Reporting Suspicious Currency and Other Questionable Transactions To the IRS/Customs Hotline

*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The Department of the Treasury recently established a toll-free number, 800-BSA-CTRS, as a hotline for reporting suspicious currency transactions. Broker-dealers can use the hotline to refer information on transactions that appear to be arranged in such a way as to evade the requirements of the Bank Secrecy Act (the Act) to report cash transactions of $10,000 or more. Members are strongly advised also to be alert to suspicious noncash transactions (i.e., multiple cashier's checks, money orders, traveller's checks, and bank checks in amounts below $10,000) and wire transfers that may involve illegal activities, such as money laundering. Such transactions could be violations of the Money Laundering Control Act of 1986 (MLCA) and should be reported to the Customs hotline, 800-BE-ALERT.

BACKGROUND

SEC Rule 17a-8 requires broker-dealers that are subject to the requirements of the Act to file reports and make and preserve records in accordance with the regulations promulgated pursuant to the Act, Part 103, Title 31 of the Code of Federal Regulations. These regulations implement the provisions of the Act and require certain financial institutions, including broker-dealers, to keep records and file reports regarding various financial matters that would be useful in criminal, tax, or other regulatory investigations. Under the regulations, members must report all cash transactions of $10,000 or more. However, to avoid this reporting, some individuals break down their transactions involving $10,000 or more in currency into smaller transactions so that none exceeds the $10,000 threshold. Such arrangements can constitute a criminal violation for evasion of the regulations' currency-reporting requirements.

EXPLANATION

In 1986, Congress incorporated into the Act an anti-structuring provision, 31 U.S.C. 5324, to combat the problem of drug traffickers and other money launderers who routinely engage in transactions under the $10,000 reporting threshold to conceal their activities from law enforcement authorities. This provision and the regulations thereunder, which were issued in 1987, prohibit an individual from conducting transactions in a manner designed to evade the currency-reporting requirements.

With regard to securities transactions, broker dealers should be aware that multiple transactions by or for any person, which in any one day total more than $10,000, must be treated as a single transaction. If a transaction in currency of more than $10,000 has occurred, it does not matter if the transaction was conducted by one person with one account, several persons with the same account, or one person with several accounts. It is a reportable transaction, and a broker-dealer is required to file a currency transaction report. Structuring, however, is not limited to multiple transactions conducted on the same day at a single financial institution.

Although the enactment of Section 5324 was meant to clarify that all currency transaction structuring schemes, regardless of whether the $10,000 threshold is met at a single financial institution on a single day, are unlawful, some concern has arisen because neither the statute itself nor the regulation defines the terms "structure" or "structuring." As a result, the Treasury has proposed an amendment to the regulations that would add a formal definition of "structure" and "structuring" (see Department of the Treasury, Notice of Proposed Rulemaking, Federal Register, June 21, 1988).

This definition states clearly that a person structures a transaction when that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, to evade the currency-reporting requirements. Therefore, it is important for all members to be alert for individuals who may be attempting to launder money by intentionally structuring transactions to evade the currency-reporting requirements and to elude law enforcement authorities.

If a member becomes aware of suspicious activity, the member should report it to the Internal Revenue Service. Members now can use a recently installed IRS hotline to report suspicious currency transactions. The toll-free number, 800-BSA-CTRS, will put the caller in touch with an appropriate IRS office. Members still can report suspicious activity directly to their local office of the IRS Criminal Investigation Division.

Members who report suspicious transactions through the toll-free number or directly to the IRS are urged to maintain a written record providing evidence that the referrals were made to the IRS. The record, which may be kept in any manner a member chooses, should contain at a minimum the following information:

• names and account numbers of any persons involved in the suspicious transactions;
• home and business addresses;
• Social Security or taxpayer identification numbers;
• types of accounts;
• description of the financial instruments involved;
• location of the office where the suspicious transactions occurred;
• a notation of the offense that the member believes was violated; and
• a description of the activities giving rise to the member's suspicions.¹

Members also should know that money launderers and others may seek to hide their profits by engaging in transactions that do not involve currency. MLCA makes it a federal criminal offense to engage in financial or monetary transactions involving the profits from illegal activities that are aimed at, among other things, concealing or disguising the source, ownership, location, or nature of profits from unlawful activity or aimed at avoiding state and federal reporting statutes (see 18 U.S.C. 1956 and 1957). It was the specific intent of Congress in enacting this legislation to address the laundering of illegal proceeds through wire transfers and other noncash transactions.

Some examples of possible suspicious transactions that could violate MLCA are:

• Large international funds transferred to or from the accounts of domestic customers in amounts and of a frequency that are not consistent with the nature of the customer's known business activities.
• Receipt of funds in the form of multiple cashier's checks, money orders, traveller's checks, bank checks, or personal checks that are drawn on or issued by U.S. financial institutions and made payable to the same individual or business, in U.S. dollar amounts that are below the $10,000 Bank Secrecy Act reporting threshold and that then are wire-transferred to a financial institution outside the U.S.

Members that notice such transactions should report them to the Customs Department via the hotline, 800-BE-ALERT, or by contacting their local Customs office. As with reports of suspicious currency transactions, members are encouraged to keep a written record of any reports to Customs concerning questionable noncash transactions.

Since the scope of these regulations encompasses noncash transactions, as well as currency transactions, all members are urged to have their legal counsel review these matters to determine their obligations under the law and advise them regarding any necessary changes to their operating procedures. A member that, as a matter of policy, does not accept cash still has an obligation to report suspicious transactions. Failure to report such transactions could be construed as aiding and abetting, for which the member may face civil and criminal charges.

Questions concerning this Notice can be directed to Susan Lang, Senior Research Analyst, NASD Surveillance Department, at (202) 728-6969.

¹Members should note that Congress enacted amendments to the Right to Financial Privacy Act of 1978, Section 1103(c), to permit financial institutions to disclose this information.