Q: When should a bank make a risked-based determination to exempt an otherwise eligible Phase II customer before they have been a customer for two months?
A: The preamble to the 2008 final rule provides some examples of criteria that may be appropriate when making such a risk-based decision. For example, banks could consider the nature of the market the customer serves, the type of services offered, the location of the business, and whether the bank had a past relationship with the customer. In light of such factors, possible examples of customers who may qualify for exemption prior to two months may include the following:
Returning customers that reopen a previously maintained exempt transaction account with the bank;
Customers whose exempt status has changed (for example, when a customer that was a publicly listed company privatizes and is otherwise eligible for Phase II exemption).
The above examples are not intended to be exhaustive, but rather representative of the types of customer relationships where a risk-based determination to exempt prior to two months may be appropriate. Readers should note that for each of the examples provided above, there is some factor contributing to a bank's level of knowledge exceeding what is typical for a new customer being considered for exemption. Such knowledge, or other mitigating factors, could assist the bank in forming a reasonable conclusion that the risk of exempting the customer prior to two months was low.
Banks are not required to use the risk-based approach. FinCEN originally proposed11 removing any prescribed amount of time before a bank could consider a Phase II customer for exemption, enabling a bank to make a risk-based determination of when to exempt in all instances. Due to comments submitted in response to that proposal, however, FinCEN implemented a hybrid approach that allows banks to choose the flexibility of a risk-based approach or the simplicity of the two-month threshold.
Banks should remember that even if using the two month approach, they are required at least annually to conduct a review of the customer to determine continued eligibility for exemption and to monitor for suspicious activity.
This FAQ was obtained from FinCEN’s issuance FIN-2012-G003 – Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements, which may be found here: