Act, Public Law 91-508. This law is often cited as the Bank Secrecy Act (BSA) because Part I, codified in Title 12 of the United States Code (U.S.C.) requires in part that banks not keep secret certain internal changes. Part II of the law, sometimes cited as the Currency and Foreign Transactions Reporting Act, is codified now at 31 U.S.C., Money and Finance, Chapter 53, Monetary Transactions, Part II, Records and Reports on Monetary Instruments Transactions. Since the law appears in Title 31, the Anti-Money Laundering (AML) compliance program based on it is often called the Title 31 program to distinguish it from Title 26, Internal Revenue Code (IRC) Section 6050I, law side of the AML program.

  2. The BSA requires reporting and recordkeeping of certain transactions. Congress gave the Secretary of the Treasury (sometimes jointly with the Federal Reserve Board) broad discretion to define the entities subject to the law and detail the reports and records to be made and retained. Treasury issued detailed regulations, which are more frequently cited than the law itself. They appear in the Code of Federal Regulations (C.F.R.) at Title 31, Money and Finance, Part 103, Financial Recordkeeping and Reporting of Currency and Foreign Transactions.

4.26.5.2.1  (01-01-2003)
1970's

  1. After the passage of the Bank Secrecy Act (BSA) in 1970 and the establishment of the beginning regulatory structure, judicial decisions established their constitutionality. Aggregation of multiple transactions was required by judicial decision.

4.26.5.2.2  (01-01-2003)
1980's

  1. An important lower court decision, U.S. v. Deak Perera, 566 F. Supp. 1398 (D.D.C. 1983) guarded privacy concerns during Bank Secrecy Act (BSA) examinations. Congress expanded civil and criminal penalties. Treasury issued regulations detailing the circumstances under which " geographical targeting orders" would be issued.

4.26.5.2.3  (01-01-2003)
1990's

  1. As a result of the millions of Currency Transaction Reports (CTRs) being filed, mostly by banks and mostly on legitimate business activity, Congress directed that Treasury research the uses made of BSA reports. Legislative focus then shifted from reporting all transactions to reducing, through exemptions, the number of CTRs filed and to requiring reports on suspicious transactions. Laws were passed to specifically address money laundering by and through nonbank financial institutions. Registration of money services businesses was required although the enabling regulations set the effective date on 12/31/ 2001. More emphasis was placed on requiring that the financial institutions retain records.

4.26.5.2.4  (01-01-2003)
2000's

  1. A terrorist attack on September 11, 2001 led to intense Congressional interest in terrorist financing. On October 26, 2001, the USA Patriot Act became law. Congress mandated anti-money laundering compliance programs for all financial institutions as defined in The Bank Secrecy Act (BSA), rather than the more restrictive regulatory definition. Suspicious activity report requirements were enhanced. All nonfinancial trades and businesses were required to report receipt of coins or currency greater than $10,000 under BSA as well as under IRC 6050I. This dual Form 8300 filing requirement effectively released Form 8300 information, except for Clerk of Court reports, from the disclosure protections of the IRC. Civil and criminal penalties for money laundering were increased. The Secretary of the Treasury received expanded powers respecting geographical targeting orders. FinCEN was elevated to Bureau status within Treasury.

4.26.5.3  (01-01-2003)
Entities Subject to the BSA

  1. Many BSA duties apply only to financial institutions. The statutory definition of financial institution at 31 U.S.C. 5312(a) lists many types of businesses, including many not offering financial services. The financial institutions required to comply include such diverse businesses as vehicle dealers and "any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system."

  2. Regulations at 31 C.F.R. 103.11 identify only some of these businesses as financial institutions for regulatory purposes. The regulations make clear that each agent, branch and office of an institution is considered a separate financial institution.

4.26.5.3.1  (01-01-2003)
Financial Institutions Defined in 31 C.F.R. 103(n)

  1. Financial institutions as defined in 31 C.F.R. 103.11(n) include:

    • A bank. The definition of a bank in 31 C.F.R. 103.11(c) includes most depository institutions.

    • A broker or dealer in securities.

    • A money services business as defined in 31 C.F.R. 103.11(uu).

    • A telegraph company

    • A casino (gross annual gaming revenue exceeds $1 million).

    • A card club (gross annual gaming revenue exceeds $1 million).

    • A person subject to supervision by any state or federal bank supervisory authority.

     

4.26.5.3.2  (01-01-2003)
Money Services Businesses

  1. Money Services Businesses under 31 C.F.R. 103.11(uu) include:

    • A currency dealer or exchanger, other than a person who does not exchange currency in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions.

