> (Examination, Vashington, DC 20224 The Honorable Fernand J. St Germain Dear Mr. Chairman: JUN 17 1986 RECEIVED JUN 24 1993 In your letter to Mr. Percy Woodard, Jr. of April 25, 1984, you presented five questions in connection with hisubcorated indiaperal institutions April 17, 1986. The following is our response to your questions. Question 1. Both you and Mr. Serino, of the Office of the Comptroller of a) b) Response: The Internal Revenue Service does not have authority under the Bank Secrecy Act (BSA) to issue a summons to those financial institutions under its jurisdiction. Summons authority is necessary for two situations. The most common is the instance where a financial institution is cooperative, but requests a summons as a means of protecting itself from possible suits by its customers. The other type of situation is where an institution declines to cooperate by providing us with access to the appropriate books and records in order to determine if it is complying with the reporting and recordkeeping requirements of the BSA. These situations would be corrected by providing the summons authority proposed in H. R. 2785 and 2786. The summons authority would permit the examination of records and testimony for the purposes of investigating BSA violations. The records of the customers would be accessible solely for the purposes of determining the institution's compliance with the BSA. The incidental review of individual customers would be analogous to the review of such records by bank examiners; the focus is on the actions of the institution, not the customer. -2 The Honorable Fernand J. St Germain While we have not drafted specific written criteria, income tax compliance activities would have to be generated from filed CTRs. If a financial institution's records were then desired for a tax investigation relating to a particular customer, a summons would have to be served under the provision of Title 26 to gain access to the records. Question 2. Concerning names and businesses which may inappropriately Response: The IRS monitors the propriety of exemptions by requesting and reviewing exemption lists from financial institutions (some unsolicited lists are also received). We are also assisted by the review functions performed by other regulatory federal agencies that conduct compliance checks. The following is a summary of what the Service does in the way of ensuring that listed exemptions are proper. The Service has the authority to direct banks to remove entities from the list and to file CTRS for the preceding 5-year statutory period. Where an unqualified business is found on an exemption list, we would direct removal and, if useful, require the filing of delinquent CTRs. If warranted, a referral to our Criminal Investigation function would be made. Our Criminal Investigation function has the authority to conduct investigations of criminal violation (s) of any bank. Also, other supervisory agencies in conjunction with their compliance checks can direct a bank to remove an entity from the exemption list. In these situations, the bank is usually directed to apply for a special exemption and request the Service's advice on the need to file delinquent CTRs. -3 The Honorable Fernand J. St Germain During the review of an exemption list, we look for entities that are clearly outside of the regulatory definitions, such as automobile, boat, and aircraft dealers. We review for incomplete data required by the regulations, such as tax identification and account numbers. We ensure that personal accounts are not listed for exemption. We evaluate the dollar limitations for reasonableness. We contact the banks, where warranted, for information to complete the determination. Where warranted, we will request a recent 2-month summary of deposit and withdrawal activity, and the amount of activity in $100 bills. A determination is then made to either accept, remove, or modify an exemption. Sometimes, we will have to direct the banks to remove a customer (s) from the exemption list and file CTRS for both prior and future transactions. Examples of modification might include a reduction of the dollar limitations, or qualifying the exemption to accommodate weekend deposits or seasonal fluctuations. At present, civil penalties are under the jurisdiction of the Department of Treasury. Where the evidence demonstrates that the bank, and/or its unqualified customer, knowingly, used the exemption list for the purpose of circumventing the financial reporting requirements, IRS Criminal Investigation can recommend prosecution of the financial institution under 31 U.S.C. 5322 for failing to file a CTR and/or of the customer (under 18 U.S.C. 2(b) in conjunction with 31 U.S.C. 5322 or 18 U.S.C. 1001) for causing the institution to fail to file a CTR. However, not all judicial circuits agree that the customer is subject to prosecution. See United States v. Dela Espriella, 781 F. 2nd 1432 (9th Cir. 1986). At the present time, the reporting requirement and Title 31 penalties are directed at the bank. We do not have direct Title 31 civil sanctions to impose on customers who are improperly on the exemption list. Question 3. Should the term "monetary instruments" in the Bank Secrecy Act and its regulations be amended to include "postal money orders" in order to include them under the requirements of the Act and its regulations. Response: We understand that Treasury will be responding directly to you on this question. The Honorable Fernand J. St Germain Question 4. Has any thought been given to the use of the civil money penalty provisions of the Financial Institution Regulatory and Interest Rate Control Act, with appropriate amendments, in connection with violations of the Bank Secrecy Act by financial institutions and their employees? Present delays caused by extended negotiations and record review to determine "willfulness" possibly could be minimized. Response: We understand that Treasury will be responding directly to you on this question. Question 5. In your testimony, you explained what financial institutions Response: By "licensed" we mean that the entity is licensed by a state or federal regulatory agency, such as a State Banking Commission. Although Customs has the compliance jurisdiction for funds being sent or transmitted abroad, IRS also shares in this responsibility. For instance, if a foreign currency exchange dealer sends funds outside the U.S. via an air courier service, the IRS is responsible for ensuring compliance by the dealer relative to the filing of Forms 4789 (CTR) and 4790 (CMIR). In general, a foreign currency exchange dealer is licensed by a State Banking Commission or other state regulatory agency. It should be noted that the term "Licensed entities ...." is from 31 CFR 103.11(e) (5). I hope this information is of assistance to your review of the Service's role in connection with the Bank Secrecy Act. Sincerely yours, Frederic P. Williams |