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Treas.
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10
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P4
v.401

Department of the Treasury

PRESS R E L E A S E S

The following numbers were not used:
JS-230 to JS-329

S-149: John F. Taylor Testimony before the Subcommittee on Domestic and International Monetary Po... Page 1 of 5

PRLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 1,2003
JS-149
John B. Taylor
Under Secretary of Treasury for International Affairs
Testimony before the
Subcommittee on Domestic and International Monetary Policy, Trade and
Technology
Committee on Financial Services
U.S. House of Representatives
Chairman King, Ranking Member Maloney and distinguished members of the
House Financial Services Subcommittee, thank you for inviting m e to testify about
the financial services provisions of recent trade agreements and, in particular, the
Free Trade Agreements (FTAs) with Chile and Singapore. I will also discuss the
investment and capital transfer provisions in these FTAs and h o w they relate to the
successful 20-year program bilateral investment treaties (BITs) that guarantee the
free movement of investment-related capital across borders.
Financial Services Provisions in the Chile and Singapore FTAs
Strong financial services rules and commitments are an essential component of any
comprehensive trade agreement. Reducing barriers to trade in financial services is
a necessary part of meaningful economic integration. Recent studies have shown
that countries with an open and well-supervised financial services sector
experience substantially increased growth rates. Downstream sectors that
consume those services benefit from their enhanced efficiency. And a strong
financial sector increases both the amount of national savings and the efficiency of
its allocation.
Our trade agreements have traditionally contained separate provisions on financial
services. The FTAs with Chile and Singapore are no exception. The F T A
provisions on financial services:
1. Secure the right to invest and to establish financial institutions in our FTA
partners' territory and ensure that our F T A partners do not apply measures that
discriminate against U.S. financial institutions, investors and investment in financial
institutions, or cross-border financial service suppliers as compared to domestic or
other foreign counterparts.
2. Secure rights with regard to expropriation and the transfer of capital and
investment returns as well as the right to resolve disputes with a host government
through binding international arbitration for these obligations.
3. Provide exceptions for prudential measures and for monetary and exchange rate
policy in order to provide the regulatory flexibility required by financial regulators.
(Regulators' concerns about dispute resolution procedures are addressed by
provisions that encourage or require the use of financial experts, particularly in
cases involving prudential measures.)
These provisions apply to all types of investment in financial services unless an
F T A partner identifies and negotiates exceptions called "non-conforming
measures."

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In the case of the Singapore FTA, w e were able to achieve significant liberalization
in areas where markets were not previously open or were not sufficiently
transparent. For instance, Singapore has agreed to substantial n e w access for
U.S. banks to Singaporean customers. Within 18 months of entry into force of the
agreement, it will lift its ban on n e w licenses for banks authorized to provide the
broadest range of services, and it will lift its ban on wholesale banks 18 months
later. It will end discriminatory restrictions on the number of customer locations two
years after entry into force of the agreement and will allow our banks to negotiate
access to A T M networks run by locally owned banks.
Chile does not currently have major restrictions of this nature, but it too will
implement s o m e changes. For instance, it has agreed to adopt changes to its
financial services regime to provide for prior notification and comment on n e w
regulations. Moreover, Chile will not apply its economic needs test to U.S. financial
institutions managing assets under its mandatory pension system.
The FTAs we have negotiated with Chile and Singapore provide financial service
suppliers the opportunity to compete in these markets, providing benefits to people
in Chile, Singapore and the United States.
Investment and Capital Transfer Provisions: Some History
The investment chapters of the Chile and Singapore FTAs provide for the free
transfer of funds related to an investment into and out of each country. These
provisions reflect a continuation of the United States' long-standing policy of
assuring that investment flows m a y m o v e unimpeded by controls. Therefore,
before describing the details of the investment and capital transfer provisions
contained in the Chile and Singapore FTAs, I would like to review the history and
basis for this policy.
Foreign investment is vital to economic growth around the globe. In the case of the
United States, annual flows of U.S. direct investment abroad increased from an
average of $28 billion between 1983-91 to $91 billion between 1992-2002. O n
average, the sales of U.S. affiliates abroad exceed $2.2 trillion annually; these sales
help support jobs and business activities in the United States. In total, about twothirds of all U.S. exports since 1989 were m a d e by U.S. companies with
investments overseas. Foreign investment into the United States also provides a
host of economic and social benefits. Like domestic investment, foreign direct
investment in the United States creates good jobs, increases productivity, and
raises U.S. living standards. It also strengthens U.S. firms and makes them more
competitive in the global economy.
Foreign investment is also a principal means to spur economic growth and
development in poorer countries. It can provide the financial, technical, and
managerial resources to expand economic potential in these countries. FDI can act
as an engine for economic development by bringing in n e w technology and
management practices, and by setting standards for local suppliers, thereby making
those suppliers more competitive at h o m e and abroad.
There are several ways the Administration is seeking to help developing countries
attract investment. Most recently, w e are working very hard to push forward the
President's Millennium Challenge Account. The M C A will allocate development
assistance to those countries that are committed to the adoption of sound policies.
The strong incentive provided by the M C A is intended to spur countries to improve
contract enforcement, the independence of the judiciary, and the security of
property rights. Only those countries that are pursuing responsible monetary and
fiscal policies, removing the barriers to business formation, and investing for a
healthier and more educated work force will be rewarded. The key point here is
that the M C A will m a k e those countries more attractive to investors.
The bilateral investment treaty program, which started in the early 1980s, is another
way of encouraging private sector investment flows to developing countries. The
existence of a U.S. investment agreement can affect the location decisions of U.S.
companies. Surveys of U.S. companies with investments in developing and

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S-149: John B. Taylor Testimony before the Subcommittee on Domestic and International Monetary Po... Page 3 of 5

emerging market countries indicate that U.S. companies factor political or noncommercial risk into their investment decisions. O n e of the most important
elements they consider is whether there is an environment based on the rule of
law. U.S. investment treaties are intended to foster the rule of law and lower
political risk by, a m o n g other things, obligating countries to honor contracts,
encourage economic and regulatory reforms, and agree to international arbitration
as an alternative to biased or corrupt court systems.
The United States now has over forty Bilateral Investment Treaties (BITs) with other
countries. U.S. investment agreements facilitate investment by assuring investors,
a m o n g other things, six basic rights:
1. The fundamental right to transfer capital and investment returns freely into and
out of a country without delay and at a market rate of exchange.
2. Both pre- and post-establishment rights to the better of national or most-favorednation ( M F N ) treatment.
3. Limits on the ability of a government to impose inefficient and trade-distorting
performance requirements such as local content and export requirements.
4. Protection against expropriation of an investment that is not in accordance with
customary international law standards.
5. Right to resolve disputes with a host government through binding international
arbitration as an alternative to domestic courts.
6. Right to employ top managerial personnel of their choice, regardless of
nationality.
The first of these rights—free transfers of capital and investment-related returns—is
a mainstay of U.S. international investment agreements. It has weathered s o m e
twenty years of change in the economic and political climate and held fast through
Republican and Democratic Administrations. The right of free transfers is
considered by the business community as one of the most important protections
conferred in these treaties.
Protection of free transfers is also a key part of a sound investment climate, which
is particularly important for emerging markets and developing countries. In a world
where countries must compete for scarce international capital, countries that offer
investors a high-quality investment climate will be more successful in attracting
investment—investment that is needed to create jobs, raise productivity, and
increase living standards. Conversely, restrictions on capital flows serve to
discourage investment.
Despite the long history of protecting the right of free transfers, some have
contended that the Asian financial crisis showed the need for limits on the free
movement of capital. They argue that restrictions on capital flows into developing
and emerging market economies are needed in times of financial crisis. I disagree
strongly with this view for several reasons.
First, I know of no conclusive evidence that capital controls have corrected an
economic crisis. T o the contrary, such controls have negative economic
consequences. Capital controls weaken investor confidence and can reduce
inflows of foreign investment. Indeed, foreign direct investment in Malaysia fell after
imposition of controls even though the controls did not apply to FDI.
Second, capital controls involve significant administrative costs. Governments that
impose controls must administer them through strong regulation and enforcement
because controls create circumvention incentives. Countries are often forced to
pass n e w legislation to address the circumvention of capital controls. Maintaining
capital flow restrictions is a difficult, expensive, and often futile task. For countries
in the world that are already battling cronyism, the imposition of capital controls

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offers another avenue for rent-seeking behavior.
Third, capital controls artificially reduce the pressure for countries to institute
needed economic reforms. Capital controls tend to forestall the execution of
difficult reforms that are needed to build the foundation for economic growth and
rising living standards.
Fourth, capital controls increase the risk to the domestic economy in a time of
crisis. Capital controls prevent domestic investors from diversifying into
international markets, with the consequence that any shock to the domestic
economy is amplified. In addition, capital controls on inflows limit sources of credit
and investment for domestic companies, which is particularly problematic in a
period of crisis. If domestic credit markets dry up because of a shock, the inability
of domestic industries to tap foreign investment flows will subject them to additional
pressures resulting from the ensuing credit crunch.
Some proponents of capital controls argue that requiring governments not to
interfere with capital movements is an infringement on national sovereignty. But
ensuring free capital transfers does not imply that host countries forfeit their
sovereign right to pursue domestic economic policies. The host country continues
to have the ability to pursue other adjustment mechanisms that are consistent with
free transfers, such as monetary policy (which effects changes in international
reserves, interest rates, and exchange rates) and fiscal policy.
Investment and Capital Transfer Provisions in the Chile and Singapore FTAs
In the negotiations of the Chile and Singapore FTAs, all sides agreed on the
importance of free transfers and avoiding capital controls. The investment chapters
of the Chile and Singapore FTAs provide for the free transfer of funds related to an
investment into and out of each country. The flows covered by this provision
include foreign direct investment, profits, dividends, the proceeds from the sale of
an investment, and payments for loans or bonds issued in a foreign market.
The Chile and Singapore FTAs contain a special dispute settlement mechanism
that would apply in the event that Chile or Singapore takes measures to restrict the
transfer of capital. Under this mechanism, U.S. investors cannot file claims for
violations of the free transfers obligation for up to one year on certain capital flows,
provided the restrictions do not "substantially impede transfers." If the restrictions
are lifted within a year, the affected investor will not have recourse to dispute
settlement on these restrictions. If the restrictions are in place for more than a year,
the investor m a y take a claim to dispute settlement, and m a y seek d a m a g e s
caused by the controls after their first year in operation. Investors will have the
burden to prove the existence and extent of damages caused by the controls. T h e
cooling-off period for other issues before a claim m a y be taken to dispute resolution
is six months.
These new provisions are found in an annex to the investment chapters of the
FTAs. Whether these provisions are appropriate for other countries will be
determined on a case-by-case basis.
The free transfer provisions of the Chile and Singapore FTAs meet an important
Trade Promotion Authority (TPA) objective - "freeing the transfer of funds related to
investments." These provisions provide U.S. investors with substantially
strengthened transfer rights over those available under the IMF Articles of
Agreement and the General Agreement on Trade in Services (GATS). These
agreements, like most multilateral agreements, represent a floor for investor
protection.
Our position is to seek greater protection for U.S. investors than the IMF Articles of
Agreement and the G A T S afford. In addition, unlike those other agreements, the
F T A s provide for effective investor-state arbitration provisions to enforce free
transfer rights.
The approach undertaken in these FTAs is consistent with the shared economic
philosophy and policy perspective of the United States, Chile, and Singapore. T h e

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Page 5 of 5

inclusion of the free transfer provision in the Chile and Singapore F T A s with the
United States sends a strong signal to the markets that all three countries support
the free flow of capital and recognize its importance in the development of an
economy. Without a doubt, these agreements represent a win-win situation for all
involved countries.
I wish to thank the Subcommittee for this valuable opportunity to discuss the
Administration's trade in financial services and international investment policies.

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PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
April 01, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 03, 2003
May 01, 2003
9127 95MK4

High Rate: 1.155% Investment Rate 1/: 1.177% Price: 99.910
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 33.73%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

48,818,578
53,135
0

Accepted
$

18,948,.329
53, . 135
0

48,871,713

19,001, 464

2,003,890

2,003, 890

50,875,603

21,005, 354

Median rate 1.150%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 48,871,713 / 19,001,464 = 2.57
1/ Equivalent coupon-issue yield.

http ://www.publicdebt.treas.go v

JS \sQ

fS-151: Treasury Secretary John S n o w Travels to Florida to Promote President Bush's E c o n o m i c A g e n d a

PRESS ROOM

F R O M THE OFFICE O F PUBLIC AFFAIRS
April 2, 2003
JS-151
Treasury Secretary John Snow Travels
to Florida to Promote President Bush's Economic Agenda
Treasury Secretary John Snow will travel to Orlando, Fort Lauderdale and
Naples, Florida on Thursday and Friday, April 3-4, to discuss President
George W . Bush's efforts to strengthen the economy and to promote
President's Jobs and Growth plan.
The Secretary will meet with members of the hospitality and tourist
industry, local economic officials, small business owners, individual
investors, business leaders, and members of the financial services industry
to highlight the importance of swiftly enacting the President's Jobs and
Growth plan, which will create and secure jobs, accelerate and sustain our
economic recovery, and increase workers' standards of living. More than 5
million taxpayers in Florida will have lower income tax bills in 2003 under
the President's growth package.
During meetings with senior citizens, the Secretary will pay special
attention to discussing the elimination of the double taxation of dividends a key component of President Bush's Jobs and Growth plan. More than
half of all taxable dividends go to America's seniors and one point seven
million taxpayers in Florida will benefit from the exclusion of dividends paid
from previously-taxed corporate income.
The Secretary will discuss how elderly taxpayers will benefit from the
provision that would allow them to exclude 100 percent of dividends from
taxable income. Economists estimate that 9.8 million senior households
receive dividend income that is currently taxable. Seniors rely on these
checks for a steady source of income in their retirement. Yet, their income
is taxed twice - once at the corporate level and then again on their o w n
return. The President's Jobs and Growth Package would increase seniors'
rates of return on investments by eliminating the double taxation of
dividend income.
Administration estimates show that the dividend exclusion would provide
tax relief for 7 million elderly taxpayers by an average of $1,252.
Open Press Events
AMENDED
Thursday, April 3, 2003
12:00 pm
Remarks to the Orlando Chamber of C o m m e r c e
Orlando Regional Chamber of C o m m e r c e
Chamber Boardroom
75 South Ivanhoe Boulevard
Orlando, Florida
2:00 pm

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Page 1 of 2

)S-151: Treasury secretary John S n o w Travels to Florida to Promote President Bush's Economic A g e n d a

Page 2 of 2

Roundtable Discussion with Seniors
Mark Street Senior Recreational Complex
The Oak R o o m
East Mark Street
Orlando, Florida 32803
Friday, April 4, 2003
9:30 am
Roundtable Discussion With Seniors
Beach Community Center
3351 Northeast 33rd Avenue
Fort Lauderdale, Florida 33308
12:00 pm
Remarks to Ft. Lauderdale Chamber of Commerce
Riverside Hotel
620 East Las Olas Blvd
Ft. Lauderdale, Florida 33301

http://www.treas.gov/press/releases/jsl51.htm

7/23/2003

S-152: Treasurer Rosario Marin's R e m a r k s to the California State Society

Page 1 of 5

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PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 1,2003
JS-152
Prepared Remarks of
The Honorable Rosario Marin
Treasurer of the United States
The California State Society Golden State Roundtable Luncheon
The Capitol Hill Club
Washington, D C
Thank you, Congressman George Radanovich, for those kind words.
You've all heard the rumors, the speculation in the newspapers. Well, I've
decided to put all that to the rest.
This is a non-partisan event, but this IS the Republican Club of Capitol Hill and the perfect place to urge George Radanovich to run for the Senate,
and endorse his candidacy.
Oh, but I just remembered - it's April Fool's Day!!! Sorry about that,
George!
Seriously, I can't think of another Member of Congress more dedicated to
his District and more knowledgeable about his constituents than George
Radanovich.
It is so good to be having lunch with some Californians. Tod Burnett told
m e that every one in this room is from California - or wishes they were. And
it's great to see so m a n y friends.
Besides George Radanovich, I want to recognize the President of the
California State Society, Bob Cochran. Bob w h o works for representative
"Buck" M c K e o n and in his spare time, manages to do so m u c h for
California by setting the direction of our State Society.
I want to thank Linda Ulrich, and my friend Representative Ken Calvert, for
making her available to organize these Golden State Roundtable
luncheons.
And I want to remember my friend Tod Burnett of the EPA, who serves with
Linda on the Board of the California State Society, and w h o w a s kind
enough to invite m e here today.
Everybody knows that there's no State Society in Washington more active
than California's - and each of us is incredibly grateful to each of you for
your efforts. Please join m e in recognizing the work of these individuals for
doing so much to keep this important voice for California's interests alive
and active in our nations capital.
It would be an honor for any person to stand here, literally in the shadow of
the United States Capitol, to speak to their h o m e State Society. But for m e ,
it's a very special privilege because this place is a long w a y from where I
c a m e from, as a little girl from Mexico City w h o c a m e to this country with
m y mother and father.

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(S-152: Treasurer Rosario Marin's R e m a r k s to the California State Society

Page 2 of 5

I w a s 14. I couldn't even pronounce "U.S. Capitol," m u c h less draw you a
picture of it. And the biggest thing on m y mind w a s that I w a s going to miss
m y "Quinceahera" Coming of A g e Fiesta.
But my mother and my father taught us something special. That in this
country, you can do whatever you want to do. You can go wherever your
dreams take you. In America, they said, they don't care w h o your parents
and grandparents were, or where you c a m e from, or whether you speak
with an accent. Not if you show up on time, not if you work hard, not if
you're willing to live by the rules. And w e did. Just like each one of you. W e
overcame obstacles. Just like each one of you did. And people reached
out to help us. Just like someone has helped you in your lives.
And today, in America, that little girl form Mexico City, who couldn't even
introduce her self in English, much less pledge allegiance to the Flag - that
s a m e little girl today holds the oldest office in the American government
and is treasurer of the freest and most vibrant economy on earth.
I am so proud to be an American. I'm particularly grateful to President Bush
for allowing m e to serve at a time and in an Administration where w e have
more Latinos serving this country than any previous time in history.
And as one who owes everything I have and everything I am to California,
it's especially grateful for m e to be able to do m y small part on behalf of m y
fellow Californians.
Lord knows, our state cries out for it. We Californians now pay the tenth
highest state and local taxes in the country - more than thirty-five hundred
dollars for every man, every w o m a n and every child in the Golden State.
Fourteen thousand dollars for the average family of four. And yes, that's
after Proposition 13. Yet for all that money - for all those billions of dollars our state is awash in red ink. The Governor can't tell us h o w big the budget
deficit is. Somewhere between $26 billion and $35 billion, he says. That's
like a little college kid calling h o m e to say he ran up the credit card. H o w
m u c h ? Somewhere between "Oh m y God!" and "Get m e the smelling
salts."
It's the worst budget crisis in California's history, and it's going to hit every
family in our state. Schools. Child care. Colleges. Health Care. Pensions.
Care for the elderly and the disabled.
Meanwhile, more than 345,000 California families have lost jobs, mostly in
the collapse of the computer and dot-com "bubble," according to a report
two weeks ago by the Center for Continuing Study of the California
Economy at Palo Alto.
Those same California families pay the highest gasoline prices in the
country. $2.10 a gallon, on average statewide, for regular unleaded,
according to the American Automobile Association. In the Bay Area, it's
$2.24.
Think of that when you consider that the typical commute of the folks in the
Inland Empire is three hours and counting. That's because if you are a
young working family, you trade a three hour commute for a starter house
you can afford. It's a trade-off that 3.2 million Californian's have m a d e more people than those w h o live in Detroit, Philly, and Seattle combined.
And I don't have to tell you how much we are paying for energy costs. It
reminds m e of a line in the n e w Chris Rock movie, "Head of State." H e
asks the crowd, "How m a n y of you are working two jobs just to be broke?"

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Well, today, lots of Californians are.
It's about time we gave them a break. And, if we're to begin to fix the
budget crisis in Sacramento, higher taxes aren't the answer and more
loans certainly aren't the answer. The answer is that the economy of the
Golden State needs stimulus.
Can you imagine what a difference a thousand-dollar-per-child tax credit
will m e a n for this person's family? It's not just shoes, n e w school clothes,
or m a y b e braces. It's tutors or a computer. M a y b e even a family vacation
- the kind of memories that m a k e childhood really special.
There are almost 3 million California families that'll qualify for the tax credit.
And if each one of those families or single parents has just one child a
piece that's nearly 3 billion dollars for the California economy. That's just
one child per family. That's not economic stimulus. That's putting
California economy on turbo chargers! And it's putting the m o n e y right
where it belongs - in the hands of hard-working people trying to raise a
family.
Our nation at this moment is engaged in a war half a world away. It's not a
war of our choosing, against an e n e m y so ruthless he uses suicide as a
weapon. We'll prevail in that struggle, and G o d willing, we'll do it with
minimal loss of life. But we'll do ourselves no good if in the meantime w e
fail to fight the battle to revive the economy of states like California.
The 300-thousand brave fighting men and woman in Iraq deserve jobs to
c o m e h o m e to- and so do their brothers and sisters, their cousins, aunts
and uncles, mothers and fathers, boyfriends and girlfriends here at home.
But creating jobs, stimulating the economy from above, is only half the job.
W e also have to teach people h o w to m a k e the best financial decisions for
themselves and their families.
Let me tell you what I mean - and in the process, explain to you one of the
great problems that keeps poor people poor.
In the United States today, the average family carries $8,100 dollars in
credit card debt. If they pay the minimum very month, at an interest rate of
1 8 % , it'll take them 53 Y E A R S to pay that debt off.
What's the answer? It's certainly not government regulation or restrictions
on lending. That won't work. Never has never will. The answer is to teach
folks what they should have learned in high school the impact of
compound interest. I call it "financial education."
I look to my fellow Latinos - hard-working, responsible. Some send, on
average, $200 to $300 dollars on a regular basis h o m e to their relatives in
Mexico and Latin America. Gifts, incidentally, that help reduce illegal
immigration into the United States.
But until very recently, they were paying up to 20 percent to do so. Why?
Because there are 10 million Americans w h o have no relationship with a
bank or credit union, and a large percent are Latinos. The answer is to get
Latinos to form relationships with banks and credit unions.
Banks and credit unions can wire money to Mexico at only a nominal
charge. A check costs almost nothing. If w e can get un-banked Latinos to
build relationships with financial institutions, w e can stop them from being
abused and exploited by people like s o m e car dealers, w h o charge them
upwards of 30 percent for a used car loan. More importantly, if w e can get
folks to establish relationships with banks and credit unions, w e can

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5-152: Treasurer Rosario Marin's Remarks to the California State Society

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establish credit histories.
That way, we can get them to qualify for loans for automobiles at low
interest. Eventually, w e can qualify them for mortgages. Get them out of
rental units into homes they own. Maybe even get them business loans.
Latinos, by the way, represent just 25 to 40 percent of what we call "the unbanked." Altogether, there are 10 million Americans w h o don't have any
relationship with a financial institution. They're easy prey to unscrupulous
lenders, they pay huge surcharges to cash a paycheck, and to write a
cashier's check.
We're making progress with the un-banked. And in the meantime, we were
able to bring down the charge send money overseas. Instead of a 20
percent surcharge, I'm pleased to tell you that, today; it costs a flat $10
dollar fee to send money overseas, plus the average fee.
It's a process of fits and starts. A major progress here, small advances
there. Just like in your jobs, and the projects you're involved in. I learned a
lot about fits and starts when, 17 years ago, I had m y oldest son Eric.
He was born with Downs Syndrome. And everything in our lives - my
husband and mine - turned upside down the day he w a s diagnosed. I w a s
about to be named Assistant Vice President at a bank - a place where I'd
started as an Assistant Receptionist - and, believe m e , she never let m e
forget w h o the receptionist was!
I quit my job to take care of him. My dream of an M.B.A? Gone in an
instant. W e had to sell our house, just to pay the bills. I remember saying
to m y husband, "My God, why us?" H e looked back at m e and said, "Why
N O T us?"
And over the next 17 years, I've learned why. Because that little baby - my
beautiful son - has shown m e what love is. In Eric, there's no greed. N o
grudges. There's no anger. N o avarice.
No resentment, no jealousy. And when I look into the eyes of my wonderful
son, I don't see the Downs. I see only the love.
When I served in Sacramento, fighting for the rights of the disabled, I kept
Eric's picture on m y desk. I had it there when I w a s Mayor of Huntington
Park. And when you c o m e visit m e over at the Treasury Department - and I
hope that each of you will - you'll see that I still keep a picture of him there.
And, no, I don't give out samples! But when I think of these little obstacles
that I face in the course of the day or the great challenges that face our
nation and our state in times like this...I look at Eric.
I think of a 2-year old that they thought would be paralyzed, and of the two
neck surgeries he went through. I think of 3 years of brutal, agonizing
physical therapy. And I know, from seeing h o w God watched over m y
beautiful boy these past 17 years, that he'll be there for us, too.
What helps me, what gives me the fortitude and the patience to take one
step at a time, is remembering Eric's progress. I think of the m e n and
w o m a n I speak to every day w h o are out of work. W e o w e it to them to
revitalize the economy of California, and of the United States.
The parents of children trying to save for college and for their futures in
these difficult times. The ones who'll benefit so greatly from the thousanddollar-per child tax credit I told you about.

http://www.treas.gov/press/releases/js 152.htm

7/23/2003

S-152: Treasurer Rosario Marin's Remarks to the California State Society

Page 5 of 5

I visit the hospitals and the clinics and I think of those w h o still need
medical coverage... of the senior citizens w h o still can't get the medicines
they need on Medicare.
And I think of Eric. Of a little boy they said would never hold his head up walking and playing basketball n o w with his brother and sister.
And I know that if God has done for Eric - that we can certainly put those
m e n and w o m a n back to work, put more money in their pockets, and help
them m a k e better financial decisions.
That's because in America, where a 14-year old little Mexican girl can grow
up to sign the nation's currency, where her paralyzed baby can run, there is
no challenge, no obstacle w e cannot overcome and no e n e m y w e cannot
defeat.
God bless you, ladies and gentlemen, and God bless the United States.

http://www.treas.gov/press/releases/js 152.htm

7/23/2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 12-DAY BILLS
Term: 12-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 03, 2003
April 15, 2003
912795MY4

High Rate: 1.180% Investment Rate 1/: 1.190% Price: 99.961
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 63.18%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tend*5red

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal

Reserve

TOTAL

Accepted

, 000
51,, 734,
7
0

2 0 , 0 0 0 , 065
7
0

51,,734,,007

2 0 , 0 0 0 , 072

51, 734, 007

2 0 , 0 0 0 , 072

Median rate
1.165%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 51,734,007 / 20,000,072 = 2.59
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

fS-154: Under Secretary Fisher's Statement on House Passage of F D I C Reform Act

Page 1 of 1

PR CSS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
April 2, 2003
JS-154
Statement of Treasury Under Secretary for Domestic Finance Peter R. Fisher
on House of Representatives' Passage of the Federal Deposit Insurance
Reform Act
"We commend the leadership of Chairman Oxley and Rep. Bachus in the
effort to reform the federal deposit insurance system. W e share the goals
of improving the operation of the system to ensure its long-term strength
and soundness, promoting the important role of banks in our nation's
economic growth. W e look forward to working with the Senate and then
with a House-Senate conference where a final bill will be crafted that is
consistent with the needs of depositors, the banking industry, and the
Administration's priorities."

http://www.treas.gov/press/releases/jsl54.htm

7/23/2003

JS-155: Assistant Secretary Abernathy's Statement on Remittances

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 2, 2003
JS-155
Statement of Treasury Assistant Secretary for Financial Institutions
W a y n e A. Abernathy on Remittances
I applaud Bank of America's announcement that it has reduced its remittance fees
for non-customers to send money to Mexico. Mexican-Americans send an
estimated $10 billion back to family members in Mexico each year. Through the
benefits of N A F T A and other agreements that w e have with Mexico, mainstream
financial institutions are playing an increasing role in making these transfers in a
safer way and at lower cost. As part of Partnership for Prosperity, the Treasury
continues to encourage such progress. While w e continue to work to educate more
Americans about the benefits of establishing a relationship with a bank or other
financial institution, I a m pleased to see that banks as well are reaching out to noncustomers, with steps that can lead to a growing banking relationship for
consumers in both countries.

http^w^.treas.gov/press/releases/js 155.htm

4/22/2005

5-156: Treasury Secretary John W . S n o w Orlando Chamber of C o m m e r c e Remarks

Page 1 of 3

PRESS ROOM

F R O M THE OFFICE O F PUBLIC AFFAIRS
April 3, 2003
JS-156
United States Treasury Secretary John W. Snow
Orlando Chamber of Commerce Remarks
Orlando, Florida
April 3, 2003

Thanks for a warm welcome to Florida on m y first visit here as Treasury
Secretary. Since it snowed in Washington on Monday, I'm considering
moving the Treasury Department down here.
Everyone's attention these days is on the war overseas, and rightly so. A
lot of young Americans - a lot of young Floridians - are over in the Middle
East now, risking their lives and giving everything they've got to secure our
nation against weapons of mass destruction, and to rid the world of a
brutal, ruthless regime. I can tell you that President Bush is overwhelmed
with pride and admiration for our troops, as I know all of us are.
I also want you to know that even though the spotlight is on our national
security today, the President's administration is working hard to secure our
economy as well. W e want to m a k e sure that when our troops c o m e h o m e
victorious, they have the strongest economy in the world waiting for them,
full of opportunity for the future.
I believe that these are the two pillars supporting our nation's greatness
and the well-being of our people: national security and economic security.
As a matter of principle, this Administration believes we have an obligation
to the American people to rebuild our economy, even as w e protect our
national security. Choosing one over the other is a false choice. Rather,
w e must pursue both. The President is doing everything in his power to
protect our national security. H e is also doing everything in his power to
strengthen the economy and create jobs.
We cannot wait until the war is over to focus on economic growth. We
must act now. Those here in Florida w h o are looking for work cannot wait
for a job, and should not have to wait for a job.
To address our economic security, President Bush has proposed his Jobs
and Growth Plan. The Jobs and Growth plan will create and secure jobs,
accelerate and sustain our recovery, increase workers' standards of living
and increase the economic performance of our nation right n o w and for
m a n y years to come. It will stimulate consumer spending and small
business investment in the near term by letting workers and owners keep
more of their own money. It will increase savings and investment for job
creation and retention through the elimination of the unfair double taxation
of dividends-the single most powerful thing w e can do to sustain and grow
the economy. W e are urging Congress to pass this plan in its original form,
true to its intentions, and I hope you will join us with your support.

http://www.treas.gov/press/releases/js 156.htm

7/23/2003

S-156: Treasury Secretary John W . S n o w Orlando C h a m b e r of C o m m e r c e R e m a r k s

Page 2 of 3

With regard to national security, the President is also taking action. And to
support this action, he has submitted a supplemental budget request to
Congress. The m o n e y in the supplemental will give the m e n and w o m e n of
our armed forces the resources that they need to conduct Operation Iraqi
Freedom and to fight the war on terror; it will provide humanitarian relief to
the people of Iraq; and it will help defend our homeland against the threat
of terrorism.
America can afford the cost of this war, which at $74.7 billion makes up
less than 1 percent of G D P . W h a t w e cannot afford is the cost of inaction
against terrorist threats. The cost of inaction is unacceptably high, for both
national security and economic security - in American lives, and American
livelihoods. September 11th cost an estimated $83 billion to N e w York City
alone. The top 315 U.S. metro areas sustained estimated losses of $191
billion and lost 1.6 million jobs as a result of the attacks.
Failure to pass the President's full Jobs and Growth plan would cost
450,000 n e w jobs by the end of this year, and 1.4 million by the end of
next. American workers and families are anxious. W e need to restore their
sense of security. W e need to act.
The state of Florida, specifically, would benefit a great deal from the
President's proposals. Your economy has done better than the national
average in m a n y ways, but in other ways it has been suffering, andit needs
a boost. Unemployment, for example, is lower than in the country overall,
and personal income has been rising much faster than the national
average, but manufacturing, international trade and tourism have been
hurt.
Now consider the President's economic plan, which will bring relief to five
million Florida taxpayers - especially Florida's senior population. Over one
million Florida small businesses will have tax savings to apply toward n e w
jobs and equipment. Nearly four million married- and single-filers will
benefit from the expanded 10-percent tax bracket. Nearly two million
couples will benefit from the elimination of the marriage penalty; about one
and a half million parents will benefit from the increased child tax credit,
and 1.7 million taxpayers will gain from the end of double taxation of
dividends.
That last figure, those who will benefit from the end of the double taxation
of dividends, is disproportionately comprised of seniors. Nationwide, 9.8
million senior households receive dividend income that is n o w taxable, and
more than half of all taxable dividends go to America's seniors. It doesn't
seem right to put a higher tax burden on folks w h o have already
contributed most of a lifetime to this country.
The dividend exclusion in would provide tax relief for 7 million senior
taxpayers by an average of $1,252, and 4.5 million taxpayers, mostly
seniors, will have a smaller portion of their social security benefit payments
taxed if the President's plan is enacted.
We cannot afford to fail the American people, especially our troops
overseas. N o w is not the time for partisan politics. N o w is the time to work
together. The President's economic and national security proposals are in
the best interests of the state of Florida, and our nation.
Thank you.

http://www.treas.gov/press/releases/js 156.htm

7/23/2003

Ol I I CI. O K PI'BI.IC A H M R S • I5IH» I'l'AA^ IA.YNI \ \\ K M

EMBARGOED UNTIL 11:00 A.M.
April 3, 2003

I., N.W. • W A S H I N G T O N . O.t '.• 202211 •.21)2 ft2 22<>MI

CONTACT: Office of Financing
202/691-3550

TREASURY OFFERS CASH MANAGEMENT BILLS
The Treasury will auction approximately $8,000 million of 6-day
Treasury cash management bills to be issued April 9, 2003.
Tenders for Treasury cash management bills to be held on the book-entry
records of TreasuryDlrect will not be accepted.
Up to $1,000 million in noncompetitive bids from Foreign and International Monetary Authority (FIMA) accounts bidding through the Federal
Reserve Bank of New York will be included within the offering amount of
the auction. These noncompetitive bids will have a limit of $100 million
per account and will be accepted in the order of smallest to largest, up
to the aggregate award limit of $1,000 million.
Note: The closing times for receipt of noncompetitive and competitive
tenders will be at 11:00 a.m. and 11:30 a.m. eastern daylight saving time,
respectively.
The allocation percentage applied to bids at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g.,
17.13%.
This offering of Treasury securities is governed by the terms and conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended).
Details about the new security are given in the attached offering
highlights.
oOo
Attachment

fe m

HIGHLIGHTS OF TREASURY OFFERING
OF 6-DAY CASH MANAGEMENT BILLS
April 3, 2003
Offering Amount $ 8,000 million
Maximum Award (35% of Offering Amount) .. $
Maximum Recognized Bid at a Single Rate . $
NLP Reporting Threshold
$
NLP Exclusion Amount
$

2,800
2,800
2,800
7,000

million
million
million
million

Description of Offering:
Term and type of security
6-day Cash Management Bill
CUSIP number
912795 MY 4
Auction date
April 8, 2003
Issue date
April 9, 2003
Maturity date
April 15, 2003
Original issue date
April 3, 2003
Currently outstanding
$20,000 million
Minimum bid amount and multiples . . . $1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount
rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to
Federal Reserve Banks as agents for FIMA accounts will not exceed $1,000
million. A single bid that would cause the limit to be exceeded will be
partially accepted in the amount that brings the aggregate award total to
the $1,000 million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be prorated to
avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments
of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the
total bid amount, at all discount rates, and the net long position equals or
exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the
closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 11:00 a.m. eastern daylight saving time on auction day
Competitive tenders:
Prior to 11:30 a.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue
date.

DEPARTMENT

THE

TREASURY

NEWS

TREASURY

Oil It K Or ITBI.lr ATI-AIRS • !5<H> I ' I W S Y I A A M \ A V I M I : , N A Y . • W A S H I N G T O N . !>.<.» 2022U •iHil: <.222<>MJ

EMBARGOED UNTIL 11:00 A.M.
April 3, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $31,000
million to refund an estimated $28,830 million of publicly held 13-week and 26-week
Treasury bills maturing April 10, 2003, and to raise new cash of approximately $2,170
million. Also maturing is an estimated $22,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced April 7, 2003.
The Federal Reserve System holds $12,350 million of the Treasury bills maturing
on April 10, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held April 8, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDizect customers have requested that we reinvest their maturing holdings
of approximately $1,149 million into the 13-week bill and $828 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
0O0

Attachment

•

<-r

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 10, 2003

April 3, 2003
Offering Amount $15,000 million $16,000 million
Maximum Award (35% of Offering Amount)
$ 5,250
Maximum Recognized Bid at a Single Rate .... $ 5,250
NLP Reporting Threshold
$ 5,250
NLP Exclusion Amount
$ 5,200
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

million
million
million
million

$ 5,600 million
$ 5,600 million
$ 5,600 million
None

91-day bill
912795 NC 1
April 7, 2003
April 10, 2003
July 10, 2003
January 9, 2003
$20,542 million
$1,000

182-day bill
912795 NR 8
April 7, 2003
April 10, 2003
October 9, 2003
April 10, 2003
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

Bureau of the Public Debt: Public Debt Announces Activity for Securities In The STRIPS Program For ... Page 1 of 1

B u r e a u of the

. w^.lC
Pub

united Stives L->epai rmeni ot rhe Treasury

Public Debt Announces Activity for Securities in the STRIPS Program for March
2003
FOR IMMEDIATE RELEASE
April 4, 2003
The Bureau of the Public Debt announced activity for the month of March 2003, of securities within the Separate Trading of Registered
Interest and Principal of Securities program (STRIPS).
In T h o u s a n d s
Principal Outstanding (Eligible Securities)

$2,275,999,766

Held in Unstripped Form

$2,105,471,145

Held in Stripped Form

$170,528,621

Reconstituted in March

$11,496,397

The accompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
audit and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
"Holdings of Treasury Securities in Stripped Form."
The STRIPS table, along with the n e w Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
www.publicdebt.treas.gov. A wide range of information about the public debt and Treasury securities is also available at the site.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004

-m

http://www.publicdebt.treasJLgov/com/com0403s.htm

5/10/2005

JS-160: SCHEDULE OF PRESS EVENTS FOR THE G7 MINISTERIAL MEETINGS

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 4, 2003
JS-160
SCHEDULE OF PRESS EVENTS FOR THE G7
MINISTERIAL MEETINGS
The following are the open press events of the G7 Ministerial meeting for planning
purposes only. All members of the press who wish to cover the events will be
issued a credential by Treasury Public Affairs. Please submit your name, social
security # (passport # for non U S citizens) date of birth and news affiliation to
Frances Anderson at 202-622-2960 or e-mail to frances.anderson@do.treas.gov by
3:00 pm Wednesday, April 9, 2003. Credentials will be distributed at the Pre - G 7
Press Conference on Thursday, April 10, 2003.
Note: All camera crews must enter the Treasury Department through the moat
entrance on East Executive Drive.
Thursday, April 10, 2003
4:30 P M

Pre - G 7 Press Conference with Secretary Snow
Department of Treasury
Media Room 4121
Note: Press should arrive one hour prior
to the press conference

Saturday, April 12, 2003
8:00 A M

G 7 Ministerial Meeting
Photo Only
Blair House

9:30 A M

G 7 Ministers "Family Photo"
Photo Only
Blair House

12:00 PM Post G7 Press Conference with Secretary Snow
Department of Treasury
Media Room 4121
Note: Press should arrive one hour prior
to the press conference

http://www.treas.gov/press/releases/jsl60.htm

7/23/2003

fS-161: Treasury & I R S withdraw proposed pension plan regulation that created obstacle to transition rel... P a g e 1 o f 3

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 7, 2003
JS-161
Treasury and IRS withdraw proposed pension plan
regulation that created obstacle to transition relief
Today, the Treasury Department and the IRS announced that they will
withdraw recently proposed regulations that created an obstacle to the
provision of transition relief for conversions to cash balance pension plans.
The proposed regulations cover the provision of disproportionate benefits
to highly compensated employees.
A tax-qualified pension plan, including a cash balance plan, may not
provide disproportionate benefits to highly compensated employees. T h e
proposed nondiscrimination regulations would have applied that rule to
different types of cash balance plans.
Comments have raised serious concerns as to the effect of the proposed
nondiscrimination regulations on cash balance plan conversions. In m a n y
conversions, employers provide transition relief to certain workers - for
example, by providing workers a choice whether to accrue future benefits
under the traditional plan or the cash balance plan, providing workers the
greater of the benefit under the traditional plan or the cash balance plan,
"grandfathering" current workers under the traditional plan, or giving
"transition credits" to certain workers. Employers provide this transition
relief to protect the interests of their workers.
"The proposed nondiscrimination regulations would have had the
unintended effect of making it more difficult for employers to provide
workers with transition relief in cash balance conversions," stated Treasury
Assistant Secretary for Tax Policy Pamela Olson. "When the effect w a s
identified, Treasury and IRS decided to withdraw the proposed
nondiscrimination regulations immediately so they do not prevent
employers from reducing the impact of cash balance conversions on their
employees."
Treasury and the IRS intend to re-propose nondiscrimination regulations in
the future that do not create a regulatory impediment to the provision of
transition relief for cash balance conversions. This action does not affect
the proposed age-discrimination regulations for cash balance plans and
cash balance conversions.
The text of Announcement 2003-22 follows.
Part IV-ltems of General Interest
Cash Balance New Comparability Regulations
Announcement 2003-22
On December 11, 2002, Treasury and the IRS published proposed
regulations under §§ 411 (b)(1 )(H) and 411 (b)(2) of the Internal Revenue

http://www.treas.gov/press/releases/jsl61 .htm

7/23/2003

fS-161: Treasury & I R S withdraw proposed pension plan regulation that created obstacle to transition rel... P a g e 2 of 3

C o d e (the "Code"). 67 Fed. Reg. 76123. These proposed regulations
interpret the statutory age-discrimination rules for all qualified plans,
including cash balance pension plans.
At the same time, Treasury and the IRS published proposed regulations
under C o d e § 401(a)(4). The proposed § 401(a)(4) regulations provide that
an "eligible cash balance plan" (as defined in the proposed § 411(b)(1)(H)
regulations) m a y not demonstrate that the benefits under the plan do not
discriminate in favor of highly compensated employees using the rules for
defined benefit plans unless the plan complies with a modified version of
the special § 401(a)(4) regulations related to cross-testing by defined
contribution plans and certain arrangements involving combinations of
defined contribution and defined benefits plans. This restriction on the use
of inconsistent testing methods between §§ 411(b)(1)(H) and 401(a)(4) w a s
intended to ensure that plan sponsors could not avoid the "new
comparability" rules applicable to a defined contribution plan and those
combination arrangements through the use of a cash balance plan (which
has a benefit accrual pattern similar to that of a defined contribution plan).
However, comments submitted on the proposed § 401(a)(4) regulations
have raised serious concerns about their effect on cash balance
conversions. Specifically, comments have indicated that the proposed §
401(a)(4) regulations would m a k e it difficult - or, in certain cases,
impossible - for plan sponsors converting long-standing traditional pension
plans to cash balance plans to provide different types of transition relief to
plan participants. The practices that would be problematic under the
proposed § 401(a)(4) regulations include, a m o n g others, providing plan
participants w h o meet certain age or service criteria with a "choice"
whether to accrue future benefits under the traditional plan formula or the
cash balance plan formula; providing such participants, at retirement, the
greater of the benefit under the traditional plan formula or the benefit under
the cash balance plan formula; "grandfathering" current plan participants
under the traditional plan formula; and providing "transition credits" to
certain plan participants.
These consequences for plan participants who receive and plan sponsors
w h o provide transition relief in cash balance conversions were not
intended. Therefore, Treasury and the IRS will withdraw the proposed §
401(a)(4) regulations.
Treasury and the IRS remain concerned about the potential for plan
sponsors to avoid the requirements of the n e w comparability regulations
through the use of a cash balance plan. Treasury and the IRS intend to
issue n e w proposed regulations that will address this specific concern
without creating impediments to conversion practices implemented in the
interests of fairness to plan participants. C o m m e n t s are requested on this
issue.
Comments may be submitted on or before July 27, 2003, in writing, and
should reference Announcement 2003-22. C o m m e n t s m a y be submitted to
CC:PA:RU (Announcement 2003-22), room 5226, Internal Revenue
Service, P O B 7604 Ben Franklin Station, Washington, D C 20044. In
addition, comments m a y be hand delivered between the hours of 8 a.m.
and 4 p.m. Monday to Friday to: CC:PA:RU (Announcement 2003-22),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N W ,
Washington, D.C. Alternatively, comments m a y be submitted via the
Internet at Notice.Comments@irscounsel.treas.gov. All comments will be
available for public inspection and copying.

http://www.treas.gov/press/releases/js 161 .htm

7/23/2003

On-'K. I. *)Y IM BI.IC U I \ 1 U S • 1500 I'l-.NNS VIA A M \ AN I M

EMBARGOED UNTIL 11:00 A.M.
April 7, 2003

I., V W . • W'AMI INC I O N . !>.<.» 2022(1 • • 2U2' <.222<>MI

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $19,000 million to
refund an estimated $22,000 million of publicly held 4-week Treasury bills maturing
April 10, 2003, and to pay down approximately $3,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $12,350 million of the Treasury bills maturing
on April 10, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of
New York will be included within the offering amount of the auction. These
noncompetitive bids will have a limit of $100 million per account and will be
accepted in the order of smallest to largest, up to the aggregate award limit of
$1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

oOo
Attachment

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED APRIL 10, 2003
April 7, 2003
Offering Amount $19,000 million
Maximum Award (35% of Offering Amount) . . . $ 6,650 million
Maximum Recognized Bid at a Single Rate. . $ 6,650 million
NLP Reporting Threshold.
$ 6, 650 million
NLP Exclusion Amount
$12,500 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 ML 2
Auction date
April 8 , 2003
Issue date
April 10, 2003
Maturity date
May 8 , 2003
Original issue date
November 7, 2002
Currently outstanding
$48,836 million
Minimum bid amount and multiples....$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 10, 2003
July 10, 2003
912795NC1

High Rate: 1.135% Investment Rate 1/: 1.158% Price: 99.713
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 75.62%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

31,673,139
1,599,639
145,000

13,255,539
1,599,639
145,000

SUBTOTAL 33,417,778 15,000,178 2/
Federal Reserve 4,717,671 4,717,671
TOTAL $ 38,135,449 $ 19,717,849
Median rate 1.125%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.110%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,417,778 / 15,000,178 = 2.23
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,271,371,000

http://www.publicdebt.treas.gov

JS-M3

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2 6-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 10, 2003
October 09, 2003
912795NR8

High Rate: 1.135% Investment Rate 1/: 1.161% Price: 99.426
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 73.96%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

32,228,270
1,107,703
65,000

14,827,486
1,107,703
65,000

SUBTOTAL 33,400,973 16,000,189 2/
Federal Reserve 5,509,242 5,509,242
TOTAL $ 38,910,215 $ 21,509,431
Median rate 1.125%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.100%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,400,973 / 16,000,189 = 2.09
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $888,162,000

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5-165: Tax Information Exchange Agreement between United States and Antigua and Barbuda Enters i... Page 1 of 1

•
PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 8, 2003
JS-165
Tax Information Exchange Agreement between United States
and Antigua and Barbuda Enters into Force
The Treasury Department announced today that the United States and Antigua and
Barbuda have exchanged diplomatic notes that bring into force the agreement for
exchange of information with respect to taxes between the two countries that was
signed in Washington, DC, on December 6, 2001 (the "Agreement"). The
Agreement entered into force as of February 10, 2003, and is effective as of that
date.
The Agreement satisfies the criteria set forth in the Caribbean Basin Economic
Recovery Act of 1983 and is consistent with the standards for an exchange of
information agreement described in section 274(h)(6)(C) of the United States
Internal Revenue Code of 1986, as amended (relating to deductions for attendance
at foreign conventions). Antigua and Barbuda therefore is now considered part of
the "North American area" for purposes of determining whether U.S. taxpayers may
deduct expenses incurred in attending conventions, business meetings and
seminars there. Convention expenses incurred by U.S. taxpayers for meetings in
Antigua and Barbuda that otherwise are deductible as ordinary and necessary
business expenses will be allowed without regard to the additional limitations
applicable to foreign convention deductions. A list of other geographical areas that
similarly are included in the North American area for purposes of the convention
expense deduction is provided in Revenue Ruling 94-56, and this revenue ruling
will be updated to take into account the agreement with Antigua and Barbuda.

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7/21/2003

JS-166: Promoting Corporate Responsibility Through the Elimination of Dividend T a x

Page 1 of 2

PR CSS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
April 8, 2003
JS-166
Testimony of
Under Secretary for Domestic Finance Peter R. Fisher
Before Senate Commerce Subcommittee on Consumer Affairs and Product
Safety
Hearing: Promoting Corporate Responsibility Through the Elimination of Dividend
Tax
Chairman Fitzgerald, Ranking Member Wyden, and distinguished members of the
Subcommittee, I am honored to testify before you in support of the President's
proposal to eliminate the double taxation of dividends.
This proposal would strengthen our economy and create jobs by improving
corporate governance and re-targeting investment to its most productive ventures.
Corporate governance would improve because the proposal would better align
executives' interests with shareholders' and encourage companies to disclose more
clearly their cash earnings and taxes paid. Investment efficiency would rise
because the proposal would reduce tax distortions to fundamental corporate
decisions such as whether to repay shareholders or how much debt to raise.
The result would be more investment, higher productivity, more new jobs and faster
economic growth. At a time when too many people who want jobs can't find them,
and when economic growth around the world is slower than we should accept, the
President's proposal would be a welcome shot in the arm.
In the past year, under Chairman Oxley's and Senator Sarbanes' leadership,
Congress took a major step toward improving corporate governance in America.
Investors have matched that with their own call for improved governance.
Corporate executives, directors, auditors, and lawyers are already hearing and
heeding the call for greater accountability. Better-run corporations make for more
efficient capital markets and a healthier economy.
But there is more to be done in encouraging the best conduct from corporate
executives. Think of the headlines of the past couple years. Jobs destroyed by
bankrupt firms that took on too much debt.
Executives that "managed" earnings, inflating their companies' stock prices and
pumping up the value of their own stock options. "Corporate inversions" where
companies moved to tax havens abroad.
There are many forces responsible for these problems, but our tax code shares
some of the blame. By taxing dividends twice, our tax code encourages companies
to retain earnings instead of paying them to shareholders; to raise excessive levels
of debt; to repurchase shares, often on a one-off basis, instead of issuing dividend
checks; to dedicate some of America's leading minds to tax minimization instead of
job creation. There's nothing wrong with debt or retained earnings or share
repurchases. But there's no reason our tax code should favor them, either.
Eliminating the double taxation of dividends would reduce these biases against
investing and creating jobs. A shareholder would no longer pay a second layer of
taxes on dividends if the corporation had already paid tax on that income. If the

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7/21/2003

JS-166: Promoting Corporate Responsibility Through the Elimination of Dividend T a x

Page 2 of 2

company retained that income and invested it again, the shareholder would get an
equivalent credit.
This is a ripe moment to improve corporate governance by removing the tax bias
toward debt and retained earnings. C E O s and capital markets are n o w acutely
sensitive to the risks of managed earnings. Yet today, because of double taxation,
only half of non-financial firms pay dividends. Without periodic dividends unmistakable facts about cash flow - investors are basically left with earnings
opinions. A s Secretary S n o w says, you can fudge earnings, but you can't fudge
cash. The President's proposal would clear the barriers to companies that sought
to mirror their earnings reports with dividend checks.
The President's proposal is bad news, too, for the attractiveness of corporate tax
shelters, corporate inversions, and other tax minimization devices. T h e rationale for
creating these devices would lessen, because an investor could only claim an
exclusion on a dollar of dividends if the company had paid full tax on that dollar.
The proposal's second benefit would be boosting investment efficiency and thus job
creation. Let's be clear where jobs c o m e from. N e w jobs c o m e from investment the willingness of investors and entrepreneurs to put capital at risk in a business
venture. The President's proposal is focused precisely on that point: at sharpening
the incentives for investors and entrepreneurs to invest in the most productive
ventures. And higher productivity means higher wages and a stronger economy for
everyone.
Taxing dividends twice means that we tax investment more heavily than any other
major industrial nation. If investment is the blood of n e w jobs and growth, this is
bad policy.
The double taxation of dividends also distorts companies' decision to retain funds
versus returning capital to shareholders. Even if shareholders have more promising
investment opportunities elsewhere, the tax code locks those funds up inside the
company.
That's not good for shareholders, and it's certainly not good for the economy.
Each year American firms invest over$1 trillion in fresh capital and generate $700800 billion in corporate profits. Think of the gains in capital utilization and job
creation for everyone if w e accelerate and re-target this entire investment process.
The Council on Economic Advisors estimates that through 2004 the dividend tax cut
alone would generate more than 400,000 n e w jobs, nearly a third of the total from
the President's Jobs and Growth Package. The Business Roundtable says it's
even higher, closer to half.
Taxing dividends once and only once would convert directly into higher share
prices. Private sector economists estimate that the President's proposal could
boost stock prices by 5 to 15 percent, delivering immediate wealth to a confidenceshort market.
Last, some ask why the President has not proposed eliminating the corporate
income tax instead. The main reason is that doing so would violate the President's
principle that the government tax dividends once and only once. If Congress
eliminated corporate-level taxation, many billions in profits, headed to tax-free
entities or abroad, would escape any taxation at all. Much more revenue would be
foregone. And the way would be kept open for the s a m e kind of tax minimization
devices that today's tax code fosters and which the President's proposal would cut
back.
On behalf of the Administration, I urge you to take this opportunity. Thank you.

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IS-167: Statement of Donald V. H a m m o n d Before House Government Reform Subcommittee on Gover...

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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 8, 2003
JS-167
Statement of
Fiscal Assistant Secretary Donald V. H a m m o n d
Before
House Government Reform Subcommittee on Government Efficiency
and Financial Management
Financial Report of the United States Government for Fiscal Year 2002
Mr. Chairman and Members of the Subcommittee,
Thank you for the opportunity to discuss the Financial Report of the United States
Government (Financial Report). O n behalf of the Secretary, I would like to thank
you for focusing on and promoting the improvement of Federal Government
financial accountability and reporting. These are important transitional times, and
w e appreciate your leadership on these issues. Before I continue, I wish to
congratulate you, Chairman Platts, on your appointment to chair this important
panel. W e had the pleasure of working very closely with Chairman Horn in previous
Congresses on improving government financial management, and w e look forward
to the s a m e effective working relationship with your Subcommittee in the months
and years ahead.
As you know, the Government Management Reform Act of 1994 requires that not
later than March 31 of each year, the Secretary of the Treasury, in coordination with
the Office of Management and Budget ( O M B ) Director, shall prepare and submit to
the President and the Congress financial statements subject to audit for the
preceding fiscal year. They are prepared in accordance with generally accepted
accounting principles as established by the Federal Accounting Standards Advisory
Board (FASAB).
The Financial Report is prepared in order to provide the President, the Congress,
and the American people with reliable information about the financial position of the
Federal Government on an accrual basis, the net cost of its operations, and the
financing sources used to fund these operations. The Federal Government does
not have a single bottom line that reflects its financial status, but the information
included in the statements provides a comprehensive view of the Federal
Government's finances that is not available elsewhere. The Financial Report
consists of management's discussion and analysis, statements of net cost,
statements of operations and changes in net position, reconciliations of net
operating revenue (or cost) and unified budget surplus (or deficit), statements of
changes in cash balance from unified budget and other activities, balance sheets,
notes to the principal statements, and other useful information.
The Financial Report covers all accounts from the executive branch.
Since the legislative and judicial branches are not required to prepare financial
statements, some limited reporting information from those branches is included.
IMPORTANCE OF THE FINANCIAL REPORT
The Department of the Treasury is committed to producing accurate and useful
government-wide financial statements and continues to devote considerable
resources to this effort. This report continues our efforts to fulfill our responsibilities
to the Congress and the public by making the government's finances as clear and
transparent as possible. Everyone should be able to understand the cost of the

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government's operations and the implications of its commitments. The Financial
Report, which is prepared using the accrual basis of accounting, is intended to meet
this objective. Under the accrual basis, transactions are reported w h e n the events
giving rise to the transactions occur rather than when cash is received or paid (cash
basis).
The importance of this accrual-based report should not be overlooked. The
changes affecting the Government over the past decade have resulted in a m u c h
smaller share of the budget that is discretionary. Almost two-thirds of the budget
goes for mandatory spending such as Social Security and Medicare. Accrual
results offer a longer-term view that extends the horizon for making budget
decisions. The ability to assess the budget impact of policy decisions is enhanced
when this analysis is used in conjunction with our traditional receipts and outlays
information. The Financial Report is important in this respect because it highlights
this difference, particularly in the Management's Discussion and Analysis section,
which goes beyond simply reporting accounting results by discussing the effects of
governmental commitments. This year, for the first time, w e have grouped together
all of the significant liabilities, stewardship responsibilities and other commitments in
the front of the report. They total an estimated $31.1 trillion and represent a
measure of the significant commitments the government has made. These amounts
have been included separately in the report for several years; however, w e believe
they become more transparent when they are presented together.
The Financial Report is the only source of this financial information on a
government-wide consolidated level, which provides a more transparent picture of
the Government's financial position and operations. The importance of this report is
also highlighted in this year's results. For fiscal 2002, the Financial Report indicates
an accrual-based net operating cost of $365 billion. This compares to the $158
billion budget deficit, based generally on the cash basis, for this year's results. The
principal difference is the accrual recognition of over $157 billion of veterans benefit
costs. The Financial Report covers the disposition of more than $1.9 trillion in
revenues and $2.3 trillion in operating costs, as well as extensive stewardship
responsibilities and social insurance commitments, such as Social Security,
Medicare, and liabilities including civilian and military retirement pensions and
benefits.
For Treasury to achieve its goals for improved financial reporting, continued strong
support from O M B and all the Chief Financial Officers Act agencies will be critical.
W e have charted a course for continued improvements, and w e expect to
implement the plan fully in the fiscal 2004 statements. In m y remaining time, Mr.
Chairman, I will discuss our progress in the last year and outline s o m e of the
planned improvements.
PROGRESS MADE THIS YEAR
This is the sixth year we have prepared consolidated, government-wide financial
reports. There have been significant improvements in the agency data. This year,
21 of the 24 C F O Act agencies received clean audit opinions, up from 18 last year
and just 6 agencies only 7 years ago. Also, three major agencies, the Social
Security Administration, Treasury Department and U.S. Postal Service, completed
their financial statement audits by November 15, which w a s three and a half months
earlier than statutorily required. This is a significant achievement and is a model for
all agencies to improve the timeliness and usefulness of their financial data. In
addition to these improvements in timeliness and data quality, the report includes
the summary schedule of total government commitments that improves the
transparency of the data.
Data for the Financial Report primarily comes from 24 CFO Act agencies, nine
other significant entities and 180 smaller entities. Each agency is financially
independent and maintains its o w n financial system. Preparing the report is a
complex task based on a foundation of over 2,000 individual reporting components'
standardized Standard General Ledger reporting.
In auditing the Financial Report, GAO was unable to express an opinion on the
reliability of this year's financial statements. This is due primarily to only three
areas, data and financial system problems at the Department of Defense (DoD),

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JS-167: Statement ot Donald V. H a m m o n d Before House Government Reform Subcommittee on Gover...

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preparation issues relating to intragovernmental balances both in agency data
quality and consolidation eliminations, and consistency with agency financial
reporting. However, G A O did acknowledge in its audit report that financial
management improvement initiatives are being undertaken that will improve the
quality of financial management and reporting in the Federal Government. For
example, D o D has been aggressive in improving its financial management and has
m a d e real progress in rationalizing and streamlining its systems. In addition,
Treasury and O M B have taken a number of steps to address the intragovernmental
issue. O M B has issued n e w intragovernmental business rules for standardizing
inter-agency transactions, which will help correct this situation in future years. Also,
Treasury's Financial Management Service (FMS) developed a database tool to
support Treasury analysis and agency reconciliation of trading partner differences.
Finally, consistency will be assured with the identification of a n e w preparation
process I will speak to shortly.
IMPROVEMENTS UNDERWAY
The current state of federal financial reporting needs improvement. I am confident
that a creative and committed effort by top management at Treasury, program
agencies, O M B , the C F O Council, and G A O can result in breakthrough changes.
W e are taking aggressive actions to improve government-wide financial
management. Later this year, for example, Treasury will provide agencies with a
detailed account statement to help them reconcile their fund balance with Treasury.
For the very first time, agencies will have more timely access to this statement, as
opposed to having to wait up to 45 days for a hard copy report to be issued. The
production of this account statement is the next step in a government-wide
accounting modernization project that, when completed, will provide agencies with
better tools for both reporting their financial information and monitoring its status.
Next year, the plan is to continue the improvement to our systems by beginning to
provide agencies the capability to capture and classify transactions directly to the
appropriate account at the initiation of the transaction. W h e n fully operational,
agencies will have access to financial information in 1-2 days compared to the
current timeframe of 15-18 days after the close of the month.
This new approach will enable agencies to eliminate duplicative reporting and
costly, manually intensive reconciliations.
After extensive consultation with financial managers throughout the government, it
was clear that broad and sweeping changes in the compilation process of the
Financial Report were necessary to address the "process" material weaknesses
(i.e., significantly inadequate systems, controls, and procedures to prepare the
Financial Report) identified by G A O . This will require a major rebuilding of the
electronic processes used by Treasury's Financial Management Service to prepare
the Financial Report.
Treasury, in coordination with OMB, is adopting a new process to collect agency
financial information that will be used to prepare the fiscal 2004 Financial Report.
The n e w data submission, referred to as the "closing package", will be a web-based
submission. Agencies will follow an automated process to convert their audited
financial statements to a standardized statement format. Using agency financial
statement information in the preparation of the Financial Report will ensure that the
data in the Financial Report is consistent with the data in agencies' audited financial
statements. Having consistent data will better leverage audit work done at the
agency level and allow G A O to rely on the agency-level audits. These changes,
along with modifications in the manner in which F M S performs eliminations and
consolidates the data, should eliminate the material compilation weaknesses
identified by G A O .
We are also in the process of accelerating agency budget reporting. To facilitate
the accelerated deadlines for submission of annual agency-level financial
statements and the government-wide financial statements, F M S has accelerated
the monthly agency budget reporting timeframes. Federal agencies are required to
submit the monthly reporting data within three days following the close of the
previous month. The accelerated monthly timeframes will provide the necessary
discipline for agencies to prepare their year-end audited financial statements and
provide for more timely information to improve decision-making.

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The scheduled date for issuing the fiscal 2004 Financial Report is December 15,
2004. Meeting this accelerated timeframe is dependent on agencies improving the
quality and timeliness of the information they report and the audit community
responding to increased audit responsibilities. While the report w a s again issued
on time, Treasury is the first to acknowledge that reporting financial results six
months after the close of a fiscal year is simply not good enough. I currently chair
the C F O council committee charged with assisting agencies in meeting the
accelerated issuance dates required by O M B for fiscal 2004 for both agency-level
financial statements and government-wide financial statements by identifying and
removing barriers. This is a significant step forward since w e will finally have actual
data about the prior year for use in the budget deliberations for the coming year and
managers throughout government will have accurate data for day-to-day decision
making at all levels.
CONCLUSION
A core responsibility of the Treasury Department is to accurately and effectively
report on the nation's finances. Providing transparency to government financial
results has been a top priority starting with our first Treasury Secretary, Alexander
Hamilton. Long ago w e accomplished transparency of budget results. Our
challenge is to bring that s a m e transparency to the full extent of our financial
operations. W e have m a d e great progress in that quest, and the federal financial
community working together will soon realize that vision.
Thank you, Mr. Chairman. This concludes my formal remarks and I would be
happy to respond to questions.

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fS-168: Testimony of Pamela F. Olson for the Committee on Finance United States Senate April 8, 2003

Page 1 of 10

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
April 8, 2003
JS-168
Testimony of Pamela F. Olson Assistant Secretary of the Treasury
(Tax Policy) for the Committee on Finance United States Senate April 8, 2003
Mr. Chairman, Senator Baucus, and distinguished Members of the Finance
Committee, thank you for the opportunity to testify regarding the Administration's
legislative and regulatory proposals on executive compensation. The recent report
by the staff of the Joint Committee on Taxation, prepared at the request of this
Committee, reveals Enron Corporation's excessive and questionable executive
compensation practices. The details of the report underscore the importance and
timeliness of this hearing.
The practices of Enron make clear that executive pay is about more than just tax
policy. Executive pay is an issue of corporate governance and accountability.
Many investors' confidence has been adversely affected by reports of increasing
executive compensation during times of deteriorating returns. Executive pay is an
issue of fiscal responsibility - as the markets worry about the integrity of
companies' financial statements. And executive pay is an issue of fairness - the
same set of rules governing the taxation of income should apply to all taxpayers.
The issues raised by the Enron report deserve the attention of legislators and
regulators. W e think it is important, however, to distinguish matters of tax policy
from matters of corporate governance and accountability. W e have specific
recommendations for addressing tax policy matters through tax legislation, but w e
believe recent experience indicates there are risks to using the tax code as a
means of influencing decisions about corporate governance and accountability.
Consequently, w e recommend that such concerns be dealt with directly and not
through amendments to the tax code.
In reviewing the report, we noted three general points about Enron's executive
compensation. First, several of the executive pay practices at Enron pushed the
envelope of current law. The company permitted its executives to defer staggering
amounts of income but took measures to insulate them from the risk of nonpayment that the law requires as a trade-off for tax deferral. Enron was helped in
this effort by out-dated rules on executive compensation - rules that the
Treasury Department and the IRS have been statutorily prohibited from updating
since 1978. Second, w e were pleased to note that several of the pay practices at
Enron have been addressed through legislation signed by President Bush last year
and by recently-issued Treasury and IRS regulations. Third, the largest category of
executive pay at Enron was the massive stock option gains realized by Enron's
executives. Enron's heavy use of stock options, which parallels the use of options
by some other large companies, may in fact be the unintended result of legislation
from past Congresses and of current financial accounting standards.
The Enron report raises another important issue, one extending beyond executive
compensation. The sheer complexity of Enron's tax-motivated transactions m a d e it
very difficult for the IRS to find them and then understand what the company w a s
attempting. In many cases, it appears that Enron intended the complexity of the
transactions to frustrate detection by the IRS. In other words, Enron was
deliberately hiding the ball, and that is cause for concern.
Tax Rules for Executive Compensation
It is important to understand the current tax rules for executive compensation and

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S-168: testimony oi Pamela F. Olson for the Committee on Finance United States Senate April 8, 2003

Page 2 of 10

h o w those rules factored into Enron's compensation practices. The tax law does
not specifically encourage executive compensation arrangements. In contrast to
qualified retirement plans and employer-provided health insurance, Congress has
never enacted incentives for companies to maintain or enhance executive pay
arrangements. In certain cases, Congress has taken the opposite approach by
imposing a tax penalty on practices considered inappropriate.
The rules on executive compensation generally have focused on three policy
goals: first, to prevent tax avoidance; second, to protect the qualified-plan system;
and, third, to promote good corporate governance. I want to say a few words about
each of these goals before turning in detail to the applicable tax rules.
First, many of the rules on executive compensation aim to prevent tax avoidance.
General tax principles allow an executive to defer tax on compensation only if the
executive accepts the risk that the compensation m a y never be paid if the company
becomes insolvent or bankrupt. Executives, naturally, do not like this risk and so
push for greater security and control in their deferred compensation arrangements.
Many of the current rules are intended to prevent tax deferral where the executive
has minimized the risk of non-payment or has realized current economic value from
deferred amounts. This is an area in which w e seek legislation from the
Committee.
Second, certain executive compensation rules protect the integrity of the qualified
plan system. To ensure the retirement security of millions of American workers and
their families, the tax code provides substantial tax incentives for companies to
establish and maintain qualified plans. These tax benefits are most valuable to
high-paid employees, but they are available to those employees only if the qualified
plans give proportional benefits to a broad cross-section of rank-and-file workers.
Allowing executive pay plans to provide the s a m e tax benefits that qualified plans
can provide would undermine the qualified plan system. That, in turn, would put the
retirement security of rank-and-file workers at risk. Thus, the tax code ensures that
executive pay arrangements do not inappropriately compete with qualified plans.
Third, certain tax rules for executive compensation are intended to promote good
corporate governance and accountability. In certain cases, Congress has
determined that particular types of executive compensation arrangements harm
shareholders - either because of the type of payment involved or the size of the
payment involved. In response, Congress has enacted rules that impose tax
penalties unless the company meets certain shareholder-protection standards.
It is useful to begin by considering the tax rules for executive compensation,
focusing on h o w the rules apply to c o m m o n types of executive pay and the
compensation practices at Enron. Instead of setting out comprehensive rules, the
tax law addresses executive pay through a combination of general tax principles
and particular rules aimed at very specific situations. These principles and rules
are found in the tax code, IRS rulings and regulations, and federal court decisions.
I want to stress the role of the Treasury Department and the IRS in executive
compensation matters. Our job is to interpret and administer tax rules - in
particular, to ensure that companies and executives adhere to the long-standing tax
rules about h o w much control an executive can have over deferred compensation
payouts (the "constructive receipt" rules) and h o w much protection the company
can give the executive against non-payment if the company becomes bankrupt or
insolvent (the "funding" rules). Enforcing the constructive receipt and funding rules
fits within the IRS's role and capabilities. W e do not believe that w e are well-served
by assigning to the IRS the role of enforcing rules intended to protect shareholders'
interests.
We recognize that corporate governance and accountability are legitimate policy
goals for executive compensation, and w e understand that Congress in particular
cases m a y conclude that legislation is needed to promote those goals. Experience
indicates, however, that attempting to influence corporate governance and
accountability decisions through the tax code is ineffective. Moreover, logic dictates
that the issues should be dealt with directly and not through the tax code. S o m u c h
as possible, the tax code should be neutral in choosing a m o n g forms of

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compensation.
Nonqualified Deferred Compensation - Tax Policy Issues. Nonqualified deferred
compensation arrangements - including both executive bonus plans and executive
pension plans - constitute one of the most c o m m o n elements of executive pay.
The terms of these arrangements vary widely, but their c o m m o n objective is to
provide tax deferral for a specified period on either an elective or non-elective
basis. The compensation compounds during the deferral period at a fixed or
variable rate of return, and the executive typically receives distributions of the
accumulated amounts at or after retirement (with provisions for distributions under
certain other circumstances, as discussed below). M a n y plans provide the
executive with s o m e measure of actual or hypothetical investment control over
deferred amounts.
If structured correctly, the tax treatment of a nonqualified deferred compensation
arrangement is as follows. The executive does not include the deferred amount in
gross income until it is actually paid out to the executive. The company cannot
claim a deduction for the deferred amount until the executive includes it in gross
income. During the deferral period, earnings on the deferred amount generally
remain taxable to the company. Thus, the law imposes a "tax tension" between the
executive and the company because every dollar for which the executive defers
income is a dollar for which the company must defer its deduction.
However, that tax tension only works if the executive and the company are both
representing their o w n interests; it does not work if the company structures the pay
with the sole aim of maximizing value for the executive without regard to the
interests of shareholders. For example, an arrangement under which a company
commits substantial assets to an irrevocable trust for the executive's benefit results
in the company having less capital to re-invest in its business and m a y result in
lower returns for shareholders - without an offsetting tax deduction for the
compensation the company has set aside.
Deferred compensation arrangements must meet certain legal requirements. First,
the executive cannot be in "constructive receipt" of any deferred amount. This
means that an executive can defer an amount only as long as there is a "substantial
limitation or restriction" on the executive's right to receive the amount. The principle
of constructive receipt ensures that an executive cannot manipulate the timing of
when taxes are due by turning his or her back on income that would be paid right
away if the executive simply asked for it. If an executive can choose to receive
deferred compensation at any time, the executive is in constructive receipt and is
taxed immediately.
The IRS has applied the constructive-receipt doctrine by refusing to approve any
decision to defer income and any decision about when and h o w that income will be
paid unless the decision is m a d e in the taxable year before the income is earned.
For this reason, deferred compensation plans often provide for deferral elections to
be m a d e before the start of the taxable year. The plans often state the time w h e n
amounts will be paid out and the form of the distribution. Payout usually is m a d e in
a lump s u m or in annuity or installment form at retirement or other termination of
employment, death, disability, financial hardship, or after a fixed number of years.
Many plans allow an executive to make a subsequent election to defer payouts that
are coming due or to change the form of the payout (or both). The plans typically
require that the subsequent election be m a d e a fixed number of months (often
twelve) before the payout is due. S o m e plans also allow for accelerated payouts.
For example, a plan m a y provide for an early distribution with a "haircut" - such as
a forfeiture of 10 percent - or a suspension from further participation.
The IRS has had difficulty enforcing the constructive-receipt rules in disputes with
taxpayers. The federal courts generally have followed an expansive interpretation
of these rules, which were first written decades ago. Each court loss for the IRS
has m a d e companies and executives bolder in pushing out the line of c o m m o n
practice, with Treasury and the IRS prevented by Congress from updating the rules
in response. The treatment by the courts of this issue has been a major factor in
the expansion of deferred compensation.

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Second, the tax law treats an unfunded promise to pay differently from a funded
promise. Thus, the "economic benefit" doctrine and the rules governing transfers of
property require that assets related to nonqualified deferred compensation remain
subject to the claims of the company's general creditors along with the other
general assets of the company. These rules are intended to put the executive at
risk of non-payment if the company becomes bankrupt or insolvent.
If a company insulates deferred compensation assets from the claims of its
creditors - for example, by placing the deferred compensation in a trust or an
escrow account for the exclusive benefit of the executive - the executive has a
taxable economic benefit and must include the deferred compensation in gross
income. Special rules, intended to backstop the qualified plan rules, provide a
harsher result for discriminatory trusts by requiring the executive to pay tax
currently on earnings as well.
The IRS has allowed very limited funding arrangements - commonly known as
"rabbi trusts" - without triggering current tax to executives. Assets held by a rabbi
trust are treated as belonging to the company, and the company continues to pay
tax on any income they produce. More importantly, assets in a rabbi trust must be
reachable by the general creditors of the company in the event of bankruptcy or
insolvency. However, certain executive pay arrangements have increasingly
stretched the limits on rabbi trusts and deferred compensation funding. In general,
these arrangements- which include offshore rabbi trusts and hybrid (rabbi and
non-rabbi) arrangements - are meant to keep assets away from creditors without
triggering current tax to the executives.
Finally, the cash-equivalence and assignment-of-income doctrines require that an
executive's interest in deferred compensation be non-assignable. This ensures that
the executive cannot sell, transfer, pledge, or borrow against the deferred
compensation and thereby realize economic value from it before it is paid.
The staff of the Joint Committee on Taxation found that Enron, like many large
companies, provided very significant deferred compensation to its executives. It
appears that Enron's deferred compensation arrangements generally complied with
current law. However, Enron's arrangements also demonstrate the limitations of
current law. A s the company rapidly approached bankruptcy, m a n y Enron
executives were able to invoke accelerated distribution clauses. Although those
accelerated distributions required a "haircut" - the executives had to forfeit 10
percent of the deferred compensation - the choice between receiving most of their
deferred compensation and receiving none of their deferred compensation w a s
surely an easy one. The practical effect of the accelerated distributions w a s to put
these Enron executives in line ahead of the company's general creditors, allowing
an end-run around the legal requirement that deferred compensation remain at risk
of non-payment.
As discussed in more detail below, current law prevents Treasury and the IRS from
restricting haircuts and other accelerated distribution clauses. Because of
legislation passed by Congress in 1978, Treasury and IRS only have the authority
to m a k e haircut provisions less restrictive for executives. This is precisely the
opposite of the authority w e need when confronting arrangements that present
potential for inappropriate tax avoidance or that undermine the qualified plan
system. W e strongly recommend that Congress repeal that limitation and give us
the authority necessary to address both appropriate and inappropriate deferred
compensation arrangements.

Nonqualified Deferred Compensation - Corporate Governance Issues. It is
important to recognize that interpretation and administration of the constructive
receipt and funding rules fit within the traditional role for Treasury and the IRS while
enforcing shareholder protections do not. Practices that pass muster under the
constructive receipt and funding rules m a y still present corporate governance or
accountability concerns that Congress should address through legislation. If so, w e
recommend that Congress legislate directly rather than indirectly by trying to
influence corporate governance and accountability decisions through the tax code.
The tax code should be neutral. If it is not, it is likely to influence or skew decision-

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making one way or the other with unfortunate unintended consequences.
Recent history provides examples of what happens when Congress does or does
not legislate directly on corporate governance and accountability. Last summer,
Congress passed and President Bush signed the Sarbanes-Oxley Act, which
includes important new rules about executive compensation. Sarbanes-Oxley
enacts one of the President's retirement-security proposals by prohibiting corporate
insiders from trading company stock during a "blackout" period of the company's
401 (k) or other defined contribution retirement plan; it prohibits public companies
from making virtually any loan to executives or directors; and it requires the chief
executive officer and the chief financial officer to forfeit incentive and equity-based
compensation if the company restates its financial statements. In all these cases,
Sarbanes-Oxley directly addresses the problem; it does not attempt to ban or curb
a practice indirectly by amending the tax code and then asking the IRS to take on
the role of enforcing shareholder protections.
Compare the Sarbanes-Oxley approach with two situations where Congress has
used the tax code to address shareholder-protection concerns - the $1 million cap
on deductible compensation and the "golden parachute" payments. Both these
sets of rules show the unintended consequences that follow from legislating
corporate governance through the tax laws.
Section 162(m) provides that a public company cannot deduct compensation in
excess of $1 million for any of its top five executives. The provision contains a key
exception for certain "performance-based" compensation that has been approved
by shareholders after full disclosure. Stock option grants ordinarily fall within this
exception. Congress enacted section 162(m) on the rationale that taking away a
deduction for "excessive" compensation to top executives would protect investors in
public companies by instilling greater discipline in executive pay packages.
But section 162(m) has had the opposite of its intended effect. At many companies,
the $1 million "cap" has effectively become a $1 million "floor" for base salary and
non-performance bonuses. Additionally, the "performance-based" exception has
encouraged many companies, like Enron, to shift compensation above the $1
million amount into stock options and other forms of compensation tied to the,
company's stock price. A s the Committee is well aware, much of the recent
concern about the accuracy of companies' financial statements has focused on
whether tying executive pay to the company's stock price gives the executive too
much incentive to manipulate earnings statements in order to affect the stock price.
Finally, many companies facing the choice between losing the deduction for
compensation above $1 million or trimming executive pay simply do not claim the
deduction.
In those cases, the loss to shareholders simply compounds - the executive still
receives the s a m e pay, and the company loses its tax deduction. What w a s
intended as a shield for investors instead becomes a sword against them.
The golden parachute rules provide a similar example. Congress enacted these tax
penalties in the mid-1980s to prevent executives from draining value out of
companies in connection with corporate takeovers. Section 280G prevents the
company from deducting an excess golden parachute payment, and section 4999
imposes a 20 percent excise tax on an executive w h o receives such a parachute
payment. Again, however, the tax penalties intended to protect shareholders have
had the opposite effect. In many situations, companies and executives respond to
the tax penalties by agreeing that the company will "gross up" the executive - that
is, pay for any penalty tax that the executive incurs on a golden parachute
payment. The law treats the gross up as a parachute payment, meaning that the
cost of making the executive whole spirals upward - and of course, the company
cannot deduct the underlying parachute payment or the gross up payment. Thus,
the golden parachute penalties have resulted in many companies paying executives
larger parachute payments and losing their tax deductions - to the detriment of
shareholders.
Congress must consider corporate governance and accountability issues when
crafting legislation on executive compensation, but w e recommend that Congress
not use the tax code to legislate on those issues. Experience demonstrates that

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trying to implement shareholder protections through the tax laws likely will
compound the harm to shareholders. Additionally, legislating corporate governance
through the tax code puts the IRS in a position of being the primary defender of
shareholder interests - a position for which the IRS simply is not well-suited.
Shareholder interests are best protected by shareholders themselves and
appropriate federal regulatory agencies, such as the S E C . Congress should look to
the tax code to promote sound tax policy and, on executive compensation, should
enable Treasury and the IRS to administer the long-standing rules concerning
constructive receipt and funding of deferred compensation.
Restricted Stock and Stock Options. Restricted stock has long been a component
of executive pay packages. Section 83 sets out rules for taxing restricted stock and
stock options. An executive must include the fair market value of restricted stock at
the time the restricted stock becomes "substantially vested" - that is, when it
becomes transferable or not subject to a substantial risk of forfeiture. A special rule
allows the executive to m a k e an election to include the restricted stock in gross
income prior to its becoming substantially vested. The company's deduction for the
restricted stock matches the timing and amount of the executive's income.
In recent years, companies have made extensive use of stock options to
compensate executives. A n executive is not taxed on the receipt of a stock option
(except in the highly unusual case where the option has a "readily ascertainable fair
market value" when granted). Instead, the executive is taxed upon exercise of the
option. At that time, the executive includes in gross income the "spread" on the
option - that is, the difference between the fair market value of the stock and the
amount the executive pays to exercise the option (plus any amount the executive
paid to acquire the option). The company's deduction for the spread matches the
timing and the amount of the executive's income.
A major consideration in the use of stock options for executive pay has been the
current accounting rules for options. Under those rules, a company must account
for stock-based executive compensation plans under the "fair value" method or the
"intrinsic value" method. Under the fair value method (set out in F A S 123), a
company expenses an option under Black-Scholes or a binomial model. This
creates a charge to earnings at grant or on vesting. Under the intrinsic value
method (set out in A P B Opinion No. 25) an option granted at fair market value does
not have any intrinsic value and results in no charge to earnings. However, a
company using the intrinsic value method must disclose in a footnote to its financial
statements the effect on earnings, including earnings per share, of using the fair
value method to account for option grants.
Most companies, Enron included, have used the intrinsic value method for stock
options, thereby avoiding any charge to earnings for this element of executive
compensation. It is important to note that the tide m a y be changing. More
companies are beginning to use the fair value method, and F A S B currently has this
issue under review.
Enron compensated its executives primarily with stock options. According to the
Enron report, total compensation for the 200 highest-paid executives w a s $1.4
billion, and over $1 billion of that amount w a s attributable to stock options. For the
years 1998 to 2000, Enron's deduction for stock-option compensation increased by
more than 1,000 percent. Still, it appears from the Enron report that the company
treated the option grants and exercises properly under the tax law and that Enron
accounted for these options in conformity with F A S B accounting rules.
It is important that the Committee's review of executive compensation consider the
working of the current rules with regard to stock options and whether these rules
caused the concentration of stock options in the Enron executives' pay packages.
Administration's Proposals on Executive Compensation
This Administration has a strong commitment to ensuring that the tax rules apply
fairly to everyone. Those w h o play by the rules rightly expect that all will play by the
rules. The law cannot allow executives to end-run existing rules for paying tax on
amounts that are currently available to them or that have been insulated from
creditors. Unfortunately, Congress in 1978 tied the hands of the Treasury

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Department and the IRS. The Administration proposes that Congress lift the
restrictions on n e w regulation of executive compensation and give Treasury and the
IRS full authority to address appropriate and inappropriate deferred compensation
arrangements.
Section 132 of the Revenue Act of 1978. In 1978, Treasury and the IRS proposed
Treasury Regulations section 1.61-16, providing for current inclusion of
compensation deferred "at the taxpayer's individual option." The proposed
regulation alarmed companies because the scope of the regulation w a s vague, and
it w a s not clear whether all deferred compensation might be taxed currently.
Companies also m a d e strong arguments that they needed deferred compensation
as part of their executive pay packages.

In response, Congress enacted section 132 of the Revenue Act of 1978 to prevent
finalization of section 1.61-16. Section 132 provides that the taxable year of
inclusion of any amount under a private deferred compensation plan "shall be
determined in accordance with the principles set forth in regulations, rulings, and
judicial decisions relating to deferred compensation which were in effect on
February 1, 1978." The broad rule-making moratorium imposed by section 132
currently prohibits Treasury and the IRS from issuing n e w regulations or other
guidance on many aspects of nonqualified deferred compensation arrangements.
Since the enactment of section 132, Treasury and the IRS have been unable to
provide n e w guidance about core elements of deferred compensation
arrangements. N e w guidance is needed to ensure that the tax rules keep pace with
the constant changes in deferred compensation practices and to address federal
court decisions that have undercut the rules on constructive receipt. The guidance
also is needed simply to update IRS ruling guidelines that were issued in 1971 and
that, despite minor changes in 1992, are considered out of step with the case law.
Budget Proposal to Repeal Section 132. The Administration's budget for fiscal year
2004 proposes the repeal of section 132 of the Revenue Act of 1978 and a grant of
new authority to write regulations on inappropriate deferred compensation
arrangements. Last year this Committee reported legislation that would have
repealed section 132, and the staff of the Joint Committee on Taxation also
recommended repeal of section 132 in the Enron report.
Repeal of section 132 would greatly enhance the ability of Treasury and the IRS to
write regulations addressing deferred compensation practices. This enhanced
ability is appropriate for Treasury and the IRS to have, because it is a matter of
enforcing tax law through the definition of taxable income. In s o m e situations,
section 132 directly constrains issuing n e w rules. In others, repeal of section 132
along with n e w statutory authority to address inappropriate arrangements would
m a k e the rules more likely to survive court challenge. Treasury and the IRS would
not implement proposed section 1.61-16 as part of this authority.
The new regulations would address the following topics, among others: benefit
distribution elections; initial and subsequent deferral elections; executive control
over deferred amounts; shielding deferred compensation from creditors; and
constructive receipt of property. Let m e describe these briefly:
• Regarding benefit distribution elections, the regulations could address
circumstances under which executives control the timing of their benefit payouts to
the detriment of general creditors - for example, "haircuts" and other acceleration
clauses.
• Regarding initial and subsequent deferral elections, the regulations could provide
clearer rules to require that an executive's choice to defer income be m a d e before
the income is actually available - eliminating the executive's ability to defer tax on
amounts under the executive's immediate control; the regulations also could state
whether and when subsequent deferral elections are permitted.