    • A check casher, other than a person who does not cash checks in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions. Check cashing need not be the principal business of the check casher.

    • An issuer of traveler's checks, money orders or stored value, other than a person who does not issue such checks or money orders or stored value in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions.

    • A seller or redeemer of traveler's checks, money orders or stored value, other than a person who does not sell such checks or money orders or stored value in an amount greater than $1,000 in currency or monetary or other instruments to or redeem such instruments for an amount greater than $1,000 from any person on any day in one or more transactions.

    • A money transmitter. Money transmitters include any person engaged as a business in the transfer of funds. There is no threshold for money transmitters.

    • The U.S. Postal Service except with respect to the sale of postage or philatelic products.

     

4.26.5.3.3  (01-01-2003)
Agents and Offices of Financial Institutions

  1. The definition of financial institution under 31 C.F.R. 103.11 also includes each agent, agency, branch or office within the United States of an included financial institution. Each is separately required to follow the reporting and recordkeeping requirements of the Bank Secrecy Act.

  2. Where the reports to be filed or records to be kept would be duplicates, only one report is required to be filed. This means that the principal office and the branches can determine who files the report and where the records will be retained. Each is separately responsible if the requirements of the law are not met.

  3. A foreign bank with no contacts within the United States is not a financial institution under the definition. However, an agent of a foreign bank is a financial institution if the agent is operating within the United States. Such agents are required to register as foreign agents with the Justice Department. For example, a law firm, acting as an agent of a foreign bank, is a financial institution under IRS jurisdiction because neither the foreign bank nor the law firm is regularly examined for safety and soundness by a federal banking authority.

4.26.5.3.4  (01-01-2003)
Nonfinancial Trades or Businesses

  1. A nonfinancial trade or business that receives more than $10,000 in cash in 1 transaction (or 2 or more related transactions) is now required to file a Form 8300, both under Sec. 5331 of the Bank Secrecy Act, as well as under IRC Sec. 6050I. The Form 8300 reflects this dual statutory purpose in its heading. The purpose of Sec. 5331 is to free the Form 8300 information from the disclosure protections applicable to information returns required by the IRC. For a detailed discussion of Form 8300 see IRM 4.26.10.

4.26.5.3.5  (01-01-2003)
Individuals

  1. Individual owners, officers or employees of the financial institution act for it. The knowledge, intent or negligence of these individuals may be attributed to the financial institution. The individuals themselves are separately liable as individuals for additional penalties for willful violations. See for example:

    • 31 C.F.R. 103.41(c) makes any person owning or controlling a money services business responsible for registering the business. Control is determined by the instructions on the registration form and extends even to 5% shareholders. Any person who fails to comply with the section is liable for a civil penalty.

    • 31 C.F.R. 103.57(c). "For any willful violation of any recordkeeping requirement for financial institutions, except [those relating to foreign bank accounts] the Secretary may assess upon any financial institution and upon any partner, director, officer, or employee thereof who willfully participates in the violation a civil penalty..."

    • 31 C.F.R. 103.57(f). "For any willful violation committed after October 27, 1986, of any reporting requirement for financial institutions under this part except [reports related to foreign financial accounts, reports of transactions with foreign financial agencies and records relating thereto] the Secretary may assess upon any domestic financial institution and upon any partner, director, officer, or employee thereof who willfully participates in the violation a civil penalty..."

     

  2. Individuals as well as financial institutions are also directly required to report transportation of currency or monetary instruments, under 31 C.F.R. 103.23, and foreign financial accounts and reports of transactions with foreign financial agencies, under 31 C.F.R. 103.24 and 31 C.F.R. 103.25. They are also required to keep related records under 31 C.F.R. 103.32.

4.26.5.4  (01-01-2003)
Reports

  1. Both individuals and financial institutions are required to obtain and/or retain information about certain financial transactions. Some of this information must be filed in reports transmitted to the Internal Revenue Service and generally collected on the Currency and Banking Retrieval System (CBRS) database at the Detroit Computing Center (DCC). Banks may exempt certain types of customers from Currency Transaction Reports filed by the bank. Reports must generally be retained for five years.

  2. Reporting requirements depend on the type of entity, the type of transaction and amount of the transaction. In some cases the information to be reported must be verified and the document used to verify the information must be described on the report. Reports appear as exhibits to this section.

  3. Failure to report not only includes a complete failure to file a report, it also includes a failure to timely file a report and filing a report with material false statements or omissions.

