4 May 2006
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[Federal Register: May 4, 2006 (Volume 71, Number 86)]
[Rules and Regulations]
[Page 26213-26220]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04my06-7]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA37
Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations--Requirement That Mutual Funds Report
Suspicious Transactions
AGENCY: Financial Crimes Enforcement Network, Department of the
Treasury.
ACTION: Final rule.
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SUMMARY: This document amends the regulations implementing the statute
generally known as the Bank Secrecy Act to require mutual funds to
report suspicious transactions to the Financial Crimes Enforcement
Network. The amendment constitutes a further step in the enhancement of
the comprehensive system for the reporting of suspicious transactions
by major categories of financial institutions operating in the United
States, as a part of the Department of the Treasury's counter-money
laundering program.
[[Page 26214]]
DATES: Effective Date: This final rule is effective June 5, 2006.
Applicability Date: The requirements in this final rule apply to
transactions occurring after October 31, 2006. See 31 CFR 103.15(g) of
the final rule contained in this document.
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division, Financial Crimes Enforcement Network, (800) 949-2732.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Provisions
The Bank Secrecy Act \1\ authorizes the Secretary of the Treasury
(Secretary) 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, or in the
conduct of intelligence or counter-intelligence activities, to protect
against international terrorism, and to implement counter-money
laundering programs and compliance procedures.\2\ The Secretary's
authority to administer the Bank Secrecy Act has been delegated to the
Director of the Financial Crimes Enforcement Network. Our regulations
implementing the Bank Secrecy Act are codified at 31 CFR part 103.
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\1\ Public Law 91-508, as amended, codified at 12 U.S.C. 1829b,
12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314; 5316-5332.
\2\ Language expanding the scope of the Bank Secrecy Act to
intelligence or counter-intelligence activities to protect against
international terrorism was added by section 358 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the USA
PATRIOT Act), Public Law 107-56.
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With the enactment of 31 U.S.C. 5318(g) in 1992,\3\ Congress
authorized the Secretary to require financial institutions to report
suspicious transactions. As amended by the USA PATRIOT Act, subsection
5318(g)(1) states that:
\3\ 31 U.S.C. 5318(g) was added to the Bank Secrecy Act by
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act, Title
XV of the Housing and Community Development Act of 1992, Public Law
102-550; it was expanded by section 403 of the Money Laundering
Suppression Act of Title IV of the Riegle Community Development and
Regulatory Improvement Act of 1994, Public Law 103-325, to require
designation of a single government recipient for reports of
suspicious transactions.
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The Secretary may require any financial institution, and any
director, officer, employee, or agent of any financial institution,
to report any suspicious transaction relevant to a possible
violation of law or regulation.
Subsection (g)(2)(A) provides further:
If a financial institution or any director, officer, employee,
or agent of any financial institution, voluntarily or pursuant to
this section or any other authority, reports a suspicious
transaction to a government agency--
(i) The financial institution, director, officer, employee, or
agent may not notify any person involved in the transaction that the
transaction has been reported; and
(ii) No officer or employee of the Federal Government or of any
State, local, tribal, or territorial government within the United
States, who has any knowledge that such report was made may disclose
to any person involved in the transaction that the transaction has
been reported, other than as necessary to fulfill the official
duties of such officer or employee.
Subsection (g)(3)(A) provides that neither a financial institution,
nor any director, officer, employee, or agent of any financial
institution
That makes a voluntary disclosure of any possible violation of
law or regulation to a government agency or makes a disclosure
pursuant to this subsection or any other authority * * * shall * * *
be liable to any person under any law or regulation of the United
States or any constitution, law or regulation of any State or
political subdivision of any State, or under any contract or other
legally enforceable agreement (including any arbitration agreement),
for such disclosure or for any failure to provide notice of such
disclosure to the person who is the subject of such disclosure or
any other person identified in the disclosure.
Finally, subsection (g)(4) requires the Secretary, ``to the extent
practicable and appropriate,'' to designate ``a single officer or
agency of the United States to whom such reports shall be made.'' \4\
The designated agency is in turn responsible for referring any report
of a suspicious transaction to ``any appropriate law enforcement,
supervisory agency, or U.S. intelligence agency for use in the conduct
of intelligence or counterintelligence activities, including analysis,
to protect against international terrorism.'' \5\
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\4\ This designation does not preclude the authority of
supervisory agencies to require financial institutions to submit
other reports to the same agency or another agency ``pursuant to any
other applicable provision of law.'' See 31 U.S.C. 5318(g)(4)(C).
\5\ See 31 U.S.C. 5318(g)(4)(B).
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B. Mutual Fund Regulation and Money Laundering
This final rule applies to investment companies that are ``mutual
funds,'' which are open-end management investment companies as
described in the Investment Company Act of 1940 (15 U.S.C. 80a). Mutual
funds are the predominant type of investment companies. As of September
2005, investors held approximately $8.6 trillion in U.S. mutual fund
shares, representing more than 95 percent of the assets held by
investment companies regulated by the U.S. Securities and Exchange
Commission (Commission).\6\ Currently, more than 2,400 active mutual
funds are registered with the Commission.\7\
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\6\ The staff of the Commission estimates, based on filings,
that as of September 2005, approximately $8.6 trillion was invested
in U.S. mutual funds (including $1 trillion invested in open-end
management companies that fund variable life insurance and variable
annuity contracts, and $259 billion invested in open-end management
companies that are exchange-traded funds).
