Bank Secrecy Act

Table of Contents
I. In a Nutshell: What is the Bank Secrecy Act?
II. Why does the Bank Secrecy Act exist?
III. The Details: Bank Secrecy Act Requirements & Compliance
IV: How does the Bank Secrecy Act affect your business?
V: Bank Secrecy Act Information Resources

In a Nutshell: What is the Bank Secrecy Act?

The Bank Secrecy Act of 1970, or BSA for short, is the primary U.S. anti-money laundering (AML) law. The BSA is essentially an act that specifies the financial transactions that must be recorded and/or reported by financial institutions in order to prevent money laundering and fraud. The BSA is also commonly referred to as the Currency and Foreign Transactions Reporting Act.

Why does the Bank Secrecy Act exist?

The purpose of this act is to detect and prevent money laundering, which describes activities that criminals use to attempt to hide the illicit source and/or destination of their funds. Ultimately, the criminals want to spend the money they obtained illicitly by funneling the money through legal channels, which is why it’s called money laundering – the money’s past sins are washed away. There are many different kinds of activities that qualify as ‘money laundering’: tax evasion, using shell companies, and manipulating financial records are some examples of money laundering.

There are three basic elements that money launderers incorporate in their schemes:

Placement: The money is introduced to the financial system; for example, as a bank deposit
Layering: The money is moved around through many transactions – the more complex the better; for example, after the money is deposited in a bank, it is transferred to another account, where it is wired to, say, a foreign account, and so on
Integration: The money is ‘clean enough’ to use without suspicion; for example, after the money has been deposited from account to account, it may be used to make a large purchase, such as the purchase of a house, which is soon resold, and the resulting money from the reselling transaction may then be once again transferred from account to account until it is removed far enough from the original source that it can be spent freely without association

It is the first element – placement – that the BSA hopes to eliminate; by preventing ‘placement’ from ever taking place, the theory is that the rest of the elements needed to successfully launder money will also be prevented. And the gateway to successfully ‘place’ money in the financial system is through a financial institution, such as a bank. And so, the BSA’s rules are imposed on financial institutions, such as banks, and regulate the transactions made through them.

The Details: Bank Secrecy Act Requirements & Compliance

The most prominent BSA rule is perhaps what is commonly referred to as the “$10,000 Rule”. It is widely known that financial institutions will report transactions that are over $10,000 - which under BSA regulations is partially true. Not all transactions over $10,000 need to be reported, however, and in certain cases, transactions under $10,000 can be reported.

Generally, when a transaction meets the following two criteria, it needs to be reported:

More than $10,000 is involved in a single transaction or in two or more related transactions within a 24-hour period, by the same person
The $10,000 limit is reached via cash. Cash is defined as domestic and foreign currency and coins, and as monetary instruments, such as cashier’s checks, bank drafts, traveler’s checks, and money orders. However, a personal check does not qualify as cash, no matter how large its face value.

Reports on BSA regulated transactions are given to and managed by the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Financial institutions are required to electronically file their reports via the BSA E-Filing System.

In order to comply with BSA regulations, financial institutions need to file the necessary and correct forms for every qualifying transaction. The following forms are used to report transactions that are regulated by the BSA:

Form 112 – Currency Transaction Report (CTR): This form is filed when a currency-based transaction exceeds $10,000 – whether it is a deposit, withdrawal, exchange of currency, or payment. Multiple transactions that total more than $10,000 are combined as a single transaction in this situation if the transactions are conducted by or on behalf of a single person.
Form 105 – Report of International Transportation of Currency or Monetary Instruments (CMIR): This form is filed when anyone, including financial institutions, is involved with the physical transportation of currency and monetary instruments totaling over $10,000 in or out of the United States. (This is why Customs at the airport asks if you have any money to declare.)
Form 114 – Report of Foreign Bank and Financial Accounts (FBAR): This form is filed when anyone, including financial institutions, who own securities or have a financial account in a foreign country that, aggregated, amounts to more than $10,000
Form 90-22.47 and Form 8010-9, 8010-1 – Suspicious Activity Report (SAR): This form is filed when a transaction is deemed suspicious by financial institutions: ∙ a financial institution insider participates in financial abuse/fraud, no matter how big or small the amount∙ fraudulent transaction or transactions totaling at least $5,000 is conducted by a known suspect∙ fraudulent transaction or transactions totaling at least $25,000 is conducted by an unknown suspect∙ transaction or transactions totaling at least $5,000 that are deemed suspicious
Form 110 – Designation of Exempt Person: This form is filed when a bank customer meets the BSA criteria that qualify the customer to have an ‘exempt’ status from CTR filings; not all financial institutions are allowed to exempt customers using Form 110, banks are the only financial institutions allowed to do so. Banks are required to annually review and verify that each customer who has been deemed ‘exempt’ can maintain that status.

There is another form – the Monetary Instrument Log (MIL) – that is required to be filled out, but not necessarily reported. The MIL is a form that keeps track of cash purchases of monetary instruments – such as cashier’s checks, bank drafts, traveler’s checks, and money orders – that have a face value of $3,000 - $10,000, inclusive. Each MIL is required to be kept for at least 5 years; although the MIL does not need to be reported, it needs to be made accessible in the event of an audit.

In the event a transaction is under $10,000 or the total of related transactions within a 24-hour period is under $10,000, financial institutions are still required to report these transactions under BSA regulations if they are simply deemed suspicious.

In order to make sure that financial institutions can monitor whether they are BSA compliant or not, BSA regulations require each and every financial institution to have a written, board-approved BSA compliance program. This program must contain the following elements:

A system of internal controls that can assure and oversee adherence to BSA regulations
A system that allows for independent testing of BSA compliance
A designated individual who is responsible for supervising day-to-day BSA compliance
A system to properly train appropriate personnel
A customer identification program: The implementation of the Patriot Act in 2001 amended BSA regulations to include the financial institution BSA compliance program requirement of incorporating a customer identification program. A customer identification program essentially pushes financial institutions to authenticate customers’ identities via identification documents, such as a driver’s license. Under BSA regulations, financial institutions need to take reasonable and practical steps to assess the identities of customers.

It is worth mentioning that the passage of the Patriot Act also amended the BSA to include a provision for the Secretary of the Treasury to classify a foreign jurisdiction, institution, class of transaction, or type of account as being a ‘primary money-laundering concern’. In other words, BSA regulations provide the Secretary of the Treasury the power to enhance the definition of what is considered ‘suspicious’ under the rules of the BSA.

How does the Bank Secrecy Act affect your business?

It isn’t as widely known, but BSA regulations also cover regular businesses – any cash payment more than $10,000 needs to be reported to the government via the IRS’s Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business. Unlike banks, however, that’s where the BSA’s regulations reach stops – there are no other forms that need to be filled out.

BUT, businesses listed on North American exchanges – e.g. the American Stock Exchange – are exempt from BSA regulations. In other words, if a company is not listed under such exchanges, BSA regulations apply.

For businesses, BSA regulations mandate that cash payments over $10,000 need to be reported if the following criteria are met:

The amount of cash – U.S. and foreign countries’ coins and currency – is more than $10,000. Cashier’s checks, bank drafts, traveler’s checks, and money orders are all considered cash if the face value is under $10,000¹
More than $10,000 in cash means: ∙ A lump sum of more than $10,000∙ Installment payments that total more than $10,000 within a year of the first installment payment∙ Previously unreported payments that end up totaling more than $10,000 within a 12-month period
The cash is received as an ordinary course of a trade or business
The cash is given as payment by the same customer
The cash is given as payment either in a single transaction or multiple, related transactions²

*It should be noted that a personal check that has been drawn on the account of the customer does not qualify as ‘cash’ under BSA regulations*

In addition, according to BSA regulations, businesses must file Form 8300 for transactions that are suspicious, regardless of whether or not they meet the above 5 criteria. ‘Suspicious’ transactions are those in which the customer attempts to prevent the filing of Form 8300 or attempts to falsify information on Form 8300.