4.26.5.4.1  (01-01-2003)
Currency Transaction Reports

  1. 31 C.F.R. 103.22 requires most financial institutions to file Currency Transaction Reports (CTRs), Form 4789. See Exhibit 4.26.5-2. Certain casinos file Currency Transaction Reports by Casinos (CTRCs), Form 8362. See Exhibit 4.26.5-3. Nevada casinos file Currency Transaction Reports by Nevada Casinos (CTRC-Ns), Form 8852, under Nevada State Regulation 6A. See Exhibit 4.26.5-4.

  2. The following chart details these forms and verification requirements:

     

    Figure 4.26.5-1

    Entity & Form Transaction & Amount Verification Requirements
    Financial Institutions Currency Transaction Report CTR IRS Form 4789 Transaction (cash in or cash out) in currency over $10,000 31 C.F.R. 103.28 Verify and record name and address of person presenting transaction. Record (1) Type and number of verification document (2) Presenter's taxpayer identification number (TIN) (3) Identity and (TIN) of any other person on whose behalf the transaction is conducted.
    Certain Casinos Currency Transaction Report by Casinos CTRC IRS Form 8362 Transaction (cash in or cash out) in currency over $10,000 31 C.F.R. 103.28 Verify and record name and address of person presenting transaction. Record (1) Type and number of verification document (2) Presenter's taxpayer identification number (TIN) (3) Identity and (TIN) of any other person on whose behalf the transaction is conducted.
    Nevada Casinos Currency Transaction Report by Casinos-Nevada CTRC-N IRS Form 8852 Transaction (cash in or cash out) in currency over $10,000 Nevada Gaming Commission Regulation 6-A Verify and record name and address of presenter. Record (1) Type and number of verification document (2) Presenter's taxpayer identification number (TIN) (3) Identity and (TIN) of any other person on whose behalf the transaction is conducted.

     

4.26.5.4.2  (01-01-2003)
CTR Exemptions

  1. Banks are not required to file Currency Transaction Reports (CTRs) on transactions with certain entities and are allowed, at the discretion of the bank, to exempt certain types of business transactions. Exemption law changed rapidly in the late 1990s. Some banks were not exercising their discretion to exempt and filed numerous CTRs, many of which related to normal business transactions. In 1994, Congress charged Treasury with the duty of reducing the number of CTRs filed. FinCEN issued new regulations amending 31 C.F.R. 103.22 in two phases.

  2. Designation of Exempt Person, TD F 90-22.53, must be filed by any bank that wishes to designate a customer as an exempt person for purposes of CTR reporting. 31 C.F.R. 103.22(d)(3)(i).See Exhibit 4.26.5-8.

  3. The CTR exemption does not mean that a Suspicious Activity Report (SAR) need not be filed.

  4. Banks must exempt other banks, government entities and listed entities, that is, businesses appearing on a recognized stock exchange and their subsidiaries. In addition, banks can exempt customers who have transaction accounts with the bank for a 12-month period and who are either nonlisted businesses that regularly withdraw or deposit more than $10,000 or payroll customers that regularly withdraw more than $10,000 to meet payroll.

4.26.5.4.3  (01-01-2003)
Nonbank Financial Institutions and Exemptions

  1. The exemption rule of 31 C.F.R. 103.22(d) applies to banks. It generally does not apply to nonbank financial institutions (NBFIs).

    • An NBFI must file a CTR on an appropriate transaction regardless of the customer involved because it is not included in the overall exemption language.

    • NBFIs are not required to file CTRs on transactions in currency between the NBFI and a commercial bank under 31 C.F.R. 103.22(d)(1), since commercial banks report such transactions.

    • A business engaged primarily as a financial institution or agent of a financial institution may not be treated as a non-listed (a type of exemptible) business by a bank. 31 C.F.R. 103.22(d)(6)(viii).

     

  2. Banks must apply special exemption rules to NBFIs.

    • Nonbank financial institutions that are listed entities are exempt only to the extent of domestic operations. 31 C.F.R. 103.22(d)(2)(iv).

    • Nonbank financial institutions may not be exempted as nonlisted customers, unless the regulated financial service(s) is 50% or less of gross revenues.

     

4.26.5.4.4  (01-01-2003)
Transportation of Currency and Foreign Financial Reports

  1. All persons file reports on foreign financial accounts and transportation of currency or monetary instruments into or out of the United States. See Exhibit 4.26.5-6. See Exhibit 4.26.5-7. They must also comply with any special targeting order when issued.