\7\ Approximately 1,219 of these funds are ``series companies''
with an aggregate of 8,425 portfolios. A ``series company'' is a
registered investment company that issues two or more classes or
series of preferred or special stock, each of which is preferred
over all other classes or series with respect to assets specifically
allocated to that class or series. 17 CFR 270.18f-2. The assets
allocated to such a class or series are commonly known as a
``portfolio.'' The series or portfolios of a series company operate,
for many purposes, as separate investment companies.
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This final rule is part of a series of steps that we are taking to
address comprehensively the risk of money laundering through mutual
funds. In April 2002, we issued an interim final rule to implement
section 352 of the USA PATRIOT Act. The interim final rule required
mutual funds to develop and implement anti-money laundering programs
designed to prevent them from being used to launder money or finance
terrorist activities, which includes achieving and monitoring
compliance with the applicable requirements of the Bank Secrecy Act and
its implementing regulations.\8\ In May 2003, we issued, jointly with
the Commission, a final rule to implement section 326 of the USA
PATRIOT Act, requiring mutual funds to implement reasonable procedures
to: (1) Verify the identity of any person seeking to open an account,
to the extent reasonable and practicable; (2) maintain records of the
information used to verify the person's identity; and (3) determine
whether the person appears on any lists of known or suspected
terrorists or terrorist organizations provided to investment companies
by any federal government agency and designated as such by the
Department of the Treasury in consultation with federal functional
regulators.\9\
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\8\ See 67 FR 21117 (Apr. 29, 2002).
\9\ See 68 FR 25131 (May 9, 2003) text accompanying notes 116-
117. Under the final rule, a mutual fund may contractually delegate
the implementation and operation of its customer identification
program to a service provider such as a transfer agent, although the
mutual fund would continue to be responsible for compliance with
applicable requirements.
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[[Page 26215]]
This final rule follows other recent actions that expand the
application of requirements that financial institutions report
suspicious activity. Since April 1996, we have issued rules under the
authority of 31 U.S.C. 5318(g) requiring banks, thrifts, and other
banking organizations to report suspicious activity.\10\ In
collaboration with us, the federal bank supervisory agencies
concurrently issued suspicious activity reporting rules under their own
authority, applying to banks, bank holding companies, and non-
depository institution affiliates and subsidiaries of banks and bank
holding companies.\11\ Since the beginning of 2002, we have required
certain money services businesses to report suspicious activity.\12\ We
adopted final rules for the reporting of suspicious activity applicable
to brokers or dealers in securities in July 2002,\13\ to casinos and
card clubs in September 2002,\14\ to currency dealers and exchangers in
February 2003,\15\ to futures commission merchants and introducing
brokers in commodities in November 2003,\16\ and to insurance companies
in November 2005.\17\ This final rule extends suspicious activity
reporting to mutual funds. Suspicious activity reporting by mutual
funds is expected to provide highly useful information in law
enforcement and regulatory investigations and proceedings, as well as
in the conduct of intelligence activities to protect against
international terrorism.\18\
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\10\ See 31 CFR 103.18 (requiring banks, thrifts, and other
banking organizations to report suspicious transactions).
\11\ See 12 CFR 21.11 (issued by the Office of the Comptroller
of the Currency); 12 CFR 208.62 (issued by the Board of Governors of
the Federal Reserve System); 12 CFR 353.3 (issued by the Federal
Deposit Insurance Corporation); 12 CFR 563.180 (issued by the Office
of Thrift Supervision); 12 CFR 748.1 (issued by the National Credit
Union Administration).
\12\ See 31 CFR 103.20 (requiring money transmitters and
issuers, sellers, and redeemers of money orders and traveler's
checks to report suspicious transactions).
\13\ See 67 FR 44048 (July 1, 2002). In 2003, broker-dealers
filed 4,267 Suspicious Activity Reports, 5.7% of which (242 reports)
involved money market funds and 6.3% of which (268 reports) involved
other mutual funds. In the first six months of 2004, of 2,612
reports filed by broker-dealers, 5.3% (139 reports) involved money
market funds and 6.2% (162 reports) involved other mutual funds.
Financial Crimes Enforcement Network, The SAR Activity Review--By
the Numbers (Issue 3, December 2004).
\14\ See 67 FR 60722 (September 26, 2002).
\15\ See 68 FR 6613 (February 10, 2003).
\16\ See 68 FR 65392 (November 20, 2003).
\17\ See 70 FR 66761 (November 3, 2005).
\18\ See 31 U.S.C. 5311 (stating purpose of the reporting
authority under the Bank Secrecy Act).
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II. Notice of Proposed Rulemaking
On January 21, 2003, we published a Notice of Proposed Rulemaking
(Proposed Rule), proposing an amendment to the regulations implementing
the Bank Secrecy Act that would extend the requirement to report
suspicious activity to mutual funds.\19\ The comment period for the
Proposed Rule ended on March 24, 2003. We received five comment
letters: Three from trade associations, and one each from a regulatory
advocacy group and an academic society at a university. These comments
are discussed below in the Section-by-Section Analysis.
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\19\ See 68 FR 2716 (January 21, 2003).
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III. Section-by-Section Analysis
A. Section 103.15(a)--Reports by Mutual Funds of Suspicious
Transactions
Section 103.15(a) sets forth the obligation of mutual funds to
report suspicious transactions that are conducted or attempted by, at,
or through a mutual fund and that involve or aggregate at least $5,000
in funds or other assets.\20\ The obligation to report a transaction
under this rule and 31 U.S.C. 5318(g) applies whether or not the
transaction involves currency.\21\ We are aware that the use of
currency in mutual funds transactions is rare.
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\20\ A mutual fund is already obligated to report the receipt of
cash (and certain cash-related instruments) totaling more than
$10,000 in one transaction or two or more related transactions. See
67 FR at 21119. 26 U.S.C. 6050I requires a person to report
information about such transactions to the Internal Revenue Service;
31 U.S.C. 5331 requires a person to report information about similar
transactions to us. One commenter expressed concern over some mutual
funds or their transfer agents being required to file both a report
under this final rule and a report under 26 U.S.C. 6050I (``Form
8300'') because they are considered to be ``nonfinancial trades or
businesses.'' The commenter expressed concern about both duplication
of reporting and conflicting disclosure provisions, because 26 CFR
1.6050I-1(f) requires notifying the subject of a report that the
amount of cash in the transaction(s) is being reported to the
Internal Revenue Service, whereas section 103.15(d) of this final
rule prohibits notifying the subject of a Suspicious Activity Report
that the transaction has been reported. With regard to the concern
over duplication of reporting, we note that the forms serve
different purposes and are required under different circumstances.
Form 8300 is designed to provide information about large cash (and
certain non-cash instrument) transactions received by a business.
The triggering factors are entirely objective. On the other hand,
the Suspicious Activity Report is designed to provide information
about transactions and activity that the reporting entity knows,
suspects, or has reason to suspect may be a violation of law or
regulation. The triggering factors for the Suspicious Activity
Report are largely subjective. While it is possible that a
particular transaction may trigger the filing of both forms, and
while some of the information provided may overlap, the purposes for
the filings and the ways in which the information will be used by
law enforcement differ greatly. Furthermore, the filing of a Form
8300 does not presume the filing of a Suspicious Activity Report,
and vice versa. Moreover, with regard to the concern over
conflicting disclosure requirements, we note that there is nothing
in the requirement for disclosure of the filing of a report under 26
U.S.C. 6050I that would require disclosure of the filing of a
Suspicious Activity Report. In fact, a mutual fund is prohibited
from intentionally or unintentionally disclosing the filing of a
Suspicious Activity Report when it discloses the filing of a report
of the receipt of cash or certain non-cash instruments, as required
by 26 CFR 1.6050I-1(f).
\21\ Many currency transactions are not indicative of money
laundering or other violations of law, a fact recognized both by
Congress, in authorizing reform of the currency transaction
reporting system, and by us, in issuing rules to implement that
system (see 31 U.S.C. 5313(d) and 31 CFR 103.22(d), 63 FR 50147
(September 21, 1998)). Many non-currency transactions (for example,
transmittals of funds) can indicate illicit activity, especially in
light of the breadth of the statutes that make money laundering a
crime. See 18 U.S.C. 1956 and 1957.
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The obligation extends to transactions conducted or attempted by,
at, or through, the mutual fund. However, section 103.15(a) also
contains language designed to encourage the reporting of transactions
that appear relevant to violations of law or regulation, even in cases
in which the rule does not explicitly so require (for example, in the
case of a transaction falling below the $5,000 threshold in the rule).
Section 103.15(a) contains the general statement regarding a mutual
fund's obligation to file reports of suspicious transactions with us.
To clarify that the final rule creates a reporting requirement that is
uniform with that for other financial institutions, section
103.15(a)(1), which is unchanged from the proposed rule, incorporates
language from the suspicious activity reporting rules applicable to
other financial institutions, such as banks, broker-dealers, casinos,
and money services businesses, requiring the reporting of ``any
suspicious transaction relevant to a possible violation of law or
regulation.'' Further, a mutual fund may also report ``any suspicious
transaction that it believes is relevant to a possible violation of any
law or regulation but whose reporting is not required'' by the final
rule. For example, a mutual fund may report a suspected violation of
law that involves less than $5,000. Such voluntary reporting would be
subject to the same protection from liability as mandatory reporting
pursuant to 31 U.S.C. 5318(g)(3).
The final rule requires reporting by mutual funds, but not by
affiliated persons of mutual funds. This approach is consistent with
our other rules requiring the reporting of suspicious activity.
Mutual funds typically conduct many operations through separate
entities, which may or may not be affiliated
[[Page 26216]]
persons of the mutual fund. These separate entities include investment
advisers, principal underwriters, administrators, custodians, transfer
agents, and other service providers. Personnel of these separate
entities may be in the best position to perform the reporting
obligation, and a mutual fund may contract with an affiliated or
unaffiliated service provider to perform the reporting obligation as
the fund's agent. In such cases, however, the mutual fund remains
responsible for assuring compliance with the rule, and therefore must
actively monitor the performance of its reporting obligations.\22\ The
fund should take steps to assure that the service provider has
implemented effective compliance policies and procedures administered
by competent personnel, and should maintain an active working
relationship with the service provider's compliance personnel.\23\
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\22\ Under 17 CFR 270.38a-1, each mutual fund must appoint a
chief compliance officer, reporting directly to the mutual fund's
board of directors, to administer its compliance policies and
procedures. See 68 FR 74714 (December 24, 2003).
\23\ For a discussion of the oversight responsibilities of
mutual funds over their service providers, see Compliance Programs
of Investment Companies and Investment Advisers, supra note 22,
nn.91-92 and accompanying text.
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Section 103.15(a)(2), which is also unchanged from the Proposed
Rule, requires the reporting of suspicious activity that involves or
aggregates at least $5,000 in funds or other assets. The suspicious
activity reporting rules, however, are not intended to operate (and
indeed cannot properly operate) in a mechanical fashion. Rather, such
requirements are intended to function in such a way as to have
financial institutions evaluate customer activity and relationships for
money laundering risks.\24\
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\24\ For example, transactions involving investments by the
pension fund of a publicly traded corporation, even though involving
a large dollar amount, would likely require more limited scrutiny
than less typical transactions, such as those involving customers
who wish to use currency or money orders to purchase mutual fund
shares, even though the dollar amounts in those latter cases may be
relatively small.
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Section 103.15(a)(2) specifies four categories of transactions that
require reporting if the mutual fund knows, suspects, or has reason to
suspect that any such category applies to a transaction, or a pattern
of transactions of which the transaction is a part. The ``knows,
suspects, or has reason to suspect'' standard incorporates a concept of
due diligence into the reporting requirement.
The first category, described in section 103.15(a)(2)(i), includes
transactions involving funds derived from illegal activity, or intended
or conducted in order to hide or disguise funds derived from such
illegal activity as part of a plan to violate or evade any federal law
or regulation or to avoid any transaction reporting requirement under
federal law or regulation. The second category, described in section
103.15(a)(2)(ii), includes transactions designed, whether through
structuring or other means, to evade the requirements of the Bank
Secrecy Act. The third category, described in section
103.15(a)(2)(iii), includes transactions that appear to serve no
business or apparent lawful purposes, and for which the mutual fund
knows of no reasonable explanation after examining the available facts
relating to the transaction and the parties. The fourth category,
described in section 103.15(a)(2)(iv), includes any other transactions
that involve the use of the mutual fund to facilitate criminal
activity.\25\
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\25\ The fourth reporting category has been added to the
suspicious activity reporting rules promulgated since the passage of
the USA PATRIOT Act to make it clear that the requirement to report
suspicious activity encompasses the reporting of transactions in
which legally derived funds are used for criminal activity, such as
the financing of terrorism.
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In determining whether to file a Suspicious Activity Report, a
mutual fund must base the determination on all of the facts and
circumstances relating to the transaction and the customer in
question.\26\ Different fact patterns will require different types of
judgments. In some cases, the facts of the transaction may indicate the
need to file a Suspicious Activity Report. For example, if a mutual
fund closes the account and redeems the shares of a customer whose
identity the fund is unable to verify under its customer identification
program,\27\ the fund should consider whether the circumstances
surrounding its failure to verify would warrant the filing of a
Suspicious Activity Report. In these and other situations, the fact
that a customer refuses to provide information necessary for the mutual
fund to verify the customer's identity, make reports, or keep records
required by this part or other regulations, provides information that
the mutual fund determines to be false, or seeks to change or cancel a
transaction after such person is informed of information verification
or recordkeeping requirements relevant to the transactions, would
indicate the probability that a Suspicious Activity Report should be
filed.\28\ In other situations, determining whether a transaction is
suspicious within the meaning of the rule may require more involved
judgment. Transactions that raise the need for such judgment may
include, for example: (1) Transmission or receipt of funds transfers
without normal identifying information, or in a manner that may
indicate an attempt to disguise or hide the country of origin or
destination, or the identity of the customer sending the funds, or the
beneficiary to which the funds are sent; or (2) repeated use of a
mutual fund as a temporary resting place for funds from multiple
sources without a clear business (including investment) purpose. The
judgments involved will also extend to whether the facts and
circumstances and the institution's knowledge of its customer provide a
reasonable explanation for the transaction that removes it from the
suspicious category.\29\
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\26\ In the case of a transaction conducted through an omnibus
account maintained by an intermediary, a mutual fund may not know,
suspect, or have reason to suspect that the transaction is one for
which reporting would be required, because a fund typically has
little or no information about individual customers of the
intermediary. An omnibus account is usually maintained by another
financial institution, such as a broker-dealer, that has a reporting
obligation with regard to its customers. The omnibus account holder
(i.e., the financial institution intermediary) is a customer of the
mutual fund for purposes of the final rule. An omnibus account
maintained for a foreign financial institution would be considered a
correspondent account under section 312 of the USA PATRIOT Act, and
as such, is subject to due diligence and possibly enhanced due
diligence requirements under that section of the Act and
implementing regulations. See Anti-Money Laundering Programs;
Special Due Diligence for Certain Foreign Accounts, 71 FR 496 (Final
Rule) and 71 FR 516 (Notice of Proposed Rulemaking) (January 4,
2006).
\27\ See supra note 9 and accompanying text.
\28\ As section 103.15(d) of the final rule makes clear, the
mutual fund must not notify the customer that it intends to file or
has filed a Suspicious Activity Report with respect to the
customer's activity.
\29\ One commenter expressed concern that a mutual fund would be
expected to obtain additional information that it does not already
have to meet the ``knows, suspects, or has reason to suspect''
standard of section 103.15(a)(2). We expect funds to determine
whether to file a Suspicious Activity Report based on the
information obtained in the account opening process or subsequently
in the course of processing transactions.
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The means of commerce and the techniques of money launderers are
continually evolving, and it is not possible to provide an exhaustive
list of suspicious transactions. We intend to continue our dialogue
with the mutual fund industry about the manner in which a combination
of government guidance, training programs, and government-industry
information exchange can facilitate operation of the new suspicious
activity reporting system in as flexible and cost-efficient a way as
possible.
[[Page 26217]]
Individual mutual funds are frequently part of a complex of related
funds, and it is possible that more than one mutual fund would be
obligated to report the same transaction or transactions. In order to
clarify the permissibility of joint reports, section 103.15(a)(3) of
the final rule has been revised to permit all of the mutual funds
involved in a particular transaction to file a single joint report.
Because the Suspicious Activity Report by Securities and Futures
Industries (``Form SAR-SF'') accommodates the name of only one filer,
only one of the filing institutions should be identified as the
``filer'' in the filer identification section of the form.\30\ The
narrative section of the Form SAR-SF must include the words ``joint
filing'' and identify the other mutual funds on whose behalf the report
is being filed. The joint report must contain all relevant facts, and
each mutual fund must maintain a copy of the joint report, along with
any supporting documentation.\31\ A service provider who performs
reporting obligations under contract with multiple mutual funds may
file a single joint report on behalf of all of the funds involved in a
transaction or series of transactions.\32\
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\30\ The term ``SF'' is an abbreviation for ``Securities and
Futures Industries,'' the form that is used for reporting by members
of the securities and futures industries. See 67 FR 50751 (August 5,
2002). The form became final on December 26, 2002, and is available
on our Web site at http://www.fincen.gov/reg_bsaforms.html.
\31\ The filer should not submit supporting documentation with
the Form SAR-SF. See infra note 38 and accompanying text.
\32\ See supra note 22 and accompanying text.
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Further, section 103.15(a)(3) of the final rule has been revised to
also recognize that other financial institutions, such as broker-
dealers in securities, may have separate obligations to report the same
suspicious activity under other Bank Secrecy Act regulations.\33\ In
those instances, it is permissible for either a mutual fund or the
other financial institution to file a single joint report on behalf of
all of the mutual fund(s) and other financial institution(s) involved
in the transaction. As with a joint report filed by a mutual fund on
behalf of other mutual funds, the joint report filed must contain all
relevant facts, and the narrative of the Form SAR-SF must include the
words ``joint filing'' and must identify the other financial
institutions on whose behalf the report is being filed.
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\33\ See 31 CFR 103.19.
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One commenter requested that this final rule clarify that it will
not impose a duplicative reporting requirement on insurance companies,
because a single transaction may create a reporting requirement for
both an insurance company, under the rule applicable to insurance
companies,\34\ and for a separate account of the insurance company that
issues variable insurance products, under this rule. Because this rule
applies only to open-end management investment companies, it does not
apply to separate accounts that are organized as unit investment
trusts, which comprise a majority of the separate accounts that issue
variable insurance products. Accordingly, the rule applies only to a
separate account that is organized as a managed separate account. To
avoid the possibility of duplicative suspicious activity reporting, we
are contemporaneously amending the rule applicable to insurance
companies to require an insurance company that issues variable
insurance products funded by separate accounts that meet the definition
of a mutual fund to report suspicious activity pursuant to this final
rule.\35\ In addition, a registered broker-dealer involved in a
suspicious transaction may file a joint report on behalf of any
separate account under section 103.15(a)(3).
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\34\ See 31 CFR 103.16.
\35\ See 31 CFR 103.16(b)(3)(iii).
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When a mutual fund or other financial institution files or
considers filing a joint report on behalf of other mutual funds, it
typically will exchange information with the other entities to
determine whether the transaction must be reported under this section,
and, if so, to determine which party should file the report, provide
the filer with comprehensive information and supporting documentation,
and provide confirmation of the filing to each mutual fund (and other
financial institution) involved in the transaction. Prior to filing a
joint report, a mutual fund may share information pertaining to a
suspicious transaction with any other financial institution or service
provider involved in the transaction, provided that such financial
institution or service provider will not be the subject of the report.
Such sharing of information does not violate the non-disclosure
provisions of section 103.15(d ).\36\ If a service provider is
performing the reporting obligations of one or more mutual funds under
contract with the fund(s), the service provider may similarly share the
information as an agent of the mutual fund(s).\37\ However, after the
report is filed, further disclosure of the fact that a suspicious
activity report was filed is prohibited, except as permitted by section
103.15(d). The cross-reference in section 103.15(d) to section
103.15(a)(3) in the Proposed Rule remains in the final rule.
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\36\ See Section III.D. infra.
\37\ For a discussion of the types of service providers that may
perform reporting obligations under contract with mutual funds, see
supra note 22 and accompanying text.
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B. Section 103.15(b)--Filing Procedures
Section 103.15(b), unchanged from the proposed rule except as noted
in footnote 39 below, directs mutual funds to report suspicious
activities by completing a Form SAR-SF, and sets forth the filing
procedures to be followed by mutual funds making reports of suspicious
activity. Within 30 days after initial detection of a suspicious
activity by a mutual fund, the fund must report the transaction by
completing a Form SAR-SF, collecting and maintaining supporting
documentation, and filing the form as indicated in the instructions to
the form. The filer should not submit the supporting documentation with
the Form SAR-SF. Form SAR-SF is the same form used by broker-dealers,
futures commission merchants, and introducing brokers in
commodities.\38\ If a separate entity that is not a financial
institution files a Form SAR-SF as agent for a mutual fund, that entity
should designate the mutual fund as the reporting financial institution
on the Form SAR-SF.
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\38\ See 67 FR 70808 (November 26, 2002) (effective January 1,
2003).
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If the mutual fund does not identify a suspect on the date of the
initial detection, it may delay filing a Form SAR-SF for 30 days, but
may not delay filing more than 60 days after the date of such initial
detection. In situations involving violations that require immediate
attention, such as suspected terrorist financing or ongoing money
laundering schemes, a mutual fund must notify an appropriate law
enforcement authority by telephone in addition to filing a Form SAR-
SF.\39\ A mutual fund may also, but is not required to, contact the
Commission in such situations. A mutual fund that chooses to contact
the Commission should contact its Office of Compliance Inspections and
Examinations. In addition, we wish to remind mutual funds of our
Financial Institutions Hotline (1-866-556-3974), which financial
institutions may use to voluntarily report suspicious activity that may
relate to terrorist financing. Mutual funds that report suspicious
activity by calling the Financial
[[Page 26218]]
Institutions Hotline must also file a timely Form SAR-SF to the extent
required by this final rule.
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\39\ The final rule has been revised to make such notification
mandatory, to be consistent with the reporting rules for other
financial institutions. See, e.g., 31 CFR 103.18(b)(3),
103.19(b)(3), and 103.16(c)(3).
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C. Section 103.15(c)--Retention of Records
Section 103.15(c) requires that a mutual fund maintain copies of
Suspicious Activity Reports that it files or that are filed on its
behalf (including joint reports), and the original (or business record
equivalent) and copies of related documentation, for a period of five
years from the date of filing. The final rule has been modified to
include references to reports filed on behalf of the fund (e.g., by a
service provider) and joint reports (whether filed by the fund or by
another financial institution naming the fund). The Suspicious Activity
Report and the supporting documentation are to be made available to the
Financial Crimes Enforcement Network, the Commission, and other
appropriate law enforcement and regulatory authorities. The final rule
also has been modified to add a self-regulatory organization registered
with the Commission in those cases where a mutual fund maintains
supporting documentation concerning a joint Suspicious Activity Report
involving a broker-dealer being examined pursuant to 31 CFR 103.19(g).
D. Section 103.15(d)--Confidentiality of Reports
Section 103.15(d) reflects the statutory prohibition against the
disclosure of information filed in, or the fact of filing, a Suspicious
Activity Report, except to the extent permitted by paragraph (a)(3).
The final rule has been revised to clarify that the prohibition applies
whether the report is required by the final rule or is filed
voluntarily. See 31 U.S.C. 5318(g)(2). Section 103.15(d) extends the
prohibition to any mutual fund subpoenaed or otherwise required to
disclose a Suspicious Activity Report or information contained in a
Form SAR-SF. Thus, section 103.15(d) specifically prohibits persons
filing Suspicious Activity Reports (including persons on whose behalf a
report has been filed) from disclosing, except to the Financial Crimes
Enforcement Network, the Commission, or another appropriate law
enforcement or regulatory agency, or a self-regulatory organization
registered with the Securities and Exchange Commission conducting an
examination of a broker-dealer pursuant to 31 CFR 103.19(g), that a
Suspicious Activity Report has been filed or from providing any
information that would disclose that a report has been prepared or
filed. The final rule has been modified to note that the prohibition
also applies to joint reports.
Section 103.15(d) does not prohibit a mutual fund from engaging in
discussions with any other financial institution or service provider
involved in the transaction, other than the person who is or is
expected to be the subject of the report, to determine whether the
transaction must be reported under this section; to determine which
party will file the report, provide the filer with comprehensive
information and supporting documentation; and to provide confirmation
of the filing to each mutual fund involved in the transaction.\40\
Similarly, this provision does not prohibit a service provider who
performs reporting obligations under contract with one or more mutual
funds from sharing information as an agent of the mutual fund(s). In
addition, we have issued regulations under section 314(b) of the USA
PATRIOT Act to permit certain financial institutions, after providing
notice to us, to share information with one another solely for the
purpose of identifying and reporting to the federal government
activities that may involve money laundering or terrorist activity.\41\
Neither section 314(b) nor its implementing regulations, however, apply
to the sharing of a Suspicious Activity Report with another financial
institution. However, as described in Sections III.A. and III.C., a
Suspicious Activity Report may be shared between financial institutions
for the purposes of jointly filing and maintaining a record of such a
report.
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\40\ See 31 CFR 103.15(a)(3).
\41\ See 31 CFR 103.110.
