the bank secrecy act & beyond: currency and monetary ... does not include negotiable...

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The Bank Secrecy Act & Beyond: Currency and Monetary Reporting

Requirements

Jason B. Freeman, J.D., CPAFreeman Law, PLLC

2595 Dallas Pkwy., Suite 420Frisco, Texas 75034

(214) 984-3410

[email protected]

Copyright © Freeman Law, PLLC. All rights reserved.

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Jason B. Freeman, J.D., CPAMr. Freeman is the managing member of Freeman Law,PLLC, a tax, white-collar, and litigation boutique law firmbased in the Dallas-Fort Worth Metroplex with clientsthroughout the world. He is a tax attorney and adjunctprofessor at SMU’s School of Law, as well as a licensed CPA.Mr. Freeman handles federal and state tax controversies andwhite-collar civil and criminal matters, as well as advisesclients in tax planning and compliance matters.

Mr. Freeman has been recognized multiple times by DMagazine as one of the Best Lawyers in Dallas for tax law,and by Super Lawyers and Texas Monthly magazine. He is thePresident of the North Texas chapter of the AmericanAcademy of Attorney-CPAs, serves on the Executive Boardfor the Texas Society of CPA's, and sits on the Board ofDirectors for the Dallas Society of CPAs.

JASON B. FREEMAN

Phone (214) 984-3410

Toll-free (855) 676-1040

[email protected]

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What is the Bank Secrecy Act?

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What is the Purpose of the BSA?

The stated purpose of the BSA is to require certain reports or records where they have a high degree of usefulness in:◦ criminal, tax, or regulatory investigations; or◦ to protect against international terrorism.

See 31 U.S.C. § 5311.

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Common Reports Under the BSA

Form Filed by Legal Authority

Suspicious Activity Report (SAR)

FinCEN Report 111

Financial Institution –

Mandatory electronic filing

31 U.S.C. § 5318

Currency Transaction Report (CTR)

FinCEN Report 112

Financial Institution –


31 U.S.C. § 5313

Report of Cash Payment Over $10,000

In a Trade or Business

Form 8300

Recipient of payments –

Electronic filing “strongly encouraged”

31 U.S.C. § 5331

26 U.S.C. § 60501

Report of International Transportation

Of Currency or Monetary Instruments (CMIR)

Anyone entering or departing the U.S., or shipping,

mailing or receiving monetary instruments

exceeding $10,000 at one time

31 U.S.C. § 5316

Report of Foreign Bank and Financial Accounts

(FBAR) FinCEN Report 114

U.S. Person with a financial interest in or signature

authority over a foreign financial account –


31 U.S.C. § 5314


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BSA - AMLUnder the BSA, 31 U.S.C. § 5318(h):

─ Each financial institution shall establish anti-money launderingprograms, including, at a minimum:

(A) the development of internal policies, procedures,and controls;

(B) the designation of a compliance officer;

(C) an ongoing employee training program; and

(D) an independent audit function to test programs.

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Implementing an Effective BSA/AML Program•Although instituting an AML program is anindependent obligation, AML programs are designed toensure compliance with the reporting, identification,and record-keeping requirements of the BSA.

•Failure to sufficiently minimize the risk of violatingspecific BSA obligations is itself a violation.

• 31 U.S.C. §§ 5318(h), 5322, 5321


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Polling QuestionThe Bank Secrecy Act requires certain “financialinstitutions” to file Currency Transaction Reports andSuspicious Activity Reports when appropriate?

◦ True

◦ False?


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Who Regulates Compliance with the BSA? FinCEN

Internal Revenue Service

Comptroller of the Currency

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Federal Home Loan Bank Board

National Credit Union Administration

Securities and Exchange Commission

Commodity Futures Trading Commission

Bureau of Customs and Border Protection

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Current Enforcement TrendsHeightened regulatory and prosecutorial scrutiny

◦ Everybody’s getting in on the action – DOJ, OCC, FRB, FDIC

Have seen a number of recent high-profile enforcement actions forBSA/AML compliance deficiencies

In the past, BSA violations were addressed with regulatory orders;but in recent cases, seeing Deferred Prosecution Agreements andlarge fines

Prevention-minded approach

Federal agencies are increasingly looking to senior managementpersonally for BSA/AML compliance failures


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Examples of Recent BSA Enforcement

JP Morgan Chase Bank, N.A.—◦ In January of 2014, FinCEN assessed a $461 million civil money

penalty against J.P. Morgan for violating the Bank Secrecy Act.

◦ Total monetary fines topped $2 Billion.

◦ J.P. Morgan Chase allegedly failed to report suspicious transactionsarising out of Bernard Madoff’s fraudulent investment scheme.


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More Examples of Recent BSA Enforcement

•HSBC─ In December 2012, HSBC entered into a Deferred Prosecution

Agreement with DOJ in which it agreed to pay $1.9 billion tosettle charges involving BSA violations.

─ HBSC allegedly failed to implement an adequate complianceprogram for monitoring suspicious transactions and toadequately assess the risks associated with its financial servicesin certain regions.

•ING Bank─ Forfeited $619 million for OFAC violations for facilitating the

movement of funds on behalf of Cuban and Iranian interests.


(cont’d)

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Other Enforcement Examples Trump Taj Mahal Casino Resort

Ripple Labs◦ Virtual currency; money services business (“MSB”)

Thomas Haider◦ $1 million civil money penalty for BSA violations

Jack Miller◦ President of private, closely-held bank charged;

Bank of Mingo ◦ Small bank with 48 employees; $4.5 million civil money penalty and Deferred Prosecution

Agreement

Lone Star National Bank

Milenium Cash Exchange◦ $10,000 civil money penalty against NMCE and owner

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Keys to ComplianceReporting

Record-keeping

Anti-Money Laundering (“AML”) Program

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Polling Question A financial institution subject to the BSA must designate a complianceofficer in order to implement a compliant AML Program?

◦ Yes

◦ No

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BSA ReportingCurrency Transaction Reports (“CTRs”)

Form 8300

Suspicious Activity Reports (“SARs”)

Report of International Transportation of Currency of Monetary

Instruments (CMIR)

Report of Foreign Bank and Financial Accounts (FBAR)

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Currency Transaction Reports, FinCEN Form 112“Financial institutions” must file FinCEN Form 112 Currency

Transaction Report (“CTR”) to report:

• any deposit or withdrawal that involves a “transaction” in “currency” in

excess of $10,000

Note: There are certain excepted transactions that are not

subject to the CTR filing requirement.

CTRs must be filed within 15 calendar days of the reported

transaction(s)

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“Financial Institution”Banks

Brokers and dealers in securities

Money service businesses

Future commission merchants

Introducing commodities brokers

Telegraph companies

An operator of a credit card system

An insurance company

A dealer in precious metals,

stones, or jewels.

A pawnbroker

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Casinos

Card clubs

Gaming establishments with gross annual revenue in excess of $1 million per year

Any person subject to supervision by any state or federal bank supervisory authority

And others….

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“Money Service Business”As a general rule, businesses offering check cashing,money orders, travelers checks, money transfers,foreign currency exchange, and pre-paid accessproducts are Money Services Businesses and aresubject to BSA reporting and recordkeepingrequirements.

With few exceptions, each money services businessmust register with the Department of the Treasury byfiling FinCEN Form 107.

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Virtual Currencies“Virtual” currency

◦ FinCEN defines as a medium of exchange that operates like a currency in

some environments, but does not have all the attributes of real currency. In

particular, virtual currency does not have legal tender status in any

jurisdiction.

Under FinCEN Guidance,

◦ “exchangers” and

◦ “administrators”

are considered to be money transmitters unless a limitation orexemption from the definition of money transmitter applies.

◦ See FIN-2013-G001

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“Transaction” For purposes of the CTR filing requirements, the phrase

“transaction in currency” means:◦ Physical transfer of currency from one person to another

◦ It does not include a transfer of funds by means of a bank check,

bank draft, wire transfer, or other written order, which does not

include the physical transfer of currency

Multiple transactions in currency must be treated as a

single transaction if the financial institution “has

knowledge that they are by or on behalf of any person

and result in either cash in or cash out totaling more than

$10,000 during any one business day.”

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“Currency”“Currency” is defined to include:

◦ Coin and paper money of the U.S. or of any other country that is designatedas legal tender and that circulates and is customarily used and accepted as amedium of exchange in the country of issuance

◦ “Currency” includes U.S. silver certificates, U.S. notes, Federal Reserve notes,and foreign bank notes.

◦ It does not include negotiable instruments, such as checks

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Examples of Currency Transactions that Require a CTRFilingCash withdrawals

Cash deposits

Cash or purchase of checks

Foreign currency exchange

Cash payment

Cash purchase of monetary instruments

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Hypothetical - CTRsIf a person deposits $7,000 and later, on the same day, withdraws $4,000, does this trigger a CTR filing obligation?

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Poll QuestionIs a Money Services Business considered a “financial institution” subject to the BSA?

◦ Yes

◦ No?

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Structuring Transactions to Avoid a Currency Report Is a Crime31 U.S.C. § 5324 provides that no person shall, for thepurpose of evading the reporting requirements of § 5313:

(1) Cause or attempt to cause a financial institution not to filea CTR;

(2) Cause a financial institution to file a CTR that contains amaterial omission or misstatement; or

(3) Structure or attempt to structure a transaction to avoid areporting requirement.

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Civil & Criminal Penalties for“Structuring”A civil penalty of up to the amount of currency involved in thetransaction is imposed on anyone who causes or attempts tocause a bank to fail to file a CTR. 31 U.S.C. § 5321(a)(4)

A criminal fine of not more than $250,000 and/or imprisonmentof not more than 5 years may also be imposed. 31 U.S.C. §5324(d)(1)

The criminal fine can be increased to $500,000 and/orimprisonment of 10 years in cases involving the violation of otherlaws or a pattern of activity involving more than $100,000 in a 12month period. 31 U.S.C. § 5324(d)(2)

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Criminal ProsecutionsFor criminal prosecutions under § 5324, the governmentonly has to prove that the defendant:

◦ knowingly structured a currency transaction

◦ knew of the reporting requirement

◦ structured the transaction to evade the report

The government does not have to prove that the defendantknew that structuring was illegal.

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Poll Question True or false? It is legal to structure one’s cash deposits to avoidtriggering the bank’s obligation to file a CTR? (For example, bydepositing in amounts of $10,000 or below.)

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Form 8300: Reports of Currency Received in a Non-Financial Trade or Business

26 U.S.C. § 6050I requires that:

(1) Any person who is engaged in a trade or business,and

(2) Who, in the course of such business, receives morethan $10,000 in coins or currency in 1 transaction(or 2 or more related transactions), shall file a report with respect to suchtransaction.

Form 8300

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Parallel Reporting Requirementunder Title 26

31 U.S.C. § 5331 contains an identical reporting requirement.

31 USC § 5331 and 26 USC § 6050I can both be satisfied by filing the FinCEN / IRS Form 8300.

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Definitions Related to Form 8300“Trade or Business” has the same meaning as it does under26 U.S.C. § 162.

◦ If the receipt of currency is not in the course of the person’s trade orbusiness, a Form 8300 is not required

“Transaction” includes (but is not limited to) the sale of (a)goods or services, (b) real or personal property, and (c)intangible property

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Definitions Related to Form 8300 “Currency” includes the coin and currency of the U.S. or of any other

country which are customarily used and accepted as money in theother country

In addition, solely for purposes of Form 8300, “currency” alsoincludes:

◦ A cashier’s check, bank draft, traveler’s check or money order having aface amount of less than $10,000 that is:

(a) received in a “designated reporting transaction”, or

(b) received in any other transaction in which the recipient knows that theinstrument is being used in an attempt to avoid reporting the transaction.