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• Regarding executive control over deferred amounts, the regulations could address
questions about h o w much control an executive m a y have over deferred amounts for example, whether and to what extent an executive m a y control the investment of
deferred compensation or "swap" deferred compensation rights for stock options or
life insurance arrangements.
• Regarding shielding deferred compensation from creditors, the new regulations
could address techniques that attempt to shield assets from creditors while making
it appear that the assets are reachable by creditors - for example, offshore rabbi
trusts, secured trusts that "spring" into existence as a company approaches
insolvency, trigger clauses that provide for automatic payouts as a company
approaches insolvency, and third-party guarantees of deferred benefits.
• Regarding constructive receipt of property, the regulations could address when an
executive is taxable on property (such as company stock) that is m a d e available to
the executive but is not actually transferred; this would give Treasury and the IRS
clearer authority to address the taxation of deeply discounted stock options,
resolving uncertainty about h o w certain old federal court decisions apply to current
practices of issuing discounted options in lieu of deferred compensation.
One of the key points of the Administration's legislative proposal is the on-going
flexibility that it will provide. Companies and executives regularly restructure
executive pay packages, and the tax laws need to keep pace with these changes.
The status quo is unacceptable as a matter of tax policy - Treasury and the IRS are
actually forbidden from shaping or updating the law to address n e w practices.
Moreover, legislation targeted at specific transactions or practices would be an
incomplete response. It m a y not reach the n e w transactions or practices
companies and executives develop in the future.
Furthermore, it is important that Treasury and the IRS have the authority to
determine not only what types of arrangements cross the line but also to say what
types of arrangements are permissible. The market pressures for executive
compensation are significant, and limiting one particular inappropriate practice
inevitably will lead companies and executives to develop n e w practices, s o m e
troublesome and s o m e not. Effective regulation in this area requires a
comprehensive approach and continual updating of the rules to respond to n e w
developments so that companies and executives are guided to appropriate
arrangements.
We need also to shape the rules for nonqualified deferred compensation to keep
pace with changes in the rules for qualified plans. O n e of the policy goals of the
nonqualified plan rules is to protect the viability and the integrity of the qualified plan
system. Because of the important role that qualified plans play in providing
retirement income security for millions of American workers and their families,
Congress regularly reviews and updates the rules for those plans through n e w
legislation, and Treasury and the IRS regularly issue n e w regulations and rulings to
implement that legislation. In fact, this Committee last year reported legislation, first
proposed by the President, to protect the retirement security of workers whose
plans invest in employer stock. Just as the Administration urges you to take up the
retirement security legislation again this year, so too w e urge you to give us the
tools needed to m a k e sure that this and future legislation will maintain the balance
between qualified and nonqualified plans.
To meet the policy challenges of this dynamic area, we strongly recommend that
Congress repeal section 132 of the Revenue Act of 1978 and give Treasury and the
IRS lasting and meaningful authority to write proper rules for taxing executive pay.
Untying our hands is the only way to ensure that Treasury and the IRS can respond
quickly and effectively to developments in executive compensation.
Other Recent Legislative and Regulatory Developments
Certain of the executive compensation practices discussed by the staff of the Joint
Committee on Taxation in its report have been addressed either through legislation

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signed into law by President Bush or through regulations issued by Treasury and
the IRS. Additionally, Treasury and the IRS are continually reviewing n e w
transactions to determine whether they are appropriate.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act signed by President Bush last
s u m m e r addresses outside the tax code certain executive compensation issues.
Sarbanes-Oxley prohibits insider trading during "blackout" periods, prohibits almost
all loans from public companies to executives and directors, and requires certain
executives to forfeit incentive and equity-based compensation if the company
restates its financial statements. All these changes would have had a material
impact on Enron's executive compensation practices, and w e believe they will help
curb inappropriate executive pay practices in the future.
Split-Dollar Life Insurance Arrangements. Also last summer, Treasury and the IRS
proposed n e w regulations for taxing split-dollar life insurance arrangements. A
split-dollar life insurance arrangement is a contract to allocate the benefits and, in
s o m e cases, the costs of a life insurance policy. Under a typical equity split-dollar
arrangement, an executive receives an interest in the policy cash value
disproportionate to the executive's share of premiums. The n e w regulations ended
many years of uncertainty about h o w these arrangements are taxed and remove
the tax advantage of split-dollar life insurance arrangements. Under the
regulations, an executive will be taxed as receiving below-market loans from the
company (if the executive owns the life insurance policy) or as receiving taxable
economic benefits from the company (if the company owns the policy). Treasury
and the IRS intend to finalize these regulations in the near future.
Other Arrangements. We are aware of other executive pay arrangements that raise
tax policy concerns, and in s o m e cases w e anticipate publishing regulations or
other guidance. For example, s o m e executives w h o own stock options purport to
sell those options to a family limited partnership, a family trust, or another entity in
which they or their family members have a direct financial stake. This transaction is
intended to defer the gain the executive would otherwise recognize on exercise of
the options. W e have reviewed these transactions, and w e have serious concerns
with them. W e expect to issue a notice in the near future indicating h o w and w h y
w e intend to challenge them.
Of course, our review of certain transactions would potentially be different if
Congress enacted our budget proposal to repeal section 132 of the Revenue Act of
1978. Section 132 ties our hands. To challenge a transaction, w e have to
conclude that it violates the law as in effect back in 1978. Executive compensation
has changed a lot since 1978, and w e need to be able to issue n e w rules and
regulations to keep pace with changes in the market.
Finally, once we have identified a type of transaction and have determined that it
fails under current law, w e are able to list the transaction type and require taxpayers
to disclose their participation in it. A s with other types of abusive tax avoidance, w e
believe that listing is an important tool in tax administration and enforcement.
Summary and Closing
I thank the Committee for holding a hearing on this important topic, and I appreciate
the opportunity to discuss these critical issues with you. W e urge the Committee to
do this year what it did last year - report legislation to repeal section 132 of the
Revenue Act of 1978 to give Treasury and the IRS n e w authority to address
deferred compensation, as proposed in the Administration's budget. W e further
urge the Committee to address the corporate governance and accountability issues
raised by executive compensation directly rather than through the tax code. Mr.
Chairman and Senator Baucus, the Office of Tax Policy would be happy to offer any
assistance to you and your staff as you continue your review of this critical issue.
Mr. Chairman, this concludes my formal statement. I would be pleased to answer
any questions that you or any other m e m b e r m a y wish to ask.

-30-

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202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 10, 2003
May 08, 2003
912795ML2

High Rate: 1.165% Investment Rate 1/: 1.191% Price: 99.909
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 58.73%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type
Competitive
Noncompetitive
FIMA (noncompetitive)

Tendered
$

SUBTOTAL
Federal Reserve
TOTAL

40,373,.300
45, .579
0

Accepted
$

18,955,.183
45, 579
0

40,418, 879

19,000, 762

2,123, 179

42,542, 058

21,123, 941

Median rate
1.160%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 40,418,879 / 19,000,762 = 2.13
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

Js -Iti

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 6-DAY BILLS
Term: 6-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 09, 2003
April 15, 2003
912795MY4

High Rate: 1.200% Investment Rate 1/: 1.220% Price: 99.980
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 30.03%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

Accepted

28,985, 000
5
0

8,000,299
5
0

28,985, 005

8,000,304

28,985, 005

8,000,304

Median rate
1.180%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.175%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 28,985,005 / 8,000,304 = 3.62
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

J$W7<5

S-171: SCHEDULE OF PRESS EVENTS FOR THE G7 SCHEDULE OF PRESS EVENTS FOR THE ... Page 1 of 2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 8, 2003
JS-171
SCHEDULE OF PRESS EVENTS FOR THE G7
MINISTERIAL MEETINGS
AMENDED
The following are the open press events of the G 7 Ministerial meeting for
planning purposes only. All members of the press w h o wish to cover the
events will be issued a credential by Treasury Public Affairs. Please submit
your name, social security # (passport # for non U S citizens) date of birth
and news affiliation to Frances Anderson at 202-622-2960 or e-mail to
frances,anderson@do.treas.gov by 3:00 p m Wednesday, April 9, 2003.
Credentials will be distributed at the Pre - G 7 Press Conference on
Thursday, April 10, 2003.

Thursday, April 10, 2003
4:30 P M
Pre - G 7 Press Conference with Secretary S n o w
Department of Treasury
Media R o o m 4121
Note: Press should arrive one hour prior of the Press conference
Note: All camera crews must use the moat entrance to enter Main
Treasury.
Saturday, April 12, 2003
8:00 A M
G 7 Ministerial Arrivals and Meeting
Photo Only (Meeting will be Pooled)
Blair House
Note: All press covering the arrival must enter at Jackson Place and H
Street with a government issued ID by 7:00 A M to be swept and escorted
to the press area.
No one will be admitted after 7:00 A M .
9:30 AM
G 7 Ministers "Family Photo"
Photo Only
Blair House
12:00 PM
Post G 7 Press Conference with Secretary S n o w
Department of Treasury
Media R o o m 4121
Note: Press should arrive one hour prior to the press conference. All
camera crews should arrive through the north gate and Bell entrance of
Main Treasury.

http://www.treas.gov/press/releases/js 171 .htm

Page 1 o f 2

JS-172: Fact Sheet: Cash Balance Plans

PRGSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 9, 2003
JS-172
Fact Sheet:
Cash Balance Plans
The American ideal is that everyone should retire with dignity and with the financial
security to live out their years in comfort. That ideal depends on a sound pension
plan and adequate private savings, complemented by Social Security.
The American workforce has changed dramatically in recent years. No longer do
workers spend their entire career at one company. Traditional employer-based
retirement plans provide the majority of benefits to employees only after they have
worked with that employer for many years. This was a good deal for workers when
they tended to stay with a single employer for long periods of time-20 or 30 years.
But, these traditional retirement plans are not a good deal for workers who stay for
only a few years. This fact has presented challenges for employers and employees
in ensuring that retirement savings options are fair for all workers.
Since the majority of the workforce is now far more mobile, one increasingly popular
retirement option is called a "cash balance" plan. A cash balance plan is a type of
tax-qualified retirement plan that combines features of a defined contribution plan
(like a 401k), with features of a more traditional defined benefit plan. Cash balance
plans are better suited to a mobile workforce because employees accrue more
substantial benefits earlier in their careers and can take their cash balance plan
with them as they move from job to job. They also provide some investment
protections similar to a defined benefit plan.
Like a defined contribution plan (like a 401k), cash balance plans provide each
employee with an "account." The employer credits the account with "pay credit"
contributions (for example, 5 percent of pay) and interest. This allows all employees
regardless of age - to earn benefits evenly over their careers. W h e n workers
change jobs, their cash balance plan can move with them. If the new employer
doesn't have a cash balance plan, the employee can roll their cash balance plan
into an IRA.
But like a defined benefit plan, the employer bears all the investment, or downside,
risk for a cash balance plan. This means that the employer always has to make
sure that the employee's account has enough to pay out total contributions plus
interest - even if the plan investments do not perform well.
This is an added protection for workers over 401 k type plans-they don't have to
worry that their retirement benefits are going to fluctuate with the markets.
A cash balance "conversion" occurs when an employer changes from a traditional
pension plan into a cash balance plan.
Current law does not prevent companies from converting to cash balance plans, but
the law does prevent an employer from taking away or reducing the value of a
pension benefit that has already been earned by a worker- whether or not there is a
cash balance conversion. A cash balance plan conversion has no effect on current
retirees. In addition, the conversion cannot reduce the pension benefits that a
worker earned prior to the conversion.

http://www.treas.gov/press/releases/js 172.htm

7/21/2003

S-172: Fact Sheet: Cash Balance Plans

Page 2 o f 2

During the 1990s, a number of companies converted their defined-benefit plans into
cash-balance plans, prompting charges from older workers that the change violated
age-discrimination laws. Three years ago, Treasury and the IRS stopped
sanctioning the switch to cash-balance plans until rules could be put in place
governing the switch from a traditional pension to a cash-balance plan.
Treasury proposed regulations in December 2002 that would address these issues.
The regulations provide important n e w protections for older workers in a number of
ways. They require that any cash balance plan must give older employees pay
credits that are equal to or greater than the pay credits for younger employees.
Also, the regulations require that any cash balance "conversion" be age-neutralwhich means that employers can't use factors in a conversion that provide a bigger
benefit for younger workers than for older workers. The regulations require the
plan to be age-neutral before, after, and in the process of the conversion.
The Treasury Department is seeking to ensure that cash balance plans remain a
viable option, while ensuring that if a company converts from a traditional retirement
plan to a cash balance plan, it does so in a manner that is fair to all its workers.
These reforms are part of the Administration's agenda to preserve defined benefit
plans and to provide American workers with necessary protections for their
pensions and retirement security.

http://www.treas.gov/press/releases/js 172.htm

7/21/2003

JS-173: Deputy Assistant Secretary Timothy Bitsberger's Remarks to the B o n d Market Association

Page 1 of 3

PRLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 10,2003
JS-173
Deputy Assistant Secretary Timothy Bitsberger's Remarks
to the Bond Market Association
Today, I would like to follow-up on a speech Under Secretary Fisher gave last
January to the B M A Legal and Compliance Conference when he highlighted the
importance of the auction process to our efforts to reduce our cost of borrowing
over time. Improvements in this process, whether in terms of speed, consistency,
and/or transparency, are likely to generate long-term savings to the taxpayer by
reducing the uncertainty that market participants face and Treasury pays for in each
auction. Today I would like to review the efforts w e have m a d e over the past year
and our goals for the near future.
No other debt market compares to the size and scope of the U.S. Treasury market.
Last year w e auctioned $3.8 trillion of securities over 188 auctions, with awards of
$2.5 trillion going to primary dealers. In the auctions, w e receive bids from a large
and diverse pool that technically includes every person and enterprise with a bank
account. Taking the 26-week bill as an example, w e typically receive 110
commercial competitive bids, 430 commercial noncompetitive bids, and 21,500
individual submissions through Treasury-Direct. Bids are submitted through
systems of varying degrees of sophistication and antiquity: Fedline, T A A P S , mail,
telegraph and, possibly, pony express.
Despite the number of auctions, submitters, and systems, we have come a long
way toward meeting one of our major efforts to improve the efficiency of the primary
market, that of consistent, two-minute auctions. Since Under Secretary Fisher first
outlined the mission of two-minute auctions last year, average auction release times
have dropped from an average often to four minutes. These improvements
represent no small accomplishment given the age of the software, the varying level
of sophistication of the systems at work, and the number of bids received. W e want
to thank you, the primary dealers, other market participants, the Bureau of Public
Debt, the Federal Reserve Bank of N e w York and the press, for working together in
the auction process to make such considerable progress. W e believe that by
continuing this work together w e will reduce auction release times further until the
goal of the two-minute auction is met. W e ask that you continue to support our
ongoing efforts to develop better long-term solutions, and w e are always interested
in your ideas.
What is even more gratifying to us is that the more recent reductions in auction
release times have been accompanied by a reduction in bidding errors. A n y
system that requires virtually simultaneous actions by many people at multiple firms
is prone to mistakes from time to time. Of the 188 auctions last year, technical
factors delayed only 17 auctions. W e will do better and I a m confident that w e are
on the right track in making a first rate auction process even better.
One small way we are trying to prevent bidding problems is by providing market
participants laminated cards with detailed instructions printed what should be done
in the event of a system problem. W e want to make sure that your bids are in the
auction; the cards are meant to prompt you to think about h o w you would respond
to last-minute technical problems. W e encourage you to keep these cards handy
and develop your processes to detect and address system failures. An unfortunate
reality is that human, electronic, or operational errors occur; however, w e must find
ways to be prepared to deal with them. W e invite more of your suggestions on h o w
w e can continue the long-term process of improving Treasury auctions.

http://www.treas.gov/press/releases/js 173 .htm

7/21/2003

FS-173: Deputy Assistant Secretary Timothy Bitsberger's Remarks to the B o n d Market Association

Page 2 of 3

While w e have m a d e good progress in consistently reducing auction times and
bidding errors, I have been less satisfied with the transparency of the information
w e provide to you, the auction participants, on overall participation in our auctions.
By providing a transparent auction process, w e can ensure the continued efficiency
of the primary market. W e must continue to protect the anonymity of all participants
in our auctions, but w e think w e can do more to improve the depth of information w e
provide. N o one has suggested that w e provide too much information about auction
participation, but s o m e of you have on occasion requested more detailed
participation information to m a k e the auction process even more transparent.
In response, we have been slicing and dicing the auction participation data to
determine what additional metrics would be useful to auction participants but also
would not compromise the confidentiality of bidders. Currently w e m a k e available
to the public the amount of competitive bids, the amount of non-competitive bids,
and the amount of bids by the Federal Reserve System and statistics on the
distribution of awards. In past quarterly releases, w e have also released
comparative information on auction participation in long-term nominal and inflationindexed securities.
We think these releases have not thoroughly communicated information about the
demand for our securities. W e hope to increase the market's awareness of auction
participation by enhancing the information w e release following an auction to
include s o m e type of breakdown of awards to primary dealers, other direct bidders,
and indirectly submitted bids. W e hope that all auction participants will consider
whether this information will be beneficial and help in making the auction process
more transparent and efficient.
While there are a lot of ways for us to breakdown the auction data and to categorize
participants, I think a useful and relevant starting point is to begin by highlighting the
important role the primary dealers play in the auction process.
I am sure it will not surprise you to know that the size and scope of the primary
dealer participation is substantial. Looking at 2002 auction data, the primary dealers
received awards for approximately 8 2 % of the auction amount for bills, and 7 1 % of
the coupon offerings. I would like to say explicitly what these numbers tell us: the
primary dealers are very important to us.
The large and stable participation of primary dealers is critical to Treasury in
meeting its objective of lowest cost financing over time. Treasury benefits from the
continuous provision of primary and secondary market liquidity by primary dealers.
That said, w e acknowledge that there must be incentives for primary dealers to
participate in auctions and w e believe w e should do more to promote the role of
primary dealers as underwriters in Treasury auctions.
Not only are your firms providing support for the auction process, we also
appreciate and are encouraged by the way in which you continue to support the
auction process through submission of your customer activity. M a n y of you bring a
large and consistent customer base to both the bill and note auctions. In 2002,
your customers took down 15 percent in bill auctions and 2 5 % in the note
auctions.
Lastly, we realize that the role of market makers goes beyond what we can slice out
of auction data. The unparalleled liquidity of the Treasury market is in no small part
due to the primary dealers. O n a daily basis approximately $350 billion in
Treasuries change hands
While we recognize and appreciate the primary sources of participation in our
auctions you, the primary dealer community, as the public debt issuer, w e also
have an obligation to the American taxpayer to m a k e our auctions easily accessible
and open to anyone w h o wishes to participate. W e not only want to m a k e the
primary market as broad and deep as possible, but w e want to m a k e every effort to
sell our securities at the highest possible price. W e believe it is important to
continue to welcome participation outside of the primary dealer community,
recognizing though that direct bidding remains a small part of overall auction

ittp://www.treas.gov/press/releases/js 173 .htm

7/21/2003

fS-173: Deputy Assistant Secretary Timothy Bitsberger's Remarks to the B o n d Market Association

Page 3 of 3

participation.
We hope this information increased your awareness of auction participation. As
part of our obligation to obtain lowest cost financing over time, w e believe Treasury
must consistently provide an auction process that is attractive for market
participants, including you the primary dealers. W e think it is important to maintain
ongoing conversations with market participants about the auction process, Treasury
issuance, and secondary market trading, in order for the U S Treasury market to
remain the broadest, deepest financial market in the world. W e hope you continue
to take time to suggest information or processes that would be beneficial to you as
auction participants, and, if you have any thoughts about this; do not hesitate to let
us know.
Powerpoint Slides

http://www.treas.gov/press/releases/js 173 .htm

7/21/2003

Auction Release Times
For October 2001-April 2003
10:00

00:00
10/01/01

11/13/01

1/02/02

2/19/02

4/08/02

5/20/02

7/08/02

8/20/02

10/08/02

11/25/02

1/13/03

2/26/03

PUBLIC DEBT N E W S
Department of the Treasury • Bureau oT the Public Debt • Washington, D C 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
March 31, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 03, 2003
October 02, 2003
912795NQ.0

High Rate: 1.090% Investment Rate 1/: 1.114% Price: 99.449
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 33.74%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

27,798,985
906,163
50,000

16,043,964
906,163
50,000

SUBTOTAL 28,755,148 17,000,127 2/
Federal Reserve 5,912,694 5,912,694
T

°TAL $ 34,667,842 $ 22,912,821

Median rate 1.075%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.050%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 28,755,148 / 17,000,127 = 1.69
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $698,420,000

Distribution of Competitive Auction Awards
of 10-Year Treasury Notes
10-Year Inflation-Indexed Notes 10-Year Fixed-Rate Notes
July 2002, October 2002 & January 2003

August 2002, November 2002 & February 2003

Percentage of Auctions Awarded to Primary Dealers
During 2002
100%
90% / ;a
80%
70%
60%
50%
40%
30%
20%
10%
0% z.
4-wk

•

A
S

T
13-wk 26-wk

2-yr

5-yr

10-yr 10-yr
TIIS

S-174: Treasury Announces Tax Relief for Military and Support Personnel Involved in Operation Iraqi... Page 1 of 1

PRCSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 10,2003
JS-174
Treasury Announces Tax Relief for
Military and Support Personnel Involved
in Operation Iraqi Freedom
Today the Treasury Department and the Internal Revenue Service announced
administrative tax relief that is being provided for military and support personnel
involved in Operation Iraqi Freedom.
"We are indebted to all the members of the armed forces for what they are doing to
protect our freedom and to liberate the Iraqi people," stated Treasury Secretary
John Snow. "In recognition of their service to this country, all servicemen and
w o m e n are provided an exclusion from income for the military pay they earn while
in the combat zone and automatic extensions of time for filing a return or paying a
tax. Relieving members of the military and their families from concerns about their
taxes is a small token of the appreciation w e o w e them."
Secretary Snow continued, "And like the President said to the Marines at Camp
Lejeune 'When freedom needs defending, America turns to our military. And as
they do their job, our m e n and w o m e n in uniform count on their families -- like you
all here today. This is a time of hardship for many military families. S o m e of you
have been separated from your loved ones for quite a while because of long
deployments. All of America is grateful for your sacrifice.'"
Treasury and IRS issued Notice 2003-21 which provides guidance for those serving
in the combat zone. The notice, in question and answer format, discusses tax relief
available to military and support personnel involved in Operation Iraqi Freedom.
The relief includes exclusion from income of military pay earned while serving in the
combat zone and extensions of deadlines for certain acts, such as filing a return or
paying a tax. The notice explains how to contact IRS offices, both in the U S and
abroad, by e-mail, telephone or telecopier, for more information.
The text of Notice 2003-21 is attached.

http://www.treas.gov/press/releases/js 174.htm

7/21/2003

Part III -Administrative, Procedural, and Miscellaneous
Tax Relief for Those Involved in Operation Iraqi Freedom

Notice 2003-21

PURPOSE
This notice provides guidance in a question and answer format on the tax relief
provided under Executive Order No. 12744, 56 Fed. Reg. 2663 (Jan. 23, 1991), for U.S.
military and support personnel involved in the military operations in the "Arabian
Peninsula Areas," as defined below.

BACKGROUND
The Executive Order, effective January 17, 1991, designated the "Arabian Peninsula
Areas," as defined below, as a combat zone for purposes of section 112 of the Internal
Revenue Code. N o authority has terminated the designation, which continues to be in
effect.
The provisions of the Code affected by the designation of a combat zone include the
following:
(1) Section 2(a)(3) (relating to the special rule where a deceased spouse w a s in
missing status);
(2) Section 112 (relating to the exclusion from gross income of certain combat pay
received by m e m b e r s of the U.S. Armed Forces);
(3) Section 692 (relating to income taxes of m e m b e r s of the U.S. Armed Forces on
death);
(4) Section 2201 (relating to estate tax as to m e m b e r s of the U.S. Armed Forces
dying in a combat zone or as a result of wounds, disease or injury suffered while serving
in a combat zone);
(5) Section 3401(a)(1) (defining wages relating to combat pay for m e m b e r s of the
U.S. Armed Forces);
(6) Section 4253(d) (relating to taxation of telephone service originating from
members of the U.S. Armed Forces in a combat zone);
(7) Section 6013(f)(1) (relating to a joint return where an individual is in missing
status as a result of service in a combat zone); and
(8) Section 7508 (relating to the time for performing certain acts (including filing a
return; paying, assessing or collecting a tax; claiming a refund, litigating a suit; and
performing any act listed in Rev. Proc. 2002-71, 2002-46 I.R.B. 850) postponed by
reason of service in a combat zone).

Under the Executive Order, the deadline extension provisions under section 7508
apply to members of the U.S. Armed Forces (and those serving in support of the U.S.
Armed Forces) in the combat zone.

QUESTIONS AND ANSWERS
The following questions and answers apply to members of the U.S. Armed Forces
on active duty and, where applicable in Part 2, to those serving in support of the U.S.
Armed Forces and are patterned after the questions and answers in Notice 2002-17,
2002-1 C.B. 567 (Tax Relief for Those Involved in Operation Enduring Freedom); Notice
99-30, 1999-1 C.B. 1135 (Tax Relief for Those Affected by Operation Allied Force); and
Notice 96-34, 1996-1 C.B. 379 (Tax Relief for Those Affected by Operation Joint
Endeavor). A taxpayer covered by the relief provisions discussed in this Notice (a
"covered taxpayer") should write "Combat Zone" in red at the top of his or her return. A
covered taxpayer w h o receives a notice from the IRS regarding a collection or
examination matter should return the notice to the IRS with the words "Combat Zone" at
the top of the notice and on the envelope so the IRS can suspend the action. For
additional information on the tax treatment of members of the U.S. Armed Forces,
including reservists, decedents, or persons missing in action, consult Publication 3,
Armed Forces' Tax Guide.

PART 1 -- MILITARY PAY EXCLUSION
Q-1: What geographic areas are included in the combat zone covered by this Notice?
A-1: The geographic areas in the combat zone (the "Arabian Peninsula Areas") include
• The Persian Gulf,
• The Red Sea,
• The Gulf of O m a n ,
• The portion of the Arabian Sea that lies north of 10 degrees north latitude and
west of 68 degrees east longitude,
• The Gulf of Aden, and
• The total land areas of Iraq, Kuwait, Saudi Arabia, O m a n , Bahrain, Qatar, and
the United Arab Emirates.
The Arabian Peninsula Areas include the airspace above such locations.
Q-2: I am a member of the U.S. Armed Forces performing services in the Arabian
Peninsula Areas. Is any part of m y 2002 military pay for serving in this area excluded
from gross income?
A-2: Yes. The Arabian Peninsula Areas constitute the combat zone. If you serve in the
combat zone as an enlisted m e m b e r or as a warrant officer (including commissioned
warrant officers) for any part of a month, all your military pay received for military
service that month is excluded from gross income. For commissioned officers, the
monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or

imminent danger pay received. Therefore, for 2002, the most a commissioned officer
can earn tax-free each month is $5,532.90 ($5,382.90, the highest monthly enlisted pay,
plus $150.00 hostile fire or imminent danger pay). For 2003, the most a commissioned
officer can earn tax-free each month is $5,882.70. Amounts excluded from gross
income are not subject to federal income tax.
Q-3: My husband and I are both enlisted members of the U.S. Armed Forces serving in
the combat zone. Are w e both entitled to the income tax exclusion for military pay?
A-3: Yes. Each of you qualifies for the income tax exclusion for your military pay.
Q-4: I am a member of the U.S. Armed Forces stationed on a ship in the Indian Ocean.
I fly missions over the Arabian Peninsula Areas as part of the military operations in the
combat zone. Is any part of m y military pay excluded from gross income?
A-4: Yes. The combat zone includes the airspace over the Arabian Peninsula Areas,
so you are serving in the combat zone. See Q & A-2 for a discussion of the amount of
your military pay that is excluded.
Q-5: If I am injured and hospitalized while serving in the U.S. Armed Forces in the
combat zone, is any of m y military pay excluded from gross income?
A-5: Yes. Military pay received by enlisted members who are hospitalized as a result of
injuries sustained while serving in the combat zone is excluded from gross income for
the period of hospitalization, subject to the 2-year limitation provided below.
Commissioned officers have a similar exclusion, limited to the m a x i m u m enlisted pay
amount per month. See Q & A-2. These exclusions from gross income for hospitalized
enlisted members and commissioned officers end 2 years after the date of termination
of the designation as a combat zone.
Q-6: My wife is currently serving in the U.S. Armed Forces in the combat zone and will
be eligible for discharge when she returns home. If she is discharged upon her return,
will the payment for the annual leave that she accrued during her service in the combat
zone be excluded from gross income?
A-6: Yes. Annual leave payments to enlisted members of the U.S. Armed Forces upon
discharge from service are excluded from gross income to the extent the annual leave
was accrued during any month in any part of which the m e m b e r served in the combat
zone. If your wife is a commissioned officer, the portion of the payment she receives for
annual leave accrued during any month in any part of which she served in the combat
zone is excluded. The annual leave payment is not excludable to the extent it exceeds
the m a x i m u m enlisted pay amount (see Q & A-2) for the month of service to which it
relates less the amount of military pay already excluded for that month.
Q-7: I am an enlisted member serving in the combat zone. If I reenlist early while I am
in the combat zone and receive m y reenlistment bonus several months later when I a m

stationed outside the combat zone, is any part of m y reenlistment bonus excluded from
gross income?
A-7: Yes. The reenlistment bonus is excluded from gross income although received in
a month that you were outside the combat zone, because you completed the necessary
action for entitlement to the reenlistment bonus in a month during which you served in
the combat zone.

Q-8: My brother, who is a civilian in the merchant marine, is on a ship that transport
military supplies between the United States and the combat zone. Is he entitled to the
combat zone military pay exclusion?
A-8: No. Those serving in the merchant marine are not members of the U.S. Armed
Forces. The combat zone military pay exclusion applies only to members of the U.S.
Armed Forces. The U.S. Armed Forces include all regular and reserve components of
the uniformed services that are under the control of the Secretaries of Defense, Army,
Navy, and Air Force, and the Secretary of Homeland Security with respect to the Coast
Guard.
Q-9: My husband is a member of the U.S. Armed Forces performing services as part of
Operation Iraqi Freedom, but he is not in the combat zone and he is not receiving
hostile fire/imminent danger pay. Is he entitled to the military pay exclusion?
A-9: No. U.S. Armed Forces members serving outside the combat zone are not
entitled to the military pay exclusion, unless they are serving in direct support of military
operations in the combat zone for which they receive hostile fire/imminent danger pay.
As of the date of this Notice, the Department of Defense has not certified any area as
supporting the Iraqi Freedom Combat Zone. For a more detailed discussion of the tax
treatment of military personnel, see Publication 3, Armed Forces' Tax Guide.
Q-10: How do I certify my entitlement to the military pay exclusion?
A-10: Your service branch must certify your entitlement on the Form W-2 it provides
you. If you believe you are entitled to the exclusion, but it is not reflected on your Form
W-2, ask your service branch to issue a corrected Form W-2.

PART 2 » EXTENSION OF DEADLINES
Q-11: I have been serving in the Arabian Peninsula Areas since December 1, 2002. I
understand that the deadline for performing certain actions required by the internal
revenue laws is extended as a result of m y service. O n what date did these deadline
extensions begin?

A-11: The deadline extensions apply to most tax actions required to be performed on or
after January 17, 1991, or the date you began serving in the combat zone, whichever is
later. In your case, the date that the deadline extensions began is December 1, 2002.
Q-12: My son is a member of the U.S. Armed Forces, and he has been serving in the
combat zone since February 1, 2003. Is he entitled to an extension of time for filing and
paying his 2002 federal income taxes? Are any assessment or collection deadlines
extended?
A-12: For both questions, the answer is yes. In general, the deadlines for performing
certain actions applicable to his taxes are extended for the period of his service in the
combat zone, plus 180 days after his last day in the combat zone. This extension
applies to the filing and paying of your son's 2002 income taxes. Also, in addition to the
180-day period, your son's extension period includes the 74-day period that w a s left
before the April 15, 2003, deadline. During this 254-day extension period, assessment
and collection deadlines will be extended, and interest and penalties attributable to the
extension period will not be charged. See Publication 3, Armed Forces' Tax Guide, for
additional extension examples and computations of the extended due date.
Q-13: Assuming the same facts as in question 12, does the extension for filing and
paying his individual income taxes apply to unearned income from m y son's
investments?
A-13: Yes. The deadline extensions apply without regard to the source of your son's
income.
Q-14: Assuming the same facts as in question 12, will the deadline extensions continue
to apply if m y son is hospitalized as a result of an injury sustained in the combat zone?
A-14: Yes. The deadline extensions will apply for the period that your son is
continuously hospitalized outside of the United States as a result of injuries sustained
while serving in the combat zone, including 180 days thereafter. For hospitalization
inside the United States, the extension period cannot be more than 5 years.
Q-15: My son is a member of a unit of the U.S. Armed Forces and most members of
the unit have been serving in the combat zone since April 1, 2003. M y son has been
overseas since February 1, 2003, but he did not enter the combat zone until M a y 1,
2003. Is he entitled to an extension of time for filing and paying his 2002 federal income
taxes?
A-15: No. Only a deadline arising on or after the date your son entered the combat
zone, M a y 1, 2003, is postponed.
Q-16: Do the deadline extensions apply only to members of the U.S. Armed Forces
serving in the combat zone?

A-16: No. Unlike the combat zone military pay exclusion discussed in Part 1, the
deadline extensions also apply to individuals serving in the combat zone in support of
the U.S. Armed Forces, such as merchant marines serving aboard vessels under the
operational control of the Department of Defense, Red Cross personnel, accredited
correspondents, and civilian personnel acting under the direction of the U.S. Armed
Forces in support of those forces.
Q-17: Do the deadline extensions apply only to those inside of the combat zone?
A-17: No. Members of the U.S. Armed Forces who perform military service in an area
outside the combat zone qualify for the deadline extensions if their service is in direct
support of military operations in the combat zone, and they receive special pay for duty
subject to hostile fire or imminent danger as certified by the Department of Defense.
See Q & A-9 regarding certification by the Department of Defense.
Q-18: My son is a civilian explosive specialist who is in the combat zone training U.S.
Armed Forces members serving in the combat zone. D o the deadline extension
provisions apply to m y son?
A-18: Yes. The deadline extensions apply to your son because he is serving in the
combat zone in support of the U.S. Armed Forces.
Q-19: My husband is a private businessman working in the Arabian Peninsula Areas on
nonmilitary projects. D o the deadline extensions apply to m y husband?
A-19: No. Other than military members, the only individuals working in the combat
zone that are entitled to the deadline extensions are those serving in support of the U.S.
Armed Forces.
Q-20: I am a member of the U.S. Armed Forces serving in the combat zone. Do the
deadline extensions apply to m y husband, w h o is in the United States?
A-20: Yes. The deadline extensions apply not only to members serving in the U.S.
Armed Forces (or individuals serving in support thereof) in the combat zone, but to their
spouses as well, with two exceptions. First, if you are hospitalized in the United States
as a result of injuries received while serving in the combat zone, the deadline
extensions would not apply to your husband. Second, the deadline extensions for your
husband do not apply for any tax year beginning more than 2 years after the date of the
termination of the combat zone designation.
Q-21: Assuming the same facts as in question 20, will my husband have to file a joint
tax return in order to benefit from the deadline extensions?
A-21: No. The deadline extensions apply to both spouses whether joint or separate
returns are filed. If your husband chooses to file a separate return, he will have the
s a m e extension of time to file and pay his taxes that you have.

Q-22: M y husband is serving in the U.S. Armed Forces in the combat zone. In 2002,
our son, w h o is 12 years old, received interest income that is subject to income tax. Our
daughter, w h o is 17 years old, received investment income. In addition, she received
earned income from part-time work and is entitled to a refund. W e claim both children
as dependents on our joint income tax return. Must I file individual income tax returns
for our children while m y husband is in the combat zone?
A-22: No. Filing individual income tax returns for your dependent children is not
required while your husband is in the combat zone. Instead, these individual income tax
returns will be timely if filed on or before the deadline for filing your joint income tax
return under the applicable deadline extensions. W h e n filing your children's 2002
individual income tax returns, you should write "Combat Zone" in red at the top of those
individual income tax returns. Because your older child m a y be entitled to a refund of
tax, she m a y want to file her individual income tax return and obtain her refund without
regard to the extension.
Q-23: I am a member of the U.S. Armed Forces serving in the combat zone. My
spouse and our three children live in our h o m e in the United States. During 2002, a
child care provider took care of our children in our home. W e are required to file a
Schedule H, Household Employment Taxes, as an attachment to our joint income tax
return to report the employment taxes on wages w e paid to our child care provider. D o
the deadline extensions apply to the filing of Schedule H as an attachment to our joint
income tax return?
A-23: Yes. The deadline extensions apply to all schedules and forms that are filed as
attachments to an income tax return.
Q-24: Almost two years ago, the IRS contacted me to collect tax on a joint income tax
return I had filed with m y now former spouse. I believe only m y former spouse should
be held liable for the tax. I understand that I m a y file Form 8857, Request for Innocent
Spouse Relief, within 2 years of the first collection activity against m e by the IRS. I
have just entered a combat zone. D o the deadline extensions apply to the filing of Form
8857?
A-24: Yes. A list of time-sensitive acts for which performance is postponed for
members of the U.S. Armed Forces (or individuals serving in support thereof) in a
combat zone is provided in Rev. Proc. 2002-71, 2002-46 I.R.B. 850. Section 14.03(2)
of that revenue procedure concerns innocent spouse relief.
Q-25: I served in the U.S. Armed Forces in Afghanistan from April 1, 2002, until August
31, 2002. I w a s reassigned to the Arabian Peninsula Areas on March 5, 2003. I
understand that I w a s entitled to an extension of time for filing and paying m y 2001
income taxes of 195 days (180 days plus the 15-day period that w a s left before the April
15, 2002 deadline). This extension period would have expired on March 14, 2003 195 days from September 1, 2002 (my first day out of the combat zone in Afghanistan).

What effect does m y reentry into a combat zone have on m y extension for filing and
paying m y 2001 income taxes?
A-25: Because the extension period had not expired for your 2001 individual income
tax return before you reentered a combat zone, a new 180-day period will begin after
you leave a combat zone for the second time. In addition, any time that remained in the
15-day period when you entered the Arabian Peninsula Areas adds to the new 180-day
period when you leave the Arabian Peninsula Areas. In determining how much of the
15-day period is unused, treat the 180-day period as being used first. In your case, on
March 5, 2003, 10 of the 15 days remained. After you leave the Arabian Peninsula
Areas, you will have a 190-day extension period.
Q-26: My wife is a member of the U.S. Armed Forces serving in the combat zone. Can
she m a k e a timely qualified retirement contribution for 2002 to her individual retirement
account (IRA) after April 15, 2003, and on or before the due date of her 2002 individual
income tax return after applying the deadline extensions?
A-26: Yes. Your wife can make a timely qualified retirement contribution for 2002 to
her IRA on or before the extended deadline for filing her 2002 income tax return under
the deadline extensions.
Q-27: My brother, who began serving in the U.S. Armed Forces in the combat zone on
January 10, 2003, did not m a k e his fourth estimated tax payment for 2002 which was
due January 15, 2003. Will m y brother be liable for estimated tax penalties?
A-27: No. Your brother is covered by the deadline extensions and will not be liable for
any penalties if he files and pays any tax due by his extended filing due date. W h e n
your brother files his 2002 individual income tax return, he should write "Combat Zone"
in red at the top of that individual income tax return.
Q-28: M y son, w h o is a m e m b e r of the U.S. Armed Forces, w a s on an installment
payment plan with the IRS for back income taxes before he w a s assigned to the combat
zone. What should be done now that he is in the combat zone?
A-28: The IRS office where your son was making payments should be contacted.
Because your son is serving in the combat zone, he will not have to m a k e payments on
his back income taxes for his period of service in the combat zone plus 180 days. N o
additional penalties or interest will accrue during the deadline extension period.
Q-29: My son, who is a member of the U.S. Armed Forces serving in the combat zone,
will file his individual income tax return for 2002 after April 15, 2003, but on or before the
end of the deadline extension for filing that return. H e expects to receive a refund. Will
the IRS pay interest on the refund?
A-29: Yes. The IRS will pay interest from April 15, 2003, on a refund issued to your
son if he files his 2002 individual income tax return on or before the due date of that
return after applying the deadline extension provisions. W h e n your son files his 2002

individual income tax return, he should write "Combat Zone" in red at the top of that
return. If his 2002 individual income tax return is not timely filed on or before the due
date after applying the deadline extensions, no interest will be paid on the refund except
as provided under the normal refund rules. Even though the deadline is extended, your
son m a y file an individual income tax return earlier to receive any refund due.

Q-30: Do the deadline extensions apply to tax returns other than the individual incom
tax return?

A-30: Yes. The deadline extension provisions also apply to estate and gift tax return
However, the deadline extensions do not apply to other tax and information returns,
such as those for corporate income taxes, employment taxes, or excise taxes.
Q-31: My husband and I are civilian employees of defense contractors. I work in the
United States and m y husband temporarily works in Germany. Our jobs involve the
production of equipment used by the U.S. Armed Forces for Operation Iraqi Freedom.
Do the deadline extensions apply to either of us?
A-31: No. The deadline extensions do not apply to civilian employees of defense
contractors unless they are serving in the combat zone in support of the U.S. Armed
Forces.

PART 3 -- MISCELLANEOUS PROVISIONS
Q-32: My daughter is a member of the U.S. Armed Forces serving in the combat zone.
She makes calls to m e here in the United States. Are these calls exempt from the
excise tax on toll telephone service?

A-32: Yes. Telephone calls that originate within the combat zone and that are made by
members of the U.S. Armed Forces serving there are exempt from the excise tax on toll
telephone service, provided a properly executed certificate of exemption is furnished to
the telephone service provider receiving payment for the call. The exemption certificate
should be in substantially the following form:
EXEMPTION CERTIFICATE
(Overseas Telephone Calls)
(Date)
20...
I certify that the toll charges of $
are for telephone or radio telephone
messages originating at
(Point of origin) within a combat zone
from
(Name) a m e m b e r of the Armed Forces of the United States performing
service in such combat zone; that the transmission facilities were furnished by
(Name of carrier); and that the charges are exempt from tax under section
4253(d) of the Internal Revenue Code.
(Signature of Subscriber)

(Address)
Note: Penalty for fraudulent use: fine or imprisonment or both.

Q-33: If I already have paid an excise tax on the toll telephone service in Q & A-32, can
I obtain a refund?
A-33: Yes. If you already have paid an excise tax on that toll telephone service, you
m a y obtain a refund either from the telephone service provider that collected the excise
tax, or from the IRS by filing Form 8849, Claim for Refund of Excise Taxes.
Q-34: How will my military pay for active service in the U.S. Armed Forces in the combat
zone appear on m y 2002 Form W-2, W a g e and Tax Statement?

A-34: Military pay attributable to your active service in the combat zone that is exclude
from gross income will not appear on your 2002 Form W - 2 in the box marked "Wages,
tips, other compensation." However, military pay for such service is subject to social
security and medicare taxes and will appear on your 2002 Form W - 2 in the boxes
marked "Social security wages" and "Medicare wages and tips." If you believe you are
entitled to the military pay exclusion, but the military pay exclusion is not reflected on
your Form W-2, ask your service branch to issue a corrected Form W - 2 .
Q-35: I am an officer who served in the Operation Enduring Freedom combat zone from
January 2002 until October 2002 and the Operation Iraqi Freedom combat zone from
November 2002 through December 2002. I have m a d e monthly contributions to an
individual retirement account (IRA) for 2002. In view of the military pay exclusion for m y
service in the combat zones, I m a y have little or no taxable compensation for 2002 and
may not be eligible to m a k e an IRA contribution for 2002. If m y taxable compensation is
less than $3,000 ($3,500 if age 50 or older), should I withdraw the portion of m y
contributions that exceeds m y taxable compensation?
A-35: Yes. In general, any amount contributed to your IRA that is more than the smaller
of (1) your taxable compensation; or (2) $3,000 ($3,500 if age 50 or older), is an excess
contribution and must be withdrawn to avoid a 6 percent excise tax. If you are married
and file a joint income tax return, you m a y still be eligible to m a k e an IRA contribution.
See Publication 590, Individual Retirement Arrangements (IRAs), for more information
on spousal contribution limits. Once you are sure that your taxable compensation will
be less than $3,000 ($3,500 if age 50 or older), you should withdraw the portion of your
contributions that exceeds your taxable compensation. You will not be taxed on the
distributed amount if you receive the distribution on or before the deadline for filing your
2002 individual income tax return after applying the deadline extension provisions. You
m a y not take a deduction with respect to these distributed contributions. You must also
withdraw the amount of net income attributable to the distributed contributions while
they were assets of the IRA. That portion of the net income is includible in your gross
income for 2002. For further information, see Publication 590, Individual Retirement
Arrangements (IRAs).

Q-36: Assuming the s a m e facts as in question 35, how will the financial institution that
distributes m y 2002 IRA contributions to m e report this distribution?

A-36: The financial institution will report the entire amount of the distribution (20
distributed contributions and attributable net income) on Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc. However, it should report only the amount of any net income attributable
to the distributed contributions as the "Taxable amount" on Form 1099-R.
Q-37: How might my combat zone military pay exclusion affect my eligibility for the
Earned Income Credit (EIC)?
A-37: A change in the tax law for 2002 and later years removes from the definition of
"earned income" for purposes of the EIC all employee compensation that is not
includible in gross income for the tax year. Thus, for example, excludable combat zone
compensation no longer counts as earned income. Also excluded from earned income
are the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence
(BAS). With this change, your income m a y fall within the qualifying range to claim the
credit. But if the exclusion leaves you with no earned income, you will not be able to
claim the EIC. See Publication 3, Armed Forces' Tax Guide, for details.
PART 4 - INQUIRIES
The IRS Web site at www.irs.gov offers tax information for Armed Forces members
(and those serving in support of the Armed Forces) -- search for "Armed Forces" on the
site.
The IRS has a special e-mail address -- combatzone@irs.gov -- for taxpayers in a
combat zone to send questions specifically related to filing and payment issues and to
update their combat zone status in order to qualify for relief provisions. The W e b site
has more information about this service and restrictions on IRS responses that would
include tax account information.
Taxpayers within the United States may seek assistance by calling the IRS at 1-800829-1040 (toll-free). Taxpayers outside the United States m a y contact the IRS in
Philadelphia, PA, at (215) 516-2000 or via fax at (215) 516-2555 (these are not toll-free
numbers).
The IRS offices in Italy, Germany, France, England, Japan, and Singapore, can also
assist you with your federal income tax questions. The Singapore office will close after
June 30, 2003. You m a y contact the R o m e office at [39] (06) 4674-2560, or via fax at
[39] (06) 4674-2223; the Berlin office at [49] (30) 8305-1136 and [49] (30) 8305-1140, or
via fax at [49] (30) 8305-1145; the Paris office at [33] (1) 4312-2555, or via fax at [33]
(1) 4312-4752; the London office at [44] (207) 408-8077, or via fax at [44] (207) 4954224; the Tokyo office at [81] (3) 3224-5466, or via fax at [81] (3) 3224-5274; and the
Singapore office at [65] 6476-9413 or via fax at [65] 6476-9030.

IS-175: Treasury Department Issues Advanced Notice of Proposed Rulemaking Under the U S A PATRI...

PRLSS ROOM

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^B|

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 10,2003
JS-175
Treasury Department Issues Advanced Notice of Proposed
Rulemaking Under the U S A P A T R I O T Act
The Department of the Treasury and the Financial Crimes Enforcement Network
(FinCEN) today issued an advance notice of proposed rulemaking concerning a
requirement that persons involved in real estate closings and settlements establish
anti-money laundering programs. This rule will serve as another tool in the
Administration's continuing effort to fight illicit money laundering.
This proposal is part of Treasury and FinCEN's work to implement section 352 of
the U S A P A T R I O T Act, a provision that requires all financial institutions - including
those involved in real estate closings and settlements - to establish anti-money
laundering programs.
The advance notice of proposed rulemaking seeks additional comment and input to
identify the money laundering risks associated with real estate closings and
settlements, as well as defining who should fall within the scope of the regulation.
The focus is on real estate professionals. Section 352 requires Treasury to issue
regulations establishing an anti-money laundering program that is commensurate
with the size, location and activities of persons involved in real estate closings and
settlements. Because so many different categories of people and businesses
participate in real estate closings and settlements, Treasury and FinCEN are
seeking more insight from those real estate professionals w h o m a y be affected by
this rulemaking. Their input will play an important role in developing the new rules.
The Treasury Department commends them for the efforts they have already taken
to help identify the many participants and the roles they play in the real estate
closing and settlement process. This advance notice of proposed rulemaking
provides Treasury and FinCEN with an opportunity to continue discussing the
various risks and regulatory issues while soliciting public comment prior to issuing a
proposed rule.
Written comments on the advance notice of proposed rules may be submitted
within 45 days of its publication in the Federal Register, which is scheduled to occur
later this week.
The advance notice of proposed rulemaking is attached below:

Related Documents:
• 352 Real Estate

http://www.treas.gov/press/releases/js 175.htm

7/21/2003

(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA28
Financial Crimes Enforcement Network; Anti-Money Laundering Program
Requirements for "Persons Involved in Real Estate Closings and Settlements"
AGENCY: Financial Crimes Enforcement Network ("FinCEN"), Treasury.
ACTION: Advance notice of proposed rulemaking.
SUMMARY: FinCEN is in the process of implementing the requirements delegated to it
under the USA Patriot Act of 2001, in particular the requirement pursuant to Section 352
of the Act that financial institutions establish anti-money laundering programs. The term

"financial institution" includes "persons involved in real estate closings and settlements."
FinCEN is issuing this advance notice of proposed rulemaking ("ANPRM") to solicit
public comments on a wide range of questions pertaining to this requirement, including
how to define "persons involved in real estate closings and settlements," the money
laundering risks posed by such persons, and whether any such persons should be
exempted from this requirement.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
60 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Commenters are encouraged to submit comments by electronic mail
because paper mail in the Washington, D.C., area may be delayed. Comments submitted
by electronic mail may be sent to regcomments@fmcen.treas. gov with the caption in the
body of the text, "ATTN: Section 352 - Real estate settlements." Comments may also be
submitted by paper mail to FinCEN, P.O. Box 39, Vienna, VA 22183-0039, "ATTN:

Section 352 - Real estate settlements." Comments should be sent by one method only.
Comments may be inspected at FinCEN between 10 a.m. and 4 p.m., in the FinCEN
Reading Room in Washington, D.C. People wishing to inspect the comments submitted
must request an appointment by telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN,
(703) 905-3590; Office of the General Counsel (Treasury), (202) 622-1927; or the Office
of the Assistant General Counsel for Banking and Finance (Treasury), (202) 622-0480
(not toll-free numbers).

SUPPLEMENTARY INFORMATION
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT Act) Act of 2001 (Public Law 107-56) ("the Act"). Title III of the Act,
also known as the International Money Laundering Abatement and Financial AntiTerrorism Act of 2001, made a number of amendments to the anti-money laundering
provisions of the Bank Secrecy Act ("BSA"), which are codified in subchapter II of
chapter 53 of title 31, United States Code. These amendments are intended to make it
easier to prevent, detect, and prosecute international money laundering and the financing
of terrorism.
Section 352(a) of the Act, which became effective on April 24, 2002, amended
section 5318(h) of the BSA. As amended, section 5318(h)(1) requires every financial
institution, including persons involved in real estate settlements and closings under
section 5312(a)(l)(U), to establish an anti-money laundering program that includes, at a

m i n i m u m : (i) the development of internal policies, procedures, and controls; (ii) the
designation of a compliance officer; (iii) an ongoing employee training program; and (iv)
an independent audit function to test programs. When prescribing minimum standards
for anti-money laundering programs, section 352 directs the Secretary of the Treasury to
"consider the extent to which the requirements imposed under [section 352 of the Act]
are commensurate with the size, location, and activities of the financial institutions to
which such regulations apply." The Secretary has delegated the authority to administer
the BSA to the Director of FinCEN.
On April 29, 2002, and again on November 6, 2002, FinCEN temporarily
exempted certain financial institutions, including persons involved in real estate closings
and settlements, from the requirement to establish an anti-money laundering program.l
The purpose of the temporary exemption was to enable Treasury and FinCEN to study
the affected industries and to consider the extent to which anti-money laundering
program requirements should be applied to them, taking into account the specific
characteristics of the various entities defined as "financial institutions" by the BSA.
A real estate closing or settlement is the process in which the purchase price is
paid to the seller and title is transferred to the buyer.2 The process may be carried out in
different ways, depending on a number of factors, including location. In the eastern
states, typically the parties meet and exchange documents in what is sometimes referred
to as a "New York style" or "table closing." In the western states, the parties may not
meet, instead relying on the services on an escrow agent to handle the documents in what

See 31 CFR 103.170, as codified by interim final rule published at 67 FR 21110 (April 29, 2002, as
amended at 67 F R 67547 (November 6, 2002) and corrected at 67 F R 68935 (November 14, 2002).

is sometimes referred to as a "Western style" or an "escrow closing."3 The person
actually conducting the process may be an attorney, a title insurance company, an escrow
company, or another party.
H. Issues for Comment
1. What are the money laundering risks in real estate closings and settlements?
The real estate industry could be vulnerable at all stages of the money laundering
process by virtue of dealing with high value products.4 Money launderers have used real
estate transactions to attempt to disguise the illegal source of their proceeds. For
example, narcotics traffickers have purchased property with monetary instruments that
they purchased in structured amounts (that is, multiple purchases each below the BSA
reporting thresholds that in aggregate exceeded the thresholds).5 Narcotics traffickers
have also tried to launder cash proceeds by exchanging them for checks from a real estate
company.6
In money laundering, the initial or placement stage is the stage at which funds

from illegal activity, or funds intended to support illegal activity, are first introduced into
the financial system. This could occur, for example, in the real estate industry through
the payment for real estate with a large cash down payment.
In the second or layering stage of money laundering, the illicit funds are further
disguised and distanced from their illegal source through the use of a series of frequently

Whether the process is referred to as a settlement or a closing may vary by jurisdiction. See, e.g., 24
C F R 3500.2 explaining that settlement forpurposes of the Real Estate Settlement Procedures Act of 1974
("RESPA") m a y also be called a "closing" depending on the jurisdiction.
3
See. 11 Thompson on Real Property, sec. 94.04.
4
According to a report published by the National Institute of Justice, "real estate transactions offer
excellent money laundering opportunities," and, in particular, opportunities to "legitimate and repatriate
illegal funds." Barbara Webster and Michael S. McCampbell, National Institute of Justice, International
M o n e y Laundering: Research and Investigation Join Forces, September 1996, pages 5 and 6.
5
See, e.g., U.S. v. High. 117 F.3d 464 (11th Or. 1997).

6: Schedule of Press Events for the G 7 Ministerial Meetings - A m e n d e d

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PRCSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 10,2003
JS-176
Schedule of Press Events for the G7 Ministerial Meetings - Amended
The following are the open press events of the G7 Ministerial meeting for planning
purposes only. All members of the press who wish to cover the events will be
issued a credential by Treasury Public Affairs. Please submit your name, social
security # (passport # for non U S citizens) date of birth and news affiliation to
Frances Anderson at 202-622-2960 by 3:00 p m Wednesday, April 9, 2003.
Credentials will be distributed at the Pre - G 7 Press Conference on Thursday, April
10,2003.

Thursday, April 10, 2003
4:30 PM: Pre - G7 Press Conference with Secretary Snow
Department of Treasury
Media R o o m 4121
Note: Press should arrive one hour prior of the Press conference.
Note: All camera crews must use the moat entrance to enter Main
Treasury.
Friday, April 11,2003
9:00 AM: Central American Finance Ministers
Photo Only at the top
The Cash R o o m
Main Treasury, 2nd Floor.
Saturday, April 12, 2003
8:00 AM G7 Ministerial Arrivals and Meeting
Photo Only (Meeting will be Pooled)
Blair House
Note: All press covering the arrival must enter at Jackson Place
and H Street with a government issued ID by 7:00 A M to be
swept and escorted to the press area. N o one will be admitted
after 7:00 A M .
9:30 AM: G7 Ministers "Family Photo"
Photo Only
Blair House
12:00 PM: Post G7 Press Conference with Secretary Snow
Department of Treasury
Media R o o m 4121
Note: Press should arrive one hour prior to the press
conference. All camera crews should arrive through the north
gate and Bell entrance of Main Treasury.

://www.treas.gov/press/releases/jsl 76.htm

7/21/2003

FS-177: Assistant Secretary Abernathy's Remarks to University of North Carolina L a w School

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F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 10,2003
JS-177
Remarks of
W a y n e A. Abernathy
Treasury Assistant Secretary for Financial Institutions
to the 2003 Banking Institute of
University of North Carolina School of Law's Center for Banking and Finance
Charlotte, North Carolina
The Many Ugly Faces of Identity Theft
This is something of a trip home for me, to come to Charlotte today. Or at least it's
a trip h o m e to m y kin. M y father was born just outside of Charlotte, in Davidson,
here in Mecklenburg County. And he was raised just up the road, near Salisbury, in
the little town of China Grove—not the Doobie Brothers' China Grove. And, like
many people from China Grove, he worked for a time in the cotton mills, as did m y
aunts and uncles.
Besides an opportunity to join with me in reflecting and perhaps reminiscing, this
information could be valuable to you. With this information and other information
like it, you might be able to participate in America's fastest growing financial crime,
the crime of identity theft. Not that anyone here would consider it, but I suspect that
most of you here are concerned about it.
In fact, according to a recent survey, 90% of homeowners in America are
concerned that somewhere, someone might use their good name to engage in
fraud, to steal from a furniture store, rob a bank account, engage in stock swindles,
write bad checks, run up huge phone bills, escape gambling debts, shield illegal
drug deals, create false resumes, impersonate doctors or other professionals,
destroy reputations.
Identity theft has many ugly faces. I want to expose some of them to you today, in
the hope that awareness can put us on our guard and perhaps strengthen our
resolve to fight this crime.
I begin with the dead. The dead are not immune from identity theft. Necrolarceny
is one of the more repulsive, but not uncommon, faces of the crime.
Charlotte Smith Mecklenburg—I've made up the name, but otherwise I am reading
from an obituary notice, found in newspapers in every community—age 77, died on
Sunday, April 6, 2003.
Wife of John Mecklenburg of State Street, Davidson, and mother of Wendy
Mecklenburg Salisbury, of China Grove, North Carolina, and Robert J. Mecklenburg
of Washington, D.C. Also survived by eleven grandchildren. A graduate of
Roanoke Valley High School, before becoming a cum laude graduate of Duke
University, and continuing her chosen profession in art restoration at Johns Hopkins
University. Involved in local Republican party politics, as well as the Y W C A and
Girl Scouts. Served on the Board of Directors of the American Society for Art
Restoration.
Here, for all the world to read, is a deep well of information that an identity thief can
draw from to impersonate Mrs. Mecklenburg, and probably get away with it for a
good while. W e know here an approximate date of birth, where she lived, where
she went to school, her profession, her charitable activities, and names of family

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Page 2 o f 4

members. Chances are that Mrs. Mecklenburg is not going to be reading her
financial statements for a while, and it is doubtful that closing Mrs. Mecklenburg's
financial accounts is high on the To D o List of the bereaved family. Yet there might
be a tragic surprise awaiting when the will of Mrs. Mecklenburg reaches probate
and the family discovers how active she w a s financially in the days and weeks after
her death.
But this obituary also points to potential victims among the living. We now know the
mother's maiden n a m e for W e n d y Mecklenburg Salisbury of China Grove, North
Carolina, and for Robert J. Mecklenburg of Washington, D.C., that is assuming that
the "Smith" in Charlotte Smith Mecklenburg w a s the deceased's n a m e at baptism, a
pretty good guess. Until recently, mother's maiden n a m e w a s one of those unique
but little-known identifiers, used by financial institutions to validate customer
identity. For this and other reasons, it is less relied upon today.
As an aside, a senior official at the Treasury gave my staff a Rumpelstiltskin
challenge: discover his mother's maiden n a m e within 24 hours. They did it.
Is this necrolarceny form of identity theft far-fetched, implausible? In May of last
year a N e w Jersey w o m a n received a notice from a North Carolina police
department that her husband had just committed a traffic violation. The woman's
shock gave way to renewed hope. Could it be that her husband, believed killed
eight months earlier in the World Trade Center collapse, could it be that he had
actually survived and s o m e h o w turned up in North Carolina? Unfortunately, her
hope w a s dashed when she discovered that she had been terrorized once again,
this time by a domestic criminal w h o used her deceased husband's identity as a
shield to break the law.
According to more than one estimate, as many as a million people will become
victims of identity theft this year. Many will suffer from the unauthorized use of their
own legitimate credit card. This is one of the milder versions of the crime. A s long
as the consumer is diligent and promptly reports lost or stolen cards or
unauthorized charges, the direct loss to the card holder is zero. The law sets the
m a x i m u m loss at $50, but credit card companies have found that there are great
benefits in consumer confidence from eliminating all liability for the innocent victim.
The loss still occurs, though, and it adds up to billions each year, ultimately born by
all card users in higher prices and higher interest rates.
Do not look for patriotism among identity thieves. Just as they show no pity to the
victims of terrorism in N e w York, the identity thieves are likely poised to take
advantage of the war.
A s our soldiers, sailors, and airmen move to the front lines to engage the enemy,
the identity thieves are ready to move in to take advantage of the serviceman's
absence from h o m e to engage in fraud. I would guess that the soldier in the Third
Infantry Division in Baghdad is not giving much thought to his bank account, or
worrying about his credit cards, certainly not looking at his financial statements. But
the fraudster is paying attention, for he knows that the fraud could go undetected for
a long time, unless friends and family are vigilant, on the watch here at h o m e over
the financial affairs of the service m a n and w o m a n overseas.
In the survey I mentioned, 12% of homeowners reported being victimized by identity
theft, and 2 2 % knew of a family member, friend, or acquaintance w h o w a s a victim.
Undoubtedly, many in this room this afternoon have been victimized or know
someone w h o has. Tragically, there m a y be s o m e here w h o are being victimized
right n o w and won't know of it for several more weeks or months.
Perhaps someone is dumpster diving, going through your trash to get important bits
of information about you or your accounts. Perhaps someone will call,
impersonating a government employee, asking to "verify" s o m e of your personal
data in order to continue to send you your Social Security check or veterans
benefits. Maybe you will be snared by a supposedly "free" service on the Internet,
that only needs your name, address, date of birth, and so on, in order to provide
you with access to the free service. Or is there a very attractive charity asking for a
check or credit card donation to help fight a terrible disease? Many imposters,
m a n y ugly faces of identity theft.

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fS-177: Assistant Secretary Abernathy's Remarks to University of North Carolina L a w School

Page 3 of 4

So let us turn to one of the more virulent faces of this crime. This is not where a
crook uses your legitimate credit card to make unauthorized purchases. This is
where the crook takes your good n a m e and uses it to open new accounts that you
know nothing of, with the statements going to places you have never been, so that
weeks and months pass without your knowledge of the fraud. The crook m a y even
keep up minimum payments for a time until he can m a x out on the credit limits.
Then he disappears, the payments stop and the creditors c o m e looking. But they
don't find the crook. They don't look for the crook. They look for you. And you
discover the fraud when you can't pay for your dinner because your charge won't
clear. Your h o m e equity loan is turned down because there already is a lien on
your house. You lose your job, because, though your boss is very sorry and
thought you were an exemplary employee, he can't have someone in such a
sensitive job w h o has such a poor credit history.
And then you find perhaps the ugliest face of all the ugly faces associated with the
crime of identity theft, the face of the victim. Where do you go? H o w do you begin
to clear your name? H o w do you convince creditors all around the country that you
never m a d e those transactions, that there must be some mistake? D o you turn to
your local police department? They might fill out a police report, but many don't.
What can the local police do about it anyway? The crime took place in Miami, not
in your h o m e town. Will the Miami police take up the case? Maybe, but you live in
North Carolina. W h o will handle a case for a victim living in Charlotte, for fraudulent
transactions m a d e in Miami, Denver, and San Francisco, with money borrowed
over the Internet from a bank headquartered in Philadelphia? You go to the federal
authorities, you go to the FBI. H o w many millions of dollars were involved, they
ask?
You say, not millions, thousands, a lot of money to you. But the FBI has a lot of
cases to handle, many much bigger than yours. H o w much time can they devote to
your case of lost thousands?
So you the victim start down the long painful road of proving your innocence. The
General Accounting Office reports that it can take victims as many as 175 m a n
hours to clear their n a m e and their records. That would be the equivalent of more
than one full month of 8-hour days, five-day work weeks of full-time work. Of
course, that is spread out overtime, over months and sometimes years, with
thousands of dollars of expenses.
No wonder that in that survey of homeowners, 83% said that government should do
something to prevent this crime. W e need to do something about it, or very
important benefits of living in America will be in jeopardy.
We live in a country that offers to consumers the widest variety of financial services
anywhere on earth, at the lowest cost anywhere on earth, to the broadest range of
the population anywhere on earth. That is a marvelous achievement that w e must
not surrender.
This achievement is made possible by information, broad information,
instantaneous information. Today, you can walk into practically any bank anywhere
in America and obtain that very day a financial product suited to the needs of you
and your family. And that is not just because the banker can look at your credit
history and learn w h o you are, confident that he is getting the full story, but also
because that banker can draw upon the information of a million people like you, and
can define your risk and price it.
Some would say, "stop that information flow, that information is what feeds the
identity thieves." But what would w e give up? W h o would w e cut off from access to
the h o m e loan, the business loan, the college loan? It is true that when everyone in
town puts their savings in the bank they make it easier for thieves to rob the
community, all the money in one place—the crooks don't have to rob each house,
one by one, they just rob the bank. But do w e give up banks because the
community's money is there, or do w e make the banks more secure? D o w e
surrender the benefits w e all enjoy from information sharing because crooks might
use our information to harm us? Or do w e provide for better security of that
information, so that its use for our benefit is preserved?

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JS-177: Assistant Secretary Abernathy's Remarks to University of North Carolina L a w School

Page 4 of 4

W e can stop the flow of information, but stagnant pools of information are of no
more benefit than stagnant pools of water, and they are no more free from
pollution. Instead, w e can use information to fight the crime. The banker stops the
identity thief when the banker knows more about his customer than the thief does.
The police can catch the crook if information can jump state lines faster than the
crook can. The victim's records can be restored if information on his clean record
can be sent quickly to all parts of the nation.
These are some of the faces of identity theft. Not a pretty picture. But we need to
face up to them and to recognize the danger to our modern, information-based
economy. And rather than back away from the crime, w e need to take it head on.
To do that w e need to recognize that it is not information that makes the crime
possible. It is lack of information.
The identity thief wears a mask. W h e n the merchant or the banker can look behind
the mask, and he knows what he sees, then w e will strike a major blow at the
crime. It is neither too soon nor too late to begin.

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fS-178: Statement by Treasury Secretary John S n o w in advance of meetings of the G 7 , I M F and World ... Page 1 of 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 10,2003
JS-178
Statement by Treasury Secretary John Snow
in advance of meetings of the G7, IMF and World Bank
Good afternoon. I look forward to hosting Central American Ministers tomorrow,
and G 7 Finance Ministers and Central Bank Governors tomorrow evening and
Saturday morning.
Economic growth is always at the top of our agenda. It is particularly important at
this time when the world economy is falling far short of its potential. To bring about
a strong recovery, each of our countries must act decisively to implement strong
policies to spur economic growth. The United States has done its part by moving
quickly and aggressively to ease both monetary and fiscal policy. The President's
Jobs and Growth program will accelerate the U.S. economic recovery and raise
economic growth. I will reiterate to m y colleagues tomorrow the importance of
implementing strong policies, including structural reforms, suitable to their economic
situation in order to contribute to global growth. W e must also reduce barriers to
trade through implementation of the Doha Development Agenda as trade
liberalization will also significantly add to global economic growth - in the industrial
economies, in emerging market economies and - most importantly - in developing
economies.
Combating terrorist financing will be another focus of our discussions. The
cooperation and leadership among G 7 nations in this area is notable and
continues. W e will review achievements and determine how to maximize further
progress. Hard work remains ahead to keep our financial institutions and systems
safe from abuse by terrorists. The ongoing programs of the IMF, World Bank,
Financial Action Task Force, and other international bodies to address our c o m m o n
challenge are vital. The United States has taken aggressive action to ensure that
Iraqi assets are being put to use for the Iraqi people. This weekend I intend to
encourage all nations to identify, marshal and eventually return to the Iraqi people
assets associated with the corrupt regime of Saddam Hussein. These assets
should be put to work to help the Iraqi people.
Crisis prevention and resolution remain priorities for us. We will review progress
( made over the last year in strengthening our crisis prevention strategy and
establishing a more orderly and predictable process for the restructuring of
sovereign debt. W e welcome the strong leadership that Mexico has shown by
demonstrating that emerging market countries can successfully issue debt with new
clauses that would help promote a more orderly restructuring process.
We encourage others to follow Mexico's lead. The IMF's work on a centralized
sovereign debt restructuring mechanism has raised important issues. It has
advanced this important issue but clearly, given the reactions of markets and
emerging market countries, it is time to move forward with collective action
clauses. These clauses, and not the Fund's sovereign debt restructuring
mechanism, are the vehicle to resolve these issues connected with sovereign debt
restructuring. Therefore, it is neither necessary nor feasible to continue working on
SDRM.
We will also discuss ongoing work to promote growth and reduce poverty in
developing countries. Sound policies and measurable results are the first steps
toward these goals. W e continue to stress the importance of measuring results as
part of our International Development Association contribution. President Bush's

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5-178: Statement by Treasury Secretary John S n o w in advance of meetings of the G 7 , I M F and World ...

Page 2 of 2

Millennium Challenge Account will provide substantial additional assistance to
reward strong policies and performance. T h e President has requested $1.3 billion
for this account this year, and has proposed to increase this to $5 billion by year
three and thereafter.
I also expect to have a substantive conversation with my G7 counterparts about
h o w our nations and international institutions can work together to help the Iraqi
people recover - not just from 25 days of conflict, but from 25 years of economic
misrule. A s President Bush has emphasized, the international institutions will have
a vital role to play in the reconstruction of Iraq. T h e World Bank, the IMF and other
institutions should be prepared to offer their expertise and technical assistance as
soon as possible. Our discussion should also include beginning to review the issue
of Iraqi debt. A s Finance Ministers w e are in a unique position to offer our talents,
our ideas and our leadership as w e look forward to a historic effort to help the Iraqi
people take control of their nation.
Finally, I also look forward to starting off the weekend with a special meeting with
ministers from the Central America region. W e will discuss the specific challenges
of that region - in particular, emphasizing efforts to promote economic growth
through the implementation of strong fiscal policies, the development of small and
medium-sized enterprises and attracting foreign investment, the importance of
strengthening governance and fighting corruption, and our joint efforts to combat
terrorist financing. Trade liberalization also remains an important priority for the
region.

http://www.treas.gov/press/releases/js 178.htm

7/21/2003

OFI'K I-. O F IM'KI.IC AFTM R S • 1500 I'F \ NS\ l.\ V \ I \ \\ K M

EMBARGOED UNTIL 11:00 A.M.
April 10, 2003

F, V\V. • U \ Ml I M ; T O N . I M .» 2022(1 •i2l)2: <i2 2 2<>MI

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $30,000
million to refund an estimated $30,890 million of publicly held 13-week and 26-week
Treasury bills maturing April 17, 2003, and to pay down approximately $890 million.
Also maturing is an estimated $27,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced April 14, 2003.
The Federal Reserve System holds $13,114 million of the Treasury bills maturing
on April 17, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held April 15, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDlrect customers have requested that we reinvest their maturing holdings
of approximately $1,023 million into the 13-week bill and $546 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo

Attachment

$-111

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 17, 2003

Offering Amount
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Rate
NLP Reporting Threshold
NLP Exclusion Amount
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

$15,000
$ 5,250
$ 5,250
$ 5,250
$ 5,200

million
million
million
million
million

91-day bill
912795 ND 9
A p r i l 1 4 / 2 003
A p r i l 1 7 # 2 003
J u l y 1 7 , 2 003
January 16, 2003
$20,558 million
$1,000

April 10, 2003
$15,000 million
$ 5,250 million
$ 5,250 million
$ 5,250 million
None

182-day bill
912795 NS 6
April 14, 2003
April 17, 2003
October 16, 2003
April 17, 2003
$1 000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated'
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount^ at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

j-180: Press Statement Ministers Meeting o n Central America Washington, D . C .

P a g e 1 of 1

PR CSS ROOM

F R O M T H E OFFICE OF PUBLIC AFFAIRS
April 11,2003
JS-180
Press Statement
Ministers Meeting on Central America
Washington, D.C.
April 11, 2003
Today Secretary Snow hosted a meeting of Central American Ministers to
discuss shared challenges in promoting sustained growth and financial
stability in the region. The meeting w a s part of the Bush Administration's
focus on strengthening Hemispheric ties vital to our economic interests. It
followed yesterday's meeting on the Central American Free Trade
Agreement hosted by President Bush. Participating in the discussion were
Ministers Fonseca of Belize, Trejos of Costa Rica, Daboub of El Salvador,
W e y m a n n of Guatemala, Cosenza of Honduras, Montealegre of Nicaragua,
and Delgado of Panama.
The discussion centered on key building blocks of growth and stability:
sustainable public finances, new business creation and foreign investment,
fighting corruption, and fighting terrorism through cutting off access to
finance. Ministers reviewed successes in the region and identified best
policy practices, as well as effective political strategies for advancing
reform. Secretary S n o w welcomed the free exchange of ideas and
concrete evidence of progress on difficult challenges. H e pledged to
continue to engage with these and other Hemispheric economic leaders to
foster real gains for countries pursuing strong policies.

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.-181: Treasury Department Spokesman R o b Nichols Announcing Trip by Secretary S n o w to Indiana,...

Page 1 of 2

PRLSS R O O M

F R O M THE OFFICE OF PUBLIC AFFAIRS
April 12,2003
JS-181
Statement by Treasury Department Spokesman Rob Nichols
Announcing Trip by Secretary Snow to Indiana, Louisiana
Treasury Secretary John Snow will travel to Indiana and Louisiana on
Monday and Tuesday, April 14-15, to discuss President George W . Bush's
efforts to strengthen the economy and to promote the President's Jobs and
Growth plan.
The Secretary will travel to Indianapolis, New Orleans, and Shreveport to
meet with local chamber of commerce officials, economists, small business
owners, individual investors, and taxpayers to highlight the importance of
swiftly enacting legislation sought by President Bush which will create jobs
and strengthen economic growth.
Secretary Snow's top priority is the enactment of President Bush's Jobs
and Growth plan. During his two month tenure as Treasury Secretary,
Secretary S n o w has traveled to five states - N e w York, Michigan,
Pennsylvania, Ohio and Florida - to promote President Bush's economic
agenda.
Open Press Events
Monday, April 14th
10:30-11:30am
Coffee with Taxpayers
R o o m 112
100 S.Capitol St.
Indianapolis, IN
12:00- 1:30pm
Remarks to the Economic Club of Indianapolis
Indiana Convention Center
100 S.Capitol St.
Indianapolis, IN
Tuesday, April 15*
9:00- 10:00am
Remarks to N e w Orleans Regional Chamber of Commerce
Hotel Intercontinental, Executive Conference CenterCabildo Room, 1st Floor
444 St. Charles Ave.
N e w Orleans, LA
10:15-10:45am
Coffee with Taxpayers
Mother's Restaurant
401 Poydras Street

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N e w Orleans, LA
12:30pm
Remarks to the Shreveport/Bossier Chambers of Commerce
Greater Shreveport Chamber of Commerce, Carrier Room, 1st Floor
400 Edward Street
Shreveport, LA
2:00pm
Coffee with Taxpayers
Theo's Sandwich Shop
420 Marshall Street
Shreveport, LA

C O N T A C T : R O B NICHOLS, 202-622-2910

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7/21/2003

5-182: Treasury and IRS Crack D o w n on Tax Shelter Involving Welfare Benefit Funds

Page 1 of

PRLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 11, 2003
JS-182
Treasury and IRS Crack Down on Tax Shelter Involving Welfare Benefit Funds
Today, the Treasury Department and the IRS issued Notice 2003- 24 to shut down
tax shelters involving welfare benefit funds.
The arrangements targeted by Notice 2003- 24 are set up through sham labor
negotiations to take advantage of a special tax rule. The special rule allows
deductions for contributions m a d e to welfare benefit funds set up through good faith
bargaining by labor unions legitimately representing the interests of their members.
Treasury and the IRS will not allow deductions under the special rule if the welfare
benefit fund is not set up as a result of good faith bargaining. This m a y occur where
the owner of the company purports to bargain on behalf of employees, but the
arrangement in fact benefits the owner with little benefit for other employees, or in
other cases where the facts indicate a lack of good faith bargaining for non-owner
employees. In addition, Notice 2003- 24 indicates that certain types of these
arrangements are n o w "listed transactions" for tax reporting purposes.
This action of Treasury and IRS will not affect welfare benefit funds negotiated in
good faith by labor unions for the benefit of the employees.
The text of Notice 2003- 24 follows.

Part III - Administrative, Procedural, and Miscellaneous
Tax Problems Raised by Certain Trust Arrangements Seeking to Qualify for
Exception for Collectively Bargained Welfare Benefit Funds under § 419A(f)(5)
Notice 2003-24
The Internal Revenue Service and the Treasury Department have become aware of
certain arrangements purporting to qualify as collectively-bargained welfare benefit
funds excepted from the account limits of § 419 and § 419A of the Internal Revenue
Code. This notice alerts taxpayers and their representatives that the tax benefits
purportedly generated by these transactions are not allowable for federal income
tax purposes. This notice also identifies s o m e purported collectively bargained
arrangements as listed transactions and alerts taxpayers, their representatives, and
organizers or sellers of these transactions to certain responsibilities that m a y arise
from participating in these transactions.
In general, contributions to a welfare benefit fund are deductible when paid, but only
if they qualify as ordinary and necessary business expenses of the taxpayer and
only to the extent allowable under § 419 and § 419A of the Code. Those sections
impose strict limits on the deduction for contributions in excess of current costs. A n
exception to s o m e of the limits is provided under § 419A(f)(5) for contributions to a
separate welfare benefit fund under a collective bargaining agreement. T h e
exception is based in part on the premise that deductions in such a setting will not
be excessive because of the arms' length negotiations between adversary parties
inherent in the collective bargaining process. See S. Rep. No. 313, 99th C o n g
2nd Sess. 1010 (1986), 1986-3 C.B. (Vol. 3) 1, 1010.

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^182: Treasury ami IRS Crack D o w n on Tax Shelter Involving Welfare Benefit Fimd^

Page 2 of 5

Section 1.419A-2T, Q&A-2, of the Income Tax Regulations sets out a number of
requirements that a fund must meet in order to qualify as a welfare benefit fund
under a collective bargaining agreementforpurposes of § 419A(f)(5) of the Code.
O n e of those requirements is that the benefits provided through the fund were the
subject of anTts4ength negotiations between employee representatives and one or
more employers. Another requirement is that the circumstances surrounding a
collective bargaining agreement must evidence good faith bargaining between
adverse parties over the welfare benefitstobe provided through the fund.
Section 7701 (aX46) of the Code provides, in part, that an agreement will not be
treated as a collective bargaining agreement unless it is a bona fide agreement
between bonafideemployee representatives and one or more employers. W h e n
this language w a s addedtothe Code in 1966, the Committee on W a y s and M e a n s
reported that s o m e promoters of tax avoidance arrangements were entering into
arrangements with employers under which, superficially, the employer and its
employees were represented by agents in collective bargaining. The Committee
noted that the named bargaining agent for the employees m a y have obtained a
ruling by the Internal Revenue Service that the agent is exempt from tax as a labor
organization. Even so, the Committee noted, no good faith bargaining occurred
under this type of arrangement because the bargaining agent for the employees
merely acts in concert with the named bargaining agentforthe employer. T h e
Committee Report states:
The committee believes that these arrangements are, in fact, designed for no
material purpose other than the improper exploitation of provisions that are
appropriate ontyforlegitimate collectively bargained plans. The committee wishes
to m a k e clear that it does not regard such an arrangement as the product of good
faith bargaining and that it does not consider an entitytobe an employee
representative merely because of its statusfortax exemption or a determination by
the Internal Revenue Service with respecttothat status.
H.R. Rep. No. 426,99th Cong., 1st Sess. 760 (1986), 1986-3 C.B. (Vol. 2) 1,760.
A number of business owners have been approached about arrangements that
purportedly allow the businesstotake a current tax deductionforall contributions to
a welfare benefit fund. Priortothis contact, these businesses typically have had no
involvement with labor organizations or other aspects of the collective bargaining
process. The promoters of these arrangements rely on § 419A(f)(5), claiming that
the benefits are provided under a collective bargaining agreement T h e individual
or company promoting the arrangement typically arranges for an organization
(sometimes referredtoas a management group)toact on the businesses behalf in
bargaining with an employee representative over benefitstobe provided to s o m e or
afl of the employees of the business (including employees w h o are also owners of
the business) and over certain other terms. While its n a m e m a y include the word
'union,*' the employee representative is often established specificallyforthe
purpose of the welfare benefit arrangement that is being promoted. In other cases,
the employee representative m a y be affiliated with an established union.
These arrangements usually require large employer contributions relativetothe
amount actually needed to provide the current coverageforthe welfare benefits
under the arrangement Typically, benefits that are provided or expected to be
providedtoemployees w h o are also owners are more favorable than the benefits
providedtoemployees w h o are not owners. For example, if death benefit
protection is being provided, owners m a y be covered by cash value life insurance
policies (and entitledtocertain benefits resulting from amounts accumulating under
those policies) while other employees receive only term insurance coverage or
other less valuable coverage than that providedtothe owners.
In some of the arrangements, participants can access funds by obtaining a loan
from the trust While the plan documents m a y indicate that the loans are available
onlyforunanticipated future events, in reality, most owners will be able to obtain a
loan without regardtowhether those events occur.

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Often, the arrangement will operate to allow the owner or owners to benefit from
any contributions to the trust in excess of amounts actually used to provide
coverage to other employees.
In general, these arrangements and other similar arrangements do not satisfy the
requirements of § 419A(f)(5) of the Code and do not provide the tax deductions
claimed by their promoters. For example, if an employer (or its agent) bargains for
benefits to be provided to employees, including the owner or owners of that
employer, and the benefits to be provided to an owner are more favorable than
those provided to other employees, the circumstances of that bargaining process
strongly indicate a lack of the good faith bargaining required to satisfy the
conditions for the § 419A(f)(5) exception. Further, even if the stated benefits for an
owner are not more favorable than those for other employees (e.g., all benefits are
based on a uniform percentage of compensation), the facts and circumstances of
the particular arrangement or the bargaining process m a y indicate that the good
faith bargaining requirement, or another requirement to be treated as a collective
bargaining agreement for purposes of § 419A(f)(5), has not been met.
In addition, an employer's deduction for contributions to the trust will be subject to
the deduction limits of §§ 419 and 419A of the Code if it is not a "separate" welfare
benefit fund under a collective bargaining agreement. Moreover, the deduction m a y
be subject to or disallowed by other provisions of the Code. For example,
depending on the facts and circumstances, the arrangement m a y actually be
providing deferred compensation or a constructive dividend to an owner rather than
welfare benefits. If the arrangement is providing deferred compensation, the
employer's deduction for contributions to the trust is governed by § 404(a)(5) of the
Code, rather than by §§ 419 and 419A. If the arrangement is providing a
constructive dividend, to the extent of the constructive dividend, the contributions
are not deductible at all.
Taxpayers and their representatives should be aware that the Service has
disallowed deductions for contributions to these types of arrangements in the past
and intends to do so in the future.
The Service would like to emphasize that the fact that a trust used to provide
benefits under an arrangement m a y have received a determination letter stating
that the trust is exempt under § 501(c)(9) of the Code has no relevance to the
issues discussed in this Notice. A determination letter under § 501(c)(9)
determines only the tax status of the trust. It does not determine the tax
deductibility of contributions to such a trust, nor does it determine the taxation of the
benefits provided through the fund to the participants. Also, as provided by
regulations, even if a union has been recognized as exempt under § 501(c)(5), the
Service nevertheless has the authority to determine whether there is a collective
bargaining agreement under the Code. Regs. § 301.7701-17T.
Listed Transactions

The following arrangements, and any arrangement that is substantially similar to
one of the following arrangements, are identified as "listed transactions" for
purposes of § 1.6011 -4(b)(2) of the Income Tax Regulations and § 301.6111 -2(b)
(2) and § 301.6112-1 (b)(2) of the Procedure and Administration Regulations. For
purposes of determining whether an arrangement is a listed transaction described
in this Notice, the term owner refers to a "key employee" as defined in § 416(i)(1) of
the Code, other than an individual w h o is a key employee solely by reason of § 416
(i)(1)(A)(i) (officers having annual compensation greater than a specified amount).
Any arrangement involving a purported collectively bargained welfare benefit fund is
a listed transaction with respect to an employer if, in any year, the employer's
contributions with respect to any owner or owners of the employer, considered in
the aggregate, are more than one-half of the employer's total contributions, but only
if there is at least one owner with respect to w h o m the employer's contributions
exceed $20,000. For this purpose, an employer's contributions with respect to an
owner m e a n s employer contributions used to fund the coverage or benefits for the
owner, including any employer contributions used to pay premiums on an insurance

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contract covering the owner.
Any arrangement involving a purported collectively bargained welfare benefit fund is
a listed transaction with respect to an employer if it provides more favorable
coverage for an owner of the employer than for employees w h o are not owners.
Even if the stated coverage under an arrangement is not more favorable for an
owner, an arrangement provides more favorable coverage for an owner (and thus is
a listed transaction) if it has any attributes that are likely to result in an owner
actually receiving more favorable coverage or benefits than other employees, either
during the term of the purported collective bargaining agreement or after the
agreement has terminated. A n arrangement that provides coverage based on a
uniform percentage of each employee's compensation will not be treated as
providing more favorable coverage to an owner merely because the owner has
higher coverage as a result of the owner's higher compensation.
Some examples of purported collectively bargained arrangements that have
attributes likely to result in an owner actually receiving more favorable coverage or
benefits than other employees are as follows:
An arrangement providing death benefits based on a uniform multiple of
compensation, if it can be expected that an owner will obtain other benefits, such as
rights to accumulated amounts under the arrangement, that are not available on the
s a m e basis to other employees;
An arrangement allowing loans to participants under which it can be expected that
an owner will be able to obtain the loans more readily, or on better terms, than the
other employees;
An arrangement providing benefits only to participants who have completed a
specified number of years of service with the employer, if it can be expected that
one or more owners will be the only employees to satisfy the years-of-service
requirement.
It should be noted that, independent of any classification as "listed transactions" for
purposes of §§ 1.6011 -4(b)(2), 301.6111 -2(b)(2), and 301.6112-1 (b)(2) of the
regulations, arrangements that are the s a m e as, or substantially similar to, the
arrangements described in this notice m a y already be subject to the disclosure
requirements of § 6011 of the Code, the tax shelter registration requirements of §
6111 or the list maintenance requirements of § 6112 (§§ 1.6011 -4, 301.6111 -1T,
301.6111-2, and 301.6112-1).
Persons who are required to satisfy the registration requirement of § 6111 of the
Code with respect to the arrangements described in this notice and w h o fail to do
so m a y be subject to the penalty under § 6707(a). Persons w h o are required to
satisfy the list-keeping requirement of § 6112 with respect to the arrangements and
w h o fail to do so m a y be subject to the penalty under § 6708(a). In addition, the
Service m a y impose penalties on participants in these arrangements or
substantially similar arrangements, or, as applicable, on persons w h o participate in
the promotion or reporting of these arrangements or substantially similar
arrangements, including the accuracy-related penalty under § 6662, the return
preparer penalty under § 6694, the promoter penalty under § 6700, and the aiding
and abetting penalty under § 6701. In addition to other penalties, any person w h o
willfully attempts to evade or defeat tax by means of the arrangements described in
this notice, or w h o willfully counsels or advises such evasion or defeat, m a y be
guilty of a criminal offense under §§ 7201, 7203, 7206, or 7212(a) or other
provisions of federal law.
Future Regulations
The Service is planning to publish proposed regulations under § 419A(f)(5) that will
address, a m o n g other things, the "separate" fund requirement discussed above.
The Service understands that there are bona fide collectively bargained welfare
benefit plans that provide benefits to one or more employees w h o are not

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collectively bargained, and that some of these plans might not have maintained a
separate and distinct fund for only the collectively bargained employees. The
Treasury and the Service request comments from the public regarding the
"separate" fund requirement in advance of publishing the proposed regulations.
Those comments may be mailed to CC:PA:RU (Notice 2003-24), room 5226,
Internal Revenue Service, P O B 7604, Ben Franklin Station, Washington, D C
20044. Alternatively, comments m a y be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (Notice 2003-24), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue N W , Washington, D C ,
or submitted electronically to: Notice.Comments@irscounsel.treas.gov. C o m m e n t s
should be submitted no later than August 3, 2003. All comments will be available
for public inspection and copying.
Drafting Information
The principal authors of this notice are Louis Leslie of the Employee Plans, Tax
Exempt and Government Entities Division and Betty Clary of the Office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this notice contact Mr. Leslie at (202) 283-9888 (not a
toll-free call) or Ms. Clary at (202) 622-6080 (not a toll-free call).

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5-183: Statement by treasury Secretary John S n o w after meetings with the G 7 Finance Ministers

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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 12,2003
JS-183
Statement by Treasury Secretary John Snow
after meetings with the G 7 Finance
Ministers and Central B a n k Governors
Good afternoon. I was very pleased to host my fellow G-7 Finance Ministers and
Central Bank Governors over the last two days to discuss developments in the
world economy and the challenges that confront us. I appreciated the opportunity
to engage on s o m e very important issues with m y colleagues.
One important issue is the future of Iraq. During our bilateral discussions and in the
G 7 meetings w e began substantive discussions about h o w our nations and the
international institutions can work together to help the Iraqi people recover- not just
from 25 days of conflict, but from 25 years of economic misrule. W e agreed that
the international financial institutions should provide technical assistance and
expertise in Iraq and undertake a preliminary needs study. I
noted the importance the United States attaches to international cooperation as the
people of Iraq claim their liberty.
Cooperation is necessary in the efforts underway to find, freeze and marshal the
assets of the S a d d a m regime and there w a s broad agreement on that subject as
well.
And again we recognized that cooperation is vital for providing humanitarian
assistance and for the challenges of reconstruction ahead. W e had useful
discussions about h o w to proceed with the Iraqi debt - recognizing that the Iraqi
people cannot bear the burden of current debt levels - and w e recognize the need
of the Paris Club to begin to address this issue.
We shared the view that growth in our economies is not as strong as it needs to be
- both because of geopolitical uncertainties and other underlying weaknesses. A
reduction of geopolitical uncertainty will help a global recovery, but this alone will
not bring about the strong and lasting growth essential for our countries and for the
world. Each of us pledged to pursue economic policies at h o m e that support strong
growth with low inflation, to raise potential growth through productivity-enhancing
structural reforms, and to strengthen investor confidence through continued
improvements in corporate governance practices, market discipline, and
transparency.
Here in the United States, President Bush's Jobs and Growth plan will enhance
growth potential over the long term. I underscored the need for structural reform in
Europe and Japan so that all are contributing to global growth.
Terrorism financing continues as a key priority. We reiterated our commitment to
implement the work plan w e laid out in February and thereby keep our financial
institutions and systems safe from abuse by terrorists. W e reiterated our
commitment to w a g e war against terrorist financing.
We also reiterated our commitment to strengthen crisis prevention and resolution
measures as reflected in the communique. W e also adopted an action plan which
documents the progress m a d e last year and charts a course for future activity.

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A s for crisis resolution, w e welcomed the strong leadership that Mexico has shown
and there w a s broad agreement on the need to m o v e forward with clauses to
promote an orderly restructuring process.
We reaffirmed our support that aid is most effective in countries with sound policies,
good governance, and an environment conducive to private sector-led growth.
Finally, we underscored the importance of trade liberalization to global growth and
poverty reduction. Successful implementation of the Doha Development Agenda, in
particular the agricultural and financial services agendas, offers potential benefits
for all countries.
I would now be delighted to take a few questions.

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5-184: Secretary S n o w Statement (Prepared) to the World B a n k Development Committee

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PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
April 12,2003
JS-184
Prepared Statement by Treasury Secretary John Snow to the World Bank
Development Committee
April 12,2003
The United States is committed to helping the developing world—particularly the
poorest countries—increase economic growth, raise living standards, and eliminate
poverty. Developed and developing countries, together with the international
financial institutions, must redouble their efforts toward achieving these goals.
Last year at Monterrey, President Bush and other world leaders committed to a new
partnership between developed and developing countries. This partnership links
increased development assistance to the pursuit of sound policies, good
governance, and the rule of law in developing countries. It is a partnership
designed to realize our c o m m o n goal of a better life for millions of people around
the world.
Increased Development Assistance
The United States has acted to make good on the Monterrey vision. Last year
President Bush proposed the Millennium Challenge Account (MCA). The M C A is
based on the principle that aid can succeed in reducing poverty only if coupled with
policies and institutions that promote productivity growth and raise living standards.
The M C A channels assistance to countries that pursue good governance and the
rule of law, invest in their people, encourage innovation and investment, and lay the
foundation for a vibrant private sector. The President has requested $1.3 billion for
the M C A this year, and has proposed to increase this to $5 billion by the third year
and thereafter. In addition, to fight two of the world's great scourges, the President
has proposed $10 billion in new money to combat HIV/AIDS over the next five
years and $200 million in new money to address famine and food security
worldwide this year.
The United States has also pledged an 18 percent increase in our replenishment
allocation to both IDA and the African Development Bank, and asked for a 16
percent increase in resources for the Global Environment Facility. In total, the
United States is requesting an increase of over $2.5 billion this year in development
assistance and plans to request roughly an additional $6 to $8 billion by the third
year.
Supporting Policies & Projects that Raise Productivity Growth
The United States believes that the MDBs have an essential role to play in
supporting policies and projects that increase productivity growth, reduce poverty,
and raise living standards. The United States will continue to emphasize the
importance of the performance-based allocation systems within the M D B s . And w e
will continue to press the M D B s to focus on projects that raise productivity by
supporting private sector led growth and placing a greater emphasis on the delivery
of education, health care and potable water.
Since some human capital investments—although essential for long-run economic
growth—provide little direct financial return, poor countries are sometimes reluctant
to contemplate borrowing for them. For this reason the United States has placed a
high priority on the increased use of grants by the M D B s . In implementing the IDA13 agreement on grants, it is imperative to keep IDA credits and IDA grants

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separate. Grants must not simply be used to m a k e loans more concessional, as
history has shown that even highly concessional loans can create debt burdens so
heavy that they can never be repaid. Moreover, blending grants and loans makes it
impossible to empirically assess the effectiveness of grants versus traditional
credits.
Finally, trade liberalization—by both developed and developing countries—is
central to economic growth, development and poverty reduction. I c o m m e n d the
World Bank's increased attention to trade issues in support of the trade negotiations
begun at Doha. I urge the Bank to intensify its efforts to increase its operational
focus on building both institutional and physical capacity to help developing
countries take advantage of new trade opportunities.
Measurable Results
Building public support for increased development assistance depends on showing
that aid is making a difference in the lives of the people it is intended to help. N o
matter h o w altruistic our goals, w e will not gain our citizens' support for more aid
money unless w e can demonstrate that it will be put to good use. And without a
system for measuring the results of development activities, it is impossible to
channel scarce aid resources to the projects that have the greatest positive impact
on the world's poorest people.
The United States will continue to insist on measurable results in all aspects of
M D B activities. Goals, baselines, benchmarks and post-completion evaluations
must be embedded in the design and implemented throughout the life of country,
sector, and institutional strategies as well as individual projects. Projects must
contain clearly defined components with a sound results-based performance
measurement plan that will enable mid-course adjustments to maximize success.
The World Bank has made significant strides in developing a results measurement
framework. Implementing this successfully will require embedding the focus on
results in practices and incentives throughout the Bank's operations. W e look
forward to regular reports on this effort. A s part of IDA-13, the United States
committed to provide an additional $300 million in contributions if IDA produces a
results measurement system, expands essential diagnostics, and achieves
progress toward concrete health, education, and private sector goals.
The United States is committed to achieving the goals adopted as part of the UN
Millennium Declaration in September 2000. W e also recognize that increasing
economic growth in the developing world is the sine qua non for achieving them,
since growth raises the living standards of the poor and produces the resources
needed for critical social investments. For this reason, a focus on increasing
productivity growth must be the foundation for the World Bank's work in pursuing all
international development goals.
World Bank Role in Reconstruction
The World Bank has played a vital role in addressing development challenges in
many difficult situations. I c o m m e n d the World Bank on its leadership in rebuilding
Afghanistan, particularly in coordinating with the Afghan government and with other
donors in administering the Afghanistan Reconstruction Trust Fund. W e all look
forward to a brighter future for the people of Afghanistan. In Iraq, engagement by
the international financial institutions is vital. A n assessment by the World Bank of
Iraq's reconstruction needs will help inform the international community's efforts to
mobilize financing for reconstruction. The people of Iraq have waited long enough
for the promise of aid and assistance from the international community. W e look
forward to working with the World Bank and other shareholders to deliver on this
promise.
Combating Terrorist Financing
Maintaining the integrity of the financial system is central to a well-functioning
economy. Therefore I c o m m e n d the World Bank for its significant contributions to
the fight against the financing of terrorism and money laundering since w e last met
in September. I a m encouraged by progress at the mid-point of the pilot project
launched by the World Bank, IMF and F A T F to assess country performance in this

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crucial area. M y hope is that after review, this effort will b e c o m e a permanent part
of the international financial institutions' work to help protect financial systems from
abuse by terrorists and money launderers.

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5-185: Treasury Secretary S n o w Statement to the International Monetary and Financial Committee

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PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 12,2003
JS-185
Statement by Treasury Secretary John S n o w before the International
Monetary and Financial Committee of the IMF
Today w e meet at a time of many challenges for the global economy. I welcome
this opportunity to review recent developments and to discuss our work together to
promote global growth and stability. Our continued multilateral cooperation is, as
always, vital to success.
Promoting Global Growth
The world recovery is continuing, but the recovery is not strong enough. For this
reason each country must do its part to take action now to strengthen this
recovery. The United States has contributed by aggressive and well-timed
monetary and fiscal easing. President Bush's Jobs and Growth plan will underpin
the U.S. economic recovery and provide enhanced growth in future years. Other
countries need to pursue policies appropriate to their own economic situations to
contribute to a stronger global economy.
Reducing trade barriers is fundamental to achieving growth and reducing poverty.
It is important for all of us, along with the IMF, to support the objectives of the W T O
negotiations begun at Doha, with particular focus on financial services and
agriculture and the need for results-oriented, trade-related capacity building.
Enhancing Crisis Prevention and Resolution
The United States continues to attach high priority to enhancing the IMF's
effectiveness in preventing crises and strengthening the framework for resolving
crises that do occur.
A critical part of crisis prevention is early identification of problems and early action
to address them. Strong and independent IMF surveillance is important both for
countries receiving IMF support and for those that do not have IMF programs. In
order to be a credible and useful guide for decisionmaking, it is crucial that IMF
advice be comprehensive, transparent and accountable—and as objective and
clear as possible. It is particularly important to develop better and more objective
assessments of the vulnerabilities that lead to crises, such as currency mismatches.
Providing better information to the public is key to crisis prevention. The IMF
cannot contribute in this respect if the results of its analyses are not widely
available. W e call on the IMF and its members to move to a presumption of
publication for surveillance and program documents, as well as summaries of Board
discussions of these documents. For countries making a case for exceptional
access, IMF program documents should always be published.
To help create incentives for strong policies and prudent risk-taking, the United
States has emphasized that official sector finance is limited. W e welcome the
decisions taken to help ensure that exceptional access remains exceptional. W e
look forward to seeing the new criteria and procedures made operational, especially
the separate report evaluating each case for exceptional access.
Creating a more orderly and predictable process for debt restructuring has been a
particular priority in recent months. The United States welcomes the excellent
progress made in developing and incorporating collective action clauses in external
sovereign bond contracts. Mexico has shown strong leadership in issuing several

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bonds that include such clauses and committing to include such clauses in all n e w
bond issues. Mexico's successful issuances demonstrate that emerging market
countries can follow a contractual approach that would help promote a more orderly
restructuring process. W e urge other emerging market borrowers to follow Mexico's
lead.
The IMF's exploration of a sovereign debt restructuring mechanism has raised
important issues. But clearly, given the reactions of markets and emerging market
countries, w e should m o v e forward with collective action clauses. These clauses,
and not a centralized mechanism, are the vehicle to resolve the issues connected
with sovereign debt restructuring. There can at times be "collective action"
problems that prevent a prompt, orderly resolution of a sovereign debt crisis. The
source of these problems lies in the relationships and agreements of debtors and
their creditors. It is these parties, not an international organization, that must
assume responsibility for the solution. Therefore, it is neither necessary nor
feasible to continue working on S D R M .
In coming months, we believe it is essential that work continue to strengthen the
crisis resolution framework through broad voluntary approaches, and w e look
forward to consideration of such issues as h o w best to promote more widespread
inclusion of collective action clauses and enhanced transparency and disclosure.
Emerging markets countries which regularly access international financial markets
need to assume rightful ownership of these issues and help assure a more stable
and orderly international financial system.
Helping Low Income Countries
The best way to help low income countries is to focus on results and to support
countries with good economic policies. Increasing economic growth is the only w a y
to reduce poverty and raise living standards. Assistance can only be effective when
countries have policies and institutions that encourage innovation and investment,
and create the foundation for a vibrant private sector. President Bush's Millennium
Challenge Account is designed to channel assistance to countries that are ruling
justly, investing in people, and encouraging economic freedom.
The IMF should support countries that develop and implement strongly-owned
reform plans that will deliver results. Maintaining strong standards on HIPC is vital.
The current approach to topping up debt reduction is appropriate to assist countries
to cope with external shocks. The United States supports the steps being taken to
ensure that the African chairs can be effectively represented, while preserving the
existing governance of the Fund.

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Combating Terrorism Financing
We have made significant strides in the fight against the financing of terrorism since
w e last met. But the war against terrorism financing is far from won. W e must
avoid complacency, maintain focus, and keep our financial institutions and systems
safe from abuse by terrorists.
The IMF/World Bank and FATF pilot project to assess country performance in
combating money laundering and terrorist finance is an important part of this work.
W e are encouraged by progress at the mid-point of the pilot project and look
forward to successful implementation and review of this important initiative. This
assessment effort should become a permanent part of surveillance and oversight
against money laundering and terrorist financing.
Rebuilding Iraq
It is important for the international community to cooperate in providing
humanitarian relief to the Iraqi people and laying the groundwork for reconstruction
and economic recovery. The IMF and World Bank have crucial roles to play,
drawing on their respective areas of expertise. Engagement by the international
financial institutions is vital, with the IMF performing the critical function of
assessing the macroeconomic situation and helping Iraq to establish the basis for
growth. The United States looks forward to working with the IMF and other
shareholders in this very important undertaking.

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303-4-12-13-25-23-15778: G-7 ACTION PLAN IMPLEMENTATION, APRIL 2003

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PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 12,2003
2003-4-12-13-25-23-15778
G-7 ACTION PLAN IMPLEMENTATION, APRIL 2003
In April 2002, we adopted an integrated Action Plan to strengthen crisis prevention
and resolution measures designed to promote conditions for sustained growth of
private investment in emerging markets. The progress made on each element of
the Action Plan is set out below.
Surveillance and Crisis Prevention - Better information is key to sound economic
analysis and improved pricing of risk, with a view to promoting more stable capital
flows. In this regard, the IMF has made progress in deepening its surveillance
capacity, including through the development of more robust debt sustainability
analyses and greater focus on national balance sheets. The IMF and its
Independent Evaluation Office (IEO) have identified areas for further progress to
make surveillance more comprehensive, independent and accountable, including a
fresh perspective in program countries and improved analysis of vulnerabilities. W e
urge the Fund to intensify its work in these and other critical areas, including
currency mismatches, reporting progress to the 2003 Annual Meetings. To
complement these measures, w e support the presumption of publication of Article
IV reports, Public Information Notices (PINs) of relevant Board discussions,
program documents, and reports on the observance of standards and codes
(ROSCs), especially for countries with IMF programs, while taking into account its
impact on deletion and correction policy. Program documents for cases of
exceptional access should always be published.
Access Limits - Consistent with the need for greater discipline in the provision of
official finance in crisis situations, w e support the IMF Board's decision that normal
access should be limited to 100 per cent of quota in any one year and a cumulative
total of 300 per cent of quota. Lending under any facility, or combination of facilities,
above these limits will be considered exceptional. Over the past year, the IMF has
set out criteria and procedures to inform decisions and judgements for cases where
exceptional access is contemplated. These stronger procedures, including early
Board involvement and a separate report evaluating the case for exceptional
lending, will be applied to any exceptional lending, even where the member is not
experiencing a capital account crisis. W e welcome the recent establishment of a
strong presumption that only the S R F will be used for any exceptional lending to
address significant balance of payment pressures on the capital account. W e also
welcome the progress made in clarifying the Fund's policy for lending in cases
where members are in arrears to their private creditors.
Code of Conduct - In the light of growing interest in exploring a voluntary "code of
good conduct", and since good investor relations are key to timely, orderly debt
restructurings, w e have instructed our officials to prepare a report, in consultation
with issuers and the private sector, on these issues by our Fall meeting. W e note
that the Fund has already started to examine the concept and w e look forward to a
progress report on its work.
Collective Action Clauses (CACs) - We remain committed to promoting the early
and widespread adoption of CACs. To date, experts from the private and official
sector have made progress toward developing model clauses for use in sovereign
bond contracts. W e expect that G-7 countries will continue their leadership by
adopting C A C s in their own bonds governed by the laws of a foreign jurisdiction.
Consistent with the policy of the European Union to introduce these clauses in new

http://www.treas.gov/press/releases/200341213252315778.htm

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)03-4-12-13-25-23-15778: G-7 ACTION PLAN IMPLEMENTATION, APRIL 2003

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foreign bond issues, some E U members will start issuing bonds with such clauses
this year. W e welcome the leadership that Mexico has shown by including C A C s in
its successful bond issues under N e w York law.
Sovereign Debt Restructuring Mechanism (SDRM) - The extensive analysis and
consultations undertaken in the course of the Fund's development of a concrete
S D R M proposal have promoted a better understanding of the issues to be
addressed in the more orderly resolution of sovereign debt crises. In view of the
experience gained through the implementation of C A C s and the interest in a code
of conduct, and recognizing that it is not feasible now to implement the S D R M
proposal, work should continue on issues raised in the S D R M discussions, such as
aggregation, scope of debt, and inter-creditor equity that are of general relevance to
the orderly resolution of financial crises.

ittp.7/www.treas.gov/press/releases/200341213252315778.htm

7/21/2003

003-4-12-13-10-1-15576: Statement of G-7 Finance Ministers and Central Bank Governors

Page 1 o f 2

I
PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 12,2003
2003-4-12-13-10-1-15576
Statement of G-7 Finance Ministers and Central Bank Governors April 2003
We met today at a time in which the world economy faces many challenges. In this
light, w e reaffirm our commitment to multilateral cooperation.
Growth in most of our economies has been subdued, though uncertainties have
diminished. A strong and lasting recovery is essential for our own countries and for
the world. To this end, w e each commit to pursue sound macroeconomic policies
that support sustained growth. In a low inflation, low interest rate environment, there
is potential for higher growth through productivity-enhancing structural reforms, and
to buttress investor confidence through continued improvements in corporate
governance practices, market discipline, and transparency. W e will respond as
needed to developments in the economic environment. W e will continue to monitor
exchange markets closely and cooperate as appropriate. W e underscore the
importance to global growth and poverty reduction of successful trade liberalization
through the timely implementation of the Doha Development Agenda, notably in
financial services.
We encourage all emerging market countries to pursue sound policies and to
enhance their investment climates. These policies will help attract financial flows,
importantly including foreign direct investment, to reduce external vulnerabilities,
and to support sustained growth. W e welcome the strong macroeconomic policies
and ambitious structural reforms that Brazil's authorities are implementing.
We reiterate our commitment to strengthen crisis prevention and resolution
measures. W e are pleased to see progress being made on each element of our
Action Plan of last April, as detailed in the accompanying update. W e will continue
to work to further implementation in this area.
We reaffirm our strong commitment to combat terrorist financing and pledge to
maintain the momentum w e have achieved thus far. W e will work with the Financial
Action Task Force, the UN, and the International Financial Institutions to implement
the work plan that w e endorsed in February. W e welcome the Action Plan of the
IMF and World Bank, and are encouraged by the progress of the Pilot Program
agreed with FATF; w e urge them to successfully carry forward this important
initiative. W e look forward to revised FATF recommendations by June, establishing
an enhanced standard in the fight against financial crime.
We reaffirm our February commitment to address the challenge of global poverty
and our support for the Millennium Development Goals and the Monterrey
consensus. Achieving these will require mobilization of greater financial resources
by developed and developing countries. W e will continue to focus on the goals and
their financing, including facilities, with a view to progress by Evian. Aid is most
effective in countries with sound policies, good governance, and an environment
conducive to private sector-led growth. W e reiterate our support for N E P A D
principles. W e will develop an approach for dealing with non-IDA countries within
the Paris Club for consideration at our May meeting. W e also encourage
developing countries, working with the World Bank, to integrate trade objectives as
key elements of their P R S P s and C A S lending programs.
We recognize the need for a multilateral effort to help Iraq. We support a further
U N Security Council resolution. The IMF and the World Bank should play their

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normal role in rebuilding and developing Iraq, recognizing that the Iraqi people have
the ultimate responsibility to implement the right policies and build their o w n future.
It is important to address the debt issue and w e are looking forward to the early
engagement of the Paris Club.

ittp://www.treas.gov/press/releases/20034121310115576.htm

7/21/2003

,-186: Treasury Secretary S n o w Announces Request of Additional $100 million for Development

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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 13,2003
JS-186
Treasury Secretary John Snow Announces Request of an Additional $100
million for the International Development Association, Affirms Progress on
Goals and Measurable Results
U.S. Treasury Secretary John Snow today announced that he will request an
additional $100 million in funding for the World Bank's International Development
Association (IDA). Last year the United States proposed additional funding as an
incentive contribution if IDA satisfactorily initiated work on a results measurement
system and had delivered key country diagnostic assessments. Secretary S n o w
determined that conditions have been met to allow for the additional contribution.
"The International Development Association is making strong progress toward
ensuring that development resources are invested effectively," said Snow.
"President Bush wants to be certain that assistance will deliver results on the
ground and m a k e real improvements in people's lives. I a m very pleased to
announce that I a m requesting of this increase today."
Last year, the United States achieved agreement on sweeping reforms in the
M D B s , including a greater focus on measuring results. For the first time IDA donors
are able to link a portion of their contributions to the achievement of results. T h e
U.S. committed to increase its budgetary request by 1 8 % for IDA. Of the $2.85
billion U.S contribution to IDA, $300 million is contingent on improving results in a
concrete and measurable way.
The contingent contribution was divided into two parts:
FY04 -- the President's budget made $100 million contingent on IDA creating a new
measurable results system and significantly increasing the number of diagnostic
studies, which are vital to increasing assessment and accountability for measuring
development results. Diagnosing the adequacy of existing conditions in the poorest
countries - national accountability structures, sources of growth, nature of poverty,
investment climate, absorptive capacity, etc. - is critical to informed decisions on
lending amounts, appropriate instruments, and priority sectors for assistance.
FY05 -- the United States will link an extra $200 million to quantifiable results in the
areas of education, health, and private sector development. Ultimately, success
needs to be measured by what w a s actually achieved on the ground in borrowing
countries. Productivity growth is the key driver of poverty reduction in all countries
around the world, and investments in people and vibrant private sectors are
important contributors to increasing productivity. Therefore, the U.S. will provide an
additional $200 million if satisfactory progress is m a d e toward achieving the
following results:

Education: Increase in aggregate (IDA) primary school completion rates
across IDA countries as well as an increase in the number of countries that have
raised their completion rates.

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-186: Treasury Secretary S n o w Announces Request of Additional $100 million for Development

Page 2 of 2

Health: Increase in measles immunization coverage across IDA countries
as well as an increase in the number of countries with 80 percent coverage.

Private Sector Development: Reductions in both the number of days and
the official costs of starting businesses in IDA countries.

The United States will continue working with IDA, the other multilateral development
banks, and other donor and recipient partners with a view to more fully integrating
and strengthening a results-based approach throughout the development system.

ittp:/7v\ \v\v.treas.gov/press/releases/js 186.htm

7/21/2003

5-187: M o r e T h a n 2.4 Million Taxpayers Filed on-Line for Free

P a

lof 2

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 15,2003
JS-187
More Than 2.4 Million Taxpayers Filed on-Line for Free
Taxpayers Benefit from Free, Easy and Secure On-Line Filing
Today the Treasury Department and the Internal Revenue Service
announced that more than 2.4 million Americans (as of April 9, 2003) have
prepared and filed their taxes on-line for free using the Free File website.
In February 2002, President Bush proposed free online tax filing as one of
his E-Govemment initiatives. Less than one year later, the Treasury
Department, Office of Management and Budget ( O M B ) and the Internal
Revenue Service (IRS) launched the n e w Free File W e b site featuring
private-sector partners that allow most taxpayers to prepare and file their
taxes online for free. Treasury, O M B and IRS m a d e this possible through a
public-private partnership with a consortium of tax software companies, the
Free File Alliance, LLC.
Free File is an easy, fast and secure way for citizens to file taxes and will
also allow Americans to get refunds in half the time. The efficiency of E-file
saves both taxpayers and the IRS time and money.
"No one likes paying taxes-it's too confusing and time consuming. With this
n e w Free File website, we're seeing great success that has saved more
than 2 million taxpayers time and money-and an even bigger bonus is they
get their refunds in half the time," stated Treasury Secretary John Snow.
" W e hope that, in years to come, even more taxpayers will take advantage
of the Free File program."
"The midnight lines at the post office will be a lot shorter tonight because
the President delivered on his pledge to use the Internet to ease the
taxpayers' burden," said Mitchell E. Daniels, Jr., Director of the Office of
Management and Budget (OMB).

"Free File provided the nation's taxpayers with one more option for e-filing
their tax returns. The public's response to this new initiative bodes well for
the future of electronic tax filing and e-govemment in general," said IRS
Acting Commissioner Bob Wenzel.
At the conclusion of this filing season, Treasury and IRS will review
feedback received on the program's inaugural season with program
participants, and consider any modifications to the agreement prior to next
filing season.
Free File, together with IRS's pending legislative proposal for a 15 day
filing extension for e-fllers, will m a k e important strides towards achieving
Congress' target of 8 0 % of taxpayers e-filing by 2007.

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1-187: M o r e T h a n 2.4 Million Taxpayers Filed on-Line for Free

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E-Government is an integral part of the President's Management Agenda,
making it easier for citizens and businesses to interact with the
government, saving taxpayer dollars and streamlining citizen-togovernment transactions. For more information on each of the President's
E-Government initiatives, please visit www.egov.gov.

http://www.treas.gov/press/releases/js 187.htm

7/21/2003

;-188: Remarks of Under Secretary for Domestic Finance Peter R. Fisher T o The National Postal Forum

B^g^gggll

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 14, 2003
JS-188
Remarks of Under Secretary for Domestic Finance Peter R. Fisher Upon
Accepting the Postmaster General's Partnership for Progress Award at the
National Postal Forum, N e w Orleans, Louisiana
I am honored to be here today and honored to accept this award. But just like so
many Americans who serve our government and our military, I was only doing the
job that President Bush asked m e to do - and mine was neither hard nor
dangerous.
We have seen with the Postal Commission, and in so many other ways, that the
President believes leadership is about confronting our long-term challenges even
when they seem difficult. Whether the challenge is international or domestic, I think
w e all now see that George W . Bush is the kind of leader w h o looks far ahead, tells
us what he believes, decides where to go and then drives hard to get there.
The President asked the Postal Commission - and all of us - to look to the future of
the Postal Service and to find ways to make it even more efficient and more
productive - an even more vital part of our nation's commerce. I want to take a
moment to ask you to support the President as he looks to the future of our whole
economy.
Today, too many Americans want jobs but can't find them. Our economy is growing
more slowly than w e should accept. Because of this, the President wants Congress
to act now on his plan to create and secure jobs and to increase our standard of
living for years to come.
Part of the President's package is to accelerate tax cuts already enacted into law to
bring cash to families right now. The 10 percent tax bracket would expand
immediately, enabling low-earners to keep more of their pay. The marriage penalty
will end once and for all. The child credit will increase by $400 to $1000 per child.
But the area of our economy that's struggling the most, unfortunately, is the source
of new jobs.
Let's be clear about where jobs come from. New jobs come from investment, from
the willingness of businessmen and -women like you - of entrepreneurs and
investors, to put their money at risk in expanding their operations and in new
ventures. This is where the President is focused: on removing a barrier to
investment and job creation by ending the double taxation of dividends.
Taxing dividends twice - once for the company, once for the individual - means that
w e tax investment more heavily than any other major industrial nation. This makes
no sense. No one can defend this double taxation on investment. Maybe w e could
afford the luxury of foolish policies like this in the past. But in this increasingly
competitive world and with economic growth in other countries stagnating, w e
cannot afford this any longer; it's the wrong way to try to expand our economy and
create jobs.
Each year American firms invest over one trillion dollars in fresh capital. Think of
the new jobs and higher productivity w e can achieve - by accelerating capital
formation and business formation if w e remove the distortion of the dividend tax.

ittp://www.treas.gov/press/releases/js 188.htm

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5-188: Remarks of Under Secretary for Domestic Finance Peter R. Fisher T o T h e National Postal F o r u m

Page 2 of 2

The President's economists predict that the complete Jobs and Growth Package
will create 1.4 million new jobs by the end of 2004 and that the dividend proposal
alone will create more than 400,000 of these jobs. Other economists are even more
optimistic.
The President wants Congress to act now, to provide our economy with sound tax
policies that will pay off today and over the coming years. Putting more money in
people's pockets and lowering the cost of business investment will help create an
expanding economy, more business opportunities, more orders, more volume,
more jobs, and a more abundant future for us all and that's why I hope you will
support the President's plan.
Thank you for this honor and for this opportunity.

ntp: www.treas.gov/press/releases/jsl88.htm

7/21/2003

S-189: Treasury Secretary John S n o w Travels to Indiana and Louisianato

S e *o f 2

PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 11,2003
JS-189
Treasury Secretary John Snow Travels to Indiana and Louisiana
to Promote President Bush's Economic Agenda
Treasury Secretary John Snow will travel to Indiana and Louisiana on Monday and
Tuesday, April 14-15, to discuss President George W . Bush's efforts to strengthen
the economy and to promote the President's Jobs and Growth plan.
The Secretary will travel to Indianapolis, New Orleans, and Shreveport to meet with
local chamber of commerce officials, economists, small business owners, individual
investors, and taxpayers to highlight the importance of swiftly enacting legislation
sought by President Bush which will create jobs and strengthen economic growth.
Secretary Snow's top priority is the enactment of President Bush's Jobs and Growth
plan. During his two month tenure as Treasury Secretary, Secretary S n o w has
traveled to five states - N e w York, Michigan, Pennsylvania, Ohio and Florida - to
promote President Bush's economic agenda.
Open Press Events
Monday, April 14th
10:30 11:30am
Coffee with Taxpayers
R o o m 112
100 S.Capitol St.
Indianapolis, IN
12:00-1:30pm
Remarks to the Economic Club of Indianapolis
Indiana Convention Center
100 S.Capitol St.
Indianapolis, IN
Tuesday, April 15th
9:00- 10:00am
Remarks to N e w Orleans Regional Chamber of Commerce
Hotel Intercontinental, Executive Conference CenterCabildo Room, 1st Floor
444 St. Charles Ave.
N e w Orleans, LA
10:15-10:45am
Coffee with Taxpayers
Mother's Restaurant
401 Poydras Street
N e w Orleans, LA
12:30pm
Remarks to the Shreveport/Bossier Chambers of Commerce

rttp://www.treas.gov/press/releases/js 189.htm

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Greater Shreveport Chamber of Commerce, Carrier Room, 1st Floor
400 Edward Street
Shreveport, LA
2:00pm
Coffee with Taxpayers
Theo's Sandwich Shop
420 Marshall Street
Shreveport, LA

C O N T A C T : R O B NICHOLS, 202-622-2910

ittp://www.treas.gov/press/releases/js 189.htm

7/21/2003

2003-4-11-20-39-41-4626: Treasury Secretary John S n o w on passage of the Budget Resolution

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 11, 2003
2003-4-11 -20-39-41-4626
Statement by Treasury Secretary John Snow on passage of the Budget
Resolution
Contact Rob Nichols at 202-622-2910.
I look forward to working with the full Congress to swiftly enact tax relief necessary
to grow the economy and create jobs. The budget resolution which passed today
provides for $550 billion in tax relief for the President's Jobs and Growth package,
and I will work closely with President Bush and the Congress to obtain the greatest
amount of tax relief possible to grow the economy and create jobs for the American
people.

ttp://www.treas.gov/press/releases/20034112039414626.htm

7/21/2003

S-190: Tax D a y Reminder: Treasury & IRS Continue Crackdown on Abusive Tax Shelters

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PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 15,2003
JS-190
Tax Day Reminder: Treasury & IRS Continue Crackdown on Abusive Tax
Shelters
As part of a comprehensive strategy to ensure all taxpayers pay their fair share, the
Treasury Department and the Internal Revenue Service are moving aggressively to
combat abusive tax avoidance transactions.
"The IRS is building an enforcement web to catch and eliminate tax shelters.
Taxpayers should come forward now, before they get tangled in the web. The IRS
is collecting information about taxpayers and promoters w h o don't come forward so
it can act on that information," stated Treasury Assistant Secretary for Tax Policy
P a m Olson. "It's time to come in from the cold."
The number and complexity of questionable tax avoidance devices has expanded
in recent years. To address them, the IRS is pursuing a multi-pronged approach on
abusive transactions.
"We are committed to using the tools at our disposal to identify questionable
transactions early, analyze those transactions quickly and take appropriate action
promptly to stop those transactions w e determine to be abusive," said IRS Chief
Counsel B. John Williams. "We will continue to pursue promoters and taxpayers to
ensure they are complying with their legal obligations, and will take them to court if
necessary."
"Our enforcement strategy to combat abusive transactions is working," said Larry
Langdon, Large and Mid-Size Business Division B Commissioner. "Early disclosure
is important, and our efforts to encourage promoters and investors to step forward
on these abusive transactions have been extremely successful."
Among the key steps taken:
The IRS is actively pursuing promoters of abusive transactions. The IRS conducts
promoter examinations in instances where a promoter has not complied with
regulations requiring identification of potentially abusive tax avoidance transactions
by registering such transactions, and maintaining or making investor lists available
to the IRS upon request.
• L M S B currently has 78 promoters under investigation.
• 239 summonses have been issued to secure investor lists, of which 77 have been
referred to the Justice Department for enforcement.
• IRS has obtained investor lists from 25 promoters covering multiple transactions.
The IRS and Treasury Department are publishing legal guidance when a
transaction is determined to be abusive. W h e n a transaction is determined to be
abusive, IRS and Treasury publish guidance as early as possible. This process is
designed to deter subsequent promotion and investment in abusive transactions
and to facilitate identification of investors and promoters. It also ensures consistent
treatment of such transactions by IRS agents in the field.
• The IRS and Treasury have identified 25 abusive transactions through formal
guidance.
The IRS Disclosure Initiative brought many taxpayers into compliance and providing

http://www.treas.gov/press/releases/js 190.htm

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S-190: Tax D a y Reminder: Treasury & IRS Continue Crackdown on Abusive Tax Shelters

Page 2 o f 2

leads on promoters and emerging abusive transactions.
• The disclosure initiative conducted from December 2001 to April 2002 resulted in
1,664 disclosures from 1,206 taxpayers.
• Taxpayers have disclosed transactions in which they claimed deductions or losses
amounting to billions of dollars.
• The IRS is analyzing the n e w transactions to determine whether they are abusive
and warrant published guidance or other administrative response.
The IRS is auditing taxpayers to determine whether they invested in abusive
transactions, using information derived from promoter audits, the Disclosure
Initiative, public information and other sources.
A special Settlement Initiative offered equitable alternatives to protracted
enforcement and litigation.
• In October 2002, Treasury and IRS announced limited time resolution options for
taxpayers engaged in the Contingent Liability, Basis Shifting and COLI tax shelters.
• The IRS is taking cases to court where it is necessary to enforce the law.
The IRS has placed a special emphasis on abusive shelters and transactions.
• The Office of Tax Shelter Analysis (OTSA) provides centralized data collection
and analysis on all aspects of the tax shelter program, including information
required to be disclosed by regulation, developed by field agents and obtained
during the course of our disclosure and settlement initiatives.
• Internal Revenue Service officials announced Feb. 12 the creation of a n e w senior
executive position within the Office of Chief Counsel to focus on potentially abusive
tax avoidance transactions. Washington attorney Nicholas J. DeNovio w a s
selected to fill this post.
• IRS teams are assembled to implement a comprehensive strategy to deal with
questionable transactions. T e a m s are headed by an L M S B executive and include
representatives from Chief Counsel, technical advisors and field specialists.
The President's budget proposes an additional $100 million to support this effort to
pursue high income individuals and businesses. This request is awaiting action by
Congress.
More information on IRS actions involving abusive shelters and transactions is
available by visiting:
http://www.irs.gov/busjnessesicorpp^

-tp://www.treas.gov/press/releases/js 190.htm

7/21/2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 17, 2003
May 15, 2003
912795MM0

High Rate: 1.155% Investment Rate 1/: 1.177% Price: 99.910
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 32.09%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

46,765,400
48,489
25,000

15,927,444
48,489
25,000

SUBTOTAL 46,838,889 16,000,933
Federal Reserve 2,914,669 2,914,669
TOTAL $ 49,753,558 $ 18,915,602
Median rate 1.150%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 46,838,889 / 16,000,933 = 2.93
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

J<> HI

S-192: Second Set of Regulations Implementing the Terrorism Risk Insurance Act

Page 1 o f 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 15,2003
JS-192
Treasury Department Announces Second Set of Regulations Implementing
the Terrorism Risk Insurance Act

The Treasury Department today announced the second set of regulations
under the Terrorism Risk Insurance Act of 2002, which was signed into law
by President Bush on November 26, 2002.
These regulations address the disclosure requirements, the "make
available" requirements, and the participation of state residual market
insurance entities and state workers' compensation funds under the
Terrorism Risk Insurance Act. Treasury has submitted these regulations
for publication in the Federal Register. Insurers and other interested
parties will have the opportunity to submit comments during the comment
period, which will last for 30 days from the date of publication.
"Treasury continues to move forward with regulations implementing the
aspects of the Program addressed previously through interim guidance and
is developing new regulations on other aspects of the Terrorism Risk
Insurance Act," said Treasury Assistant Secretary for Financial Institutions
W a y n e A. Abernathy, who oversees the Terrorism Risk Insurance
Program. "We also are in the process of evaluating the comments w e
received on the first set of regulations issued to implement the Act, and that
regulation should be finalized in the coming weeks."
The interim final rule on the disclosure and "make available" requirements
largely incorporates previously issued interim guidance that was designed
to assist insurers in determining how they may comply with certain
immediately applicable provisions of the Terrorism Risk Insurance Act prior
to the issuance of regulations by the Treasury. The interim final rule
clarifies statutory conditions for federal payment that require insurers to
make certain disclosures to policyholders within specified time periods.
Treasury continues to stress that insurers should follow normal business
practices in complying with the disclosure requirements contained in the
interim final rule.
The interim final rule also incorporates and clarifies statutory requirements
that insurers must "make available" coverage for insured losses resulting
from an act of terrorism as defined by the Act. Consistent with previously
issued interim guidance, Treasury has maintained a reliance on state laws
as it relates to requirements for insurance coverage in this interim final
rule.
Treasury also is issuing a notice of proposed rulemaking on the
participation of state residual market insurance entities and state workers'
compensation funds under the Program. The Act defines such entities as
insurers and specifies methods for such entities' participation depending on

http://wTvw.treas.gov/press/releases/js 192.htm

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3-192: Second Set of Regulations Implementing the Terrorism Risk Insurance Act

Page 2 o f 2

whether or not they share profits and losses with their participating
insurers. If adopted, the proposed rulemaking would implement these
statutory requirements in a manner that would allocate risk to the ultimate
risk bearer. The interim final regulation and notice of proposed rulemaking,
and other information related to the Terrorism Risk Insurance Program can
be found at www.treasury.gov/trip.

Related Documents:
• Terrorism Risk Ins Interim Subparts BC
• Terrorism Risk Ins N P R M Subpart D
• Terrorism Risk Ins Interim Subparts B C N P R M

ittp://www.treas.gov/press/releases/js 192.htm

7/21/2003

Billing Code 4810-25-M

DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AA98
Terrorism Risk Insurance Program
AGENCY: Departmental Offices, Treasury.
ACTION: Interim final rule with request for comments.
SUMMARY: The Department of the Treasury (Treasury) is issuing this interim final
rule as part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002
(Act). The Act established a temporary Terrorism Risk Insurance Program (Program)
under which the Federal Government will share the risk of insured losses from certified
acts of terrorism wdth commercial property and casualty insurers until the Program
sunsets on December 31, 2005. This interim final rule incorporates and clarifies statutory
conditions for federal payment under the Program that require insurers to make certain
disclosures to policyholders. The rule also incorporates and clarifies statutory
requirements that insurers "make available," in their commercial property and casualty
insurance policies, terrorism risk coverage for insured losses under the Program. The
interim final rule generally incorporates interim guidance previously issued by Treasury
in this area, but with some modifications. This is the second in a series of regulations
that Treasury will issue to implement the Act.
DATES: This interim final rule is effective [INSERT DATE OF PUBLICATION IN
THE FEDERAL REGISTER]. Written comments on this interim final rule may be

-1 -

submitted on or before [INSERT D A T E T H A T IS 30 D A Y S A F T E R D A T E O F
PUBLICATION IN THE FEDERAL REGISTER.]

ADDRESSES: Submit comments (if hard copy, preferably an original and two copies

to Office of Financial Institutions Policy, Attention: Terrorism Risk Insurance
Public Comment Record, Room 3160 Annex, Department of the Treasury, 1500
Pennsylvania Ave., N.W., Washington, DC 20220. Because paper mail in the
Washington, D.C. area may be subject to delay, it is recommended that comments

submitted by electronic mail to: triacomments@do-treas.gov. All comments should
captioned with "[INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER]

Interim Final Rule TRIA Comments." Please include your name, affiliation, addres

mail address and telephone number in your comment. Comments will be available f

public inspection by appointment only at the Reading Room of the Treasury Libra
make appointments, call (202) 622-0990 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,

Office of Financial Institutions Policy (202) 622-2730, or Martha Ellett or Cynt
Attorney-Advisors, Office of the Assistant General Counsel (Banking & Finance),
622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
I. Background

A. Terrorism Risk Insurance Act of 2002

-2-

O n November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The Act was effective
immediately. Title I of the Act establishes a temporary federal program of shared public
and private compensation for insured commercial property and casualty losses resulting
from an act of terrorism as defined in the Act and certified by the Secretary of the
Treasury, in concurrence with the Secretary of State and the Attorney General. The Act
authorizes Treasury to administer and implement the Terrorism Risk Insurance Program,
including the prescription of regulations and procedures. The Program will sunset on
December 31, 2005.
The Act's purposes are to address market disruptions, ensure the continued
widespread availability and affordability of commercial properly and casualty insurance
for terrorism risk and to allow for a transition period for the private markets to stabilize
and build capacity while preserving State insurance regulation and consumer protections.
The amount of federal payment for an insured loss resulting from an act of terrorism
is to be determined based upon the insurance company deductibles and excess loss
sharing with the Federal Government, as specified by the Act. Thus, the Program
provides a federal reinsurance backstop for a temporary period of time. The Act also
provides Treasury with authority to recoup federal payments made under the Program
through policyholder surcharges, up to a maximum annual limit.
Each entity that meets the definition of "insurer" (well over 2000 firms) must
participate in the Program. From the date of enactment of the Act through the last day of
Program Year 2 (December 31, 2004), insurers under the Program must "make available"
terrorism risk insurance in their commercial property and casualty insurance policies and

-3-

the coverage must not differ materially from the terms, amounts and other coverage
limitations applicable to commercial property and casualty losses arising from events
other than acts of terrorism. The Act permits Treasury to extend the "make available"
requirement into Program Year 3, based on an analysis of factors referenced in the study
required by section 108(d)(1) of the Act, and not later than September 1, 2004.
An insurer's deductible increases each year of the Program, thereby reducing the
Federal Government's involvement prior to sunset of the Program. An insurer's
deductible is based on "direct earned premiums" over a statutory Transition Period (now
expired) and the three Program Years. Once an insurer has met its deductible, the federal
payments cover 90 percent of insured losses above the deductible, subject to an aggregate
annual cap of $100 billion The Act prohibits duplicative payments for insured losses that
are covered under any other federal program.
As conditions for federal payment under the Program, insurers must provide clear
and conspicuous disclosure to the policyholders of the premium charged for insured
losses covered by the Program, and must submit a claim and certain certifications to
Treasury. Treasury will be prescribing claims procedures at a later date.
The Act also contains specific provisions designed to manage litigation arising from
or relating to a certified act of terrorism. Section 107 creates an exclusive federal cause
of action, provides for claims consolidation in federal court and contains a prohibition on
federal payments for punitive damages under the Program. This section also provides the
United States with the right of subrogation with respect to any payment or claim paid by
the United States under the Program. As part of the claims process, and as directed by

-4-

Billing Code 4810-25-M

DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AA99
Terrorism Risk Insurance Program
AGENCY: Departmental Offices, Treasury
ACTION: Notice of proposed rulemaking.
SUMMARY: The Department of the Treasury (Treasury) is issuing this proposed rule

as part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002 (Act
The Act established a temporary Terrorism Risk Insurance Program (Program) under

which the Federal Government will share the risk of insured losses from certified acts o
terrorism with commercial property and casualty insurers until the Program sunsets on
December 31, 2005. This notice of proposed rulemaking would apply provisions of the
Act to State residual market insurance entities and State workers' compensation funds
which are insurers under the Program. This is the third in a series of regulations that
Treasury will issue to implement the Act.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER.]
ADDRESSES: Submit comments (if hard copy, preferably an original and two copies)
to Office of Financial Institutions Policy, Attention: Terrorism Risk Insurance Program
Public Comment Record, Room 3160 Annex, Department of the Treasury, 1500
Pennsylvania Ave., N.W., Washington, DC 20220. Because paper mail in the
Washington, D.C. area may be subject to delay, it is recommended that comments be

submitted by electronic mail to: triacomments@do.treas.gov. All comments should be
captioned with "[INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER]
NPRM TRIA Comments." Please include your name, affiliation, address, e-mail address
and telephone number in your comment. Comments will be available for public
inspection by appointment only at the Reading Room of the Treasury Library. To make
appointments, call (202) 622-0990 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,

Office of Financial Institutions Policy (202) 622-2730, or Martha Ellett or Cynthia Reese,
Attorney-Advisors, Office of the Assistant General Counsel (Banking & Finance), (202)
622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
On November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The Act was effective
immediately. Title I of the Act establishes a temporary Federal program of shared public
and private compensation for insured commercial property and casualty losses resulting
from an act of terrorism as defined in the Act and certified by the Secretary of the
Treasury, in concurrence with the Secretary of State and the Attorney General. The Act
authorizes Treasury to administer and implement the Terrorism Risk Insurance Program,
including the prescription of regulations and procedures. The Program will sunset on
December 31,2005.

The Act's purposes are to address market disruptions, ensure the continued
widespread availability and affordability of commercial property and casualty insurance
for terrorism risk and to allow for a transition period for the private markets to stabilize
and build capacity while preserving State insurance regulation and consumer protections.
The amount of Federal payment for an insured loss resulting from an act of terrorism
is to be determined based upon the insurance company deductibles and excess loss
sharing with the Federal Government, as specified by the Act. Thus, the Program
provides a Federal reinsurance backstop for a temporary period of time. The Act also
provides Treasury with authority to recoup Federal payments made under the Program
through policyholder surcharges, up to a maximum annual limit.
Each entity that meets the definition of "insurer" (well over 2000 firms) must
participate in the Program. The Act includes State residual market insurance entities and
State workers compensation funds in the definition of insurer but requires Treasury to
issue regulations as soon as practicable to apply the provisions of the Act to these
insurers.
From the date of enactment of the Act through the last day of Program Year 2
(December 31, 2004), insurers under the Program must "make available" terrorism risk
insurance in their commercial property and casualty insurance policies and the coverage
must not differ materially from the terms, amounts and other coverage limitations
applicable to commercial property and casualty losses arising from events other than acts
of terrorism. The Act permits Treasury to extend the "make available" requirement into
Program Year 3, based on an analysis of factors referenced in the study required by
section 108(d)(1) of the Act, and not later than September 1, 2004.

A n insurer's deductible increases each year of the Program, thereby reducing the
Federal Government's involvement prior to sunset of the Program. An insurer's
deductible is based on "direct earned premiums" over a statutory Transition Period (now
expired) and the three Program Years. Once an insurer has met its deductible, the
Federal payments cover 90 percent of insured losses above the deductible, subject to an
aggregate annual cap of $100 billion. The Act prohibits duplicative payments for insured
losses that are covered under any other Federal program.
As conditions for Federal payment under the Program, insurers must provide clear
and conspicuous disclosure to the policyholders of the premium charged for insured
losses covered by the Program, and must submit a claim and certain certifications to
Treasury. Treasury will be prescribing claims procedures at a later date.
The Act also contains specific provisions designed to manage litigation arising from
or relating to a certified act of terrorism. Section 107 creates an exclusive Federal cause
of action, provides for claims consolidation in Federal court and contains a prohibition on
Federal payments for punitive damages under the Program. This section also provides
the United States with the right of subrogation with respect to any payment or claim paid
by the United States under the Program. As part of the claims process, and as directed by
the President, Treasury will be issuing regulations addressing Treasury's role in the
approval of settlements.

B. Previously Issued Interim Guidance

Billing Code 4810-25-M

D E P A R T M E N T OF T H E T R E A S U R Y

31 CFR Part 50

RIN 1505-AA98

Terrorism Risk Insurance Program

AGENCY: Departmental Offices, Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to interim final rule.

SUMMARY: The Department of the Treasury (Treasury) is issuing this proposed rule as
part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002 (the
Act). That Act established a temporary Terrorism Risk Insurance Program (Program)
under which the Federal Government will share the risk of insured loss from certified acts
of terrorism with commercial property and casualty insurers until the Program sunsets on
December 31, 2005. This rule incorporates and clarifies statutory conditions for federal
payment under the Program that require insurers to make certain disclosures to
policyholders. The rule also incorporates and clarifies statutory requirements that
insurers "make available," in their commercial property and casualty insurance policies,
terrorism risk coverage for insured losses under the Program. The rule generally
incorporates interim guidance previously issued by Treasury in this area, but with some
modifications. This proposed rule, together with the interim final rule published

elsewhere in this separate part of the Federal Register, are the second in a series of
regulations Treasury will issue to implement the Act.
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].

ADDRESSES: Submit comments (if hard copy, preferably an original and two copies

Washington, DC area may be subject to delay, it is recommended that comments be

submitted by electronic mail to: triacomments@do.treas.gov. All comments should
captioned with "[INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER]

TRIA Interim Final Rule Comments." Please include your name, affiliation, addres

mail address and telephone number in your comment. Comments will be available f

Office of Financial Institutions Policy (202) 622-2730, or Martha Ellett or Cynt
Attorney-Advisors, Office of the Assistant General Counsel (Banking & Finance),
622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
I. The Proposed Rule

Published elsewhere in this separate part of the Federal Register is an interim

mle adding Subparts B and C to 31 CFR Part 50, which comprises Treasury's regul

implementing the Act. The preamble to the interim final rule explains these provisions
of the proposed rule in detail, and the text of the interim final rule serves as the text for
this proposed rule.
II. Procedural Requirements
This proposed rule is a significant regulatory action and has been reviewed by the
Office of Management and Budget under the terms of Executive Order 12866.
It is hereby certified that this proposed rule will not have a significant economic
impact on a substantial number of small entities. The Act requires all licensed or
admitted insurers to participate in the Program. This includes all insurers regardless of
size or sophistication. The Act also defines property and casualty insurance to mean
commercial lines without any reference to the size or scope of the commercial entity. The
disclosure and make available requirements are required by the Act. The proposed rule
allows all insurers, whether large or small, to use existing systems and business practices
to demonstrate compliance. Accordingly, any economic impact associated with the
proposed rule flows from the Act and not the proposed rule. However, the Act and the
Program are intended to provide benefits to the U. S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop to commercial
property and casualty insurance policyholders and spreading the risk of insured loss
resulting from an act of terrorism.

List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
Authority and Issuance
For the reasons set forth above, the Department of the Treasury proposes to adopt

as afinalrule the interimfinalrule adding subparts B and C to 31 C F R Part 50, as
follows:
[The text of proposed subparts B and C to 31 CFR Part 50 is the same as the text
of subparts B and C to 31 CFR Part 50 in the interim final rule published elsewhere in
this separate part of this issue of the Federal Register.]

Dated: February ,2003

W a y n e A. Abernathy
Assistant Secretary of the Treasury

JS-193: Treasury Department Rescinds Ukraine's Designation as a Primary M o n e y Laundering Concern

Page 1 of 1

mm
PRLSS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 15,2003
JS-193
Treasury Department Rescinds Ukraine's Designation as a Primary Money
Laundering Concern
The Department of the Treasury and the Financial Crimes Enforcement
Network (FinCEN) today announced that they have rescinded the
designation of Ukraine as a primary money laundering concern pursuant to
Section 311 of the U S A P A T R I O T Act. This announcement marks a
recognition by the United States that the Ukraine has taken important steps
to improve their anti-money laundering regime in response to consistent
international vigilance and U.S. action under Section 311.
Section 311 of the USA PATRIOT Act gives the Secretary of the Treasury
the authority to designate a foreign jurisdiction, a foreign financial
institution, a type of account or a type of transaction to be a primary money
laundering concern. Once designated, the Secretary can require U.S.
financial institutions to take appropriate countermeasures against the
concern. In December of 2002, Treasury m a d e the first designations under
Section 311, designating both Nauru and Ukraine as primary money
laundering concerns.
In a notice that will be published in the Federal Register later this week,
Treasury will announce the rescission of the designation of Ukraine as a
primary money laundering concern as a result of the important steps they
have taken to address deficiencies in their anti-money laundering regime.
Ukraine m a d e several amendments to its key anti-money laundering laws
and has pledged to vigorously implement these changes.
Although Treasury has rescinded the designation under Section 311, U.S.
financial institutions are reminded that the revocation of the designation
does not affect existing guidance issued by FinCEN or obligations arising
under the Bank Secrecy Act with respect to accounts and transactions
involving Ukraine. Furthermore, Ukraine remains on the non-cooperative
countries and territories list of the Financial Action Task Force.
The Treasury Department is encouraged by Ukraine's efforts to improve
their anti-money laundering regime and looks forward to effective
enforcement of their new anti-money laundering laws.
Related Documents:
• 311 Ukraine Notice

%://www.treas.gov/press/releases/js 193 .htm

7/21/2003

(BILLING C O D E 4810-02-P)
DEPARTMENT OF THE TREASURY

Revocation of Designation of Ukraine as Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Revocation of Designation.

SUMMARY: This notice revokes the Department of the Treasury's December 20, 2002,

designation of Ukraine as a primary money laundering concern pursuant to sectio

5318A of title 31, United States Code, as added by section 311 of the Uniting a
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT ACT) Act of 2001(Public Law 107-56).
DATES: The revocation of the designation is effective [INSERT DATE OF
PUBLICATION IN THE FEDERAL REGISTER].
FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel (FinCEN),

(703) 905-3590; Executive Office for Terrorist Financing and Financial Crimes, (

622-0400; Office of the General Counsel (Treasury), (202) 622-1927 (not toll-fre
numbers).

SUPPLEMENTARY INFORMATION:
On December 20, 2002, Treasury designated Ukraine as a primary money

laundering concern under 31 U.S.C. 5318A, as added by section 311(a) of the USA

PATRIOT Act. In a notice published in the Federal Register on December 26, 2002,

various factors supporting the designation were outlined. Of particular importa

decision to designate was the fact that while Ukraine had recently enacted anti

laundering legislation, it was deficient in several material respects.2 A s noted in the
designation, among other things, Ukraine's system for reporting suspicious transactions
remained so constrained as to be virtually ineffective, and the ability of its financial
intelligence unit to share information with law enforcement and function appropriately
was in doubt. Having analyzed the legislation, the Financial Action Task Force (FATF)
likewise concluded that the new legislation was inadequate and called on FATF members
to take appropriate counter-measures against Ukraine. In the designation, Treasury
specifically warned Ukraine that unless it took steps to address the concerns giving rise to
its designation, Treasury anticipated imposing one or more special measures that would
require U.S. financial institutions to obtain nominal and beneficial ownership information
on certain accounts and transactions involving Ukraine.
Since Treasury's designation of Ukraine under section 5318A, Ukraine has taken
steps to address the deficiencies. First, Ukraine amended its anti-money laundering law
clearly to allow the Ukrainian financial intelligence unit to share information with law
enforcement and to lower the suspicious transaction reporting thresholds. Second, the
Ukrainian criminal code was amended to criminalize money laundering, the failure to file
suspicious transaction reports, and tipping off the subjects of such reports. Finally, the
Ukrainian banking and financial services laws were amended to require the full
disclosure of beneficial ownership at account opening for all legal entities and natural
persons. These new provisions are scheduled to come into force as of June 7, 2003.

67 FR 78859 (December 26, 2002). In that same Notice, Treasury also designated Nauru as a primary
money laundering concern. Published elsewhere in this issue of the Federal Register is FinCEN's notice of
proposed rulemaking seeking to impose counter-measures against Nauru.
O n November 28, 2002, Ukraine's Supreme Council (Parliament) passed a L a w on Prevention and
Counteraction of the Legalization (Laundering) of the Proceeds from Crime, and the President of Ukraine
signed the L a w on December 7.

A s a result of these further legislative enhancements, along with the pledge of
aggressive implementation, on February 14, 2003, the FATF rescinded its call for
counter-measures against Ukraine.
hi light of the further legislative enhancements, the commitment of Ukraine to
further efforts to implement its anti-money laundering legislation, and the FATF's
decision to rescind the call for counter-measures, Treasury has decided to revoke the
designation of Ukraine as a primary money laundering concern under section 5318A.
Significantly, Treasury's revocation of the primary money laundering concern
designation should not be construed as an indication that financial transactions involving
Ukraine do not continue to present a heightened risk of money laundering. To the
contrary, Ukraine's recent legislative enactments are not yet in force and much work
remains. Ukraine is still on the FATF's NoitCooperative Countries and Territories
(NCCT) list due to its inadequate anti-money laundering regime. The FATF will require
additional progress and effective implementation of the anti-money laundering legislation
before considering removing Ukraine from the NCCT list.
Moreover, U.S. financial institutions are reminded that the revocation of the
designation does not affect existing guidance issued by FinCEN or obligations arising
under the Bank Secrecy Act with respect to accounts and transactions involving Ukraine.
For example, the April 2002 FinCEN advisory on trans actions involving Ukraine remains
in effect, and, due to Ukraine's status as an NCCT jurisdiction, U.S. financial institutions
are or will be required by 31 U.S.C. 5318(i), as added by section 312 of the USA

P A T R I O T Act, to conduct enhanced scrutiny on any correspondent accounts maintained
for a foreign bank operating under a license issued by Ukraine.3
Revocation of the Designation of Ukraine as a Primary Money Laundering Concern
For the foregoing reasons, the designation of the country of Ukraine as a primary
money laundering concern for purposes of section 5318A of title 31, United States Code,
is hereby revoked.
Dated:

James F. Sloan
Director
Financial Crimes Enforcement Network

3
Section 5318(i) requires U.S. financial institutions to conduct enhanced scrutiny when opening or
maintaining a correspondent account for a foreign bank operating, among other things, under a banking
license issued by a foreign country designated as non-cooperative with international anti-money laundering
principles or procedures by an intergovernmental group or organization of which the United States is a
m e m b e r and with which designation the U.S. representative concurs. Jurisdictions placed on the F A T F
N C C T list fall into this category.
B y its o w n terms, section 5318(i) became effective on July 23, 2002. O n M a y 30, 2002, F i n C E N
issued a proposed rule implementing the various provisions of section 5318(i). 67 F R 37736 (May 30,
2002). O n July 23, 2002, F i n C E N issued an interim rule that temporarily deferred application of section
5318(i) to certain financial institutions, and provided guidance to those subject to the provision pending
FinCEN's issuance of afinalrule. 67 F R 48348 (July 23, 2002). F i n C E N expects that thefinalrule
implementing section 5318(i) will be issued shortly. In the meantime, only U.S. depository institutions
must comply with the enhanced scrutiny provisions in the manner set forth in the interim guidance.

4: Treasury Department Announces Proposed Anti-Money Laundering Countermeasure Against N...

PRESSROOM

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Page 1 of 1

^|gj

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 15,2003
JS-194
Treasury Department Announces Proposed Anti-Money Laundering
Countermeasure Against Nauru

The Department of the Treasury and the Financial Crimes Enforcement
Network (FinCEN) today announced a notice of proposed rulemaking that
would require U.S. financial institutions to terminate correspondent
accounts involving Nauru financial institutions. Today's action is part of
the Treasury Department's ongoing efforts to attack m o n e y laundering and
to diminish the risks of terrorist financing worldwide.
Section 311 of the USA PATRIOT Act gives the Secretary of the Treasury
the authority to designate a foreign jurisdiction, a foreign financial
institution, a type of account or a type of transaction to be a primary m o n e y
laundering concern. O n c e designated, the Secretary can require U.S.
financial institutions to take appropriate countermeasures against the
concern. In December of 2002, Treasury m a d e the first designations under
Section 311, designating both Nauru and Ukraine as primary m o n e y
laundering concerns.
The proposed rule would impose the fifth and most severe countermeasure
available to the Secretary under section 311 against Nauru, requiring U.S.
financial institutions to terminate correspondent accounts with Nauru
financial institutions. T h e proposed prohibition includes correspondent
accounts maintained for Nauru financial institutions, as well as
correspondent accounts maintained for other foreign banks that are used to
provide banking services indirectly to Nauru financial institutions. With
respect to services provided to Nauru financial institutions indirectly, the
proposed rule does not impose additional due diligence requirements on
U.S. financial institutions. Instead, the proposed rule relies on existing due
diligence obligations and requires termination of such correspondent
accounts only if the U.S. institution has actual knowledge that the accounts
are being used to provide services to Nauru financial institutions indirectly.
U.S. financial institutions affected by this proposed rule include depository
institutions, securities broker-dealers, mutual funds, and futures
commission merchants.
In short, this action cuts off Nauru's financial institutions from the U.S.
financial system. This notice of proposed rulemaking is scheduled to be
published in the Federal Register later this week. Written c o m m e n t s on the
notice of proposed rulemaking m a y be submitted within 30 days of its
publication.
Related Documents:
• 311 Nauru NPRM

•'//www.treas.gov/press/releases/is 194.htm

7/21/2003

(BILLING CODE: 4810-02-P)
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA43

Financial Crimes Enforcement Network; Imposition of Special Measures Aga
the Country of Nauru
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: The Department of the Treasury and FinCEN are issuing this proposed

rule, pursuant to the provisions of section 311 of the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (Public Law 107-56), to impose "special measures" against Nauru. Nauru was
previously designated as a country of primary money laundering concern pursuant to

section 311 on December 20, 2002, a pre-requisite for the imposition of special measures
DATES: Written comments may be submitted on or before [INSERT DATE THAT IS
30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Commenters are encouraged to submit comments by electronic mail
because paper mail in the Washington, DC, area may be delayed. Comments submitted
by electronic mail may be sent to regcomments@fmcen.treas.gov with the caption in the
body of the text, "Attention: Section 311 Special Measures Regulations." Comments
may also be submitted by paper mail to FinCEN, P.O. Box 39, Vienna, VA 22183, Attn:
Section 311 Special Measures Regulations. Comments should be sent by one method
only. Comments may be inspected at FinCEN between 10 a.m. and 4 p.m. in the FinCEN
Reading Room in Washington, DC. Persons wishing to inspect the comments submitted

must request an appointment by telephoning (202) 354-6400 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of the General Counsel,
Department of the Treasury, (202) 622-1925; Office of the Assistant General Counsel for
Banking and Finance (Treasury), (202) 622-0480; or the Office of Chief Counsel
(FinCEN), (703) 905-3590 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
I. Background
On October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (USA PATRIOT Act) (Public Law 107-56) (the Act). Title III of the Act
makes a number of amendments to the anti-money laundering provisions of the Bank
Secrecy Act (BSA) that are codified in subchapter II of chapter 53 of title 31, United
States Code. These amendments are intended to promote the prevention, detection, and
prosecution of international money laundering and the financing of terrorism.
Section 311 of the Act added section 5318A to the BSA. Section 5318A gives the
Secretary of the Treasury (Secretary) the authority to designate a foreign jurisdiction,
institution(s), class(es) of transactions, or type(s) of account(s) as a "primary money
laundering concern" and to impose certain "special measures" with respect to such
jurisdiction, institution(s), class(es) of transactions, or type(s) of account(s). On
December 20, 2002, the Secretary designated Nauru as a jurisdiction of primary money
laundering concern pursuant to section 5318A.
Section 5318A identifies the factors that the Secretary must consider and the
agencies with which he must consult before designating a primary money laundering
1

67 FR 78859 (December 26, 2002).

concern. U p o n designation, section 5 3 1 8 A sets forth five potential special measures, the
factors to be considered in selecting these measures, and the agencies with which the
Secretary must consult before imposing special measures on the designee.
Section 5318A gives the Secretary the authority to bring additional and useful
pressure on those jurisdictions and institutions that pose money laundering concerns to
encourage them to eliminate the bases for these concerns. Through the imposition of
various special measures, the Secretary can gain more information about the concerned
jurisdictions, institutions, transactions, and accounts, can more effectively monitor the
respective institutions, transactions, and accounts, and can protect U.S. financial
institutions from involvement with jurisdictions, institutions, transactions, or accounts
that pose a money laundering concern.
A. Required Consultations, and Statutory Factors to Consider, Prior to
Designating a Primary Money Laundering Concern
Prior to making a finding that a foreign jurisdiction, institution(s), class(es) of
transactions, or type(s) of account(s) is a primary money laundering concern, the
Secretary is required to consult with both the Secretary of State and the Attorney General.
In addition to these consultations, the Secretary is required by the statute to
consider "such information as the Secretary determines to be relevant," including the
following "potentially relevant [jurisdictional] factors":
• Evidence that organized criminal groups, international terrorists, or both, have
transacted business in the jurisdiction;

•

T h e extent to which the jurisdiction or financial mstitutions operating in the

jurisdiction offer bank secrecy or special regulatory advantages to non-residents
or non-domiciliaries of the jurisdiction;
• The substance and quality of administration of the bank supervisory and countermoney laundering laws of the jurisdiction;
• The relationship between the volume of financial transactions occurring in the
jurisdiction and the size of the economy of the jurisdiction;
• The extent to which the jurisdiction is characterized as an offshore banking or
secrecy haven by credible international organizations or multilateral expert
groups;
• Whether the United States has a mutual legal assistance treaty with the
jurisdiction, and the experience of United States law enforcement officials and
regulatory officials in obtaining information about transactions originating in or
routed through or to such jurisdiction; and
• The extent to which the jurisdiction is characterized by high levels of official or
institutional corruption.
Once the Secretary, after having consulted with the Secretary of State and the
Attorney General and having considered the factors set forth immediately above, has
made a finding that reasonable grounds exist for concluding that a jurisdiction, etc., is a
primary money laundering concern, one or more of the five statutorily permitted "special
measures" may be imposed following the appropriate consultations as described below.2

For the purposes of this action, the required consultation was performed at the staff level.

fS-195: Treasury Secretary John S n o w to visit three South American nations

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m
PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 16,2003
JS-195
Treasury Secretary John Snow to visit three South American nations
Treasury Secretary John Snow will visit Brazil, Ecuador and Colombia next week to
learn first hand how these three nations are building strong economic policies,
addressing social problems, and promoting economic growth. All three countries
have new leaders with sound, progressive agendas for raising peoples' living
standards. This will be Secretary Snow's first trip to South America as Secretary of
the Treasury.
"I am looking forward to my visits to Brazil, Ecuador and Colombia," said Snow.
"Economic success in the entire hemisphere is very important to President Bush.
We're seeing good progress in Latin America. Leaders in these nations are
courageously working to put sound economic policies in place, encourage
economic freedom, and invest in their people. We're traveling to Brazil, Ecuador
and Colombia to emphasize these issues and to see evidence of success."
Snow will meet with leaders in government, business, the financial sector, and civil
society. In Brazil, Snow will deliver a lunchtime speech to the Brazil-American
Chamber of Commerce on Wednesday, April 23. In Ecuador he will learn more
about the country's efforts to grow small and medium sized businesses. A focus in
Colombia will be how strengthening security will benefit growth.
Secretary Snow will begin the first leg of his trip in Brasilia, Brazil on Tuesday, April
22 and in Sao Paulo on Wednesday, April 23. He will visit Quito, Ecuador on
Thursday, April 24; and end the trip in Colombia on Friday, April 25. H e will return to
Washington Friday night.
Randall Quarles, Assistant Secretary of the Treasury for International Affairs, will
accompany Secretary Snow on the trip.

W/www.treas.gov/press/releases/j s 195 .htm

7/21/2003

DEPARTMENT

TREASURY

THE

TREASURY

NEWS

O F ! l( I. O K I'l Bill A M \lkS • 1500 I'l- V N S VIA A N | \ AN I.MI , \.\V. • \\ \ Ml IN c; T O N . [>.(.• 2022U • i 202

EMBARGOED UNTIL 11:00 A.M.
April 17, 2003

CONTACT:

(,22-2VMl

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $31,000
million to refund an estimated $32,531 million of publicly held 13-week and 26-week
Treasury bills maturing April 24, 2003, and to pay down approximately $1,531 million.
Also maturing is an estimated $23,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced April 21, 2003.
The Federal Reserve System holds $14,073 million of the Treasury bills maturing
on April 24, 2003, in the System Open Market Account (SOMA) . This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held April 22, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,090 million into the 13-week bill and $826 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo

Attachment

/?<*

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 24, 2003
April 17, 2003

Offering Amount
$15,000
Maximum Award (35% of Offering Amount)
$ 5,250
Maximum Recognized Bid at a Single Rate .... $ 5,250
NLP Reporting Threshold
$ 5,250
NLP Exclusion Amount
$ 5,000
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

million
million
million
million
million

91-day bill
912795 NE 7
April 21, 2003
April 24, 2003
July 24, 2003
January 23, 2003
$20,592 million
$1,000

$16,000
$ 5,600
$ 5,600
$ 5,600
None

million
million
million
million

182-day bill
912795 NT 4
April 21, 2003
April 24, 2003
October 23, 2003
April 24, 2003
$1,000

497: Treasury Issues Third Quarterly Update to the Guidance Plan

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 18,2003
JS-197
Third Quarterly Update of the 2002 - 2003 Priority Guidance Plan
Joint Statement by:
Pamela F. Olson
Assistant Secretary (Tax Policy)
U.S. Department of the Treasury
Robert Wenzel
Acting Commissioner
Internal Revenue Service
B. John Williams, Jr.
Chief Counsel
Internal Revenue Service
We are pleased to announce the third quarterly update of the 2002 2003 Priority
Guidance Plan.
On July 10, 2002, we released the 2002 2003 Priority Guidance Plan listing 250
projects for the plan year beginning July 1, 2002 and ending June 30, 2003. In our
Joint Statement that accompanied the release of the 2002 2003 Priority Guidance
Plan, w e emphasized our commitment to increased and more timely published
guidance. W e indicated that w e would update the plan quarterly to reflect additional
guidance that w e intend to publish during the plan year. W e expressed our intent to
add a number of revenue rulings and revenue procedures not previously reflected
on the plan. Updating the plan also provides flexibility to respond to developments
arising during the year.
The attached update sets forth the guidance on the original 2002 2003 Priority
Guidance Plan, as previously updated, that w e have published. Although the
update may indicate that a particular item on the plan has been completed, it is
possible that one or more additional projects may be completed in the plan year
relating to that item. The update also includes 45 items of additional guidance for
the third quarter, some of which have already been published. As promised, many
of the additional items are revenue rulings and revenue procedures.
Some of the additional guidance projects were identified from suggestions received
from taxpayers and practitioners. W e continue to invite the public to provide us with
comments and suggestions as w e identify and write guidance throughout the plan
year.
The updated 2002 -2003 Priority Guidance Plan will be republished on the IRS
website on the Internet (www.irs.gov) under Tax Professionals, IRS Resources,
Administrative Information and Resources, 2002 2003 Priority Guidance Plan.
The Third Quarterly Update of the 2002-2003 Priority Guidance Plan is attached.

tp://www.treas.gov/press/releases/js 197.htm

7/21/2003

OFFICE OF TAX POLICY
AND
INTERNAL REVENUE SERVICE
2002 - 2003 PRIORITY GUIDANCE PLAN LIST
March 31, 2003 UPDATE
CONSOLIDATED RETURNS
Original PGP Projects Published:
1. Final regulations containing conforming amendments to section 446 regulations to
reflect changes in the consolidated return regulations.
• P U B L I S H E D 12/16/2002 in F R as T D 9025.
3. Guidance under section 1502 and 337(d) regarding losses on member stock.
• P U B L I S H E D 10/23/2002 in F R as N P R M REG-131478-02
• PUBLISHED 3/14/2003 in F R as T D 9048

CORPORATIONS AND THEIR SHAREHOLDERS
Original PGP Projects Published:
1. Guidance regarding redemptions of corporate stock.
• P U B L I S H E D 10/18/2002 in F R a s N P R M REG-150313-01
2. Final regulations regarding conversions of C corporations to RIC or REIT status.
• P U B L I S H E D 3/18/2003 in F R as T D 9047
7. Guidance regarding the active trade or business requirement under section 355(b).
• PUBLISHED 2/18/2003 in IRB 2003-7 as REV. RUL. 2003-18 (released
1/22/2003)
• WILL PUBLISH 4/28/2003 in IRB 2003-17 as REV. RUL. 2003-38 (released
4/4/2003)
10. Guidance regarding mergers with disregarded entities.
• P U B L I S H E D 1/24/2003 in F R as T D 9038

12. Guidance under section 368 regarding reorganizations involving non-stock entitie
• P U B L I S H E D 2/18/2003 in IRB 2003-7 as REV. RUL. 2003-19 (released
1/22/3002)

14. Guidance regarding the application of section 368(a)(1 )(D) when assets are
transferred by the transferee to a subsidiary.
• P U B L I S H E D 12/30/2002 in IRB 2002-52 as REV. RUL. 2002-85
Additional Project

19. Revenue procedure regarding section 301.9100-3 relief for section 338 elections.
• WILL PUBLISH 4/21/2003 in IRB 2003-16 as REV. P R O C . 2003-33 (released
4/2/2003)
EMPLOYEE BENEFITS
A. Retirement Benefits
Original PGP Projects Published:
1. Guidance under section 72(t) regarding substantially equal periodic payments.
• PUBLISHED 10/21/2002 in IRB 2002-42 as REV. RUL. 2002-62 (released
10/3/2002)
2. Final regulations relating to plan loans under section 72(p).
• P U B L I S H E D 12/3/2002 in F R as T D 9021

4. Guidance under section 401 (a)(17) regarding whether the increase in the allowabl
compensation limit enacted by E G T R R A may be applied to former employees.
• PUBLISHED 1/21/2003 in IRB 2003-3 as REV. RUL. 2003-11 (released
12/20/2002)
9. Guidance under section 408(d) regarding how to request the discretionary 60 day
rollover period related to disasters.
• PUBLISHED 1/27/2003 in IRB 2003-4 as REV. P R O C . 2003-16 (released
1/8/2003)
10. Guidance under section 408(q).
• PUBLISHED 1/27/2003 in IRB 2003^1 as REV. P R O C . 2003-13. (released
1/2/2003)
11. Guidance relating to cash balance pension plans.
• P U B L I S H E D 12/11/2002 in F R a s N P R M R E G 209500-86
• PUBLISHED 1/13/2003 in IRB 2003-2 as A N N O U N C E M E N T 2003-1 (released
12/10/2002)
12. Guidance relating to the application of section 411 (d)(6).
• PUBLISHED 2/3/2003 in IRB 2003-5 as N O T I C E 2003-10 (released 1/10/2003)

17. Guidance on disclosure to participants regarding their distributions from pension
plans.
• P U B L I S H E D 10/7/2002 in F R as N P R M REG-124667-02

22. Final regulations relating to section 4980F on notice of significant reduction in t
rate of future benefit accrual.
• P U B L I S H E D 4/9/2003 in F R as T D 9052
Additional Projects:
24. Revenue ruling modifying Rev. Rul. 2002-46 regarding grace period contributions
to a section 401 (k) plan and matching contributions to a qualified defined
contribution plan.
• P U B L I S H E D 11/12/2002 in IRB 2002-45 as REV. RUL. 2002-73
25. Revenue ruling on recovery of plan overpayment.
• P U B L I S H E D 12/16/2002 in IRB 2002-50 as REV. RUL. 2002-84 (released
11/27/2002)
26. Revenue ruling under section 411 on taking frozen accruals into account.
27. Revenue procedure on statute of limitations under section 4971.
28. Revenue ruling on the effect of EGTRRA on the elimination of optional forms of
benefit in defined contribution plans.
29. Proposed regulations on the application of section 401 (a)(4) for cash balance
plans.
• P U B L I S H E D 12/11/2002 in F R a s N P R M REG-164464-02
• WILL PUBLISH 4/28/2003 in IRB 2003-17 as A N N O U N C E M E N T 2003-22
(released 4/7/2003)
30. Notice on section 401 (a)(9) effective date.
• P U B L I S H E D 1/13/2003 in IRB 2003-2 as N O T I C E 2003-2 (released
12/20/2002)
31. Notice extending delay of nondiscrimination rules for certain governmental plans.
• P U B L I S H E D 1/21/2003 in IRB 2003-3 as N O T I C E 2003-6 (released
12/20/2002)
32. Notice regarding section 401(a)(9) reporting.
• P U B L I S H E D 1/13/2003 in IRB 2003-2 as N O T I C E 2003-3 (released
12/20/2002)

33. Revenue procedure regarding extension of G U S T amendment period.
• P U B L I S H E D 12/9/2002 in IRB 2002-49 as REV. P R O C . 2002-73 (released
11/19/2002)
34. Revenue procedure regarding delayed effective date of section 401 (a)(9).
• P U B L I S H E D 1/13/2003 in IRB 2003-2 as REV. P R O C . 2003-10 (released
12/20/2002)
35. Revenue ruling regarding effective date of S Corp/ESOP.
• P U B L I S H E D 1/21/2003 in IRB 2003-3 as REV. RUL. 2003-6 (released
12/17/2002)

36. Guidance regarding length-of-service award program under section 457(e)(11 )(B).
37. Guidance on prohibited allocations of securities in an S corporation.
38. Proposed regulations under section 408(q) deemed IRAs.
B. Executive Compensation, Health Care and Other Benefits, and Employment
Taxes
Original PGP Projects Published:
4. Guidance on whether accident and health plan reimbursements for medical
expenses incurred before the inception of the plan are excludable from the
recipient's gross income under section 105(b).
• P U B L I S H E D 9/23/2002 in IRB 2002-38 as REV. RUL. 2002-58
5. Guidance under section 105(b) on self-insured medical flexible spending
arrangements that pay the full amount of the maximum benefit at the beginning of
the plan year.
• P U B L I S H E D 12/9/2002 in IRB 2002^9 as REV. RUL. 2002-80
Additional Projects:
18. Notice regarding effective date of Rev. Proc. 2002-41.
• P U B L I S H E D 9/9/2002 in IRB 2002-36 as N O T I C E 2002-55
19. Revenue ruling under section 83 regarding payment for property with a note.
20. Notice regarding leave donation programs.
• P U B L I S H E D 1/13/2003 in IRB 2003-2 as N O T I C E 2003-1

21. Guidance under section 419A(f)(5) on the definition of collectively bargained
agreement.
• WILL PUBLISH 5/5/2003 in IRB 2003-18 as N O T I C E 2003-24 (released
4/11/2003)
22. Notice on issues with respect to the tax treatment of choreworkers.
23. Withdrawal of proposed regulations under section 3321 regarding imposition of
Railroad Unemployment Repayment Tax.
• P U B L I S H E D 11/7/2002 in F R as REG-209116-89
24. Revenue ruling on application of section 4980 to transfer of excess assets.
25. Revenue ruling on application of section 4980B in divorce situations.
• P U B L I S H E D 12/30/2002 in IRB 2002-52 as REV. RUL. 2002-88
26. Announcement regarding Form W-2, Code V.
• P U B L I S H E D 12/9/2002 in IRB 2002-49 as A N N O U N C E M E N T 2002-108
(released 11/22/2002)
27. Revenue ruling under section 4980B on COBRA small employer plan exception.
28. Notice on certain offshore deferred compensation arrangements involving
domestic and foreign employee leasing companies.
• WILL PUBLISH 5/5/2003 in IRB 2003-18 as N O T I C E 2003-22 (released
4/4/2003)

29. Revenue ruling on distributions from a qualified retirement plan used to pay heal
insurance under a former employer's cafeteria plan.

EXCISE TAXES
Original PGP Projects Published:
1. Guidance under sections 4041 and 4081 regarding biodiesel.
• P U B L I S H E D 11/18/2002 in IRB 2002-46 as REV. RUL. 2002-76

4. Final regulations under section 4081 relating to the revision of the definition of
dieselfuel.
• P U B L I S H E D 4/2/2003 in F R as T D 9051
5. Guidance under section 4221 regarding fuel used in foreign trade.
• P U B L I S H E D 8/12/2002 in IRB 2002-32 as REV. RUL. 2002-50

j-198: Bush Administration Official Visits Nebraska T o Highlight Economic Benefits

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 18, 2003
js-198
Senior Bush Administration Official Visits Nebraska on Tuesday To Highlight
Economic Benefits of President's Jobs and Growth Plan
Treasury Under Secretary for Domestic Finance Peter R. Fisher will join Governor
Mike Johanns in Bellevue, Nebraska on Tuesday, April 22, to visit with local
business leaders and highlight the economic benefits of the President's Jobs and
Growth Plan.
Under the plan, more than 550,000 Nebraska taxpayers will have lower income tax
bills in 2003, and 140,000 business taxpayers can use their tax savings in invest in
new equipment, hire additional workers, and increase pay.
The event will be open the media, and there will be time immediately after the event
for interviews with media organizations in attendance:
Who: Treasury Under Secretary Peter Fisher, Governor Mike Johanns
What: Bellevue Chamber of Commerce meeting
When: 10:00 am, April 22, 2003
Where: Bellevue Offutt AFB, Welcome Center, Hwy. 370 & Ft. Crook Rd.,
Bellevue

tp://www.treas.gov/press/reigases/js 198.htm

7/21/2003

.199: Bush Administration Official Visits N e w York on Tuesday T o Highlight Economic Benefits

Page 1 of 1

FROM THE OFFICE OF PUBLIC AFFAIRS
April 18,2003
js-199
Bush Administration Official Visits New York on Tuesday To Highlight
Economic Benefits of President's Jobs and Growth Plan
Treasury Assistant Secretary for Financial Markets Brian C. Roseboro will visit
Amherst, N e w York on Tuesday, April 22, to meet with local business leaders and
highlight the economic benefits of the President's Jobs and Growth Plan.
Under the plan, nearly 5.9 million New York taxpayers will have lower income tax
bills in 2003, and more than 1.4 million business taxpayers can use their tax
savings in invest in new equipment, hire additional workers, and increase pay.
The event will be open the media:
• Who:
•
•
•

Treasury Assistant Secretary for Financial Markets Brian C. Roseboro
What: Amherst Chamber of Commerce meeting
W h e n : 10:15 am, April 22, 2003
Where: Entercom Radio Headquarters, 550 Corporate Parkway, Amherst

%//v*ww\ treas.gov/press/releases/js 199.htm

7/21/2003

5-200: Bush Administration Official Visits N e w Jersey on Tuesday T o Highlight Economic Benefits

Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 18,2003
js-200
Bush Administration Official Visits New Jersey on Tuesday To Highlight
Economic Benefits of President's Jobs and Growth Plan
Treasury Deputy Assistant Secretary for Financial Institutions Policy Gregory
Zerzan will visit Vineland, N e w Jersey on Tuesday, April 22, to meet with local
business leaders and highlight the economic benefits of the President's Jobs and
Growth Plan.
Under the plan, more than 2.9 million New Jersey taxpayers will have lower income
tax bills in 2003, and 790,000 business taxpayers can use their tax savings in invest
in new equipment, hire additional workers, and increase pay.
The event will be open the media:
• Who:
•
•
•

Treasury Deputy Assistant Secretary Gregory Zerzan
What: Vineland Chamber of Commerce meeting
W h e n : 11:45 am, April 22, 2003
Where: R a m a d a Inn, 2216 West Landis Ave., Vineland

-30-

%//www.treas.gov/press/releases/js200.htm

7/21/2003

.201: Bush Administration Official Visits Pennsylvania T o Highlight Economic Benefits

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
April 18,2003
js-201
Bush Administration Official Visits Pennsylvania on Tuesday To Highlight
Economic Benefits of President's Jobs and Growth Plan
Treasury Assistant Secretary for Financial Institutions Wayne A. Abemathy will visit
the Pittsburgh, Pennsylvania area on Tuesday, April 22, to meet with citizens and
local business leaders and highlight the economic benefits of the President's Jobs
and Growth Plan.
Under the plan, more than 4 million Pennsylvania taxpayers will have lower income
tax bills in 2003, and more than 1 million business taxpayers can use their tax
savings in invest in new equipment, hire additional workers, and increase pay.
The following events will be open the media:
• Who: Treasury Assistant Secretary for Financial Institutions Wayne A.
Abemathy
• What: Pittsburgh Chamber of Commerce meeting
• W h e n : 3:30 pm, April 22, 2003
• Where: 425 6th St., 6th Floor, Pittsburgh

W h o : Treasury Assistant Secretary W a y n e Abemathy and U.S. Rep. Tim
Murphy
What: Moon Township Town Hall Meeting
W h e n : 7:30 pm, April 22, 2003
Where: Moon Municipal Building, 1000 Beaver Grade Rd., Moon
-30-

'ttp://www.treas.gov/press/releases/js201 .htm

7/21/2003

O I T K I O K IM Bill . M " F \ I R M l£M<> PI N N N \ I . W V h . W IAI I".. V W . « U \ M I I \ C T O N . D.t • 24I22H •(21)2: 62 2 2<>f>ll

EMBARGOED UNTIL 11:00 A.M.
April 21, 2003

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $13,000 million to
refund an estimated $23,000 million of publicly held 4-week Treasury bills maturing
April 24, 2003, and to pay down approximately $10,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDlrect will not be accepted.
The Federal Reserve System holds $14,073 million of the Treasury bills maturing
on April 24, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

oOo
Attachment

)S20^

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED APRIL 24, 2003
April 21, 2003
Offering Amount $13,000 million
Maximum Award (35% of Offering Amount)... $ 4,550 million
Maximum Recognized Bid at a Single Rate.. $ 4,550 million
NLP Reporting Threshold
$ 4,550 million
NLP Exclusion Amount
$11, 000 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 MN 8
Auction date
April 22, 2003
Issue date
April 24, 2003
Maturity date
May 22 , 2003
Original issue date
November 21, 2002
Currently outstanding
$43,338 million
Minimum bid amount and multiples....$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

fUKIC'K OF PUBLIC WTMKS • 1500 PK\NSYI.\ \ M \ WKNtJH, VW. • WASHINGTON, D.C •• 2U220 • l202j 622-2960

EMBARGOED UNTIL 11:00 A.M.
April 21, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 2-YEAR NOTES
The Treasury will auction $27,000 million of 2-year notes to refund $18,619
million of publicly held notes maturing April 30, 2003, and to raise new cash of
approximately $8,381 million.
In addition to the public holdings, Federal Reserve Banks hold $7,293 million
of the maturing notes for their own accounts, which may be refunded by issuing
an additional amount of the new security.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction. These noncompetitive
bids will have a limit of $100 million per account and will be accepted in the order
of smallest to largest, up to the aggregate award limit of $1,000 million.
TreasuryDlrect customers requested that we reinvest their maturing holdings
of approximately $560 million into the 2-year note.
The auction will be conducted in the single-price auction format. All competitive and noncompetitive awards will be at the highest yield of accepted competitive
tenders. The allocation percentage applied to bids awarded at the highest yield will
be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

oOo
Attachment

S - £03

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED APRIL 30, 2003
April 21, 2003
Offering Amount $27 , 000 million
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Rate
NLP Reporting Threshold
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest payable by investor
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TINT(s)

$ 9,450 million
$ 9,450 million
$ 9,450 million

2-year notes
K-2005
912828 AX 8
April 23, 2003
April 30, 2003
April 30, 2003
April 30, 2005
Determined based on the highest
accepted competitive bid
Determined at auction
October 31 and April 30
$1,000
None
Determined at auction

$1,000
912820 HU 4
April 30, 2005 - - 912833 ZG 8

Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a yield with three decimals, e.g., 7.123%.
(2) Net long position for each bidder must be reported when the sum of the total
bid amount, at all yields, and the net long position equals or exceeds the NLP
reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the
closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date,
or payment of full par amount with tender. TreasuryDixect customers can use the Pay
Direct feature which authorizes a charge to their account of record at their
financial institution on issue date.

ureau of the Public Debt: Treasury Calls 8 3/8 Percent Bonds of 2003-08

Page 1 of 1

B u r e a u of

Public

Un;ted bt:i rei Depar THeni of r,'- e ,' /'ecsvry

reasury Calls 8 3/8 Percent Bonds of 2003-08
OR IMMEDIATE RELEASE
pril 15, 2003
ie Treasury today announced the call for redemption at par on August 15, 2003, of the 8-3/8% Treasury Bonds of 2003-08, issued
ugust 15, 1978, due August 15, 2008 (CUSIP No. 912810CC0). There are $2,103 million of these bonds outstanding, of which $1,314
lillion are held by private investors. Securities not redeemed on August 15, 2003, will stop earning interest.

nese bonds are being called to reduce the cost of debt financing. The 8-3/8% interest rate is significantly above the current cost of
^curing financing for the five years remaining to their maturity. In current market conditions, Treasury estimates that interest savings
om the call and refinancing will be about $270 million.
ayment will be made automatically by the Treasury for bonds in book-entry form, whether held on the books of the Federal Reserve
anks or in TreasuryDirect accounts. Bonds held in coupon or registered form should be presented for redemption to financial institutions
r mailed directly to the Bureau of the Public Debt, Definitives Section, P.O. Box 426, Parkersburg, W V 26106-0426. For more
iformation concerning called coupon or registered bonds, you m a y contact the Definitives Section at (304) 480-7936.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004

Js-a<54
^ttp://www.pubjicdetorejs^pv/com/comcall403.htm

5/10/2005

5: Statement by the Treasury Spokesman, R o b Nichols

I — f c

Page 1 of 1

| | i|||flM|||BM||^^

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 21, 2003
JS-205
Statement by the Treasury Spokesman, Rob Nichols
As the President has said, we are committed to a jobs and growth package of at
least $550 billion in tax relief that includes all of the elements the President has
proposed, including 1 0 0 % exclusion of the double tax on dividends and all the tax
rate reductions already approved by Congress in 2001 relief which will
immediately help millions of Americans and especially small businessmen and
women. There are many ways to achieve the President's priorities, and w e will
work with Congress in the weeks ahead to determine the best way to achieve those
priorities.

://www.treas.gov/press/releases/js205.htm

7/21/2003

PUBLIC DEBT N E W S
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
April 21, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 24, 2003
July 24, 2003
912795NE7

High Rate: 1.160% Investment Rate 1/: 1.182% Price: 99.707
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 42.21%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

38,599,762
1,454,383
195,000

13,350,955
1,454,383
195,000

SUBTOTAL 40,249,145 15,000,338 2/
Federal Reserve 4,763,169 4,763,169
TOTAL $ 45,012,314 $ 19,763,507
Median rate 1.150%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.130%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 40,249,145 / 15,000,338 = 2.68
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,183,394,000

http://www.publicdebt.treas.gov

JS 2*b

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2 6-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 24, 2003
October 23, 2003
912795NT4

High Rate: 1.185% Investment Rate 1/: 1.212% Price: 99.401
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 35.47%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

32,258,380
1,053,011
175,000

14,772,690
1,053,011
175,000

SUBTOTAL 33,486,391 16,000,701 2/
Federal Reserve 6,068,214 6,068,214
TOTAL $ 39,554,605 $ 22,068,915
Median rate 1.175%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.150%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,486,391 / 16,000,701 = 2.09
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $874,580,000

http ://www.publicdebt.treas.go v

JS ^07

fS-208: Deputy Assistant Secretary Greg Zerzan Remarks Before the Vineland Chamber of C o m m e r c e

Page 1 of 3

mam
PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 22, 2003
JS-208
Remarks of
Deputy Assistant Secretary for Financial Institutions Policy Greg Zerzan
Before the
Vineland Chamber of C o m m e r c e
Vineland, NJ
Thank you very much for inviting m e to speak to you today. It is a great privilege to
be able to leave Washington and come before a group dedicated to providing jobs
and economic growth in our communities.
It is interesting to me to think back to last year at this time. All of us were shocked
by the accounts of corporate wrongdoing which swept through our capital markets,
the revelations of misdeeds throughout the summer that ultimately led Congress to
pass the Sarbanes-Oxley Act. This legislation made sweeping reforms in our
securities laws which are designed to ensure that fairness and transparency remain
the norm in America's capital markets.
But throughout last summer, as Congress investigated the wrongdoing at Enron,
WorldCom, Global Crossing and a handful of other large companies, the most
striking thing was the story that wasn't reported in the media. That is the story of
the great success that is the American enterprise system. The reason Enron and
the others made such news was because they represented such an aberration.
In a system like ours, which rewards competition and separates market winners and
losers based solely on their ability to get the job done, it truly was newsworthy that
anyone would think they could get away with trying to fool the market. As you in
this room know as well as anyone, at the end of the day the bottom line is hard to
hide. Market forces are relentless in separating businesses into winners and
losers.
It is this principle that drives the President's plan to promote jobs and growth in our
economy. The President's plan rests on one very central idea: our money belongs
to us, and not the government. The American people have proven they do a better
job deciding how to spend and save than government ever could. That is why the
President's plan to put money back in the hands of the taxpayers is so essential to
our economic success.
Consider the President's plan to eliminate the double taxation of corporate
dividends. Under the current system, investors are punished for their investment
success. If you take a dollar out of your savings account to buy a share of stock,
you are becoming an owner of that company. If your company earns a profit, your
company is taxed. If your company then returns that profit to you in the form of a
dividend, you are then taxed again on that same profit. What do companies do to
avoid this double taxation? They avoid paying you a dividend. In the current
system, it makes more sense for a company to increase its borrowing and run a
deficit then it does for the company to pay dividends. By having debt on its books,
the company gets a tax deduction. Therefore companies take on more loans and
retain their earnings, rather than pass the profits on to the shareholders that own
the company.
This perverse disincentive to pay dividends has severe real world consequences. It

ttp://www.treas.gov/press/releases/js208.htm

7/21/2003

208: Deputy Assistant Secretary Greg Zerzan Remarks Before the Vineland C h a m b e r of C o m m e r c e

Page 2 of 3

makes debt more attractive, thus increasing the risk of bankruptcy in hard times. It
encourages the diversion of corporate funds to non-optimal economic allocation. It
makes it more likely that a company will attempt to use accounting methods that
obscure its books in order to avoid paying dividends. And it makes relocating
overseas more attractive, where companies can take advantage of foreign tax laws
that don't penalize dividends. Currently the United States is one of only three
countries in the developed world that treats dividends as fully taxable.
Eliminating the double taxation of dividends has several clear advantages. Most
importantly, it immediately provides economic stimulus by putting money directly in
the hands of investors. This money can be reinvested, used to pay off debt, or
spent in the economy, in any case creating new jobs and further stimulating
growth. And rather than being a one-time shot, the dividend tax cut has long-term
effects: it continues to return money to the economy for as long as companies are
succeeding, thus cycling money back into the economy and producing a wealth
generating effect.
Secondly, reducing the double taxation makes companies more accountable to the
market. There is no better w a y to judge h o w your investments are doing than by
looking at what they are doing for your bank account. The President likes to say
"earnings are an opinion, cash is fact." By encouraging companies to pay out
profits in the form of dividends, shareholders will get the best method yet devised to
figure out h o w well their investments are doing.
The President's jobs and growth plan also calls for accelerating tax cuts that are
currently scheduled to take effect over the next seven years. A s the President has
said, if tax cuts are going to do us good in the future, they will certainly do us good
now. Under the President's plan single filers, married couples, families with
children and small businesses will all benefit from the creation of a more fair tax
system.
The President's jobs and growth plan will provide very real benefits here in New
Jersey. With the President's plan:
• More than 2.9 million taxpayers in New Jersey will have lower income tax bills this
year.
• 790,000 business taxpayers can use their tax savings to invest in new equipment,
hire additional workers, and increase pay.
• 2.25 million married couples and single filers will benefit from accelerating to 2003
the planed expansion of the 10-percent bracket currently scheduled for 2008.
• More than 1.16 million taxpayers in New Jersey will benefit from accelerating to
2003 the reductions in income tax rates in excess of 15-percent currently scheduled
for 2004 and 2006.
• More than 1.12 million married couples in New Jersey will benefit from eliminating
the marriage tax penalty by increasing the standard deduction for joint filers to
double the amount for single filers, and increase the width of the 15-percent bracket
to twice the width for single filers. These two provisions are currently scheduled to
phase in between 2005 and 2009.
• More than 755,000 married couples and single parents in New Jersey will benefit
from increasing the child tax credit from $600 to $1,000 now. This increase is
currently scheduled to phase in between 2005 and 2010.
• More than 1.17 million taxpayers in New Jersey will benefit from eliminating the
double taxation of dividends.
The President's plan will provide tax relief to 92 million Americans. A family of four
with an income of $40,000 a year would receive a 9 6 % reduction in federal income
taxes. Instead of paying $1,178 a year, that family would pay $45. For small

ww.treas.gov/press/releases/js208.htm

7/21/2003

S-208: Deputy Assistant Secretary Greg Zerzan Remarks Before the Vineland C h a m b e r of C o m m e r c e

Page 3 of 3

businesses, the tax relief is equally impressive. Under the jobs and growth plan 23
million small business owners will see their taxes reduced. The plan would triple
the amount that a business can deduct for equipment purchases, to $75,000 in a
single year, and would index the business equipment deduction to inflation.
Some people say that now is not the right time for tax cuts. These are not new
arguments. In fact, they have been m a d e every time a tax cut has been proposed.
They m a d e these arguments in 1962, when President Kennedy proposed across
the board tax cuts even as America fought the Cold W a r and raced to put a m a n on
the moon. They m a d e these arguments in 1982, when President Reagan proposed
tax cuts even as he increased defense spending in order to bring about the collapse
of the Berlin Wall. These arguments were on the wrong side of history then, and
they're on the wrong side of history now. In both cases, the results of tax cuts were
dramatic: lower taxes led to higher growth and more jobs.
The President's plan to create jobs and growth is the right stimulus needed to
ensure America's economic success both now and in the future. For s o m e people
it is never the right time to cut taxes; they will always favor more government
spending over more money in taxpayers' hands. But w e cannot control the growth
of government spending by giving government more money; w e cannot keep the
deficit under control by allowing a blank check to be drawn on the taxpayers'
account. By putting money back into the hands of those that earned it, w e ensure
both greater fiscal responsibility on the part of the government, and greater growth
in our economy.
Let me conclude by saying it is almost impossible to give a speech at this time in
our history without thinking for a moment about w h o w e are as a people, and where
w e stand in the world. Our heroes in Afghanistan and Iraq and around the world
have been putting their lives on the line to protect the American way. Their
successes have been awesome, and it is important to understand why. It is not
simply because our military is the best trained, best equipped, best armed fighting
force the world has ever seen, although that plays a large part. It is because at the
end of the day, when asked to plunge into a dark cave or go house to house
against people that want to kill them, it is the individual soldier, not his equipment,
that will allow him to get the job done.
Our soldiers come from a society that values individual initiative, encourages risk
taking, and rewards success. These values are not new to us; they c a m e to us
from our parents and grandparents and great-grandparents, and it is these s a m e
values that draw people to our shores everyday. And it these values that m a k e our
soldiers advance while our enemies retreat; it is these values, brought to the
battlefield by our brave m e n and w o m e n in uniform, that allow them to defeat
enemies that wish to impose a very different way of life upon the world.
And as I don't need to tell the people in this room, it is these same values that
provide the backbone of our free enterprise system. Hard work, individual initiative,
risk taking, and the promise that you will get to keep what you earn are what drive
our businessmen and w o m e n everyday. The President's plan embraces these
values by returning money to the people that earn it. It is the right plan to create
jobs and growth, and it promises results for both the short term as well as into the
future.
Thank you very much for allowing me to speak with you today, and I look forward to
answering any questions you m a y have.

ttp://www.treas.gov/press/releases/js208.htm

7/21/2003

£ederal £ inaneinq }j<aril
A S -i\ :h r::!«.. G C

5022:;

NEWS

FEDERAL FINANCING BANK
2003 PRESS RELEASE
April 2003

Gary Burner, Manager, Federal Financing B a n k (FFB) a n n o u n c e d the
following activity for the m o n t h of April 2003.
FFB holdings of obligations issued, sold or guaranteed by other
Federal agencies totaled $35.8 billion on April 30, 2003, posting an increase
of $28.2 million from the level on March 31, 2003. This net change w a s the
result of an increase in holdings of government-guaranteed loans of $28.2
million. T h e F F B m a d e 28 disbursements and received 41 prepayments
during the m o n t h of April.
Attached to this release are tables presenting FFB April loan activity
and F F B holdings as of April 30, 2003.

FEDERAL FINANCING BANK
April 2003 ACTIVITY

Amt. Of
Advance

Final
Maturity
Century 2000

JS-P<$7

Int. Rate

Semi-Annual
or Quarterly

federal £ inane inr? b a n k
\AS

-I*-.3T::K

FEDERAL FINANCING BANK
2003 PRESS RELEASE
April 2003

Gary Burner, Manager, Federal Financing B a n k (FFB) a n n o u n c e d the
following activity for the m o n t h of April 2003.
FFB holdings of obligations issued, sold or guaranteed by other
Federal agencies totaled $35.8 billion on April 30, 2003, posting an increase
of $28.2 million from the level o n March 31, 2003. This net c h a n g e w a s the
result of an increase in holdings of government-guaranteed loans of $28.2
million. T h e F F B m a d e 28 disbursements and received 41 prepayments
during the m o n t h of April.
Attached to this release are tables presenting FFB April loan activity
and F F B holdings as of April 30, 2003.

FEDERAL FINANCING BANK
April 2003 ACTIVITY

Amt. Of
Advance

Final
Maturity
Century 2000

Int. Rate

Semi-Annu
or Quarterl

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Semi-Annually

4/17

$20,164.85

7/31/1925 4.595%

Semi-Annually

San Francisco OB

4/17

$137,410.19

8/1/1905

1.923%

Semi-Annually

Atlanta CDC Lab

4/28

$38,000.00

1/30/1931

4.734%

Semi-Annually

San Francisco Bldg Lease

4/30

$661,436.10

8/1/1905

1.857%

Semi-Annually

DEPARTMENT OF EDUCATION
Tuskegee Univ.

4/14

$1,730,086,05 1/2/1932 4.761%

Semi-Annually

Livingstone College

4/25

$184,367.56

Semi-Annually

Morgan County Elec. #710

4/01

$800,000.00 12/31/1909 2.572%

Quarterly

Tri-CountyEMC#814

4/03

$3,400,000.00 12/31/1936 4.811%

Quarterly

Bowie-Cass Electric Coop. #835

4/08

$7,000,000.00 1/2/1935

4.673%

Quarterly

S. Illinois Power #792

4/09

$606,000.00

1/2/1935

4.771%

Quarterly

Minnesota valley Elec. #879

4/10

$1,959,000.00 7/1 /1913

3.864%

Quarterly

Runestone Electric Ass. #886

4/10

$2,500,000.00 12/31/1936 4.800%

Quarterly

wild Rice Elec. #806

4/10

$470,000.00

Quarterly

Farmers Telephone #476

4/11

$9,740,401,00 7/2/1907

2.589%

Quarterly

Rio Grand Electric #615

4/11

$685,000.00

1/3/1934

4.754%

Quarterly

Ravalli #641

4/14

$225,000.00

9/30/1910 3.490%

Quarterly

Cumberland Electric #623

4/15

$6,829,000.00 12/31/1929 4.694%

Quarterly

Daviess-Martin County #670

4/15

$3,900,000.00 1/2/1935

4.829%

Quarterly

Northeast Louisiana Power #841

4/17

$2,350,000.00 12/31/1936 4.798%

Quarterly

The Carroll E.M.C. #859

4/18

$7,831,000.00 12/31/1931 4.686%

Quarterly

Shelby Energy Coop. #758

4/22

$2,500,000.00 12/31/1935 4.787%

Quarterly

Somerset Rural Elec. #583

4/22

$3,200,000.00 1/3/1934

4.746%

Quarterly

Guthrie County Elec. #831

4/28

$1,110,000.00 12/31/1936 4.713%

Quarterly

Blair Telephone C o m p a n y #862

4/29

$700,000.00

12/31/1919 4.050%

Quarterly

Northern Electric #666

4/29

$1,062,000.00 10/2/1906 2.202%

Quarterly

Sangre De Cristo Elec. #732

4/29

$500,000.00

4.655%

Quarterly

Tri-State #475

4/29

$8,010,000.00 12/31/1925 4.516%

Quarterly

Tri-State #757

4/29

$1,976,000.00 12/31/1925 4.388%

Quarterly

7/1/1931

4.629%

RURAL UTILITIES SERVICE

12/31/1935 4.779%

1/3/1934

Return To top

FEDERAL FINANCING BANK HOLDINGS APRIL 2003
(in millions of dollars)

April 30, 2003

fogram

March 31, 2003

Monthly Net
Fiscal Year Net
Change
I
Change
I
4/01/03I .
W/01/02- 4/30/03
I
4/30/03
j '

xjency Debt:
,S. Postal Service

$7,273.4

$0.0

($3,840.6]

ubtotal*

$7,273.4

$0.0

($3,840.6)

mHA-RDIF

$950.0

$0.0

mHA-RHIF

$2,530.0

$0.0

($375.0)

ural Utilities Service-CBO

$4,270.2

$0.0

80.C

ubtotal*

$7,750.2

$0.0

($375.0)

$1,802.8

$1,805.4

($2.7)

($119.8)

$76.2

$74.2

$1.9

$7.5

$3.8

$3.9

$0.0

($1.2)

HUD-Public Housing Notes

$1,133.2

$0.0

($74.1)

ieneral Services Administration+

$2,169.5

$2,172.0

($2.5)

($36.1)

$10.1

$0.0

($1.3)

$705.3

$0.0

($75.4)

$14,793.0

$14,759.9

$33.1

$734.7

$87.3

$89.0

($1.7)

($15.1)

$3.2

$0.0

($0.1)

•ubtotal*

$20,784.4

$20,756.2

$28.2

$419.2

Irand total*

$35,808.0

$35,779.9

$28.2

($3,796.3)

gency Assets:

lovernment-Guaranteed Lending:
OD-Foreign Military Sales
oEd-HBCU+
HUD-Community Dev. Block Grant

Ol-Virgin Islands
'ON-Ship Lease Financing
lural Utilities Service
BA-State/Local Development Cos.
»0T-Section 511

"figures m a y not total due to rounding; +does not include capitalized interest

Return To top

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

April 24, 2003
May 22, 2003
912795MN8

High Rate: 1.115% Investment Rate 1/: 1.138% Price: 99.913
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 21.08%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

SUBTOTAL
Federal Reserve
TOTAL

38,524,790
45,228
0

Accepted
$

12,954,936
45,228
0

38,570,018

13,000,164

3,241,307

41,811,325

16,241,471

Median rate 1.110%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.100%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 38,570,018 / 13,000,164 = 2.97
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

JC2U

S-211: U.S. Treasury Secretary John S n o w Speech to the Brazil-American Chamber of C o m m e r c e S a o ... Page 1 o f 4

mm
PRLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 23, 2003
JS-211
U.S. Treasury Secretary John Snow
Speech to the Brazil-American C h a m b e r of C o m m e r c e
Sao Paulo, Brazil
April 23, 2003
Thank you Mr. de Souza (President, American Chamber of Commerce). It is a
pleasure to meet with the American Chamber of C o m m e r c e today, during m y first
trip to Brazil as the Secretary of the Treasury.
I am here because we see a moment of real opportunity for strengthening relations
with a country of vital importance to the U.S. A s you in this room know, our
commercial ties are already strong. U.S. investors account for nearly one out of
every four dollars of foreign direct investment in Brazil. And I a m confident these
linkages can be greatly increased.
Our shared interests extend beyond our bilateral ties. Brazil and the United States
share responsibility for economic progress in the entire hemisphere. W e have an
opportunity together to drive economic growth and to raise living standards for
millions of people.
President Bush is intent on seizing this opportunity, because it is in our mutual
interest to do so, but also because Brazil has dynamic, n e w leaders w h o can be
partners for strengthening growth.
Our relationship is a "mature partnership." Our nations agree on many issues - as
major democracies, as important market economies. But w e also have our
differences, most recently with respect to the debate over Iraq. W e are
disappointed with the lack of support w e received on an issue so crucial to m y
country. But in a mature relationship it is important and healthy to recognize our
differences, to turn the page, and to be certain that w e continue to strive for
understanding and progress in areas where w e do agree.
President Lula and his team have already demonstrated extraordinary leadership in
setting their economic course. Their agenda is both broad and ambitious.
I have seen first hand the evidence of this leadership. I met again this week with
Finance Minister Palocci and Central Bank Governor Mereilles, continuing a good
discussion w e began when w e met two weeks ago in Washington. I a m immensely
impressed with their c o m m a n d of the policies to keep Brazil's economic program on
track. And later today I a m looking forward to meeting President Lula.
Brazil's leaders are focusing their energies on both growth and poverty reduction.
S o m e people seem to think you.must choose between these goals. I do not.
Rather, I see these as mutually reinforcing objectives. The policies that spur private
investment create productive jobs, and this is the only effective w a y to reduce
poverty. At the s a m e time, lifting people out of poverty builds their stake in a lawful,
democratic, stable society, the kind of society where people are willing to invest for
the long-term.
The roles of the public and private sectors embodied in the Lula Administration
agenda m a k e sense to m e . Government must provide a stable policy framework

ttp://www.treas.gov/press/releases/js211 .htm

7/21/2003

5-211: U.S. Treasury Secretary John S n o w Speech to the Brazil-American Chamber of CommerceSao ...

Page 2 of 4

that allows people to risk their capital. Government must also provide essential
services that the private sector cannot. And the private sector must be the primary
engine or agent of growth and job creation.
Nowhere is the emphasis on a stable policy framework more evident than in Brazil's
macroeconomic policy course. I w a s reminded this week of something President
Lula said at his inauguration: "You must first plant the seed before you can pick the
fruit from the tree." The seeds the Lula Administration is planting include an
aggressive attack on inflation and a focus on reducing the nation's debt burden. A s
any farmer knows, patience can be as essential as sunshine and water, but it
appears that these seeds are already bearing fruit: the Real has strengthened; the
nation's risk rating has reduced significantly; and inflation is falling. The world is
regaining its trust in Brazil's economy.
Importantly, the new government did not stop at stabilization. There are more
seeds to plant. The Lula team focused right from the start on other critical building
blocks for sustained growth: tax reform, pension reform, and central bank
autonomy. By tackling these issues early on and by reaching out to build political
consensus, this government is crafting a strategy that is effective in both political
and economic terms, one which can accelerate tangible economic returns.
For President Lula, reaching out includes extending a hand to those at the margins
of society to integrate them into the productive economy. The fight against hunger,
F o m e Zero, will be difficult but no effort is more important. It is essential to build a
more cohesive society and to boost the productivity of people, especially children,
w h o can m a k e an enormous contribution to Brazil's future.
No less significant is the government's commitment to fulfill the dream of home
ownership to residents of the favelas. Property ownership is an essential building
block for stable, sustained economic growth. Owning property, owning a home,
fundamentally changes the attitudes and behavior of people.
It helps to generate a sense of responsibility to the community as people gain an
equity stake in their neighborhoods and their cities. Holding title to property unlocks
enormous potential for income and wealth generation because it can give them
access to credit. Press reports quote a widow with two children living in a Rio
slum: "If I could just get s o m e credit, I could expand m y shop and put a bathroom
in m y house and rent a couple of rooms out to tenants. Right now, I don't have the
means to do that because nothing I have is recognized as valid by the legal
system." Property is a real asset and a first step toward the development of a
mature banking system and mortgage market. I often remind people that in the
United States our mortgage market has, among other benefits, served as an
important shock absorber and a source of growth during economic downturns.
Responding to the needs of the poor is more than a simple act of compassion.
With appropriate policies it can also be an investment in a nation's economic
potential. To be most productive people must not want for food or water or
electricity. Education is essential. People must be healthy and safe from crime.
They must have a place they can call home. They must have every door of
economic freedom open to them. Giving the people these opportunities and
combining them with sound macro and micro economic policies will allow Brazil to
realize its potential as an engine of growth in this region - and as a global leader in
the pursuit of development.
We have said that each country must pursue strong economic growth in its own
way. Brazil has developed its o w n strategy for growth. In the United States w e are
also pursuing strong growth. W e know that the United States, as the world's largest
economy, can raise growth in this hemisphere and the world. The U.S. economy
has not grown as fast as w e want it to and that's w h y President Bush has proposed
a plan that will generate economic growth and create n e w jobs.
Among other things, the President's plan would speed up the reduction in marginal
income tax rates and eliminate the double taxation of dividends paid to
shareholders. The reduction in marginal tax rates is the most effective tool to

%://www.treas.gov/press/releases/js211 .htm

7/21/2003

5-211: U.S. Treasury Secretary John S n o w Speech to the Brazil-American Chamber of C o m m e r c e S a o ...

Page 3 of 4

increase economic growth in the United States right now. Eliminating the double
taxation of dividend income is a fundamental reform that will have the benefit of
boosting values in the stock market, increasing investment and encouraging
companies to pay more dividends. This is the right plan for the U.S. economy and
w e are fully committed to working with our Congress to pass the President's plan in
full.
We want to be partners with Brazil as we work to pursue a growth agenda.
President Bush has proposed a bilateral Summit this year and President Lula has
agreed. W e at Treasury and our counterparts in Brazil's Ministry of Finance are
thinking about ways to foster productive bilateral discussions aimed at accelerating
growth in both countries. A frank and creative dialogue on growth-generating
strategies is long overdue, and so w e have begun this dialogue.
We are already working together to liberalize trade throughout the hemisphere,
boosting growth in the process. The United States and Brazil are co-chairing the
final stage of negotiation of the Free Trade Area of the Americas agreement, so w e
share a responsibility to bring the benefits of open trade to all nations in the
hemisphere.
I know that prospect of a trade agreement has sparked much debate here in Brazil
so let m e take a m o m e n t to clearly state m y thoughts on trade: our goal is
comprehensive trade liberalization and all sectors are on the table. In this pursuit
w e know that Brazil, the United States, and every nation in the Americas will seek
the best possible deal it can negotiate in the best interest of our nations. That is
how it should be. There are skilled negotiators here in Brazil - in fact President
Lula himself has terrific experience as a negotiator. M y country has skilled
negotiators as well. S o negotiations will be tough. But if w e all keep our eye on the
prize - expanding trade and eliminating barriers - each nation will win, and millions
of people will be better off for our efforts. This is the essence of the negotiating
process.
The United States is offering to eliminate its import duties on the vast majority of
industrial and agricultural imports from the Western Hemisphere immediately upon
entry into force of the FTAA. W e also are offering broad access to our services,
investment and government procurement sectors. Treasury plays a leading role in
these negotiations on investment and financial issues and w e look forward to
making progress in these areas.
One study by the University of Michigan estimates that a Free Trade of the
Americas agreement would increase gross domestic product in the Western
Hemisphere by $78 billion per year. The experience of the three North American
Free Trade Agreement (NAFTA) economies is encouraging in this regard. Trade
has flourished under N A F T A . In fact, more than 3.5 million trade related jobs have
been created in Mexico alone since 1995.
We want the international financial institutions to be as helpful as possible as Brazil
pursues stability and higher growth. A s you know, w e vigorously supported
additional IMF lending to Brazil in September because w e believed that the n e w
government would reflect the will of the Brazilian people to pursue sound policies. I
think events since then have demonstrated that this w a s the right judgment.
The international financial institutions can also use their capacity building and
financing to catalyze lending to the private sector. Despite Brazil's sizable,
sophisticated financial sector, many small businesses have little access to lending.
W e know that the government and central bank are working on structural barriers to
lending, such as creditor rights. W e would like to be helpful in this area.
We are asking the Inter-American Development Bank to use its resources and
know-how to help overcome these barriers and expand lending to small and
medium enterprises in the region.
A combination of grants for technical assistance and loan officer training, combined
with on-lending facilities, can create more sustainable lending by local banks to
serve smaller companies.

tp://www.treas.gov/press/releases/js211 .htm

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;-211: U.S. Treasury SecretaryTohn S n o w Speech to the Brazil-American C h a m b e r of C o m m e r c e S a o ...

Page 4 of 4

And on social sector issues, our governments are working together to identify best
practices in the fight against hunger and HIV/AIDs. Other areas where w e want to
continue and expand our cooperation are education; science and technology; the
environment; and disease eradication.
I came to Brazil with the intention of learning first-hand how Brazil is building strong
economic policies, addressing the needs of its people, and promoting economic
growth. I c o m e away from m y visit with greater confidence that this government
has the courage, leadership and creativity to m a k e major changes to generate
major gains for the Brazilian people. The United States is resolved to work in
partnership with our Brazilian friends in the interest of both countries and the region
as a whole.
Thank you.

ttp.7/www.treas.gov/press/releases/js211 .htm

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;-212: M E D I A A D V I S O R Y Senior Bush Administration Official Visits Ohio

Page 1 of 1

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 23, 2003
JS-212
MEDIA ADVISORY
Senior Bush Administration Official Visits Ohio
Senior Bush Administration Official Visits Ohio on Thursday
To Highlight Economic Benefits of President's Jobs and Growth Plan

Treasury Under Secretary for Domestic Finance Peter R. Fisher will visit Cleveland,
Ohio on Thursday, April 24, to meet with local business leaders and highlight the
economic benefits of the President's Jobs and Growth Plan.
Under the plan, more than 3.9 million Ohio taxpayers will have lower income tax
bills in 2003, and 920,000 business taxpayers can use their tax savings in invest in
new equipment, hire additional workers, and increase pay.
The event will be open the media, and there will be time immediately after the event
for interviews with media organizations in attendance:
Who: Treasury Under Secretary for Domestic Finance Peter R. Fisher
What: The City Club of Cleveland
When: 12:30 am, April 24, 2003
Where: The City Club of Cleveland, 850 Euclid Ave., 2nd Floor, Cleveland

3ttp://www.treas.gov/press/releases/j s212.htm

7/21/2003

F R O M T H E OFFICE O F PUBLIC AFFAIRS
March 26, 2003
JS213
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,719 million as of the end of that week, compared to $78,681 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
March 14, 2003

March 21, 2003

78,529

78,595

TOTAL
1. Foreign Currency Reserves

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

7,039

13,264

20,303

6,903

12,296

19,198

Of which, issuer headquartered in the U.S.

b. Total deposits with:
b.i. Other central banks and BIS

11,518

2,663

14,181

11,330

3,260

14,590

b.ii. Banks headquartered in the U.S.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.

b.iii. Of which, banks located in the U.S.

2. IMF Reserve Position2

21,644

21,527

3. Special Drawing Rights (SDRs) 2

11,358

11,267

11,043

4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 14, 2003
Euro
1. Foreign currency loans and securities

Yen

March 21, 2003

TOTAL

Euro

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

Yen

TOTAL
0

2. a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 14, 2003
Euro
1. Contingent liabilities in foreign currency

Yen

March 21, 2003

TOTAL
0

Euro

Yen

TOTAL
0

La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
S.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts

Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

Page 1 o f 2

5214: U.S. international Reserve Position

PRLSS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 2, 2003
JS214
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,719 million as of the end of that week, compared to $78,681 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

TOTAL

March 21. 2003

March 28. 2003

78,595

79,402

1. Foreign Currency Reserves 1

Euro

Yen

TOTAL

Euro

Yen

a. Securities

6,903

12,296

19,198

7,063

13,088

Of which, issuer headquartered in the U.S.
b. Total deposits with:
11,330

3,260

TOTAL
20,151

I °

b.i. Other central banks and BIS

14,590

14,197

2,628

11,569

b.ii. Banks headquartered in the U.S.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.

b.iii. Of which, banks located in the U.S.

22,527

22,708

11,237

11,303

11,043

2. IMF Reserve Position

3. Special Drawing Rights (SDRs) 2
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 21, 2003
Euro

Yen

1. Foreign currency loans and securities

March 28, 2003
TOTAL

Euro

TOTAL

Yen

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions

2.b. Long positions

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
l

ittp://www.treas.gov/press/releases/js214.htm

March 21, 2003
H
II

March 28, 2003
I>

7/23/2003

Page 2 o f 2

JS214: U.S. International Reserve Position

Euro

Yen

TOTAL

Euro

Yen

TOTAL |

2. Foreign currency securities with e m b e d d e d
options

3. Undrawn, unconditional credit lines

1. Contingent liabilities in foreign currency
1 .a. Collateral guarantees on debt due within 1
year
1 .b. Other contingent liabilities

3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

W/www.treas.gov/press/releases/j s214.htm

7/23/2003

Page 1 o f 2

5215: U.S. International Reserve Position

PRCSS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 9, 2003
JS215
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,719 million as of the end of that week, compared to $78,681 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

TOTAL

March 28, 2003

April 4. 2003

79,402

79,304

1. Foreign Currency Reserves 1

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,063

13,088

20,151

7,033

13,102

20,135

Of which, issuer headquartered in the U.S.

I °

b. Total deposits with:
b.i. Other central banks and BIS

11,569

2,628

b.ii. Banks headquartered in the U.S.

14,197

11,519

2,631

14,150

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.

b.iii. Of which, banks located in the U.S.

22,708

22,680

11,303

11,296

11,043

2. IMF Reserve Position 2
3. Special Drawing Rights (SDRs)
4. Gold Stock

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
March 28. 2003
Euro

Yen

1. Foreign currency loans and securities

April 4,2003
TOTAL

Euro

Yen

TOTAL
0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions

2.b. Long positions

3. Other

Contingent Short-Term Net Drains on Foreign Currency Assets
March 28, 2003

ttp.7/www.treas.gov/press/releases/js215 .htm

April 4, 2003

7/21/2003

Page 2 o f 2

,215: U.S. International Reserve Position

Euro

Yen

1. Contingent liabilities in foreign currency

TOTAL

1.a. Collateral guarantees on debt due within 1
year

Euro

Yen

TOTAL
0

1.b. Other contingent liabilities
2. Foreign currency securities with e m b e d d e d
options

3. Undrawn, unconditional credit lines

Headquartered in the U.S.

I
I
I|

3.c. With banks and other financial institutions

3.a. With other central banks
3.b. With banks and other financial institutions

- < •

Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign

Currencies vis-a-vis the U.S. dollar

4. a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts

Notes:

1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Acco
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

tp://www.treas.gov/press/releases/js215 .htm

7/21/2003

Page 1 o f 2

216: U.S. International Reserve Position

PR CSS R O O M

F R O M T H E OFFICE O F PUBLIC AFFAIRS
April 16,2003
JS216
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,719 million as of the end of that week, compared to $78,681 million as of the end of the prior week.
I. Official U.S. Reserve Assets (inJS millions)

TOTAL
1. Foreign Currency Reserves

a. Securities

April 4. 2003

ApriM 1.2003

79,304

79,402

Euro

Yen

TOTAL

Euro

Yen

TOTAL

7,033

13,102

20,135

7,060

13,059

20,119
0

Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS

11,519

2,631

14,150

11,568

2,622

14,190

b.ii. Banks headquartered in the U.S.

b.ii. Of which, banks located abroad

b.iii. Banks headquartered outside the U.S.

b.iii. Of which, banks located in the U.S.

22,680

22,718

11,296

11,309

11,043

2. IMF Reserve Position

3. Special Drawing Rights ( S D R s )

4. Gold Stock 3
5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
April 4, 2003
Euro

Yen

1. Foreign currency loans and securities

April 11, 2003
TOTAL

Euro

Yen

TOTAL
0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions

2.b. Long positions

3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 4, 2003

ittp://www.treas.gov/press/releases/js216.htm

April 11, 2003

7/21/2003

216: U.S. International Reserve Position

Euro

Yen

TOTAL

Euro

Yen

TOTAL

2. Foreign currency securities with e m b e d d e d
options

3. Undrawn, unconditional credit lines

1. Contingent liabilities in foreign currency

1.a. Collateral guarantees on debt due within 1
year
lb. Other contingent liabilities

Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

%//www.treas.gov/press/releases/js216.htm

7/21/2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Interest Rate: 1 5/8% Issue Date: April 30, 2003
Series:
K-2005
Dated Date:
CUSIP No:
912828AX8
Maturity Date:

High Yield:

1.704%

Price:

April 30, 2003
April 30, 2005

99.845

All noncompetitive and successful competitive bidders were awarded
securities at the high yield. Tenders at the high yield were
allotted 11.08%. All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

57,514,017
773,236
3,000

26,223,777
773,236
3,000

SUBTOTAL 58,290,253 27,000,013 1/
Federal Reserve 7,293,033 7,293,033
T0TAL

$ 65,583,286 $ 34,293,046

Median yield 1.689%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low yield
1.640%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 58,290,253 / 27,000,013 = 2.16
1/ Awards to TREASURY DIRECT = $644,075,000

http ://www.publicdebt.treas.gov

OS 2>1

-218: Air Transportation StaMrzation Board Conditionally Approves Application b y World Airways,... Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
April 23, 2003
JS-218
Air Transportation Stabilization Board
Conditionally Approves Application by World Airways, Inc.
WASHINGTON, DC - The Air Transportation Stabilization Board (the Board) today
conditionally approved the application by World Airways, Inc. for a $27 million loan
guarantee under the Air Transportation Safety and System Stabilization Act and
implementing regulations promulgated by the Office of Management and Budget.
The Board voted 2:1 with Treasury Under Secretary Peter Fisher dissenting. The
Board's approval is subject to several conditions identified in the Board's letter to
World Airways, Inc., which is attached.

Related Documents:
•
•
•
•

326
326
326
326

Final Rule
Final Rule
Final Rule
Final Rule

Banks
MFS
BDS
FCM

tp://www.treas.gov/press/releases/js335.htm

7/21/2003

DEPARTMENT OF THE TREASURY
Office of Public Affairs
April 30, 2003

FACT SHEET:
Final Regulations Implementing Customer Identity Verification Requirements under
Section 326 of the USA PATRIOT
Act
Today's Action:
The U.S. Treasury, the Financial Crimes Enforcement Network and the federal financial
regulators today announced final regulations implementing customer identification and
verification requirements under Section 326 of the U S A P A T R I O T Act. These n e w
regulations will provide another tool to protect the U.S. financial system from m o n e y
laundering, terrorist financing, identity theft and other forms of fraud.
Background:
O n October 26, 2001, President Bush signed into law the U S A P A T R I O T Act, important
legislation providing a wide range of n e w tools to combat m o n e y laundering and the
financing of terrorists. In July of 2002, Treasury announced a proposed rule
implementing Section 326 of the P A T R I O T Act and is today announcing a final rule
incorporating important changes that increase the effectiveness of the rule while
eliminating unnecessary burden on regulated institutions.
What it requires:
The rule requires that financial institutions develop a Customer Identification Program
(CIP) that implements reasonable procedures to:
1) Collect identifying information about customers opening an account
2) Verify that the customers are w h o they say they are
3) Maintain records of the information used to verify their identity
4) Determine whether the customer appears on any list of suspected terrorists or
terrorist organizations
Collecting information:
As part of a Customer Identification Program (CIP), financial institutions will be required
to develop procedures to collect relevant identifying information including a customer's
name, address, date of birth, and a taxpayer identification number - for individuals, this
will likely be a Social Security number. Foreign nationals without a U.S. taxpayer
identification number could provide a similar government-issued identification number,
such as a passport number.
Verifying identity:
A CIP is also required to include procedures to verify the identity of customers opening
accounts. Most financial institutions will use traditional documentation such as a driver's
license or passport. However, the final rule recognizes that in some instances institutions
cannot readily verify identity through more traditional means, and allows them the
flexibility to utilize alternate methods to effectively verify the identity of customers.

Maintaining records:
A s part of a CIP, financial institutions must maintain records including customer
information and methods taken to verify the customer's identity.
Checking terrorist lists:
Institutions must also implement procedures to check customers against lists of suspected
terrorists and terrorist organizations when such lists are identified by Treasury in
consultation with the federal functional regulators.
Reliance on other financial institutions:
The final rule also contains a provision that permits a financial institution to rely on
another regulated U.S. financial institution to perform any part of the financial
institution's CIP. For example, in the securities industry it is c o m m o n to have an
introducing broker - w h o has opened an account for a customer - conduct securities
trades on behalf of the customer through a clearing broker. Under this regulation, the
introducing broker is required to identify and verify the identity of their customers and
the clearing broker can rely on that information without having to conduct a second
redundant verification, provided certain criteria are met.
The following financial institutions are covered under the rule:
> Banks and trust companies
> Savings associations
> Credit unions
> Securities brokers and dealers
> Mutual funds
> Futures commission merchants and futures introducing brokers
The regulations were developed jointly by:
> The Department of the Treasury
> Treasury's Financial Crimes Enforcement Network
> The Board of Governors of the Federal Reserve System
> The Commodity Futures Trading Commission
> The Federal Deposit Insurance Corporation
> The National Credit Union Administration
> The Office of the Comptroller of the Currency
> The Office of Thrift Supervision
> The Securities and Exchange Commission

[Billing Code: 4810-02P; 6720-01P; 6210-01; 7537-01-U; 4810-33-P; 6714-01-P]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 21
[Docket No. 03-08]
RIN 1557-AC06
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 211
[Docket No. R-l 127]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 326

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563
[No. 2003-16]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 748
RIN 3133

DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA31

Customer Identification Programs for Banks, Savings Associations, Credit U
and Certain Non-Federally Regulated Banks.

A G E N C I E S : The Financial Crimes Enforcement Network, Treasury; Office of the
Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve
System; Federal Deposit Insurance Corporation; Office of Thrift Supervision, Treasury;
National Credit Union Administration.
ACTION: Joint final rule.
SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), together with the Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the
Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS),
and the National Credit Union Administration (NCUA) (collectively, the Agencies), have
jointly adopted a final rule to implement section 326 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT) Act of 2001 (the Act). Section 326 requires the Secretary of the
Treasury (Secretary) to jointly prescribe with each of the Agencies, the Securities and
Exchange Commission (SEC), and the Commodity Futures Trading Commission
(CFTC), a regulation that, at a minimum, requires financial institutions to implement
reasonable procedures to verify the identity of any person seeking to open an account, to
the extent reasonable and practicable; maintain records of the information used to verify
the person's identity; and determine whether the person appears on any lists of known or

suspected terrorists or terrorist organizations provided to the financial institution by any
government agency. This final regulation applies to banks, savings associations, credit
unions, private banks, and trust companies.
DATES: Effective Date: This rule is effective [INSERT DATE 30 DAYS AFTER

DATE OF

PUBLICATION IN T H E F E D E R A L REGISTER].
Compliance Date: Each bank must comply with this final rule by October 1,
2003.

FOR FURTHER INFORMATION CONTACT:
OCC: Office of the Chief Counsel at (202) 874-3295.
Board: Enforcement and Special Investigations Sections at (202) 452-5235,
(202) 728-5829, or (202) 452-2961.
FDIC: Special Activities Section, Division of Supervision and Consumer
Protection, and Legal Division at (202) 898-3671.
OTS: Compliance Policy Division at (202) 906-6012.
NCUA: Office of General Counsel at (703) 518-6540; or Office of Examination
and Insurance at (703) 518-6360.
Treasury: Office of the Chief Counsel (FinCEN) at (703) 905-3590; Office of the

General Counsel (Treasury) at (202) 622-1927; or the Office of the Assistant Gen
Counsel for Banking & Finance (Treasury) at (202) 622-0480.

SUPPLEMENTARY INFORMATION:
I. Background
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the USA PATRIOT Act,
Pub. L. 107-56. Title III of the Act, captioned "International Money Laundering

Abatement and Anti-terrorist Financing Act of 2001," adds several new provisions
Bank Secrecy Act (BSA), 31 U.S.C. 5311 §1 seg^ These provisions are intended to

facilitate the prevention, detection, and prosecution of international m o n e y laundering
and the financing of terrorism.
Section 326 ofthe Act adds a new subsection (1) to 31 U.S.C. 5318 of the BSA
that requires the Secretary to prescribe regulations "setting forth the minimum standards
for financial institutions and their customers regarding the identity ofthe customer that
shall apply in connection with the opening of an account at a financial institution."
Section 326 applies to all "financial institutions." This term is defined very
broadly in the BSA to encompass a variety of entities, including commercial banks,
agencies and branches of foreign banks in the United States, thrifts, credit unions, private
banks, trust companies, investment companies, brokers and dealers in securities, futures
commission merchants, insurance companies, travel agents, pawnbrokers, dealers in
precious metals, check-cashers, casinos, and telegraph companies, among many others.
See 31 U.S.C. 5312(a)(2) and (c)(1)(A).
For any financial institution engaged in financial activities described in section
4(k) ofthe Bank Holding Company Act of 1956 (section 4(k) institutions), the Secretary
is required to prescribe the regulations issued under section 326 jointly with each ofthe
Agencies, the SEC, and the CFTC (the Federal functional regulators).
Section 326 ofthe Act provides that the regulations must require, at a minimum,
financial institutions to implement reasonable procedures for (1) verifying the identity of
any person seeking to open an account, to the extent reasonable and practicable; (2)
maintaining records of the information used to verify the person's identity, including
name, address, and other identifying information; and (3) determining whether the person
appears on any lists of known or suspected terrorists or terrorist organizations provided to

the financial institution by any government agency. In prescribing these regulations, the
Secretary is directed to take into consideration the various types of accounts maintained
by various types of financial institutions, the various methods of opening accounts, and
the various types of identifying information available.
B. Overview of Comments Received
On July 23, 2002, Treasury and the Agencies published a joint notice of proposed
rulemaking in the Federal Register (67 FR 48290) applicable to (a) any financial
institution defined as a "bank" in 31 CFR 103.11(c)1 and subject to regulation by one of
the Agencies; and (b) any foreign branch of an insured bank. On the same date, Treasury
separately published an identical, proposed rule for credit unions, private banks, and trust
companies that do not have a Federal functional regulator (67 FR 48299).2 Treasury and
the Agencies proposed general standards that would require each bank to design and
implement a customer identification program (CIP) tailored to the bank's size, location,
and type of business. The proposed rule also included certain specific standards that
would be mandated for all banks.3
Treasury and the Agencies collectively received approximately five hundred
comments in response to these proposed rules (collectively referred to as the "proposal"
or the "proposed rule" for "banks"), although some commenters sent copies ofthe same
letter to Treasury and to each ofthe Agencies. The majority of comments received by

This definition includes banks, savings associations, credit unions, Edge Act and Agreement corporations,
and branches and agencies of foreign banks.
2
In the preamble for this proposed rule, Treasury explained that a single final regulation would be is sued
for all financial institutions defined as "banks" under 31 C F R 103.11(c), with modifications to
accommodate certain differences between Federally regulated and non-Federally regulated banks. See 67
F R 48299, 48300.
3
At the same time, Treasury also published (1) together with the S E C , proposed rules for broker-dealers
(67 F R 48306) and mutual funds (67 F R 48318); and (2) together with the C F T C , proposed rules for futures
commission merchants and introducing brokers (67 F R 48328).

Treasury and the Agencies were from banks, savings associations, credit unions, and their
trade associations. Most of these commenters agreed with the largely risk-based
approach set forth in the proposal that allowed each bank to develop a CIP based on its
specific operations.
Some commenters, however, criticized the specific requirements in the proposed
rule and suggested that Treasury and the Agencies issue a final rule containing an entirely
risk-based approach without any minimum identification and verification requirements.
According to some of these commenters, such a thoroughly risk-based approach would
give banks appropriate discretion to focus their efforts and finite resources on specific,
high-risk accounts most likely to be used by money-launderers and terrorists.
Other commenters, especially those representing credit card banks and credit card
issuers, asserted that the proposed minimum identification and verification requirements
should be eliminated because they did not take into account the unique nature of credit
card operations. They warned that these requirements, if implemented, would have a
chilling effect on credit practices important to U.S. consumers and would impose
significant compliance costs on their industry with little benefit to law enforcement.
By contrast, some smaller banks criticized the flexibility ofthe proposal and
stated that a risk-based approach would leave too much room for interpretation by the
Agencies. These commenters urged Treasury and the Agencies to issue a final rule
establishing more specific requirements. For example, some commenters suggested that
the rule prescribe risk assessment levels for each customer type and type of account,
along with a specific description of acceptable forms of identification and methods of
verification appropriate for each bank's size and location.

While commenters representing various segments ofthe industry differed on the
approach that should be taken in the final rule, the vast majority concluded that Treasury
and the Agencies had underestimated the compliance burden that would be imposed by
certain elements ofthe proposal. Commenters were especially concerned about the
proposed requirements that banks verify the identity of signatories on accounts, keep
copies of documents used to verify a customer's identity, and retain identity verification
records for five years after an account is closed.
Some commenters also suggested that banks be given greater flexibility when
dealing with established customers and urged that banks be permitted to rely on
identification and verification of customers performed by a third party, including an
affiliate. Other commenters asked for additional guidance regarding the lists of known
and suspected terrorists and terrorist organizations that must be checked, and regarding
what will be deemed adequate notice to customers for purposes of complying with the
final rule. Many commenters requested that the final rule contain a delayed
implementation date that would provide banks with the time needed to design a customer
identification program, obtain board approval, alter existing policies and procedures,
forms and software, and train staff.
Several comments were received from companies engaged in the sale of
technology or services that could be used to identify and verify customers, retain records,
and check lists of known and suspected terrorists and terrorist organizations. Many of
these companies recommended that the proposed rule be modified to make clear that use
of specific products and services would be permissible. Some of these commenters urged

that the rule require banks to authenticate any documents obtained to verify the identity
of the customer through the use of automated document authentication technology.
A small number of comments were received from individuals. Some of these
individuals criticized the proposed requirement that banks obtain a social security number
from persons opening an account as an infringement upon individual liberty and privacy.
Some individuals were concerned that this requirement would expose them to an added
risk of identity theft. Other individuals supported the proposal and concluded that its
verification requirements might diminish instances of identity theft and fraud. A few
commenters suggested that the government develop a separate national identification
number or require that social security cards bear photographs and or other safeguards.
A variety of commenters applauded the efforts of Treasury and the Federal
functional regulators to devise a uniform set of rules that apply to banks, broker-dealers,
mutual funds, futures commission merchants, and introducing brokers.4 They noted that,
without uniformity, customers of financial institutions may seek to open accounts with
institutions that customers perceive to have less robust customer identification
requirements. These commenters also suggested revisions that would enhance the
uniformity ofthe rules.
Treasury and the Agencies have modified the proposed rule in light of the
comments received. A discussion of the comments, and the manner in which the
proposed rule has been modified, follows in the section-by-section analysis.
In addition, as suggested by a number of commenters, Treasury and the Agencies
expect to issue supplementary guidance following issuance ofthe final rule.
C. Joint Issuance by Treasury and the Agencies

The final rule implementing section 326 is being issued jointly by Treasury,
through FinCEN, and by the Agencies. It applies to (1) a "bank," as defined in 31 CFR
103.11(c), that is subject to regulation by one ofthe Agencies, and (2) to any nonFederally insured credit union, private bank or trust company that does not have a Federal
functional regulator (collectively referred to in the final rule as "a bank").
The substantive requirements of this joint final rule are being codified as part of
Treasury's BSA regulations located in 31 CFR part 103. In addition, each ofthe
Agencies is concurrently publishing a provision in its own regulations5 to cross-reference
this final rule in order to clarify the applicability ofthe final rule to the banks subject to
its jurisdiction.
Regulations governing the applicability of section 326 to certain financial
institutions that are regulated by the SEC and the CFTC are the subject of separate
rulemakings. Treasury, the Agencies, the SEC, and the CFTC consulted extensively in
the development of all joint rules implementing section 326 ofthe Act. All ofthe
participating agencies intend the effect ofthe rules to be uniform throughout the financial
services industry. Treasury intends to issue separate rules under section 326 for certain
non-bank financial institutions that are not regulated by one ofthe Federal functional
regulators.
The Secretary has determined that the records required to be kept by section 326
ofthe Act have a high degree of usefulness in criminal, tax, or regulatory investigations
or proceedings, or in the conduct of intelligence or counterintelligence activities, to
protect against international terrorism.

See footnote 3, supra.

In addition, Treasury, under its o w n authority, is issuing conforming amendments
to 31 CFR 103.34, which imposes requirements concerning the identification of bank
customers.
D. Compliance Date
Nearly all commenters on the proposed rule requested that banks be given
adequate time to develop and implement the requirements of any final rule implementing
section 326 ofthe Act. These commenters stated that if the proposed rule were
implemented, banks would be required, among other things, to revise existing account
opening policies and procedures, obtain board approval, train staff, update forms,
purchase new or updated software for customer verification and checking of government
lists, and purchase new equipment for copying or scanning and storing records.
Commenters requested a delayed effective or compliance date, but, given the variety of
banks that would be covered by the final rule, there was no consensus regarding the
amount of time that would be necessary to comply with the final rule. The transition
periods suggested by commenters ranged from 60 days to two years from the date a final
rule is published.
The final rule modifies various aspects ofthe proposal and eliminates some ofthe
requirements that commenters identified as being most burdensome. Nonetheless,
Treasury and the Agencies recognize that some banks will need time to develop a CIP,
obtain board approval, and implement the CIP, which will include various measures, such
as training of staff, reprinting forms, and developing new software. Accordingly,
although this final rule will be effective 30 days after publication, banks are provided

12 CFR 21.21 (OCC); 12 CFR 208.63, 211.5, and 211.24 (FRB); 12 CFR 326.8 (FDIC); 12 CFR 563.177
(OTS); and 12 CFR 748.2 (NCUA).

with a transition period to implement the rule. Treasury and the Agencies have
determined that each bank must fully implement its CIP by October 1, 2003.
II. Section-by-Section Analysis of Final Rule Implementing Section 326
Section 103.121(a) Definitions.
Section 103.121(a)(1) Account. The proposed rule defined "account" as each
formal banking or business relationship established to provide ongoing services, dealings,
or other financial transactions and stated that a deposit account, transaction or asset
account, and a credit account or other extension of credit would each constitute an
"account."6 The proposal also explained that the term "account" was limited to formal
banking and business relationships established to provide "ongoing" services, dealings, or
other financial transactions to make clear that this term is not intended to cover infrequent
transactions such as the occasional purchase of a money order or a wire trans fer.
Treasury and the Agencies received a large number of comments on this proposed
definition. Some commenters agreed with the proposed definition though others thought
the definition of "account" was either too broad or needed clarification. Some
commenters suggested that the definition of "account" be narrowed to include only those
relationships that are financial in nature. A number of commenters urged that the
definition be limited to high-risk relationships that experts have identified as actually
used by money launderers and terrorists. Some of these commenters suggested that
particular types of accounts, especially those established as part of employee benefit
plans, be excluded from the definition of "account."

The definition of "account" in the proposed rule was based on the statutory definition of "account" that is
used in section 311 ofthe Act.

Most commenters requested that thefinalrule provide additional examples ofthe
relationships that would constitute an "account." Many commenters requested that the
rule clarify the meaning of "ongoing services." These commenters asked whether a
person who repeatedly and regularly purchased a money order, requested a wire transfer,
or cashed a check on a weekly basis, without any other relationship with a bank, would
be considered to have an "account." Many other commenters asked that the exclusion for
transfers of accounts between banks described in the preamble for the proposal — which
commenters characterized as the "transfer exception" - be stated expressly in the
regulation and expanded to cover all loans originated by a third party and purchased by a
bank, such as mortgages purchased from non-bank lenders and vehicle loans purchased
from car dealers.
The final rule contains a number of changes prompted by these comments. First,
the reference to the term "business relationship" has been deleted from the definition of
"account." This change is made to clarify that the regulation applies to the bank's
provision of financial products and services, as opposed to general "business" dealings,
such as those in connection with the bank's own operations or premises. Second, the
definition now contains additional, but non-exclusive, examples of products and services,
such as safety deposit box and other safekeeping services, cash management, and
custodian and trust services, that constitute an "account."
The definition of "account" also has been changed to include a list of products
and services that will not be deemed an "account." The preamble for the proposed rule
had used the term "ongoing services" to define accounts covered by the final rule, and
had referred to the exclusion of "occasional" transactions and "infrequent" purchases

(which arguably would require a bank to monitor all transactions for repetitive contacts).
By contrast, the final rule clarifies that "account" excludes products and services where a
formal banking relationship is not established with a person, such as check cashing, wire
transfer, or the sale of a check or money order.7 Treasury and the Agencies note that part
103 already requires verification of identity in connection with many of these products
and services. See, e.g., 31 CFR 103. 29 (purchases of bank checks and drafts, cashier's
checks, money orders, and traveler's checks for $3000 or more); 31 CFR 103.33 (funds
transfers of $3000 or more).
In addition, the final rule codifies and clarifies the "transfer exception." Under
the final rule, the definition of "account" excludes accounts that a bank acquires through
an acquisition, merger, purchase of assets, or assumption of liabilities from any third
Q

party.

Treasury and the Agencies note that the Act provides that the regulations shall

require reasonable procedures for "verifying the identity of any person seeking to open an
account." Because these transfers are not initiated by customers, these accounts do not
fall within the scope of section 326.

This exclusion is consistent with legislative history indicating that by referencing the term "customers,"
Congress intended "that the regulations prescribed by Treasury take an approach similar to that of
regulations promulgated under title V ofthe Gramm-Leach-Bliley Act of 1999, where the Federal
functional regulators defined 'customers' and 'customer relationship' for purposes ofthe financial privacy
rules." H.R. Rep. N o . 107-250, pt. 1, at 62 (2001). The definitions of "customer" and "customer
relationship" in the financial privacy rules apply only to a consumer w h o has a "continuing relationship"
with a bank, for example, in the form of a deposit or investment account, or a loan. See .3(h) and (i) of 12
C F R part 40 ( O C C ) ; 12 C F R part 216 (Board); 12 C F R part 332 (FDIC); 12 C F R part 573 (OTS); and 12
C F R part 716 ( N C U A ) .
8
In many cases, these third parties are themselves "financial institutions" for purposes ofthe B S A .
Treasury anticipates that these third parties ultimately will be subject to their o w n customer identification
rules implementing section 326 ofthe Act in the event that they are not presently covered by such a rule.
9
Nevertheless, there m a y be situations involving the transfer of accounts where it would be appropriate for
a bank, as part ofthe customer due diligence procedures required under existing regulations requiring
banks to have compliance programs implementing the B S A ( B S A compliance programs), to verify the
identity of customers associated with accounts that it acquires from another financial institution. Treasury
and the Agencies expect financial institutions to implement reasonable procedures to detect money
laundering in any account, however acquired.

Treasury and the Agencies generally agree with the view expressed by
commenters who suggested that a bank's limited resources be focused on relationships
that pose a higher risk of money laundering and terrorism. Accordingly, the Agencies
have included an exception to the definition of "account" for accounts opened for the
purpose of participating in an employee benefit plan established pursuant to the
Employee Retirement Income Security Act of 1974. These accounts are less susceptible
to use for the financing of terrorism and money laundering, because, among other
reasons, they are funded through payroll deductions in connection with employment
plans that must comply with Federal regulations which impose various requirements
regarding the funding and withdrawal of funds from such accounts, including low
contribution limits and strict distribution requirements.
Section 103.121(a)(2) Bank. The proposal jointly issued by Treasury and the
Agencies applied to any financial institution defined as a "bank" in 31 CFR 103.11(c)
and subject to regulation by one ofthe Agencies, including banks, savings associations,
credit unions, Edge Act and Agreement corporations, and branches and agencies of
foreign banks. The proposed definition also included "any foreign branch of an insured
bank" to make clear that the procedures required by the rule would have to be
implemented throughout the bank, no matter where its offices are located. The preamble
for the proposal explained that the rule would apply to bank subsidiaries to the same
extent as existing regulations requiring banks to have BSA compliance programs.10 As

All insured depository institutions currently must have a BSA compliance program. See 12 CFR 21.21
(OCC); 12 C F R 208.63 (Board); 12 C F R 326.8 (FDIC); 12 C F R 563.177 (OTS); and 12 C F R 748.2
( N C U A ) . In addition, all financial institutions are required by section 352 ofthe Act, 31 U.S.C. 5318(h), to
develop and implement an anti-money laundering program. Treasury issued a regulation implementing
section 352 providing that a financial institution regulated by a Federal functional regulator is deemed to
satisfy the requirements of section 5318(h)(1) if it implements and maintains an anti-money laundering
program that complies with the regulation of its Federal functional regulator, Le., the requirement to

described above, a second proposal issued simultaneously by Treasury applied to certain
other financial institutions defined as a "bank" in 31 CFR 103.11(c), namely, those credit
unions, private banks, and trust companies that do not have a Federal functional
regulator.
Under the final rule, "bank" includes all financial institutions covered by both of
the proposals described above, except that "bank" does not include any foreign branch of
an insured U.S. bank. Several commenters explained that the proposal to cover foreign
branches might conflict with local laws applicable to branches of insured banks operating
outside ofthe United States and might place U.S. institutions at a competitive
disadvantage. Consistent with the approach taken with respect to final regulations
implementing other sections ofthe Act,11 Treasury and the Agencies have determined
that foreign branches of insured U.S. banks are not covered by the final rule.
Nevertheless, Treasury and the Agencies encourage each bank to implement an effective
CIP, as required by this final rule, throughout its organization, including in its foreign
branches, except to the extent that the requirements ofthe rule would conflict with local
law.
As noted in the preamble for the proposal, the CIP must be a part of a bank's BSA
compliance program. Therefore, it will apply throughout such a bank's U.S. operations
(including subsidiaries) in the same way as the BSA compliance program requirement.
However, all subsidiaries that are in compliance with a separately applicable, industry-

implement a BSA compliance program. See 31 CFR 103.120(b); 67 FR 2113 (April 29, 2002). However,
Treasury temporarily deferred subjecting certain non-Federally regulated banks to the anti-money
laundering program requirements in section 352. See 67 F R 67547 (November 6, 2002) (corrected 67 F R
68935 (November 14, 2002)).
1
' See, e.g.. 67 F R 60562, 60565 (Sept. 26, 2002) (FinCEN's regulation titled "Anti-Money Laundering
Requirements -Correspondent Accounts for Foreign Shell Banks: Recordkeeping and Termination of
Correspondent Accounts for Foreign Banks" implementing sections 313 and 319(b) ofthe Act).

specific rule implementing section 326 ofthe Act will be deemed to be in compliance
with this final rule.
Section 103.121(a)(3) Customer. The proposal defined "customer" to mean any
person12 seeking to open a new account. In addition, the proposal defined a "customer"
to include any signatory on an account. The preamble for the proposal explained that the
term "customer" included a person that applied to open an account, but not someone
seeking information about an account, such as rates charged or interest paid on an
account, if the person did not apply to open an account. The preamble also stated that
any person seeking to open an account at a bank, on or after the effective date ofthe final
rule, would be a "customer," regardless of whether that person already had an account at
the bank.
This proposed definition prompted a large number of comments. First, nearly all
commenters recommended that the Agencies clarify in the text of the final rule that
"customer" does not include a person who does not receive banking services, such as a
person whose deposit or loan application is denied. Some of these commenters suggested
that the rule for banks define "customer" to mean "a person who opens a new account,"
as did the proposed rules for broker-dealers, mutual funds, futures commission merchants
and introducing brokers.
Treasury and the Agencies agree with the view expressed by some commenters
that the statute should be construed to ensure that banks design procedures to determine
the identity of only those persons who open accounts. Accordingly, the final rule defines

The proposed rule defined "person" by reference to § 103.1 l(z). This definition includes individuals,
corporations, partnerships, trusts, estates, joint stock companies, associations, syndicates, joint ventures,
other unincorporated organizations or groups, certain Indian Tribes, and all entities cognizable as legal

a "customer" as "a person that opens a n e w account."13 For example, in the case of a
trust account, the "customer" would be the trust. For purposes of this rule, a bank will
not be required to look through trust, escrow, or similar accounts to verify the identities
of beneficiaries and instead will only be required to verify the identity ofthe named
accountholder.14 In the case of brokered deposits, the "customer" will be the broker that
opens the deposit account. A bank will not need to look through the deposit broker's
account to determine the identity of each individual sub-account holder; it need only
verify the identity of the named accountholder.
Many commenters requested that the final rule clarify whether "customer"
includes a minor child or an informal group with a common interest, such as a club
account, where there is no legal entity. The final rule addresses these comments by
providing that "customer" means "an individual who opens a new account for (1) an
individual who lacks legal capacity, such as a minor; or (2) an entity that is not a legal
person, such as a civic club."
A few banks stated that defining "customer" to include a signatory was consistent
with their current practice of verifying the identity of the named accountholder and any
signatory on the account. However, most commenters strenuously objected to the
inclusion of a signatory as a customer whose identity must be verified, and asserted that
this proposed requirement would deviate significantly from their current business

personalities. Treasury and the Agencies agree that it is not necessary to repeat this definition. Therefore,
it is omitted from thefinalrule.
13
Therefore, each person named on a joint account is a "customer" under this final rule unless otherwise
provided.
However, based on a bank's risk assessment of a n e w account opened by a customer that is not an
individual, a bank m a y need to take additional steps to verify the identity of the customer by seeking
information about individuals with ownership or control over the account in order to identify the customer,
as described in § 103.121(b)(2)(ii)(C), or m a y need to look through the account in connection with the
customer due diligence procedures required under other provisions of its B S A compliance program.

practices. These commenters stated that requiring banks to verify signatories on an
account would be enormously burdensome to the financial institutions and signatories
themselves - many of whom simply work as employees for firms with corporate accounts
— and would outweigh any benefit.15 One commenter asserted that inclusion of
signatories as customers went beyond the scope of section 326 ofthe Act. Although
some commenters advocated that any requirement regarding a signatory should be
omitted altogether, these commenters generally advocated a risk-based approach that
would give banks the discretion to determine when a signatory's identity should be
verified.
Credit card banks, in particular, were critical ofthe signatory requirement because
the proposed provision, as drafted, encompassed all authorized users of credit cards.
These banks characterized the signatory requirement as unnecessary in the case of credit
card companies, which, they explained, already use sophisticated fraud filters to detect
fraud and abnormal use. These banks also noted that a person need not be a signatory to
use another person's credit card, especially when purchasing products by telephone or
over the Internet. Therefore, the signatory requirement would not necessarily ensure that
banks would be able to verify the identity of those using a credit card account.

Commenters contended that banks and individuals would confront numerous practical problems. S o m e
commenters noted, for example, that the identification and verification of signatories could be burdensome
for banks because business accounts might have m a n y signatories and those signatories would change over
time. S o m e commenters explained that collecting detailed information about an employee w h o is a
signatory would raise privacy concerns for those employees w h o would be required to disclose personal
information to their employer's financial institutions. Other commenters stated that a signatory rarely is
present at the time of account opening and, consequently, a bank would encounter substantial obstacles
when attempting to verify the signatory's identity using any ofthe most c o m m o n methods described in the
proposal, including by examining documents or by obtaining a credit report. (Under the Fair Credit
Reporting Act ( F C R A ) , a consumer reporting agency generally m a y furnish a consumer report in
connection with transactions involving the consumer and no other. See 15 U.S.C. 1681b. Thus, for
example, a bank would be prohibited from obtaining a credit report to verify the identity of an authorized
user of a customer's credit card.)

After revisiting the issue of whether a signatory should be a "customer," Treasury
and the Agencies have determined that requiring a bank to expend its limited resources
on verifying the identity of all signatories on accounts could interfere with the bank's
ability to focus on identifying customers and accounts that present a higher risk of not
being properly identified. Accordingly, the proposed provision defining "customer" to
include a signatory on an account is deleted. Instead, the final rule, at §
103.121 (b)(2)(ii)(C), requires a bank's CIP to address situations when the bank will take
additional steps to verify the identity of a customer that is not an individual by seeking
information about individuals with authority or control over the account, including
signatories, in order to verify the customer's identity.
In addition to defining who is a "customer," the final rule contains a list of entities
that will not be deemed "customers." Many commenters questioned why a bank should
be required to verify the identity of a government agency or instrumentality opening a
new account, or of a publicly-traded company that is subject to SEC reporting
requirements. Consistent with these and other comments urging that the final rule focus
on requiring verification ofthe identity of customers that present a higher risk of not
being properly identified, the final rule excludes from the definition of "customer" the
following readily identifiable entities: a financial institution regulated by a Federal
functional regulator; a bank regulated by a state bank regulator; and governmental
agencies and instrumentalities, and companies that are publicly traded described in
§ 103.22(d)(2)(ii)-(iv).16 Section 103.22(d)(2)(iv) exempts such companies only to the

Treasury previously determined that banks should be exempted from having to file reports of transactions
in currency in connection with these entities. See 31 C F R 103.22(d)(1).

extent of their domestic operations. Accordingly, a bank's CIP will apply to any foreign
offices, affiliates, or subsidiaries of such entities that open new accounts.
A great many commenters also objected to the requirement in § 103.121(b)(2)(h)
ofthe proposed rule that a bank verify the identity of an existing customer seeking to
open a new account unless the bank previously verified the customer's identity in
accordance with procedures consistent with the proposed rule and continues to have a
reasonable belief that it knows the true identity ofthe customer. These commenters
asserted that such a requirement would be burdensome for the bank and would upset
existing customers. Some commenters recommended that the rule apply prospectively to
new customers who previously had no account with the bank. Many commenters
suggested that the final rule contain a risk-based approach where verification would not
be required for an existing customer who opens a new account if the bank has a
reasonable belief that it knows the identity ofthe customer, regardless ofthe procedures
the bank followed to form this belief.
Treasury and the Agencies acknowledge that the proposed rule might have had
unintended consequences for bank-customer relationships and that the risk-based
approach suggested by commenters would avoid these consequences. Accordingly, the
final rule excludes from the definition of "customer" a person that has an existing account
with the bank, provided that the bank has a reasonable belief that it knows the true
identity ofthe person.17

17
A s a foreign branch of an insured U.S. bank is no longer a "bank" for purposes of this rule, a customer of
a bank's foreign branch will no longer be "a person w h o has an existing account with the bank." Therefore,
the bank must verify the identity of a customer of its foreign branch in accordance with its CIP if such a
customer opens a new account in the U.S.

Section 103.121(a)(4) Federal functional regulator. The proposed rule defined
"Federal functional regulator" by reference to § 103.120(a)(2), meaning each ofthe
Agencies, the SEC, and the CFTC. There were no comments on this definition, and
Treasury and the Agencies have adopted it as proposed.
Section 103.121(a)(5) Financial institution. The final rule includes a new
definition for the term "financial institution" that cross-references the BSA, 31 U.S.C.
5312(a)(2) and (c)(1). This is a more expansive definition of "financial institution" than
that in 31 CFR 103.11, and includes entities such as futures commission merchants and
introducing brokers.
Section 103.121(a)(6) Taxpayer identification number. The proposed rule
repeated the language from § 103.34(a)(4), which states that the provisions of section
6109 ofthe Internal Revenue Code and the regulations ofthe Internal Revenue Service
thereunder determine what constitutes "a taxpayer identification number." There were no
comments on this approach, and Treasury and the Agencies have adopted it substantially
as proposed, with minor technical modifications.
Section 103.121(a)(7) and (8) U.S. Person and non-U.S. person. The proposed
rule provided that "U.S. person" is an individual who is a U.S. citizen, or an entity
established or organized under the laws of a State or the United States. A "non-U.S.
person" was defined as a person who did not satisfy either of these criteria.
As described in greater detail below, a bank is generally required to obtain a U.S.
taxpayer identification number from a customer who opens a new account. However, if
the customer is a non-U.S. person and does not have such a number, the bank may obtain

an identification number from some other form of government-issued document
evidencing nationality or residence and bearing a photograph or similar safeguard.
Several commenters suggested that it would be less confusing to bankers if "U.S.
person" meant both a U.S. citizen and a resident alien, consistent with the definition of
this term used in the Internal Revenue Code (IRS definition).18 A few commenters
criticized the proposed definition because it would require banks to establish whether a
customer is or is not a U.S. citizen.
Treasury and the Agencies believe that the proposed definition of "U.S. person" is
a better standard for purposes of this final rule than the IRS definition. Adoption ofthe
IRS definition of "U.S. person" would require bank staff to distinguish among various tax
and immigration categories in connection with any type of account that is opened. Under
the proposed definition, a bank will not necessarily need to establish whether a potential
customer is a U.S. citizen. The bank will have to ask each customer for a U.S. taxpayer
identification number (social security number, employer identification number, or
individual taxpayer identification number). If a customer cannot provide one, the bank
may then accept alternative forms of identification. For these reasons, the definition is
adopted as proposed.
Section 103.121(b)Customer Identification Program: Minimum Requirements.
Section 103.121(b)(1) General Rule. The proposed rule required each bank to
implement a CIP that is appropriate given the bank's size, location, and type of business.
The proposed rule required a bank's CIP to contain the statutorily prescribed procedures,
described these procedures, and detailed certain minimum elements that each ofthe

26 U.S.C. 7701(a)(30)(A).

procedures must contain. In addition, the proposed rule required that the CIP be written
and that it be approved by the bank's board of directors or a committee ofthe board.
The proposed rule also stated that the CIP must be incorporated into the bank's
BSA19 compliance program and should not be a separate program. A bank's BSA
compliance program must be written, approved by the board, and noted in the bank's
minutes. It must include (1) internal policies, procedures, and controls to ensure ongoing
compliance; (2) designation of a compliance officer; (3) an ongoing employee training
program; and (4) an independent audit function to test programs. The preamble for the
proposal explained that the CIP should be incorporated into each of these four elements
of a bank's BSA program.
Most commenters agreed with the proposal's approach of allowing banks to
develop risk-based programs tailored to their specific operation, though some of these
commenters recommended that Treasury and the Agencies adopt an entirely risk-based
approach without any minimum requirements while others recommended a more
prescriptive approach. Many commenters suggested that Treasury and the Agencies
clarify the extent to which a bank could rely on a third party, especially an affiliate, to
perform some or all aspects of its CIP.
Other commenters focused on the requirement that a bank's board of directors
approve the CIP. These commenters urged Treasury and the Agencies to adopt a
regulation that states that the role of a bank's board of directors need only be to approve
broad policy rather than the specific methods or actual procedures that will be a part of a
bank's CIP. One commenter recommended that the governing body of a financial
institution be permitted to delegate its responsibility to approve the CIP.

Thefinalrule attempts to strike an appropriate balance between flexibility and
detailed guidance by allowing a bank broad latitude to design and implement a CIP that is
tailored to its particular business practices while providing a framework of minimum
standards for identifying each customer, as the Act mandates. Following the description
ofthe procedures and minimum requirements for each element of a bank's CIP (identity
verification, recordkeeping, comparison with government lists, and customer notice), the
final rule contains a new section describing the extent to which a bank may rely on a third
party to perform these elements, described in detail below.
The final rule removes the requirement that the bank's board of directors or a
committee ofthe board must approve the bank's CIP because this requirement is
redundant. A bank's BSA compliance program must already be approved by the board.
Treasury and the Agencies regard the addition of a CIP to the bank's BSA compliance
program to be a material change in the BSA compliance program that will require board
approval. The board of director's responsibility to oversee bank compliance with section
326 ofthe Act is a part of a board's conventional supervisory BSA compliance
responsibilities that cannot be delegated to bank management. Therefore, a bank's board
of directors must be responsible for approving a CIP described in detail sufficient for the
board to determine that (1) the bank's CIP contains the minimum requirements of this
final rule; and (2) the bank's identity verification procedures are designed to enable the
bank to form a reasonable belief that it knows the true identity ofthe customer.
Nevertheless, responsibility for the development, implementation, and day-to-day
administration ofthe CIP may be delegated to bank management.

See footnote 10, supra.

Thefinalrule will apply to some non-Federally regulated banks that are not yet
subject to an anti-money laundering compliance program requirement.20 Therefore, the
final rule only requires that the CIP be a part of a bank's anti-money laundering program
once a bank becomes subject to an anti-money laundering compliance program
requirement.21
Section 103.121(b)(2) Identity Verification Procedures. The proposed rule
provided that each bank must have a CIP that includes procedures for verifying the
identity of each customer, to the extent reasonable and practicable, based on the bank's
assessment of certain risks. The proposed rule stated that these procedures must enable
the bank to form a reasonable belief that it knows the true identity ofthe customer.
Some commenters recommended that the identity verification requirement be
waived for new customers that are well known to a senior officer ofthe bank. Some of
these commenters endorsed such a waiver provided that a bank employee could provide
"an affidavit of identity" on behalf of the customer.
One commenter criticized the standard requiring a bank to have identity
verification procedures "that enable the bank to form a reasonable belief that it knows the
true identity ofthe customer" as too subjective. This commenter suggested that a better
standard would be lack of affirmative notice of deficiency in the identity process.
Another commenter suggested that the rule make clear that a bank is only required to
verify a customer's identity, to the extent reasonable and practical, in order to establish
that it has a reasonable basis for knowing the true identity of its customer.

See footnote 10, supra.
Thefinalrule therefore provides that until such time as credit unions, private banks, and trust companies
without a Federal functional regulator are subject to such a program, their CIPs must be approved by their
boards of directors.
21

The final rule provides that a bank's CIP must include risk-based procedures for
verifying the identity of each customer22 to the extent reasonable and practicable. The
final rule also states that the procedures must enable the bank to form a reasonable belief
that it knows the true identity ofthe customer. As section 326 ofthe Act states, a bank's
affirmative obligation to verify the identity of its customer applies to "any person" rather
than only to a person whose identity is suspect, as suggested by one commenter.
Furthermore, Treasury and the Agencies have determined that the statutory obligation to
"verify the identity of any person" requires the bank to implement and follow procedures
that allow the bank to have a reasonable belief that it knows the true identity ofthe
customer.
Given the flexibility built into the final rule, Treasury and the Agencies believe
that it is not appropriate to provide special treatment for new customers known to bank
personnel. In addition, permitting reliance on bank personnel to attest to the identity of a
customer may be subject to manipulation. Accordingly, the final rule does not establish
different rules for customers who are known to bank personnel.
The final rule requires the identity verification procedures to be based upon
relevant risks, including those presented by the types of accounts maintained by the bank,
the various methods of opening accounts provided by the bank, and the types of
identifying information available. In addition to these risk factors, which are specifically
identified in section 326, the final rule states that the procedures should take into account

Other elements ofthe bank's CIP, such as procedures for recordkeeping or checking of government lists,
are requirements that m a y not vary depending on risk factors.

the bank's size, location, and type of business or customer base, additional factors
mentioned in the Act's legislative history.23
Section 103.121(b)(2)(i) Customer Information Required. The proposed rule
required that a bank's CIP must contain procedures that specify the identifying
information the bank must obtain from a customer. It stated that, at a minimum, a bank
must obtain from each customer the following information prior to opening an account:
(1) name; (2) address (a residential and mailing address for individuals, and principal
place of business and mailing address for a person other than an individual); (3) date of
birth for individuals; and (4) an identification number.
Treasury and the Agencies received a variety of comments criticizing the
requirement that a bank obtain certain minimum identifying information prior to opening
an account. Some commenters, including a trade association representing large financial
institutions, recommended that a bank be permitted to open an account for a customer
who lacks some of the minimum identifying information, provided that the bank has
formed a reasonable belief that it knows the true identity ofthe customer. Credit card
banks explained that the minimum information requirement would create problems for
retailers that offer credit cards at the point of sale. These commenters stated that retailers
were not likely to have the means to record identifying information other than what is
currently collected. They suggested that when there are systems in place to identify
customers and detect suspicious transactions, the rule should require only the collection
of information that the credit card bank or card issuer deems necessary and appropriate to
identify the customer.

H.R. Rep. No. 107-250, pt. 1, at 62 and 63 (2001).

Other commenters stated that the rule should not require a bank to obtain the
minimum identifying information prior to account opening in every instance. Some of
these commenters suggested that a bank be permitted to obtain the required information
within a reasonable time after the account is opened. Some commenters suggested that
the rule permit banks to obtain identifying information from a party other than the
customer. This would arise, for example, when a bank offers a credit card based on
information obtained from a credit reporting agency. Other commenters suggested that a
bank also be required to obtain information about a customer's occupation, profession or
business, as this information is needed by a bank that intends to file a report of
transactions in currency or a suspicious activities report on the customer.
Consistent with the proposal, the final rule provides that a bank's CIP must
contain procedures that specify the identifying information that the bank must obtain
from each customer prior to opening an account. In addition, the rule specifies the four
basic categories of information that a bank must obtain from the customer prior to
opening an account. Treasury and the Agencies believe that requiring banks to gather
these standard forms of information prior to opening an account is not overly burdensome
because such identifying information is routinely gathered by most banks in the account
opening process and is required by other sections of 31 CFR part 103. Of course, based
upon an assessment ofthe risks described above, a bank may require a customer to
provide additional information to establish the customer's identity.
Treasury and the Agencies acknowledge that imposing this requirement on banks
that offer credit card accounts is likely to alter the manner in which they do business by
requiring them to gather additional information beyond that which they currently obtain

directly from a customer w h o opens an account at the point of sale or by telephone.
Treasury and the Agencies are mindful ofthe legislative history of section 326, which
indicates that Congress expected the regulations implementing this section to be
appropriately tailored for accounts opened in situations where the account holder is not
physically present at the financial institution and that the regulations should not impose
requirements that are burdensome, prohibitively expensive, or impractical.24
Therefore, Treasury and the Agencies have included an exception in the final rule
for credit card accounts only, which would allow a bank broader latitude to obtain some
information from the customer opening a credit card account, and the remaining
information from a third party source, such as a credit reporting agency, prior to
extending credit to a customer. Treasury and the Agencies recognize that these practices
have produced an efficient and effective means of extending credit with little risk that the
lender does not know the identity ofthe borrower.
Treasury and the Agencies also received comments on the advisability of
requiring banks to collect the specific identifying information (name, date of birth,
address, and identification number), as would have been required under the proposed
rule. With respect to obtaining the customer's name, one commenter recommended that
based on Texas law and banks' experience, a bank should be required to obtain the name
under which the customer is doing business and the customer's legal name. The final
rule continues to require that the bank obtain the customer's name, meaning a legal name
that can be verified. As noted above, this is a minimum requirement, and a bank may
also need to obtain the name under which a person does business in order to establish a
reasonable belief it knows the true identity ofthe customer.

H.R. Rep. No. 107-250, pt. 1, at 63 (2001).

O n e trade association suggested that banks be permitted to m a k e a risk-based
determination before requiring a customer to provide date of birth because many
customers would prefer not to share this information. One commenter stated that date of
birth is not an important identifying characteristic and should be deleted. Another
commenter stated that credit card issuers do not request this information because it can
raise fair lending issues. Finally, a few commenters noted that standardized mortgage
applications require age rather than date of birth and would have to be altered.
The final rule provides that a bank must obtain the date of birth for a customer
who is an individual. Treasury and the Agencies believe that date of birth is an important
identifying characteristic and can be used to provide a bank or law enforcement with an
additional means to distinguish between customers with identical names. However, the
required collection and retention of information about a customer's date of birth does not
relieve the bank from its obligations to comply with anti-discrimination laws or
regulations, such as the prohibition in the Equal Credit Opportunity Act against
discrimination in any aspect of a credit transaction on the basis of age or other prohibited
classification. Banks collecting date of birth from individual customers should be able to
take reasonable measures to convert this information into age for purposes of the forms
used in the secondary mortgage market given the delayed compliance date for the final
rule.
Many commenters criticized the requirement that a bank obtain both the
customer's physical and mailing address, if different. Most commenters urged Treasury
and the Agencies to eliminate the requirement that the customer provide a physical
address. Some of these commenters stated that this requirement could interfere with the

ability of certain segments ofthe population to obtain a bank account, such as members
ofthe military, persons who reside in mobile homes with no fixed address, and truck
drivers who do not have a physical address. Banks that offer credit card accounts and
card issuers stated that the address requirement would be extremely burdensome because
they would have to change the manner in which they do business, and in some cases,
credit card banks currently do not have the capacity to collect both addresses. Some of
these commenters stated that new credit card customers are reluctant to give more than
one address and, therefore, it would be difficult to obtain this information from
customers. A trade association representing credit card banks asserted that customers
may have a legitimate reason for handling correspondence through post office boxes and
should not have to provide a physical address. This commenter asserted that requiring
the customer to provide a physical address will discourage the provision of financial
services to the unbanked and will prevent a victim of identity theft from using an
alternative to an unsecured home mailbox. Another commenter noted that the physical
address of a customer's principal place of business may not be relevant if the bank is
working with a customer's local office. This commenter recommended that the rule
simply permit the bank to obtain the customer's street address. Credit card banks and
issuers urged Treasury and the Agencies to make the requirement that a bank obtain the
customer's physical address optional.
Section 326 ofthe Act requires Treasury and the Agencies to prescribe
regulations that require financial institutions to implement "reasonable procedures."
Accordingly, under the final rule, a bank will not be required to obtain more than a single
address for a customer. Nonetheless, Treasury and the Agencies believe that the

identification, verification, and recordkeeping provisions ofthe Act, taken together,
should provide appropriate resources for law enforcement agencies to investigate money
laundering and terrorist financing. The final rule therefore provides that a bank generally
must obtain a residential or business street address for a customer who is an individual
because Treasury and the Agencies have determined that law enforcement agencies
should be able to contact an individual customer at a physical location, rather than solely
through a mailing address. Treasury and the Agencies recognize that this provision may
be impracticable for members ofthe military who cannot readily provide a physical
address, and other individuals who do not have a physical address but who reliably can be
contacted. Accordingly, the final rule provides an exception under these circumstances
that allows a bank to obtain an Army Post Office or Fleet Post Office box number, or the
residential or business street address of next of kin or of another contact individual. For a
customer other than an individual, such as a corporation, partnership, or trust, the bank
may obtain the address ofthe principal place of business, local office, or other physical
location ofthe customer. Of course, a bank is free to obtain additional addresses from the
customer, such as the customer's mailing address, to meet its own or its customer's
business needs.
The proposal required that banks obtain an identification number from customers.
For U.S. persons, a bank would have been required to obtain a U.S. taxpayer
identification number. For non-U.S. persons, a bank would have been required to obtain
a number from various alternative forms of government-issued identification.
One commenter stated that this requirement would not be burdensome.
Commenters representing certain consumer advocacy groups commended Treasury and

the Agencies for providing banks with the discretion to accept alternative forms of
identifying information from non-U.S. citizens. These commenters stated that this
position would assist low-income immigrants in gaining financial stability. By contrast,
some commenters stated that the final rule should not permit a bank to open an account
for a customer using only a foreign identification number when the customer provides a
U.S. address. Other commenters asked for guidance on whether a bank is permitted to
accept a number from the identification document issued by a foreign government. A
few commenters urged the government to require a national identification document for
all individuals.
Other commenters, primarily credit card banks, stated that the requirement that a
bank obtain a U.S. taxpayer identification number from U.S. persons would create
considerable hardship. They stated that new credit card customers are reluctant to give
out their social security numbers, especially over the telephone. They urged that banks
be given the discretion to collect identifying information, other than social security
numbers, when appropriate in light of consumer privacy and security concerns. In the
alternative, they recommended that banks be permitted to obtain a U.S. taxpayer
identification number for U.S. persons from a trusted third party source, such as a credit
reporting agency.
Some commenters questioned what number to use for accounts opened in the
name of a bowling league or class reunion, or to accept donations for a special cause.
Other commenters questioned what number could be obtained from foreign businesses
and enterprises that have no taxpayer identification number or other government-issued
documentation.

The final rule provides that a bank must obtain an "identification number" from
every customer. As discussed above, under the definition of "customer," the final rule
permits a bank to obtain the identification number ofthe individual who opens an account
in the name of an individual who lacks legal capacity, such as a minor, or a civic group,
such as a bowling league.
After reviewing the comments, Treasury and the Agencies have determined that
requiring a bank to obtain a customer's identification number, such as a social security
number, from the customer himself or herself, in every case, including over the
telephone, would be unreasonable and impracticable because it would be contrary to
banks' current practices and could alienate many potential customers. Accordingly,
Treasury and the Agencies have adopted an exception for credit card accounts that will
permit a bank offering such accounts to acquire information about the customer,
including an identification number, from a trusted third party source prior to extending
credit to the customer, rather than having to obtain this information directly from the
customer prior to opening an account.
The final rule also provides that for a non-U.S. person, a bank must obtain one or
more ofthe following: a taxpayer identification number (social security number,
individual taxpayer identification number, or employer identification number); passport
number and country of issuance; alien identification card number; or number and country
of issuance of any other government-issued document evidencing nationality or residence
and bearing a photograph or similar safeguard. This standard provides a bank with some
flexibility to choose among a variety of identification numbers that it may accept from a

non-U.S. person.25 However, the identifying information the bank accepts must permit
the bank to establish a reasonable belief that it knows the true identity ofthe customer.
Treasury and the Agencies emphasize that the final rule neither endorses nor
prohibits bank acceptance of information from particular types of identification
documents issued by foreign governments. A bank must decide for itself, based upon
appropriate risk factors, including those discussed above (the types of accounts
maintained by the bank, the various methods of opening accounts provided by the bank,
the other types of identifying information available, and the bank's size, location, and
customer base), whether the information presented by a customer is reliable.
Treasury and the Agencies recognize that a foreign business or enterprise may not
have a taxpayer identification number or any other number from a government-issued
document evidencing nationality or residence and bearing a photograph or similar
safeguard. Therefore, the final rule notes that when opening an account for such a
customer, the bank must request alternative government-issued documentation certifying
the existence ofthe business or enterprise.
The proposal also contained a limited exception to the requirement that a bank
obtain a taxpayer identification number from a customer opening a new account. The
exception permitted a bank to open an account for a person other than an individual (such
as a corporation, partnership, or trust) that has applied for, but has not received, an
employer identification number (EIN), provided that the bank obtains a copy ofthe
application before it opens the account and obtains the EIN within a reasonable period of
time after the account is established. The preamble for the proposed rule explained that

The rule provides this flexibility because there is no uniform identification number that non-U.S. persons
would be able to provide to a bank. See Treasury Department, " A Report to Congress in Accordance with

this exception was included for a n e w business that might need access to banking
services, particularly a bank account or an extension of credit, before it has received an
EIN from the Internal Revenue Service.
Some commenters questioned this limited exception for certain businesses. A
few commenters suggested expanding the exception to include individuals who have
applied for, but have not yet received a taxpayer identification number. Another
commenter stated that the exception provided no added benefit and would add to a bank's
recordkeeping and monitoring burden.
Treasury and the Agencies have determined that a bank should be afforded more
flexibility in situations where a person, including an individual, has applied for, but has
not yet received, a taxpayer identification number. Therefore, the final rule states that
instead of obtaining a taxpayer identification number from a customer prior to opening an
account, the CIP may include procedures for opening an account for a customer
(including an individual) that has applied for, but has not received, a taxpayer
identification number.26 To lessen the recordkeeping burden for a bank that elects to use
this exception, the final rule also provides that the bank's CIP need only include
procedures requiring the bank to confirm that the application was filed before the
customer opens the account and to obtain the taxpayer identification number within a
reasonable period of time after the account is opened. Thus, a bank will be able to
exercise its discretion27 to determine how to confirm that a customer has filed an

Section 326(b) ofthe USA PATRIOT Act," October 21, 2002.
26
This position is analogous to that in regulations issued by the Internal Revenue Service (IRS) concerning
"awaiting-TIN [taxpayer identification number] certificates." The IRS permits a taxpayer to furnish an
"awaiting-TIN certificate" in lieu of a taxpayer identification number to exempt the taxpayer from the
withholding of taxes owed on reportable payments (i.e.. interest and dividends) on certain accounts. See 26
CFR31.3406(g)-3.
27
For example, the bank m a y wish to examine a copy ofthe application filed.

application for a taxpayer identification number rather than having to keep a copy ofthe
application on file.
Section 103.121(b)(2)(ii) Customer Verification. The proposed rule provided that
the CIP must contain risk-based procedures for verifying the information that the bank
obtains in accordance with§ 103.121 (b)(2)(i), within a reasonable period of time after the
account is opened.28 The proposed rule also described when a bank is required to verify
the identity of existing customers.
Several commenters asked Treasury and the Agencies to underscore that these
verification procedures may be risk-based by noting that a bank may verify less than all
ofthe identifying information provided by the customer. Many commenters noted that
there is currently no reliable, efficient, or effective means of verifying a customer's social
security number. Some of these commenters asked the government to establish a method
that would permit banks to establish the authenticity and accuracy of a customer's name
and taxpayer identification number.
Treasury and the Agencies recognize that there currently is no method that would
permit a bank to verify, for example, a taxpayer identification, passport or alien
identification number through an official source. Accordingly, the final rule provides that
a bank's CIP must contain procedures for verifying the identity of the customer, "using
the information obtained in accordance with paragraph (b)(2)(i)," namely, the identifying
information obtained by the bank. Thus, a bank need not establish the accuracy of every

The preamble for the proposed rule noted that, although an account m a y be opened, it is c o m m o n
practice a m o n g banks to place limits on the account, such as by restricting the number of transactions or the
dollar value of transactions, until a customer's identity is verified. Therefore, the proposed regulation
provided the bank with the flexibility to use a risk-based approach to determine h o w soon identity must be
verified.

element of identifying information obtained but must do so for enough information to
form a reasonable belief it knows the true identity ofthe customer.
Some commenters stated that they appreciated the flexibility ofthe proposal
permitting an institution to determine how soon identity must be verified. Other
commenters asked Treasury and the Agencies to clarify what is a "reasonable period of
time." As stated in the preamble for the proposal, Treasury and the Agencies believe that
the amount of time it will take an institution to verify a customer's identity may depend
upon various factors, such as the type of account opened, whether the customer is
physically present when the account is opened, and the type of identifying information
available. For the same reasons, the final rule provides banks with the flexibility
necessary to accommodate a wide range of situations by stating that the bank must verify
the identifying information within a reasonable time after the account is opened.29
As discussed above in the definition section, many commenters criticized the
proposed approach regarding verification of existing customers that open new accounts.
The final rule addresses these concerns by modifying the definition of "customer" to
exclude a person who has an existing account with the bank if the bank has a reasonable
belief that it knows the true identity ofthe person.
Many commenters urged that the final rule continue to allow, but not mandate,
documentary verification. A few commenters requested that the final rule provide
additional guidance on verification. Some commenters asked that the final rule clarify
that a bank may choose to use only documentary methods and may refuse to open an

It is possible that a bank would, however, violate other laws by permitting a customer to transact
business prior to verifying the customer's identity. See, e.g. 31 C F R part 500 (regulations of Treasury's
Office of Foreign Asset Control ( O F A C ) prohibiting transactions involving designated foreign countries or
their nationals).

account using other methods.
The final rule addresses these comments by stating that a bank's CIP's
verification procedures must describe when the bank will use documents, nondocumentary methods, or a combination of both methods to verify a customer's identity.
Section 103.121(b)(2)(H)(A) Verification Through Documents. The proposed rule
provided that the CIP must contain procedures describing when the bank will verify
identity through documents and setting forth the documents that the bank will use for this
purpose. It then gave examples of documents that could be used to verify the identity of
individuals and other persons such as corporations, partnerships, and trusts.
Most commenters noted that banks do not have the means to authenticate or
validate documents provided by their customers and urged Treasury and the Agenc ies to
clarify that document authentication is not a CIP requirement. Treasury and the Agencies
wish to confirm that once a bank has obtained and verified the identity ofthe customer
through a document such as a driver's license or passport, the bank will not be required to
take steps to determine whether the document has been validly issued. A bank generally
may rely on government-issued identification as verification of a customer's identity;
however, if a document shows obvious indications of fraud, the bank must consider that
factor in determining whether it can form a reasonable belief that it knows the customer's
true identity.
Some commenters also asked that Treasury and the Agencies provide more
examples and discuss appropriate types of documentary identification in the final rule or
in separate guidance that banks may easily access. Commenters asked whether a utility
bill, or library card addressed to the same physical address and name ofthe person

seeking the account, or a foreign identification card, such as a foreign voter registration
card or driver's license, would be acceptable. Some commenters questioned whether
copies of documents would suffice.
Given the recent increases in identity theft and the availability of fraudulent
documents, Treasury and the Agencies agree with a commenter who suggested that the
value of documentary verification is enhanced by redundancy. The rule gives examples
of types of documents that are considered reliable. However, a bank is encouraged to
obtain more than one type of documentary verification to ensure that it has a reasonable
belief that it knows the customer's true identity. Moreover, banks are encouraged to use
a variety of methods to verify the identity of a customer, especially when the bank does
not have the ability to examine original documents.
The final rule attempts to strike the appropriate balance between the benefits of
requiring additional documentary verification and the burdens that may arise from such a
requirement by providing that a bank's CIP must state the documents that a bank will use.
This will require each bank to conduct its own risk-based analysis ofthe types of
documents it believes will enable it to know the true identity of its customers.
The final rule continues to provide an illustrative list of identification documents.
For an individual, these may include an unexpired government-issued identification
evidencing nationality or residence and bearing a photograph or similar safeguard, such
as a driver's license or passport. For a person other than an individual, these may include
documents showing the existence ofthe entity, such as certified articles of incorporation,
a government-issued business license, a partnership agreement, or a trust instrument.
Some commenters questioned whether the examples of identification documents

given for persons other than individuals would be reliable. O n e commenter questioned
whether trust documents alone would be sufficient verification of identity. Another
commenter suggested allowing banks to rely on a certification by the trustee, or an
appropriate legal opinion, rather than the trust instrument to verify the existence of a
trust. Someone else suggested that banks should be allowed to rely on documentation
consisting of evidence that a business is either publicly traded or is authorized to do
business in a state or the United States.
The examples provided in the final rule were intended only to illustrate the
documents a bank might use to verify the identity of a customer that is a corporation,
partnership, or trust. A bank may use other documents, provided that they allow the bank
to establish that it has a reasonable belief that it knows the true identity of its customer.
Accordingly, the final rule makes no significant changes to the examples.
Section 103.121 (b)(2)(ii)(B) Non-Documentary Verification. Recognizing that
some accounts are opened by telephone, by mail, and over the Internet, the proposed rule
provided that a bank's CIP also must contain procedures describing what nondocumentary methods the bank will use to verify identity and when the bank will use
these methods (whether in addition to, or instead of, relying on documents). The
preamble for the proposed rule also noted that even if the customer presents identification
documents, it may be appropriate to use non-documentary methods as well.
The proposed rule gave examples of non-documentary verification methods that a
bank may use, including contacting a customer after the account is opened; obtaining a
financial statement; comparing the identifying information provided by the customer
against fraud and bad check databases to determine whether any of the information is

associated with k n o w n incidents offraudulentbehavior (negative verification);
comparing the identifying information with information available from a trusted third
party source, such as a credit report from a consumer reporting agency (positive
verification); and checking references with other financial institutions. The preamble for
the proposed rule stated that a bank also may wish to analyze whether there is logical
consistency between the identifying information provided, such as the customer's name,
street address, ZIP code, telephone number, date of birth, and social security number
(logical verification).
The proposal required that the procedures address situations where an individual,
such as an elderly person, legitimately is unable to present an unexpired governmentissued identification document that bears a photograph or similar safeguard; the bank is
not familiar with the documents presented; the account is opened without obtaining
documents; the account is not opened in a face-to-face transaction, for example over the
phone, by mail, or through the Internet; and the type of account increases the risk that the
bank will not be able to verify the true identity ofthe customer through documents.
Several commenters asked for additional guidance regarding when nondocumentary verification methods should be used in addition to documentary verification
methods and the circumstances in which only one or all ofthe non-documentary
verification methods listed are necessary. Commenters also asked for guidance on audit
methodology, and an explanation ofthe due diligence required for verification of
accounts opened by telephone, mail, and through the Internet. A few commenters
suggested that reference to verification, where a bank compares information provided by

the customer with information from trusted third party sources, be expressly mentioned in
the final rule.
As the large number of comments on this section illustrates, a rule that attempted
to address every scenario and combination of risk-factors that a bank might confront
would be extremely complex and invariably would fail to address many situations.
Rather than adopt a lengthy and potentially unwieldy rule that still would not address
every situation, Treasury and the Agencies have concluded that it would be more
effective to adopt general principles that are fleshed out through examples. Therefore,
the final rule states that for a bank relying on non-documentary verification methods, the
CIP must contain procedures that describe the non-documentary methods the bank will
use.
The final rule generally retains the illustrative list of non-documentary methods
contained in the proposal. Treasury and the Agencies have clarified that one method is
"independently verifying the customer's identity through the comparison of information
provided by the customer with information obtained from a consumer reporting agency,
public database, or other source," rather than verifying "documentary information"
through such sources.
The final rule also retains the variety of situations that the procedures must
address that were identified in the proposal, with the following two changes. First,
because "transaction" is a defined term in 31 CFR part 103, instead of using the term
"face-to-face transaction," the final rule states that the procedures must address the
situation where a customer opens an account without appearing in person at the bank.
Second, the final clause of this provision provides that the CIP must include procedures

to address situations where the bank is otherwise presented with circumstances that
increase the risk that the bank will be unable to verify the true identity of a customer
through documents. This clause acknowledges that there may be circumstances beyond
those specifically described in this provision when a bank should use non-documentary
verification procedures.
As stated in the preamble for the proposed rule, because identification documents
may be obtained illegally and may be fraudulent, and in light ofthe recent increase in
identity theft, Treasury and the Agencies encourage banks to use non-documentary
methods even when the customer has provided identification documents.
Section 103.121(b)(2)(ii)(C) Additional Verification for Certain Customers. As
described above, the proposed rule required the identification and verification of each
signatory for an account. Most commenters objected to this requirement as overly
burdensome, and, upon consideration ofthe points raised by the commenters, Treasury
and the Agencies agree that it is appropriate to delete it. For the reasons discussed below,
however, the rule does require that a bank's CIP address the circumstances in which it
will obtain information about such individuals in order to verify the customer's identity.
Treasury and the Agencies believe that while the majority of customers may be verified
adequately through the documentary or non-documentary verification methods described
in paragraphs (b)(2)(ii)(A) and (B), there may be instances where this is not possible.
The risk that the bank will not know the customer's true identity may be heightened for
certain types of accounts, such as an account opened in the name of a corporation,
partnership, or trust that is created or conducts substantial business in a jurisdiction that

has been designated by the United States as a primary m o n e y laundering concern or has
been designated as non-cooperative by an international body.
Obtaining sufficient information to verify a customer's identity can reduce the
risk that a bank will be used as a conduit for money laundering and terrorist financing.
Treasury and the Agencies believe that a bank must identify customers that pose a
heightened risk of not being properly identified, and a bank's CIP must prescribe
additional measures that may be used to obtain information about the identity ofthe
individuals associated with the entity in whose name such an account is opened when
standard documentary and non-documentary methods prove to be insufficient.
For these reasons, the requirement to verify the identity of signatories has been
replaced by a new provision in the final rule that requires that a bank's CIP address
situations where, based on the bank's risk assessment of a new account opened by a
customer that is not an individual, the bank also will obtain information about individuals
with authority or control over such account, including signatories, in order to verify the
customer's identity. This additional verification method will only apply when the bank
cannot adequately verify the customer's identity using the documentary and nondocumentary verification methods described in (b)(2)(ii)(A) and (B). Moreover, a bank
need not undertake any additional verification if it chooses not to open an account when
it cannot verify the customer's identity using standard documentary and nondocumentary verification methods.
Section 103.121 (b)(2)(iii) Lack of Verification. The proposed rule stated that a
bank's CIP must include procedures for responding to circumstances in which the bank
cannot form a reasonable belief that it knows the true identity of a customer. The

preamble for the proposed rule listed what these procedures should include. In addition,
the proposal stated that a bank should only maintain an account for a customer when it
can form a reasonable belief that it knows the customer's true identity.30
The final rule retains the general requirement that a bank's CIP include
procedures for responding to circumstances in which the bank cannot form a reasonable
belief that it knows the true identity ofthe customer. However, the rule text itself now
states that the procedures should describe the following: when a bank should not open an
account for a potential customer; the terms under which a customer may use an account
while the bank attempts to verify the customer's identity; when the bank should close an
account after attempts to verify a customer's identity have failed; and when the bank
should file a Suspicious Activity Report in accordance with applicable law and
regulation.
One commenter stated that requiring a bank to close an account if it cannot verify
a customer's identity would conflict with state laws and would subject the bank to legal
liability. The commenter urged that if this provision is retained, the final rule also should
shield banks from state regulatory and borrower liability in these circumstances. Other
commenters asked that Treasury and the Agencies clarify that further investigation that
results in failure to open an account will not trigger adverse action requirements under the
FCRA, 15 U.S.C. 1681 et seq. or the Equal Credit Opportunity Act (ECOA), 15 U.S.C.
1691 et seq.

The preamble also explained that there are some exceptions to this basic rule. For example, a bank m a y
maintain an account at the direction of a law enforcement or intelligence agency, even though the bank
does not k n o w the true identity ofthe customer.

Thefinalrule does not specifically require a bank to close the account of a
customer whose identity the bank cannot verify, but instead leaves this determination to
the discretion ofthe bank. Treasury and the Agencies have determined that there is no
statutory basis to create a safe harbor that would shield banks from state regulatory or
borrower liability if a bank should choose to close a customer's account. Any such
closure should be consistent with the bank's existing procedures for closing accounts in
accordance with its risk management practices. Treasury and the Agencies also note that
a bank must comply with other applicable laws and regulations, such as the adverse
action provisions under ECOA and the FCRA, when determining not to open an account
because it cannot establish a reasonable belief that it knows the true identity ofthe
customer.31
Section 103.121(b)(3) Recordkeeping.
Section 103.121(b)(3)(i) Required Records. The proposed rule set forth
recordkeeping procedures that must be included in a bank's CIP. Under the proposal, a
bank would have been required to maintain a record ofthe identifying information
provided by the customer. Where a bank relies upon a document to verify identity, the
proposal would have required the bank to maintain a copy of the document that the bank
relied on that clearly evidences the type of document and any identifying information it
may contain. The bank also would have been required to record the methods and result
of any additional measures undertaken to verify the identity of the customer. Last, the

31
See 12 C F R 202.9(b) (Federal Reserve Regulation B that prescribes the form of E C O A notice and
statement of specific reasons); 15 U.S.C. 1681m ( F C R A provision that provides for duties of users taking
adverse actions on the basis of information contained in consumer reports from other third parties or
affiliates).

bank would have been required to record the resolution of any discrepancy in the
identifying information obtained.
This section of the proposed rule prompted the most comment. Though one
commenter felt that the recordkeeping requirements in the proposed rule were weak,
almost all other commenters identified the proposed documentation and record retention
requirements as overly burdensome. Commenters urged Treasury and the Agencies to
permit a bank to record the information from the documents obtained rather than
requiring banks to maintain copies of these documents for the life ofthe account.
Commenters generally argued that it would be difficult and very burdensome to store and
retrieve copies of documents used to verify the identity ofthe customer. In addition,
some commenters noted that many kinds of identification documents, particularly some
new driver's licenses, have security features that prevent them from being copied legibly.
Other commenters stated that copies of documents would be difficult to safeguard and
could facilitate identity theft.
Commenters stated that requiring banks to keep copies of documents would
substantially deviate from current banking practice and would violate certain states' laws.
Banks offering credit card accounts through retailers, who require the customer to
provide identifying documents at the point of sale, strenuously opposed this requirement
if it were interpreted to cover documents presented to the merchant. These commenters
stated that copy machines are not usually available at the point of sale, and that the rule as
proposed would require merchants to purchase large numbers of additional copy
machines. The commenters also anticipated that consumers would be greatly
inconvenienced by this requirement and might have to endure lengthy waits during any

busy shopping season. These commenters questioned whether therisksof moneylaundering and the financing of terrorism through retail store credit cards, which
generally have relatively low credit limits, restrictions on pre-payment, and other features
to detect fraud, warrant the imposition of these additional costs.
Other commenters stated that requiring banks to keep copies of documents that
have pictures, such as driver's licenses, could expose the bank to allegations of unlawful
discrimination, even if the retention of this information were not prohibited under ECOA.
Some banks objected to this requirement on the grounds that it directly conflicted with
the position that the Agencies have traditionally taken on this issue, including the
criticism of banks that have retained such information in their files when extending
credit.
Other commenters asked that a bank be permitted to record the processes and
procedures generally used for verification rather than being required to keep records of
the methods used and the resolution for each and every account, especially where the
bank uses standardized procedures for all customers and could demonstrate that these
procedures were applied. Some commenters suggested that the final rule permit banks to
use a risk-based approach for recordkeeping.
In light ofthe comments received, Treasury and the Agencies have reconsidered
and modified the recordkeeping requirements ofthe proposed rule. The final rule
provides that a bank's CIP must include procedures for making and maintaining a record
of all information obtained under the procedures implementing the requirement that a
bank develop and implement a CIP. However, the final rule affords banks significantly
more flexibility than did the recordkeeping provisions contained in the proposal. Under

thefinalrule, a bank's records are to include "a description," rather than a copy, of any
document upon which the bank relied in order to verify the identity of the customer,
noting the type of document, any identification number contained in the document, the
place of issuance, and, if any, the date of issuance and expiration date. The final rule also
clarifies that the record must include "a description" ofthe methods and results of any
measures undertaken to verify the identity ofthe customer, and ofthe resolution of any
"substantive" discrepancy discovered when verifying the identifying information
obtained, rather than any documents generated in connection with these measures.
As Treasury and the Agencies indicated in the preamble for the proposal, nothing
in the rule modifies, limits', or supersedes section 101 ofthe Electronic Signatures in
Global and National Commerce Act, Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001) (ESign Act). Thus, a bank may use electronic records to satisfy the requirements of this
final rule, as long as the records are accurate and remain accessible in accordance with 31
CFR 103.38(d).
Section 103.121(b)(3)(H) Retention of Records.
The proposal required a bank to retain all ofthe records specified in the
recordkeeping provision for five years after the date the account is closed.
This requirement prompted strenuous objections. Assuming that copies ofthe
documents used to verify the identity ofthe customer would have to be retained,
commenters asserted that retaining records until five years after the account is closed
would be very burdensome. Some commenters noted that imaging is not a routine
practice for community banks and could be costly. Banks offering credit card accounts
stated that the record retention requirement would require a change in forms, processes,

JS-336: Treas. and Financial Crimes Enforcement Network Officials to hold briefing on F... Page 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
April 30, 2003
JS-336
**MEDIA ADVISORY**
Treasury and Financial Crimes Enforcement Network
Officials to hold briefing on Final
U S A PATRIOT Act Regulations on Customer Identification
The Department of the Treasury, the Financial Crimes Enforcement Network, and
the seven federal financial regulators today issued final rules under section 326 of
the U S A PATRIOT Act that require certain financial institutions to establish
procedures to verify the identity of new accountholders. Treasury General Counsel
David Aufhauser, Financial Crimes Enforcement Network Director James Sloan,
and other officials will provide a briefing this morning at 11:30 a m in the Secretary's
large conference room in the Treasury Building.
WHAT: Briefing on final rule Implementing Sec. 326 of the PATRIOT Act
W H E N : 11:30 A M
W H E R E : Secretary's Large Conference Room (Rm. 3327)
PARTICIPANTS: David Aufhauser, General Counsel
James Sloan, Director, Financial Crimes Enforcement Network
Other officials
C O V E R A G E : Pen and paper only
These regulations are part of the Administration's continuing work to implement the
U S A Patriot Act and prevent money laundering, terrorist financing, identity theft,
and other forms of fraud while also providing financial institutions the flexibility they
need to effectively implement the rules.
Media without Treasury or White House press credentials planning to attend
should contact Treasury's Office of Public Affairs at (202) 622-2960 with the
following information: name, social security number and date of birth. This
information may also be faxed to (202) 622-2960.

httD.7/www.trea^£Oj^rcss/r£leases/j s3 3 6.htm

4/25/2005

and systems, while also increasing storage costs. A s credit cards do not have a specific
term, commenters noted that banks would be required to keep these records forever,
unless they are culled manually. Some commenters suggested that the retention period be
shortened, with suggestions ranging from one to three years after the account is closed,
while other commenters suggested that the period be shortened to five years from when
the account is opened. Many commenters stated that two years from when the
information is obtained would be consistent with other regulatory requirements, such as
the record retention requirements for an application for an extension of credit subject to
ECOA (12 CFR 202.12(b)).
By eliminating the requirement that a bank retain copies of the documents used to
verify the identity of the customer, Treasury and the Agencies believe that the final rule
largely addresses the main concern of these commenters. However, Treasury and the
Agencies also have determined that, while the identifying information provided by the
customer should be retained, there is little value in requiring banks to retain the
remaining records for five years after an account is closed because this information is
likely to have become stale. Therefore, the final rule now prescribes a bifurcated record
retention schedule that is consistent with the general five-year retention requirement in 31
CFR 103.38. First, the bank must retain the information referenced in paragraph
(b)(3)(i)(A) (that is, information obtained about a customer), for five years after the date
the account is closed or, in the case of credit card accounts, five years after the account is
closed or becomes dormant. Second, the bank need only retain the records that it must
make and maintain under the remaining parts of the recordkeeping provision, paragraphs

(b)(3)(i)(B), (C), and (D) (that is, information that verifies a customer's identity) for five
years after the record is made.
Section 103.121(b)(4) Comparison with Government Lists. The proposed rule
required a bank to have procedures for determining whether the customer appears on any
list of known or suspected terrorists or terrorist organizations provided to the bank by any
Federal government agency. In addition, the proposal stated that the procedures must
ensure that the bank follows all Federal directives issued in connection with such lists.
Most commenters were concerned about how a bank would be able to determine
what lists should be checked for purposes of this provision and how these lists would be
made available. Some commenters asked that the final rule confirm that a bank will not
have an affirmative duty to seek out all lists compiled by the Federal government and
would only be required to check lists provided to it by the Federal government. Some
commenters noted that lists published by OF AC are published but are not provided to
financial institutions.32 Many commenters urged that all lists within the meaning of
section 326 of the Act, be centralized, issued by a single designated government agency,
and provided to financial institutions in a commonly used electronic format. Some of
these commenters suggested that instead of providing multiple lists, the government set
up a single website that would permit a bank to search for a name alphabetically, similar
to the OFAC list. Other commenters asked Treasury and the Agencies to clarify what
action a bank should take when a customer appears on a list.

Nevertheless, the legislative history for this provision indicates that the lists Congress intended financial
institutions to consult "are those already supplied to financial institutions by the Office o f Foreign Asset
Control ( O F A C ) , and occasionally by law enforcement and regulatory authorities, as in the days
immediately following the September 11, 2001, attacks on the World Trade Center and the Pentagon." H.R.
Rep. N o . 107-250, pt. 1, at 63 (2001).

Commenters also asked for guidance regarding the timing of w h e n the
comparison must be performed and asked whether the lists could be checked after an
account is opened. Some commenters stated that there is no practical way for a financial
institution to check lists prior to opening an account.
The final rule states that a bank's CIP must include procedures for determining
whether the customer appears on any list of known or suspected terrorists or terrorist
organizations issued by any Federal government agency and designated as such by
Treasury in consultation with the Federal functional regulators. Because Treasury and
the Federal functional regulators have not yet designated any such lists, the final rule
cannot be more specific with respect to the lists banks must check in order to comply
with this provision. However, banks will not have an affirmative duty under this
regulation to seek out all lists of known or suspected terrorists or terrorist organizations
compiled by the Federal government. Instead, banks will receive notification by way of
separate guidance regarding the lists that must be consulted for purposes of this
provision.
Treasury and the Agencies have modified this provision to give guidance as to
when a bank must consult a list of known or suspected terrorists or terrorist
organizations. The final rule states that the CIP's procedures must require the bank to
make a determination regarding whether a customer appears on a list "within a
reasonable period of time" after the account is opened, or earlier if required by another
Federal law or regulation or by a Federal directive issued in connection with the
applicable list.

Thefinalrule provides that a bank's CIP must contain procedures requiring the
bank to follow all Federal directives issued in connection with such lists. Again, because
there are no lists that have been designated under this provision as yet, the final rule
cannot provide more guidance in this area.
Section 103.121(b)(5) Customer Notice. The proposed rule would have required a
bank's CIP to include procedures for providing bank customers with adequate notice that
the bank is requesting information to verify their identity. The preamble for the proposal
stated that a bank could satisfy that notice requirement by generally notifying its
customers about the procedures the bank must comply with to verify their identities. It
stated that the bank could post a notice in its lobby or on its Internet website, or provide
customers with any other form of written or oral notice.
Treasury and the Agencies received a large number of comments on this
provision. Some commenters did not agree that section 326 of the Act requires notice to
bank customers. Some of these commenters suggested that a bank's request for
identifying information should be considered adequate notice. Other commenters did not
question this requirement and stated that they appreciated the flexibility of this provision.
However, a great many commenters asked for additional guidance on the content and
timing of the notice and specifically requested that the final rule provide model language
so that all institutions represent the requirements of section 326 in the same manner and
the adequacy of notice is not left to the interpretation of individual examiners.
Section 326 provides that the regulations issued "shall, at a minimum, require
financial institutions to implement, and customers (after being given adequate notice) to
comply with reasonable procedures" that satisfy the statute. Based upon this statutory

requirement, thefinalrule requires a bank's CIP to include procedures for providing bank
customers with adequate notice that the bank is requesting information to verify their
identities. However, the final rule provides additional guidance regarding what
constitutes adequate notice and the timing of the notice requirement.
The final rule states that notice is adequate if the bank generally describes the
identification requirements of the final rule and provides notice in a manner reasonably
designed to ensure that a customer views the notice, or is otherwise given notice, before
opening an account. The final rule also states that depending upon the manner in which
an account is opened, a bank may post a notice in the lobby or on its website, include the
notice on its account applications, or use any other form of oral or written notice. In
addition, the final rule includes sample language that, if appropriate, will be deemed
adequate notice to a bank's customers when provided in accordance with the
requirements of this final rule.
Section 103.121(b)(6) Reliance on Another Financial Institution. Many
commenters urged that the final rule permit a bank to rely on a third party to perform
elements of the bank's CIP. For example, some commenters asked that the final rule
clarify that a bank may use a third party service provider to perform tasks and keep
records. Other commenters recommended that the rule should permit a third party to
verify the identity of the bank's customer in indirect lending arrangements, for example,
where a car dealer acting as agent of the bank extends a loan to a customer or where a
mortgage broker acts on a bank's behalf. Some commenters urged that the final rule be
modified to more broadly permit financial institutions to share customer identification
and verification duties with other financial institutions so as to avoid each institution

having to undertake duplicative customer identification efforts. S o m e of these
commenters suggested that a bank be permitted to allocate its responsibility to verify the
customer's identity by contract with another financial institution as permitted in the
proposed rule for broker-dealers.
Other commenters requested that the final rule permit the CIP obligations to be
performed initially by only one financial institution if a customer has different accounts
with different affiliates. These commenters noted that it is common for a customer to
maintain several different accounts with a financial institution and its affiliates. The
same customer, for example, may have a credit card account with one affiliate, a home
mortgage with another affiliate, and a brokerage account with a broker-dealer affiliate.
The commenters urged that a bank be permitted to rely on customer identification and
verification performed by an affiliate because it would be superfluous and unnecessarily
burdensome to subject the same customer to substantially similar customer identification
and verification procedures on multiple occasions. Furthermore, those commenters urged
Treasury and the Agencies to allow a bank to rely on an affiliate in order to reduce the
substantial costs of maintaining duplicative records regarding identity verification under
the recordkeeping provisions of the rule.
Treasury and the Agencies recognize that there may be circumstances where a
bank should be able to rely on the performance by another financial institution of some or
all of the elements of the bank's CEP. Therefore, the final rule provides that a bank's CIP
may include procedures specifying when the bank will rely on the performance by
another financial institution (including an affiliate) of any procedures of the bank's CIP
and thereby satisfy the bank's obligations under the rule. Reliance is permitted if a

customer of the bank is opening, or has opened, an account or has established a similar
banking or business relationship with the other financial institution to provide or engage
in services, dealings, or other financial transactions.
In order for a bank to rely on the other financial institution, such reliance must be
reasonable under the circumstances, and the other financial institution must be subject to
a rule implementing the anti-money laundering compliance program requirements of 31
U.S.C. 5318(h) and be regulated by a Federal functional regulator. The other financial
institution also must enter into a contract requiring it to certify annually to the bank that it
has implemented its anti-money laundering program and that it will perform (or its agent
will perform) the specified requirements of the bank's CIP. The contract and certification
will provide a standard means for a bank to demonstrate the extent to which it is relying
on another institution to perform its CIP, and that the institution has in fact agreed to
perform those functions. If it is not clear from these documents, a bank must be able to
otherwise demonstrate when it is relying on another institution to perform its CIP with
respect to a particular customer.
The bank will not be held responsible for the failure of the other financial
institution to adequately fulfill the bank's CIP responsibilities, provided the bank can
establish that its reliance was reasonable and that it has obtained the requisite contracts
and certifications. Treasury and the Agencies emphasize that the bank and the other
financial institution upon which it relies must satisfy all of these conditions set forth in
the rule. If they do not, then the bank remains solely responsible for applying its own
CIP to each customer in accordance with this regulation.

All of the Federal functional regulators are adopting comparable provisions in
their respective regulations to permit such reliance. Furthermore, the Federal functional
regulators expect to share information and to cooperate with each other to determine
whether the institutions subject to their jurisdiction are in compliance with the conditions
of the reliance provision of this final rule.
The final rule issued here does not affect a bank's authority to contract for
services to be performed by a third party either on or off the bank's premises. Thus, for
example, a bank may contract with a third party service provider to keep its records even
when the bank does not act under the reliance provision set forth in the regulation.
However, Treasury and the Agencies note that the performance of these services for
Federally regulated banks will be subject to regulation and examination by the Agencies
under other applicable laws and regulations. See, e.g., 12 U.S.C. 1867.
The final rule also does not alter a bank's authority to use an agent to perform
services on its behalf. Therefore, a bank is permitted to arrange for a car dealer or
mortgage broker, acting as its agent in connection with a loan, to verify the identity of its
customer. However, as with any other responsibility performed by an agent, and in
contrast to the reliance provision in the rule, the bank ultimately is responsible for that
agent's compliance with the requirements of this final rule.
Section 103.121(c) Exemptions. The proposed rule provided that the appropriate
Federal functional regulator, with the concurrence of Treasury, may by order or
regulation exempt any bank or type of account from the requirements of this section. The

Because it lacks the specific statutory authority to regulate and examine service providers, NCUA, as a
matter of safety and soundness, will require credit unions to document that their service providers fully
comply with this regulation and with the credit union's customer identification program.

proposal stated that, in issuing such exemptions, the Federal functional regulator and
Treasury shall consider whether the exemption is consistent with the purposes of the
BSA, consistent with safe and sound banking, and in the public interest. The proposal
stated that the Federal functional regulator and Treasury also may consider other
necessary and appropriate factors.
There were a number of comments suggesting that various types of accounts be
exempted from the final rule. For example, several commenters suggested that accounts
of Federal, state, and local governmental entities, public companies, and correspondent
banks be exempted from the final rule. One commenter suggested that student loan
programs be exempted from the rule because current safeguards are sufficient to verify
the identity of student loan borrowers. Another commenter suggested that small trust
companies and limited purpose banks that provide trust services be exempted from the
rule, because such entities are more local in operation, would be burdened by the rule,
and have fewer employees to ensure compliance. Yet another commenter suggested that
the NCUA exempt credit unions from the CIP requirements.
Any suggested exemptions that Treasury and the Agencies have determined to be
appropriate are incorporated into the definitions of "account" and "customer" for the
reasons described above. The exemption provision of the final rule is essentially adopted
as proposed with respect to banks that have a Federal functional regulator. Because the
final rule will also apply to certain banks that do not have a Federal functional regulator,
a new provision has been added to make clear that Treasury alone will make all
determinations regarding exemptions for these institutions.

Section 103.121(d) Other Information Requirements Unaffected. The proposal
provided that nothing in § 103.121 shall be construed to relieve a bank of its obligations
to obtain, verify, or maintain information in connection with an account or transaction
that is required by another provision in part 103. For example, if an account is opened
with a deposit of more than $10,000 in cash, the bank opening the account must comply
with the customer identification requirements in § 103.121, as well as with the provisions
of § 103.22, which require that certain information concerning the transaction be reported
by filing a Currency Transaction Report (CTR). There were no comments on this
provision. Therefore, Treasury and the Agencies have adopted this provision generally as
proposed, except that it has been clarified to provide that nothing in § 103.121 should be
construed to relieve a bank of any of its obligations, including its obligations to obtain,
verify, or maintain information in connection with an account or transaction that is
required by another provision in part 103.
III. Conforming Amendments to 31 CFR 103.34
Section 103.34(a) sets forth customer identification requirements when certain
types of deposit accounts are opened. Together with the proposed rule implementing
section 326, Treasury, on its own authority, proposed deleting 31 CFR 103.34(a) for the
following reasons.
First, the preamble for the proposal explained that Treasury regards the
requirements of §§ 103.34(a)(1) and (2) as inconsistent with the intent and purpose of
section 326 of the Act and incompatible with proposed section 103.121. Generally
§§ 103.34(a)(1) and (2) require a bank, within 30 days after certain deposit accounts are
opened, to secure and maintain a record of the taxpayer identification number of the

customer involved. If the bank is unable to obtain the taxpayer identification number
within 30 days (or a longer time if the person has applied for a taxpayer identification
number), it need take no further action under § 103.34 concerning the account if it
maintains a list of the names, addresses, and account numbers of the persons for which it
was unable to secure taxpayer identification numbers, and provides that information to
Treasury upon request. In the case of a non-resident alien, the bank is required to record
the person's passport number or a description of some other government document used
to determine identification. These requirements conflicted with those in proposed
§ 103.121 which required a bank to obtain the name, address, date of birth and an
identification number from any person seeking to open a new account.
Second, § 103.34(a)(3) currently provides that a bank need not obtain a taxpayer
identification number with respect to specified categories of persons34 opening certain
deposit accounts. Proposed § 103.121 did not exempt any persons from the CIP
requirements. Treasury requested comment on whether any of the exemptions in
§ 103.34(a)(3) should apply in light of the intent and purpose of section 326 of the Act
and the requirements of proposed § 103.121.

The exemption applies to (i) agencies and instrumentalities of Federal, State, local, or foreign
governments; (ii) judges, public officials, or clerks of courts of record as custodians of funds in controversy
or under the control of the court; (iii) aliens w h o are ambassadors; ministers; career diplomatic or consular
officers; naval, military, or other attaches of foreign embassies and legations; and members of their
immediate families; (iv) aliens w h o are accredited representatives of certain international organizations, and
their immediate families; (v) aliens temporarily residing in the United States for a period not to exceed 180
days; (vi) aliens not engaged in a trade or business in the United States w h o are attending a recognized
college or university, or any training program supervised or conducted by an agency of the Federal
Government; (vii) unincorporated subordinate units of a tax exempt central organization that are covered by
a group exemption letter; (viii) a person under 18 years of age, with respect to an account opened as part of a
school thrift savings program, provided the annual interest is less than $10; (ix) a person opening a
Christmas club, vacation club, or similar installment savings program, provided the annual interest is less
than $10; and (x) non-resident aliens w h o are not engaged in a trade or business in the United States.

Third, § 103.34(a)(4) also provides that IRS rules shall determine whose number
shall be obtained in the case of multiple account holders. In the preamble that
accompanied its proposal, Treasury stated that this provision is inconsistent with section
326 of the Act, which requires that banks verify the identity of "any" person seeking to
open an account.
In addition, Treasury proposed deleting § 103.34(b)(1) which requires a bank to
keep "any notations, if such are normally made, of specific identifying information
verifying the identity of the signer [who has signature authority over an account] (such as
a driver's license number or credit card number)." Treasury stated that the quoted
language in § 103.34(b)(1) is inconsistent with the proposed requirements of § 103.121.
For this reason, Treasury, under its own authority, proposed to delete the quoted
language.
Few comments were received regarding the proposed deletion of these provisions.
Some commenters agreed that § 103.34(a) should be deleted if proposed § 103.121 were
adopted. One commenter suggested that § 103.34(a) should be revised to achieve the
objectives of the section 326 of the Act. One commenter representing a military bank
requested continuance of the exemption for agencies and instrumentalities of the Federal
government that will permit exemption of commissaries, exchanges and various military
organizations. Another commenter requested maintenance of the exemption for
government entities, court funds, unincorporated units of tax-exempt organizations, and
school thrift programs.
Treasury has determined that given the more comprehensive requirements of the
final version of § 103.121, there is no longer a need for § 103.34 (a). A number of the

exemptions formerly in § 103.34(a) have n o w been added to § 103.121. Other
exemptions conflict with the language and intent of section 326 of the Act and thus were
not adopted in the final rule. While § 103.34(a) will no longer be needed once the final
rule is fully effective, withdrawing the provision before October 1, 2003, would create a
gap period during which banks would not be subject to a rule under the BSA requiring a
customer to be identified when opening an account. Because Treasury and the Agencies
do not believe such a gap period would be appropriate, the final rule — rather than
withdrawing § 103.34(a) - amends the section to cut off its applicability on October 1,
2003, when § 103.121 becomes fully effective.35
By contrast, Treasury no longer believes that it is necessary to delete the quoted
language in § 103.34(b), which requires a bank to keep "any notations, if such are
normally made, of specific identifying information verifying the identity of [a person
with signature authority over an account] (such as a driver's license number or credit card
number)." The definition of "customer" in the final version of § 103.121 no longer
includes a signatory on an account. Therefore, § 103.121 and § 103.34(b)(1) are not
inconsistent and the records required to be kept in accordance with § 103.34(b)(1) will
still have a high degree of usefulness in criminal, tax, or regulatory investigations or
proceedings, or in the conduct of intelligence or counterintelligence activities, and to
protect against international terrorism. Therefore, the proposal to delete the quoted
language in § 103.34(b)(1) is not adopted as proposed.
IV. Technical Amendment to 31 CFR 103.11(j)

35
Appropriate conforming amendments are made to §§ 103.34(b)(l 1) and (12) to add a cross-reference to
the Internal Revenue Code regarding the rules for determining what constitutes a taxpayer identification
number.

Section 103.1 l(j), which defines the term "deposit account," contains an obsolete
reference to the definition of "transaction account," which is defined in § 103.1 l(hh).
Under its own authority, Treasury proposed to correct this reference. There were no
comments on this proposed technical correction. Therefore, it is adopted as proposed.
V. Regulatory Analysis
A. Regulatory Flexibility Act
Under the Regulatory Flexibility Act (RFA), an agency must either prepare a
Final Regulatory Flexibility Analysis (FRFA) for a final rule or certify that the final rule
will not have a significant economic impact on a substantial number of small entities.36
See 5 U.S.C. 604 and 605(b).
Treasury and the Agencies have reviewed the impact of this final rule on small
banks. Treasury and the Agencies certify that the final rule will not have a significant
economic impact on a substantial number of small entities.
First, Treasury and the Agencies believe that banks already have implemented
prudential business practices and anti-money laundering programs that include most of
the procedures that a CIP must contain under this final rule. Banks generally undertake
extensive measures to verify the identity of their customers as a matter of good business
practice. In addition, Federally regulated banks already must have anti-money laundering
programs that include procedures for identification, verification, and documentation of
customer information.

The R F A defines the term "small entity" in 5 U.S.C. 601 by reference to the definitions published by the
Small Business Administration (SB A ) . The S B A has defined a "small entity" for banking purposes as a
bank or savings institution with less than $150 million in assets. See 13 C F R 121.201. The N C U A defines
"small credit union" as those under $1 million in assets. Interpretive Ruling and Policy Statement No. 872, developing and Reviewing Government Regulations (52 F R 35231, September 18, 1987).
37
See footnote 10.

Second, although thefinalrule contains several requirements that will be n e w to
banks we anticipate that the costs of implementing these requirements will not be
economically significant. For example, the recordkeeping requirements in the final rule
may impose some costs on banks to the extent that the information that must be
maintained is not already collected and retained.38 Treasury and the Agencies believe
that the compliance burden is minimized for banks, including small banks, because the
final rule vests a bank with the discretion to design and implement appropriate
recordkeeping procedures, including allowing banks to maintain electronic records in lieu
of (or in combination with) paper records.
The section of the final rule that requires banks to check lists of known and
suspected terrorists and terrorist organizations and to follow Federal agency directives in
connection with the lists is also a new requirement that will impose nominal burden, once
Treasury and the Agencies publish lists that banks must consult. However, no such lists
have been issued to date. Moreover, banks already must have procedures to satisfy other
similar requirements. For instance, banks already have to ensure that they do not engage
in transactions involving designated foreign countries, foreign nationals, and other
entities prohibited under OFAC rules. See 31 CFR part 500. We also understand that
many banks, including small banks, use electronic search tools to check lists39 and
already use identity verification software, both as part of their customer due diligence
obligations under existing BSA compliance program requirements and to detect fraud.

See, e.g.. identification and verification of customers in connection with each share or deposit account
opened (31 C F R 103.34).
3
W e believe that most banks will use technology rather than manual methods to check lists. O F A C lists
are generally incorporated into bank software and, in response to bank inquiries, Treasury and the Agencies
have made clear that banks are permitted to share the lists they receive pursuant to section 314 of the Act
with their service providers. W e expect that any lists provided under section 326 of the Act will also be
provided under the same conditions.

The notice provisions of the rule also are new. However, they are \ery flexible
and, as written, should impose only minimal costs. The final rule permits a bank to
satisfy the notice requirement by choosing from a variety of low-cost measures, such as
posting a sign in the lobby or on its website, by adding it to an account statement, or
using any other form of written or oral notice. In addition, the amount of time that a bank
will need to develop its notices will be minimal as the final rule now contains a sample
notice.
Treasury and the Agencies believe that the flexibility incorporated into the final
rule will permit each bank to tailor its CIP to fit its own size and needs. In this regard,
Treasury and the Agencies believe that expenditures associated with establishing and
implementing a CIP will be commensurate with the size of a bank. If a bank is small, the
burden to comply with the proposed rule should be de minimis.
Most commenters on the proposed rule stated that Treasury and the Agencies had
underestimated the burden imposed by the proposed rule. They highlighted aspects of the
proposal that they maintained would have imposed excessive burdens and would have
required banks to alter their current practices. Most comments focused on the proposed
provisions requiring banks to verify the identity of signatories on accounts, to keep copies
of documents used to verify a customer's identity, and to retain identity verification
records for five years after an account is closed.
In drafting the final rule, Treasury and the Agencies have either eliminated or
minimized the most significant burdens identified by commenters. In response to
commenters, for example, the final rule eliminates signatories from the definition of
"customer," no longer requires a bank to keep copies of documents used to verify a

customer's identity, and reduces the universe of records that must be kept for five years
after an account is closed. Treasury and the Agencies have taken other steps that
significantly reduce the scope of the rule and burdens of the rule. Many of these burdenreducing actions are described in the Paperwork Reduction Act discussion below.40 As a
result of these changes, the final rule is far more flexible and less burdensome than the
proposed rule while still fulfilling the statutory mandates enumerated in section 326 of
the Act.
Finally, Treasury and the Agencies did consider whether it would be appropriate
to exempt small banks from the requirements of the rule. We do not believe that an
exemption for small banks is appropriate, given the flexibility built into the rule to
account for, among other things, the differing sizes and resources of banks, as well as the

In addition to the burden-reducing measures discussed in the Paperwork Reduction Act discussion, other
changes include:
• A clarification that a bank must verify the customer's identity using the identifying information
obtained. The proposed rule would have required the bank to verify all identifying information.
• The elimination of the requirement that a bank must obtain a physical and a mailing address from
a customer opening an account. Under thefinalrule, the bank is only required to obtain a physical
address.
• A n e w provision that permits a bank to rely on anotherfinancialinstitution to perform its CIP
under certain conditions. This provision allowsfinancialinstitutions that share a customer to
share customer identification and verification obligations and to reduce the cost of maintaining
duplicative records required by the recordkeeping provisions of thefinalrule.
• A revised provision that extends to customers w h o are individuals the exception that permits a
bank to open an account for a customer that has applied for, but has not received, a taxpayer
identification number.
• A n e w exemption for credit card accounts from the requirement that a bank obtain identifying
information from the customer prior to opening an account. In connection with credit card
accounts, a bank is permitted to obtain identifying information from a third party source prior to
extending credit.
• A clarification stating that the government will provide lists of k n o w n or suspected terrorists and
terrorist organizations to banks. Banks will not be required to seek out this information. In
addition, the rule n o w states that the bank m a y determine whether a customer appears on the list
within a reasonable time after the account is opened, unless it is required to do so earlier by
another Federal law, regulation, or directive.
• A transition period that permits banks a period of several months to comply with thefinalrule.

importance of the statutory goals and mandate of section 326. M o n e y laundering can
occur in small banks as well as large banks.
B. Paperwork Reduction Act
Certain provisions of the final rule contain "collection of information"
requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). An agency may not conduct or sponsor, and a respondent is not required to
respond to, an information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. Treasury submitted the final rule to the
OMB for review in accordance with 44 U.S.C. 3507(d). The OMB has approved the
collection of information requirements in today's rule under control number 1506-0026.
Collection of Information Under the Proposed Rule
The proposed rule applied only to a financial institution that is a "bank" as defined
in 31 CFR 103.11(c),41 and any foreign branch of an insured bank. The proposed rule
required each bank to establish a written CIP that must include recordkeeping procedures
(proposed § 103.121(b)(3)) and procedures for providing customers with notice that the
bank is requesting information to verify their identity (proposed § 103.121(b)(5)).
The proposed rule required a bank to maintain a record of (1) the identifying
information provided by the customer, the type of identification document(s) reviewed, if
any, the identification number of the document(s), and a copy of the identification
document(s); (2) the means and results of any additional measures undertaken to verify
the identity of the customer; and (3) the resolution of any discrepancy in the identifying
information obtained. It also required these records to be maintained at the bank for five
years after the date the account is closed (proposed-§ 103.121(b)(3)).

The proposed rule also required a bank to give its customers "adequate notice" of
the identity verification procedures (proposed § 103.121(b)(5)). The proposed rule stated
that a bank could satisfy the notice requirement by posting a sign in the lobby or
providing customers with any other form of written or oral notice.
Collection of Information Under the Final Rule
The final rule, like the proposed rule, requires banks to implement reasonable
procedures to (1) maintain records of the information used to verify a customer's identity,
and (2) provide notice of these procedures to customers. These recordkeeping and
disclosure requirements are required under section 326 of the Act. However, the final
rule greatly reduces the paperwork burden attributable to these requirements, as described
below.
The final rule also contains a new recordkeeping provision permitting a bank to
rely on another financial institution to perform some or all its CIP, under certain
circumstances. Among other things, the other financial institution must provide the bank

with a contract requiring it to certify annually to the bank that it has implemented its antimoney laundering program, and that it will perform (or its agent will perform) the
specified requirements of the bank's CIP.
Response to Comments Received
We received approximately 500 comments on the proposed rule. Most of the
commenters specifically mentioned the recordkeeping burden associated with the
proposed rule. Some commenters also asked Treasury and the Agencies to clarify the
meaning of "adequate notice" and requested that a sample notice be provided in the final
rule.

This definition includes banks, thrifts, and credit unions.

Only a few commenters provided burden estimates of additional burden hours that
would result from the proposed rule. However, these burden estimates did not
necessarily focus on the recordkeeping and disclosure requirements in the proposal and
ranged from 200 extra hours per year to 9,000 additional hours. Treasury and the
Agencies believe that the final rule substantially addresses the concerns of the
commenters. Specific concerns about paperwork burden have been addressed as follows:
First, the recordkeeping and disclosure burden are minimized in the final rule
because Treasury and the Agencies reduced the entire scope of the final rule, by:
• narrowing and clarifying the scope of "account." The final rule specifically
excludes accounts that (1) a bank acquires through an acquisition, merger,
purchase of assets, or assumption of liabilities from a third party, and (2) accounts
opened for the purpose of participating in an employee benefit plan established
pursuant to the Employee Retirement Income Security Act of 1974. It also
specifically excludes wire transfers, check cashing, and the sale of travelers
checks, and any other product or service that does not lead to a "formal banking
relationship" from the scope of the rule;
• narrowing the definition of "bank" covered by the rule to exclude a bank's foreign
branches; and
• limiting and clarifying who is a "customer" for purposes of the final rule. The
final rule now defines "customer" as "a person that opens a new account" making
clear that a person who does not receive banking services, such as a person whose
deposit or loan application is denied, is not a customer. The definition of
customer also excludes signatories from the definition of "customer." Moreover,

the final rule excludes from the definition of "customer" the following readilyidentifiable entities: a financial institution regulated by a Federal functional
regulator; a bank regulated by a state bank regulator; and governmental agencies
and instrumentalities and companies that are publicly traded (i.e., entities
described in § 103.22(d)(2)(ii)-(iv)). The final rule also excludes existing
customers of the bank, provided that the bank has a reasonable belief that it
knows the true identity of the person.42
Second, recordkeeping burden was further reduced by:
• eliminating the requirement that a bank keep copies of any document that it relied
upon hi order to verify the identity of the customer and substituting a requirement
that a bank's records need only include "a description" of any document that it
relied upon in order to verify the identity of the customer. The final rule also
clarifies that the records need only include "a description" of the methods and
results of any measure undertaken to verify the identity of the customer, and of
the resolution of any substantive discrepancy discovered when verifying the
identifying information obtained, rather than any documents generated in
connection with these measures; and
• reducing the length of time that records must be kept. The final rule requires that
identifying information be kept for five years after the date the account is closed
(or for credit card accounts, five years after the account is closed or becomes
dormant). All other records may be kept for five years after the account is
opened.

The proposed rule stated that the identity of an existing customer would not need to be verified if the
bank (1) had previously verified the customer's identity in accordance with procedures consistent with the

Third, disclosure burden was reduced by providing sample language that, if
appropriate and properly provided, will be deemed adequate notice to a bank's customer.
Disclosure burden also was reduced by clarifying the term "adequate notice."
Treasury and the Agencies believe that little additional burden is imposed as a
result of the recordkeeping requirements outlined in section 103.121(b)(3), because the
type of recordkeeping required by the final rule is a usual and customary business
practice. In addition, banks already must keep similar records to comply with existing
regulations in 31 CFR part 103 (see, e^, 31 CFR 103.34, requiring certain records for
each deposit or share account opened).
Treasury and the Agencies believe that nominal burden is associated with the
disclosure requirement outlined in § 103.121(b)(5). This section contains a sample notice
that if appropriate and provided in accordance with the final rule, will be deemed
adequate notice. In addition, it continues to permit banks to choose among a variety of
low-cost methods of providing adequate notice and to select the least burdensome
method, given the circumstances under which customers seek to open new accounts.
Treasury and the Agencies also believe that nominal burden is associated with the
new recordkeeping requirement in § 103.121(b)(6). This section permits a bank to rely
on another financial institution to perform some or all its CIP under certain conditions,
including the condition that the financial institution enter into a contract with the bank
providing that it will certify annually to the bank that it (1) has implemented its antimoney laundering program and (2) will perform (or its agent will perform) the specified
requirements of the bank's CIP. Not all banks will choose to rely on a third party. For

proposed rule, and (2) continues to have a reasonable belief that it knows the true identity of the customer.

those that do, the minimal burden of retaining the certification described above should
allow them to reduce net burden under the rule by such reliance.

Burden Estimates
Treasury and the Agencies have reconsidered the burden estimates published in
the proposed rule, given the comments stating that the burdens associated with the
paperwork collections were underestimated. Having done so, and considering the
reduction in burden taken in this final rule, Treasury and the Agencies have adjusted their
estimates of the paperwork burden of this rule. The burden estimates that follow are
estimates of the incremental burden imposed upon banks by this final rule, recognizing
that some of the requirements in this rule are a usual and customary practice in the
banking industry, or duplicate other regulatory requirements.
The potential respondents are national banks and Federal branches and agencies
(OCC financial institutions); state member banks and branches and agencies of foreign
banks (Board financial institutions); insured state nonmember banks (FDIC financial
institutions); savings associations (OTS financial institutions); Federally insured credit
unions (NCUA financial institutions); and certain non-Federally regulated credit unions,
private banks, and trust companies (FinCEN institutions).
Estimated number of respondents:
OCC: 2207.
Board: 1240.
FDIC: 5,500.
OTS: 962.

N C U A : 9,688.
FinCEN: 2,460.
Estimated average annual recordkeeping burden per respondent: 10 hours.
Estimated average annual disclosure burden per respondent: 1 hour.
Estimated total annual recordkeeping and disclosure burden: 242,627 hours.
Treasury and the Agencies invite comment on the accuracy of the burden estimates and
invite suggestions on how to further reduce these burdens. Comments should be sent
(preferably by fax (202-395-6974)) to Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Office of Management and Budget,
Paperwork Reduction Project (1506-0026), Washington, DC 20503 (or by the Internet to

i lackevj (5),omb. eop. gov), with a copy to FinCEN by mail or the Internet at the addresses
previously specified.
Executive Order 12866
Treasury, the OCC, and OTS have determined that the final rule is not a
"significant regulatory action" under Executive Order 12866 for the following reasons.
The rule follows closely the requirements of section 326 of the Act. Moreover,
Treasury, the OCC, and OTS believe that national banks and savings associations already

have procedures in place that fulfill most of the requirements of the final rule because the
procedures are a matter of good business practice. In addition, national banks and
savings associations already are required to have BSA compliance programs that address
many of the requirements detailed in this final rule.
At the proposed rule stage, Treasury, the OCC, and OTS invited national banks,

the thrift industry, and the public to provide any cost estimates and related data that they

think would be useful in evaluating the overall costs of the rule. Most of the cost
estimates provided by commenters related to the requirements in the proposed rule that
banks verify the identity of signatories on accounts, keep copies of documents used to

verify a customer's identity, and retain identity verification records for five years after an
account is closed. As described in the preamble, the final rule eliminates signatories from
the definition of "customer," and no longer requires a bank to keep copies of documents
used to verify a customer's identity. The final rule also reduces the universe of records
that must be kept for five years after an account is closed. Treasury, the OCC and the
OTS have taken other steps that significantly reduce the scope of the rule and the burden
of the rule. These burden-reducing measures are described in the Paperwork Reduction
Act discussion and Regulatory Flexibility Act discussion, above.

List of Subjects
12 CFR Part 21
Crime, Currency, National banks, Reporting and recordkeeping requirements,
Security measures.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business information,
Crime, Currency, Investments, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 211

For these same reasons, and consistent with section 201 of the Unfunded Mandates Reform Act of 1995
(Pub. L. 104-4), Treasury, the O T S and the O C C have also determined that thisfinalrule will not result in
expenditures by
State, local, and tribal governments in the aggregate, or by the private sector of $100 million or more in any
one year, and therefore the rule is not subject to the requirements of section 202 of that Act.

Exports, Foreign banking, Holding companies, Investments, Reporting and
recordkeeping requirements.
12 CFR Part 326
Banks, banking, Currency, Insured nonmember banks, Reporting and
recordkeeping requirements, Security measures.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Investments, Reporting and
Recordkeeping requirements, Savings associations, Securities, Surety bonds.
12 CFR Part 748
Credit unions, Crime, and Security measures.
31 CFR Part 103
Administrative practice and procedure, Authority delegations (Government
agencies), Banks, banking, Brokers, Currency, Foreign banking, Foreign currencies,
Gambling, Investigations, L a w enforcement, Penalties, Reporting and recordkeeping
requirements,
Securities.
Department of the Treasury
31 CFR Chapter I
Authority and Issuance
For the reasons set forth in the preamble, part 103 of title 31 of the Code of
Federal Regulations is amended as follows:

PART 103-FINANCIAL RECORDKEEPING AND REPORTING OF
CURRENCY AND FOREIGN TRANSACTIONS
1. The authority citation for part 103 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 and 53165332; title III, sees. 312, 313, 314, 319, 326, 352, Pub L. 107-56, 115 Stat. 307.
§ 103.11 [Amended]

2. Section 103.1 l(j) is amended by removing "paragraph (q)" and adding
"paragraph (hh)" in its place.
§ 103.34 [Amended}
3. Section 103.34 is amended as follows:
a. By amending the first sentence of paragraph (a)(1) to add the words "and
before October 1, 2003" after the words "May 31, 1978" and after the words "June 30,
1972";
b. By amending paragraph (b)(l 1) to add the words "as determined under section
6109 of the Internal Revenue Code of 1986" after the words "taxpayer identification
number;" and
c. By amending paragraph (b)(12) to add the words "as determined under section
6109 of the Internal Revenue Code of 1986" after the words "taxpayer identification
number."
2. Subpart I of part 103 is amended by adding new §103.121 to read as follows:
§ 103.121 Customer Identification Programs for banks, savings associations, credit
unions, and certain non-Federally regulated banks.
(a) Definitions. For purposes of this section:
(l)(i) Account means a formal banking relationship established to provide or
engage in services, dealings, or other financial transactions including a deposit account, a
transaction or asset account, a credit account, or other extension of credit. Account also
includes a relationship established to provide a safety deposit box or other safekeeping
services, or cash management, custodian, and trust services.
(ii) Account does not include:

(A) A product or service where a formal banking relationship is not established
with a person, such as check-cashing, wire transfer, or sale of a check or money order;
(B) An account that the bank acquires through an acquisition, merger, purchase of
assets, or assumption of liabilities; or
(C) An account opened for the purpose of participating in an employee benefit
plan established under the Employee Retirement Income Security Act of 1974.
(2) Bank means:
(i) A bank, as that term is defined in § 103.11(c), that is subject to regulation by a
Federal functional regulator; and
(ii) A credit union, private bank, and trust company, as set forth in § 103.11(c),
that does not have a Federal functional regulator.
(3) (i) Customer means:
(A) A person that opens a new account; and
(B) An individual who opens a new account for:
(1) An individual who lacks legal capacity, such as a minor; or
(2) An entity that is not a legal person, such as a civic club.
(ii) Customer does not include:
(A) A financial institution regulated by a Federal functional regulator or a bank
regulated by a state bank regulator;
(B) A person described in § 103.22(d)(2)(ii)-(iv); or
(C) A person that has an existing account with the bank, provided that the bank
has a reasonable belief that it knows the true identity of the person.
(4) Federal functional resulator is defined at § 103.120(a)(2).

(5) Financial institution is defined at 31 U.S.C. 5312(a)(2) and (c)(1).
(6) Taxpayer identification number is defined by section 6109 of the Internal
Revenue Code of 1986 (26 U.S.C. 6109) and the Internal Revenue Service regulations
implementing that section (e.g., social security number or employer identification
number).
(7) U.S. person means:
(i) A United States citizen; or
(ii) A person other than an individual (such as a corporation, partnership, or trust),
that is established or organized under the laws of a State or the United States.
(8) Non-U.S. person means a person that is not a U.S. person.
(b) Customer Identification Program: minimum requirements.
(1) In general A bank must implement a written Customer Identification
Program (CIP) appropriate for its size and type of business that, at a minimum, includes
each of the requirements of paragraphs (b)(1) through (5) of this section. If a bank is
required to have an anti-money laundering compliance program under the regulations
implementing 31 U.S.C. 5318(h), 12 U.S.C. 1818(s), or 12 U.S.C. 1786(q)(l), then the
CLP must be a part of the anti-money laundering compliance program. Until such time as
credit unions, private banks, and trust companies without a Federal functional regulator
are subject to such a program, their CIPs must be approved by their boards of directors.
(2) Identity verification procedures. The CIP must include risk-based
procedures for verifying the identity of each customer to the extent reasonable and
practicable. The procedures must enable the bank to form a reasonable belief that it
knows the true identity of each customer. These procedures must be based on the bank's

assessment of the relevantrisks,including those presented by the various types of
accounts maintained by the bank, the various methods of opening accounts provided by
the bank, the various types of identifying information available, and the bank's size,
location, and customer base. At a minimum, these procedures must contain the elements
described in this paragraph (b)(2).
(i) Customer information required. (A) In general. The CIP must contain
procedures for opening an account that specify the identifying information that will be
obtained from each customer. Except as permitted by paragraphs (b)(2)(i)(B) and (C) of
this section, the bank must obtain, at a minimum, the following information from the
customer prior to opening an account:
(1) Name;
(2) Date of birth, for an individual;
(3) Address, which shall be:
(i) For an individual, a residential or business street address;
(ii) For an individual who does not have a residential or business street address,
an Army Post Office (APO) or Fleet Post Office (FPO) box number, or the residential or
business street address of next of kin or of another contact individual; or
(iii) For a person other than an individual (such as a corporation, partnership, or
trust), a principal place of business, local office, or other physical location; and
(4) Identification number, which shall be:
(i) For a U.S. person, a taxpayer identification number; or
(ii) For a non-U.S. person, one or more of the following: a taxpayer identification
number; passport number and country of issuance; alien identification card number; or

number and country of issuance of any other government-issued document evidencing
nationality or residence and bearing a photograph or similar safeguard.
Note to paragraph (b)(2)(i)(A)(4)(ii): When opening an account for a
foreign business or enterprise that does not have an identification number, the
bank must request alternative government-issued documentation certifying the
existence of the business or enterprise.
(B) Exception for persons applying for a taxpayer identification number. Instead
of obtaining a taxpayer identification number from a customer prior to opening the
account, the CIP may include procedures for opening an account for a customer that has
applied for, but has not received, a taxpayer identification number. In this case, the CIP
must include procedures to confirm that the application was filed before the customer
opens the account and to obtain the taxpayer identification number within a reasonable
period of time after the account is opened.
(C) Credit card accounts. In connection with a customer who opens a credit card
account, a bank may obtain the identifying information about a customer required under
paragraph (b)(2)(i)(A) by acquiring it from a third-party source prior to extending credit
to the customer.
(ii) Customer verification The CIP must contain procedures for verifying the
identity of the customer, using information obtained in accordance with paragraph
(b)(2)(i) of this section, within a reasonable time after the account is opened. The
procedures must describe when the bank will use documents, non-documentary methods,
or a combination of both methods as described in this paragraph (b)(2)(h).
(A) Verification through documents. For a bank relying on documents, the CIP
must contain procedures that set forth the documents that the bank will use. These
documents may include:

(!) For an individual, unexpired government-issued identification evidencing
nationality or residence and bearing a photograph or similar safeguard, such as a driver's
license or passport; and
(2) For a person other than an individual (such as a corporation, partnership, or
trust), documents showing the existence of the entity, such as certified articles of
incorporation, a government- issued business license, a partnership agreement, or trust
instrument.
(B) Verification through non-documentary methods. For a bank relying on nondocumentary methods, the CIP must contain procedures that describe the nondocumentary methods the bank will use.
(!) These methods may include contacting a customer; independently verifying
the customer's identity through the comparison of information provided by the customer
with information obtained from a consumer reporting agency, public database, or other
source; checking references with other financial institutions; and obtaining a financial
statement.
(2) The bank's non-documentary procedures must address situations where an
individual is unable to present an unexpired government-issued identification document
that bears a photograph or similar safeguard; the bank is not familiar with the documents
presented; the account is opened without obtaining documents; the customer opens the
account without appearing in person at the bank; and where the bank is otherwise
presented with circumstances that increase the risk that the bank will be unable to verify
the true identity of a customer through documents.

(C) Additional verification for certain customers. The CIP must address
situations where, based on the bank's risk assessment of a new account opened by a
customer that is not an individual, the bank will obtain information about individuals with
authority or control over such account, including signatories, in order to verify the
customer's identity. This verification method applies only when the bank cannot verify
the customer's true identity using the verification methods described in paragraphs
(b)(2)(ii)(A) and (B) of this section.
(iii) Lack of verification The CIP must include procedures for responding to
circumstances in which the bank cannot form a reasonable belief that it knows the true
identity of a customer. These procedures should describe:
(A) When the bank should not open an account;
(B) The terms under which a customer may use an account while the bank
attempts to verify the customer's identity;
(C) When the bank should close an account, after attempts to verify a customer's
identity have failed; and
(D) When the bank should file a Suspicious Activity Report in accordance with
applicable law and regulation.
(3) Recordkeeping. The CIP must include procedures for making and maintaining
a record of all information obtained under the procedures implementing paragraph (b) of
this section.
(i) Required records. At a minimum, the record must include:
(A) All identifying information about a customer obtained under paragraph
(b)(2)(i) of this section;

(B) A description of any document that was relied on under paragraph
(b)(2)(ii)(A) of this section noting the type of document, any identification number
contained in the document, the place of issuance and, if any, the date of issuance and
expiration date;
(C) A description of the methods and the results of any measures undertaken to
verify the identity of the customer under paragraph (b)(2)(ii)(B) or (C) of this section;
and
(D) A description of the resolution of any substantive discrepancy discovered
when verifying the identifying information obtained.
(ii) Retention of records. The bank must retain the information in paragraph

(b)(3)(i)(A) of this section for five years after the date the account is closed or, in the case
of credit card accounts, five years after the account is closed or becomes dormant. The
bank must retain the information in paragraphs (b)(3)(i)(B), (C), and (D) of this section
for five years after the record is made.
(4) Comparison with government lists. The CIP must include procedures for
determining whether the customer appears on any list of known or suspected terrorists or
terrorist organizations issued by any Federal government agency and designated as such
by Treasury in consultation with the Federal functional regulators. The procedures must
require the bank to make such a determination within a reasonable period of time after
the account is opened, or earlier, if required by another Federal law or regulation or
Federal directive issued in connection with the applicable list. The procedures must also
require the bank to follow all Federal directives issued in connection with such lists.

(5)(i) Customer notice. The CIP must include procedures for providing bank
customers with adequate notice that the bank is requesting information to verify their
identities.
(ii) Adequate notice. Notice is adequate if the bank generally describes the
identification requirements of this section and provides the notice in a manner reasonably
designed to ensure that a customer is able to view the notice, or is otherwise given notice,
before opening an account. For example, depending upon the manner in which the
account is opened, a bank may post a notice in the lobby or on its website, include the
notice on its account applications, or use any other form of written or oral notice.
(iii) Sample notice. If appropriate, a bank may use the following sample language
to provide notice to its customers:

(ii) The otherfinancialinstitution is subject to a rule implementing 31 U.S.C.
5318(h) and is regulated by a Federal functional regulator; and
(iii) The other financial institution enters into a contract requiring it to certify
annually to the bank that it has implemented its anti-money laundering program, and that
it will perform (or its agent will perform) the specified requirements of the bank's CIP.
(c) Exemptions. The appropriate Federal functional regulator, with the
concurrence of the Secretary, may, by order or regulation, exempt any bank or type of
account from the requirements of this section. The Federal functional regulator and the
Secretary shall consider whether the exemption is consistent with the purposes of the
Bank Secrecy Act and with safe and sound banking, and may consider other appropriate
factors. The Secretary will make these determinations for any bank or type of account
that is not subject to the authority of a Federal functional regulator.

(d) Other requirements unaffected. Nothing in this section relieves a bank of its
obligation to comply with any other provision in this part, including provisions

concerning information that must be obtained, verified, or maintained in connection with
any account or transaction.

Dated:

James F. Sloan,
Director, Financial Crimes Enforcement Network.

Dated:

In concurrence:

John D. Hawke, Jr.,
Comptroller of the Currency.

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED,
"CUSTOMER IDENTIFICATION PROGRAMS FOR BANKS, SAVINGS
ASSOCIATIONS, AND CREDIT UNIONS."]
In concurrence:

By order of the Board of Governors of the Federal Reserve System,
, 2003.

Jennifer J. Johnson,
Secretary of the Board.

[THIS SIGNATURE P A G E PERTAINS T O T H E FINAL R U L E TITLED,
"CUSTOMER IDENTIFICATION PROGRAMS FOR BANKS, SAVINGS
ASSOCIATIONS, AND CREDIT UNIONS."]

In concurrence:

this

By order of the Board of Directors of the Federal Deposit Insurance Corporation
day of
.

Valerie J. Best,
Assistant Executive Secretary.

[THIS S I G N A T U R E P A G E PERTAINS T O T H E FINAL R U L E TITLED,
"CUSTOMER IDENTIFICATION PROGRAMS FOR BANKS, SAVINGS
ASSOCIATIONS, AND CREDIT UNIONS."]

Dated:

In concurrence:

James E. Gilleran,
Director, Office of Thrift Supervision.

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED,
"CUSTOMER IDENTIFICATION PROGRAMS FOR BANKS, SAVINGS
ASSOCIATIONS, AND CREDIT UNIONS."]

Dated:

In concurrence:

Becky Baker,
Secretary of the Board, National Credit Union Administration.

Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set out in the preamble, the OCC amends chapter I of title 12 of
the Code of Federal Regulations as set forth below:

PART 21- MINIMUM SECURITY DEVICES AND PROCEDURES, REPORTS
OF SUSPICIOUS ACTIVITIES, AND BANK SECRECY ACT COMPLIANCE
PROGRAM
SUBPART C-PROCEDURES FOR MONITORING BANK SECRECY ACT
COMPLIANCE

1. The authority citation for part 21, subpart C, continues to read as follows:
Authority: 12 U.S.C. 93a, 1818, 1881-1884 and 3401-3422; 31 U.S.C. 5318.
2. In §21.21:
A. Revise the section heading; and
B. Revise § 21.21(b) to read as follows:

§ 21.21 Procedures for monitoring B a n k Secrecy Act (BSA) compliance.

* * * * *
(b) Establishment of a B S A compliance program. (I) Program requirement. Each
bank shall develop and provide for the continued administration of a program reasonably
designed to assure and monitor compliance with the recordkeeping and reporting
requirements set forth in subchapter II of chapter 53 of title 31, United States Code and
the implementing regulations

issued by the Department of the Treasury at 31 C F R part 103. The compliance program
must be written, approved by the bank's board of directors, and reflected in the minutes
of the bank.
(2) Customer identification program. Each bank is subject to the requirements of
31 U.S.C. 5318(1) and the implementing regulation jointly promulgated by the OCC and
the Department of the Treasury at 31 CFR 103.121, which require a customer
identification program to be implemented as part of the BSA compliance program
required under this section.

Dated:

John D. Hawke, Jr.,
Comptroller of the Currency.

Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set out in the preamble, the Board of Governors of the Federal
Reserve System amends 12 CFR Chapter II as follows:

PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 24a, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461,
481-486,601,611, 1814, 1816, 1818, 1820(d)(9), 18230), 1828(o), 1831, 1831o, 1831p1, 1831r-l, 1831w, 1831x, 1835a, 1843(1), 1882, 2901-2907, 3105, 3310, 3331-3351, and
3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-l, and 78w; 31
U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
2. Revise § 208.63(b) to read as follows:
§ 208.63 Procedures for monitoring Bank Secrecy Act compliance.

(b) Establishment of BSA compliance program. (1) Program requirement. Each
bank shall develop and provide for the continued administration of a program reasonably
designed to ensure and monitor compliance with the recordkeeping and reporting

requirements set forth in subchapter II of chapter 53 of title 31, United States Code, the
Bank Secrecy Act, and the implementing regulations promulgated thereunder by the
Department of the Treasury at 31 CFR part 103. The compliance program shall be
reduced to writing, approved by the board of directors, and noted in the minutes.

(2) Customer identification program. Each bank is subject to the requirements of
31 U.S.C. 5318(1) and the implementing regulation jointly promulgated by the Board and
the Department of the Treasury at 31 CFR 103.121, which require a customer
identification program to be implemented as part of the BSA compliance program
required under this section.

PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for part 211 is revised to read as follows:
Authority: 12 U.S.C. 221 et seq,, 1818, 1835a, 1841 et seq,, 3101 et secu, and
3901 et secu; 15 U.S.C. 6801 and 6805; 31 U.S.C. 5318.
2. In § 211.5, add new paragraph (m) to read as follows:
§ 211.5 Edge and agreement corporations.

(m) Procedures for monitoring Bank Secrecy Act compliance.
(1) [Reserved]
(2) Customer identification program Each Edge or agreement corporation is
subject to the requirements of 31 U.S.C. 5318(1) and the implementing regulation jointly
promulgated by the Board and the Department of the Treasury at 31 CFR 103.121, which
require a customer identification program.
3. In § 211.24, add new paragraph (j) to read as follows:

§ 211.24 Approval of offices of foreign banks; procedures for applications;
standards for approval; representative office activities and standards for approval;
preservation of existing authority.

(j) Procedures for monitoring Bank Secrecy Act compliance.
(1) [Reserved]
(2) Customer identification program. Except for a federal branch or a federal
agency or a state branch that is insured by the FDIC, a branch, agency, or representative
office of a foreign bank operating in the United States is subject to the requirements of 31
U.S.C. 5318(1) and the implementing regulation jointly promulgated by the Board and the
Department of the Treasury at 31 CFR 103.121, which require a customer identification
program.

By order of the Board of Governors of the Federal Reserve System, April ,
2003.

Jennifer J. Johnson,
Secretary of the Board.

Federal Deposit Insurance Corporation
12 CFR Chapter III
For the reasons set out in the preamble, the FDIC amends title 12, chapter III of the Code
of Federal Regulations, as set forth below:

PART 326 - Minimum Security Devices and Procedures and Bank Secrecy Act
Compliance
1. The authority citation for part 326 is revised to read as follows:
Authority: 12 U.S.C. 1813, 1815, 1817, 1818, 1819 (Tenth), 1881-1883; 31 U.S.C. 53115314 and 5316-5332.2.
2. Revise § 326.8(b) to read as follows:
§ 326.8 Bank Secrecy Act compliance.

(b) Compliance procedures. (1) Program requirement. Each bank shall develop
and provide for the continued administration of a program reasonably designed to assure
and monitor compliance with recordkeeping and reporting requirements set forth in
subchapter II of chapter 53 of title 31, United States Code and the implementing
regulations issued by the Department of the Treasury at 31 CFR part 103. The
compliance program shall be written, approved by the bank's board of directors, and
noted in the minutes.

(2) Customer identification program Each bank is subject to the requirements of 31
U.S.C. 5318(1) and the implementing regulation jointly promulgated by the FDIC and the
Department of the Treasury at 31 CFR 103.121, which require a customer identification
program to be implemented as part of the Bank Secrecy Act compliance program
required under this section.

100

B y order of the Board of Directors of the Federal Deposit Insurance Corporation
this _ day of April 2003.

Valerie J. Best,
Assistant Executive Secretary.

101

Office of Thrift Supervision
12 CFR Chapter V
For the reasons set out in the preamble, OTS amends title 12, chapter V of the Code of
Federal Regulations, as set forth below:

PART 563 - SAVINGS ASSOCIATIONS - OPERATIONS
1. The authority citation for part 563 is revised to read as follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 1817,
1820, 1828, 1831o, 3806; 31 U.S.C. 5318; 42 U.S.C. 4106.
2. In §563.177:
A. Revise the section heading; and
B. Revise paragraph (b) to read as follows:

§ 563.177 Procedures for monitoring Bank Secrecy Act (BSA) compliance.

(b) Establishment of a BSA compliance program (1) Program requirement.
Each savings association shall develop and provide for the continued administration of a
program reasonably designed to assure and monitor compliance with the recordkeeping
and reporting requirements set forth in subchapter II of chapter 53 of title 31, United
States Code and the implementing regulations issued by the Department of the Treasury
at 31 CFR part 103. The compliance program must be written, approved by the savings
association's board of directors, and reflected in the minutes of the savings association.

102

(2) Customer identification program. Each savings association is subject to the
requirements of 31 U.S.C. 5318(1) and the implementing regulation jointly promulgated
by the OTS and the Department of the Treasury at 31 CFR 103.121, which require a
customer identification program to be implemented as part of the BSA compliance
program required under this section.

Dated:

James E. Gilleran,
Director, Office of Thrift Supervision.

103

National Credit Union Administration
12 CFR Chapter VII
For the reasons set out in the preamble, NCUA amends title 12, chapter VII of the Code
of Federal Regulations, as set forth below:

PART 748 - SECURITY PROGRAM, REPORT OF CRIME AND
CATASTROPHIC ACT AND BANK SECRECY ACT COMPLIANCE

1. The authority citation for part 748 is revised to read as follows:
Authority: 12 U.S.C. 1766(a), 1786(q); 15 U.S.C. 6801 and 6805(b); 31 U.S.C. 5311 and
5318.

2. In § 748.2:

A. Revise the section heading; and
B. Revise paragraph (b) to read as follows:

§ 748.2 Procedures for monitoring Bank Secrecy Act (BSA) compliance.
* * * *

104

(b) Establishment of a B S A compliance program (1) Program requirement.
Each federally-insured credit union shall develop and provide for the continued
administration of a program reasonably designed to assure and monitor compliance with
the recordkeeping and recording requirements set forth in subchapter II of chapter 53 of
title 31, United States Code and the implementing regulations issued by the Department
of the Treasury at 31 CFR Part 103. The compliance program must be written, approved
by the credit union's board of directors, and reflected in the minutes of the credit union.

105

(2) Customer identification program. Each federally- insured credit union is
subject to the requirements of 31 U.S.C. 5318(1) and the implementing regulation jointly
promulgated by the NCUA and the Department of the Treasury at 31 CFR 103.121,
which require a customer identification program to be implemented as part of the BSA
compliance program required under this section.

* * * *

Dated: April ,2003.

Becky Baker,
Secretary of the Board, National Credit Union Administration.

106

[Billing Code: 4810-02P; 8010-01]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-26031; File No. S7-26-02]
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA33
Customer Identification Programs for Mutual Funds
AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities and
Exchange Commission.
ACTION: Joint final rule.
SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), and the Securities and Exchange Commission are
jointly adopting a final rule to implement section 326 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA PATRIOT ACT) Act of 2001 (the Act). Section 326 requires the Secretary of the
Treasury (the Secretary or Treasury) to jointly prescribe with the Securities and Exchange
Commission (the Commission or SEC) a regulation that, at a minimum, requires
investment companies to implement procedures to verify the identity of any person
seeking to open an account, to the extent reasonable and practicable; to maintain records
of the information used to verify the person's identity; and to determine whether the
person appears on any lists of known or suspected terrorists or terrorist organizations

provided to investment companies by any government agency. This final regulatio
applies to investment companies that are mutual funds.
D A T E S : Effective Date: This rule is effective [INSERT D A T E 30 D A Y S A F T E R
D A T E O F PUBLICATION IN T H E F E D E R A L REGISTER].
Compliance Date: Each mutual fund must comply with this final rule by October 1,
2003. Section I.D. of the S U P P L E M E N T A R Y I N F O R M A T I O N contains additional
information concerning the compliance date for thefinalrule.

FOR FURTHER INFORMATION CONTACT:
Securities and Exchange Commission: Division of Investment Management,
Office of Regulatory Policy at (202) 942-0690.
Treasury: Office of the Chief Counsel (FinCEN) at (703) 905-3590; Office of the
General Counsel (Treasury) at (202) 622-1927; or the Office of the Assistant General
Counsel for Banking & Finance (Treasury) at (202) 622-0480.
S U P P L E M E N T A R Y I N F O R M A T I O N : Treasury and the Commission are jointly
adopting (1) a new final rule, 31 CFR 103.131, proposed in July 2002,l to implement
section 326 of the U S A PATRIOT Act2 and (2) a new rule 0-11 [17 C F R 270.0-11] under
the Investment Company Act of 19403 (the "1940 Act") that cross-references this new
final rule.

BACKGROUND
A.

Section 326 of the USA PATRIOT Act

Customer Identification Programs for Mutual Funds, 67 FR 48318 (July 23, 2002)
(proposed rule).
Pub. L. 107-56.
15 U.S.C. 80a-l.

O n October 26, 2001, President Bush signed into law the U S A P A T R I O T Act.
Title III of the Act, captioned "International Money Laundering Abatement and Antiterrorist Financing Act of 2001," adds several new provisions to the Bank Secrecy Act
(BSA).4 These provisions are intended to facilitate the prevention, detection, and
prosecution of international money laundering and the financing of terrorism. Section
326 of the Act adds a new subsection (1) to 31 U.S.C. 5318 of the BSA that requires the
Secretary to prescribe regulations "setting forth the minimum standards for financial
institutions and their customers regarding the identity of the customer that shall apply in
connection with the opening of an account at a financial institution."
Section 326 applies to all "financial institutions." This term is defined broadly in
the BSA to encompass a variety of entities, including commercial banks, agencies and
branches of foreign banks in the United States, thrifts, credit unions, private banks, trust
companies, investment companies, brokers and dealers in securities, futures commission
merchants, insurance companies, travel agents, pawnbrokers, dealers in precious metals,
check-cashers, casinos, and telegraph companies, among many others.5 Although
"investment companies" are "financial institutions" for purposes of the BSA,6 the BSA
does not define "investment company."7 The 1940 Act defines the term broadly and

31 U.S.C. 5311 etseq.

See 31 U.S.C. 5312(a)(2) and (c)(1)(A). For any financial institution engaged in
financial activities described in section 4(k) of the Bank Holding Company Act of 1956,
the Secretary is required to prescribe the regulations issued under section 326 jointly with
the Office of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration (collectively, the banking
agencies), the SEC, and the Commodity Futures Trading Commission (CFTC).

See 31 U.S.C. 5312(a)(2)(I).

Treasury has not yet adopted rules defining "investment company" for purposes of the
B S A . B y interim rule published on April 29, 2002, Treasury required that certain "open-

subjects investment companies to comprehensive regulation by the SEC.8 This final rule
applies only to those investment companies that are "open-end companies" required to
register with the SEC under section 8 of the 1940 Act.9 These entities are commonly
referred to as "mutual funds."
The regulations implementing section 326 must require, at a minimum, financial
institutions, including investment companies, to implement reasonable procedures for
(1) verifying the identity of any person seeking to open an account, to the extent
reasonable and practicable; (2) maintaining records of the information used to verify the

end companies," as that term is defined in the 1940 Act (mutual funds) adopt anti-money
laundering programs pursuant to section 352 of the Act. 67 F R 21117 (Apr. 29, 2002).
Treasury temporarily exempted investment companies other than mutual funds from the
requirement that they establish anti-money laundering programs and temporarily deferred
determining the definition of "investment company" for purposes of the B S A . Id O n
September 26, 2002, Treasury issued a rule proposal that, if adopted, would require
certain "unregistered investment companies" to adopt and implement anti-money
laundering programs. 67 F R 60617 (Sept. 26, 2002). Treasury has also submitted,
jointly with the S E C and the Board of Governors of the Federal Reserve System, a report
to Congress recommending that customer identification requirements be applied to
unregistered investment companies. See A Report to Congress in Accordance with §
356(c) of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 ( U S A P A T R I O T Act)
(December 31, 2002) at 38 (available at
www.treasury.gov/press/releases/reports/356report.pdf). W e anticipate that this
recommendation will be addressed by separate rulemaking.
Section 3(a)(1) of the 1940 Act defines "investment company" as any issuer that (A) is or
holds itself out as being engaged primarily, or proposes to engage primarily, in the
business of investing, reinvesting, or trading in securities; (B) is engaged or proposes to
engage in the business of issuing face-amount certificates of the installment type, or has
been engaged in such business and has any such certificate outstanding; or (C) is engaged
or proposes to engage in the business of investing, reinvesting, owning, holding, or
trading in securities, and owns or proposes to acquire investment securities having a
value exceeding 40 per centum of the value of such issuer's total assets (exclusive of
Government securities and cash items) on an unconsolidated basis.
See §103.131(a)(8). Section 5(a)(1) of the 1940 Act defines "open-end company." Other
types of investment companies regulated by the S E C include closed-end companies and
unit investment trusts. The Secretary and the S E C will continue to consider whether a
CIP requirement would be appropriate for the issuers of these products, or whether they
are effectively covered by the CIP requirements of other financial institutions involved in
their distribution (e.g., broker-dealers).

5
person's identity, including n a m e , address, and other identifying information; and (3)
determining whether the person appears on any lists of known or suspected terrorists or
terrorist organizations provided to the financial institution by any government agency. In
prescribing these regulations, the Secretary is directed to take into consideration the types
of accounts maintained by different types of financial institutions, the various methods of
opening accounts, and the types of identifying information that are available.
Final rules governing the applicability of section 326 to other financial
institutions, including broker-dealers, banks, thrifts, credit unions, and futures
commission merchants, are being issued separately.10 Treasury, the SEC, the CFTC and
the banking agencies consulted extensively in the development of all rules implementing
section 326 of the Act. These participating agencies intend the effect of the final rules to
be uniform throughout the financial services industry.
B. Overview of Comments Received
On July 23, 2002, Treasury and the SEC jointly proposed a rule to implement
section 326 with respect to mutual funds.'' Treasury and the SEC proposed general

Treasury intends to issue separate rules under section 326 for non-bank financial
institutions that are not regulated by the federal functional regulators.
Proposed rule, supra note 1. Treasury simultaneously published (1) jointly with the
banking agencies, a proposed rule applicable to banks (as defined in 31 C F R 103.11(c))
and foreign branches of insured banks; (2) a proposed rule applicable to credit unions,
private banks and trust companies that do not have a federal functional regulator; (3)
jointly with the S E C , a proposed rule applicable to broker-dealers; and (4) jointly with
the C F T C , a proposed rule applicable to futures commission merchants and introducing
brokers. Customer Identification Programs for Banks, Savings Associations, and Credit
Unions, 67 F R 48290 (July 23, 2002); Customer Identification Programs for Certain
Banks (Credit Unions, Private Banks and Trust Companies) That D o Not Have a Federal
Functional Regulator, 67 F R 48299 (July 23, 2002); Customer Identification Programs
for Broker-Dealers, 67 F R 48306 (July 23, 2002); Customer Identification Programs for
Futures Commission Merchants and Introducing Brokers, 67 F R 48328 (July 23, 2002).
Treasury, the Commission, the C F T C , and the banking agencies received approximately
five hundred comments in response to these proposed rules. M a n y of those commenters

standards that would require each mutual fund to design and implement a customer
identification program (CIP) tailored to the mutual fund's size, location, and type of
business. The proposed rule also included certain specific standards that would be
mandated for all mutual funds.
Treasury and the SEC received eight comments in response to the proposal.12
Commenters included investment companies, a financial services holding company, a
registered investment adviser, a transfer agent, trade associations, and a company
engaged in the sale of technologies and services used to locate persons and authenticate
identities. Commenters generally supported the proposal but suggested revisions.
Two commenters agreed with the largely risk-based approach set forth in the
proposal, which allows each mutual fund to develop a CIP based on its specific
operations, taking into consideration variables such as size and type of business. Five
commenters suggested that the final rule make greater use of a risk-based approach, in
lieu of specific identification and verification requirements. They suggested that such a
comprehensively risk-based approach would give mutual funds appropriate discretion to
focus efforts and resources on the high-risk accounts that are most likely to be used by
money launderers and terrorists. All of the commenters recommended that the final rule
include more specific requirements addressing the risks presented by particular
situations.13 Seven of the eight commenters suggested that we had underestimated the
burdens that would be imposed by certain elements of the proposal. Three commenters

raised issues similar to those we received in connection with the proposal respecting
mutual fund customer identification programs.
12

The comment letters are available for public inspection and copying in the SEC's Public
Reference Room, 450 5th Street, N W , Washington, D C (File No. S7-26-02).

7
suggested that mutual funds be given greater flexibility when dealing with established
customers and be permitted to rely on identification and verification of customers
performed by third parties, including other funds in the same fund complex.
All of the commenters asked for additional guidance concerning one or more
elements of the proposed rule. Six commenters requested guidance regarding the
requirement to check

For example, two commenters suggested that the rule exclude accounts opened by
participants in qualified retirement plans or other qualified benefit plan customers.

government lists of known and suspected terrorists and terrorist organizations. Four
commenters requested guidance concerning the proposal to require notice to customers
that the mutual fund is requesting information to verify the customer's identity. Seven
commenters requested that the final rule contain a delayed implementation date in order
to provide mutual funds with sufficient time to design CIPs, obtain board approval, alter
existing policies and procedures, forms, and software, and train staff.
We have modified the proposed rule in light of these comments. The section-bysection analysis that follows discusses the comments and the modifications that we have
made to the rule.
C. Codification of the Joint Final Rule
The final rule is being issued jointly by Treasury, through FinCEN, and by the
SEC. The substantive requirements of this joint final rule are being codified as part of
Treasury's BSA regulations located in 31 CFR Part 103. In addition, to provide a
reference to the joint final rule in the SEC regulations for investment companies, the SEC
is concurrently publishing a provision in its own regulations in 17 CFR Part 270 that
cross-references this final rule.14
D. Compliance Date
Six commenters requested that mutual funds be given adequate time to develop
and implement the requirements of any final rule implementing section 326. The
transition periods suggested by commenters ranged from 90 days to 12 months after the
publication of a final rule.

17 C F R 270.0-11.

T h e final rule modifies various aspects of the proposed rule and eliminates s o m e
of the requirements that commenters identified as being most burdensome. Nonetheless,
we recognize that some mutual funds will need time to develop a CIP, obtain board
approval, and implement the CIP, which will include various measures, such as training
staff, reprinting forms, and developing new software. Accordingly, although this rule
will be effective 30 days after publication, mutual funds will have a transition period to
implement the rule. Treasury and the Commission have determined that each mutual
fund must fully implement its CIP by October 1, 2003.
II. Section-by-Section Analysis
Section. 131 (a) Definitions.
Section 103.131(a)(1) Account. We proposed to define "account" as any
contractual or other business relationship between a customer and a mutual fund
established to effect financial transactions in securities, including the purchase or sale of
securities.15 The final rule limits the definition of "account" to relationships between a
person and a mutual fund that are established to effect transactions in securities issued by
the mutual fund in order to clarify that the purchase or sale of a mutual fund's underlying
portfolio securities does not establish an "account" for purposes of this rule.16

See proposed § 103.131(a)(1).
See § 103.131 (a)( 1 )(i). Three commenters suggested that the definition of "account" be
limited to formal ongoing relationships, as in the CIP rules proposed by Treasury and the
banking agencies. These commenters suggested that, as proposed, the definition could be
read to include isolated transactions where an account relationship with the mutual fund
is not established. Treasury and the banking agencies proposed to limit the definition of
"account" to "ongoing transactions" to specifically address situations where a person
obtains certain services or products from a bank such as cashing or buying a check or
purchasing a wire transfer or money order. Thefinalrules being issued by the Treasury
and the banking agencies do not include the term "ongoing" in their definitions of
"account." Instead, their definitions of "account" n o w specifically exclude these types of
products or services and any others where a "formal banking relationship" is not

The proposed rule stated that transfers of accounts from one mutual fund to
another are outside the definition of "account" for purposes of the proposed rule.17 The
final rule codifies and clarifies this "transfer exception," by excluding from the definition
of "account" any account that a mutual fund acquires through an acquisition, merger,
purchase of assets, or assumption of liabilities from any third party. Because these
transfers are not initiated by customers, the accounts do not fall within the scope of
section 326.18
Finally, the rule excludes from the definition of "account" accounts opened for
the purpose of participating in an employee benefit plan established pursuant to the
Employee Retirement Income Security Act of 1974.19 Two commenters recommended
that these accounts be excluded from the rule. We believe that these accounts are less
susceptible to use for the financing of terrorism and money laundering, because, among
other reasons, they are funded through payroll deductions in connection with employment
plans that must comply with federal regulations that impose various requirements
regarding the funding and withdrawal of funds from such accounts, including low

established with a person. Mutual funds do not offer these types of products or services
to persons w h o are not fund shareholders. Thus, w e did not include the term "ongoing"
in the definition of account or adopt the specific exclusions included in the bank rules.
See proposed rule, supra note 1, Section LA.
Section 326 of the Act provides that the regulations thereunder shall require financial
institutions to implement reasonable procedures for "verifying the identity of any person
seeking to open an account." (emphasis added) If a financial institution acquires a preexisting account, the customer is not opening an account with the financial institution.
Nevertheless, there m a y be situations involving the transfer of accounts where it would
be appropriate for a mutual fund to verify the identity of customers associated with the
accounts that it acquires from another financial institution. W e expect financial
institutions to implement reasonable procedures to detect money laundering in any
accounts, however acquired. A mutual fund may, as part of its A M L compliance
program, need to take additional steps to verify the identity of customers, based on its
assessment of the relevant risks.
19

§ 103.131(a)(l)(ii)(B).

contribution limits and strict distribution requirements. Therefore, we have decided to
exclude them from the definition of "account" in the final rule.

Section 103.131(a)(2) Customer. W e proposed to define "customer" to m e a n any
mutual fund shareholder of record who opens a new account with a mutual fund, and any
person authorized to effect transactions in the shareholder of record's account.20 The
proposed rule described various relationships that would be included in, or excluded
from, the definition of "customer.,m Seven commenters expressed concern about the
proposed definition. Three commenters recommended that the final rule provide that
persons who do not actually establish an account or receive services from a mutual fund
are not "customers." One commenter recommended that the rule define "customer" as a
person who opens a new account, and explicitly exclude existing customers. Two
commenters suggested that a person who exchanges fund shares within a fund family be
excluded, whether or not the exchange occurred in a single account.
We have revised the definition of "customer" to address these and other issues.
The final rule defines "customer" as "a person that opens a new account."22 For example,
in the case of a trust account, the "customer" would be the trust. For purposes of this
rule, a mutual fund is not required to look through a trust, or similar account to verify the
identities of beneficiaries, and instead is required only to verify the identity of the named
accountholder.23 Similarly, with respect to an omnibus account established by an

Proposed § 103.131(a)(3).
See proposed rule, supra note 1, Section II.A.
§ 103.131 (a)(2)(i). Each person named on a joint account is a "customer" under this final
rule unless otherwise provided.
However, based on its risk assessment of a new account opened by a customer that is not
an individual, a mutual fund may need to take additional steps to verify the identity of the
customer by seeking information about individuals with ownership or control over the
account in order to identify the customer, as described in § 103.121 (b)(2)(ii)(C). See
notes 82-84 infra and accompanying text, discussing procedures for additional
verification for certain customers. A mutual fund may, as a part of its A M L compliance

intermediary, a mutual fund generally is not required to look through the intermediary to
the underlying beneficial owners.24
The final rule clarifies the treatment of a minor child or an informal group with a
common interest (e.g., a civic club), where there is no legal entity. In those
circumstances, "customer" includes "an individual who opens a new account for (1) an
individual who lacks legal capacity, such as a minor; or (2) an entity that is not a legal
person, such as a civic club."25
In order to make the rule less burdensome, the final rule excludes from the
definition of "customer" certain readily identifiable entities, including: (1) financial
institutions regulated by a federal functional regulator; (2) banks regulated by a state
bank regulator; and (3) governmental agencies and instrumentalities and companies that
are publicly traded (Le^ the entities described in § 103.22(d)(2)(ii)-(iv)).26 Finally, the
definition of "customer" excludes a person that has an existing account with a mutual
fund, provided that the mutual fund has a reasonable belief that it knows the true identity
of the person.27

program, need to take additional steps to verify the identity of customers, based on its
assessment of the relevant risks.
See also note 47 infra and accompanying text, discussing omnibus accounts.
§ 103.131(a)(2)(i)(B).
§ 103.131(a)(2)(ii)(A)-(B). Section 103.22(d)(2)(h)-(iv) exempts such companies only to
the extent of their domestic operations. Accordingly, a mutual fund's CIP will apply to
any foreign offices, affiliates, or subsidiaries of such entities that open n e w accounts.
§ 103.131 (a)(2)(ii)(C). Although a customer of one mutual fund would not necessarily
be considered an existing customer of other funds in the same fund complex, one fund
m a y rely on another fund's performance of any elements of its CIP. See_ discussion at
notes 115-122 and accompanying text, infra describing circumstances in which a fund
m a y rely on the performance of all or part of its CIP by another financial institution,
including another fund in the fund complex.

Five commenters objected to the proposal to define "customer" to include all
persons with authority to effect transactions in the account of a shareholder of record.28
While acknowledging that there are circumstances in which it would be appropriate to
verify the identity of all such persons (e.g., accountholders that are small or closely held
corporations), they asserted that the proposal in this respect was overbroad and unduly
burdensome, and would not further the goals of the statute. In light of these comments,
we have revisited the issue and have determined that requiring a mutual fund to verify the
identity of all such parties could interfere with the mutual fund's ability to focus on
identifying customers that present a significant risk of not being properly identified.
Accordingly, the final rule does not define "customer" to include persons authorized to
effect transactions in the account of a shareholder of record. Rather, a mutual fund's CIP
must address situations in which the mutual fund will take additional steps to verify the
identity of a customer that is not an individual (such as a corporation or partnership) by
seeking information about individuals with authority or control over the account,
including persons with authority to effect transactions in the account.29
Section 103.131 (a)(3) Federal functional regulator. The proposed rule did not
define "federal functional regulator." The final rule uses the term in several provisions,
including the provisions concerning government lists and reliance on other financial
institutions. The final rule defines the term by reference to § 103.120(a)(2), meaning
each of the banking agencies, the SEC, and the CFTC.
Section 103.131 (a)(4) Financial institution. The proposed rule did not define
"financial institution." The final rule uses the term in several provisions, including the

Proposed § 103.131(a)(3)(h).

definition of "customer" and the provisions on verification through non-documentary
methods, notice, and reliance on other financial institutions. Therefore, thefinalrule
defines the term by cross-reference to the B S A . 3 0
Section 103.131(a)(5) Mutual fund. W e proposed to define "mutual fund" as an
"investment company" that is an "open-end company" (as those terms are defined in the
1940 Act). 31 W e have revised the definition to limit it to entities that are registered or are
required to register with the S E C under section 8 of the 1940 Act. 32 This change clarifies
that the rule does not apply to foreign mutual funds that meet the statutory definition but
are not subject to the registration requirements of the 1940 Act.
Section 103.131(a)(6) Non-U.S. person. W e proposed to define "non-U.S.
person" as a person that is not a U.S. person.33 There were no comments on this
definition and w e are adopting it as proposed.
Section 103.131 (a)(7) Taxpayer identification number. W e proposed to define
"taxpayer identification number" by reference to section 6109 of the Internal Revenue
Code and the regulations of the Internal Revenue Service.34 There were no comments on
this approach and w e are adopting it substantially as proposed, with minor technical
modifications.

§ 103.131 (b)(2)(ii)(C). See discussion at notes 82-84 and accompanying text, infra.

§ 103.131(a)(4), referring to 31 U.S.C. §§ 5312(a)(2) and (c)(1). This definition is more
expansive than the definition of "financial institution" in 31 C F R 103.11, and includes
entities such as futures commission merchants and introducing brokers.

Proposed § 103.131(a)(4).

§ 103.131(a)(5).

Proposed § 103.131(a)(8).

Proposed § 103.131(a)(6).

Section 103.131(a)(8) U.S. person We proposed to define "U.S. person" as a
U.S. citizen, or a corporation, partnership, trust, or person (other than a natural person)
established or organized under the laws of a State or the United States.35 There were no
comments on this definition and w e are adopting it substantially as proposed, with
technical changes that conform the definition to that used in the final CIP rules for other
financial institutions.
Section 103.131 (b) Customer Identification Program: Minimum Requirements.
Section 103.131(b)(1) General Rule. W e proposed to require that each mutual
fund establish, document, and maintain a written CIP as part of its required anti-money
laundering ( A M L ) program, and that the procedures of the CIP enable the fund to form a
reasonable belief that it knows the true identity of a customer.36 The mutual fund's CIP
procedures were to be based on the type of identifying information available and on an
assessment of relevantriskfactors, including (1) the mutual fund's size; (2) the manner in
which accounts are opened, fund shares are distributed, and purchases, sales and
exchanges are effected; (3) the mutual fund's types of accounts; and (4) the mutual fund's
customer base.37 The proposed rule discussed these risk factors and explained that,
although the rule requires certain m i n i m u m identifying information and suitable
verification methods, mutual funds should consider on an ongoing basis whether other
information or methods are appropriate, particularly as they become available in the
future.38 Commenters generally supported the approach of the proposed general CIP

35
36

Proposed § 103.131(a)(7).
Proposed § 103.131(b). 31 C F R 103.130 requires mutual funds to develop and
implement A M L programs.
Id

Proposed rule, supra note 1, Section II.B.

requirements and we are adopting them substantially as proposed, although the final rule
reorganizes the provisions of the CIP requirements section.39
The proposed rule would have required a mutual fund's CEP to be approved by the
fund's board of directors or trustees.40 Four commenters requested clarification that the
provision would not require ongoing review or monitoring by the board. One commenter
observed that fund AML programs must already be approved by the board, and suggested
that it would be redundant to require that the CIP, which is part of the fund's AML
program, be separately approved.41 In order to eliminate any duplicative requirements we
are eliminating the board approval requirement from the final rule. We note, however,
that a fund with an AML program that the board has approved as required, must
nonetheless obtain board approval of a new CIP. The addition of the CIP is a material
change that must be approved by the board.
Section 103.131(b)(2) Identity verification procedures. We proposed to require
that a mutual fund's CIP include procedures for verifying the identity of customers, to the
extent reasonable and practicable, using information specified in the rule, and that such
verification occur within a reasonable time before or after the customer's account is
opened or the customer is granted authority to effect transactions with respect to an

In the final rule, § 103.131(b)(1) specifies the general requirement that a mutual fund
adopt a written CIP appropriate for its size and type of business, and that the CIP must be
a part of the mutual fund's A M L program under 31 C F R 103.130. The discussion of the
factors to be considered in implementing a CIP n o w is in § 103.131(b)(2).
Proposed § 103.13 l(i).
See 31 CFR 103.130(b) (requiring that each mutual fund's AML program be approved in
writing by its board of directors or trustees).

18
account.42 Commenters supported these general requirements, although five commenters
recommended greater use of a risk-based approach.
The final rule continues to strike a balance between flexibility and detailed
guidance, and we are adopting the provisions on identity verification procedures
substantially as proposed. Under the final rule, a mutual fund's CIP must include riskbased procedures for verifying the identity of each customer to the extent reasonable and
practicable.43 Such procedures must enable the mutual fund to form a reasonable belief
that it knows the true identity of each customer.44 The procedures must be based on the
mutual fund's assessment of the relevant risks, including those presented by the manner
in which accounts are opened, fund shares are distributed, and purchases, sales and
exchanges are effected, the various types of accounts maintained by the mutual fund, the
various types of identifying information available, and the mutual fund's customer base.45
As noted in the proposed rule, a mutual fund's CIP need not include procedures for
verifying identities of persons whose transactions are conducted through an omnibus
account.46 The holder of the omnibus account (e.g., a broker-dealer) is considered to be
the customer for purposes of this rule.47

Proposed § 103.131(d).

§ 103.131(b)(2). Other elements of the fund's CIP, such as procedures for recordkeeping
or checking of government lists, are requirements that m a y not vary depending on risk
factors.

IdId.
46

Proposed rule, supra note 1, Section II.B.

See note 24 supra and accompanying text This treatment of omnibus accounts is
consistent with the legislative history of the Act, which includes the following: "[W]here
a mutual fund sells its shares to the public through a broker-dealer and maintains a 'street
name' or omnibus account in the broker-dealer's name, the individual purchasers of the
fund shares are customers of the broker-dealer, rather than the mutual fund. The mutual
fund would not be required to 'look through' the broker-dealer to identify and verify the

Section 103.131 (b)(2)(i) Customer information required.
The proposed rule would have required a mutual fund's CIP to require the fund to
obtain certain identifying information about each customer, including, at a minimum: (1)
names; (2) dates of birth, for natural persons; (3) certain addresses;48 and (4) certain
identification numbers.49 The proposed rule further stated that in certain circumstances a
mutual fund should obtain additional identifying information, and that the CIP should set
forth guidelines regarding those circumstances and the additional information that should
be obtained.50
Commenters expressed some concerns about this aspect of the proposal. Two
commenters objected to the proposed requirement to obtain more than one address from a
customer. Two commenters pointed out that a non-U. S. person may not have any of the
specified identification numbers. One commenter recommended that the rule permit a
mutual fund to obtain the foreign equivalent of a taxpayer identification number from
non-U. S. persons, or a number and country of issuance of any government-issued
document evidencing nationality or residence, without the requirement of a photograph or
similar safeguard, from non-U.S. entities. Two commenters argued that the final rule

identities of those customers. Similarly, where a mutual fund sells its shares to a
qualified retirement plan, the plan, and not its participants, would be the fund's
customers. Thus the fund would not be required to 'look through' the plan to identify its
participants." H.R. Rep. 107-250, pt. 1, at 62 (2001).
48

Proposed § 103.13 l(c)(l)(iii). We proposed to require funds to obtain residence and
mailing addresses (if different) for a natural person, or principal place of business and
mailing address (if different) for a person other than a natural person.
Proposed § 103.131 (c)( 1 )(iv). W e proposed to require funds to obtain: (1) for a
customer that is a U.S. person, a taxpayer identification number, or (2) for a customer
that is not a U.S. person, a taxpayer identification number, passport number and country
of issuance, alien identification card number, or number and country of issuance of any
other government-issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.

should provide financial institutions with flexibility to determine what information to
obtain, using arisk-basedapproach.
We are adopting the customer information provisions substantially as proposed,
with changes to accommodate individuals w h o m a y not have physical addresses. Prior to
opening an account, a mutual fund must obtain, at a m i n i m u m , a customer's (1) name; (2)
date of birth, for an individual; (3) address; and (4) identification number. 51 The address
must be (1) for an individual, a residential or business street address, or for an individual
w h o does not have a residential or business street address, an A r m y Post Office or Fleet
Post Office box number, or the residential or business street address of next of kin or
another contact individual; or (2) for a person other than an individual, a principal place
of business, local office or other physical location.52
W e are adopting the identification number requirement substantially as proposed.
For a customer that is a U.S. person, the identification number is a taxpayer identification
number (social security number, individual taxpayer identification number, or employer
identification number). For a customer that is not a U.S. person, the identification
number is one or more of the following: a taxpayer identification number, passport
number and country of issuance, alien identification card number, or number and country
of issuance of any other government-issued document evidencing nationality or residence
and bearing a photograph or similar safeguard.53 This provision provides a mutual fund
with some flexibility to choose a m o n g a variety of identification numbers that it m a y

Proposed rule, supra note 1, Section II.C.
§ 103.131(b)(2)(i)(A).
§ 103.131(b)(2)(i)(A)(3).
§ 103.131(b)(2)(i)(A)(4).

accept from a non-U.S. person.54 However, the identifying information the mutual fund
accepts must permit the fund to establish a reasonable belief that it knows the identity of
the customer.55
The proposed rule included an exception from the requirement to obtain a
taxpayer identification number from a customer opening a new account. The exception
would have allowed a mutual fund to open an account for a person that has applied for,
but has not yet received, an employer identification number (EIN).56 We are adopting an
expanded version of this exception in the final rule. As proposed, the exception was
limited to persons that are not natural persons.57 On further consideration, we have
determined that it is appropriate to expand the exception to include natural persons who
have applied for, but have not received, a taxpayer identification number.58 We have also

The rule provides this flexibility because there is no uniform identification number that
non-U.S. persons would be able to provide to a mutual fund. See Treasury Department,
" A Report to Congress in Accordance with Section 326(b) of the U S A P A T R I O T Act,"
October 21, 2002.
W e emphasize that the rule neither endorses nor prohibits a mutual fund from accepting
information from particular types of identification documents issued by foreign
governments. The mutual fund must determine, based upon appropriate risk factors,
including those discussed above, whether the information presented by a customer is
reliable. W e recognize that a foreign business or enterprise m a y not have a taxpayer
identification number or any other number from a government-issued document
evidencing nationality or residence and bearing a photograph or similar safeguard.
Therefore thefinalrule notes that when opening an account for such a customer, the
mutual fund must request alternative government-issued documentation certifying the
existence of the business or enterprise.
Proposed § 103.131(c)(2). This position is analogous to that in regulations issued by the
Internal Revenue Service (IRS) concerning "awaiting - T I N [taxpayer identification
number] certificates." The IRS permits a taxpayer to furnish an "awaiting-TIN
certificate" in lieu of a taxpayer identification number to exempt the taxpayer from the
withholding of taxes owed on reportable payments (Le^ interest and dividends) on certain
accounts. See 26 CFR31.3406(g)-3.
In the proposed rule, w e explained that the exception was for businesses that m a y need to
open a mutual fund account before they receive an EIN from the Internal Revenue
Service. Proposed rule, supra note 1, Section II.C.
58

§ 103.131(b)(2)(i)(B).

modified the exception to reduce the recordkeeping burden for mutual funds. The
proposed rule would have required the mutual fund to retain a copy of the customer's
application for a taxpayer identification number. The final rule permits the fund to
exercise discretion to determine how to confirm that a customer has filed an application.59
Section 103.13l(b)(2)(ii) Customer verification.
We proposed to require that a mutual fund's CIP include procedures for verifying
the identity of customers, to the extent reasonable and practicable, using the information
obtained under the rule.60 We also proposed to require such verification to occur within a
reasonable time before or after the customer's account is opened or the customer is
granted authority to effect transactions with respect to an account.61 The proposed rule
stated that a mutual fund need not verify each piece of identifying information if it is able
to form a reasonable belief that it knows the customer's identity after verifying only
certain of the information.62 The proposed rule also stated that the flexibility to undertake
verification within a reasonable time must be exercised in a reasonable manner, that
verifications too far in advance may become stale and verifications too long after the fact
may provide opportunities to launder money while verification is pending, and that the
appropriate amount of time may depend on the type of account opened, whether the
customer opens the account in person, and the type of identifying information available.63

The mutual fund's CIP must include procedures to confirm that the application was filed
before the person opens the account and obtain the taxpayer identification number within
a reasonable period of time after the account is opened. § 103.131(b)(2)(i)(B).

Proposed § 103.131(d).

IdProposed rule, supra note 1, Section II.D.

The final rule adopts the customer verification requirements substantially as
proposed, with modifications that conform this provision of the final rule to the revised
definition of "customer," described above. The final rule requires that the CIP contain
procedures for verifying the identity of the customer, using the customer information
obtained in accordance with paragraph (b)(2)(i), within a reasonable time after the
account is opened.64 The final rule does not require verification if a person is granted
authority to effect transactions with respect to an account. As stated in the proposed rule,
mutual funds must exercise in a reasonable manner the flexibility to undertake
verification within a reasonable time. The amount of time may depend on various
factors, such as the type of account opened, whether the customer opens the account inperson, and the type of identifying information that is available.65
The final rule also requires that a mutual fund's CIP include procedures that
describe when the fund will use documents, non-documentary methods, or a combination
of both to verify customer identities.66 Depending on the type of customer and the
method of opening an account, it may be more appropriate to use either documentary or
non-documentary methods, and in some cases it may be appropriate to use both methods.
The CIP should set forth guidelines describing when documents, non-documentary

§ 103.131(b)(2)(h).
It is possible, however, that a mutual fund would violate other laws by permitting a
customer to transact business prior to verifying the customer's identity. See, e.g., 31
C F R part 500 (regulations of Treasury's Office of Foreign Asset Control prohibiting
transactions involving designated foreign countries or their nationals).
Id In the proposed rule, this language was in the provisions on verificatio n through
documents and non-documentary methods. Proposed § 103.131(d)(1) and (2).

methods, or a combination of both will be used. These guidelines should be based on the
mutual fund's assessment of the relevant risk factors.67
Section 103.131(b)(2)(ii)(A) Customer verification- through documents.
W e proposed to require that a mutual fund's CIP describe documents that the fund
will use to verify customers' identities. Suitable documents for verification would
include: (1) for natural persons, unexpired government-issued identification evidencing
nationality or residence and bearing a photograph or similar safeguard; and (2) for
persons other than natural persons, documents showing the existence of the entity, such
as registered articles of incorporation, a government- issued business license, partnership
agreement, or trust instrument.68
Three commenters noted problems with the use of documents to verify customers'
identities. T w o commenters stated that it is impossible to obtain objective verification
that documents are authentic, complete or current. O n e commenter pointed out that some
states do not require documentation of certain legal entities, and that, as a result, there
m a y be no documentary evidence of such entities. O n e commenter stated that
documents, even government-issued identification cards, are inadequate as a sole means
of verification, and recommended that the rule require a mutual fund also to obtain
information about customers from unrelated sources. Thefinalrule attempts to strike an
appropriate balance between the benefits of requiring additional documentary verification
and the burdens that m a y arise from such a requirement. Thefinalrule requires a mutual
fund's CIP to contain procedures that set forth the documents that the mutual fund will

§ 103.131(b)(2) describes theseriskfactors.
Proposed § 103.131(d)(1).

use for verification.69 Each mutual fund will conduct its o w n risk-based analysis of the
types of documents that it believes will enable it to verify customer identities, given the
risk factors that are relevant to the mutual fund.70
In light of recent increases in identity theft and the availability of fraudulent
documents, we believe that the value of documentary verification is enhanced by
redundancy. The rule gives examples of types of documents that are considered reliable.
However, we encourage mutual funds to obtain more than one type of documentary
verification to ensure that it has a reasonable belief that it knows the customer's true
identity. Moreover, we encourage mutual funds to use a variety of methods to verify the
identity of a customer, especially when the mutual fund does not have the ability to
examine original documents.
The final rule continues to include, without significant change, an illustrative list
of identification documents.71 A mutual fund may use other documents, provided that
they allow the fund to establish a reasonable belief that it knows the true identity of the
customer. In addition to the risk factors described in paragraph (b)(2), the mutual fund
should take into account the problems of authenticating documents and the inherent

§ 103.131(b)(2)(ii)(A).
Once a mutual fund obtains and verifies the identity of a customer through a document,
such as a driver's license or passport, the fund is not required to take steps to determine
whether the document has been validly issued. A fund generally m a y rely on government
issued identification as verification of a customer's identity; however, if a document
shows obvious indications offraud,the fund must consider that factor in determining
whether it can form a reasonable belief that it knows the customer's true identity.
For an individual, these documents may include unexpired government-issued
identification evidencing nationality or residence and bearing a photograph or similar
safeguard, such as a driver's license or passport. § 103.131(b)(2)(ii)(A)Q). For a person
other than an individual, these documents m a y include documents showing the existence
of the entity, such as certified articles of incorporation, a government-issued business
license, a partnership agreement, or trust instrument. § 103.131 (b)(2)(ii)(A)(2).

limitations of documents as a means of identity verification. These limitations will affect
the types of documents that will be necessary to establish a reasonable belief that the fund
knows the true identity of the customer, and may require the use of non-documentary
methods in addition to documents.
Section 103.131 (b)(2)(ii)(B) Customer verification- through non-documentary
methods.
Recognizing that some accounts are opened by telephone, by mail and over the
Internet, we proposed to require a mutual fund's CIP to describe what non-documentary
methods the fund would use to verify customers' identities and when the fund would use
these methods in addition to, or instead of, relying on documents.72 We explained that the
proposed rule allowed the exclusive use of non-documentary methods because some
accounts are opened by telephone, mail, or over the Internet.73 We also noted that even if
the customer presents identification documents, it may be appropriate to use nondocumentary methods as well.74
The proposed rule provided examples of non-documentary verification methods
that a mutual fund may use, including: contacting a customer; independently verifying
information through credit bureaus, public databases, and other sources; and checking
references with other financial institutions.75 In the proposed rule we observed that
mutual funds may wish to analyze whether there is logical consistency between the

Proposed § 103.131(d)(2).

Proposed rule, supra note 1, Section II.D.2.

74
75

IdProposed § 103.131(d)(2).

identifying information provided, such as the customer's name, street address, ZIP code,
telephone number (if provided), date of birth, and social security number. 76
W e proposed to require mutual funds to use non-documentary methods when:
(1) a customer w h o is a natural person cannot present an unexpired, government-issued
identification document that bears a photograph or similar safeguard; (2) the mutual fund
is presented with unfamiliar documents to verify the identity of a customer; or (3) the
mutual fund does not obtain documents to verify the identity of a customer, does not meet
face-to-face with a customer w h o is a natural person, or is otherwise presented with
circumstances that increase theriskthe mutual fund will be unable to verify the true
identity of a customer through documents.77 In the proposed rule w e explained that w e
recognize that identification documents m a y be obtained illegally and m a y be
fraudulent.78 In light of the recent increase in identity theft, w e encouraged mutual funds
to use non-documentary methods even w h e n the customer has provided identification
documents.79
O n e commenter requested that w e clarify that account applicants w h o are not
physically present at an account opening m a y be treated under the mutual fund's nondocumentary
verification methods. Another commenter suggested that the proposed non-documentary

Proposed rule, supra note 1, Section II.D.2.

Proposed § 103.131(d)(2).

Proposed rule, supra note 1, Section II.D.2.

methods of verification would be ineffective for foreign individuals, and therefore could
preclude foreign individuals who are not physically present in the United States from
investing in mutual funds.
We recognize that there are many scenarios and combinations of risk factors that
mutual funds may encounter, and we have decided to adopt general principles that are
illustrated by examples, in lieu of a lengthy and possibly unwieldy regulation that
attempts to address a wide variety of situations with particularity. Under the final rule,
for a mutual fund relying on non-documentary verification methods, the CIP must
contain procedures that describe non-documentary methods the mutual fund will use.
The final rule includes an illustrative list of methods, similar to the list that was included
in the proposed rule. These methods may include: (1) contacting a customer; (2)
independently verifying the customer's identity through the comparison of information
provided by the customer with information obtained from a consumer reporting agency,
public database, or other source; (3) checking references with other financial institutions;
and (4) obtaining a financial statement.80 As we stated in the proposed rule, we
recommend that mutual funds analyze whether there is logical consistency between the
identifying information provided, such as the customer's name, street address, ZIP code,
telephone number (if provided), date of birth, and social security number.
The final rule also includes a list, similar to that in the proposal, of circumstances
that may require the use of non-documentary procedures. The final rule requires that
non-documentary procedures address circumstances in which: (1) an individual is unable
to present an unexpired government-issued identification document that bears a

§ 103.131(b)(2)(ii)(B)(D.

photograph or similar safeguard; (2) the mutual fund is not familiar with the documents
presented; (3) the account is opened without obtaining documents; (4) the customer opens
the account without appearing in person; and (5) the circumstances increase the risk that
the mutual fund will be unable to verify the true identity of a customer through
documents.81
As we stated in the proposed rule, because identification documents may be
obtained illegally and may be fraudulent, and in light of the recent increase in identity
theft, we encourage mutual funds to use non-documentary methods even when the
customer has provided identification documents.
Section 103.131(b)(2)(ii)(C) Customer verification- additional verification for
certain customers.
As described above, we proposed to require verification of the identity of any
person authorized to effect transactions in a shareholder's account with a mutual fund.
Most commenters objected to this requirement, and it does not appear in the final rule.82
For the reasons discussed below, however, the rule does require that a mutual fund's CIP
address the circumstances in which it will obtain information about such individuals in
order to verify the customer's identity. Treasury and the SEC believe that while mutual
funds may be able to verify the majority of customers adequately through the
documentary or non-documentary verification methods described above, there may be
circumstances when these methods are inadequate. The risk that the mutual fund will not
know the customer's true identity may be heightened for certain types of accounts, such

§103.131 (b)(2)(ii)(B)(2). The final clause acknowledges that there may be
circumstances, beyond those specifically described in this provision, when a mutual fund
should use non-documentary verification procedures.
See supra notes 28 - 29, and accompanying text.

as an account opened in the name of a corporation, partnership, or trust that is created or
conducts substantial business in a jurisdiction that has been designated by the United
States as a primary money laundering concern or has been designated as non-cooperative
by an international body. We believe that a mutual fund must identify customers that
pose a heightened risk of not being properly identified and that a mutual fund's CIP must
prescribe additional measures that may be used to obtain information about the identity of
the individuals associated with the customer, when standard documentary or nondocumentary methods prove to be insufficient.
The final rule, therefore, includes a new provision on verification procedures.83
This provision requires that the CIP address circumstances in which, based on the mutual
fund's risk assessment of a new account opened by a customer that is not an individual,
the mutual fund also will obtain information about individuals with authority or control
over the account, including persons authorized to effect transactions in the shareholder's
account, in order to verify the customer's identity.84 This additional verification method
will apply only when the mutual fund cannot adequately verify the customer's identity
using the documentary and non-documentary verification methods.85
Section 103.131 (b)(2)(iii) Lack of verification.
We proposed to require that a mutual fund's CIP include procedures for
responding to circumstances in which the fund cannot form a reasonable belief that it

§ 103.131(b)(2)(ii)(C).

Id A mutual fund need not undertake any additional verification if it chooses not to open
an account when it cannot verify the customer's true identity using standard documentary
and non-documentary verification methods.

knows the true identity of the customer.86 W e explained in the proposed rule that the CIP
should specify the actions to be taken, which could include closing the account or placing
limitations on additional purchases.87 W e also explained that there should be guidelines
for w h e n an account will not be opened (e.g., w h e n the required information is not
provided), and that the CIP should address the terms under which a customer m a y
conduct transactions while the customer's identity is being verified.88
Thefinalrule adopts this provision substantially as proposed, and adds a
description of recommended features of these procedures, based on the features described
in the proposed rule.89 Thefinalrule states that the procedures should describe: (1) w h e n
the mutual fund should not open an account; (2) the terms under which a customer m a y
use an account while the mutual fund attempts to verify the customer's identity; (3) w h e n
the mutual fund shouldfilea Suspicious Activity Report ( S A R ) in accordance with
applicable law;90 and (4) w h e n the mutual fund should close an account, after attempts to
verify a customer's identity have failed.91
Section 103.131 (b)(3) Recordkeeping.
Section 103.131 (b)(3)(i) Required Records. W e proposed to require mutual fund
CIPs to include certain recordkeeping procedures.92 First, the proposed rule would have

Proposed § 103.131(g).
See proposed rule, supra note 1, at Section II.G.
Id
§ 103.131(b)(2)(iii).
90

Although mutual funds are not currently required tofileSARs, they are encouraged to do
so voluntarily. O n January 21, 2003, Treasury proposed new rule 31 C F R 103.15 which,
if adopted, will require mutual funds tofileS A R s in certain circumstances. 68 F R 2716
(Jan. 21, 2003).
§ 103.131(b)(2)(iii)(A)-(D).

Proposed § 103.131(h).

required that a mutual fund maintain a record of the identifying information provided by
customers.93 Second, if a mutual fund relies on a document to verify a customer's
identity, the proposed rule would have required the mutual fund to maintain a copy of the
document. 94 Third, the proposed rule would have required mutual funds to record the
methods and results of any additional measures undertaken to verify the identity of
customers.95 Finally, the proposed rule would have required mutual funds to record the
resolution of any discrepancy in the identifying information obtained.96
Six commenters expressed concern that the recordkeeping requirements as
proposed were unduly burdensome. T w o commenters recommended that the rule be
modified to incorporate a materiality standard so that a fund need retain only those
records that reflect the resolution of material discrepancies. Three commenters
recommended that w e eliminate the requirement that mutual funds retain copies of
documents used to verify customer identities. O n e commenter requested clarification on
the types of records that will suffice to memorialize non-documentary customer
verification methods and their results.
In light of these comments, w e have reconsidered and modified the recordkeeping
requirements of the rule. Thefinalrule provides that a mutual fund's CIP must include
procedures for making and maintaining a record of all information obtained under the
procedures implementing the requirement that a mutual fund develop and implement a

93
94

Proposed § 103.131(h)(1).
Id

Proposed § 103.131(h)(2).

Proposed § 103.131(h)(3).

CIP.97 However, the final rule is significantly more flexible than the proposed rule.
Under thefinalrule, in addition to required identifying information about a customer, a
mutual fund's records must include a description rather than a copy, of any document
that the mutual fund relied on to verify the identity of the customer, noting the type of
document, any identification number contained in the document, the place of issuance,
and the issuance and expiration dates, if any.98 The record must include "a description"
of the methods and results of any measures undertaken to verify the identity of the
customer, and of the resolution of any "substantive" discrepancy discovered w h e n
verifying the identifying information obtained, rather than any documents generated in
connection with these measures.99
A s w e stated in the proposed rule, nothing in the rule modifies, limits, or
supersedes Section 101 of the Electronic Signatures in Global and National C o m m e r c e
Act.100 A mutual fund m a y use electronic records to satisfy the requirements of this final
rule, in accordance with guidance that the Commission has issued.101
Section 103.131(b)(3)(ii) Record Retention.
W e proposed to require that a mutual fund retain all required records for five
years after the account is closed.102 Six commenters expressed concern about this aspect
of the proposal, recommending that the recordkeeping period be shortened, or that mutual

97
98

§ 103.131(b)(3).
§ 103.131(b)(3)(i)(A)-(B).
§ 103.131(b)(3)(i)(C)-(D).

100

Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001).

101

See Electronic Recordkeeping by Investment Companies and Investment Advisers,
Investment Company Act Release No. 24991 (May 24, 2001) [66 F R 29224 (May 30,
2001)].

102

Proposed § 103.131(h).

funds be required to retain records only for five years after verification of the customer's
identity.
We believe that, by eliminating the requirement that a mutual fund retain copies
of documents used to verify customer identities, the final rule addresses many of the
commenters' concerns. Nonetheless, we believe that, while the identifying information
provided by customers should be retained, there is little value in requiring mutual funds
to retain the remaining records for five years after an account is closed, because this
information is likely to be stale. Therefore, the final rule prescribes a bifurcated record
retention schedule that is consistent with a general five-year retention requirement.
Under the final rule, the mutual fund must retain the information referenced in paragraph
(b)(3)(i)(A) (i.e., information obtained about a customer) for five years after the date the
account is closed.103 The mutual fund need only retain a record that it must make and
maintain under the other recordkeeping provisions, paragraphs (b)(3)(i)(B), (C), and (D)
(i.e., information that verifies a customer's identity) for five years after the record is
made.104
Section 103.131(b)(4) Comparison with government lists.
We proposed to require that a mutual fund's CIP have procedures for determining
whether the customer appears on any list of known or suspected terrorists or terrorist
organizations prepared by any federal government agency and made available to the

§ 103.131(b)(3)(h). The Secretary has determined that the records required to be kept by
section 326 of the Act have a high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings, or in the conduct of intelligence or counterintelligence
activities, to protect against international terrorism.
104

fund.105 In addition, the proposed rule stated that mutual funds must follow all federal
directives issued in connection with such lists.106
Six commenters recommended that the final rule specify which government lists
must be checked and provide a mechanism for communicating that information to mutual
funds. These commenters also suggested that all such lists be consolidated, and that
mutual funds not be required to check such lists until an account is established or a
customer receives services from the fund.
The final rule states that a mutual fund's CIP must include procedures for
determining whether the name of the customer appears on any list of known or suspected
terrorists or terrorist organizations issued by any federal government agency and
designated as such by Treasury in consultation with the federal functional regulators.107
Because Treasury and the federal functional regulators have not yet designated any such
lists, the final rule cannot be more specific with respect to the lists that mutual funds must
check. However, mutual funds will not have an affirmative duty under this rule to seek
out all lists of known or suspected terrorists or terrorist organizations compiled by the
federal government. Instead, mutual funds will receive notification by way of separate
guidance regarding the lists that they must consult for purposes of this provision.
We also have modified this provision to give guidance as to when a mutual fund
must consult a list of known or suspected terrorists or terrorist organizations. The final
rule states that the CIP's procedures must require the mutual fund to determine whether a
customer appears on a list "within a reasonable period of time" after the account is

105
.06

107

Proposed § 103.131(e).
^

§ 103.131(b)(4).

opened, or earlier if required by another federal law or regulation or by a federal directive
issued in connection with the applicable list.108
T h efinalrule also requires a mutual fund's CIP to include procedures that require
the fund to follow all federal directives issued in connection with such lists. Again,
because no lists have yet been designated under this provision, thefinalrule cannot
provide more guidance in this area.
Section 103.131(b)(5) Customer notice.
W e proposed to require that a mutual fund's CIP include procedures for providing
customers with adequate notice that the fund is requesting information to verify their
identities.109 The proposed rule stated that a mutual fund could satisfy that notice
requirement by generally notifying its customers about the fund's verification
procedures.no It stated that if an account is opened electronically, such as through an
Internet website, the mutual fund could provide notice electronically.
Three commenters generally supported the proposal, but asked that w e provide
model language and additional guidance about the circumstances in which a mutual fund
would be deemed to comply with the requirement. O n e commenter stated that the
proposed notice requirement was overbroad.
The Act requires that our rules "at a m i n i m u m , requirefinancialinstitutions to .. .
[give] customers . . . adequate notice" of the procedures they adopt concerning customer
identification. Based on this statutory requirement, thefinalrule requires a mutual fund's
CIP to include procedures for providing fund customers with adequate notice that the

Proposed § 103.131(f).
Proposed rule, supra note 1, at section II.F.

fund is requesting information to verify their identities.111 T h efinalrule provides
additional guidance regarding what constitutes adequate notice and the timing of the
notice requirement. The final rule states that notice is adequate if the mutual fund
generally describes the identification requirements of the final rule and provides notice in
a manner reasonably designed to ensure that a customer views the notice, or is otherwise
given notice, before opening an account.112 The final rule states that a mutual fund may,
depending on how an account is opened, post a notice on its website, include the notice
on its account applications, or use any other form of oral or written notice.'13 In addition,
the final rule includes sample language that, if appropriate, will be deemed adequate
notice to a mutual fund's customers when provided in accordance with the requirements
of this final rule.114
Section 103.131 (b)(6) Reliance on other financial institutions.
In the proposed rule we recognized that because mutual funds typically conduct
their operations through separate entities, some elements of the CIP will best be
performed by personnel of these separate entities.115 As we stated, it is permissible for a
mutual fund to contractually delegate the implementation and operation of its CIP to
another affiliated or unaffiliated service provider, such as a transfer agent.116 However,

§ 103.131(b)(5)(i).
Although a fund m a y include the notice in its prospectus, the prospectus would need to be
provided to the investor no later than the trade date in order to satisfy the requirement that
the notice be provided in a manner reasonably designed to ensure that a customer
receives it before the account is opened.
§ 103.131(b)(5)(h).
§ 103.131(b)(5)(iii).
Proposed rule, supra note 1, section II.B.

the mutual fund remains responsible for assuring compliance with the rule, and therefore
must actively monitor the operation of its CIP and assess its effectiveness.117
Four commenters suggested that, in certain circumstances, mutual funds be
permitted to rely on customer identification and verification performed by other financial
institutions (including other funds in the same fund complex). Two commenters
suggested that an investor that opens an account or conducts a transaction with a mutual
fund through another financial institution that is itself subject to BSA anti-money
laundering and CIP requirements should be considered a customer of the other financial
institution and not a customer of the mutual fund. One commenter suggested that all
intermediated accounts (i.e., accounts that are opened through another financial
institution) be treated similarly to omnibus accounts when the intermediary has
identification and verification responsibilities under the BSA.
We recognize that there may be circumstances in which a mutual fund should be
able to rely on the performance by another financial institution of some or all of the
elements of the fund's CIP. Therefore, the final rule provides that a mutual fund's CIP
may include procedures that specify when the fund will rely on the performance by
another financial institution of any procedures of the fund's CIP and thereby satisfy the
mutual fund's obligations under the rule.118 Reliance is permitted if a customer of the
mutual fund is opening, or has opened, an account or has established a similar business
relationship with the other financial institution to provide or engage in services, dealings,
or other financial transactions.119

See§ 103.131(b)(6).

In order for a mutual fund to rely on the other financial institution, (1) such
reliance must be reasonable under the circumstances, (2) the financial institution must be
subject to a rule implementing the anti-money laundering compliance program
requirements of 31 U.S.C. 5318(h) and be regulated by a federal functional regulator, and
(3) the other financial institution must enter into a contract with the mutual fund requiring
it to certify annually to the mutual fund that it has implemented an anti-money laundering
program and will perform (or its agent will perform) the specified requirements of the
mutual fund's CIP.120 The contract and certification will provide a standard means for a
mutual fund to demonstrate the extent to which it is relying on another institution to
perform its CIP and that the institution has in fact agreed to perform these
requirements.121 If it is not clear from these documents, a mutual fund must be able to
otherwise demonstrate when it is relying on another institution to perform its CIP with
respect to a particular customer. The mutual fund will not be held responsible for the
failure of the other financial institution to fulfill adequately the mutual fund's CIP
responsibilities, provided that the mutual fund can establish that its reliance was
reasonable and that it has obtained the requisite contracts and certifications. Treasury and
the SEC emphasize that the mutual fund and the other financial institution upon which it
relies must satisfy all of the conditions set forth in this final rule. If they do not, then the

A mutual fund must be able to demonstrate that the other financial institution has agreed
to perform the relevant requirements of the fund's CIP, regardless of whether the other
financial institution is an affiliated person of the fund. Accordingly, the contract and
certification requirement in thefinalrule applies equally to affiliated person or
unaffiliated person reliance.

40
mutual fund remains solely responsible for applying its o w n CIP to each customer in
accordance with this rule.122
All of the federal functional regulators are adopting comparable provisions in
their CIP rules to permit such reliance. Furthermore, the federal functional regulators
expect to cooperate and share information to determine whether the institutions subject to
their jurisdiction are in compliance with the conditions of the reliance provision of this
rule.
Section 103.131(c) Exemptions.
The proposed rule provided that the SEC, with the concurrence of Treasury, may
by order or regulation exempt any mutual fund or type of account from the requirements
of the rule.123 Under the proposal, in issuing such exemptions, the SEC and Treasury
were to consider whether the exemption is consistent with the purposes of the BSA, and
in the public interest.124 The proposal stated that the SEC and Treasury could also
consider other necessary and appropriate factors.125
Six commenters recommended that various types of accounts and customers be
exempted from the final rule (e.g., participants in qualified retirement plans, courtappointed executors and guardians, and individuals granted authority to effect
transactions in an account upon the death of a shareholder). We have incorporated any
suggested exemptions that we have determined to be appropriate into the definitions of

122

This provision of the rule does not affect the ability of a mutual fund to contractually
delegate the implementation and operation of its CIP to another service provider.
However, the mutual fund remains responsible for assuring compliance with the rule, and
therefore must actively monitor the operation of its CIP and assess its effectiveness.

123

Proposed § 103.1310)-

41
"account" and "customer," for the reasons described above.126 W e are adopting this
provision of the rule as proposed.
Section 103.131(d) Other requirements unaffected.
The final rule includes a provision, parallel to that in the rules that require other
financial institutions to adopt and implement CIPs,127 to the effect that nothing in
§ 103.131 shall be construed to relieve a mutual fund of its obligations to obtain, verify,
or maintain information that is required by another regulation in Part 103. This provision
will resolve any ambiguity if mutual funds in the future become obligated to obtain,
verify, or maintain information under such regulations.
III. The Commission's Analysis of the Costs and Benefits Associated with the
Final Rule
Treasury and the Commission are sensitive to the costs and benefits imposed by
their rules. Nevertheless, we believe that the rule imposes no costs in addition to those
that would result from compliance with the USA PATRIOT Act by mutual funds. While
the Commission believes the costs of the rule are attributable to the statute, the
Commission has nonetheless undertaken an analysis of these requirements.
Section 326 requires Treasury and the Commission to prescribe regulations
setting forth minimum standards for mutual funds regarding verification of the identities
of customers.128 The rule requires mutual funds to implement a written CIP as part of the

126

See notes 15-19, 20-30 and accompanying text supra.

127

A s to the rules that require other financial institutions to adopt and implement CIPs, see
supra Section LA.

128

A s discussed above, section 326 provides that such regulations, at a minimum, must
require financial institutions to implement, and customers to comply with, reasonable
procedures for- (A) verifying the identity of any person seeking to open an account to
the extent reasonable and practicable; (B) maintaining records of the information used to

anti-money laundering programs required by 31 U.S.C. 5318(h). The CIP must include
risk-based procedures for verifying the identity of each customer, to the extent reasonable
and practicable. As required by section 326, these procedures must (1) specify the
identifying information that the mutual fund will obtain with respect to each customer,
(2) contain procedures for verifying the identity of the customer, within a reasonable time
after the account is opened, using documents, non-documentary methods, or a
combination of both, and (3) include procedures for responding to circumstances in
which the mutual fund cannot form a reasonable belief that it knows the true identity of
the customer. The CIP also must include procedures for (1) maintaining a record of all
information obtained (for either five years after the date the account is closed or five
years after the record is made, depending on the type of information), (2) determining
whether the customer appears on any list of known or suspected terrorists or terrorist
organizations issued by any federal agency and designated as such by the Department of
the Treasury in consultation with the federal functional regulators, and (3) providing
customers with adequate notice that the mutual fund is requesting information to verify
their identities.
As discussed in more detail below, the Commission estimates that approximately
890 registered mutual funds and fund "families" are required to comply with section
326.129 The requirements of section 326 as implemented by today's rule will impose

verify a person's identity, including name, address, and other identifying information;
and (C) consulting lists of known or suspected terrorists or terrorist organizations
provided to thefinancialinstitution by any government agency to determine whether a
person seeking to open an account appears on any such list. See Section LA. supra.
129

Currently there are an estimated 3,060 mutual funds registered with the SEC. The 3,060
registered mutual funds are advised by approximately 890 different primary investment
advisers. W e assume, for purposes of this analysis, that mutual funds that share a
c o m m o n primary investment adviser are part of the same fund family. Therefore, w e

initial, one-time costs and ongoing costs on mutual funds and fund families. The costs
associated with establishment of CIPs and modification of computer systems and account
applications (both paper and web-based applications) to conform to the information and
notice requirements of the CIP will represent initial, one-time costs. Ongoing costs for
mutual funds and fund families will include: (1) collecting the information required by
the CIP; (2) verifying customers' identities; (3) determine whether customers appear on
designated lists issued by federal government agencies; and (4) making and maintaining
required records. The magnitude of these ongoing costs will, in large part, depend on of
the number of new accounts opened.
The Commission and Treasury believe that the requirements in the final rule are
reasonable and practicable and that, accordingly, the costs to mutual funds and fund
families of compliance with the rule's requirements are attributable to the statute. In the
proposed rule, we requested comment and specific data regarding the costs and benefits
of the proposed rule. We did not receive any data in comment letters concerning the
costs and benefits of the proposed rule.
A. Benefits Associated with the Final Rule
We anticipate that mutual funds, fund customers, and the nation as a whole will
benefit from the new rule. The anti-money laundering provisions of the USA PATRIOT

assume that 890 fund families will be required by today's rule to develop and implement
a CIP. For purposes of estimating the total costs associated with section 326
requirements in the Proposed rule, w e assumed that each mutual fund would be
responsible for establishing a CIP. See proposed rule, supra note 11 at Section V.B. 1.
Consequently, the initial cost for the 3,060 mutual funds was estimated to be
approximately $19,125,000. In the proposed rule, w e acknowledged that using the
number of mutual funds to estimate the costs may result in a high estimate of those costs,
and said that w e assumed that, in many instances, a single CIP will be developed by a
mutual fund family and used by all of the funds in that family. See proposed rule, supra
note 11, atn.20.

Act are intended to facilitate the prevention, detection, and prosecution of money
laundering and terrorist financing. Today's rule implements an important part of those
provisions. By requiring that mutual funds establish CIPs, section 326 and the rule will
limit the ability of criminals, including terrorists, to use mutual fund accounts to finance
their activities, or shelter the proceeds of criminal conduct. Moreover, mutual fund CIPs
should deter criminals from using mutual fund accounts to perpetrate fraud on the fund
complex (by placing fictitious buy and sell orders) and identity theft of legitimate mutual
fund customers. We also believe that the rules provide greater certainty to the private
sector on how to comply with the USA PATRIOT Act because they are consistent with
and comparable to the rules adopted by the other federal functional regulators. Finally, in
order to reduce compliance burdens, the final rule allows mutual funds flexibility to adopt
CIPs and to distribute notices that are best suited to the funds' businesses and needs.
These benefits are difficult to quantify. We received no data from commenters
quantifying the value of these benefits.
B. Costs Associated with the Final Rule
Section 326 of the USA PATRIOT Act, and the new rule, allow for great
flexibility in the development of CIPs. Differences in the ways that mutual fund accounts
are opened, fund shares are distributed, and fund purchases, sales and exchanges are
effected; differences in the various types of accounts maintained by mutual funds; and
differences among mutual fund customer bases make it difficult to quantify accurately a
universally applicable cost per mutual fund. Most mutual funds currently have some
procedures in place for collecting information about and verifying the identities of their
customers, and for detecting fraud in the account opening process by looking for

inconsistencies in the information provided by customers and/or checking customer
names against certain databases. We anticipate that the requirements of section 326 as
implemented by today's rule nonetheless will impose initial, one-time costs and ongoing
costs on mutual funds and fund families in connection with formulating and
implementing programs that comply with today's rule, and modifying existing
procedures to conform to those new programs. Initial one-time costs associated with
establishment of CIPs would include: (1) the development, adoption, and
implementation of a CIP; (2) the creation or modification of computer systems and
account applications (both paper and web-based applications) to collect required
information and disseminate required notices; (3) the modification of electronic
recordkeeping systems to verify and retain the required information; and (4) personnel
training. Ongoing costs for mutual funds and fund families will include: (1) collecting
the information required by the CIP; (2) verifying customers' identities; (3) determining
whether customers appear on designated lists issued by federal government agencies; and
(4) making and maintaining required records. As discussed above, the magnitude of
these ongoing costs will, in large part, depend on the number of new accounts opened.
From January 1, 1990 through December 31, 2001, approximately 16 million mutual
fund accounts were opened annually.130

This estimate is derived from information reported in the Investment Company Institute's
2002 Mutual Fund Fact Book. It represents the net annual increase in the number of
mutual fund accounts. The actual number of new accounts that were opened during this
period is probably higher because this estimate is reduced by the number of accounts that
were closed during the same period. N o data are available regarding the number of
accounts that were closed. The number of accounts with respect to which customers'
identities will be required to be verified is, however, significantly lower than the
aggregate number of new accounts that are created annually. A mutual fund will not be
required to verify the identity of a customer w h o has an existing account with the mutual
fund, provided that the mutual fund has a reasonable belief that it knows the true identity
of the person. See note 27 supra and accompanying text. A mutual fund may also, in

46
1.

Costs associated with establishing a C I P

Program Implementation
Section 326 of the Act and the new rule require mutual funds to develop written
CIPs. Based on discussions with industry representatives, the Commission estimates that
it will take approximately 50 hours for a fund, or fund family, to develop a CIP at a cost
of approximately $3,810.131 Based on these assumptions, we estimate that the aggregate
cost of developing CIPs will be approximately $3.4 million ($3,810 per program x 890
fund families).
We believe this is a reasonable estimate of the cost of developing and
implementing CIPs. We recognize that the actual development costs associated with
establishing a CIP may vary from this estimate depending upon the size of the mutual
fund or fund family, the distribution channels used by the fund or fund family, the fund's
customer base, number of affiliates, and the extent to which a fund or fund family relies
on third parties or allocates responsibilities under its CIP. For mutual funds that delegate
implementation of their CIPs to unaffiliated service providers, the burden per mutual
fund may be less because those service providers will likely use the same or similar

certain circumstances, rely on the performance by anotherfinancialinstitution of any
procedures of the mutual fund's CIP with respect to a customer. See notes 118-122 supra
and accompanying text.
W e estimate that it will take compliance personnel 45 hours at a cost of S62 per hour,
attorneys 4 hours at a cost of $130 per hour, and directors 1 hour at $500 per hour, to
develop a CIP. W e have revised this estimate since the proposal to more accurately
reflect the hourly costs of the various types of persons w h o must be involved in the
creation and implementation of a CIP. This estimate of the cost of developing a CIP
includes the cost of the rule's requirement that the mutual fund's CIP include procedures
for providing fund customers with notice that the fund is requesting information to verify
their identities. A mutual fund m a y satisfy the notice requirement by generally notifying
its customers about the procedures the fund must comply with to verify their identities.
Depending on h o w accounts are opened, the mutual fund m a y post a notice on its
website, or provide customers with any other form of written or oral notice.

software and systems for several different registrants. Similarly, the cost per fund for
funds that use a CIP developed by their fund family may be less.
Systems Modifications
The Commission anticipates that the new rule will cause individual mutual funds
and mutual fund families to incur costs to modify items such as account applications and
websites, to create or modify electronic links to other databases, and to modify their
electronic recordkeeping systems in order to collect, verify, and retain the required
information, and to provide the required notice to customers. The cost-benefit analysis in
the proposed rule did not discuss the time and costs associated with computer system
modifications, but commenters suggested that these costs could be substantial. The
Commission estimates, based on discussions with industry representatives, that it will
cost each fund or fund family approximately $40,000 to make these types of system
modifications.132 Therefore the Commission estimates that there will be a one-time
aggregate cost of approximately $36 million for these systems modifications.
2. Ongoing costs
As mentioned above, ongoing costs for mutual funds will be associated with the
need to: (1) collect the information required by the CIPs, (2) verify customers' identities,

Based on discussions with industry representatives, S E C staff estimates that it will take
compliance personnel fifteen hours, at $62 per hour ($930) to modify fund account
applications in order to collect all of the required information from and provide required
notice to fund customers. The S E C staff estimates that the aggregate cost of such
modifications will be approximately $828,000 ($930 per fund family x 890 fund
families). Based on discussions with industry representatives, the S E C staff estimates
that it will take computer programmers 640 hours at $62 per hour to implement the
necessary computer system modifications ($39,680). The S E C staff estimates the
aggregate cost of these modifications to be $35.3 million ($39,680 per fund family x 890
fund families). Thus, the S E C staff estimates the total costs of systems modifications to
be $36.1 million ($35.3 million + $828,000).

(3) determine whether customers appear on lists provided by federal agencies, and (4)
make and maintain records related to CIPs.
Information Collection
Although mutual funds generally require customers to provide a name and
mailing address in order to open an account, mutual funds currently may not require all
fund customers to provide all of the information required to be collected pursuant to a
CIP. Moreover, mutual funds may not be collecting all such information with respect to
all of the persons who will be considered to be customers for purposes of the new rule.
Therefore the Commission anticipates that mutual funds will incur costs in connection
with the collection of identifying information from their customers. Based on discussions
with industry participants, the staff of the SEC estimates that the average time spent
collecting the required information will be between one and four minutes per account and
that the hourly personnel and overhead cost associated with these requirements will be
$25 per hour. Therefore, the SEC staff estimates that this burden will result in an
aggregate annual cost to the industry of between $6.7 million and $26.7 million.133
Information Verification
The new rule also requires CIPs to contain procedures for funds to verify
customer identities. The rule provides funds with substantial flexibility to decide how
they will verify identification information. The purpose of making the rule flexible is to
give funds the ability to select verification methods that are, as section 326 requires,
reasonable and practicable. The new rule allows a mutual fund to employ such

133

We estimate that there are 16 million new mutual fund shareholder accounts created each
year. Therefore, w e estimate the range of cost to be between $6.7 million (16 million
new accounts per year x 1/60 of an hour x $25) and $26.7 million (16 million new
accounts per year x 1/15 of an hour x $25).

49
verification methods as permit it to form a reasonable belief that it k n o w s the true
identities of its customers.
The rule sets forth non-exclusive lists of methods that a fund may use to verify
customer identification. A fund may use other reasonable methods that are currently
available, or that become available in the future. The Commission believes that verifying
the identifying information could result in costs for mutual funds because some firms
currently may not use verification methods. Based on discussions with industry
participants, the SEC staff estimates that the total annual cost to the industry to verify the
identifying information will be between $49.3 million and $98.6 million.134
Resolution o f discrepancies
Based on discussions with industry participants, the staff of the SEC believes that
initial detection of discrepancies in information collected will be automated and
conducted on a batch-file basis. Once discrepancies have been detected, staff of the SEC
estimates that the average time spent by compliance personnel to resolve discrepancies in
information collected will be between one and four minutes per account and that the
hourly personnel and overhead cost associated with these requirements will be $25 per
hour. Therefore, the SEC staff estimates that this burden will result in an aggregate
annual cost to the industry of between $6.7 million and $26.7 million.
Comparison with government lists of known or suspected terrorists

134

The SEC staff believes that the processing costs associated with verification methods will
be between $1.00 and $2.00 per account. The S E C staff further estimates that the average
time spent verifying an account will be between five and ten minutes. The hourly cost of
the person w h o would undertake the verification is estimated to be $25 per hour including
overhead. Therefore, the estimated costs to the industry reported above are between: $49.3
million ((16 million new accounts per year) x ($1.00) + (16 million new accounts per year)
x (1/12 of an hour) x ($25)) and $98.6 million ((16 million new accounts per year) x
($2.00) + (16 million new accounts per year) x (1/6 of an hour) x ($25)).

Section 326 and the n e w rule require that mutual fund CIPs include reasonable
procedures for determining whether a customer's name appears on designated lists of
known or suspected terrorists or terrorist organizations issued by any federal government
agency. Mutual funds should already have procedures for deterinining whether
customers' names appear on some federal government lists. There are substantive legal
requirements associated with the lists circulated by Treasury's Office of Foreign Asset
Control (OFAC). Failure to comply with these requirements may result in criminal and
civil penalties. Based on discussions with industry representatives the SEC staff
estimates that the annual cost to the mutual fund industry of this requirement will be $3.4
million.135
Recordkeeping
The Commission believes that the recordkeeping requirement in the new rule will
result in additional costs for mutual funds that currently do not maintain certain of the
records for the prescribed time period. We believe that most funds already retain certain
of the records required by the new rule as a matter of good business practice.
The proposed rule provided that mutual fund CIPs provide for the retention of all
information for five years after a customer account is closed. The final rule bifurcates the
record retention provisions so that funds will be required to retain customer identification
information for five years after the account is closed, and to retain a description of (1) the
documents relied upon to verify the customer's identity, (2) the methods and results of

135

Based on discussions with industry representatives, the SEC staff estimates that it takes a
data entry clerk approximately 30 seconds to ascertain whether a customer's name is on a
government list. W e assume that for most mutual fund customers this check will be
automated and conducted on a batch-file basis. Therefore w e estimate that cost of this
requirement is $.21 per customer (1/120 hour x $25 per hour (cost per hour of data

measures undertaken to verify the identity a customer and (3) the resolution of any
substantive discrepancies discovered during the identity verification process for five
years after the date the record was made. The SEC staff estimates, based on discussions
with representatives of the mutual fund industry, that this recordkeeping requirement will
cost $13.3 million annually.136
IV. Final Regulatory Flexibility Analysis
Treasury and the Commission are sensitive to the impact our rules may impose on
small entities. Congress enacted the Regulatory Flexibility Act137 to address concerns
related to the effects of agency rules on small entities. Treasury and the Commission
believed that the proposed rule likely would not have a "significant economic impact on a
substantial number of small entities."138 First, the economic impact on small entities
should not be significant because most small entities are likely to have a relatively small
number of accounts, and thus compliance should not impose a significant economic
impact. Second, the economic impact on mutual funds, including small entities, is
imposed by the statute itself, and not by the rule. Treasury and the Commission sought
comment on whether the proposed rule would have a significant economic impact on a
substantial number of small entities and whether the costs are imposed by the statute

entry)). We estimate the aggregate annual cost of this requirement to be $3.4 million
(S.21 per customer x 16 million customers).
The staff estimates that it will take a data entry clerk approximately two minutes per
customer to maintain the records required by the rule. The staff assumes that for most
mutual fund accounts performance of this requirement will be automated. The staff
estimates that the cost of this requirement will be S.83 per customer (1/30 hour x $25 per
hour (estimated cost per hour of data entry)). W e estimate the aggregate annual cost of
this requirement to be SI3.3 million ($.83 per customer x 16 million new accounts per
year).
137

138

5 U.S.C. 601 etseq.
5 U.S.C. 605(b).

itself and not the proposed rule. Treasury and the Commission did not receive any
comments in response to this request.
While Treasury and the Commission believed that the proposed rule likely would
not have a significant economic impact on a substantial number of small entities, we
prepared an Initial Regulatory Flexibility Analysis that was published in the proposed
rule. Therefore, a Final Regulatory Flexibility Analysis has been prepared for this final
rule in accordance with 5 U.S.C. 604.
A. Need for and Objectives of the Rule
Section 326 requires Treasury and the Commission jointly to issue a regulation
setting forth minimum standards for mutual funds and their customers regarding the
identities of customers that will apply in connection with the opening of an account at a
mutual fund.139
The purpose of section 326, and the regulations promulgated thereunder, is to
make it easier to prevent, detect, and prosecute money laundering and the financing of
terrorism. In issuing the final rule, Treasury and the Commission are seeking to fulfill
their statutorily mandated responsibilities under section 326 and to achieve its important
purpose.
The objective of the final rule is to make it easier to prevent, detect, and prosecute
money laundering and the financing of terrorism. The rule seeks to achieve this goal by

139

As discussed previously, section 326 provides that such regulations, at a minimum, must
require mutual funds to implement, and customers to comply with, reasonable procedures
for ~ (1) verifying the identity of any person seeking to open an account to the extent
reasonable and practicable; (2) maintaining records of the information used to verify a
person's identity, including name, address, and other identifying information; and (3)
consulting lists of known or suspected terrorists or terrorist organizations provided to the
financial institution by any government agency to determine whether a person seeking to
open an account appears on any such list.

specifying the information mutual funds must obtain from or about customers that can be
used to verify the identity of the customers. This will make it more difficult for persons
to use false identities to establish customer relationships with mutual funds for the
purposes of laundering money or moving funds to effectuate illegal activities, such as
financing terrorism.
B. Significant Issues Raised by Public Comment
In the proposed rule, Treasury and the Commission specifically requested public
comments on any aspect of the IRFA, as well as the number of small entities that might
be affected by the proposed rule. The agencies received no comments on the IRFA.
C. Small Entities Subject to the Rule
A small business or organization (collectively, "small entity") for purposes of the
Regulatory Flexibility Act, is a small entity if the fund, together with other funds in the
same group of related funds, has net assets of $50 million or less as of the end of its most
recent fiscal year.140 Of approximately 3,060 registered mutual funds, approximately 158
are small entities. These 158 small entities are divided into approximately 154 fund
families.141 As discussed above in Section III, in most cases, a single customer
identification program will be developed and used by all of the mutual funds in a family
of funds.

Rule 0-10 [17 C F R 27.0-10]
The estimates of the number of registered mutual funds that are small entities and of the
number of fund families are based on figures compiled by the Commission staff from
outside databases.

D. Projected Reporting, Recordkeeping, and other Compliance
Requirements
The rule requires a mutual fund to adopt a written CIP that, at a minimum,
includes each of the following: (1) risk-based procedures for verifying the identity of
each customer, to the extent reasonable and practicable;142 (2) procedures for maintaining
records of all information obtained under its customer identity verification procedures,
(3) procedures for determining whether a customer appears on any list of known or
suspected terrorists or terrorist organizations issued by the federal government and
designated by Treasury, and (4) procedures for providing notice to customers.
As noted above, the rule is not expected to have a significant economic impact on
a substantial number of small entities. Commission staff estimates that developing a CIP
will require approximately 50 hours of each fund or fund family developing a CIP, at a
cost of approximately $3,810,143 and that systems modification will entail approximately
655 hours at a cost of $40,610 to each fund or fund family.144
Although small entities will also incur ongoing costs, the Commission expects
that they will not have a significant economic impact. For each new account, a fund will
require what we estimate to be 1-4 minutes for collecting customer information, 5-10
minutes for verifying customer information, 1-4 minutes for resolution of discrepancies
in customer information, half a minute for comparison to government lists, and 2 minutes
for record retention, each at a cost of approximately $25 per hour. Small entities are

142

These procedures must specify the identifying information that the mutual fund will
obtain with respect to each customer, such information to include, at a minimum, name,
date of birth (for an individual), street address, and identification number.

143

See note 131 supra regarding the cost of developing a CIP.

144

See note 132 supra regarding the cost of systems modifications.

likely to have a relatively small number of accounts; therefore, they will incur the
ongoing costs of individual customer identifications relatively infrequently.
E. Agency Action to Minimize Effect on Small Entities
Treasury and the Commission considered significant alternatives to the proposed
rule that would accomphsh the stated objective, while minimizing any significant
adverse impact on small entities. In connection with the proposed rule, we considered the
following alternatives: (1) the establishment of differing compliance or reporting
requirements or timetables that take into account the resources of small entities; (2) the
clarification, consolidation, or simplification of compliance and reporting requirements
under the rule for small entities; (3) the use of performance rather than design standards;
and (4) an exemption from coverage of the rule, or any part thereof, for small entities.
The final rule provides for substantial flexibility in how each mutual fund may
meet its requirements. This flexibility is designed to account for differences between
mutual funds, including size. Nonetheless, Treasury and the Commission did consider
the alternatives described above. Treasury and the Commission believe that the
alternative approaches to rninimize the adverse impact of the rule on small entities are not
consistent with the statutory mandate of section 326. In addition, Treasury and the
Commission do not believe that an exemption for small mutual funds is appropriate,
given the flexibility built into the rule to account for, among other things, the differing
sizes and resources of mutual funds, as well as the importance of the statutory goals and
mandate of section 326. Money laundering can occur in small firms as well as large
firms.

V. Paperwork Reduction Act
Certain provisions of the final rule contain "collection of information"
requirements within the meaning of the Paperwork Reduction Act of 1995.145 An agency
may not conduct or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number. Treasury submitted the
final rule to the Office of Management and Budget ("OMB") for review in accordance
with 44 U.S.C 3507(d). The OMB has approved the collection of information
requirements in today's rule under control number 1506-0033.
In the proposed rule Treasury and the Commission estimated the paperwork
burden that would be imposed by the rule and sought comments on the estimates. None
of the commenters specifically addressed the paperwork burden associated with the rule.
A. Collection of Information Under the Final Rule
The final rule contains recordkeeping and disclosure requirements that are subject
to the Paperwork Reduction Act of 1995. Like the proposed rule, the final rule requires
mutual funds to (1) maintain records of the information used to verify customers'
identities and (2) provide notice to customers that information they supply may be used to
verify their identities. These recordkeeping and disclosure requirements are required
under section 326 of the Act. The final rule also contains a new recordkeeping provision
— a mutual fund that relies on another financial institution to perform some or all of the
elements of its CIP must obtain and retain an annual certification from the financial
institution that it has implemented its anti-money laundering program, and that it will
perform (or its agent will perform) the specified requirements of the mutual fund's CIP.

.145

44 U.S.C. 3501 etseq.

B. Proposed Use of the Information
Section 326 of the Act requires Treasury and the Commission jointly to issue a
regulation setting forth minimum standards for mutual funds to verify the identities of
their customers. Furthermore, section 326 provides that the regulations must, at a
niinimum, require mutual funds to implement reasonable procedures for (1) verifying the
identity of any person seeking to open an account, to the extent reasonable and
practicable; (2) maintaining records of the information used to verify the person's
identity, including name, address, and other identifying information; and (3) determining
whether the person appears on any lists of known or suspected terrorists or terrorist
organizations provided to the financial institution by any government agency.
The purpose of section 326, and the regulations promulgated thereunder, is to
make it easier to prevent, detect and prosecute money laundering and the financing of
terrorism. In issuing the final rule, Treasury and the Commission are seeking to fulfill
their statutorily mandated responsibilities under section 326 and to achieve its important
purpose.
The final rule requires each mutual fund to establish a written CIP that must
include recordkeeping procedures and procedures for providing customers with notice
that the mutual fund is requesting information to verify their identity. The final rule
requires a mutual fund to maintain a record of (1) the identifying information provided by
the customer, the type of identification document(s) reviewed, if any, and the
identification number of the document(s); (2) the means and results of any additional
measures undertaken to verify the identity of the customer; and (3) the resolution of any
discrepancy in the identifying information obtained.

The final rule also requires each mutual fund to give customers "adequate notice"
of the identity verification procedures. Depending on how an account is opened, a
mutual fund may satisfy this disclosure requirement by providing customers with any
form of written or oral notice. Accordingly, a mutual fund may choose among a variety
of methods of providing adequate notice and may select the least burdensome method,
given the circumstances under which customers seek to open new accounts.
The final rule permits a mutual fund to rely on performance of elements of its CIP
by other financial institutions. The required contract and certification will provide
mutual fund examiners with a standard means of ascertaining that the other financial
institution has agreed to undertake the mutual fund's CIP requirements.
C. Respondents
The final rule will apply to approximately 3,060 mutual fund companies that are
registered with the Commission.146
D. Total Annual Reporting and Recordkeeping Burden
1. Recordkeeping
The requirement to make and maintain records related to the CIP will be an
annual burden. As adopted, the rule differs from the proposed rule in its requirements for
the retention of records of information obtained under customer identification procedures.
Whereas the proposed rule required that such records be retained until five years after the
date the account of a customer is closed or the grant of authority to effect transactions

with respect to an account is revoked, the final rule has two different times for the start of

the five-year period for record retention: (1) the date the account is closed, for identifying

146

This estimate is based on figures compiled by the Commission staff from Commission
filings.

information about the customer, and (2) the date the record is made, for descriptions of
any documents relied on for verification of identity, of the methods and results of any
measures undertaken to verify customer identity and of the resolution of any substantive
discrepancy discovered when verifying identifying information.
We believe that most mutual funds already retain certain of the records required
by the new rule as a matter of good business practice, but that the recordkeeping
requirement will result in additional costs for mutual funds that do not currently maintain
records for the prescribed time period. The total industry-wide burden will depend on the
number of new accounts added each year. We estimate that data entry will require
approximately two minutes per customer, and therefore that the annual, industry-wide
burden will be approximately 533,000 hours.147
We believe that there is a nominal burden associated with the new recordkeeping
requirement. Under the final rule, a mutual fund may rely on another financial institution
to perform some or all its CIP under certain conditions, including that the financial
institution must enter into a contract requiring the financial institution to certify annually
to the fund that it has implemented its anti-money laundering program and that it will
perform (or its agent will perform) the specified elements of the fund's CIP. Not all
mutual funds will choose to rely on a third party. The minimal burden of retaining the
certification described above should allow a mutual fund to reduce its net burden under
the rule by relying on another financial institution to perform some or all of its CIP.
2. Providing Notice to Customers

147

Since mutual funds will not be required to comply with the requirements of this final rule
until October 1, 2003, the industry-wide burden during thefirstyear will be
approximately 133,250 hours.

The requirement for mutual funds to provide the required notice to customers
regarding use of customers' information will create a one-time burden by necessitating
the amendment of mutual funds' account applications, both paper and web-based. As
adopted, the rule differs from the proposed rule in providing additional guidance
regarding what constitutes adequate notice and on the timing of the notice requirement,
and in including sample language that, if appropriate, will be deemed adequate notice to a
mutual fund's customers. We estimate that the estimated 3,060 registered mutual funds
will each spend approximately two hours modifying their account applications. Thus, we
estimate that the industry-wide burden will be approximately 6,120 hours.
E. Collection of Information is Mandatory
These recordkeeping and disclosure (notice) requirements are mandatory.
F. Confidentiality
The collection of information pursuant to the final rule would be provided by
customers and other sources to mutual funds and maintained by mutual funds. In
addition, the information may be used by federal regulators and other authorities in the
course of examinations, investigations, and judicial proceedings. No governmental
agency regularly would receive any of the information described above.
G. Record Retention Period
The final rule requires that the identifying information obtained about a customer
be retained until five years after the date the account of the customer is closed and that
other records relating to the verification of the customer be retained until five years after
the record is made.

H. Request for Comment
Treasury and the Commission invite comment on the accuracy of the burden

estimates and suggestions on how to further reduce these burdens. Comments shou

sent (preferably by fax (202-395-6974)) to Desk Officer for the Department of t

Treasury, Office of Information and Regulatory Affairs, Office of Management an

Budget, Paperwork Reduction Project (1506-0033), Washington, DC 20503 (or by the

Internet to ilackeyj@omb.eop.gov), with a copy to FinCEN by mail or the Interne
addresses previously specified.
VI. EXECUTIVE ORDER 12866

The Department of the Treasury has determined that this rule is not a significa

regulatory action for purposes of Executive Order 12866. As noted above, the fi

parallels the requirements of section 326 of the Act. Accordingly, a regulatory
analysis is not required.
List of Subjects
17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements, Securities.
31 CFR Part 103
Administrative practice and procedure, Authority delegations (Government

agencies), Banks, Banking, Brokers, Currency, Foreign banking, Foreign currencie

Gambling, Investigations, Investment companies, Law enforcement, Penalties, Repo
and recordkeeping requirements, Securities.
Securities and Exchange Commission
17 CFR Chapter II

The Commission is adopting 17 CFR 270.0-11 pursuant to the authority set forth
in sections 6(c) and 38(a) of the Act [15 U.S.C. 80a-6(c) and 80a-37(a)].
For the reasons as set out in the preamble, title 17, part 270 of the Code of Federal
Regulations is amended as follows:

PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
1940
1. The authority citation for Part 270 continues to read, in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, unless otherwise
noted;

2. Section 270.0-11 is added to read as follows:
§ 270.0-11 Customer identification programs.
Each registered open-end company is subject to the requirements of 31 U.S.C.
5318(1) and the implementing regulation at 31 CFR 103.131, which requires a customer
identification program to be implemented as part of the anti-money laundering program
required under subchapter II of chapter 53 of title 31, United States Code and the
implementing regulations issued by the Department of the Treasury at 31 CFR part 103.
Where 31 CFR 103.131 and this chapter use different definitions for the same term, the
definition in 31 CFR 103.131 shall be used for the purpose of compliance with 31 CFR
103.131. Where 31 CFR 103.131 and this chapter require the same records to be
preserved for different periods of time, such records shall be preserved for the longer
period of time.
By the Securities and Exchange Commission.

Margaret H. McFarland
Deputy Secretary
Dated:

Department of the Treasury
31 CFR Chapter I
Treasury is adopting 31 CFR 103.131 pursuant to the authority set forth in 31 U.S.C.
5318(1).
For the reasons as set out in the preamble, title 31, part 103 of the Code of Federal
Regulations is amended as follows:

PART 103 - FINANCIAL RECORDKEEPING AND REPORTING OF
CURRENCY AND FOREIGN TRANSACTIONS
3. 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 53165332; title III, sees. 312, 313, 314, 319, 326, 352, Pub L. 107-56, 115 Stat. 307, 12 U.S.C.
1818, 12 U.S.C. 1786(q).
4. Subpart I of part 103 is amended by adding § 103.131 to read as follows:
§ 103.131 Customer identification programs for mutual funds.
(a) Definitions. For purposes of this section:
(l)(i) Account means any contractual or other business relationship between a
person and a mutual fund established to effect transactions in securities issued by the
mutual fund, including the purchase or sale of securities.
(ii) Account does not include:

(A) An account that a mutual fund acquires through any acquisition, merger,
purchase of assets, or assumption of liabilities; or
(B) An account opened fcr the purpose of participating in an employee benefit
plan established under the Employee Retirement Income Security Act of 1974.
(2) (i) Customer means:
(A) A person that opens a new account; and
(B) An individual who opens a new account for:
Q_) An individual who lacks legal capacity, such as a minor; or
(2) An entity that is not a legal person, such as a civic club.
(ii) Customer does not include:
(A) A financial institution regulated by a federal functional regulator or a bank
regulated by a state bank regulator;
(B) A person described in § 103.22(d)(2)(h) through (iv); or
(C) A person that has an existing account with the mutual fund, provided that the
mutual fund has a reasonable belief that it knows the true identity of the person.
(3) Federal functional regulator is defined at § 103.120(a)(2).
(4) Financial institution is defined at 31 U.S.C. 5312(a)(2) and (c)(1).
(5) Mutual fund means an "investment company" (as the term is defined in
section 3 of the Investment Company Act (15 U.S.C. 80a-3)) that is an "open-end
company" (as that term is defined in section 5 of the Investment Company Act (15 U.S.C.
80a-5)) that is registered or is required to register with the Commission under section 8 of
the Investment Company Act (15 U.S.C. 80a-8).
(6) Non-U.S. person means a person that is not a U.S. person

(7) Taxpayer identification number is defined by section 6109 of the Internal
Revenue Code of 1986 (26 U.S.C. 6109) and Internal Revenue Service regulations
implementing that section (e.g., social security number or employer identification
number).
(8) U.S. person means:
(i) A United States citizen; or
(ii) A person other than an individual (such as a corporation, partnership or trust),
that is established or organized under the laws of a State or the United States.
(b) Customer identification program: minimum requirements.
(1) In general A mutual fund must implement a written Customer Identification
Program ("CIP") appropriate for its size and type of business that, at a minimum,
includes each of the requirements of paragraphs (b)(1) through (5) of this section. The
CIP must be a part of the mutual fund's anti-money laundering program required under
the regulations implementing 31 U.S.C. 5318(h).
(2) Identity verification procedures. The CIP must include risk-based procedures
for verifying the identity of each customer to the extent reasonable and practicable. The
procedures must enable the mutual fund to form a reasonable belief that it knows the true
identity of each customer. The procedures must be based on the mutual fund's
assessment of the relevant risks, including those presented by the manner in which
accounts are opened, fund shares are distributed, and purchases, sales and exchanges are
effected, the various types of accounts maintained by the mutual fund, the various types
of identifying information available, and the mutual fund's customer base. At a
minimum, these procedures must contain the elements described in this paragraph (b)(2).

(i) Customer information required. (A) In general. The CIP must contain
procedures for opening an account that specify the identifying information that will be
obtained with respect to each customer. Except as permitted by paragraph (b)(2)(i)(B) of
this section, a mutual fund must obtain, at a minimum, the following information prior to
opening an account:
(1) Name;
(2) Date of birth, for an individual;
(3) Address, which shall be:
(i) For an individual, a residential or business street address;
(ii) For an individual who does not have a residential or business street address,
an Army Post Office (APO) or Fleet Post Office (FPO) box number, or the residential or
business street address of next of kin or of another contact individual; or
(iii) For a person other than an individual (such as a corporation, partnership, or
trust), a principal place of business, local office or other physical location; and
(4) Identification number, which shall be:
(i) For a U.S. person, a taxpayer identification number; or
(ii) For a non-U.S. person, one or more of the following: a taxpayer identification
number; passport number and country of issuance; alien identification card number; or
number and country of issuance of any other government-issued document evidencing
nationality or residence and bearing a photograph or similar safeguard.
NOTE to paragraph (b)(2)(i)(A)(4)(ii): When opening an account for a
foreign business or enterprise that does not have an identification number, the
mutual fund must request alternative government-issued documentation certifying
the existence of the business or enterprise.

(B) Exception for persons applying for a taxpayer identification number. Instead
of obtaining a taxpayer identification number from a customer prior to opening an
account, the CIP may include procedures for opening an account for a person that has
applied for, but has not received, a taxpayer identification number. In this case, the CIP
must include procedures to confirm that the application was filed before the person opens
the account and to obtain the taxpayer identification number within a reasonable period
of time after the account is opened.
(ii) Customer verification The CIP must contain procedures for verifying the
identity of the customer, using the information obtained in accordance with paragraph
(b)(2)(i) of this section, within a reasonable time after the account is opened. The
procedures must describe when the mutual fund will use documents, non-documentary
methods, or a combination of both methods as described in this paragraph (b)(2)(h).
(A) Verification through documents. For a mutual fund relying on documents,
the CIP must contain procedures that set forth the documents that the mutual fund will
use. These documents may include:
(1) For an individual, unexpired government-issued identification evidencing
nationality or residence and bearing a photograph or similar safeguard, such as a driver's
license or passport; and
(2) For a person other than an individual (such as a corporation, partnership, or
trust), documents showing the existence of the entity, such as certified articles of
incorporation, a government-issued business license, a partnership agreement, or trust
instrument.

(B) Verification through non-documentary methods. For a mutual fund relying
on non-documentary methods, the CIP must contain procedures that describe the nondocumentary methods the mutual fund will use.
(1) These methods may include contacting a customer; independently verifying
the customer's identity through the comparison of information provided by the customer
with information obtained from a consumer reporting agency, public database, or other
source; checking references with other financial institutions; and obtaining a financial
statement.
(2) The mutual fund's non-documentary procedures must address situations
where an individual is unable to present an unexpired government-issued identification
document that bears a photograph or similar safeguard; the mutual fund is not familiar
with the documents presented; the account is opened without obtaining documents; the
customer opens the account without appearing in person; and where the mutual fund is
otherwise presented with circumstances that increase the risk that the mutual fund will be
unable to verify the true identity of a customer through documents.
(C) Additional verification for certain customers. The CIP must address
situations where, based on the mutual fund's risk assessment of a new account opened by
a customer that is not an individual, the mutual fund will obtain information about
individuals with authority or control over such account, including persons authorized to
effect transactions in the shareholder of record's account, in order to verify the
customer's identity. This verification method applies only when the mutual fund cannot
verify the customer's true identity using the verification methods described in paragraphs
(b)(2)(ii)(A) and (B) of this section.

(iii) Lack of verification The CIP must include procedures for responding to
circumstances in which the mutual fund cannot form a reasonable belief that it knows the
true identity of a customer. These procedures should describe:
(A) When the mutual fund should not open an account;
(B) The terms under which a customer may use an account while the mutual fund
attempts to verify the customer's identity;
(C) When the mutual fund should file a Suspicious Activity Report in accordance
with applicable law and regulation; and
(D) When the mutual fund should close an account, after attempts to verify a
customer's identity have failed.
(3) Recordkeeping. The CIP must include procedures for making and maintaining
a record of all information obtained under paragraph (b) of this section.
(i) Required records. At a minimum, the record must include:
(A) All identifying information about a customer obtained under paragraph
(b)(2)(i) of this section;
(B) A description of any document that was relied on under paragraph
(b)(2)(ii)(A) of this section noting the type of document, any identification number
contained in the document, the place of issuance, and if any, the date of issuance and
expiration date;
(C) A description of the methods and the results of any measures undertaken to
verify the identity of the customer under paragraph (b)(2)(ii)(B) or (C) of this section;
and

(D) A description of the resolution of any substantive discrepancy discovered
when verifying the identifying information obtained.
(ii) Retention of records. The mutual fund must retain the information in
paragraph (b)(3)(i)(A) of this section for five years after the date the account is closed.
The mutual fund must retain the information in paragraphs (b)(3)(i)(B), (C), and (D) of
this section for five years after the record is made.
(4) Comparison with government lists. The CIP must include procedures for
determining whether the customer appears on any list of known or suspected terrorists or
terrorist organizations issued by any federal government agency and designated as such
by the Department of the Treasury in consultation with the federal functional regulators.
The procedures must require the mutual fund to make such a determination within a
reasonable period of time after the account is opened, or earlier, if required by another
federal law or regulation or federal directive issued in connection with the applicable list.
The procedures must also require the mutual fund to follow all federal directives issued in
connection with such lists.
(5) (i) Customer notice. The CIP must include procedures for providing mutual
fund customers with adequate notice that the mutual fund is requesting information to
verify their identities.
(ii) Adequate notice. Notice is adequate if the mutual fund generally describes the
identification requirements of this section and provides the notice in a manner reasonably
designed to ensure that a customer is able to view the notice, or is otherwise given notice,
before opening an account. For example, depending on the manner in which the account

71
is opened, a mutual fund m a y post a notice on its website, include the notice on its
account applications, or use any other form of written or oral notice.
(iii) Sample notice. If appropriate, a mutual fund may use the following sample
language to provide notice to its customers:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A
NEW ACCOUNT
To help the government fight the funding of terrorism and money laundering
activities, Federal law requires allfinancialinstitutions to obtain, verify, and
record information that identifies each person w h o opens an account.
What this means for you: When you open an account, we will ask for your name,
address, date of birth, and other information that will allow us to identify you.
W e m a y also ask to see your driver's license or other identifying documents.
(6) Reliance on other financial institutions. The CIP may include procedures
specifying when a mutual fund will rely on the performance by another financial
institution (including an affiliate) of any procedures of the mutual fund's CIP, with
respect to any customer of the mutual fund that is opening, or has opened, an account or
has established a similar formal business relationship with the other financial institution
to provide or engage in services, dealings, or other financial transactions, provided that:
(i) Such reliance is reasonable under the circumstances;
(ii) The other financial institution is subject to a rule implementing 31 U.S.C.
5318(h) and is regulated by a federal functional regulator; and
(iii) The other financial institution enters into a contract requiring it to certify
annually to the mutual fund that it has implemented its anti-money laundering program,
and that it (or its agent) will perform the specific requirements of the mutual fund's CIP.
(c) Exemptions. The Commission, with the concurrence of the Secretary, may, by
order or regulation, exempt any mutual fund or type of account from the requirements of

this section. The Commission and the Secretary shall consider whether the exemption is
consistent with the purposes of the Bank Secrecy Act and is in the pub lie interest, and
may consider other appropriate factors.
(d) Other requirements unaffected. Nothing in this section relieves a mutual fund
of its obligation to comply with any other provision in this part, including provisions
concerning information that must be obtained, verified, or maintained in connection with
any account or transaction.

Dated:

James F. Sloan
Director, Financial Crimes Enforcement Network

[Billing Code: 4810-02P; 8010-01]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47752, File No. S7-25-02]

DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA32

Customer Identification Programs For Broker-Dealers

AGENCIES: Financial Crimes Enforcement Network, Treasury; Securities and
Exchange Commission.
ACTION: Joint final rule.
SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), and the Securities and Exchange Commission are
jointly adopting a final rule to implement section 326 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001. Section 326 requires the Secretary of the Treasury to jointly prescribe with
the Securities and Exchange Commission a regulation that, at a minimum, requires
brokers or dealers to implement reasonable procedures to verify the identity of any
person seeking to open an account, to the extent reasonable and practicable; to maintain
records of the information used to verify the person's identity; and to determine whether
the person appears on any lists of known or suspected terrorists or terrorist organizations
provided to brokers or dealers by any government agency. This final regulation applies
to brokers or dealers in securities except for brokers or dealers that register with the

Securities and Exchange Commission solely because they effect transactions in securities
futures products.

DATES:
Effective Date: This rule is effective [INSERT DATE 30 DAYS AFTER DATE
OF PUBLICATION IN THE FEDERAL REGISTER].

Compliance Date: Brokers or dealers subject to this final regulation must compl
with it by October 1, 2003.

FOR FURTHER INFORMATION CONTACT:
Securities and Exchange Commission: Division of Market Regulation, (202) 9420177 or marketreg(a) sec.gov.
Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590; Office of the

General Counsel (Treasury), (202) 622-1927; or the Office of the Assistant Gener
Counsel for Banking & Finance (Treasury), (202) 622-0480.

SUPPLEMENTARY INFORMATION:
I. BACKGROUND
A. Section 326 of the USA PATRIOT Act
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (USA PATRIOT Act or Act).] Title III of the Act,

captioned "International Money Laundering Abatement and Anti-terrorist Financin
of 2001," adds several new provisions to the Bank Secrecy Act (BSA).2 These

Pub. L. 107-56.
31 U.S.C. 5311 etseg.

provisions are intended to facilitate the prevention, detection, and prosecution of
international money laundering and the financing of terrorism. Section 326 of the Act
adds a new subsection (1) to 31 U.S.C. 5318 of the BSA that requires the Secretary of the
Treasury (Secretary or Treasury) to prescribe regulations "setting forth the minimum
standards for financial institutions and their customers regarding the identity of the
customer that shall apply in connection with the opening of an account at a financial
institution."
Section 326 applies to all "financial institutions." This term is defined broadly in
the BSA to encompass a variety of entities, including commercial banks, agencies and
branches of foreign banks in the United States, thrifts, credit unions, private banks, trust
companies, brokers and dealers in securities, investment companies, futures commission
merchants, insurance companies, travel agents, pawnbrokers, dealers in precious metals,
check-cashers, casinos, and telegraph companies, among many others.3
The regulations implementing section 326 must require, at a minimum, financial
institutions to implement reasonable customer identification procedures for (1) verifying
the identity of any person seeking to open an account, to the extent reasonable and
practicable; (2) maintaining records of the information used to verify the person's
identity, including name, address, and other identifying information; and (3) determining
3

See 31 U.S.C. 5312(a)(2), 5312(c)(1)(A). For any financial institution engaged in
financial activities described in section 4(k) of the Bank Holding C o m p a n y Act of
1956, the Secretary is required to prescribe the regulations issued under section
326 jointly with the Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, and the National Credit Union
Administration (collectively, the "banking agencies"), the Securities and
Exchange Commission (Commission or S E C ) , and the Commodity Futures
Trading Commission (CFTC).

whether the person appears on any lists of k n o w n or suspected terrorists or terrorist
organizations provided to the financial institution by any government agency. In

prescribing these regulations, the Secretary is directed to take into consideration the type
of accounts maintained by different types of financial institutions, the various methods of
opening accounts, and the types of identifying information that are available.
B. Overview of Comments Received
On July 23, 2002, Treasury and the SEC jointly proposed a rule to implement
section 326 with respect to brokers or dealers in securities (broker-dealers).4 We received
20 comments in response to the proposal.5 Commenters included broker-dealers,
financial services holding companies and trade associations. Commenters generally
supported the proposal but suggested revisions.

Customer Identification Programs for Broker-Dealers, Securities Exchange Act of
1934 Release No. 46192 (July 12, 2002), 67 F R 48306 (July 23, 2002) (Notice of
Proposed Rulemaking or N P R M ) . Treasury simultaneously pub lished (1) jointly
with the banking agencies, a proposed rule applicable to banks (as defined in 31
C F R 103.11(c)) and foreign branches of insured banks; (2) a proposed rule
applicable to credit unions, private banks and trust companies that do not have a
federal functional regulator; (3) jointly with the S E C , a proposed rule applicable
to mutual funds; and (4) jointly with the C F T C , a proposed rule applicable to
futures commission merchants and introducing brokers. Customer Identification
Programs for Barks, Savings Associations, and Credit Unions, 67 F R 48290 (July
23, 2002); Customer Identification Programs for Certain Banks (Credit Unions,
Private Banks and Trust Companies) That D o Not Have a Federal Functional
Regulator, 67 F R 48299 (July 23, 2002); Customer Identification Programs for
Mutual Funds, IC-25657 (July 12, 2002), 67 F R 48318 (July 23, 2002); Customer
Identification Programs for Futures Commission Merchants and Introducing
Brokers, 67 F R 48328 (July 23, 2002). Treasury, the Commission, the C F T C , and
the banking agencies received approximately 500 comments in response to these
proposed rules. M a n y of those commenters raised issues similar to those w e
received in connection with the proposal respecting broker-dealer customer
identification programs.
The comment letters are available for public inspection and copying in the SEC's
Public Reference R o o m , 450 5th Street, N W , Washington, D C (File N o . S7-2502).

Fifteen commenters addressed the proposed rule's definition of "customer." The
inclusion in the definition of persons with authority over an account caused the greatest
number of comments. The commenters provided several reasons why verifying this class
of persons would be difficult. Many suggested using a risk-based approach.
Commenters also suggested that the definition not include public companies, government
agencies, investment advisors, investment advisor sub-account holders, beneficiaries of
retirement accounts, or persons whose account relationship with the broker-dealer was
limited to delivery- versus-payment transactions.
Twelve commenters addressed the proposed rule's recordkeeping requirements.
The primary concern noted was the requirement to retain copies of documents used to
verify the identities of customers. This was stated to be a substantial recordkeeping
burden. Commenters suggested, as an alternative, requiring a record of the type of
document used. Some commenters also were concerned about the requirement that these
records be maintained until five years after the account is closed. They suggested shorter
retention periods.
Twelve commenters addressed the effective date of the proposed rule. They
suggested varying implementation periods ranging from 90 days to two years.
Nine commenters addressed the verification requirement in the proposed rule.
Several commenters suggested that existing customers or long-time acquaintances need
not be rerified. Others suggested additional verification methods such as using legal
opinions and annual reports. Two commenters requested clarification that broker-dealers
would not be responsible for verifying the validity of verification documents. One

commenter requested clarification that customers could be verified using both
documentary and non-documentary methods.
Seven commenters addressed the proposed rule's definition of "account." Some
requested that the definition only apply to accounts established to provide ongoing
services. Others suggested that the definition should not include the sale of mutual funds
or variable life products on a subscription way basis or dealer-to-dealer deli very-versuspayment transactions.
Seven commenters addressed the proposed rule's customer notice requirement.
Three commenters suggested that the rule set forth model notice language. Two
commenters suggested that the rule permit notice to be given within a reasonable time
after the account is opened.
Six commenters addressed the provision in the proposed rule permitting reliance
between clearing and introducing broker-dealers. Generally, most of the commenters
suggested the provision be expanded to allow for reliance between an executing dealer
and prime broker and between a broker-dealer and its affiliates and other types of
financial institutions such as banks, investment advisers and commodities firms.
Three commenters addressed the requirement to collect minimum types of
identifying information. One suggested that the rule not require a residential address
since some persons may not have such an address. One suggested that the rule allow
accounts to be opened even if all the required identifying information is not obtained,
provided the broker-dealer has a reasonable belief that it knows the true identity of the
customer. One suggested that the requirement be risk-based.

Three commenters addressed the requirement to check customers against terrorist
lists. One suggested that FinCEN act as a clearinghouse for such lists. One suggested
that the rule identify the lists that must be checked and specify which agencies can
provide them. One suggested permitting the lists to be checked within a reasonable time
after an account is opened and that the lists be provided in a single electronic format.
One commenter addressed the proposed rule's definitions of "U.S. person" and
"Non-U.S. person." The commenter suggested that the rule use the definitions on certain
Internal Revenue Service forms.
One commenter expressed concern as to whether the Fair Credit Reporting Act
(FCRA) would apply to verification database searches. It requested an exemption from
the FCRA for such searches.
We have modified the proposed rule in light of many of these comments and
comments made with respect to the customer identification and verification rules being
adopted for other financial institutions. The section-by-section analysis that follows
discusses the comments and the modifications that we have made to the rule.
C. Codification of the Joint Final Rule
The final rule is being issued jointly by Treasury, through FinCEN, and the SEC.
It applies to any person that is registered or required to be registered with the
Commission as a broker or dealer under the Securities Exchange Act of 1934 (Exchange
Act),6 except persons who register solely for the purpose of effecting transactions in

15 U.S.C. 77a eLseq.

securities futures products. The substantive requirements of this jointfinalrule will be
codified as part of Treasury's BSA regulations located in 31 CFR Part 103.8 SEC Rule
17a-89 requires broker-dealers to comply with all reporting, recordkeeping and record
retention requirements under the BSA. The final rule being adopted today falls directly
within the scope of Rule 17a-8, and will be examined for, and enforced, by the
Commission and appropriate self-regulatory organizations.
Final rules governing the applicability of section 326 to certain other financial
institutions, including banks, thrifts, credit unions, mutual funds and futures commission
merchants, are being issued separately. Treasury, the SEC, the CFTC and the banking
agencies consulted extensively in the development of all joint rules implementing section
326 of the Act. These participating agencies intend the effect of the final rules to be
uniform throughout the financial services industry. Treasury intends to issue separate
rules under section 326 for certain non-bank financial institutions that are not regulated
by one of the Federal Functional regulators.
D. Compliance Date
Many commenters requested that broker-dealers be given adequate time to
develop and implement the requirements of any final rule implementing section 326. The

Brokers or dealers that limit their securities business to effecting transactions in
securities futures products m a y register with the Commission pursuant to 15
U.S.C 78o(b)(l 1). These persons will be subject to the customer identification
rule being issued by the C F T C .
The regulation will be codified at 31 CFR 103.122.
17CFR240.17a-8.

transition periods suggested by commenters ranged from 90 days to two years after the
publication of a final rule.
The final rule modifies various aspects of the proposed rule and eliminates some
of the requirements that commenters identified as being most burdensome. Nonetheless,
we recognize that some broker-dealers will need time to develop and implement the
customer identification program (CIP) required under the rule, as doing so may include
various measures, such as training staff, reprinting forms, and programming automated
systems. Accordingly, although this rule will be effective 30 days after publication,
broker-dealers will have a transition period to implement the rule. Broker-dealers must
fully implement their CIPs under the final rule by October 1, 2003.10

H. THE JOINT FINAL RULE
A. Section-by-Section Analysis
Section 103.122(a) Definitions.
Section 103.122(a)(1) Account. We proposed to define "account" as any formal
business relationship with a broker-dealer established to effect financial transactions in
securities, including, but not limited to, the purchase or sale of securities, securities loan
and borrowed activity or the holding of securities or other assets for safekeeping or as
collateral.11
Four commenters suggested that the definition of "account" incorporate the
concept of ongoing relationships to make it consistent with the rules proposed by the
banking agencies. The bank rules limited the definition of "account" to "ongoing
10

1 ]

The CIP rules issued by the other Federal functional regulators also have an
implementation date of October 1, 2003.
The proposed rule text is set forth in the NPRM, 67 FR at 48317.

transactions" to specifically address situations where a person obtains certain services or
products from a bank such as cashing or buying a check or purchasing a wire transfer or
money order. In the final rules being issued by Treasury and the banking agencies, the
definition of account no longer contains the term "ongoing." Instead, the definition of
"account" now specifically excludes these types of products or services or any others
where a "formal banking relationship" is not established with the person.12 They are
being excluded because, standing alone, they do not establish a formal banking
relationship. Moreover, they generally are covered by other provisions of the BSA.13
Except in conjunction with an established securities account, broker-dealers do not offer
products or services similar to those excluded in the bank rules. Thus, we did not include
the term "ongoing" in the definition of account or adopt the specific exclusion included in
the bank rule.14
Two commenters requested clarification as to whether the sale of mutual fund
shares or variable life annuities on a subscription way basis constituted an account
relationship, given that the broker-dealer's role in the transactions could be considered
limited. We believe these transactions can give rise to an account relationship and,
therefore, have not excluded them specifically from the definition of account. However,

See 31 C F R 103.121(a)(1).
For example, 31 CFR 103.29 requires banks to obtain and verify identifying
information of any person w h o purchases a bank check or draft, cashier's check,
m o n e y order or traveler's check of $3,000 or more.
See final rule, paragraph (a)(l)(i).

changes w e made to the reliance and recordkeeping sections of the rule address many of
the concerns raised by these commenters.15
We also have removed the word "business" from the definition of account. This

change is made to clarify further that the rule applies to relationships established for t

purpose of effecting securities transactions as opposed to general business dealings, such
as those established in connection with a broker-dealer's own operations or premises.
The definition of "account" in the proposed rule contained a second sentence

setting forth examples of the types of accounts that would constitute an "account" for the
purposes of the rule. The examples - cash accounts, margin accounts, prime brokerage
accounts and accounts established to engage in securities repurchase transactions - were
not intended to be an exhaustive list. These types of accounts remain "accounts" for the

purposes of the final rule. However, the final rule text no longer specifically cites them
as examples in order to make clear that the list was not exhaustive.17
The final rule now contains two exclusions from the definition of "account." The

first is for certain transferred accounts.18 The Notice of Proposed Rulemaking stated that
transfers of accounts from one broker-dealer to another were outside the definition of
"account" for purposes of the proposed rule.19 The final rule codifies and expands this

The changes - discussed later in the Release- permit broker-dealers to rely on
mutual funds to perform the CIP requirements and eliminate the requirement to
retain a copy of documents used to verify the identity of a customer.

See NPRM, 67 FR at 48317.

See final rule, paragraph (a)(l)(i).

See final rule, paragraph (a)(l)(ii)(A).

See NPRM, Section II.A, 67 FR at 48307.

exception, by excluding from the definition of "account" any account that a broker-dealer
acquires through an acquisition, merger, purchase of assets, or assumption of liabilities.
Customers do not initiate these transfers and, therefore, the accounts do not fall within the
scope of section 326.20 Transfers may, however, fall within the broader scope of the antimoney laundering program rules required under section 352 of the USA PATRIOT Act.21
Accordingly, in developing and implementing programs under section 352, brokerdealers should consider situations where it would be appropriate to verify the identity of
customers associated with transferred accounts.22
The rule also now excludes from the definition of "account" accounts opened for
the purpose of participating in an employee benefit plan established pursuant to the
Employee Retirement Income Security Act of 1974.23 Seven commenters recommended
that the rule not cover these types of accounts. These accounts are less susceptible to be

Transfers of accounts that result from an introducing broker-dealer changing its
clearing firm would fall within this exclusion. However, the introducing firm and
the n e w clearing firm would need to meet the requirements in paragraph (b)(6)
(such as entering into a contract and providing certifications) to the extent they
intend to rely on each other to undertake CIP requirements with respect to
customers that open accounts after the transfer.
Section 352 requires brokers and dealers to establish anti-money laundering
programs that, at a minimum, include (1) the development of internal policies,
procedures, and controls; (2) the designation of a compliance officer; (3) an
ongoing employee training program; and (4) an independent audit function to test
programs. O n April 22, 2002, the Commission approved rule changes submitted
by the N A S D and the N Y S E . Exchange Act Release N o . 45798 (April 22, 2002),
67 F R 20854 (April 26, 2002). These rules ( N A S D Rule 3011 and N Y S E Rule
445) set forth m i n i m u m requirements for these programs.
For example, it may be appropriate to verify transferred accountholders if the
accounts are coming from a broker-dealer that was found to have failed to
establish or maintain an adequate CIP.
Final rule, paragraph (a)(l)(ii)(B).

used for thefinancingof terrorism and money laundering because, among other reasons,
they are funded through payroll deductions in connection with employment plans that
must comply with federal regulations. These regulations impose, among other
requirements, low contribution limits and strict distribution requirements.
Section 103.122(a)(2) Broker-dealer. We proposed to define "broker-dealer" as
any person registered or required to be registered with the Commission, except persons
who register solely to effect transactions in securities futures products.24 There were no
comments on this definition and we are adopting it as proposed.25
Section 103.122(a)(3) Commission. We proposed to define "Commission" as the
United States Securities and Exchange Commission.26 There were no comments on this
definition and we are adopting it as proposed.27
Section 103.122(a)(4) Customer. We proposed "customer" to mean any person
who opens a new account with a broker-dealer, and any person granted authority to effect
transactions in an account.28 Fifteen commenters expressed concern about the proposed
definition. Nine commenters suggested that the definition not include persons with
authority over accounts. Some suggested that these persons be excluded from the
definition entirely while others proposed using a risk-based approach. Seven commenters
suggested that the sponsors of employee benefit plans be considered customers, rather

See NPRM, 67 FR at 48317.

See final rule, paragraph (a)(2).

See NPRM, 67 FR at 48317.

See final rule, paragraph (a)(3).
28

See NPRM, 67 FR at 48317.

than the beneficiaries. Three commenters suggested that the definition of "customer"
exclude beneficiaries of trust and escrow accounts. Three commenters suggested that the
definition exclude beneficiaries of omnibus accounts. Two commenters suggested that
the definition exclude persons who are allocated portions of delivery-versus-payment
securities transactions at the direction of an investment advisor. One commenter
suggested that the definition may not capture registered owners of an account if someone
else undertook the necessary steps to open the account for the owners. One commenter
suggested that the definition exclude banks, government agencies and public companies.
We have addressed most of these comments and other issues through revisbns to the
definition of customer and through changes made to other sections of the rule.
For consistency with the Act, the final rule defines "customer" as "a person that
opens a new account." This means the person identified as the accountholder, except in
the case of minors and non-legal entities. It does not refer to persons who fill out the
account opening paperwork or provide information necessary to set up an account, if such
persons are not the accountholder as well. Thus, under this rule, a broker-dealer is not
required to look through a trust, or similar account to its beneficiaries, and is required
only to verify the identity of the named accountholder.30 Similarly, with respect to an
omnibus account established by an intermediary, a broker-dealer is not required to look

Final rule, paragraph (a)(4)(i)(A).

However, as discussed below, under paragraph (b)(2)(ii)(C) of the final rule, a
broker-dealer, based on its risk-assessment of a n e w account, m a y need to take
additional steps to verify the identity of a customer that is not an individual, such
as obtaining information about persons with control over the account. In addition,
the due diligence procedures required under other provisions of the B S A or the
securities laws m a y require broker-dealers to look through to owners of certain
types of accounts.

through the intermediary to the underlying beneficial owners, if the intermediary is
identified as the accountholder.31
As mentioned, we received the greatest number of comments for defining persons
with authority over an account as "customers." This component of the companion CIP
rules proposed for banks, mutual funds and commodities firms also garnered a great deal
of comment. Commenters asserted that the proposal in this respect was overbroad and
unduly burdensome, and would not further the goals of the statute.32 Some commenters
did acknowledge that a risk-based approach would be appropriate.
After revisiting this component of the "customer" definition, we have determined
that requiring limited resources to be expended on verifying the identities of persons with
authority over accounts could interfere with a broker-dealer's ability to focus on
identifying customers and accounts that present a higher risk of not being properly
identified. Accordingly, the final rule does not include persons with authority over
accounts in the definition of "customer."33 Instead, paragraph (b)(2)(ii)(C) of the final
rule requires a broker-dealer's CIP to address situations where the broker-dealer will take
additional steps to verify the identity of a customer that is not an individual by seeking

The final rule does not affect any requirements under 17 CFR 240.17a-3(a)(9) to
m a k e records with respect to the beneficial owners of certain accounts.

For example, commenters pointed out that corporations and other entities may
have a substantial number of individuals authorized to act on their behalf, and that
administrative personnel and other individuals acting on the entity's behalf m a y
pose a minimal risk of m o n e y laundering, especially w h e n the entity is a publicly
traded company. Several commenters emphasized that requiring an individual
employee to disclose personal information to all of the employer's financial
institutions m a y be an unwarranted intrusion into the privacy of those individuals,
increasing theirriskof becoming victims of identity theft.

See final rule, paragraph (a)(4).

information about individuals with authority or control over the account in order to verify
the customer's identity.
The definition of "customer" has been revised to clarify the treatment of minors
and informal groups (non-legal entities) with a common interest (e.g., civic clubs).34 In
the case of a minor or informal group, the "customer" for purposes of the rule is the
individual who undertakes to open the account in the name of the minor or the group.
Generally, this will be the person who fills out the account opening paperwork and
provides the information necessary to set up the account in the name of the minor or
group.
In order to make the rule less burdensome, the final rule excludes from the
definition of "customer" certain readily identifiable entities, including: (1) financial
institutions regulated by a federal functional regulator; (2) banks regulated by a state
bank regulator; and (3) persons described in section 103.22(d)(2)(ii)-(iv) of the BSA
regulations. These excluded persons include entities such as governmental agencies and
instrumentalities and companies that are publicly traded.35 The definition of "customer"
also excludes a person who has an existing account with the broker-dealer, provided that
the broker-dealer has a reasonable belief that it knows the true identity of the person.
Section 103.122(a)(5) Federal functional regulator. We have added a definition
of "Federal functional regulator" to the final rule.36 The term is used in connection with

See final rule, paragraph (a)(4)(i)(B).

See final rule, paragraph (a)(4)(h). Section 103.22(d)(2)(iv) exempts publicly
traded companies only to the extent of their domestic operations. Accordingly, a
broker-dealer's CIP will apply to any foreign offices, affiliates, or subsidiaries of
such entities that open n e w accounts.

Final rule, paragraph (a)(5).

the n e w provision in the rule allowing broker-dealers to rely on certain other financial
institutions.37 One of the requirements for such reliance is that the other financial
institution be regulated by a Federal functional regulator. The final rule uses the
definition of "Federal functional regulator" in section 103.120(a)(2) of the BSA
regulations, meaning each of the banking agencies, the SEC and the CFTC.
Section 103.122(a)(6) Financial institution. We have added a definition of
"financial institution" to the final rule.38 The term is used in connection with the new
provision in the rule allowing broker-dealers to rely on certain other "financial
institutions." The definition of "financial institution" cross-references the BSA, 31
U.S.C. 5312(a)(2) and (c)(1). This is a more expansive definition of "financial
institution" than that in section 103.11 of the BSA regulations, and includes entities such
as commodities firms.
Section 103.122(a)(7) Taxpayer identification number. The proposed rule
contained a definition of "taxpayer identification number" because that term is used later
in the rule with respect to the types of information broker-dealers must collect from
customers.39 The term was defined by referencing the provisions of section 6109 of the
Internal Revenue Code of 1986 and the regulations of the Internal Revenue Service (IRS)
promulgated under that act. There were no comments on this approach and, therefore, we
have adopted it as proposed.40

Seefinalrule, paragraph (b)(6).

Final rule, paragraph (a)(6).

See NPRM, 67 FR at 48317.

See final rule, paragraph (a)(7).

Section 103.122(a)(8) U.S. Person and $ 103.131(a)(9) Non-U.S. person.
The proposed rule defined "U.S. person" as an individual who is a U.S. citizen, or
an entity established or organized under the laws of a State or the United States.41 A
"non-U.S. person" was defined as a person who did not satisfy either of these criteria.42
One commenter suggested that the definitions of "U.S. person" and "non-U.S. person"
should comport with the definitions in certain IRS forms.
We believe that the proposed definitions of "U.S. person" and "Non-U.S. person"
are better standards for purposes of this final rule than the IRS definitions. Adoption of
the IRS definition of "U.S. person" would require broker-dealers to distinguish among
various tax and immigration categories in connection with any type of account that is
opened. Under the proposed definition, a broker-dealer will not necessarily need to
establish whether a potential customer is a U.S. citizen. The broker-dealer will have to
ask each customer for a U.S. taxpayer identification number (social security number,
employer identification number, or individual taxpayer identification number). If a

The proposed rule contained a definition of "person" that cross-referenced the
definition in section 103.1 l(z) of the B S A regulations. Since thefinalrule is
being codified in 31 C F R Part 103, it will incorporate the definition in section
103.11 (z) without the need for a specific citation. Therefore, the citation has been
removed from thefinalrule. The definition of "person" in section 103.1 l(z)
applicable to thefinalrule is: "an individual, a corporation, a partnership, a trust
or estate, a joint stock company, an association, a syndicate, joint venture, or other
unincorporated organization or group, an Indian tribe (as that term is defined in
the Indian G a m i n g Regulatory Act), and all entities cognizable as legal
personalities."
As described in greater detail below, a broker-dealer is generally required to
obtain a U.S. taxpayer identification number from a customer w h o opens a n e w
account. However, if the customer is a non-U.S. person and does not have such a
number, the broker-dealer m a y obtain an identification number from some other
form of government-issued document evidencing nationality or residence and
bearing a photograph or similar safeguard.

customer cannot provide one, the broker-dealer m a y then accept alternative forms of
identification. Therefore, the definitions are adopted as proposed.43
Section 103.122(b) Customer identification program: minimum requirements.
Section 103.122(b)(1) In General.
We proposed to require that each broker-dealer establish, document, and maintain
a written CIP as part of its required anti-money laundering (AML) program,44 and that
the procedures of the CIP enable the broker-dealer to form a reasonable belief that it
knows the true identity of a customer.45 The CIP procedures were to be based on the type
of identifying information available and on an assessment of relevant risk factors,
including the broker-dealer's size; location and methods of opening accounts, the types of
accounts maintained for customers and types of transactions executed for customers, and
the broker-dealer's reliance on another broker-dealer.46
The NPRM discussed these risk factors and explained that, although the rule
requires certain minimum identifying information and suitable verification methods,
broker-dealers should consider on an ongoing basis whether other information or
methods are appropriate, particularly as they become available in the future.
Commenters generally supported the approach of the proposed general CIP requirements.

Seefinalrule, paragraphs (a)(8) and (a)(9).
NASD Rule 3011 and NYSE Rule 445 set forth minimum requirements for these
programs.
See NPRM, 67 FR at 48317.
Id.
See NPRM, Section II.B, 67 FR at 48307 - 48308.

In thefinalrule, paragraph (b)(1) continues to set forth the general requiremert
that a broker-dealer must establish, document, and maintain a written CIP as part of its
required AML program. It now provides that the CIP should be appropriate for the
broker-dealer's size and business and that, at a minimum, it must contain the
requirements set forth in paragraphs (b)(1) through (b)(5) (which are discussed below).
The final rule was re-organized in order to be structurally consistent with the rules being
issued by the banking agencies. Thus, requirements that had been set forth in paragraphs
(c), (d), (e), (f), (g) and (h) in the proposed rule are now contained in paragraphs (b)(2)
through (b)(5) of the final rule to the extent they have been adopted.48 The rule's
structure was changed in order to avoid causing confusion by having different looking
rules and to affirm the intent of Treasury and the Federal functional regulators that all the
CIP rules impose the same requirements.
Finally, the reference to risk factors has been moved to paragraph (b)(2) of the
final rule, which requires broker-dealers to establish identity verification procedures.
This change was made to highlight that the risk factors should be considered specifically
when developing identification verification procedures.
Section 103.122(b)(2) Identity verification procedures.
We proposed to require that a broker-dealer's CIP include procedures for
verifying the identity of customers, to the extent reasonable and practicable, using

Paragraph (b)(6) of the final rule is not specified as a minimum CIP requirement
because it contains the provisions permitting broker-dealers to rely on another
financial institution. Reliance under this paragraph is optional.

The other requirements of the final rule - such as providing notice to customers,
checking government lists, and recordkeeping - are standard requirements that
m a y not vary depending on risk factors.

information specified in the rule, and that such verification occur within a reasonable
time before or after the customer's account is opened or the customer is granted authority
to effect transactions with respect to an account.50 Commenters supported these general
requirements, although several commenters recommended greater use of a risk-based
approach.
The final rule continues to strike a balance between flexibility and detailed
guidance, and we are adopting the provisions on identity verification procedures
substantially as proposed.51 Under the final rule, a broker-dealer's CIP must include riskbased procedures for verifying the identity of each customer to the extent reasonable and
practicable.52 Such procedures must enable the broker-dealer to form a reasonable belief
that it knows the true identity of each customer.53 The procedures must be based on the
broker-dealer's assessment of the relevant risks, including those presented by the various
types of accounts maintained by the broker-dealer, the various methods of opening
accounts provided by the broker-dealer, the various types of identifying information
available and the broker-dealer's size, location and customer base.54
Section 103.122(b)(2)(i) Customer information required.
The proposed rule would have required a broker-dealer's CIP to require the firm
to obtain certain identifying information about each customer, including, at a minimum:

See NPRM, 67 FR at 48317.

See final rule, paragraph (b)(2).

Id.

(1) name; (2) date of birth, for a natural person; (3) certain addresses;55 and (4)
identification number.56 The NPRM further stated that in certain circumstances a brokerdealer should obtain additional identifying information, and that the CIP should set forth
guidelines regarding those circumstances and the additional information that should be
obtained.57
Three commenters submitted comments on the required information component
of the proposed rule. One commenter pointed out that certain persons may not have
permanent residential addresses because they are military personnel living overseas or are
living on boats. This commenter suggested the rule only require that a mailing address be
obtained. Another commenter suggested that the rule permit broker-dealers to open an
account even if all the minimum identifying information is not obtained, provided the
broker-dealer has a reasonable belief that it knows the customer's true identity. The final
commenter suggested the rule be risk-based with respect to the required minimum
information. This commenter also stated that the rule should require a mailing address
only.

W e proposed to require broker-dealers to obtain residence and mailing addresses
(if different) for a natural person, or principal place of business and mailing
address (if different) for a person other than a natural person. See N P R M , 67 F R
at 48317.
We proposed to require broker-dealers to obtain: (1) for a customer that is a U.S.
person, a taxpayer identification number, or (2) for a customer that is not a U.S.
person, a taxpayer identification number, passport number and country of
issuance, alien identification card number, or number and country of issuance of
any other government-issued document evidencing nationality or residence and
bearing a photograph or similar safeguard. See N P R M , 67 F R at 48317.
See NPRM, Section II.C, 67 FR at 48308 - 48309.

W e are adopting the customer information provisions substantially as proposed
with changes to accommodate individuals who may not have physical addresses.58 We
believe the minimum required information is collected by most broker-dealers already, is
necessary for the verification process and serves an important law enforcement function.
Accordingly, prior to opening an account, a broker-dealer must obtain, at a mimmum, a
customer's (1) name; (2) date of birth, for an individual; (3) address; and (4)
identification number.59 The address must be (1) for an individual, a residential or
business street address, or for an individual who does not have a residential or business
street address, an Army Post Office or Fleet Post Office box number, or the residential or
business street address of next of kin or another contact individual; or (2) for a person
other than an individual, a principal place of business, local office or other physical
location.
We are adopting the identification number requirement substantially as
proposed.61 For a customer that is a U.S. person, the identification number is a taxpayer
identification number (social security number or employer identification number).62 For
a customer that is not a U.S. person, the identification number is one or more of the
following: a taxpayer identification number, passport number and country of issuance,

Final rule, paragraph (b)(2)(i)(A).

Based on an assessment of the relevantriskfactors, the broker-dealer's CIP m a y
require a customer to provide additional information to establish the customer's
identity.

Final rule, paragraph (b)(2)(i)(A)(3).

See NPRM, 67 FR at 48317.

Final rule, paragraph (b)(2)(i)(A)(4).

alien identification card number, or number and country of issuance of any other
government- issued document evidencing nationality or residence and bearing a
photograph or similar safeguard.63 This provision provides a broker-dealer with some
flexibility to choose among a variety of information numbers that it may accept from a
non-U.S. person. However, the identifying information the broker-dealer accepts must
permit the firm to form a reasonable belief that it knows the true identity of the
customer.65
The proposed rule included an exception from the requirement to obtain a
taxpayer identification number from a customer opening a new account.66 The exception
would have allowed a broker-dealer to open an account for a person that has applied for,
but has not yet received, an employer identification number (EIN).67 We are adopting an

Id.

The final rule provides this flexibility because there is no uniform identification
number that non-U.S. persons would be able to provide to a broker-dealer. See
Treasury Department, " A Report to Congress in Accordance with Section 326(b)
of the U S A P A T R I O T Act," October 21, 2002.

We emphasize that the rule neither endorses nor prohibits a broker-dealer from
accepting information from particular types of identification documents issued by
foreign governments. The broker-dealer must determine, based upon appropriate
risk factors, including those discussed above, whether the information presented
by a customer is reliable. W e recognize that a foreign business or enterprise m a y
not have an identification number. Therefore thefinalrule notes that w h e n
opening an account for such a customer, the broker-dealer must request
alternative government-issued documentation certifying the existence of the
business or enterprise.

66
67

See NPRM, 67 FR at 48317.
This position is analogous to that in regulations issued by the Internal Revenue
Service (IRS) concerning "awaiting - T I N [taxpayer identification number]
certificates." The IRS permits a taxpayer to furnish an "awaiting-TIN certificate"
in lieu of a taxpayer identification number to exempt the taxpayer from the

expanded version of this exception in thefinalrule.68 A s proposed, the exception was
limited to persons that are not natural persons.69 On further consideration, we have
determined that it is appropriate to expand the exception to include natural persons who
have applied for, but have not received, a taxpayer identification number.70 We also have
modified the exception to reduce the recordkeeping burden. The proposed rule would
have required the broker-dealer to retain a copy of the customer's application for a
taxpayer identification number.71 The final rule permits the broker-dealer to exercise
discretion to determine how to confirm that a person has filed an application.72
Section 103.122(b)(2)(H) Customer verification.
We proposed to require that a broker-dealer's CIP include procedures for
verifying the identity of customers, to the extent reasonable and practicable, using the
information obtained under the rule.73 We also proposed to require such verification to
occur within a reasonable time before or after the customer's account is opened or the

withholding of taxes owed on reportable payments (Le^ interest and dividends) on
certain accounts. See 26 C F R 31.3406(g)-3.
68

Seefinalrule, paragraph (b)(2)(i)(B).

In the NPRM, we explained that the exception was for new businesses that may
need to open a brokerage account before they receive an E I N from the Internal
Revenue Service. See N P R M , Section II.C, 67 F R at 48309.

Final rule, paragraph (b)(2)(i)(B).

See NPRM, 67 FR at 48317.

The broker-dealer's CIP must include procedures to confirm that the application
wasfiledbefore the person opens the account and to obtain the taxpayer
identification number within a reasonable period of time after the account is
opened.

See NPRM, 67 FR at 48317.

customer is granted authority to effect transactions with respect to an account.74 The
NPRM stated that a broker-dealer need not verify each piece of identifying information if
it is able to form a reasonable belief that it knows the customer's identity after verifying
only certain of the information.75 The NPRM also stated that the flexibility to undertake
verification within a reasonable time must be exercised in a reasonable manner.76 It
noted that verifications too far in advance may become stale and verifications too long
after the fact may provide opportunities to launder money while verification is pending,
and that the appropriate amount of time may depend on the type of account opened,
whether the customer opens the account in person, and the type of identifying
information available.77
Five commenters suggested that the rule should not require existing customers to
be verified. Two of these commenters also pointed out that a second account is not
created when a customer changes a cash account into a margin account. Accordingly,
they argued that the changing of a cash account into a margin account should not be
considered the opening of a new account. As discussed above, the definition of
"customer" in the final rule has been changed to exclude persons who have an existing
account at the broker-dealer, provided the broker-dealer has a reasonable belief that it
knows the customer's true identity. Accordingly, broker-dealers will not be required to
verify the identities of such persons. One commenter also suggested that the rule should
not require broker-dealers to verify the identities of personal acquaintances.
74

NPRM, Section II.D, 67 FR at 48309.

Id.

The final rule adopts the customer verification requirements substantially as
proposed, with modifications that conform this provision of the final rule to the revised
definition of "customer," described above. The final rule requires that the CIP contain
procedures for verifying the identity of the customer, using the customer information
obtained in accordance with paragraph (b)(2)(i), within a reasonable time before or after
the account is opened.78 The final rule does not require the identity of a person granted
authority to effect transactions in an account to be verified.
As stated in the NPRM, broker-dealers must reasonably exercise the flexibility to
undertake verification before or after an account is opened. The amount of time may
depend on various factors, such as the type of account opened, whether the customer
opens the account in-person, and the type of identifying information that is available.79
The final rule also requires that a broker-dealer's CIP include procedures that
describe when the firm will use documents, non-documentary methods, or a combination
of both to verify customer identities.80 Depending on the type of customer and the
method of opening an account, it may be more appropriate to use either documentary or
non-documentary methods, and in some cases it may be appropriate to use both methods.
The CIP should set forth guidelines describing when documents, non-documentary

Final rule, paragraph (b)(2)(h).
It is possible, however, that a broker-dealer would violate other laws by
permitting a customer to transact business prior to verifying the customer's
identity. See, e.g., 31 C F R Part 500 (regulations of Treasury's Office of Foreign
Asset Control prohibiting transactions involving designated foreign countries or
their nationals).
Final rule, paragraph (b)(2)(h).

methods, or a combination of both will be used. These guidelines should be based on the
broker-dealer's assessment of the relevant risk factors.
Finally, with respect to the comment on personal acquaintances, we believe it
would be inappropriate to provide special treatment for such customers. The rule is
sufficiently flexible to make their verification as unobtrusive as possible.
Section 103.122(b)(2)(ii)(A) Customer verification - through documents.
We proposed to require that a broker-dealer's CIP describe documents that the
firm will use to verify customers' identities.81 Suitable documents for verification would
include: (1) for natural persons, unexpired government-issued identification evidencing
nationality or residence and bearing a photograph or similar safeguard; and (2) for
persons other than natural persons, documents showing the existence of the entity, such
as certified articles of incorporation, a government-issued business license, a partnership
agreement, or a trust instrument.
Three commenters submitted comments on this aspect of the rule. Two
commenters sought clarification that broker-dealers will not be responsible for ensuring
the validity of verifying documents. One commenter suggested that certificates of trust
and legal opinions should be suitable documents for verification.
The final rule attempts to strike an appropriate balance between the benefits of
requiring additional documentary verification and the burdens that may arise from such a
requirement. The final rule requires a broker-dealer's CIP to contain procedures that set

See N P R M , 67 F R at 48317.

forth the documents that the firm will use for verification.82 Each broker-dealer will
conduct its own risk-based analysis of the types of documents that it believes will enable
it to verify the true identities of customers.
In light of recent increases in identity theft and the availability of fraudulent
documents, we believe that the value of documentary verification is enhanced by
redundancy. The rule gives examples of types of documents that are considered
reliable. However, we encourage broker-dealers to obtain more than one type of
documentary verification to ensure that it has a reasonable belief that it knows the
customer's true identity. Moreover, we encourage broker-dealers to use a variety of
methods to verify the identity of a customer, especially when the broker-dealer does not
have the ability to examine original documents.
The final rule continues to include, without significant change, an illustrative list
of identification documents.84 A broker-dealer may use other documents, provided they
allow the firm to establish a reasonable belief that it knows the true identity of the
customer. In addition to the risk factors described in paragraph (b)(2), the broker-dealer
should take into account the problems of authenticating documents and the inherent

Final rule, paragraph (b)(ii)(A).

Id. Other documents, such as the trust certificates and legal opinions suggested by
one commenter, also m a y be appropriate for verification. The list in the rule is
meant to be illustrative.

For an individual, these documents may include unexpired government-issued
identification evidencing nationality or residence and bearing a photograph or
similar safeguard, such as a driver's license or passport. Final rule, paragraph
(b)(2)(ii)(A)(J_). For a person other than an individual, these documents m a y
include documents showing the existence of the entity, such as certified articles of
incorporation, a government- issued business license, a partnership agreement, or a
trust instrument. Final rule, paragraph (b)(2)(ii)(A)(2).

limitations of documents as a means of identity verification. These limitations will affect
the types of documents that will be necessary to establish a reasonable belief that the
broker-dealer knows the true identity of the customer, and may require the use of nondocumentary methods in addition to documents.
Finally, with respect to the comments on ensuring the validity of documents, once
a broker-dealer obtains and verifies the identity of a customer through a document, such
as a driver's license or passport, the firm is not required to take steps to determine
whether the document has been validly issued. A broker-dealer generally may rely on
government issued identification as verification of a customer's identity; however, if a
document shows obvious indications of fraud, the broker-dealer must consider that factor
in determining whether it can form a reasonable belief that it knows the customer's true
identity.
Section 103.122(b)(2)(ii)(B) Customer verification — through non-documentary
methods.
We proposed to require a broker-dealer's CIP to describe the non-documentary
methods the broker-dealer would use to verify customers' identities and when the firm
would use these methods in addition to, or instead of, relying on documents.85 We
explained that the proposed rule allowed the exclusive use of non-documentary methods
because some accounts are opened by telephone, mail, or over the Internet. We also

See N P R M , 67 F R at 48317.
See NPRM, Section II.D.2, 67 FR at 48310.

noted that, even if the customer presents identification documents, it might be appropriate
to use non-documentary methods as well.87
The proposed rule provided examples of non-documentary verification methods
that a broker-dealer may use, including: contacting a customer; independently verifying
information through credit bureaus, public databases, and other sources; and checking
references with other financial institutions. In the NPRM, we observed that brokerdealers may wish to analyze whether there is logical consistency between the identifying
information provided, such as the customer's name, street address, ZIP code, telephone
number (if provided), date of birth, and social security number.88
We proposed to require broker-dealers to use non-documentary methods when:
(1) a customer who is a natural person cannot present an unexpired, government-issued
identification document that bears a photograph or similar safeguard; (2) the brokerdealer is presented with unfamiliar documents to verify the identity of a customer; or (3)
the broker-dealer does not obtain documents to verify the identity of a customer, does not
meet face-to-face with a customer who is a natural person, or is otherwise presented with
circumstances that increase the risk the broker-dealer will be unable to verify the true
identity of a customer through documents.89 In the NPRM, we explained that we
recognize that identification documents may be obtained illegally and may be fraudulent.

Id.
Id.

See NPRM, 67 FR at 48317.

In light of the recent increase in identity theft, w e encouraged broker-dealers to use nondocumentary methods even when the customer has provided identification documents.90
One commenter requested that we clarify that account applicants who are not
physically present at an account opening may be treated under the broker-dealer's nondocumentary verification methods.91 One commenter sought clarification that a brokerdealer is not prohibited from using both documentary methods in conjunction with nondocumentary methods.92 One commenter suggested that public databases, such as the
SEC's EDGAR system, should be considered a suitable source of non-documentary
verification. One commenter expressed concern about the applicability of the Fair Credit
Reporting
Act (FCRA) when using non-documentary methods, such as credit reports.93
We recognize that there are many scenarios and combinations of risk factors that
broker-dealers may encounter, and we have decided to adopt general principles that are
illustrated by examples, in lieu of a lengthy and possibly unwieldy regulation that
attempts to address a wide variety of situations with particularity. Under the final rule, a
broker-dealer relying on non-documentary verification methods must describe them in its
CIP.94 The final rule includes an illustrative list of methods, similar to the list that was
included in the proposed rule. These methods may include: (1) contacting a customer;
90

See NPRM, Section II.D.2, 67 FR at 48310.

As discussed above, non-documentary methods may be used in any circumstance.

Id.

We have determined that there is no statutory basis to shield broker-dealers from
F C R A requirements with respect to requirements under thefinalrule.

Final rule, paragraph (b)(2)(ii)(B).

(2) independently verifying the customer's identity through the comparison of
information provided by the customer with information obtained from a consumer
reporting agency, public database,95 or other source; (3) checking references with other
financial institutions; and (4) obtaining a financial statement.96 We continue to
recommend that broker-dealers analyze whether there is logical consistency between the
identifying information provided, such as the customer's name, street address, ZIP code,
telephone number (if provided), date of birth, and social security number.
The final rule also includes a list, similar to that in the proposed rule, of
circumstances that may require the use of non-documentary procedures.97 Specifically,
non-documentary procedures must address circumstances in which: (1) an individual is
unable to present an unexpired government-issued identification document that bears a
photograph or similar safeguard; (2) the broker-dealer is not familiar with the documents
presented; (3) the account is opened without obtaining documents; (4) the customer opens
the account without appearing in person; and (5) the circumstances increase the risk that
the broker-dealer will be unable to verify the true identity of a customer through
documents.

We do not list the specific types of databases that would be suitable for
verification. Thus, in response to the one comment, the SEC's E D G A R system
m a y be an appropriate means of undertaking non-documentary verification.
Ultimately, it will depend on the circumstances and the broker-dealer's
assessment of the relevantriskfactors.

Final rule, paragraph (b)(2)(ii)(B)QJ.

Final rule, paragraph (b)(2)(ii)(B)(2).

Id. The final clause acknowledges that there may be circumstances, beyond those
specifically described in this provision, w h e n a broker-dealer should use nondocumentary verification procedures.

A s w e stated in the N P R M , because identification documents m a y be obtained
illegally and may be fraudulent, and in light of the recent increase in identity theft, we
encourage broker-dealers to use non-documentary methods even when the customer has
provided identification documents.
Section 103.122(b)(2)(ii)(C) Customer verification — additional verification for
certain customers.
As described earlier, we originally proposed to require verification of the identity
of any person authorized to effect transactions in a customer's account. Most
commenters objected to this requirement, and it does not appear in the final rule. For the
reasons discussed below, however, the rule does require that a broker-dealer's CIP
address the circumstances in which it will obtain information about such individuals in
order to verify a customer's identity.99
Treasury and the SEC believe that, while broker-dealers may be able to verify the
majority of customers adequately through the documentary or non-documentary
verification methods described above, there may be circumstances when these methods
are inadequate. The risk that the broker-dealer will not know the customer's true identity
may be heightened for certain types of accounts, such as an account opened in the name

of a corporation, partnership, or trust that is created or conducts substantial business in a
jurisdiction that has been designated by the United States as a primary money laundering
concern or has been designated as non-cooperative by an international body. We believe
that a broker-dealer must identify customers that pose a heightened risk of not being
properly identified and that a broker-dealer's CIP must prescribe additional measures that
may be used to obtain information about the identity of the individuals associated with
99

See final rule, paragraph (b)(2)(ii)(C).

the customer w h e n standard documentary or non-documentary methods prove to be
insufficient.
The final rule, therefore, includes a new provision on verification procedures.
This provision requires that the CIP address circumstances in which, based on the brokerdealer's risk assessment of a new account opened by a customer that is not an individual,
the broker-dealer also will obtain information about individuals with authority or control
over the account, including persons authorized to effect transactions in the account, in
order to verify the customer's true identity.

° This additional verification method applies

only when the broker-dealer cannot adequately verify the customer's true identity using
documentary and non-documentary verification methods.101
Section 103.122 (b)(2) (iii) Lack of verification.
We proposed to require that a broker-dealer's CIP include procedures for
responding to circumstances in which the firm cannot form a reasonable belief that it
knows the true identity of the customer.102 We explained in the NPRM that the CIP
should specify the actions to be taken, which could include closing the account or placing
limitations on additional purchases.103 We also explained that there should be guidelines
for when an account will not be opened (e.g., when the required information is not

A broker-dealer need not undertake any additional verification if it chooses not to
open an account when it cannot verify the customer's true identity after using
standard documentary and non-documentary verification methods.
See NPRM, 67 FR at 48317.
See NPRM, Section II.G, 67 FR at 48310.

provided), and that the CIP should address the terms under which a customer m a y
conduct transactions while the customer's identity is being verified.104
W e did not receive any comments on this aspect of the proposed rule and the final
rule adopts the provision substantially as proposed.105 However, it adds a description of
recommended features of these procedures, based on the features described in the N P R M .
Thus, thefinalrule states that the procedures should describe: (1) w h e n the broker-dealer
should not open an account; (2) the terms under which a customer m a y use an account
while the broker-dealer attempts to verify the customer's identity; (3) w h e n the brokerdealer shouldfilea Suspicious Activity Report ( S A R ) in accordance with applicable law;
and (4) w h e n the broker-dealer should close an account, after attempts to verify a
customer's identity have failed.106
Section 103.122(b)(3) Recordkeeping.
Section 103.122(b)(3)(f) Required Records.
W e proposed to require broker-dealer CIPs to include certain recordkeeping
procedures. 107 First, the proposed rule would have required that a broker-dealer maintain
a record of the identifying information provided by customers. Second, if a broker-dealer
relies on a document to verify a customer's identity, the proposed rule would have
required the firm to maintain a copy of the document. Third, the proposed rule would
have required broker-dealers to record the methods and results of any additional measures

104

°5

106

107

Id.
Final rule, paragraph (b)(2)(iii).
M

See NPRM, 67 FR at 48317.

undertaken to verify the identity of customers. Finally, the proposed rule would have
required broker-dealers to record the resolution of any discrepancy in the identifying
information obtained.
Twelve commenters submitted comments on this aspect of the rule. Generally
they objected to the requirement to maintain copies of verification documents or reports
of non-documentary methods. They argued that this requirement was overly
burdensome. Two commenters requested that the language in the proposed rule requiring
broker-dealers to make copies that "accurately depict" the documentary records be
harmonized with the CIP rules issued by the other Federal functional regulators.
We have reconsidered and modified the recordkeeping requirements of the rule.
The final rule provides that a broker-dealer's CIP must include procedures for making
and maintaining records related to verifying customers. However, the final rule is
significantly more flexible than the proposed rule. Under the final rule, a broker-dealer
must still make a record of the identifying information obtained about each customer.108
However, rather than requiring copies of verification documents, the final rule requires
that a broker-dealer's records include a description of any document that the brokerdealer relied on to verify the identity of the customer, noting the type of document, any
identification number contained in the document, the place of issuance, and the issuance
and expiration dates, if any.109 With respect to non-documentary verification, the final
rule now requires the records to include "a description" of the methods and results of any

Seefinalrule, paragraph (b)(3)(i)(A).
Final rule, paragraph (b)(3)(i)(B).

measures undertaken to verify the identity of the customer.

The final rule also requires

a record of the resolution of any substantive discrepancy discovered when verifying the
identifying information obtained.111
As we stated in the NPRM, nothing in the rule modifies, limits, or supersedes
Section 101 of the Electronic Signatures in Global and National Commerce Act.112 A
broker-dealer may use electronic records to satisfy the requirements of this final rule, in
accordance with guidance that the Commission has issued.113
Section 103.122(b)(3)(H) Record Retention.
We proposed to require that a broker-dealer retain all required records for five
years after the account is closed. Three commenters expressed concern about this aspect
of the proposal, recommending that the recordkeeping period be shortened.
We believe that, by eliminating the requirement that a broker-dealer retain copies
of documents used to verify customer identities, the final rule addresses many of the
commenters' concerns. Nonetheless, while the identifying information provided by
customers should be retained as proposed, there is little value in requiring broker-dealers
to retain the remaining records for five years after an account is closed, because this

110

Final rule, paragraph (b)(3)(i)(C).

1 x x

Final rule, paragraph (b)(3)(i)(D). In response to one of the commenters, we
limited this requirement to "substantive" discrepancies to m a k e clear that records
would not have to be m a d e in the case of minor discrepancies, such as those that
might be caused by typographical mistakes.

112

Pub. L. 106-229, 114 Stat. 464 (15 U.S.C. 7001).

113

See Commission Guidance to Broker-dealers on the Use of Electronic Storage
Media Under the Electronic Signatures in Global and National C o m m e r c e Act of
2000 with Respect to Rule 17a-4(f), Exchange Act Release N o . 44238 (May 1,
2001), 66 F R 22916 (May 7, 2001).

information is likely to grow stale. Therefore, the final rule prescribes a bifurcated record
retention schedule that is consistent with a general five-year retention requirement. *14
Under the final rule, the broker-dealer must retain the information obtained about a
customer pursuant to paragraph (b)(3)(i)(A) for five years after the date the account is
closed.U5 The remaining records required under paragraphs (b)(3)(i)(B), (C), and (D)
(i.e., information that verifies a customer's identity) need only be retained for five years
after the record is made. The final rule provides that these records otherwise shall be
maintained in accordance with the provisions of the broker-dealer recordkeeping rule
(Rulel7a-4).116
Section 103.122(b)(4) Comparison with government lists.
We proposed to require that a broker-dealer's CIP have procedures for
determining whether the customer appears on any list of known or suspected terrorists or
terrorist organizations prepared by any federal government agency and made available to
the broker-dealer.117 In addition, the proposed rule stated that broker-dealers must follow
all federal directives issued in connection with such lists.
Two commenters recommended that the final rule specify which government lists
must be checked and provide a mechanism for communicating that information to brokerdealers. These commenters also suggested that all such lists be consolidated or provided
114

See Final rule, paragraph (b)(3)(h).

115

The Secretary has determined that the records required to be retained under
section 326 of the Act have a high degree of usefulness in criminal, tax, or
regulatory investigations or proceedings, or in the conduct of intelligence or
counterintelligence activities, to protect against international terrorism.

116

17CFR240.17a-4.

117

See NPRM, 67 FR at 48317.

through a clearinghouse, such as F i n C E N . O n e commenter suggested that the rule should
allow for the lists to be checked after an account is opened. Another commenter sought
clarification that the requirement to check these lists only applied to the broker-dealer and
not its affiliates.118
The final rule states that a broker-dealer's CIP must include procedures for
determining whether the customer appears on any list of known or suspected terrorists or
terrorist organizations issued by any federal government agency and designated as such
by Treasury in consultation with the federal functional regulators.119 Because Treasury
and the federal functional regulators have not yet designated any such lists, the final rule
cannot be more specific with respect to the lists that broker-dealers must check.
However, broker-dealers will not have an affirmative duty under this rule to seek out all
lists of known or suspected terrorists or terrorist organizations compiled by the federal
government. Instead, they will receive notification by way of separate guidance
regarding the lists that they must consult for purposes of this provision.
We also have modified this provision to give guidance as to when a broker-dealer
must consult a list of known or suspected terrorists or terrorist organizations. The final

118

This rule only applies to "broker-dealers" as that term is defined in the rule.
However, there m a y be cases where a broker-dealer's affiliate is subject to a CIP
rule issued by Treasury and one of the other Federal functional regulators.

119

Final rule, paragraph (b)(4).

120

This is not to say, however, that broker-dealers do not have obligations under
other laws to screen their customers against government lists. For example,
broker-dealers already should have compliance programs in place to ensure they
comply with Treasury's Office of Foreign Assets Control rules prohibiting
transactions with certain foreign countries or their nationals. See O F A C ' s
Foreign Assets Control Regulations for the Securities Industry, which can be
viewed at the following website:
http://www.ustreas.gov/offices/enforcement/ofac/regulations/tllfacsc.pdf.

rule states that the CIP's procedures must require the broker-dealer to determine whether
a customer appears on a list "within a reasonable period of time" after the account is

opened, or earlier if required by another federal law or regulation or by a federal directive
issued in connection with the applicable list.121
The final rule also requires a broker-dealer's CIP to include procedures that
require the firm to follow all federal directives issued in connection with such lists.122
Again, because no lists have yet been designated under this provision, the final rule
cannot provide more guidance in this area.
Section 103.122(b)(5) Customer notice.
We proposed to require that a broker-dealer's CIP include procedures for
providing customers with adequate notice that the firm is requesting information to verify
their identities.123 The NPRM stated that a broker-dealer could satisfy that notice
requirement by generally notifying its customers about the firm's verification
procedures.124 It stated that if an account is opened electronically, such as through an
Internet website, the broker-dealer could provide notice electronically.125
Four commenters requested model language for the notice. Two commenters
suggested that the rule allow notice to be given within a reasonable time after the account
is opened.

121

Final rule, paragraph (b)(4).

122

Id.

123

See NPRM, 67 FR at 48317.

124

NPRM, Section II.F, 67 FR at 48310.

125

Id.

Section 326 of the Act provides that the regulations issued " shall at a m i n i m u m ,
require financial institutions to .. . [give] customers .. . adequate notice" of the
procedures they adopt concerning customer identification. Based on this statutory
requirement, thefinalrule requires a broker-dealer's CIP to include procedures for
providing customers with adequate notice that the firm is requesting information to verify
their identities. The final rule provides additional guidance regarding what constitutes
adequate notice and the timing of the notice requirement. Thefinalrule states that notice
is adequate if the broker-dealer generally describes the identification requirements of the
final rule and provides notice in a manner reasonably designed to ensure that a customer
views the notice before opening an account.126 Thefinalrule states that, depending on
h o w an account is opened, a broker-dealer m a y post a notice in the lobby or on its
website, or use any other form of oral or written notice, such as a statement on an account
application.127 In addition, thefinalrule includes sample language that, if appropriate,
will be deemed adequate notice to a broker-dealer's customers w h e n provided in
accordance with the requirements of thefinalrule.128
Section 103.122(b)(6) Reliance on other financial institutions.
In the proposed rule, w e included as a risk factor a broker-dealer's reliance on
another broker-dealer.129 In the N P R M , w e stated that this requires an assessment of
whether the broker-dealer can rely on another broker-dealer, with which it shares an

126

127

Final rule, paragraph (b)(5)(h).

128

Final rule, paragraph (b)(5)(iii).

129

See NPRM, 67 FR at 48317.

account relationship, to undertake any of the steps required by this proposed rule with
respect to the shared account. 13° We stated that a shared account means an account
subject to a carrying or clearing agreement governed by New York Stock Exchange
(NYSE) Rule 382 or National Association of Securities Dealers, Inc. (NASD) Rule 3230
(i.e., a customer account introduced by a correspondent broker-dealer to a clearing and
carrying broker-dealer).131
Six commenters submitted a variety of comments on this aspect of the proposed
rule and the NPRM. Generally, they all supported expanding the reliance provision
beyond the confines of a clearing/introducing broker-dealer relationship. Some
suggested allowing reliance in other broker-dealer relationships, such as that between a
prime broker and an executing broker. Some also suggested permitting broker-dealers to
rely on other types of entities, such as other financial institutions or affiliates. Two
commenters also expressed concern with the degree of liability that remained with a
broker-dealer relying on another broker-dealer.
We recognize that there may be circumstances in which a broker-dealer should be
able to rely on the performance by another financial institution of some or all of the
elements of the firm's CIP.132 Therefore, the final rule provides that a broker-dealer's
CIP may include procedures that specify when the broker-dealer will rely on the
130

NPRM, Section II.B, 67 FR at 48307 - 48308.

131

Id.

132

This provision of the rule does not affect the ability of a broker-dealer to
contractually delegate the implementation and operation of its CIP to a service
provider that would not qualify under the reliance provisions of paragraph (b)(6).
However, in such a case, the broker-dealer remains solely responsible for assuring
compliance with the rule, and therefore must actively monitor the operation of its
CIP and assess its effectiveness.

performance by another financial institution (including an affiliate) of any procedures of
the firm's CIP, and thereby satisfy the broker-dealer's obligations under the rule.133
Reliance is permitted if a customer of the broker-dealer is opening, or has opened, an
account or has established a similar relationship with the other financial institution to
provide or engage in services, dealings, or other financial transactions.
In order for a broker-dealer to rely on the other financial institution, (1) such
reliance must be reasonable under the circumstances, (2) the other financial institution
must be subject to a rule implementing the anti-money laundering compliance program
requirements of 31 U.S.C. 5318(h) and be regulated by a federal functional regulator, and
(3) the other financial institution must enter into a contract with the broker-dealer
requiring it to certify annually to the broker-dealer that it has implemented an anti-money
laundering program and will perform (or its agent will perform) the specified
requirements of the broker-dealer's CIP. The contract and certification will provide a
standard means for a broker-dealer to demonstrate the extent to which it is relying on
another financial institution to perform its CIP, and that the other institution has, in fact,
agreed to perform those functions.134 If it is not clear from these documents, a brokerdealer must be able to otherwise demonstrate when it is relying on another financial
institution to perform its CIP with respect to a particular customer. The broker-dealer will
not be held responsible for the failure of the other financial institution to fulfill

133

Final rule, paragraph (b)(6).

134

A broker-dealer must be able to demonstrate that the other financial institution has
agreed to perform the relevant requirements of the broker-dealer's CIP, regardless
of whether the otherfinancialinstitution is an affiliate or a non-affiliate.
Accordingly, the contract and certification requirement in thefinalrule applies
equally to affiliate and non-affiliate reliance.

adequately the broker-dealer's CIP responsibilities, provided that the broker-dealer can
establish that its reliance was reasonable and that it has obtained the requisite contracts
and certifications. Treasury and the SEC emphasize that the broker-dealer and the other

financial institution upon which it relies must satisfy all of the conditions set forth in thi
final rule. If they do not, then the broker-dealer remains solely responsible for applying
its own CIP to each customer in accordance with this rule.
All of the federal functional regulators are adopting comparable provisions in
then CIP rules to permit such reliance. Furthermore, the federal functional regulators
expect to share information and cooperate with each other to determine whether the
institutions subject to their jurisdiction are in compliance with the reliance provision of
this rule.
Section 103.122(c) Exemptions.
The proposed rule provided that the Commission, with the concurrence of the
Secretary, may exempt any broker-dealer that registers with the Commission pursuant to
15 U.S.C. 78o and 78o-4.135 However, it excluded from this exemptive authority brokerdealers that register pursuant to 15 U.S.C. 78o(b)(l 1). These are firms that register as
broker-dealers solely because they deal in securities futures products. The exemptive
authority with respect to these firms will be in the rule issued jointly by Treasury and the
CFTC. The proposed rule provided that the Secretary, with the concurrence of the
Commission, may exempt any broker-dealer that registers pursuant to 15 U.S.C 78o-5
(i.e., government securities dealers).

See N P R M , 67 F R at 48317.

W e received no comments on this provision in the proposed rule and are
adopting it substantially as proposed.136
Section 103.122(d) Other requirements unaffected.
The final rule includes a provision, parallel to that in CIP rules adopted by the

other Federal functional regulators, to the effect that nothing in the rule shall be constru

to relieve a broker-dealer of its obligations to obtain, verify, or maintain information tha

is required by another regulation in Part J 03.137 In addition, broker-dealers continue to be
subject to existing securities law requirements, which may have different or more
rigorous requirements than those in the final rule.138
B. Requirement for CIP Approval Removed
The proposed rule had a requirement in paragraph (i) that the CIP be approved by
the broker-dealer's board of directors, managing partners, board of managers or other
governing body performing similar functions or by a person or persons specifically
authorized by such bodies to approve the CIP.139 The final rule requires the CIP to be a
part of the overall AML programs required of broker-dealers under NASD Rule 3011 and
NYSE Rule 445.140 NASD Rule 3011 and NYSE Rule 445 require the AML programs to

136

Final rule, paragraph (c). The reference to firms that register under 15 U.S.C.
78o(b)(l 1) has been removed since these firms are excluded from the rule's
definition of broker-dealer.

137

Final rule, paragraph (d).

138

For example, Rule 17a-3 (a)(9) requires broker-dealers to obtain the name and
address of the beneficial owners of certain accounts and N A S D Rule 3110, among
other things, requires broker-dealers to obtain the names of persons authorized to
transact business on behalf of customers that are legal entities.

139

See NPRM, 67 FR at 48317.

140

See final rule, paragraph (b)(1).

be approved in writing by a m e m b e r of the broker-dealer's senior management. W e
removed the approval requirement in the final rule because it was unnecessary given the
approval requirements in NASD Rule 3011 and NYSE Rule 445. We note, however, that
a broker-dealer with an AML program that has been approved as required, must
nonetheless obtain approval of a new CIP because it would be a material change to the
AML program.

III. CONFORMING AMENDMENTS TO 31 CFR 103.35
As Treasury explained in the NPRM, current section 103.35(a) sets forth
customer identification requirements when certain brokerage accounts are opened.
Together with the proposed rule implementing section 326 of the Act, Treasury, on its
own authority, proposed deleting 31 CFR 103.35(a) for the following reasons.
Generally, sections 103.35(a)(1) and (2) require a broker-dealer, within 30 days
after an account is opened, to secure and maintain a record of the taxpayer identification
number of the customer involved. If the broker-dealer is unable to obtain the taxpayer
identification number within 30 days (or a longer time if the person has applied for a
taxpayer identification number), it need take no further action under section 103.35
concerning the account if it maintains a list of the names, addresses, and account numbers
of the persons for which it was unable to secure taxpayer identification numbers, and
provides that information to the Secretary upon request. In the case of a non-resident
alien, the broker-dealer is required to record the person's passport number or a description
of some other government document used to determine identification. These
requirements conflicted with those in the proposed CIP rule, which required broker-

dealers to obtain the name, address, date of birth and an identification number from any
person opening a new account.
Section 103.35(a)(3) currently provides that a broker-dealer need not obtain a
taxpayer identification number with respect to specified categories of persons141 opening
accounts. The proposed rule did not exempt any persons from the CIP requirements. As
stated in the NPRM, Treasury believes that the requirements of section 103.35(a) are
inconsistent with the intent and purpose of section 326 of the Act and incompatible with
the proposed rule.
For these reasons, Treasury, under its own authority, proposed deleting the above
referenced provisions in 103.35(a). Treasury and the Commission requested comments
on whether any of the exemptions in Section 103.35(a)(3) should apply in the context of
the proposed CIP requirements in light of the intent and purpose of section 326 of the
Act. The comments we received requesting exemptions from the CIP requirements have
been discussed above in the section-by-section analysis of the final rule.
Treasury has determined that given the more comprehensive requirements of the
final CIP rule, there is no longer a need for § 103.35 (a). A number of the exemptions
formerly in § 103.35(a) have now been added to the final CIP rule. Other exemptions

The exemption applies to (i) agencies and instrumentalities of Federal, State,
local, or foreign governments; (ii) aliens w h o are ambassadors; ministers; career
diplomatic or consular officers; naval, military, or other attaches of foreign
embassies and legations; and members of their immediate families; (iii) aliens
w h o are accredited representatives of certain international organizations, and their
immediate families; (iv) aliens temporarily residing in the United States for a
period not to exceed 180 days; (v) aliens not engaged in a trade or business in the
United States w h o are attending a recognized college or university, or any training
program supervised or conducted by an agency of the Federal Government; and
(vi) unincorporated subordinate units of a tax exempt central organization that are
covered by a group exemption letter.

conflict with the language and intent of section 326 of the Act and thus are not adopted in
the final rule. While 103.35(a) will no longer be needed once the final rule is fully
effective, withdrawing the provision before October 1, 2003, would create a gap period
during which broker-dealers would not be subject to a rule under the BSA requiring
customers to be identified when opening brokerage accounts. Because Treasury and the
Commission do not believe such a gap period would be appropriate, the final rule—rather
than withdrawing 103.35(a)—amends the section to cut off its applicability on October 1,
2003, when 103.122 becomes fully effective.

IV. PAPERWORK REDUCTION ACT
The new rule has certain provisions that contain "collection of information"
requirements within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). Treasury submitted the proposed rule to the Office of Management and
Budget ("OMB") for review in accordance with 44 U.S.C 3507(d) and 5 CFR 1320.11.
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control number. The OMB
has approved the collection of information requirements in today's rule under control
number 1506-0034.
A. Collection of Information Under the Proposed Rule
The final rule contains recordkeeping and disclosure requirements that are subject
to the Paperwork Reduction Act of 1995. In summary, the final rule, like the proposed
rule, requires broker-dealers to implement reasonable procedures to (1) maintain records
of the information used to verify the person's identity and (2) provide notice of the CIP
procedures to customers. These recordkeeping and notice requirements are required

under section 326 of the Act. However, thefinalrule reduces the paperwork burden
attributable to these requirements, as described below.
B. Proposed Use of the Information
Section 326 of the Act requires Treasury and the Commission jointly to issue a
regulation setting forth minimum standards for broker-dealers and their customers
regarding the identity of the customer that shall apply in connection with opening of an
account at the broker-dealer. Furthermore, section 326 provides that the regulations, at a
minimum, must require broker-dealers to implement reasonable procedures for (1)
verifying the identity of any person seeking to open an account, to the extent reasonable
and practicable; (2) maintaining records of the information used to verify the person's
identity, including name, address, and other identifying information; and (3) determining
whether the person appears on any lists of known or suspected terrorists or terrorist
organizations provided to the financial institution by any government agency.
The purpose of section 326, and the regulations promulgated thereunder, is to
make it easier to prevent, detect and prosecute money laundering and the financing of
terrorism. In issuing the final rule, Treasury and the Commission are seeking to fulfill
their statutorily mandated responsibilities under section 326 and to achieve its important
purpose.
The final rule requires each broker-dealer to establish a written CIP that must
include recordkeeping procedures and procedures for providing customers with notice
that the broker-dealer is requesting information to verify their identity. The final rule
requires a broker-dealer to maintain a record of (1) the identifying information provided
by the customer, the type of identification document(s) reviewed, if any, and the

identification number of the document(s); (2) the means and results of any additional
measures undertaken to verify the identity of the customer; and (3) the resolution of any
discrepancy in the identifying information obtained.
The final rule also requires each broker-dealer to give customers "adequate
notice" of the identity verification procedures. Depending on how an account is opened,
a broker-dealer may satisfy this disclosure requirement by posting a sign in the lobby or
providing customers with any other form of written or oral notice. If the account is
opened electronically, the broker-dealer may provide the notice electronically.
Accordingly, a broker-dealer may choose among a variety of methods of providing
adequate notice and may select the least burdensome method, given the circumstances
under which customers seek to open new accounts.
C. Respondents
The final rule will apply to approximately 5,448 broker-dealers, which is the
approximate number of firms that conduct business with the general public.142
D. Total Annual Reporting and Recordkeeping Burden
1. Providing Notice to Customers
The requirement to provide notice to customers generally will be a one-time
burden in terms of drafting and posting or implementing the notices. The Commission
estimates that broker-dealers will take two hours each to draft and post the required
notices. There are approximately 5,448 broker-dealers that will have to undertake this

This figure is derived from financial informationfiledby broker-dealers on Form
X-17a-5 - Financial and Operational Combined Uniform Single ( F O C U S ) Reports
- pursuant to section 17 of the Exchange Act and rule 17a-5 (17 C F R 240.17a-5).

task. Therefore, in complying with this requirement, the Commission estimates that the
industry as a whole will spend approximately 10,896 hours.
2. Recordkeeping
The requirement to make and maintain records related to the CIP will be an
annual time burden. The total burden to the industry will depend on the number of new
accounts added each year. The Commission estimates that broker-dealers, on average,
will spend two minutes per account making and maintaining the required records.143
Therefore, in complying with this requirement, the Commission estimates that the
industry as a whole will spend approximately 140,833 hours in 2003, 620,000 hours in
2004 and 683,833 hours in 2005.144
We believe that there is a nominal burden associated with the new recordkeeping
requirement. Under the final rule, a broker-dealer may rely on another financial

The Commission estimates that the number of n e w accounts per year will be:
16,900,000 in 2003, 18,600,000 in 2004, and 20,515,000 in 2005. The
Commission arrived at this estimate by considering: (1) the total number of
accounts at the 2001 year-end (102,700,000) as reported by broker-dealers on
their F O C U S Reports; and (2) the annualized growth rate in total accounts for the
years 1990 through 2001 (ten percent). The Commission also estimates that the
number of accounts that are closed each year equalsfivepercent of the total
number of accounts. Accordingly, the Commission estimates that the total
annualized growth rate for n e w accounts each year is fifteen percent. Therefore,
starting with the 2001 total of 102,700,000 and using an annualized growth rate of
fifteen percent, the Commission estimates that 16,900,000 n e w accounts will be
added in 2003, 18,600,000 in 2004 and 20,515,000 in 2005.
The Commission derived these estimates by taking the number of new accounts
projected for each upcoming year and multiplying the number by two minutes and
then dividing that number by 60 to convert minute totals into hour totals. The
final rule will be effective only for the last quarter of 2003. Therefore, while the
total burden for a twelve-month effective period would be 563,333 hours, the
actual burden being allocated to the rule is 140,833 (or lA of 563,333).

institution to perform some or all its CIP under certain conditions, including that the

financial institution must enter into a contract requiring the financial institution to certif
annually to the broker-dealer that it has implemented its anti-money laundering program
and that it will perform (or its agent will perform) the specified elements of the brokerdealer's CIP. Not all broker-dealers will choose to rely on a third party. The minimal
burden of retaining the certification described above should allow a broker-dealer to
reduce its net burden under the rule by relying on another financial institution to perform
some or all of its CIP.
3. Request for Comment
Treasury and the Commission invite comments on the accuracy of the burden
estimates and suggestions on how to further reduce these burdens. Comments should be
sent (preferably by fax (202-395-6974)) to Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Office of Management and
Budget, Paperwork Reduction Project (1506-0034), Washington, DC 20503 (or by the

Internet to i lackeyi (a),omb. eop. gov), with a copy to FinCEN by mail or the Internet at the
addresses previously specified.
E. Collection of Information is Mandatory
These recordkeeping and disclosure (notice) requirements are mandatory.
F. Confidentiality
The collection of information pursuant to the proposed rule would be provided by
customers and other sources to broker-dealers and maintained by broker-dealers. In
addition, the information may be used by federal regulators, self-regulatory
organizations, and authorities in the course of examinations, investigations, and judicial

proceedings. N o governmental agency regularly would receive any of the information
described above.
G. Record Retention Period
The final rule requires that the documentation of the identifying information
obtained from the customer be retained until five years after the date the account of the
customer is closed and that the other records relating to the verification of the customer
be retained until five years after the record is made.

V. SEC'S ANALYSIS OF THE COSTS AND BENEFITS ASSOCIATED
WITH THE FINAL RULE
Section 326 of the Act requires Treasury and the Commission to prescribe
regulations setting forth minimum standards for broker-dealers regarding the identities of
customers that shall apply in connection with the opening of an account. The statute also
provides that the regulations issued by Treasury and the Commission must, at a
minimum, require financial institutions to implement reasonable procedures for:
(1) verification of customers' identities; (2) determination of whether a customer appears
on a government list; and (3) maintenance of records related to customer verification.
The final rule implements this statutory mandate by requiring broker-dealers to (1)
establish a CIP; (2) obtain certain identifying information from customers; (3) verify the
identifying information; (4) check customers against lists provided by federal agencies,
(5) provide notice to customers that information may be requested in the process of
verifying their identities; and (6) make and maintain records. The Commission believes
that these requirements are reasonable and practicable, as required by the section 326
and, therefore, that the costs associated with them are attributable to the statute.
Moreover, while the final rule specifies certain minimum requirements, broker-dealers

are able to design their CIPs in a manner most appropriate to their business models and
customer bases. This flexibility should be beneficial to broker-dealers in helping them to
tailor their CIPs appropriately, while still meeting the statutory requirements of section
326.
Even though the Commission believes the costs associated with the final rule are
attributable to the statute, it considered preliminarily the costs and benefits associated
with the proposed rule and requested comment on all aspects of its cost-benefit
analysis.145 The Commission sought comment on all aspects of the rule, including
whether the establishment of minimum requirements creates a benefit or, conversely,
imposes costs because broker-dealers will not be able to choose for themselves the
minimum procedures they wish to use to meet the requirements of the statute. The
Commission also sought comment on whether the costs are attributable to the statute.
Most commenters did not address the Commission's cost-benefits analysis. The
commenters that did discuss costs stated generally that they believed the Commission had
underestimated them.
In light of the comments, the Commission re-examined its analysis, obtained
further cost information and adjusted its cost estimate with respect to the one-time costs
associated with implementing a CIP. The adjustment is reflected in the cost section
below titled "Implementing the CIP." The Commission also adjusted certain of the
burden totals to reflect updated figures (e.g., number broker-dealers doing a public
business) obtained from more recent broker-dealer FOCUS reports. As discussed
throughout this release, the burdens that would have been imposed by the proposed rule

N P R M , Section VI, 67 F R at 48313.

have been lessened as a result of changes to thefinalrule including (1) the narrowing of
the definitions of "account" and "customer," (2) the elimination of need to make and
retain certain records, and (3) the expansion of the reliance provision. The estimates
below take these changes into account.
A. Benefits Associated with the Final Rule
The anti-money laundering provisions in the Act are intended to make it easier to
prevent, detect and prosecute money laundering and the financing of terrorism. The final
rule is an important part of this effort. It fulfills the statutory mandate of section 326 by
specifying how a broker-dealer is to establish a program that will assist it in determining
the identities of customers. Verifying identities, in turn, will reduce the risk of brokerdealers unwittingly aiding criminals, including terrorists, in accessing U.S. financial
markets to launder money or move funds for illicit purposes. Additionally, the
implementation of such programs should make it more difficult for persons to
successfully engage in fraudulent activities involving identity theft or the placing of
fictitious orders to buy or sell securities.
B. Costs Associated with the Final Rule
1. Implementing a CIP
Most broker-dealers, as a matter of prudent business practices, already should
have procedures in place for verifying identities of customers. In addition, Exchange Act
Rule 17a-3 (a)(9) requires broker-dealers to obtain the name and address of each
beneficial owner of a cash or margin account.I46 Similarly, the self-regulatory
organizations have rules requiring broker-dealers to obtain identifying information from

146

17CFR240.17a-3(a)(9).

customers.147 Accordingly, firms should have written procedures for complying with
these existing regulations.
Nonetheless, the Commission believes that some broker-dealers will have to
update or establish a CIP. The proposed rule seeks to keep costs low by allowing for
great flexibility in establishing a CIP. For example, the CIP should be based on factors
specific to each broker-dealer, such as size, customer base and location. Thus, the
analysis and detail necessary for a CIP will depend on the complexity of the brokerdealer and its operations. Given the considerable differences among broker-dealers, it is
difficult to quantify a cost per broker-dealer. Highly complex firms will have more risk
factors to consider, given, for example, their size, multiple offices, variety of services and
products offered, and range of customers. However, most large firms already have some
procedures in place for verifying customer identities. Smaller and less complex firms
will not have as many risk factors.
The Commission estimates that establishing a written CIP could result in
additional costs for some broker-dealers to the extent they do not have verification
procedures that meet the minimum requirements in the rule. This includes broker-dealers
that would need to augment their procedures to make them compliant. On average, the
Commission estimates the additional cost per broker-dealer to draft CIP procedures to be
approximately $2,244, resulting in a one time overall cost to the industry of
approximately $12,225,312.148

See, e.g., N Y S E Rule 405, N A S D Rule 3110.
The Commission estimates that it will take broker-dealers on average
approximately 20 hours to draft a CIP. This estimate seeks to account for the fact
that m a n y firms already have customer identification and verification procedures

Previously, the Commission included, as part of the costs of establishing a CIP, a
cost estimate associated with updating account opening applications or account opening
websites. This was estimated as a one-time cost to the industry of $563,760.149 Several
commenters stated that they believed the Commission had underestimated the burden of
establishing a CIP. One commenter also identified steps that would need to be taken in
addition to updating applications and websites. Accordingly, the Commission is now
adjusting its estimate of the costs associated with revising or designing forms and other
documentation (including applications and websites), and including costs associated with
programming and testing automated systems. The Commission estimates the one-time
costs associated with modifying account application materials to be $8,274,150.15°

and that discrepancies in size and complexity will result in differing time burdens.
The Commission believes that broker-dealers will have senior compliance
personnel draft their CIPs and that this will take an average of 16 hours. The
Commission anticipates that in-house counsel will spend on average 4 hours
reviewing the CIP. According to the Securities Industry Association ("SIA")
Management and Professional Earnings 2000 report ("SIA Earnings Report"),
Table 051, the hourly cost of a compliance manager plus 3 5 % overhead is
$101.25. The hourly cost for an in-house counsel plus 3 5 % overhead is $156.00
(SIA Earnings Report, Table 107 (Attorney)). Therefore, the Commission
estimates that the total cost per broker-dealer to establish a CIP would be $2,244
per broker-dealer [(16 x $101.25) + (4 x $156.00)]. A s of September 30, 2002,
there were approximately 5,448 broker-dealers that engaged in some form of a
public business. Therefore, the Commission estimates that the total cost to the
industry would be $2,244 multiplied by 5,448 or $12,225,312.
The Commission estimated that it would take each broker-dealer, on average, one
hour to update account opening applications or electronic account opening
systems. The Commission believed broker-dealers would have a compliance
manager implement the necessary changes. The hourly cost for a compliance
manager is $101.25 (SIA Earnings Report, Table 051 (Compliance manager)).
Accordingly, the total cost to the industry was estimated to be: ($101.25) x (the
number of broker-dealers doing a public business or 5,568) or $563,760.
The Commission estimates that it will take each broker-dealer, on average, fifteen
hours to modify account opening documentation or electronic account opening

Further, the Commission estimates the one-time costs associated with programming and
testing automated systems to be $25,505,536.151
2. Obtaining Identifying Information
The Commission believes that broker-dealers already obtain from customers
most, if not all, of the information required under the final rule.152 Rule 17a-3(a)(9)
requires broker-dealers to obtain, with respect to each margin and cash account, the name
and address of each beneficial owner, provided that the broker-dealer need only obtain

systems. The Commission believes broker-dealers will have a compliance
manager implement the necessary changes. The hourly cost for a compliance
manager is $101.25 (SIA Earnings Report, Table 051 (Compliance manager)).
Accordingly, the total cost to the industry was estimated to be: ($101.25) x (15
hours) x (the number of broker-dealers doing a public business - 5,448) or
$8,274,150.
The Commission estimates that it will take broker-dealers on average
approximately 640 hours to program and test the automated systems that will need
to be changed to comply with the rule. The Commission estimates computer
programmers will do this work. The hourly cost of a computer programmer is
$66.20 (SIA Earnings Report, Table 158 (Senior Programmer)). The Commission
estimates that generally systems changes will need to be m a d e only by brokerdealers that carry or clear customer accounts. F O C U S report data indicates that
there are approximately 602 such broker-dealers. Accordingly, the total cost to
the industry is estimated to be ($66.20) x (640 hours) x (602 broker-dealers) or
$25,505,536.
For example, the Anti-Money Laundering Committee of the SIA recommended in
its Preliminary Guidance for Deterring M o n e y Laundering Activity (February
2002) that broker-dealers obtain certain identifying information from customers at
the commencement of the business relationship, including, for natural persons:
name, address, date of birth, investment experience and objectives, social security
number or taxpayer identification number, net worth, annual income, occupation,
employer's address, and the names of any persons authorized to effect
transactions in the account. For non-resident aliens, the SIA Committee
recommended that the broker-dealer obtain, in addition to the information above,
a passport number or other valid government identification number. The SIA
Committee also m a d e a number of recommendations with respect to customers
that are not natural persons.

such information from the persons authorized to transact business for the account if it is a
joint or corporation account.153
Further, broker-dealers are already required, pursuant to NASD Rule 3110, to
obtain certain identifying information with respect to each account.154 For example, if
the customer is a natural person, the rule requires the broker-dealer to obtain the
customer's name and address.155 In addition, the broker-dealer must determine whether
the customer is of legal age, and, if the customer purchases more than just open-end
investment company shares or is solicited to purchase such shares, the broker-dealer must
obtain the customer's tax identification or social security number.156 If the customer is a
corporation, partnership, or other legal entity, the broker-dealer must obtain its name,
residence, and the names of any persons authorized to transact business on behalf of the
entity.157 If the account is a discretionary account, the broker-dealer must obtain the

153

17CFR240.17a-3(a)(9).

154

Section 15(b)(8) of the Exchange Act (15 U.S.C. 78o(b)(8)) requires each brokerdealer to become a m e m b e r of a securities association registered pursuant to
section 15A of the Exchange Act (15 U.S.C. 78o-3) unless the broker-dealer
effects transactions solely on a national securities exchange of which it is a
member. The N A S D is the only securities association registered pursuant to
section 15A. Exchange Act Rule 15b9-l (17 C F R 240.15b9-l) exempts brokerdealers from this requirement to register with the N A S D if they (1) are an
exchange member, (2) carry no customer accounts, and (3) derive gross annual
income from purchases and sales of securities other than on a national securities
exchange of not greater than $1,000. Generally then, most broker-dealers that
carry customer accounts are members of the N A S D and subject to Rule 3110.

155

NASD Rule 3110(c)(1).

156

NASD Rule 3110(c)(2).

157

NASD Rule 3110(c)(1).

signature of each person authorized to exercise discretion over the account.

Finally,

the broker-dealer must maintain all of this information as a record of the firm.
In addition, NYSE Rule 405 requires broker-dealers to "[u]se due diligence to
learn the essential facts relative to every customer, every order, every cash or margin
account accepted or carried by such organization and every person holding power of
attorney over any account accepted or carried by such organization."159
While broker-dealers currently are required to obtain most of this information, the
Commission estimates that there will be some new costs for broker-dealers because some
may not be obtaining all the required information. The Commission estimates that the
total cost to the industry to obtain the minimum identifying information will be
$1,598,458 in 2003, $7,037,000 in 2004 and $7,761,508 in 2005.160
3. Verifying Identifying Information

N A S D Rule 3110(c)(3).
NYSE Rule 405(1).
The Commission estimates that obtaining the required minimum identifying
information will take broker-dealers approximately one minute per account. This
takes into consideration the fact that approximately 9 7 % of customer accounts are
held at the 70 largest broker-dealers. These firms likely already obtain the
required identifying information from their customers. Therefore, requiring that
each piece of identifying information be obtained should not impose a significant
additional burden. The average hourly cost of the person w h o would be obtaining
this information is $22.70 per hour (per the SIA Earnings Report, Table 082
(Retail Sales Assistant, Registered) and including 3 5 % in overhead charges).
Therefore, the costs to the industry would be: (number of n e w accounts per year)
x (1/60 of an hour) x ($22.70). A s indicated previously, the Commission estimates
that the number of n e w accounts in the upcoming years will be: 16,900,000 in
2003, 18,600,000 in 2004 and 20,515,000 in 2005. Thefinalrule will be effective
only for the last quarter of 2003. Therefore, while the total cost for a twelvemonth effective period would be $6,393,833, the actual cost being allocated to the
rule for 2003 is $1,598,458 (or % of $6,393,833).

The final rule gives broker-dealers substantial flexibility in establishing h o w they
will independently verify the information obtained from customers. For example,
customers that open accounts on a broker-dealer's premises can provide a driver's license
or passport, or if the customer is not a natural person, it can provide a copy of any
documents showing its existence as a legal entity (e^, articles of incorporation, business
licenses, partnership agreements or trust instruments). There are also a number of
options for customers opening accounts via the telephone or Internet. In these cases,
broker-dealers may obtain a financial statement from the customer, check the customer's
name against a credit bureau or database, or check the customer's references with other
financial institutions.
The documentary and non-documentary verification methods set forth in the rule
are not meant to be an exclusive list of the appropriate means of verification. Other
reasonable methods may be available now or in the future. The purpose of making the
rule flexible is to allow broker-dealers to select verification methods that are, as section
326 requires, reasonable and practicable. Methods that are appropriate for a smaller
broker-dealer with a fairly localized customer base may not be sufficient for a larger firm
with customers from many different countries. The proposed rule recognizes this fact
and, therefore, allows broker-dealers to employ such verification methods as would be
suitable for a given firm to form a reasonable belief that it knows the true identities of its
customers.
The Commission estimates identity verification could result in costs for brokerdealers because some firms currently may not use verification methods. The
Commission estimates that the total cost to the industry to verify the identifying

information will be $13,343,958 in 2003, $58,745,000 in 2004 and $64,793,208 in
2005.161
4. Determining Whether Custome rs Appear on a Federal
Government List
The Commission believes that broker-dealers that receive federal government
lists, chiefly clearing firms, already have procedures for checking customers against
them. First, there are substantive legal requirements associated with the lists circulated
by Treasury's Office of Foreign Asset Control of the U.S. Treasury (OFAC). The failure
of a firm to comply with these requirements could result in criminal and civil penalties.
The Commission believes that, given the events of September 11, 2001, most brokerdealers that receive lists from the federal government have implemented procedures for
checking their customers against them.
The Commission estimates that this requirement could result in some additional
costs for broker-dealers because some may not already check such lists. The

The Commission estimates that the processing costs associated with verification
methods will be approximately $1.00 per account. The Commission further
estimates that the average time spent verifying an account will befiveminutes.
The hourly cost of the person w h o would undertake the verification is $25.90 per
hour (per the SIA Earnings Report, Table 086 (Data Entry Clerk, Senior) and
including 3 5 % in overhead charges). Therefore, the costs to the industry reported
above are: (number of n e w accounts per year) x ($1.00) + (number of n e w
accounts per year) x (1/12 of an hour) x ($25.90). The Commission estimates that
the number of n e w accounts in the upcoming years will be: 16,900,000 in 2003,
18,600,000 in 2004 and 20,515,000. Thefinalrule will be effective only for the
last quarter of 2003. Therefore, while the total cost for a twelve-month effective
period would be $53,375,833, the actual cost being allocated to the rule for 2003
is $13,343,958 (or % of $53,375,833).

Commission estimates that the total cost to the industry to check such lists will be
$911,896 in 2003, $4,014,500 in 2004 and $4,427,820 in 2005.162
5. Providing Notice to Customers
A broker-dealer may satisfy the notice requirement by generally notifying its
customers about the procedures the broker-dealer must comply with to verify their
identities. Depending on how accounts are opened, the broker-dealer may post a sign in
its lobby or provide customers with any other form of written or oral notice. If an
account is opened electronically, such as through an Internet website, the broker-dealer
may provide notice electronically. The Commission estimates the total one-time cost to
the industry to implement adequate notices will be $1,401,498.163

The Commission believes that most of the firms that receive these lists already
check their customers against them. Moreover, as indicated previously, 9 7 % of
customer accounts are held at the 70 largest firms. The Commission understands
that most of these firms have automated processes for complying with m a n y
regulatory requirements. Accordingly, the Commission estimates that it will take
broker-dealers on average thirty seconds to check whether a person appears on a
government list. The hourly cost of the person w h o would check the list is $25.90
per hour (per the SIA Earnings Report, Table 086 (Data Entry Clerk, Senior) and
including 3 5 % in overhead charges). Therefore, the costs to the industry reported
above are: (number of n e w accounts per year) x (1/120 of an hour) x ($25.90).
The Commission estimates that the number of n e w accounts in the upcoming
years will be: 16,900,000 in 2003, 18,600,000 in 2004 and 20,515,000 in 2005.
Thefinalrule will be effective only for the last quarter of 2003. Therefore, while
the total cost for a twelve-month effective period would be $3,647,583, the actual
cost being allocated to the rule for 2003 is $911,896 (or % of $3,647,583).

The Commission estimates that it will take each broker-dealer, on average, two
hours to create and implement the appropriate notice. This estimate takes into
consideration the fact that m a n y small firms will be able to provide adequate
notice by hanging signs in their premises. Larger firms will be able to provide
notice by updating account opening documentation or electronic account opening
systems. The Commission believes that broker-dealers will have an attorney draft
the appropriate notice, and that this will take approximately one hour. The hourly
cost for an in-house counsel plus 3 5 % overhead is $156.00 (SIA Earnings Report,

Recordkeeping

The Commission estimates that many of the records required by the rule are
already made and maintained by broker-dealers. As discussed above, Commission and
self-regulatory organization rules already require broker-dealers to obtain much of the
minimum identifying information specified in the proposed rule. These regulations also
require that records be made and kept of this information. Moreover, the final rule has
modified the recordkeeping requirements to make them less burdensome. The
Commission estimates that the recordkeeping requirement could result in additional costs
for some broker-dealers that currently do not maintain certain of the records for the
prescribed time period. The Commission estimates that the total cost to the industry to
make and maintain the required records in the upcoming years will be $3,647,583 in
2003, $16,058,000 in 2004 and $17,711,283 in 2005.164

Table 107, (Attorney)). The Commission believes that broker-dealers will have a
compliance manager implement the notice, and that implementation will take
approximately one hour. The hourly cost for a compliance manager is $101.25
(SIA Earnings Report, Table 051 (Compliance manager)). Accordingly, the total
cost to the industry would be: ($156.00 + 101.25) x (the number of broker-dealers
doing a public business or 5,448) or $1,401,498.
The Commission estimates that it will take approximately two minutes per new
account to m a k e and maintain the required records. This estimate takes into
account the fact that m a n y broker-dealers already m a k e and maintain m a n y of the
required records and that the requirements in thefinalrule have been modified.
The hourly cost of the person w h o would undertake the verification is $25.90 per
hour (per the SIA Earnings Report, Table 086 (Data Entry Clerk, Senior) and
including 3 5 % in overhead charges). Therefore, the costs to the industry reported
above are: (number of n e w accounts per year) x (1/30 of an hour) x ($25.90). The
Commission estimates that the number of n e w accounts in the upcoming years
will be: 16,900,000 in 2003, 18,600,000 in 2004 and 20,515,000 in 2005. The
final rule will be effective only for the last quarter of 2003. Therefore, while the
total cost for a twelve-month effective period would be $14,590,333, the actual
cost being allocated to the rule for 2003 is $3,647,583 (or % of $14,590,333).

VI.

REGULATORY FLEXIBILITY ACT

Treasury and the Commission are sensitive to the impact our rules may impose on
small entities. Congress enacted the Regulatory Flexibility Act, 5 U.S.C. 601 et seq„ to
address concerns related to the effects of agency rules on small entities. In the NPRM,
Treasury and the Commission stated that the proposed rule likely would not have a
"significant economic impact on a substantial number of small entities."165 5 U.S.C.
605(b). First, we noted that the economic impact on small entities should not be
significant because most small entities are likely to have a relatively small number of
accounts, and thus compliance should not impose a significant economic impact.
Second, we pointed out that the economic impact on broker-dealers, including small
entities, is imposed by the statute itself, and not by the final rule.
While Treasury and the Commission believed that the proposed rule likely would
not have a significant economic impact on a substantial number of small entities,
Treasury and the Commission prepared an Initial Regulatory Flexibility Analysis (IRFA)
that was published in the NPRM. Therefore, a Final Regulatory Flexibility Analysis
(FRFA) has been prepared in accordance with 5 U.S.C. 604.
A. Need for and Objectives of the Rule
Section 326 of the Act requires Treasury and the Commission jointly to issue a
regulation setting forth minimum standards for broker-dealers and their customers
regarding the identity of the customer that shall apply in connection with the opening of
an account at the broker-dealer. Furthermore, section 326 requires, at a minimum, that
broker-dealers implement reasonable procedures for (1) verifying the identity of any

N P R M , Section VII, 67 F R at 48315.

person seeking to open an account, to the extent reasonable and practicable; (2)
maintaining records of the information used to verify the person's identity, including
name, address, and other identifying information; and (3) determining whether the person
appears on any lists of known or suspected terrorists or terrorist organizations provided to
the financial institution by any government agency.
The purpose of section 326, and the regulations promulgated thereunder, is to
make it easier to prevent, detect and prosecute money laundering and the financing of
terrorism. In issuing the proposed rule, Treasury and the Commission are seeking to
fulfill their statutorily mandated responsibilities under section 326 and to achieve its
important purpose.
The rule seeks to achieve the goals of section 326 by specifying the information
broker-dealers must obtain from or about customers that can be used to verify the identity
of the customers. This will make it more difficult for persons to use false identities to
establish customer relationships with broker-dealers for the purposes of laundering
money or moving funds to effectuate illegal activities, such as financing terrorism.
B. Significant Issues Raised by Public Comment
In the NPRM, Treasury and the Commission specifically requested public
comments on any aspect of the IRFA, as well as the number of small entities that may be
affected by the proposed rule. The agencies received no comments on the IRFA.
C. Small Entities Subject to the Rule
The final rule will affect broker-dealers that are small entities. Rule 0-10 under
the Exchange Act166 defines a broker-dealer to be small if it (1) had total capital (net

17 C F R 240.0-10(c).

worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal
year as of which its audited financial statements were prepared pursuant to § 240.17a-

5(d) or, if not required to file such statements, a broker or dealer that had total capital (ne
worth plus subordinated liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not
affiliated with any person (other than a natural person) that is not a small business or
small organization as defined in the rule.
The Commission estimates there are approximately 878 broker-dealers that were
"small" for purposes of Rule 0-10 that would be subject to this rule because they conduct
business with the general public. The Commission bases its estimate on the information
provided in broker-dealer FOCUS Reports.
D. Reporting, Recordkeeping and other Compliance Requirements
The proposed rule would require broker-dealers to (1) establish a CIP; (2) obtain
certain identifying information from customers; (3) verify identifying information of
customers; (4) check customers against lists provided by federal agencies; (5) provide
notice to customers that information may be requested in the process of verifying their
identities; and (6) make and maintain records related to the CIP.
As noted above, the rule is not expected to have a significant economic impact on
a substantial number of small entities. Commission staff estimates that broker-dealers
needing to draft a CIP will spend, on average, approximately 20 hours, at a cost of
approximately $2,244 per firm, and that broker-dealers needing to make systems

modifications will spend, on average, approximately 640 hours at a cost of $39,864.44
per firm.
Although small entities will also incur annual costs, the Commission expects that
they will not have a significant economic impact. For each new account, a broker-dealer
will require what we estimate to be one minute for collecting customer information, 5
minutes for verifying customer information, half a minute for comparison to government
lists, and 2 minutes for record retention, each at a cost of approximately $22 to $26 per
hour. Small entities are likely to have a relatively small number of accounts; therefore,
they will incur the ongoing costs of individual customer identifications relatively
infrequently.
E. Agency Action to Minimize Effect on Small Entities
Treasury and the Commission considered significant alternatives to the
amendments that would accomplish the stated objective, while minimizing any
significant adverse impact on small entities.
In connection with the proposed amendments, we considered the following
alternatives: (1) the establishment of differing compliance or reporting requirements or
timetables that take into account the resources of small entities; (2) the clarification,
consolidation, or simplification of compliance and reporting requirements under the rule
for small entities; (3) the use of performance rather than design standards; and (4) an
exemption for small broker-dealers from coverage of the proposed amendments or any
part thereof.
The final rule provides for substantial flexibility in how each broker-dealer may
meet its requirements. This flexibility is designed to account for differences between

broker-dealers, including size. Nonetheless, Treasury and the Commission did consider

alternatives indicated above. Treasury and the Commission believe that the alte

approaches to minimize the adverse impact of the rule on small entities are not

with the statutory mandate of Section 326. In addition, Treasury and the Commis
not believe that an exemption is appropriate, given the flexibility built into

account for, among other things, the differing sizes and resources of broker-de

well as the importance of the statutory goals and mandate of section 326. Money
laundering can occur in small firms as well as large firms.
VII. EXECUTIVE ORDER 12866

The Department of the Treasury has determined that this rule is not a significa

regulatory action for purposes of Executive Order 12866. As noted above, the fi

parallels the requirements of section 326 of the Act. Accordingly, a regulatory
analysis is not required.

Vni. STATUTORY AUTHORITY AND TEXT OF RULES
List of Subjects in 31 CFR Part 103
Administrative practice and procedure, Authority delegations (Government

agencies), Banks, banking, Brokers, Currency, Foreign banking, Foreign currencie

Gambling, Investigations, Law enforcement, Penalties, Reporting and recordkeepin
requirements, Securities.
Department of the Treasury
31 CFR Chapter I
For the reasons set forth in the preamble, part 103 of title 31 of the Code of
Federal Regulations is amended as follows:

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. 5311-5314 and 53165332; title III, sees. 312, 313, 314, 319, 326, 352, Pub. L. 107-56, 115 Stat. 307, 12
U.S.C. 1818, 12 U.S.C. 1786(q).
2. In § 103.35, amend the first sentence of paragraph (a)(1) to add the words "and
before October 1, 2003" after the words "June 30, 1972".
3. Subpart I of part 103 is amended by adding 103.122 to read as follows:
§ 103.122 - Customer identification programs for broker-dealers.
(a) Definitions. For the purposes of this section:
(l)(i) Account means a formal relationship with a broker-dealer
established to effect transactions in securities, including,
but not limited to, the purchase or sale of securities and
securities loaned and borrowed activity, and to hold
securities or other assets for safekeeping or as collateral.
(ii) Account does not include:
(A) An account that the broker-dealer acquires through
any acquisition, merger, purchase of assets, or
assumption of liabilities; or
(B) An account opened for the purpose of participating
in an employee benefit plan established under the
Employee Retirement Income Security Act of 1974.

(2)

Broker-dealer means a person registered or required to be

registered as a broker or dealer with the Commission under the Securities Exchange Act
of 1934 (15 U.S.C 77a et seq.), except persons who register pursuant to 15 U.S.C
78o(b)(ll).
(3) Commission means the United States Securities and Exchange
Commission.
(4)(i) Customer means:
(A) A person that opens a new account; and
(B) An individual who opens a new account for:
(7) An individual who lacks legal capacity; or
(2) An entity that is not a legal person.
(ii) Customer does not include:
(A) A financial institution regulated by a Federal
functional regulator or a bank regulated by a state
bank regulator;
(B) A person described in § 103.22(d)(2)(h) through
(iv); or
(C) A person that has an existing account with the
broker-dealer, provided the broker-dealer has a
reasonable belief that it knows the true identity of
the person.
(5) Federal functional regulator is defined at § 103.120(a)(2).
(6) Financial institution is defined at 31 U.S.C. 5312(a)(2) and (c)(1).

(7)

Taxpayer identification number is defined by section 6109 of the

Internal Revenue Code of 1986 (26 U.S.C. 6109) and the Internal Revenue Service
regulations implementing that section (e.g., social security number or employer
identification number).
(8) U.S. person means:
(i) A United States citizen; or
(ii) A person other than an individual (such as a corporation,
partnership or trust) that is established or organized under
the laws of a State or the United States.
(9) Non-U.S. person means a person that is not a U.S. person.
(b) Customer identification program: minimum requirements.
(1) In general A broker-dealer must establish, document, and maintain a
written Customer Identification Program ("CIP") appropriate for its size and business
that, at a minimum, includes each of the requirements of paragraphs (b)(1) through (b)(5)
of this section. The CIP must be a part of the broker-dealer's anti-money laundering
compliance program required under 31 U.S.C. 5318(h).
(2) Identity verification procedures. The CIP must include risk-based
procedures for verifying the identity of each customer to the extent reasonable and
practicable. The procedures must enable the broker-dealer to form a reasonable belief
that it knows the true identity of each customer. The procedures must be based on the
broker-dealer's assessment of the relevant risks, including those presented by the various
types of accounts maintained by the broker-dealer, the various methods of opening
accounts provided by the broker-dealer, the various types of identifying information

available and the broker-dealer's size, location and customer base. At a minimum, these
procedures must contain the elements described in this paragraph (b)(2).
(i)(A) Customer information required. The CIP must
contain procedures for opening an account that
specify identifying information that will be obtained
from each customer. Except as permitted by
paragraph (b)(2)(i)(B) of this section, the brokerdealer must obtain, at a minimum, the following
information prior to opening an account:
(7) Name;
(2) Date of birth, for an individual;
(3) Address, which shall be:
(7) For an individual, a residential or
business street address;
(if) For an individual who does not have
a residential or business street
address, an Army Post Office (APO)
or Fleet Post Office (FPO) box
number, or the residential or business
street address of a next of kin or
another contact individual; or
(iii) For a person other than an individual
(such as a corporation, partnership or

trust), a principal place of business,
local office or other physical
location;
and
(4) Identification number, which shall be:
(i) For a U.S. person, a taxpayer
identificatbn number; or
(ii) For a non-U.S. person, one or more
of the following: a taxpayer
identification number, a passport
number and country of issuance, an
alien identification card number, or
the number and country of issuance
of any other government-issued
document evidencing nationality or
residence and bearing a photograph
or similar safeguard.
NOTE to paragraph b)(2)(i)(A)(4)(Ji):
W h e n opening an account for a foreign
business or enterprise that does not have
an identification number, the brokerdealer must request alternative
government-issued documentation
certifying the existence of the business or
enterprise.

Exception for persons applying for a taxpayer
identification number. Instead of obtaining a
taxpayer identification number from a customer

prior to opening an account, the CIP m a y include
procedures for opening an account for a customer
that has applied for, but has not received, a taxpayer
identification number. In this case, the CIP must
include procedures to confirm that the application
was filed before the customer opens the account and
to obtain the taxpayer identification number within
a reasonable period of time after the account is
opened.
(ii) Customer verification The CIP must contain procedures
for verifying the identity of each customer, using
information obtained in accordance with paragraph (b)(2)(i)
of this section, within a reasonable time before or after the
customer's account is opened. The procedures must
describe when the broker-dealer will use documents, nondocumentary methods, or a combination of both methods,
as described in this paragraph (b)(2)(h).
(A) Verification through documents. For a brokerdealer relying on documents, the CIP must contain
procedures that set forth the documents the brokerdealer will use. These documents may include:
(7) For an individual, an unexpired governmentissued identification evidencing nationality

or residence and bearing a photograph or
similar safeguard, such as a driver's license
or passport; and
(2) For a person other than an individual (such
as a corporation, partnership or trust),
documents showing the existence of the
entity, such as certified articles of
incorporation, a government-issued business
license, a partnership agreement, or a trust
instrument.
Verification through non-documentary methods.
For a broker-dealer relying on non-documentary
methods, the CIP must contain procedures that set
forth the non-documentary methods the brokerdealer will use.
(7) These methods may include contacting a
customer; independently verifying the
customer's identity through the comparison
of information provided by the customer
with information obtained from a consumer
reporting agency, public database, or other
source; checking references with other

financial institutions; or obtaining a
financial statement.
(2) The broker-dealer's non-documentary
procedures must address situations where an
individual is unable to present an unexpired
government-issued identification document
that bears a photograph or similar safeguard;
the broker-dealer is not familiar with the
documents presented; the account is opened
without obtaining documents; the customer
opens the account without appearing in
person at the broker-dealer; and where the
broker-dealer is otherwise presented with
circumstances that increase the risk that the
broker-dealer will be unable to verify the
true identity of a customer through
documents.
Additional verification for certain customers. The CIP must
address situations where, based on the broker-dealer's risk
assessment of a new account opened by a customer that is
not an individual, the broker-dealer will obtain information
about individuals with authority or control over such
account. This verification method applies only when the

broker-dealer cannot verify the customer's true identity
using the verification methods described in paragraphs
(b)(2)(ii)(A) and (B) of this section.
(iii) Lack of verification The CIP must include procedures for
responding to circumstances in which the broker-dealer cannot
form a reasonable belief that it knows the true identity of a
customer. These procedures should describe:
(A) When the broker-dealer should not open an account;
(B) The terms under which a customer may conduct
transactions while the broker-dealer attempts to verify the
customer's identity;
(C) When the broker-dealer should close an account after
attempts to verify a customer's identity fail; and
(D) When the broker-dealer should file a Suspicious Activity
Report in accordance with applicable law and regulation.
(3) Recordkeeping. The CIP must include procedures for making and
maintaining a record of all information obtained under procedures implementing
paragraph (b) of this section.
(i) Required records. At a minimum, the record must include:
(A) All identifying information about a customer
obtained under paragraph (b)(2)(i) of this section,
(B) A description of any document that was relied on
under paragraph (b)(2)(ii)(A) of this section noting

the type of document, any identification number
contained in the document, the place of issuance,
and if any, the date of issuance and expiration date;
(C) A description of the methods and the results of any
measures undertaken to verify the identity of a
customer under paragraphs (b)(2)(ii)(B) and (C) of
this section; and
(D) A description of the resolution of each substantive
discrepancy discovered when verifying the
identifying information obtained.
(ii) Retention of records. The broker-dealer must retain the records
made under paragraph (b)(3)(i)(A) of this section for five years
after the account is closed and the records made under paragraphs
(b)(3)(i)(B), (C) and (D) of this section for five years after the
record is made. In all other respects, the records must be
maintained pursuant to the provisions of 17 CFR 240.17a-4.
(4) Comparison with government lists. The CIP must include
procedures for determining whether a customer appears on any list of known or suspected
terrorists or terrorist organizations issued by any Federal government agency and
designated as such by Treasury in consultation with the Federal functional regulators.
The procedures must require the broker-dealer to make such a determination within a
reasonable period of time after the account is opened, or earlier if required by another
Federal law or regulation or Federal directive issued in connection with the applicable

list. The procedures also must require the broker-dealer to follow all Federal directives
issued in connection with such lists.
(5)(i) Customer notice. The CIP must include procedures for providing
customers with adequate notice that the broker-dealer is requesting
information to verify their identities.
(ii) Adequate notice. Notice is adequate if the broker-dealer generally
describes the identification requirements of this section and
provides such notice in a manner reasonably designed to ensure
that a customer is able to view the notice, or is otherwise given
notice, before opening an account. For example, depending upon
the manner in which the account is opened, a broker-dealer may
post a notice in the lobby or on its website, include the notice on its
account applications or use any other form of oral or written
notice.
(iii) Sample notice. If appropriate, a broker-dealer may use the
following sample language to provide notice to its customers:
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW

ACCOUNT
To help the government fight the funding of terrorism and money laundering activities,
Federal law requires all financial institutions to obtain, verify, and record information that
identifies each person who opens an account.
What this means for you: When you open an account, we will ask for your name, address,
date of birth and other information that will allow us to identify you. W e may also ask to
see your driver's license or other identifying documents.
(6) Reliance on another financial institution The CIP may include
procedures specifying when the broker-dealer will rely on the performance by another

financial institution (including an affiliate) of any procedures of the broker-dealer's CIP,
with respect to any customer of the broker-dealer that is opening an account or has
established an account or similar business relationship with the other financial institution
to provide or engage in services, dealings, or other financial transactions, provided that:
(i) Such reliance is reasonable under the circumstances;
(ii) The other financial institution is subject to a rule implementing 31
U.S.C. 5318(h), and regulated by a Federal functional regulator;
and
(iii) The other financial institution enters into a contract requiring it to
certify annually to the broker-dealer that it has implemented its
anti-money laundering program, and that it will perform (or its
agent will perform) specified requirements of the broker-dealer's
CIP.
(c) Exemptions. The Commission, with the concurrence of the Secretary,
may by order or regulation exempt any broker-dealer that registers with the Commission
pursuant to 15 U.S.C. 78o or 15 U.S.C. 78o-4 or any type of account from the
requirements of this section. The Secretary, with the concurrence of the Commission,
may exempt any broker-dealer that registers with the Commission pursuant to 15 U.S.C.
78o-5. In issuing such exemptions, the Commission and the Secretary shall consider
whether the exemption is consistent with the purposes of the Bank Secrecy Act, and in
the public interest, and may consider other necessary and appropriate factors.
(d) Other requirements unaffected. Nothing in this section relieves a brokerdealer of its obligation to comply with any other provision of this part, including

provisions concerning information that must be obtained, verified, or maintained in
connection with any account or transaction.

Dated: [ ]

By the Financial Crimes Enforcement Network

James F. Sloan
Director

[THIS SIGNATURE PAGE PERTAINS TO THE FINAL RULE TITLED
"CUSTOMER IDENTIFICATION P R O G R A M S FOR BROKER-DEALERS."]

Dated: [

]

In concurrence:
By the Securities and Exchange Commission

Margaret H. McFarland
Deputy Secretary

[Billing Code: 4810-02-P; 6351-01]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 42
RIN 3038-AB90
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA34
Customer Identification Programs For Futures Commission Merchants And
Introducing Brokers
AGENCIES: Financial Crimes Enforcement Network, Treasury; Commodity Futures
Trading Commission.
ACTION: Joint final rule.
SUMMARY: The Department of the Treasury, through the Financial Crimes
Enforcement Network (FinCEN), and the Commodity Futures Trading Commission
(CFTC) are jointly adopting a final rule to implement section 326 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT ACT) Act of 2001. Section 326 requires the
Secretary of the Treasury to jointly prescribe with the CFTC a rule that, at a minimum,
requires futures commission merchants and introducing brokers to implement reasonable
procedures to verify the identity of any person seeking to open an account, to the extent
reasonable and practicable; maintain records of the information used to verify the
person's identity; and determine whether the person appears on any lists of known or
suspected terrorists or terrorist organizations provided to futures commission merchants

or introducing brokers by any government agency. This final rule applies to all futures

commission merchants and introducing brokers, except for futures commission mer
and introducing brokers that register with the CFTC solely because they effect
transactions in security futures products.

DATES:
Effective Date: This rule is effective [INSERT DATE 30 DAYS AFTER DATE
OF PUBLICATION IN THE FEDERAL REGISTER].
Compliance Date: Futures commission merchants and introducing brokers
subject to this final rule must comply with it by October 1, 2003.

FOR FURTHER INFORMATION CONTACT:
Commodity Futures Trading Commission: Office of the General Counsel, (202)
418-5120, Commodity Futures Trading Commission, 1155 21st Street, N.W.,
Washington, D.C. 20581; or AMLstaff@cftc.gov.
Treasury: Office of the Chief Counsel (FinCEN), (703) 905-3590; Office of the

General Counsel (Treasury), (202) 622-1927; or the Office of the Assistant Gener
Counsel for Banking & Finance (Treasury), (202) 622-0480.

Obstruct Terrorism ( U S A P A T R I O T A C T ) Act of 2001 ( Act).l Title III of the Act,
captioned "International Money Laundering Abatement and Anti-terrorist Financing Act
of 2001," added several new provisions to the Bank Secrecy Act (BSA).2 These
provisions are intended to facilitate the prevention, detection, and prosecution of
international money laundering and the financing of terrorism. Section 326 of the Act
added a new subsection (1) to 31 U.S.C. 5318 of the BSA that requires the Secretary of
the Treasury (Secretary or Treasury) to prescribe regulations "setting forth the minimum
standards for financial institutions and their customers regarding the identity of the
customer that shall apply in connection with the opening of an account at a financial
institution."
Section 326 of the Act applies to all "financial institutions." This term is defined
broadly in the BSA to encompass a variety of entities, including commercial banks,
agencies and branches of foreign banks in the United States, thrifts, credit unions, private
banks, trust companies, brokers and dealers in securities, investment companies, futures
commission merchants (FCMs), introducing brokers (IBs),3 insurance companies, travel

Pub. L. 107-56.
31 U.S.C. 5311 etseq.

Treasury has clarified that the term "a broker or dealer in securities or commodities" in
the B S A , 31 U.S.C. 5312(a)(2)(H), includes IBs within the definition of "financial
institution." 67 F R 48328, 48329 n.2 (July 23, 2002); see also 67 F R 21110, 21111 n.5
(April 29, 2002).

agents, pawnbrokers, dealers in precious metals, check-cashers, casinos, and telegraph
companies, among many others.4
The regulations implementing section 326 of the Act must require, at a minimum,
financial institutions to implement reasonable customer identification procedures for: (1)
verifying the identity of any person seeking to open an account, to the extent reasonable
and practicable; (2) maintaining records of the information used to verify the person's
identity, including name, address, and other identifying information; and (3) determining
whether the person appears on any lists of known or suspected terrorists or terrorist
organizations provided to the financial institution by any government agency. In
prescribing these regulations, the Secretary is directed to take into consideration the types
of accounts maintained by different types of financial institutions, the various methods of
opening accounts, and the types of identifying information that are available.
B. Overview of Comments Received
On July 23, 2002, Treasury and the CFTC jointly proposed a rule to implement
section 326 of the Act with respect to FCMs and IBs.5 Treasury and the CFTC received

See 31 U.S.C. 5312(a)(2), 5312(c)(1)(A). For any financial institution engaged in
financial activities described in section 4(k) of the Bank Holding C o m p a n y Act of 1956,
the Secretary is required to prescribe the regulations issued under section 326 of the Act
jointly with the Office of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration (collectively, the banking
agencies), the C F T C , and the Securities and Exchange Commission (SEC).
5

Customer Identification Programs for FCMs and IBs, 67 FR 48328 (July 23, 2002)
( N P R M ) . Treasury simultaneously published: (1) jointly with the banking agencies, a
proposed rule applicable to banks (as defined in 31 C F R 103.11(c)) andforeignbranches
of insured banks (67 F R 48290 (July 23, 2002)); (2) a proposed rule applicable to credit
unions, private banks and trust companies that do not have a Federal functional regulator
(67 F R 48299 (July 23, 2002)); (3) jointly with the S E C , a proposed rule applicable to

three comments directed to this proposal.6 Commenters were a registered futures
association and two futures industry trade associations. Commenters generally supported
the proposal but suggested a few revisions.
One commenter addressed the rule's definition of "customer," specifically the
definition's inclusion of persons with authority to effect transactions in the account. This
commenter argued that the definition was overly broad and suggested that a risk-based
approach be adopted instead.
Two commenters addressed the proposed rule's identity verification requirement.
One commenter supported the proposed rule's framework for when verification would be
required of existing customers that open new accounts. The other commenter requested
clarification as to what would be considered a "new account" for which verification
would be necessary. Both commenters suggested that the final rule text include the
exception discussed in the NPRM for certain non-customer initiated transfers of accounts
between FCMs.7
Two commenters addressed the issue of permissible reliance between FCMs and
IBs that share an account relationship with respect to the performance of customer

broker-dealers (67 FR 48306 (July 23, 2002)); and (4) jointly with the SEC, a proposed
rule applicable to mutual funds (67 F R 48318 (July 23, 2002)). Treasury, the C F T C , the
S E C , and the banking agencies received approximately 500 comments in response to
these proposed rules. M a n y of those commenters raised similar issues applicable to all
the affected sectors of thefinancialservices industry.
6

The comment letters are available for public inspection and copying in the CFTCs
Reading R o o m , located in R o o m 4072 at the C F T C s principal office at Three Lafayette
Centre, 1155 21st Street, N W , Washington, D.C. 20581. The telephone number is (202)
418-5025. C o m m e n t letters are also available on the C F T C s Internet website at
http://www.cftc.gov/foia/comment02/foi02—009_l.htm.
7

See NPRM, 67 FR at 48330.

identification and verification functions. The commenters requested clarification
regarding the requirement that the relied-upon firm provide a certification to the relying
firm. They suggested that the relied-upon firm be allowed to provide one certification
that would suffice for all customers for which the two financial institutions share an
account relationship. The commenters also suggested that reliance upon non-US
financial institutions, particularly affiliates, be permitted as well.
One commenter addressed the proposed rule's customer notice requirement. This
commenter suggested that notice should not be required of FCMs and IBs, and that if it is
required, posting a notice on the firm's Internet website should be deemed sufficient for
all customers.
Treasury and the CFTC have modified the proposed rule in light of these
comments. It is the intent of Treasury, the CFTC, the SEC and the banking agencies that
all the final rules implementing 31 U.S.C. 5318(1) be substantively identical, which
approach was supported by commenters from all affected sectors of the financial services
industry. Accordingly, Treasury and the CFTC also have modified the proposed rule for
FCMs and IBs to maintain consistency and parallel treatment with the final rules
imposing customer identification and verification requirements upon other financial
institutions.8 The section-by-section analysis that follows discusses the comments and
the modifications that Treasury and the CFTC have made to the proposed rule.

See supra notes 4 and 5. Treasury and the C F T C believe that these changes either
clarify or liberalize the scope of the proposed rule with respect to F C M s and IBs.

C. Codification of the Joint Final Rule
The joint final rule applies to any person that is registered or required to be
registered with the CFTC under the Commodity Exchange Act (CEA)9 as either an FCM
or IB, except persons who register as an FCM or IB solely for the purpose of effecting
any transactions in a security futures product (SFP).10 The substantive requirements of
this joint final rule will be codified as part of Treasury's BSA regulations located in 31
CFR Part 103.n
As proposed, the CFTC is adding a rule in its own regulations that will crossreference the joint rule in 31 CFR Part 103. Specifically, the CFTC is concurrently
amending Chapter I of 17 CFR to add a new Part 42 and adopting a new rule in this Part,
Rule 42.2 (Compliance with Bank Secrecy Act).12 CFTC Rule 42.2 will require each
FCM and IB to comply with the applicable provisions of the BSA and the implementing
regulations, including 31 U.S.C. 5318(1) and the implementing regulation jointly
promulgated by Treasury and the CFTC at 31 CFR 103.123, requiring customer
identification and verification procedures as part of the FCM's or IB's anti-money
laundering (AML) compliance program.

7 U.S.C. Letseq.

FCMs and IBs that limit their futures business to effecting transactions in SFPs may
register with the C F T C pursuant to 7 U.S.C. 6f(a)(2). These persons will be subject to
the customer identification rule being issued by the S E C with respect to securities brokers
or dealers.
1

* The rule will be codified at 31 CFR 103.123.
17 CFR 42.2.

Final rules governing the applicability of section 326 of the Act to certain other
financial institutions, including banks, thrifts, credit unions, mutual funds and securities
broker-dealers, are being issued separately. Treasury, the CFTC, the SEC and the
banking agencies consulted extensively in the development of all joint rules
implementing section 326 of the Act. These agencies intend the effect of the final rules
to be uniform throughout the financial services industry. Treasury intends to issue
separate rules under section 326 of the Act for certain non-bank financial institutions that
are not regulated by one of the Federal functional regulators.
D. Compliance Date
Many commenters on the other proposed rules13 requested that financial
institutions be given adequate time to develop and implement the requirements of any
final rule adopted under section 326 of the Act. The transition periods suggested by these
commenters ranged from 60 days to two years after the publication of a final rule.
The final rule for FCMs and IBs modifies various aspects of the proposed rule and
eliminates some of the requirements that commenters identified as being most
burdensome. Nonetheless, Treasury and the CFTC recognize that some FCMs and IBs
will need time to develop and implement the customer identification program (CIP)
required by the rule, because doing so may include various measures, such as training
staff, reprinting forms, and programming automated systems. Accordingly, although this
rule will be effective 30 days after publication, FCMs and IBs will have a transition

See supra note 5.

period to implement the rule. F C M s and IBs must fully implement their CIPs under the
final rule by October 1, 2003.14

II. THE JOINT FINAL RULE IMPLEMENTING SECTION 326 OF THE ACT
A. Section-by-Section Analysis
Section 103.123(a) Definitions.
Section 103.123(a)(1) Account. The proposed rule defined "account" as any
formal business relationship with an FCM, including, but not limited to, any relationship
established to effect transactions in contracts of sale for future delivery, options on
contracts of sale for future delivery, or options on physicals in any commodity.15
The final rule includes certain changes to this definition. First, the reference to a
"business relationship" has been removed from the definition of "account." This change
has been made to clarify that the rule applies to the FCM's provision of financial
services,16 as opposed to general business dealings such as those established in
connection with an FCM's own operations or premises. Second, in order to clarify the
covered relationships, the final rule refers to transactions in "contracts of sale of a
commodity for future delivery, options on any contract of sale of a commodity for future
delivery, or options on a commodity."

The final CIP rules issued by Treasury and the other Federal functional regulators also
require full implementation by October 1, 2003.
15

See NPRM, 67 FR at 48337.

This term is intended to operate broadly to include all financial services provided by
an F C M . It would include, for example, the provision of any guarantee or clearing
services provided by an F C M . It would also include an F C M ' s provision of financial
services involving any foreign currency futures contract, option on any foreign currency
futures contract, or option on a foreign currency that occurs on an off-exchange basis.
See7U.S.C.2(c)(l>(2).

T w o commenters requested that thefinalrule codify the "transfer exception" to
the definition of an "account." The NPRM stated that transfers of accounts from one
FCM to another that are not initiated by the customer fall outside the scope of section 326
of the Act,17 and would not be covered by the proposed rule.18 The final rule codifies this
exception19 by excluding from the definition of "account" any account that an FCM
acquires through an acquisition, merger, purchase of assets, or assumption of liabilities.20

Section 326 of the Act applies with respect to persons seeking to open an account at a
financial institution. If a financial institution acquires an account through a non-customer
initiated transaction, such as a transfer due to the insolvency of an F C M , the customer is
not seeking to open an account with the financial institution.
By the same reasoning, the final rule does not, as one commenter requested, expand the
"transfer exception" to include transfers where a customer account follows an associated
person w h o moves from one firm to another, because such transfers are, at a minimum,
undertaken with the acquiescence of the customer. Nonetheless, as discussed, infra,
while the final rule requires that certain m i n i m u m customer information be obtained prior
to opening an account, verification of the customer's identity m a y be done within a
reasonable time before or after the account is opened.
18

See NPRM, 67 FR at 48330 (discussion of definition of the term "customer").

Nevertheless, there may be situations involving the transfer of accounts where it
would be appropriate for an F C M , as part of its anti-money laundering compliance
program (see, infra, note 89 and accompanying text) to verify the identity of customers
associated with accounts that it acquires from another financial institution. For example,
it m a y be appropriate to verify transferred account holders if the accounts are coming
from afinancialinstitution that has failed to establish or maintain a CIP. Treasury and
the Federal functional regulators expectfinancialinstitutions to implement reasonable
procedures to detect m o n e y laundering in any account, however acquired.

This "transfer exception" includes bulk transfers made in accordance with CFTC Rule
1.65, 17 C F R 1.65, or as required by the C F T C s m i n i m u m financial requirements in
C F T C Rule 1.17(a)(4), 17 C F R 1.17(a)(4). This exception would also cover transfers of
accounts that result w h e n an IB changes its introducing relationship from one F C M to
another. For customers that open accounts after the transfer, however, the IB and the n e w
F C M would need to meet the requirements in paragraph (b)(6) (including entering into a
contract and providing certifications) to the extent they intend to rely on each other to
undertake CIP requirements with respect to these customers.

Thefinalrule also excludes from the definition of "account" those accounts that
are opened for the purpose of participating in an employee benefit plan established
pursuant to the Employee Retirement Income Security Act of 1974. These accounts are
less susceptible to being used for the financing of terrorism and money laundering
because, among other reasons, they are funded through payroll deductions in connection
with employment plans that must comply with Federal regulations imposing, among
other requirements, low contribution limits and strict distribution requirements.
Section 103.123(a)(2) Commission. The proposed rule defined "Commission" as
the United States Commodity Futures Trading Commission. There were no comments on
the definition, and Treasury and the CFTC have adopted it as proposed.
Section 103.123(a)(3) Commodity. The proposed rule defined "commodity" by
reference to Section la(4) of the CEA, 7 U.S.C. la(4). There were no comments on the
definition, and Treasury and the CFTC have adopted it as proposed.
Section 103.123(a)(4) Contract of sale. The final rule adds a definition of
"contract of sale." The term is used in the definition of "account."21 The final rule
defines "contract of sale" as any sale, agreement of sale or agreement to sell as described
in Section la(7) of the CEA, 7 U.S.C. la(7).
Section 103.123(a)(5) Customer. The proposed rule defined "customer" to mean
any person who opens a new account with an FCM, and any person granted authority to
effect transactions in an account.22 For consistency with the text of section 326 of the
Act, the final rule defines "customer" as "a person that opens a new account." Except in

See final rule, 103.123(a)(1).

See NPRM, 67 FR at 48337.

the case of minors and informal groups with a c o m m o n interest (e.g., civic clubs), this
means that the "customer" is the person identified as the account holder, or persons in the
case of a joint account. It does not refer to a person who fills out the account opening
paperwork or provides information necessary to open an account, if such person is not the
account holder as well. Thus, an FCM or IB is not required to look through a trust or
similar account to its beneficiaries, and is required only to verify the identity of the
named account holder.23 The final rule provides for similar treatment of intermediated
accounts.
As stated in the NPRM,24 the focus of the CIP with respect to intermediated
accounts will be the intermediary itself. If the intermediary is the account holder, such as
in the case of an omnibus account, an FCM is not required to look through the
intermediary to the underlying beneficiaries. Likewise, if the intermediary opens an
account in the name of a collective investment vehicle, such as commodity pools, an
FCM or IB is not required to look through the collective investment vehicle to the
underlying participants.25

However, as discussed below, under paragraph (b)(2)(ii)(C) of thefinalrule, an F C M
or IB, based on itsrisk-assessmentof a n e w account, m a y need to take additional steps to
verify the identity of a non-individual, such as obtaining information about persons with
control over the account. In addition, the due diligence procedures required under other
provisions of the B S A or the futures laws m a y require F C M s and IBs to look through to
owners of certain types of accounts.
24

See NPRM, 67 FR at 48331.

This is not because the FCM or IB is relying upon the intermediary to perform its
required due diligence. It is because under thefinalrule, F C M s and IBs are required only
to verify the identity of their customers, and w h e n an intermediary opens an account in its
o w n n a m e (or in the n a m e of its collective investment vehicle), the intermediary (or
collective investment vehicle) is the firm's "customer."

After revisiting the "authorized person" component of the proposed "customer"
definition, Treasury and the CFTC have determined that requiring limited resources to be
expended on verifying the identities of persons with authority over accounts could
interfere with an FCM's or IB's ability to focus on customers that present a higher risk of
not being properly identified. Accordingly, the final rule does not include persons with
authority to effect transactions in accounts within the definition of "customer." Instead,
paragraph (b)(2)(ii)(C) of the final rule requires FCMs and IBs to address situations
where they will take additional steps to verify the identity of a customer that is not an
individual by seeking information about individuals with authority or control over the
account in order to verify the customer's identity.
The definition of "customer" has been revised to clarify the treatment of accounts
for an individual who lacks legal capacity (such as a minor) and accounts for an entity
that is not a legal person (such as informal groups with a common interest, which
includes civic clubs).26 In the case of a minor child or informal group, the "customer" for
purposes of the rule is the individual who undertakes to open the account in the name of
the minor or group. Generally, this will be the person who fills out the account opening
paperwork and provides the information necessary to open the account in the name of the
minor or group.

B y contrast, if an intermediary were to open an account not in its o w n n a m e (or the n a m e
of a collective investment vehicle) but in the n a m e of its client, then under thefinalrule
the F C M ' s or IB's customer would be the client. In this situation, the F C M or IB m a y
indeed seek to rely upon the intermediary for performance of its CIP procedures with
respect to these shared customers. See discussion infra regardingfinalrule,
103.123(b)(6) (reliance on other financial institutions).
26

See final rule, 103.123(a)(5)(i)(B).

In order to m a k e the rule less burdensome, the final rule excludes from the
definition of "customer" certain readily identifiable entities, including: (1) financial
institutions regulated by a Federal functional regulator; (2) banks regulated by a state
bank regulator; and (3) persons described in § 103.22(d)(2)(h)-(iv), which includes
entities such as governmental agencies and instrumentalities and companies that are
publicly traded.

The definition of "customer" also excludes a person who has an

existing account, provided that the FCM or IB has a reasonable belief that it knows the
true identity of the person.28
Finally, the proposed definition of "customer" stated that when an account is
introduced to an FCM by an IB, the person or individual opening the account shall be
deemed to be a customer of both the FCM and the IB. There were no comments on this
portion of the definition, and Treasury and the CFTC have adopted it as proposed.29
Section 103.123(a)(6) Federal functional regulator. The final rule adds a
definition of "Federal functional regulator." The term is used in the revised definition of
"customer" and in a new provision allowing FCMs and IBs to rely on certain other

Seefinalrule, 103.123(a)(5)(ii)(A)-(B). Section 103.22(d)(2)(iv) exempts such
companies only to the extent of their domestic operations. Accordingly, an F C M ' s or
IB's CIP will apply to any foreign offices, affiliates, or subsidiaries of such entities that
open n e w accounts.
28

The proposed rule provided for similar treatment of existing customers, however, it
included this exclusion in a different paragraph of the rule. Whereas the existing
customer exclusion appears in the final rule's definition of "customer," this exclusion
appeared in the proposed rule's paragraph detailing the required verification procedures.
Compare 103.123(a)(5)(ii) with N P R M , 67 F R at 48338 (proposed 103.123(d)).
29

Treasury and the CFTC believe that the revisions made to the definition of "customer"
in the proposed rule address the suggestion by one commenter that arisk-basedapproach
be taken to determining w h o is a customer whose identity must be verified.

financial institutions to perform procedures of their CIPs.

The final rule defines

"Federal functional regulator" by reference to § 103.120(a)(2).
Section 103.123(a)(7) Financial institution. The final rule adds a definition of
"financial institution." The term is used in the revised definition of "customer" and in a
new provision allowing FCMs and IBs to rely on certain other financial institutions to
perform procedures of their CIPs.31 This new definition cross-references the BSA, 31
U.S.C. 5312(a)(2) and (c)(1). This is a more expansive definition of "financial
institution" than that in 31 CFR 103.11, and includes entities such as FCMs.
Section 103.123(a)(8) FCM. The proposed rule defined "FCM" as any person
registered or required to be registered as an FCM with the CFTC under the CEA, except
persons who register pursuant to section 4f(a)(2) of the CEA solely to effect transactions
in SFPs. There were no comments on the definition, and Treasury and the CFTC have
adopted it as proposed.
Section 103.123(a)(9) IB. The proposed rule defined "IB" as any person
registered or required to be registered as an IB with the CFTC under the CEA, except
persons who register pursuant to section 4f(a)(2) of the CEA solely to effect transactions
in SFPs. There were no comments on the definition, and Treasury and the CFTC have
adopted it as proposed with the addition of a U.S.C. citation for section 4f(a)(2) of the
CEA, 7 U.S.C. 6f(a)(2).

Seefinalrule, 103.123(a)(5) and (b)(6), respectively.

Section 103.123(a)(10) Option. Thefinalrule adds a definition of "option." The
term is used in the definition of "account."32 The final rule defines "option" as an
agreement, contract or transaction described in Section la(26) of the CEA, 7 U.S.C.
la(26).
Section 103.12(a)(ll) Taxpayer identification number. The proposed rule defined
"taxpayer identification number" (TIN) by reference to the provisions of section 6109 of
the Internal Revenue Code of 1986 and the regulations of the Internal Revenue Service
(IRS) promulgated thereunder. There were no comments on the definition, and Treasury
and the CFTC have adopted it substantially as proposed.
Section 103.123(a)(12) U.S. Person and § 103.123(a)(13) Non-U.S. person.
The proposed rule defined "U.S. person" as an individual who is a U.S. citizen, or
an entity established or organized under the laws of a State or the United States.33 A
"non-U.S. person" was defined as a person who did not satisfy either of these criteria.34
Under these definitions, an FCM or IB will not necessarily need to establish
whether a potential customer is a U.S. citizen. As described in greater detail below, the
FCM or IB will have to ask each customer for a U.S. TIN (social security number,

See final rule, 103.123(a)(5).

The proposed rule contained a definition of "person" that cross-referenced the
definition in 31 C F R 103.1 l(z). See N P R M , 67 F R at 48337. Since thefinalrule is
being codified in 31 C F R Part 103, it will incorporate the definition in § 103.1 l(z)
without the need for a specific cross-reference. Therefore, the definition has been
removed from thefinalrule. The definition of "person" in § 103.1 l(z) is: "an individual,
a corporation, a partnership, a trust or estate, a joint stock company, an association, a
syndicate, joint venture, or other unincorporated organization or group, an Indian tribe (as
that term is defined in the Indian Gaming Regulatory Act), and all entities cognizable as
legal personalities."
34

See NPRM, 67 FR at 48337.

employer identification number, or individual TIN). If a customer cannot provide one,
the FCM or IB may then obtain an identification number from some other form of
government- issued document evidencing nationality or residence and bearing a
photograph or similar safeguard. There were no comments on these definitions, and
Treasury and the CFTC have adopted them as proposed.
Section 103.123(b) Customer identification program: minimum requirements.
Section 103.123(b)(1) In general.
Treasury and the CFTC proposed to require that each FCM and IB implement a
written CIP as part of its AML program required under 31 U.S.C. 5318(h),35 and that the
procedures of the CIP enable each FCM and IB to form a reasonable belief that it knows
the true identity of each customer.36 The CIP procedures were to be based on the type of
identifying information available and on an assessment of relevant risk factors, including
the FCM's or IB's size, location and methods of opening accounts, the types of accounts
maintained and the types of transactions executed for customers, and the FCM's or IB's
reliance on another FCM or IB with which it shares an account relationship.
The NPRM discussed these risk factors and explained that, although the rule
would require certain minimum identifying information and suitable verification
methods, FCMs and IBs should consider on an ongoing basis whether other information
or methods are appropriate, particularly as they become available in the future.37

National Futures Association ( N F A ) Compliance Rule 2-9(c) sets forth minimum
requirements for these A M L programs.
36

See NPRM, 67 FR at 48337-48338.

See NPRM, 67 FR at 48331.

Commenters generally supported therisk-basedapproach of the proposed CIP
requirements.
In the final rule, paragraph (b)(1) continues to set forth the general requirement
that FCMs and IBs must implement a written CIP as part of their required AML
programs. It provides that the CIP should be appropriate for the FCM's or IB's size and
business and that, at a minimum, it must contain the requirements set forth in paragraphs
(b)(1) through (b)(5), which are discussed below. The final rule has been re-organized to
be structurally consistent with the rules being issued by Treasury and the other Federal
functional regulators. Thus, requirements that had been set forth in paragraphs (c)
through (h) in the proposed rule are now contained in paragraphs (b)(2) through (b)(5) of
the final rule to the extent they have been adopted. The rule's structure was changed in
order to affirm the intent of Treasury and the Federal functional regulators that all the
CIP rules impose the same requirements.
Finally, the reference to risk factors has been moved to paragraph (b)(2) of the
final rule, which requires FCMs and IBs to establish identity verification procedures.
This change was made to clarify that the risk factors apply only to the identity
verification procedures of the CIP, and not to standard requirements, such as procedures
for providing notice to customers, recordkeeping, or checking government lists, which
may not vary depending upon the perceived risk.
Section 103.123(b)(2) Identity verification procedures.
Treasury and the CFTC proposed to require that the FCMs' and IBs' CIPs include
procedures for verifying the identity of customers, to the extent reasonable and
practicable, using information specified in the rule, and that such verification occur

within a reasonable time before or after the customer's account is opened.38 O n the
whole, commenters supported these general requirements, although they recommended
greater use of a risk-based approach.
The final rule continues to strike a balance between flexibility and detailed
guidance, and Treasury and the CFTC are adopting the provisions on identity verification
procedures substantially as proposed. Under the final rule, an FCM's or EB's CIP must
include risk-based procedures for verifying the identity of each customer to the extent
reasonable and practicable. Such procedures must enable the FCM or IB to form a
reasonable belief that it knows the true identity of each customer. The procedures must
be based on the FCM's or IB's assessment of the relevant risks, including those presented
by the various types of accounts maintained, the various methods of opening accounts,
the various types of identifying information available, and the FCM's or IB's size,
location and customer base.
Section 103.123(b)(2)(f) Customer information required.
The proposed rule provided that an FCM's or IB's CIP must require the firm to
obtain certain identifying information about its customers, including, at a minimum: (1)
names; (2) dates of birth, for natural persons; (3) certain addresses; and (4) certain

See NPRM, 67 FR at 48338.

The proposed rule would have required FCMs and IBs to obtain residence and mailing
addresses (if different) for a natural person, or principal place of business and mailing
addresses (if different) for a person other than a natural person. See N P R M , 67 F R at
48337.

identification numbers.

The N P R M further stated that in certain circumstances, an

FCM or IB should obtain additional identifying information, and that the CIP should set
forth guidelines regarding those circumstances and the additional information that should
be obtained.41
Treasury and the CFTC are adopting the customer information requirements
substantially as proposed, with changes to accommodate individuals who may not have a
physical address. Treasury and the CFTC believe that FCMs and IBs, for the most part,
already collect the information required by the rule,42 and that this information not only is
necessary for the verification process, but also serves an important law enforcement
function.
Accordingly, prior to opening an account, FCMs and IBs must obtain, at a
minimum, a customer's (1) name; (2) date of birth, for an individual; (3) address; and (4)

The proposed rule would have required F C M s and IBs to obtain: (1) for a customer
that is a U.S. person, a TIN, or (2) for a customer that is not a U.S. person, a TIN,
passport number and country of issuance, alien identification card number, or number and
country of issuance of any other government-issued document evidencing nationality or
residence and bearing a photograph or similar safeguard. See N P R M , 67 F R at 48337.
41

See NPRM, 67 FR at 48332.

See NPRM, 67 FR at 48335 n.17. See also CFTC Rule 1.37(a)(1), 17 CFR 1.37(a)(1),
which requires F C M s and IBs to obtain, among other things, the true n a m e and address of
the person for w h o m such account is carried or introduced. Although an F C M or IB can
utilize the customer information that is obtained and verified under thefinalrule to fulfill
this obligation under Rule 1.37, an F C M or IB still will need to obtain the principal
occupation or business of its customers as well as the n a m e of any other person
guaranteeing or exercising trading control with respect to its customers' accounts,
because these are among the additional requirements under C F T C Rule 1.37. Further,
F C M and IB members of N F A will still need to comply with the additional m i n i m u m
requirements in N F A Compliance Rule 2-30(c) (requires F C M and IB members to obtain
from customers that are natural persons, at least the following: "(2) the customer's current
estimated annual income and net worth; (3) the customer's approximate age; and (4) an
indication of the customer's previous investment and futures trading experience").

identification number. 43 The address must be: (1) for an individual, a residential or
business street address, or for an individual who does not have a residential or business
street address, an Army Post Office or Fleet Post Office box number, or the residential or
business street address of next of kin or another contact individual; or (2) for a person
other than an individual, a principal place of business, local office or other physical
location.
Treasury and the CFTC are adopting the identification number requirement
substantially as proposed. For a customer that is a U.S. person, the identification number
is a TIN (social security number, or employer identification number). For a customer that
is not a U.S. person, the identification number is one or more of the following: a TIN,
passport number and country of issuance, alien identification card number, or number and
country of issuance of any other government-issued document evidencing nationality or
residence and bearing a photograph or similar safeguard. This provision provides FCMs
and IBs with some flexibility to choose among a variety of identification numbers that
they may accept from a non-U.S. person.44 However, the identifying information the

Based on an assessment of the relevantriskfactors, the F C M ' s or IB's CEP m a y
require a customer to provide additional information to enable the firm to form a
reasonable belief that it knows the customer's true identity.
44

The rule provides this flexibility because there is no uniform identification number
that non-U.S. persons would be able to provide to an F C M or IB. See Treasury
Department, " A Report to Congress in Accordance with section 326(b) of the U S A
P A T R I O T Act," October 21, 2002.

F C M or IB accepts must enable it to form a reasonable belief that it knows the true
identity of the customer.45
The proposed rule included an exception from the requirement to obtain a TIN
from a customer opening a new account.46 The exception would have allowed an FCM
or IB to open an account for a customer that has applied for, but has not yet received, an
employer identification number (EIN).47 Treasury and the CFTC are adopting an
expanded version of this exception in the final rule. As proposed, the exception was
limited to customers that are not natural persons.48 On further consideration, Treasury
and the CFTC have determined that it is appropriate to expand the exception to include
natural persons who have applied for, but have not received, a TIN. Treasury and the
CFTC also have modified the exception to reduce the recordkeeping burden. The
proposed rule would have required an FCM or IB to retain a copy of the customer's

Treasury and the C F T C emphasize that the rule neither endorses nor prohibits an F C M
or IB from accepting information from particular types of identification documents issued
by foreign governments. The F C M or IB must determine, based upon appropriate risk
factors, including those discussed above, whether the information presented by a
customer is reliable. Treasury and the C F T C recognize that a foreign business or
enterprise m a y not have an identification number. Therefore thefinalrule notes that
w h e n opening an account for such a customer, the F C M or IB must request alternative
government-issued documentation certifying the existence of the business or enterprise.
46

See NPRM, 67 FR at 48337-48338.

This position is analogous to that in regulations issued by the IRS concerning
"awaiting - T I N certificates." The IRS permits a taxpayer to furnish an "awaiting-TIN
certificate" in lieu of a T I N to exempt the taxpayer from the withholding of taxes owed
on reportable payments (Le., interest and dividends) on certain accounts. See 26 C F R
31.3406(g)-3.

In the NPRM, Treasury and the CFTC explained that the exception was for businesses
that m a y need to open an account before they receive an EIN from the IRS. See N P R M ,
67 F R at 48332-48333.

application for a TIN.

The F C M ' s or IB's CIP must include procedures to confirm that

the application was filed before the customer opens the account and to obtain the TIN
within a reasonable period of time after the account is opened. The final rule permits the
FCM or IB to exercise discretion in determining how to confirm that a customer has filed
an application.
Section 103.123(b)(2)(H) Customer verification.
Treasury and the CFTC proposed to require that an FCM's or IB's CIP include
procedures for verifying the identity of customers, to the extent reasonable and
practicable, using the information obtained under the rule.50 Treasury and the CFTC also
proposed to require such verification to occur within a reasonable time before or after the
customer's account is opened. The NPRM stated that an FCM or IB need not establish
the accuracy of each piece of identifying information if it is able to form a reasonable
belief that it knows the customer's identity after verifying only certain of the
information.51 The NPRM also stated that the flexibility to undertake verification within
a reasonable time must be exercised in a reasonable manner.
The sole commenter on this aspect of the proposed rule suggested that the rule
should require verification each time the customer opens a new type of account, and not
each time the customer establishes a different account at the FCM to trade the same type
of product. As discussed above, however, the definition of "customer" in the final rule

See NPRM, 67 FR at 48338.

See NPRM, 67 FR at 48333.
Id

has been changed to exclude persons w h o have an existing account, provided the F C M or
IB has a reasonable belief that it knows the customer's true identity. Accordingly, FCMs
and IBs will not be required to verify the identities of such persons, which may include
persons who open successive accounts of either the same type, or multiple types to trade
either the same or different products.
The final rule adopts the customer verification requirements substantially as
proposed. The final rule requires that an FCM's or IB's CIP contain procedures for
verifying the identity of the customer, using the customer information obtained in
accordance with paragraph (b)(2)(i), within a reasonable time before or after the account
is opened. As stated in the NPRM, FCMs and IBs must reasonably exercise the
flexibility to undertake verification before or after an account is opened.53 The
appropriate amount of time may depend on various factors, such as the type of account
opened, whether the customer opens the account in person, and the type of identifying
information that is available.54
Although the location of the provision has been moved, the final rule continues to
require that an FCM's or IB's CIP include procedures that describe when the firm will
use documents, non-documentary methods, or a combination of both to verify customer

See NPRM, 67 FR at 48333.

An FCM or IB member of NFA would violate CFTC Rule 1.37 and NFA Compliance
Rule 2-30, however, if it allowed a natural person to transact business before obtaining
specified information about the individual's true identity. Moreover, an F C M or IB must
also comply with Treasury's Office of Foreign Asset Control's ( O F A C ) regulations
prohibiting transactions involving designated foreign countries or their nationals. See 31
C F R Part 500.

identities.

Depending on the type of customer and the method of opening an account, it

may be more appropriate to use either documentary or non-documentary methods, and in
some cases it may be appropriate to use both methods. The CIP should set forth
guidelines describing when documents, non-documentary methods, or a combination of
both will be used. These guidelines should be based on the FCM's or IB's assessment of
the relevant risk factors.
Section 103.123(b)(2)(H)(A) Customer verification - through documents.
Treasury and the CFTC proposed to require that an FCM's or IB's CIP describe
documents that the firm will use to verify a customer's identity. There were no
comments directly addressing the documentary verification provisions of the proposed
rule, and the final rule adopts the documentary verification provisions substantially as
proposed. Specifically, the final rule requires an FCM's or IB's CIP to contain
procedures that set forth the documents that the firm will use to verify a customer's
identity. Each FCM or IB will conduct its own risk-based analysis of the types of
documents that it believes will enable it to verify the true identities of its customers.
In light of recent increases in identity theft and the availability of fraudulent
documents, Treasury and the CFTC believe that the value of documentary verification is
enhanced by redundancy. Treasury and the CFTC encourage each FCM and IB to obtain
more than one type of documentary verification to ensure that it has a reasonable belief
that it knows its customer's true identity. Moreover, Treasury and the CFTC encourage
FCMs and IBs to use a variety of methods to verify the identity of a customer, especially
when it does not have the ability to examine original documents. The final rule

See final rule, 103.123(b)(2)(ii).

continues to include, without significant change, an illustrative list of identification
documents. For an individual, these documents may include unexpired governmentissued identification evidencing nationality or residence and bearing a photograph or
similar safeguard, such as a driver's license or passport.56 For a person other than an
individual, these documents may include documents showing the existence of the entity,
such as certified articles of incorporation, a government-issued business license, a
partnership agreement, or a trust instrument.57 An FCM or IB may use other
documents,58 provided they allow the firm to form a reasonable belief that it knows the
true identity of the customer.
In addition to the risk factors described in paragraph (b)(2), the FCM or IB should
take into consideration the problems associated with authenticating documents and the
inherent limitations of documents as a means of identity verification. These limitations
will affect the types of documents that will be necessary to establish a reasonable belief
that the FCM or IB knows the true identity of the customer, and may require the use of
non-documentary methods of verification in addition to documents.
Once an FCM or IB verifies the identity of a customer through a document, such
as a driver's license or passport, it is not required to take steps to determine whether the
document has been validly issued. An FCM or IB generally may rely on governmentissued identification as verification of a customer's identity; however, if a document

Seefinalrule, 103.123(b)(2)(ii)(A)(7).
See final rule, 103.123(b)(2)(ii)(A)(2).

The list of documents in the rule is meant to be illustrative. Other documents, such as
trust certificates and legal opinions, also m a y be appropriate for verification.

shows obvious indications of fraud, the F C M or IB must consider that in determining
whether it can form a reasonable belief that it knows the customer's true identity.
Section 103.123(b)(2)(H)(B) Customer verification - through non-documentary
methods.
Treasury and the CFTC proposed to require that an FCM's or IB's CIP describe
the non-documentary methods the firm would use to verify customers' identities and
when the firm would use these methods in addition to, or instead of, relying on
documents.59 Treasury and the CFTC explained that the proposed rule would allow the
exclusive use of non-documentary methods because some accounts are opened by
telephone, by mail, or over the Internet.60 Treasury and the CFTC also noted that, even if
a customer presents identification documents, it still might be appropriate to use nondocumentary verification methods as well.
The proposed rule provided examples of non-documentary verification methods
that an FCM or IB may use. In the NPRM, Treasury and the CFTC observed that FCMs
and IBs may wish to analyze whether there is logical consistency between the identifying
information provided, such as the customer's name, street address, ZIP code, telephone
number (if provided), date of birth, and social security number.61
Treasury and the CFTC proposed to require FCMs and IBs to use nondocumentary methods when: (1) a customer who is a natural person cannot present an
unexpired, government-issued identification document that bears a photograph or similar

See NPRM, 67 FR at 48338.

See NPRM, 67 FR at 48333.

See NPRM, 67 FR at 48334.

safeguard; (2) the F C M or IB is presented with unfamiliar documents to verify the
identity of a customer; or (3) the FCM or IB does not obtain documents to verify the
identity of a customer, does not meet face-to-face with a customer who is a natural
person, or is otherwise presented with circumstances that increase the risk the FCM or EB
will be unable to verify the true identity of a customer through documents.62 Treasury
and the CFTC recognize that there are many scenarios and combinations of risk factors
that FCMs and IBs may encounter, and they have decided to adopt general principles that
are illustrated by examples, in lieu of a lengthy and possibly unwieldy regulation that
attempts to address a wide variety of situations with particularity.
There were no comments specifically regarding the non-documentary verification
provisions of the proposed rule, and thus the final rule adopts them substantially as
proposed. Under the final rule, an FCM or IB relying on non-documentary verification
methods must describe them in its CIP. The final rule includes an illustrative list of nondocumentary verification methods, similar to the list that was included in the proposed
rule. These methods may include: (1) contacting a customer; (2) independently verifying
the customer's identity through the comparison of information provided by the customer
with information obtained from a consumer reporting agency, public database,63 or other
source; (3) checking references with other financial institutions; and (4) obtaining a

See NPRM, 67 FR at 48338.

The specific types of databases that would be suitable for verification ultimately will
depend on the circumstances and the F C M ' s or IB's assessment of the relevant risk
factors.

financial statement.64 A s Treasury and the C F T C stated in the N P R M , F C M s and IBs
may wish to analyze whether there is logical consistency between the identifying
information provided, such as the customer's name, street address, ZIP code, telephone
number (if provided), date of birth, and social security number.65
The final rule also includes a list, again similar to that in the proposal, of
circumstances that may require the use of non-documentary verification procedures.66
Specifically, an FCM's or IB's non-documentary procedures must address situations in
which: (1) an individual is unable to present an unexpired government-issued
identification document that bears a photograph or similar safeguard; (2) the FCM or IB
is not familiar with the documents presented; (3) the account is opened without obtaining
documents; (4) the customer opens the account without appearing in person; and (5) the
circumstances presented increase the risk that the FCM or IB will be unable to verify the
true identity of a customer through documents.
As explained in the NPRM,67 because identification documents may be obtained
illegally and may be fraudulent, and in light of the recent increase in identity theft,
Treasury and the CFTC encourage FCMs and IBs to use non-documentary methods even
when the customer has provided identification documents.

Seefinalrule, 103.123(b)(ii)(B)(l).

See NPRM, 67 FR at 48334.

See final rule, 103.123(b)(ii)(B)(2).

Id.

Section 103.123(b)(2)(H)(C) Customer verification - additional verification for
certain customers.
As described above, Treasury and the CFTC proposed to require verification of
the identity of any person authorized to effect transactions in a customer's account.
Commenters objected to this requirement, and it has been omitted from the final rule.
For the reasons discussed below, however, the final rule does require that an FCM's or
IB's CIP address the circumstances in which it will obtain information about such
individuals in order to verify a customer's identity.
Treasury and the CFTC believe that, while FCMs and IBs may be able to verify
the identity of the majority of customers through the documentary or non-documentary
verification methods described above, there may be circumstances when these methods
are inadequate. The risk that an FCM or IB will not know the customer's true identity
may be heightened for certain types of accounts, such as an account opened in the name
of a corporation, partnership, or trust that is created or conducts substantial business
jurisdiction that has been designated by the United States as a primary money laundering
concern or has been designated as non-cooperative by an international body. Treasury
and the CFTC believe that, in order to identify customers that pose a heightened risk of
not being properly identified, an FCM's or IB's CIP must prescribe additional measures

that may be used to obtain information about the identities of the individuals associated
with the customer when standard documentary or non-documentary verification methods
prove to be insufficient.
The final rule, therefore, includes a new provision requiring that the CIP address
situations in which, based on the FCM's or IB's risk assessment of a new account opened

by a customer that is not an individual, the firm also will obtain information about
individuals with authority or control over the account (e.g., persons authorized to effect
transactions in the account) in order to verify the customer's identity. This additional
verification method applies only when the FCM or IB cannot adequately verify the
customer's identity after using the documentary and non-documentary verification
methods described above.68
Section 103.123 (b)(2) (

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