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FIL-10-98 Attachment

[Federal Register: September 8, 1997 (Volume 62, Number 173)]

[Rules and Regulations]

[Page 47141-47148]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr08se97-4]


 

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DEPARTMENT OF THE TREASURY


 

31 CFR Part 103


 

RIN 1506-AA11



 

Financial Crimes Enforcement Network; Amendment to the Bank

Secrecy Act Regulations--Exemptions From the Requirement To Report

Transactions in Currency


 

AGENCY: Financial Crimes Enforcement Network, Treasury.


 

ACTION: Final rule.


 

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SUMMARY: This document contains a final rule amending the Bank Secrecy

Act regulations. The amendment will eliminate the requirement to report

transactions in currency in excess of $10,000 between depository

institutions and certain classes of "exempt persons" defined in the

rule. It will modify (and, as modified, will supersede), an interim

rule on the same subject, to reflect the comments that were requested

when the interim rule was published.

There appears elsewhere in today's edition of the Federal Register

a notice of proposed rulemaking that would further modify the rules for

granting exemptions from the currency transaction report filing

requirements. The final rule and the notice of proposed rulemaking are

additional steps in a process intended to achieve the reduction set by

the Money Laundering Suppression Act of 1994 in the number of Bank

Secrecy Act currency transaction reports required to be filed annually

by depository institutions.


 

EFFECTIVE DATE: January 1, 1998.


 

FOR FURTHER INFORMATION CONTACT: Peter Djinis, Associate Director,

FinCEN, (703) 905-3819; Charles Klingman, Financial Institutions Policy

Specialist, FinCEN, (703) 905-3602; Stephen R. Kroll, Legal Counsel,

Cynthia L. Clark, on detail to the Office of Legal Counsel, and Albert

R. Zarate, Attorney-Advisor, Office of Legal Counsel, FinCEN, (703)

905-3590.


 

SUPPLEMENTARY INFORMATION:


 

I. Statutory Provisions


 

The Bank Secrecy Act, Titles I and II of Pub. L. 91-508, as

amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31

U.S.C. 5311-5330, authorizes the Secretary of the Treasury, inter alia,

to issue regulations requiring financial institutions to keep records

and file reports that are determined to have a high degree of

usefulness in criminal, tax, and regulatory matters, and to implement

counter-money laundering programs and compliance procedures.

Regulations implementing Title II of the Bank Secrecy Act (codified at

31 U.S.C. 5311-5330) appear at 31 CFR Part 103. The authority of the

Secretary to administer Title II of the Bank Secrecy Act has been

delegated to the Director of FinCEN.

The reporting by financial institutions of transactions in currency

in excess of $10,000 has long been a major component of the Department

of the Treasury's implementation of the Bank Secrecy Act. The reporting

requirement is imposed by 31 CFR 103.22, a rule issued under the broad

authority granted to the Secretary of the Treasury by 31 U.S.C. 5313(a)

to require reports of domestic coins and currency transactions.

Four new provisions (31 U.S.C. 5313(d) through (g)) concerning

exemptions were added to 31 U.S.C. 5313 by the Money Laundering

Suppression Act of 1994 (the "Money Laundering Suppression Act"),

Title IV of the Riegle Community Development and Regulatory Improvement

Act of 1994, Pub. L. 103-325 (September 23, 1994). According to

subsection (d)(1), the Treasury must exempt a depository institution

from the requirement to report currency transactions with respect to

transactions between the depository institution and the following

categories of entities:


 

(A) Another depository institution.

(B) A department or agency of the United States, any State, or

any political subdivision of any State.

(C) Any entity established under the laws of the United States,

any State, or any political subdivision of any State, or under an

interstate compact between 2 or more States, which exercises

governmental authority on behalf of the United States or any such

State or political subdivision.

(D) Any business or category of business the reports on which

have little or no value for law enforcement purposes.


 

Subsection (d)(2) requires the Treasury to publish at least

annually a list of entities whose currency transactions are exempt from

reporting under the mandatory rules. The companion provisions of 31

U.S.C. 5313(e) authorize the Secretary to permit a depository

institution to grant additional, discretionary, exemptions from the

currency transaction reporting requirements. Subsection (f) places

limits on the liability of a depository institution in connection with

a transaction that has been exempted from reporting under either

subsection (d) or subsection (e) and provides for the coordination of

any exemption with other Bank Secrecy Act provisions, especially those

relating to the reporting of suspicious transactions. Subsection (g)

defines "depository institution" for purposes of the new exemption

provisions.

The enactment of 31 U.S.C. 5313 (d) through (g) reflects a

congressional intention to "reform * * * the procedures for exempting

transactions between depository institutions and their customers." See

H.R. Rep. 103-652, 103d Cong., 2d Sess. 186 (August 2, 1994).\1\ The

administrative exemption procedures at which the statutory changes are

directed are found in 31 CFR 103.22 (b)-(g).

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\1\ Section 402(b) of the Money Laundering Suppression Act

states simply that in administering the new statutory exemption

procedures

the Secretary of the Treasury shall seek to reduce, within a

reasonable period of time, the number of reports required to be

filed in the aggregate by depository institutions pursuant to

section 5313(a) of title 31 * * * by at least 30 percent of the

number filed during the year preceding [September 23, 1994,] the

date of enactment of [the Money Laundering Suppression Act].

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Several reasons have been given for the administrative exemption

system's lack of success in eliminating routine currency transactions

from operation of the Bank Secrecy Act rules. The first is the

retention by banks of liability for making incorrect exemption

determinations. The second is the complexity of the administrative

exemption procedures. Finally, advances in technology have made it less

expensive for some banks to report all currency transactions than to

incur the administrative costs and risks of exempting customers and

then administering the terms of particular exemptions properly.


 

II. The Interim Rule


 

On April 24, 1996, an interim rule (the "Interim Rule") adding a

new paragraph (h) to the currency transaction reporting rules in 31 CFR

103.22 was published in the Federal Register. See 61 FR 18204. The

Interim Rule exempted, from the requirement to report transactions in

currency in excess of $10,000, transactions occurring after April 30,

1996, between banks \2\ and


 

[[Page 47142]]


 

customers who fall into one of five classes of exempt persons:

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\2\ The Interim Rule used the term bank to define the class of

financial institutions to which the Interim Rule applied. As defined

in 31 CFR 103.11(c), that term includes both commercial banks and

other classes of depository institutions at which the language of 31

U.S.C. 5313 is directed.

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1. Banks, to the extent of their banking operations and

transactions within the United States; \3\

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\3\ The broad definition of "United States" in section

103.11(nn) applies.

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2. Departments and agencies of the United States and of states and

their political subdivisions;

3. Any entity established under the laws of the United States \4\

or of any state or its political subdivisions, or under an interstate

compact, that exercises governmental authority on behalf of the United

States or any such state or political subdivision;

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\4\ Again, the broad definition of "United States" applies.

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4. "Listed corporations," that is, corporations whose common

stock is listed on the New York Stock Exchange or the American Stock

Exchange or has been designated as a Nasdaq National Market Security

listed on the Nasdaq Stock Market; \5\

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\5\ The NASDAQ category did not include stock listed under the

separate "Nasdaq Small-Cap Issues" category.

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5. Subsidiaries of listed corporations that are consolidated with

such corporations for federal income tax purposes.

See 31 CFR 103.22(h)(2) (i)-(v). The first three categories of

exempt persons specified above are those to whom an exemption is

required to be granted by 31 U.S.C. 5313(d)(1) (A)-(C). The final two

categories are those entities who are exempted pursuant to the

authority contained in 31 U.S.C. 5313(d)(1)(D).

To treat a customer as exempt under the Interim Rule, a bank must

file a single form (the same form now used by banks to report a

transaction in currency) that identifies the exempt person and the bank

involved and must generally take such steps to assure itself that a

person is an exempt person that a reasonable and prudent bank would

take to protect itself from loan or other fraud or loss based on

misidentification of a person's status. Treatment of a customer as an

exempt person under the Interim Rule protects a bank generally from any

penalty for failure to file a currency transaction report with respect

to the exempt person's currency transactions, but it does not affect

the obligation of banks to file suspicious activity reports. Currency

transactions, like other transactions, between a bank and an exempt

person remain subject to the suspicious activity reporting requirements

of 31 CFR 103.21, as well as the suspicious activity reporting

requirements of the federal bank supervisory agencies. See also 12 CFR

21.11 (Office of the Comptroller of the Currency); 12 CFR 208.20

(Federal Reserve System); 12 CFR 353.3 (Federal Deposit Insurance

Corporation); 12 CFR 563.180 (Office of Thrift Supervision); 12 CFR

748.1 (National Credit Union Administration).

Because the Interim Rule implemented certain provisions of the Bank

Secrecy Act and granted significant relief from existing regulatory

requirements, it was made effective on May 1, 1996, less than 30 days

after its publication date. The Interim Rule was, however, accompanied

by a request for comments on the Rule's terms.

It appears that the Interim Rule did not immediately have the

intended effect of reducing the number of routine currency transactions

filed by depository institutions. This may have been attributable, at

least in part, to banks' reluctance to use the new exemption procedures

until the Interim Rule and proposals for the projected second stage of

currency transaction filing relief (as to which comments were solicited

by the preamble to the Interim Rule) were made final. Deferral of a

change in a bank's procedures would permit the automated systems on

which many institutions rely to be altered to take account of all the

revised currency transaction filing rules at one time. Unfamiliarity

with and uncertainty about the meaning of certain provisions of the

Interim Rule may also have initially retarded the Rule's use.\6\

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\6\ FinCEN has already issued a notice, FinCEN Notice 97-1, to

deal with one such uncertainty. That notice makes clear that an

institution may decide, after August 15, 1996, that it wishes to

adopt the new exemption system for particular customers, even if it

did not do so, for existing customers, before that date, so long as

the necessary exemption identifications are filed within 30 days of

the first transaction in currency that is sought to be exempted

under the new exemption procedures.

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Statistics based on the first half of this year indicate that banks

are making the transition to the new, streamlined exemption procedures

set forth in the Interim Rule. The number of CTR filings for each of

the months of February, March, April, May, and June of 1997 is less

than the number of filings for those same months in 1996. (FinCEN does

not yet have complete information concerning CTR filings for July

1997.) Thus, it appears that the Interim Rule is beginning to have some

effect on decreasing the number of CTR filings. FinCEN anticipates that

banks will continue to make the transition to the new exemption

procedures as they become better acquainted, and more comfortable, with

the terms of the new procedures. FinCEN also hopes that the

clarifications contained in this document will continue to aid in that

transition.


 

III. Summary of Comments and Revisions


 

A. Comments on the Notice--Overview


 

FinCEN received fifty-eight written comments on the Interim Rule.

Of these, forty-four comments were submitted by banks or bank holding

companies, six by banking trade associations, four by credit unions,

one by a credit union trade association, and one each by a compliance

consulting firm, an accounting firm, and a law firm, each on its own

behalf.

The commenters generally applauded FinCEN's efforts to improve the

exemption process. One bank commenter, for example, noted with approval

"the scope and aggressiveness of the Interim Rule" and found the Rule

"a major step in reducing the Bank Secrecy Act's burden on financial

institutions without compromising the BSA's effectiveness" because it

permitted banks to eliminate the cost of reporting "large

denomination, repetitive transactions with public entities and major

corporations engaged in legitimate retail activity." At the same time,

the commenters suggested a number of ways in which the Interim Rule

might be improved, and they raised several operating issues that banks

had encountered in applying the Interim Rule.

Comments on the Interim Rule focused primarily on five subjects:

the definition of an exempt subsidiary of a listed corporation; other

aspects of the definition of exempt person; the time frame within which

a bank was permitted to designate an existing customer as an exempt

person; the need to clarify the relationship between the provisions of

paragraph (h) and the terms of the administrative exemption provisions

of 31 CFR 103.22(b)-(g); and the interplay between the Interim Rule and

previous regulatory guidance provided by the Department of the Treasury

with respect to the currency transaction reporting requirements. The

specifics of the comments and an explanation of resulting modifications

to paragraph (h) are outlined below.

After full and careful consideration of all the comments, 31 CFR

103.22(h), as contained in the Interim Rule, is modified, and, as

modified, is adopted as a final rule.


 

B. Final Rule


 

The format and substance of the final rule and the Interim Rule are

generally the same. The final rule reflects the


 

[[Page 47143]]


 

following significant modifications to the Interim Rule:

1. The definition of exempt person has been clarified to make clear

that banks are eligible to be treated as exempt persons because they

are banks, and then only with respect to their domestic operations; a

bank that is, or is a subsidiary of, a listed company does not for that

reason obtain a second ground for exemption;

2. The definition of exempt person has been amended to treat as a

"listed entity" and entity, rather than just a corporation, whose

common stock or analogous equity interests are listed on an applicable

stock exchange;

3. The definition of exempt person has been amended to include any

subsidiary of a listed entity that is organized under the laws of the

United States or a state and at least 51 percent of whose common stock

is owned by the listed entity as shown in a reasonably authenticated

corporate officer's certificate, a reasonably authenticated photocopy

of Internal Revenue Service Form 851 (Affiliation Schedule), or in the

Annual Report or Form 10-K that is filed by the listed entity with the

Securities and Exchange Commission;

4. The definition of exempt person has been amended to make clear

that an exempt person includes a financial institution, other than a

bank, that is a listed entity or a subsidiary of a listed entity, but

only to the extent of such entity's domestic operations;

5. The time frame for designating a customer as an exempt person

has been clarified to provide that a designation may be made, for any

customer, by the close of the 30-day period beginning after the day of

the first reportable transaction in currency with that person that is

sought to be exempted from reporting under the terms of paragraph (h);

6. Examples of entities exercising governmental authority have been

added to the Interim Rule; and

7. A paragraph has been added to make clear that, absent knowledge

of a loss of an exempt person's status as such, a bank satisfies its

obligations under paragraph (h) by verifying the continued status of

exempt persons at least annually.

The changes adopted in the final rule are intended to improve,

clarify, and refine the rule's provisions in light of the objectives

FinCEN outlined when the Interim Rule was published. Those objectives

are reducing the burden of currency transaction reporting, requiring

reporting only of information that is of value to law enforcement and

regulatory authorities, and, perhaps most importantly, creating an

exemption system that is cost-effective and that works. See 61 FR

18205.


 

IV. Specific Comments and Explanation of Revisions


 

A discussion of the significant comments on the Interim Rule

appears below. As noted, many of the comments raised questions about

the interaction between the terms of paragraph (h) and various

operating requirements of the administrative exemption system.


 

A. 31 CFR 103.22(h)(1)--Transactions in Currency of Exempt Persons With

Banks


 

Paragraph (h)(1) states that general rule that no report is

required under 31 CFR 103.22(a)(1) with respect to any transaction in

currency between an exempt person and a bank. The only changes made to

this paragraph are ministerial: the phrase "currency transactions" in

the title of paragraph (h)(1) has been revised to read "transactions

in currency," and the phrases "occurring after April 30, 1996," in

the title of paragraph (h) and in the title of paragraph (h)(1), and

"that is conducted after April 30, 1996," at the end of paragraph

(h)(1), have been deleted as unnecessary in a final rule.\7\ For

consistency, the phrase "occurring after April 30, 1996" has also

been deleted as unnecessary in paragraph (a)(1).

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\7\ Deletion of the reference to a specific date is not intended

in any way to alter the effective date of this change in the Bank

Secrecy Act regulations.

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It should be noted that the exemption language of the final rule is

fundamentally different from that of the administrative exemption

system. Sections 103.22(a)(1) and 103.22(h)(1) state affirmatively that

the reporting requirements of the section do not apply to the

transactions described in paragraph (h). In contrast, the

administrative exemption provision, 31 CFR 103.22(b)(2), simply states

that a bank "may exempt" transactions described in that paragraph

from reporting. Although, as noted in the preamble to the Interim Rule,

see 61 FR 18206, the provisions of paragraph (h)(1) do not

affirmatively prohibit banks from continuing to report routine currency

transactions with exempt persons (and the requirement that exempt

persons be designated as such provides banks with operational

discretion to determine whether or not to recognize the new

provisions), banks that continue to report such routing transactions

are supplying the government with information that is not required

under the Bank Secrecy Act regulations.

1. Use of Word "Bank" Rather Than "Depository Institution"

FinCEN received no comment on its use of the term "bank" instead

of "depository institution" to define the class of financial

institutions, subject to the Bank Secrecy Act, that are exempted from

the requirement to report transactions in currency by paragraph (h)(1),

and the final rule continues to use the former term. Although 31 U.S.C.

5313(d) refers to mandatory exemptions for certain transactions in

currency with "depository institutions," the broad definition of bank

contained in 31 CFR 103.11(c) appears to include all categories of

institutions included in the statutory "depository institution"

definition, so that a change in terminology was neither necessary nor

advisable (in view of the Bank Secrecy Act regulations' general use of

the work "bank" for the classes of institutions involved).

2. Coverage of all "Transactions in Currency"

At least one commenter asked whether paragraph (h), intended to

exempt from reporting all "transactions in currency" between exempt

persons and banks, despite the fact that the administrative exemption

system rules of 31 CFR 103.22(b)(2) (i)-(ii) permit banks to exempt

from currency transactions reporting only deposits and withdrawals, of

currency from existing and specified accounts.\8\ The use of the

broader term is intentional, as paragraph (h) seeks to eliminate all

transactions in currency between exempt persons and banks from the

reporting rules of section 103.22 (subject to the limitation on

exemption for transactions carried out by an exempt person as an agent

for another person, as set forth in paragraph (h)(5)). As noted in more

detail below, however, the changes made to section 103.22 have no

impact on the requirement to report suspicious transactions under 31

CFR 103.21, and the fact that an exempt person wishes to conduct a

transaction other than a deposit or withdrawal, or a transaction that

does not involve an existing account with the bank involved, may merit

further investigation, and perhaps reporting, under the rules of

section 103.21.

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\8\ Banks are permitted by 31 CFR 103.22(b)(2)(iii) to grant a

broader exemption for transactions by government agencies.

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3. Transactions by Exempt Persons With Financial Institutions Other

Than Banks

At least one commenter sought to broaden the scope of subsection (h)

to include transactions between exempt


 

[[Page 47144]]


 

persons and financial instituons other than banks. No such change has

been made. Although, as noted below, banks are permitted, in a change

from prior practice, to recognize "listed" non-bank financial

institutions as exempt persons, a general grant of automatic exemption

for all transactions in currency in excess of $10,000 between exempt

persons, on the one hand, and, for example, brokers and dealers in

securities, money transmitters, or currency exchange houses, on the

other, is neither within the Money Laundering Suppression Act statutory

mandate nor justified by the realities of the operation of those

businesses.


 

B. 31 CFR 103.22(h)(2)--Definition of Exempt Person


 

Paragraph (h)(2) continues to contain the definition of those

classes of "exempt persons" whose transactions in currency with banks

are exempt from reporting under the final rule.

1. Banks

The Interim Rule defines an exempt person to include a bank, to the

extent of the bank's domestic operations. One commenter asserted that

the treatment of banks as exempt persons "to the extent of their

domestic operations" is less broad than the present exemption provided

for banks by section 103.22(b)(1)(ii). However the language of

paragraph (h)(2)(i) is simply a restatement of the language of section

103.22(b)(1)(ii), when the latter definition is read together with the

definition of "domestic" in section 103.11(k).

The final rule revises paragraphs (h)(2)(iv) and (h)(2)(v) to make

clear that a bank is eligible to be treated as an exempt person only

with respect to its domestic operations; a bank that is a listed entity

or a subsidiary of a listed entity does not for that reason obtain a

second ground for exemption.

2. Subsidiaries or Affiliates of Banks

At least one commenter asked whether the exempt person definition

included subsidiaries or affiliates of banks (so that a transaction in

currency between a bank subsidiary and a second bank would be exempt

from reporting in the same manner as a transaction between the

subsidiary's bank parent and the second bank.) The bank Secrecy Act

regulations do not generally treat bank subsidiaries as falling within

the definition of bank for purposes of the regulations, and until that

basic concept is re-evaluated, it is premature to extend automatic

relief for currency transaction reporting purposes to non-bank

subsidiaries and affiliates of banks.

3. Government Entities

Paragraph (h)(2)(ii), which treats various federal, state, and

local government departments and agencies as exempt persons, is

unchanged.

Several commenters asked about the status of tribal governments and

tribal enterprises under paragraph (h). The definition of "United

States" in section 103.11(nn) includes "the Indian lands (as that

term is defined in the Indian Gaming Regulatory Act)," \9\ so that

tribal governments are eligible to be exempt persons under paragraph

(h); whether particular enterprises conducted on tribal lands, for

example tribal casinos, are themselves exempt depends upon the manner

in which they are organized and operated. Thus, a tribal casino that is

operated as a department of a tribal government would generally qualify

as an exempt person, but an independently operated management company

for such a casino, or a corporation of which the tribe was a

shareholder, would likely not so qualify. While FinCEN would be pleased

to provide further guidance on that question on the basis of the facts

of a particular situation, it is not feasible on the current state of

the record do so in the Bank Secrecy Act regulations themselves.

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\9\ The term Indian Gaming Regulatory Act is itself defined in

Sec. 103.11(rr).

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One commenter argued that the definition of government agency in

paragraph (h)(2)(ii) would exclude exemption for agencies of the

District of Columbia. That is not the result of the definition, since

the definition of "United States" in section 103.11(nn) includes the

District of Columbia.

4. Entities That Exercise Governmental Authority

Paragraph (h)(2)(iii), which treats as exempt persons entities

established by federal, state, or local governments, or by interstate

compact, that exercise governmental authority, also is unchanged.

5. Listed Entities

The Interim Rule defines an exempt person to include corporations

listed on national securities exchanges. Several commenters suggested

that the definition of exempt person be broadened to include

partnerships and other non-corporations listed on those exchanges. One

commenter pointed out that the rationale FinCEN gave for exempting

listed corporations--i.e., the scale of enterprises listed on the

nation's largest securities exchanges, and the variety of internal and

external controls to which they are subject, make their use for money

laundering sufficiently unlikely to permit relaxation of the current

transaction reporting rules--applies to any listed entity regardless of

its form. After consideration of such comments, Treasury has amended

the Interim Rule to expand the definition of an exempt person in

paragraph (h)(2)(iv) to include any entity listed on an applicable

national securities exchange.

A number of commenters cited the difficulty of determining whether

a customer was listed on one of the three cited stock exchanges or was

a subsidiary of a company so listed. As noted in the preamble to the

Interim Rule, it is impossible to reduce the volume of currency

transaction reports to the extent that the Interim Rule tries to do

without creating some temporary inconvenience as the terms of the

system change. The determinations required are straightforward and are

to be based on easily available information, especially for financial

professionals. FinCEN continues to believe that the degree of effort

involved in researching whether a company's stock is listed as a

national stock exchange, or whether a corporation is a subsidiary of a

public company, is well within the scope of what a prudent bank should

know about its customers and their activities.

There is no limit on the "listed entity" definition based on the

nature of a particular company's business. Thus, for example, a listed

company that is a gaming enterprise or that issues traveler's checks or

money orders or engages in a money remittance business as a principal

is not for that reason denied exempt status. See, however, the

limitation on exemption for transactions carried out by an exempt

person as an agent for another person, as set forth in paragraph

(h)(5).

6. Subsidiaries of Listed Entities

The Interim Rule treats as an "exempt" subsidiary any subsidiary

that is included in the consolidated federal income tax return of a

listed corporation. FinCEN sought alternative formulations that bank

employees would find easy to apply and that would accomplish the goals

of the Interim Rule more effectively than the consolidated return

formulation. At least one commenter stated that an entity that is

listed as a subsidiary on a listed entity's SEC report 10K or an annual

report should be considered an exempt person. After consideration of

these comments, FinCEN has amended the definition of an exempt

subsidiary to include any subsidiary that is organized under the laws

of the United States or of any state and at least 51 per


 

[[Page 47145]]


 

cent of whose common stock is owned by the listed entity. Evidence of

such ownership may be shown by any of the ways listed in paragraph

(h)(4)(iv), including reliance upon a listed entity's Annual Report or

Form 10-K, filed in each case by the listed entity with the Securities

and Exchange Commission.\10\

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\10\ Several commenters suggested that non-profit corporations

generally be added to the list of exempt persons. FinCEN does not

believe that a blanket provision of this sort would be workable or

in keeping with the balance of objectives outlined in 31 U.S.C. 5313

(d)-(g), given the variety of organizations that can claim non-

profit status.

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7. Financial Institutions Other Than Banks

New paragraph (h)(2)(vi), which relates to financial institutions

other than banks, has been added to the Interim Rule. This new

paragraph clarifies that non-bank financial institutions that are, or

are subsidiaries of, listed entities, are exempt persons only to the

extent of their domestic operations.


 

C. 31 CFR 103.22(h)(3)--Designation of Exempt Person


 

Paragraph (h)(3) sets forth the procedures for designating an

exempt person. A few commenters sought clarification of the time frame

in which a bank could designate an exempt person. At least one

commenter stated that the Interim Rule could be interpreted as

precluding a bank from designating an existing customer as an exempt

person after August 15, 1996. After consideration of such comments,

FinCEN has amended the Interim Rule, in accord with FinCEN Notice 97-1,

to make clear that a bank can designate any customer as an exempt

person by the close of the 30-day period beginning after the day of the

first reportable transaction in currency with that person that is

sought to be exempted from reporting under the terms of paragraph (h).

At least one commenter also requested that FinCEN amend the Interim

Rule to allow banks, when designating exempt persons, to file a list of

its domestic bank customers instead of filing a form that identifies

such a customer as an exempt person. As set forth in new paragraph

(h)(3)(iii), a bank, when designating an exempt person, may either file

an Internal Revenue Form 4789 in which line 36 is marked appropriately

or filed, in such a format and manner as FinCEN may specify, a current

list of its domestic bank customers.

At least one commenter further suggested that it would be efficient

for banks simply to file designations for all their government

customers (as well as their bank customers), regardless of whether

those customers engage in transactions in excess of $10,000. FinCEN

will consider making such a change to paragraph (h) for government

entities at an appropriate time in the future.


 

D. 31 CFR 103.22(h)(4)--Operating Rules for Designating Exempt Persons


 

Paragraph (h)(4) continues to state general operating rules for

designating exempt persons. Changes to the details of the operating

rules are outlined below.

1. General Standard

A number of commenters asked for greater specificity about the

manner in which the determination that a customer is an exempt person

should be made and documented. Specific questions included, for

example, whether a bank was required to keep an "exemption list" of

exempt persons, whether a signed customer statement was required for

each exempt person, whether paper copies of filings designating exempt

persons should be maintained by a bank, and how long records relevant

to the exemption determination must be retained.

The language of paragraph (h)(4)(i) has been revised to make

explicit the general requirement, implicit in the original language,

that a bank must document, in the manner that a reasonable and prudent

bank would do, its determination that a customer is eligible to be

treated as an exempt person, in compliance with the terms of paragraph

(h). A new paragraph (h)(4)(v), discussed below, has been added to deal

specifically with record retention.

FinCEN believes that specific additional language is unnecessary

and would be contrary to the spirit of the changes in the currency

transaction filing rules that FinCEN is working with the banking

industry to make. Because the situation of each bank is different, any

uniform set of rules can only stifle creativity and efficiency in

building whatever record an individual bank's situation and

determinations warrant. Thus, for example, it would certainly be

prudent for a bank to maintain, or to be able to retrieve, in a central

location a list of the customers that it treats as exempt persons; but

whether the list is separately maintained, or simply retrievable from

general records upon need, is a matter for each bank to determine.

Similarly many institutions, as a general rule, retain copies of

documents filed with the Treasury Department; however, whether forms

filed magnetically must be converted into paper copies for examination

purposes is a matter that should be decided in accordance with general

bank policies, rather than in a universal regulatory document.

As in other situations, FinCEN believes that too much attention has

in the past been paid to mechanical compliance with particular "check

list" requirements, rather than to the spirit of compliance and the

monitoring necessary effectively to deter or detect money laundering at

the nation's financial institutions. Thus, it hesitates, in attempting

to re-engineer the currency transaction reporting system, to recreate

the defects of the system being replaced. FinCEN intends to communicate

the policy determinations behind the changes in the rules to the

federal financial institution supervisory agencies, whose authority

includes the authority to examine for compliance with Bank Secrecy Act

requirements, to assure, insofar as possible, that the expectations of

compliance examiners are in accord with the terms and spirit of the new

rules.

At least one commenter suggested that FinCEN should bear the burden

of listing all the entities falling within the classes of exempt

persons set forth in paragraph (h)(2). This suggestion has not been

adopted in the final rule. The list requirement is a flexible one and

is amply met by reliance on publicly-available sources. For FinCEN to

publish a list of particular exempt customer ab initio would amount to

a licensing requirement that would neither be efficient nor feasible.

At the same time, as indicated in the preamble to the Interim Rule,

see 61 FR 18208, FinCEN is exploring the possibility of producing a

nationwide list of exempt persons from filed designations. FinCEN also

is exploring the possibility of linking its own Web Site to those of

the national securities exchanges.

2. Governmental Entities

A few commenters requested that FinCEN provide examples of those

entities established under U.S., state, or local law, under an

interstate compact, that exercise governmental authority. A sentence

has been added to paragraph (h)(4)(ii) to cite the New Jersey Turnpike

Authority and the Port Authority of New York and New Jersey as examples

of entities that exercise governmental authority.

3. Listing Information

Language has been added to paragraph (h)(4)(iii) to make it clear

that a bank may rely, in determining whether a company is a listed

company,


 

[[Page 47146]]


 

on information available from the "Edgar" electronic information

system maintained by the Securities and Exchange Commission (http://

www.sec.gov/edgarhp.htm), and on information contained in the Web Sites

maintained by the New York Stock Exchange ((http://www.nyse.com), the

American Stock Exchange (http://www.amex.com), and the National

Association of Securities Dealers (http://www.nasdaq.com).

4. Subsidiary Status

Paragraph (h)(4)(iv) has been amended to provide banks with the

additional options, when determining whether a person is exempt as a

subsidiary of a listed entity, of relying upon the listed entity's

Annual Report or Form 10-K (filed with the Securities and Exchange

Commission) for designation of the listed entity's subsidiaries.

5. Records Maintenance

New paragraph (h)(4)(v) has been added to the Interim Rule to make

clear that records maintained by a bank to document its administration

of the rules of this paragraph (h) must be maintained in accordance

with the terms of 31 CFR 103.38, which, inter alia, requires that

records be maintained for a period of five years.


 

E. 31 CFR 103.22(h)(5)--Limitation on Exemption


 

Paragraph (h)(5) states that the exemption from reporting contained

in paragraph (h)(1) does not apply to a transaction carried out by an

exempt person as an agent of another person who is the beneficial owner

of the funds that are the subject of a transaction in currency. At

least one commenter requested that FinCEN eliminate this limitation.

This requested change has not been adopted in the final rule. Such a

change would allow an exempt person to lend its status to any person's

transactions, thereby circumventing the purposes of carefully defining

the classes of exempt persons.

At least one commenter noted a difficulty involved in tracking

deposits from large grocery stores, because some of the deposits

involved may be monies sent to holding accounts for money order or

traveler's check companies for which the grocery stores act as agent.

Although FinCEN recognizes that distinguishing between the two (or

more) sources of deposits represents an additional effort, it believes

that the holding accounts are ultimately relatively easy to distinguish

from the store's own operating accounts and do not commingle operating

funds and funds used to pay for money service products sold by grocery

stores as agents for other concerns. To the extent that the industry

still finds that the limitation set forth in paragraph (h)(5) will

result in unnecessary inconvenience, FinCEN will consider additional

comments on this subject when it considers comments to the notice of

proposed rulemaking on exemptions that appears elsewhere in today's

edition of the Federal Register.


 

F. 31 CFR 103.22(h)(6)--Effect of Exemption: Limitation on Liability


 

Paragraph (h)(6) continues to state the general rule that once a

bank has complied with the terms of paragraph (h), it is protected from

any penalty for failure to file a currency transaction report

concerning a transaction in currency by an exempt person. The language

set forth in paragraph (h)(6)(i) of the Interim Rule has been deleted

in the final rule; the issue of when a bank must designate customers it

has previously treated as exempt, is addressed in the notice of

proposed rulemaking regarding exemptions.

At least one commenter expressed the concern that the "automatic

revocation" provisions of paragraph (h)(8), in effect, force banks to

maintain a constant vigil of the status of entities they have

designated as exempt persons. New paragraph (h)(6)(ii) has been added

to clarify that, absent specific knowledge of any information that

would be grounds for revocation, a bank is required to verify the

status of those entities it has designated as exempt persons only once

each year.

A bank may, at present, elect to treat a person as exempt under

either the administrative exemption system rules of sections 103.22(b)-

(g) or the rules of section 103.22(h). As outlined in the Interim Rule,

and as confirmed above, the exemption procedures for each system are

independent of the other. Thus, if a bank treats a person as exempt

under the new exemption procedures set forth in paragraph (h), it need

not place that person on its exempt list under the administrative

exemption system rules, see sections 103.22(b)-(g), but, conversely,

the fact that a person is on an exemption list (whether it is a bank, a

government entity, or a listed company), does not eliminate the

obligation of a bank that wants to adopt the new system from filing the

single form designating the customer as an exempt person.

The limitation on liability set forth in paragraph (h)(6) does not

apply if a bank chooses to exempt a person on a basis as provided by

the administrative exemption system. One comment found this result

slightly puzzling, since the Interim Rule is clearly designed to

designate those entities whose routine transactions is currency with

banks are of little or no law enforcement value. However, even the

Interim Rule involves some trade-off in policy outcomes, and the proper

designation of exempt persons, to provide the Department of the

Treasury with a list of exempt entities, is an important part of the

overall system of which the Interim Rule is a component. The statutory

liability limitation of 31 U.S.C. 5313(f) does not extend to banks that

continue to use the administrative exemption system during the pendency

of the rulemaking that would reform that system.

One commenter on the Interim Rule argued that "the process of

exempting a business and the liability for same should be primarily

borne by the customer and FinCEN." That is neither the scheme of the

Bank Secrecy Act nor of this rule, and such an approach would place the

Treasury Department, in effect, directly on the banking floor in

dealing with a bank's customers. The final rule, like the notice of

proposed rulemaking also issued today, is an effort to work with the

banking industry to fashion an effective and workable exemption system.


 

G. 31 CFR 103.22(h)(7)--Obligation to File Suspicious Activity Reports,

Etc


 

No changes were made to this paragraph. Paragraph (h)(7) continues

to state that the new exemption procedures set forth in paragraph (h)

do not create any exemption, or have any effect at all, on the

requirement that banks file suspicious activity reports with respect to

transactions that satisfy the requirements of the rules of FinCEN, 31

CFR 103.21, and the federal bank supervisory agencies relating to

suspicious activity reporting. Similarly, a customer's status under

paragraph (h) has no impact on other Bank Secrecy Act requirements

relating to record retention or reporting. Thus, for example, the fact

that a customer is an exempt person for purposes of the currency

transaction reporting rules has no effect on the obligation of a bank

to retain records of funds transfers by such person, to the extent

required by 31 CFR 103.33(e), or to retain records in connection with

an issuance or sale of bank or cashier's checks, money orders or

traveler's checks to such person, as required by 31 CFR 103.29.


 

H. 31 CFR 103.22(h)(8)--Revocation


 

Paragraph (h)(8) continues to provide that the status of an exempt

person automatically ceases, without any action


 

[[Page 47147]]


 

or notice by the Department of the Treasury, when an entity ceases to

be listed on the applicable stock exchange or a subsidiary of a listed

entity ceases to have at least 51 per cent of its common stock owned by

a listed entity. Paragraph (h)(8) explicitly refers back to the

limitation on liability set forth in paragraph (h)(6)(ii), to make

clear that absent specific knowledge that would be grounds for

revocation, a bank is required to verify the status of those entities

it has designated as exempt persons only once each year.


 

I. 31 CFR 103.22(h)(9)--Transitional Rule


 

New paragraph (h)(9) states the transitional rule for applying new

paragraph (h)(2)(vi). The rule provides that during the period ending

May 1, 1998, no penalty will be imposed on a bank that treats as an

exempt person a non-bank financial institution, to an extent beyond

that institution's domestic operations, that is a listed entity or a

subsidiary of a listed entity.


 

V. Regulatory Matters


 

A. Executive Order 12866


 

The Department of the Treasury has determined that this final rule

is not a significant regulatory action under Executive Order 12866.


 

B. Unfunded Mandates Act of 1995 Statement


 

Section 202 of the Unfunded Mandates Reform Act of 1995 ("Unfunded

Mandates Act"), Pub. L. 104-4 (March 22, 1995), requires that an

agency prepare a budgetary impact statement before promulgating a rule

that includes a federal mandate that may result in expenditure by

state, local and tribal governments, in the aggregate, or by the

private sector, of $100 million or more in any one year. If a budgetary

impact statement is required, section 202 of the Unfunded Mandates Act

also requires an agency to designate and consider a reasonable number

of regulatory alternatives before promulgating a rule. FinCEN has

determined that it is not required to prepare a written statement under

section 202 and has concluded that on balance this final rule provides

the most cost-effective and least burdensome alternative to achieve the

objectives of the rule.


 

C. Regulatory Flexibility Act


 

The provisions of the Regulatory Flexibility Act relating to an

initial and final regulatory flexibility analysis (5 U.S.C. 604) are

not applicable to this final rule because the agency was not required

to publish a notice of proposed rulemaking under 5 U.S.C. 553 or any

other law.


 

D. Paperwork Reduction Act


 

By expanding the applicable exemptions from an information

collection that has been reviewed and approved by the Office of

Management and Budget (OMB) under control number 1505-0063, the final

rule significantly reduces the existing burden of information

collection under 31 CFR 103.22. Thus, although the final rule advances

the purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501, et

seq., and its implementing regulations, 5 CFR Part 1320, the Paperwork

Reduction Act does not require FinCEN to follow any particular

procedures in connection with the promulgation of the final rule.


 

List of Subjects in 31 CFR Part 103


 

Administrative practice and procedure, Authority delegations

(Government agencies), Banks and banking, Currency, Foreign banking,

Foreign currencies, Gambling, Investigations, Law enforcement,

Penalties, Reporting and recordkeeping requirements, Securities, Taxes.


 

Amendment


 

For the reasons set forth above in the preamble, the interim rule

amending 31 CFR Part 103, which was published at 61 FR 18204 on April

24, 1996, is adopted as a final rule with the following changes:


 

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND

FOREIGN TRANSACTIONS


 

1. The authority citation for Part 103 continues to read as

follows:


 

Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5330.


 

2. Section 103.22 is amended by revising the second sentence in

paragraph (a)(1) and by revising paragraph (h) to read as follows:


 

Sec. 103.22 Reports of currency transactions.


 

(a)(1) * * * Transactions in currency by exempt persons with banks

are not subject to this requirement to the extent provided in paragraph

(h) of this section. * * *

* * * * *

(h) No filing required by banks for transactions by exempt persons.

(1) Transactions in currency of exempt person with banks.

Notwithstanding the provisions of paragraph (a)(1) of the section, no

bank is required to file a report otherwise required by that section,

with respect to any transaction in currency between an exempt person

and a bank.

(2) Exempt person. For purposes of this section, an exempt person

is:

(i) A bank, to the extent of such bank's domestic operations;

(ii) A department or agency of the United States, of any state, or

of any political subdivision of any state;

(iii) Any entity established under the laws of the United States,

of any state, or of any political subdivision of any state, or under an

interstate compact between two or more states, that exercises

governmental authority on behalf of the United States or any such state

or political subdivision;

(iv) Any entity, other than a bank, whose common stock or analogous

equity interests are listed on the New York Stock Exchange or the

American Stock Exchange or whose common stock or analogous equity

interests have been designated as a Nasdaq National Market Security

listed on the Nasdaq Stock Market (except stock or interests listed

under the separate "Nasdaq Small-Cap Issues" heading);

(v) Any subsidiary, other than a bank, of any entity described in

paragraph (h)(2)(iv) of this section (a "listed entity") that is

organized under the laws of the United States or of any state and at

least 51 per cent of whose common stock is owned by the listed entity;

and

(vi) Notwithstanding paragraphs (h)(2)(iv) and (h)(2)(v) of this

section, any financial institution other than a bank, that is an entity

described in paragraph (h)(2)(iv) or (h)(2)(v) of this section, to the

extent to such financial institution's domestic operations.

(3) Designation of exempt persons. (i) A bank must designate each

exempt person with whom it engages in transactions in currency by the

close of the 30-day period beginning after the day of the first

reportable transaction in currency with that person that is sought to

be exempted from reporting under the terms of paragraph (h) of this

section.

(ii) Except where the person sought to be exempted is another bank

as described in paragraph (h)(2)(i) of this section, designation of an

exempt person shall be made by a single filing of Internal Revenue

Service Form 4789, in which line 36 is marked "Designation of Exempt

Person" and items 2-14 (Part I, Section A) and items 37-49 (Part III)

are completed, or by filing any form specifically designated by FinCEN

for this purpose. The designation must be made separately by each bank

that treats the person in question as an exempt person.

(iii) When designating another bank as an exempt person, a bank

must make either the filing as described in


 

[[Page 47148]]


 

paragraph (h)(3)(ii) of this section or file, in such a format and

manner as FinCEN may specify, a current list of its domestic bank

customers. In the event that a bank files its current list of domestic

bank customers, the bank must make the filing as described in paragraph

(h)(3)(ii) of this section for each bank that is a new customer and for

which an exemption is sought under this paragraph (h).

(iv) The designation requirements set forth in this paragraph

(h)(3) apply whether or not the particular exempt person to be

designated has previously been treated as exempt from the reporting

requirements of section 103.22(a) under the rules contained in

paragraph (b) or (e) of this section.

(4) Operating rules for designating exempt persons. (i) Subject to

the specific rules of this paragraph (h), a bank must take such steps

to assure itself that a person is an exempt person (within the meaning

of applicable provisions of paragraph (h)(2) of this section), and to

document the basis for its conclusions and its compliance with the

terms of this paragraph (h), that a reasonable and prudent bank would

take and document to protect itself from loan or other fraud or loss

based on misidentification of a person's status.

(ii) A bank may treat a person as a governmental department,

agency, or entity if the name of such person reasonably indicates that

it is described in paragraph (h)(2)(ii) or (h)(2)(iii) of this section,

or if such person is known generally in the community to be a State,

the District of Columbia, a tribal government, a Territory or Insular

Possession of the United States, or a political subdivision or a

wholly-owned agency or instrumentality of any of the foregoing. An

entity generally exercises governmental authority on behalf of the

United States, a State, or a political subdivision, for purposes of

paragraph (h)(2)(iii) of this section, only if its authorities include

one or more of the powers to tax, to exercise the authority of eminent

domain, or to exercise police powers with respect to matters within its

jurisdiction. Examples of entities that exercise governmental authority

include, but are not limited to, the New Jersey Turnpike Authority and

the Port Authority of New York and New Jersey.

(iii) In determining whether a person is described in paragraph

(h)(2)(iv) of this section, a bank may rely on any New York, American

or Nasdaq Stock Market listing published in a newspaper of general

circulation, or any commonly accepted or published stock symbol guide,

on any information contained on the Securities and Exchange Commission

"Edgar" System, or on any information contained in an Internet World-

Wide Web site or sites maintained by the New York Stock Exchange, the

American Stock Exchange, or the National Association of Securities

Dealers.

(iv) In determining whether a person is described in paragraph

(h)(2)(v) of this section, a bank may rely upon:

(A) Any reasonably authenticated corporate officer's certificate;

(B) Any reasonably authenticated photocopy of Internal Revenue

Service Form 851 (Affiliation Schedule) or the equivalent thereof for

the appropriate tax year; or

(C) A person's Annual Report or Form 10-K, as filed in each case

with the Securities and Exchange Commission.

(v) The records maintained by a bank to document its compliance

with and administration of the rules of this paragraph (h) shall be

kept in accordance with the provisions of section 103.38.

(5) Limitation on exemption. A transaction carried out by an exempt

person as an agent for another person who is the beneficial owner of

the funds that are the subject of a transaction in currency is not

subject to the exemption from reporting contained in paragraph (h)(1)

of this section.

(6) Effect of exemption; limitation on liability. (i) No bank shall

be subject to penalty under this part for failure to file a report

required by section 103.22(a) with respect to a transaction in currency

by an exempt person with respect to which the requirements of this

paragraph (h) have been satisfied, unless the bank:

(A) Knowingly files false or incomplete information with respect to

the transaction or the customer engaging in the transaction; or

(B) Has reason to believe that the customer does not meet the

criteria established by this paragraph (h) for treatment of the

transactor as an exempt person or that the transaction is not a

transaction of the exempt person.

(ii) Absent specific knowledge of any information that would be

grounds for revocation as provided in paragraph (h)(8) of this section,

a bank is required to verify the status of those entities it has

designated as exempt persons only once each year.

(iii) A bank that files a report with respect to a currency

transaction by an exempt person rather than treating such person as

exempt shall remain subject, with respect to each such report, to the

rules for filing reports, and the penalties for filing false or

incomplete reports that are applicable to reporting of transactions in

currency by persons other than exempt persons. A bank that continues to

treat a person described in paragraph (h)(2) as exempt from the

reporting requirements of section 103.22(a) on a basis other than as

provided in this paragraph (h) shall remain subject to the rules

governing an exemption on such other basis and to the penalties for

failing to comply with the rules governing such other exemption.

(7) Obligation to file suspicious activity reports, etc. Nothing in

this paragraph (h) relieves a bank of the obligation, or alters in any

way such bank's obligation, to file a report required by section 103.21

with respect to any transaction, including any transaction in currency,

or relieves a bank of any reporting or recordkeeping obligation imposed

by this Part (except the obligation to report transactions in currency

pursuant to this section to the extent provided in this paragraph (h)).

(8) Revocation. The status of any person as an exempt person under

this paragraph (h) may be revoked by FinCEN by written notice, which

may be provided by publication in the Federal Register in appropriate

situation, on such terms as are specified in such notice. Without any

action on the part of the Treasury Department and subject to the

limitation on liability set forth in paragraph (h)(6)(ii) of this

section:

(i) The status of an entity as an exempt person under paragraph

(h)(2)(iv) of this section ceases once such entity ceases to be listed

on the applicable stock exchange; and

(ii) The status of a subsidiary as an exempt person under paragraph

(h)(2)(v) of this section ceases once such subsidiary ceases to have at

least 51 per cent of its common stock owned by a listed entity.

(9) Transitional rule. No penalty will be imposed for the failure

to apply paragraph (h)(2)(vi) of this section, if a bank treats a

person described in paragraph (h)(2)(iv) or (h)(2)(v) of this section

as an exempt person during the period ending May 1, 1998.


 

Dated: August 27, 1997.

Stanley E. Morris,

Director, Financial Crimes Enforcement Network.

[FR Doc. 97-23643 Filed 9-5-97; 8:45 am]

BILLING CODE 4820-03-M

Last Updated: March 24, 2024