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E. Section 103.15(e)--Limitation of Liability
Section 103.15(e) restates the broad statutory protection from
liability for making reports of suspicious activity and for failure to
disclose the fact of such reporting, whether the report is required by
the final rule or is filed voluntarily. As amended by section 351 of
the USA PATRIOT Act, 31 U.S.C. 5318(g)(3) provides a safe harbor from
liability to any financial institution that makes a voluntary
disclosure of any possible violation of law or regulation to a
government agency, and to any financial institution that reports
suspicious activity pursuant to section 5318(g) or pursuant to any
other authority. Section 5318(g)(3) provides further protection from
liability for the non-disclosure of the fact of such reporting. We note
that the safe harbor extends to agents of the mutual fund filing
reports, including transfer agents and other service providers. The
final rule was modified to state the safe harbor in terms of a
protection from liability and to include joint reports within the safe
harbor.
F. Section 103.15(f)--Examinations and Enforcement
Section 103.15(f), which is unchanged from the proposed rule,
provides that the Department of the Treasury, through the Financial
Crimes Enforcement Network or its delegatees, will examine compliance
with the obligation to report suspicious activity, and that failure to
comply with the rule may constitute a violation of the Bank Secrecy Act
and the Bank Secrecy Act regulations. The Department of the Treasury
has delegated to the Commission its authority to examine mutual funds
for compliance.\42\ In reviewing any particular failure to report a
transaction as required by this section, the Financial Crimes
Enforcement Network and the Commission may take into account the
relationship between the particular failure to report and the adequacy
of the implementation and operation of a mutual fund's compliance
procedures.
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\42\ See 31 CFR 103.56(b)(6) (delegating authority to examine
investment companies to the Commission).
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G. Section 103.15(g)--Effective Date
Section 103.15(g) provides that the rule applies to transactions
occurring after October 31, 2006.
IV. Regulatory Flexibility Act
It is hereby certified that this final regulation will not have a
significant economic impact on a substantial number of small entities.
Registered investment companies, regardless of their size, are
currently subject to the Bank Secrecy Act. Procedures currently in
place at mutual funds to comply with existing Bank Secrecy Act rules
should help mutual funds to identify suspicious activity and small
mutual funds may have an established and limited customer base whose
transactions are well known to the fund. Moreover, as indicated below
in Section VI, the estimated burden associated with reporting
suspicious transactions is minimal.
V. Executive Order 12866
The Department of the Treasury has determined that this final
regulation is not a significant regulatory action under Executive Order
12866.
VI. Paperwork Reduction Act
The collection of information contained in this final regulation
has been approved by the Office of Management and Budget in accordance
[[Page 26219]]
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under
control number 1506-0019. The estimated average burden associated with
the collection of information in this final rule is four hours per
respondent. We received no comment on its recordkeeping burden
estimate.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to Desk Officer
for the Department of the Treasury, Office of Information and
Regulatory Affairs, Office of Management and Budget, Washington, DC
20503 (or by the electronic mail to ahunt@eop.omb.gov).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations
(Government agencies), Securities, Currency, Investigations, Law
enforcement, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
For the reasons set forth above in the preamble, 31 CFR part 103 is
amended as follows:
PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND
FOREIGN TRANSACTIONS
0
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. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
Subpart B--[Amended]
0
2. In subpart B, Sec. 103.15 is redesignated as Sec. 103.12.
0
3. In subpart B, a new Sec. 103.15 is added to read as follows:
Sec. 103.15 Reports by mutual funds of suspicious transactions.
(a) General. (1) Every investment company (as defined in section 3
of the Investment Company Act of 1940 (15 U.S.C. 80a-3) (``Investment
Company Act'') that is an open-end company (as defined in section 5 of
the Investment Company Act (15 U.S.C. 80a-5)) and that is registered,
or is required to register, with the Securities and Exchange Commission
pursuant to that Act (for purposes of this section, a ``mutual fund''),
shall file with the Financial Crimes Enforcement Network, to the extent
and in the manner required by this section, a report of any suspicious
transaction relevant to a possible violation of law or regulation. A
mutual fund may also file with the Financial Crimes Enforcement Network
a report of any suspicious transaction that it believes is relevant to
the possible violation of any law or regulation, but whose reporting is
not required by this section. Filing a report of a suspicious
transaction does not relieve a mutual fund from the responsibility of
complying with any other reporting requirements imposed by the
Securities and Exchange Commission.
(2) A transaction requires reporting under this section if it is
conducted or attempted by, at, or through a mutual fund, it involves or
aggregates funds or other assets of at least $5,000, and the mutual
fund knows, suspects, or has reason to suspect that the transaction (or
a pattern of transactions of which the transaction is a part):
(i) Involves funds derived from illegal activity or is intended or
conducted in order to hide or disguise funds or assets derived from
illegal activity (including, without limitation, the ownership, nature,
source, location, or control of such funds or assets) as part of a plan
to violate or evade any Federal law or regulation or to avoid any
transaction reporting requirement under Federal law or regulation;
(ii) Is designed, whether through structuring or other means, to
evade any requirements of this part or any other regulations
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended,
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332;
(iii) Has no business or apparent lawful purpose or is not the sort
in which the particular customer would normally be expected to engage,
and the mutual fund knows of no reasonable explanation for the
transaction after examining the available facts, including the
background and possible purpose of the transaction; or
(iv) Involves use of the mutual fund to facilitate criminal
activity.