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Designated Reporting TransactionA “designated reporting transaction” is a retail sale of a consumerdurable, a collectable or a travel or entertainment activity

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Example – Designated Reporting Transaction Taxpayer is a coin dealer. Customer buys gold coins from Taxpayer for$13,200. Customer pays for them with $6,200 in U.S. currency and acashier's check having a face amount of $7,000.

The cashier's check is treated as cash.

Taxpayer has received more than $10,000 cash and must file Form 8300for this transaction.

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Example – Designated Reporting TransactionTaxpayer is a boat dealer. Customer buys a boat from Taxpayer for$16,500. Customer pays for it with a cashier's check payable to Taxpayerin the amount of $16,500.

The cashier's check is not treated as cash because its face amount ismore than $10,000.

Taxpayer does not have to file Form 8300 for this transaction.

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Related Transactions“Related transactions” means any transactionconducted between a payer (or its agent) and arecipient of currency in a 24-hour period

In addition, transactions conducted between a payer(or its agent) and a currency recipient during a periodof more than 24 hours are related if the recipientknows or has reason to know that each transaction isone of a series of connected transactions

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Example of Related TransactionsAn attorney agrees to represent a client in a criminal case with theattorney's fee to be determined on an hourly basisIn the first month in which the attorney represents the client, the bill forthe attorney's services comes to $8,000 which the client pays incurrencyIn the second month in which the attorney represents the client, the billfor the attorney's services comes to $4,000, which the client again paysin currency

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Example of Related TransactionsJohn attends a one-day auction and purchases, in currency, two items

for $9,240 and $1,732.50

The transactions are “related transactions” under 31 CFR

§ 1010.330 (c)(12)(ii) because the auction house knows or has reason to

know that each transaction is one of a series of connected transactions

The auction house is required to report the aggregate amount of

currency received from the related sales (i.e. $10,972.50), even though

the auction house accounts separately on its books for each item sold

and presents the purchaser with separate bills for each item purchased

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Filing RequirementsForm 8300 must be filed within 15 days after currency is received in thereportable transaction. 26 CFR § 6050I-1(e)(1)

Receipt of multiple payments:

– The Form 8300 must be filed within 15 days of the date on which the totalpayments received exceeds $10,000

• If the initial payment is $10,000 or less, then the recipient must aggregate theinitial payment and all subsequent payments made within one year and thereport must be filed within 15 days of the date on which the payment thatcauses the total aggregate payment to exceed $10,000 is received

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Notification to Person Identified on Form 8300The business that files Form 8300 must notify any personwho was identified on the form of the filing. 26 USC §6050I(e).◦ The notification must be furnished to the person on or before

January 31 of the year following the calendar year for which the formwas required.

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Anti-Structuring LawsRelated to Form 8300No person shall for the purpose of evading the returnrequirements of this section:

(A)cause or attempt to cause a trade or business to fail to file a Form8300,

(B)cause or attempt to cause a trade or business to file a Form 8300 thatcontains a material omission or misstatement of fact, or

(C)structure or assist in structuring, or attempt to structure or assist instructuring, any transaction with one or more trades or businesses, toavoid the Form 8300 reporting requirement.

◦ 26 USC § 6050I(f)(1)

◦ 31 USC § 5324(b)

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Civil Penalties Relating to Form 8300

$250 per form for failure to file a timely and/or correct Form8300. Maximum fine of $3,000,000 per calendar year for alltransactions. 26 U.S.C. § 6721(a)

Negligent violations: Civil penalty of not more than $500

◦ If there is a “pattern of negligent activity,” an additional fine of up to $50,000may be imposed. 31 U.S.C. § 5321(a)(6)

Willful failure to file: Civil penalty of not more than the greater ofthe amount (not to exceed $100,000) involved in the transaction(if any) or $25,000. 31 U.S.C. § 5321(a)(1)

Intentional disregard: The greater of (a) $25,000 or (b) theamount of cash received up to $100,000. 26 U.S.C.§ 6721(e)(2)(C)

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Criminal PenaltiesRelating to Form 8300Willful failure to file a Form 8300 is a felony punishable by a maximumof 5 years in prison and/or a fine of $25,000 ($100,000 in the case of acorporation) may be imposed. 26 U.S.C. § 7203Filing a false Form 8300 or assisting in the filing of a false Form 8300 arefelonies punishable by a maximum of 3 years in prison and/or a fine of$100,000 ($500,000 for a corporation) may be imposed. 26 U.S.C. §7206Title 31 carries separate penalties for willfully violating Form 8300reporting requirements and can result in:

◦ A criminal fine up to $250,000 and/or imprisonment of 5 years, or

◦ A fine up to $500,000 and/or imprisonment of up to 10 years in aggravated casesinvolving the violation of other laws or a pattern of activity involving more than$100,000 in a 12 month period

◦ 31 U.S.C. § 5322

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Suspicious Activity Report (“SAR”)

• Generally, a SAR must be filed by a financial institution if:

◦ A transaction is conducted through the institution and the transaction involvesor aggregates to at least $5,000 (less in the case of certain persons), and

◦ The institution has reason to suspect that the transaction:

Involves funds derived from illegal activities;

Is designed to evade the BSA reporting requirements;

Has no business or apparent lawful purpose; or

Involves the use of a business to facilitate criminal activity

• Safe-Harbor: Federal law provides banks with a safe harbor for all reportsof suspicious activity to authorized parties. Generally, the safe harborprovides protection from civil liability to the bank and its directors,officers, employees, and agents.

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SAR’s Are an Independent RequirementThe fact that a bank also filed a CTR for a transaction doesnot relieve it from the independent responsibility to file aSAR under required circumstances.

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SAR’s and ConfidentialityA SAR filer may not notify anyone involved in the reportedtransaction, and must notify FinCEN of any request that itdisclose a SAR or the information contained in a SAR.

Safe-harbor against liability for refusing to notify a subjectof the SAR about the fact that a SAR was filed.

The so-called “314(b) rule” allows financial institutions toshare voluntarily certain types of SAR information withother financial institutions.

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SAR’s and AML Program•Maintaining an effective AML program, as required by 31 U.S.C. § 5318(h), iscritical to the ability of the financial institution to file appropriate SAR’s.

•As part of its AML program, a financial institution is required to have policiesand procedures to evaluate and identify suspicious activity.

•The Federal Financial Institutions Examination Council has promulgated alengthy and nonexhaustive list of red-flag examples that indicate suspiciousactivities, including:

◦ Customers who provide insufficient or suspicious information;◦ Efforts to avoid reporting or record-keeping requirements;◦ Activity inconsistent with the customer’s business;◦ Shell company activity

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CMIR—Report of International Transportation of Currency or Monetary Instruments, FinCEN Form 105

Must file to report the transportation, mailing, or shipping of currencyor monetary instruments over $10,000 into or out of the country. Mustbe filed by recipient under certain circumstances

“Monetary Instrument” is defined to include currency; traveler’s checksin any form; all negotiable instruments, including personal checks inbearer form, endorsed without restriction, or made out to a fictitiouspayee; securities or stock in bearer form or in such form that titlepasses upon delivery

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Report of Foreign Bank and Financial Records (“FBAR”)United States persons are required to file an FBAR if:

◦ The United States person had a financial interest in or signature or

other authority over at least one financial account located outside of

the United States; and

◦ The aggregate value of all foreign financial accounts exceeded

$10,000 at any time during the calendar year.

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Polling Question True or False? All foreign financial accounts of United States personsmust be reported to the Department of Treasury.