*It is important to make the distinction between trade/business transactions and other transactions. For regular trade/business transactions, the BSA rules apply. But for other types of transactions – for example, the selling and buying of an automobile over $10,000 between two individuals – are not regulated by the BSA because the seller is not involved in the actual trade/business of selling cars.*

There are two actions a business must complete in order to comply with BSA regulations once a customer’s transaction(s) meets the above criteria:

Correctly file Form 8300
Inform the customer that Form 8300 has been filed

When to File Form 8300

Businesses have 15 days within the receipt of the cash (or when total payments pass the $10,000 threshold) to file Form 8300. Filing Form 8300 for a customer means the cash total resets from that point for that customer.

Where to File Form 8300

Businesses can file Form 8300 electronically via the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) Systemor by mailing the completed form to:

IRS Detroit Computing Center
P.O. Box 32621
Detroit, MI 48232

Customer Notification to File Form 8300

Companies need to inform their any customer that meets the BSA $10,000 threshold requirements that Form 8300 was filed. Customers need to be notified by January 31 the year following the year the customer met the BSA requirements.

Civil Penalties for Failure to File Form 8300

If the failure to correctly file Form 8300 was based in negligence, the penalty for each failure is $250; the penalty is reduced to $50 if the form is correctly filed within 30 days of the due date.
If the failure to correctly file Form 8300 was intentional, the penalty for each failure skyrockets to the greater or $25,000 or the total amount of cash received from the transaction(s).

Civil Penalties for Failure to Inform a Customer of Form 8300 Filing

If the failure to inform a customer that Form 8300 was filed was based in negligence, the penalty for each failure is $250; the penalty is reduced to $50 if the customer is notified within 30 days of the original notification due date.
If the failure to inform a customer that Form 8300 was filed was intentional, the penalty is the greater of the total of $500 for each failure or 10% of the aggregate amount of all the failures.

Criminal Penalties for Failure to File Form 8300

Unlike civil penalties, criminal penalties are applied if the failure to file was intentional. Criminal penalties can also apply to customers – not just employees or businesses – who attempt to prevent the filing or correct filing of Form 8300
For the intentional failure to file, the penalties are:
∙ $25,000 for employees and $100,000 for the whole business
∙ Imprisonment up to 5 years + prosecution costs
For the intentional failure to include correction information or the intentional inclusion of false information, the penalties are:
∙ $ 100,000 for employees and $500,000 for the whole business
∙ Imprisonment up to 3 years + prosecution costs

¹Under BSA regulations, cashier’s checks, bank drafts, traveler’s checks, and money orders that are under $10,000 in face value should be considered as ‘cash’, and therefore necessary to report via Form 8300 once the total amount of those monetary instruments passes $10,000 per customer within a 12-month period. This is because any monetary instrument with a face value of more than $10,000 has already been documented and reported by the financial institution that issued the monetary instrument.

²Under BSA regulations, ‘related transactions’ describe two or more transactions that, all together, total more than $10,000 and occur within a 24-hour period. If a business knows, or has reason to know, that two or more payments that do not occur within a 24-hour period but are nonetheless connected, those payments are considered a single transaction and need to be reported.

Bank Secrecy Act Information Resources

Although the main BSA rules and compliance procedures have been discussed here, there are many more BSA nuances that are too extensive to fully cover.

For more information on how the BSA affects financial institutions, please refer to this page on the Financial Crimes Enforcement Networks (FinCEN) website
For more information on how the BSA affects businesses, please refer to this page on theIRS website

Where to file BSA Forms

Both financial institutions and businesses need to file their BSA forms on the US Department of Treasury's Financial Crimes Enforcement Network (FinCEN) E-Filing System. Click here to access the E-Filing system.