(3) More than one mutual fund may have an obligation to report the
same transaction under this section, and other financial institutions
may have separate obligations to report suspicious activity with
respect to the same transaction pursuant to other provisions of this
part. In those instances, no more than one report is required to be
filed by the mutual fund(s) and other financial institution(s) involved
in the transaction, provided that the report filed contains all
relevant facts, including the name of each financial institution and
the words ``joint filing'' in the narrative section, and each
institution maintains a copy of the report filed, along with any
supporting documentation.
(b) Filing and notification procedures--(1) What to file. A
suspicious transaction shall be reported by completing a Suspicious
Activity Report by Securities and Futures Industries (``SAR-SF''), and
collecting and maintaining supporting documentation as required by
paragraph (c) of this section.
(2) Where to file. Form SAR-SF shall be filed with the Financial
Crimes Enforcement Network in accordance with the instructions to the
Form SAR-SF.
(3) When to file. A Form SAR-SF shall be filed no later than 30
calendar days after the date of the initial detection by the reporting
mutual fund of facts that may constitute a basis for filing a Form SAR-
SF under this section. If no suspect is identified on the date of such
initial detection, a mutual fund may delay filing a Form SAR-SF for an
additional 30 calendar days to identify a suspect, but in no case shall
reporting be delayed more than 60 calendar days after the date of such
initial detection.
(4) Mandatory notification to law enforcement. In situations
involving violations that require immediate attention, such as
suspected terrorist financing or ongoing money laundering schemes, a
mutual fund shall immediately notify by telephone an appropriate law
enforcement authority in addition to filing timely a Form SAR-SF.
(5) Voluntary notification to the Financial Crimes Enforcement
Network or the Securities and Exchange Commission. Mutual funds wishing
voluntarily to report suspicious transactions that may relate to
terrorist activity may call the Financial Crimes Enforcement Network's
Financial Institutions Hotline at 1-866-556-3974 in addition to filing
timely a Form SAR-SF if required by this section. The mutual fund may
also, but is not required to, contact the Securities and Exchange
Commission to report in such situations.
(c) Retention of records. A mutual fund shall maintain a copy of
any Form SAR-SF filed by the fund or on its behalf (including joint
reports), and the original (or business record equivalent) of any
supporting documentation concerning any Form SAR-SF that it files (or
is filed on its behalf), for a period of five years from the date of
filing the Form SAR-SF. Supporting
[[Page 26220]]
documentation shall be identified as such and maintained by the mutual
fund, and shall be deemed to have been filed with the Form SAR-SF. The
mutual fund shall make all supporting documentation available to the
Financial Crimes Enforcement Network, any other appropriate law
enforcement agencies or federal or state securities regulators, and for
purposes of an examination of a broker-dealer pursuant to Sec.
103.19(g) regarding a joint report, to a self-regulatory organization
(as defined in section 3(a)(26) of the Securities Exchange Act of 1934,
15 U.S.C. 78c(a)(26)) registered with the Securities and Exchange
Commission, upon request.
(d) Confidentiality of reports. No mutual fund, and no director,
officer, employee, or agent of any mutual fund, who reports a
suspicious transaction under this part (whether such a report is
required by this section or made voluntarily), may notify any person
involved in the transaction that the transaction has been reported,
except to the extent permitted by paragraph (a)(3) of this section. Any
person subpoenaed or otherwise required to disclose a Form SAR-SF or
the information contained in a Form SAR-SF, including a Form SAR-SF
filed jointly with another financial institution involved in the same
transaction (except where such disclosure is requested by the Financial
Crimes Enforcement Network, the Securities and Exchange Commission,
another appropriate law enforcement or regulatory agency, or, in the
case of a joint report involving a broker-dealer, a self-regulatory
organization registered with the Securities and Exchange Commission
conducting an examination of such broker-dealer pursuant to Sec.
103.19(g)), shall decline to produce Form SAR-SF or to provide any
information that would disclose that a Form SAR-SF has been prepared or
filed, citing this paragraph (d) and 31 U.S.C. 5318(g)(2), and shall
notify the Financial Crimes Enforcement Network of any such request and
its response thereto.
(e) Limitation of liability. A mutual fund, and any director,
officer, employee, or agent of such mutual fund, that makes a report of
any possible violation of law or regulation pursuant to this section,
including a joint report (whether such report is required by this
section or made voluntarily) shall be protected from liability for any
disclosure contained in, or for failure to disclose the fact of, such
report, or both, to the extent provided in 31 U.S.C. 5318(g)(3).
(f) Examinations and enforcement. Compliance with this section
shall be examined by the Department of the Treasury, through the
Financial Crimes Enforcement Network or its delegees, under the terms
of the Bank Secrecy Act. Failure to satisfy the requirements of this
section may constitute a violation of the reporting rules of the Bank
Secrecy Act and of this part.
(g) Effective date. This section applies to transactions occurring
after October 31, 2006.
4. Add Sec. 103.16(b)(3)(iii) to read as follows:
Sec. 103.16 Reports by insurance companies of suspicious
transactions.
* * * * *
(b) * * *
(3) * * *
(iii) An insurance company that issues variable insurance products
funded by separate accounts that meet the definition of a mutual fund
in Sec. 103.15(a)(1) shall file reports of suspicious transactions
pursuant to Sec. 103.15.
* * * * *
Dated: April 27, 2006.
Robert W. Werner,
Director, Financial Crimes Enforcement Network.
[FR Doc. 06-4177 Filed 5-3-06; 8:45 am]
BILLING CODE 4810-02-P