transactions can be a big nuisance. Yet there is little rush to take advantage of new regulations - aimed particularly at community banks - that were intended to ease the paperwork burden for banks and government agencies. By some accounts, that is because the new rules are not yet well-understood. As directed by legislation revising the Bank Secrecy Act, the U.S. Treasury Department's Financial Crimes Enforcement Network has rewritten regulations governing exemptions to the requirement that banks report all cash transactions of $10,000 or more. Rather than change which transactions may ultimately be exempted, the new regulations alter the process for determining when exemptions are appropriate. A first round of new rules, issued in 1996, relieves the reporting requirement mainly for large banks by giving a blanket exemption to transactions involving publicly traded companies, other financial institutions, and government agencies. The financial crimes unit, known as FinCEN, had smaller banks in mind when it issued its second round of regulations in September 1998. The second round allows banks to create exemptions to the reporting requirement for familiar customers. And some bankers say the new terms are both reasonable and useful. "I like the new exemptions," says Anna Rentschler," vice president for compliance with First National Bank of Audrain County in Mexico, Mo. "And I think anyone who doesn't avail themselves of this is missing the boat." The $100 million bank, one of 13 banks owned by Central Bancompany, Jefferson City, Mo., has cut its filings by 75% since the regulations took effect, Ms. Rentschler said. Other bankers, however, cite ambiguous language in the regulations. They fear that examiners will assail their judgments, and contend it is still more prudent to file reports on all eligible transactions, even if they are routine and likely of no use to law enforcement agencies. "The risk of exposure with liability is too great," says Dennis Algiere, vice president for compliance with $1 billion-asset Washington Bank and Trust in Westerly, R.I. The new exemptions were added to slow the torrent of reports filed by banks in recent years. With many institutions believing that reporting all transactions of $10,000 or more was either cheaper or less risky than bothering to decide which were entitled to exemptions, banks have been filing about 12 million reports annually. Recognizing that most reports just weighed law enforcement agencies down with useless information and that the work was a burden for filers, Congress directed FinCEN in the Money Laundering Suppression Act of 1994 to simplify the process of exempting transactions. The first phase of new exemptions, applying to public companies, government agencies, and banks, is widely regarded as easy to follow. The second phase is proving more nettlesome. The regulations allow banks to exempt customers who do not qualify under the first-phase rules if they are account holders for a year or longer, frequently engage in transactions that would be subject to the reporting requirements, and are not engaged in a few lines of specifically excluded businesses. In addition, according to the regulations, "Banks must maintain a system of monitoring the transactions in currency of each exempt customer for any and all reportable suspicious activity." FinCEN provided no elaboration on what would constitute an adequate monitoring system, expecting that banks would understand that the language is merely a restatement of an obligation described in other regulations. "Banks should not exclude exempted accounts from their suspicious-activity monitoring system," said Peter Djinis, executive assistant director of FinCEN for regulatory policy. "The fact that it is exempted doesn't give banks the comfort of saying, 'I don't have to worry about it.' " But many bankers remain wary and say they believe more may be required of them than Mr. Djinis suggests. Philip J. Smith, compliance and Bank Secrecy Act officer for First United Corp. in Oakland, Md., said he had heard second-hand accounts of examiners demanding daily cash reports for exempt customers. First United, with $580 million in assets, would not be able to produce such reports without an onerous investment in upgrading its data processing system, he said. "It is cheaper for us to file currency transaction reports than to go through this exemption procedure," says Mr. Smith, explaining that he did not intend to create exemptions under the new rules. Other bankers, however, acknowledge the uncertainty in the language about monitoring customers' cash transactions and say at the same time that FinCEN's stated objective of easing a regulatory burden appears genuine. "Nobody really knows what second-guessing could occur," said Phillips Gay Jr., senior vice president and compliance manager with Commercial Bankshares Inc., "because there haven't been a lot of examinations yet." Still, said Mr. Gay, banks that know their commercial customers well, as most community banks assert they do, should have little trouble defending decisions to create reporting exemptions. Moreover, the new regulations appear to provide more leeway for mistakes made in good faith. Banks following prescribed procedures for creating exemptions will be protected from liability for failure to file a currency transaction report, according to the regulations. "That makes me feel pretty safe," said Mr. Gay, whose $460 million Miami- based bank has reduced its filings by about 20%. Such a safe-harbor provision stands in sharp contrast to the former regulations, said John Byrne, senior counsel and compliance manager for the American Bankers Association. A well-publicized $1 million fine paid by the former First National Bank of Maryland for failure to file currency transaction reports in the early 1990s convinced most bankers, Mr. Byrne said, not to trust the former exemption system. "There was a fear by a lot of banks," Mr. Byrne said, "that while the law did allow you to file exemptions, you were at peril." The previous rules required banks to perform detailed analysis of customers' cash transactions before establishing exemptions to the reporting requirements. Even then, banks had to establish upper limits on the size of cash transactions, based on the transaction patterns of each individual customer. That forced branch staff members to spend considerable time adding up multiple deposits, perhaps at multiple branches, to determine again and again whether an exemption applied or whether a filing was required for an exempt customer that exceeded its limit. New rules should cut costs in branches, several bankers said. If examiners subsequently demand detailed explanations about each exemption, the savings could be eaten up, they said. In between the complete discomfort at Washington Bank and Trust and First United and the confidence at First National Bank of Audrain County are institutions that are slowly beginning to build a list of exempt customers. "Unless I really feel comfortable with an account," said Terry Andrews, security officer and Bank Secrecy Act coordinator for FCNB Corp., "I find it hard to put them on the list." The Frederick, Md.-based bank, with $1.4 billion in assets, had been filing 200 to 250 currency transaction reports per week, Ms. Andrews said. That figure has been cut by about 20%, she said, by exempting two customers under the Phase 1 rules and 16 more, all retailers, under the Phase 2 rules. Another half dozen customers are internal candidates for the exemption list, she said, and perhaps others will be identified and added later. Banks may continue to use exemptions created under the old rules through June 2000. Beyond that, they will have to either create new exemptions or file reports on all transactions. Mr. Stoneman is a writer in Albany, N.Y.
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