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“Person”“Person” means:

(1) a citizen or resident of the United States,

(2) a domestic partnership,

(3) a domestic corporation, or

(4) a domestic estate or trust

◦ Note: Applies to SMLLC’s that are a DRE under § 7701

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“Financial Account”“Financial account” includes:

◦ Bank account

Checking, savings, deposit

◦ Brokerage account

◦ Insurance policy with cash value (whole life)

◦ Mutual Fund or similar pooled fund

◦ Any type of account with a foreign financial institution

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“Financial Interest” A person has a “financial interest” in the foreign account in two situations

◦ (1) Owner of record or has legal title of the account

◦ (2) If the owner of record or holder of legal title of the accountis:

a person acting as an agent on behalf of the U.S person

a corporation in which the U.S. person owns directly or indirectly more than 50 percent of the total value of shares of stock

a partnership in which the U.S. person owns an interest in more than 50 percent of the capital or profits

a trust in which the U.S. person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income, or

or any other entity (other than excepted entities) in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits.

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Signature or Other AuthorityGenerally, signature or other authority means the authority of anindividual (alone or in conjunction with another) to control thedisposition of money, funds or other assets held in a financial accountby direct communication (whether in writing or otherwise) to theperson with whom the financial account is maintained.

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Common Fact PatternsExample: Megan, a United States resident, has a power of attorney on her elderly

parents’ accounts in Canada, but she has never exercised the power of attorney.

Answer: Megan is required to file an FBAR if the power of attorney gives her

signature authority over the financial accounts. Whether or not the authority is ever

exercised is irrelevant to the FBAR filing requirement.

Example: Diana, a United States citizen, is a grantor of a Foreign Asset Protection

Trust but does not control trust assets nor does she receive distributions from the

trust.

Answer: Diana, as grantor and deemed owner of the trust assets for federal tax

purposes, is required to report the trust’s foreign financial accounts.

Example: Domestic LLC is a DRE, and has a foreign financial account.

Answer: Even though Domestic LLC is a DRE for Title 26 purposes, Domestic LLC must

file an FBAR for Title 31 purposes.

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Penalties Related to the FBARNon-willful violations - A penalty up to $10,000 per violation

• Reasonable cause defense is available.

Willful violations - The greater of $100,000 or 50% of the balance in theaccount at the time of the violation, for each violation. Also a criminal violation– up to $500,000 and 10 years.

• U.S. v. Williams, 489 Fed. Appx. 655, (4th Cir. 2012)

Note: Both civil and criminal penalties can apply simultaneously. It ispossible to assert civil penalties for FBAR violations in amounts thatexceed the balance in the foreign financial account. See United States v.Zwerner

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Maintaining Records Records related to foreign accounts:

◦ Maintained for 5 years

◦ Must contain: (1) the name of the account holder

(2) the number of the account

(3) the name and address of the foreign bank or other person who maintains the account, and

(4) the maximum value of the account during the reporting period

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BSA Recordkeeping Credit extension >$10,000 (excluding loans secured by real estate)

Signature card for deposit accounts

Statement or other record for deposit accounts

Check, draft, or money order drawn on MIB in an amount > $100

Records of customer account debits or credits >$100

A record of any request made or instructions received or given regarding a transfer of currency or other monetary instruments, checks, funds, investment securities, or credit greater than

$10,000 to or from any person, account, or place outside the United States

Records to reconstruct deposit account transactions and trace a check in excess of $100

Records of certificates of deposit purchased or presented including name, address, TIN, date of the transaction, description of the certificate of deposit, and method of payment

Funds transfer records in amounts >$3,000

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BSA Recordkeeping (Cont’d)Customer Identification Program information for new customers beginning October 1, 2003

A record of the TIN of any person opening an account

Currency Transaction Reports

Suspicious Activity Reports and supporting documentation

314(a) proof of compliance (log or actual requests)

314(b) certification form if applicable

Evidence of filed CMIRs

JASON B. FREEMAN

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Concluding Remarks and Questions

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DISCLAIMERThe information included in these slides is for discussionpurposes only and should not be relied on without seekingindividual legal advice.

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the bank secrecy act & beyond: currency and monetary ... does not include negotiable...

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