  2. The following table details these reports:

    Entity & Form Transaction Type & Amount Authority & Report Content Verification Requirements
    Person Report of Foreign Bank and Financial Accounts FBAR Treasury Form TD F 90-22.1 Foreign bank or financial account(s) over $10,000 31 C.F.R. 103.24 Account Name Number, Type and Maximum Value Foreign Financial Institution Name and Address Self-Reported.None
    Person Report of International Transportation of Currency or Monetary Instruments CMIR Customs Form 4790 Transportation of currency or monetary instruments over $10,000 31 C.F.R. 103.23 31 C.F.R. 103.25 Name, Address. Identifying State Number. Date of Birth, Type and Amount of Currency, Import or Export, Name of Principal if any None.

4.26.5.4.5  (01-01-2003)
Suspicious Activity Reports

  1. Some financial institutions are required to file Suspicious Activity Reports (SARs). See Exhibit 4.26.5-5. Such forms require information about the reporting financial institution, the suspect, the suspicious activity and the person to contact for assistance, as shown in the following table.

    Entity & Form Transaction Type & Amount Report to be Made Verification Requirements
    Banks Suspicious Activity Report SAR Form Number varies by Regulatory Agency Treasury Form TD F 90-22.47 Suspicious activity involving $5,000 or more where the transaction:

    • Involves funds derived from illegal activity

    • Is designed to evade any BSA requirements, or

    • Has no business or apparent lawful purpose.

    		 31 C.F.R. 103.18 Content of Report is not spelled out in 103.18. Authority to require a report implies authority to determine its contents. What is required is what is on the report. Only if verification is possible.
    Nevada Casinos SARC TD F 90-22.49 Suspicious activity as defined in Reg. 6A. Nevada Gaming Commission Regulation 6A Sec. 100 effective 10/1/1997. Only if verification is possible.
    Certain Casinos SARC TD F 90-22.49 Suspicious activity where the transaction has no apparent business reason. Form has been developed but regulations requiring its use are not in place. Only if verification is possible.
    Money Services Businesses SAR-MSB TD F 90-22.56 Limited to issuers, sellers and redeemers of money orders and travelers' checks, money transmitters, including underground banking systems, and the U.S. Postal Service. Suspicious activity if it is conducted or attempted by, at, or through a MSB, involves or aggregates funds of at least $2,000, and the MSB knows, suspects, or has reason to suspect that the transaction (or pattern of transactions):

    • Involves funds derived from illegal activity

    • Is designed to evade any BSA requirements, or

    • Serves no business or apparent lawful purpose.

    Threshold is $5,000 if discoverable only on review of clearance or similar records by an issuer of money orders or travelers checks.    		 31 C.F.R. 103.20 For transactions occurring after 12/31/2001. FinCEN web site directs MSBs to file bank SAR until the draft form has been approved. Only if verification is possible.
    Brokers & Dealers in Securities SAR-BD TD F 90-22.XX Suspicious activity if it is conducted or attempted by, at, or through a BD, involves or aggregates funds of at least $5,000, and the BD knows, suspects, or has reason to suspect that the transaction (or pattern of transactions):

    • Involves funds derived from illegal activity,

    • Is designed to evade any BSA requirements,

    • Serves no business or apparent lawful purpose, or

    • Is intended to further a criminal purpose but apparently involves legally derived funds.

    		 31 C.F.R. 103.19 For transactions occurring after 12/31/2002. Only if verification is possible.

4.26.5.4.6  (01-01-2003)
Retention of Reports

  1. The following reports must be retained:

    1. Currency Transaction Reports (CTRs, CTRCs and CTRC-Ns) for a period of five years from the date of filing the report. 31 C.F.R. 103.27(a)(3).

    2. Suspicious Activity Reports (SARs) filed pursuant to 31 C.F.R. 103.18 (d), 103.19(d) and 103.20 (c) for a period of five years from the date of filing the report.

    3. There is no report retention period in the regulations for the Report of International Transportation of Currency or Monetary Instruments (CMIR) or the Report of Foreign Bank and Financial Accounts (FBAR), although the records underlying the FBAR must be maintained for five years. 31 C.F.R. 103.32

    4. Reports required for targeting orders are to be retained for the period set forth in the order not to exceed five years. 31 C.F.R. 103.38(d).

     

  2. Retention of a report is a reporting requirement.

4.26.5.5  (01-01-2003)
Registration, Renewal and Re-registration Procedures

  1. Money Services Businesses (MSBs), with some exceptions, must register with the federal government. 31 U.S.C. 5330, 31 C.F.R.. 103.41(a)& (b). 31 U.S.C. 5330 (d)(1)(A) makes it clear that registration requirements apply to any "person who engages as a business in the transmission of funds including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system." In this case it is the statute clarifying the language of the regulations "any other person engaged