CTR Exemptions: Phase I, Phase II, and Designation Rules

CTR exemptions let a bank stop filing a Currency Transaction Report on cash transactions over $10,000 for certain low-risk customers known as “exempt persons,” under 31 CFR 1020.315.1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons The rule sorts eligible customers into two tiers: Phase I entities, which qualify almost on sight, and Phase II businesses, which require investigation up front and a review every year after. Everything else about Bank Secrecy Act compliance — suspicious activity reporting, structuring prohibitions, recordkeeping — still applies in full.

What the Exemption Actually Covers

“Currency” under the BSA means physical coin and paper money. The regulation defines a transaction in currency as the physical transfer of cash from one person to another.2FFIEC BSA/AML InfoBase. General Definitions Checks, wires, drafts, and other written orders are excluded. A customer that deposits $50,000 a week in checks has no CTR obligation to begin with, so an exemption would do nothing. The framework exists for customers who routinely move large amounts of physical cash through the bank.

An exemption also applies only to the customer’s “exemptible accounts” at the designating bank. It is not portable to other institutions and does not blanket every account the customer holds.

Phase I: Customers Who Qualify Almost Automatically

Phase I covers entities the government treats as inherently transparent. Four categories qualify:1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons

  • Any domestic bank, limited to its domestic operations.
  • Any federal, state, or local government department or agency, and any entity established under U.S. or state law that exercises governmental authority.
  • Any entity whose common stock or equivalent equity interest is listed on the New York Stock Exchange or designated as a NASDAQ National Market Security. Stock listed only under the NASDAQ Capital Markets heading does not qualify.
  • Any subsidiary organized under U.S. or state law in which a listed parent owns at least 51 percent of the equity.

Verification is straightforward: confirm the charter for a government agency, the exchange listing for a public company, or the parent’s listing and ownership share for a subsidiary.3FFIEC BSA/AML InfoBase. Transactions of Exempt Persons Listed companies and their subsidiaries still require an annual review once designated; banks and government agencies do not.

Phase II: Non-Listed Businesses

A private business that is not publicly traded can still qualify, but under tighter conditions. A non-listed business must meet all three of these tests:1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons

  • It has maintained a transaction account at the bank for at least two months. The bank can waive the waiting period by conducting and documenting a risk-based assessment that supports a reasonable belief the customer has a legitimate business reason for frequent large cash transactions.4Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements
  • It frequently conducts currency transactions over $10,000 at the bank. The regulation sets no minimum count, but the pattern must show a real, ongoing need.
  • It is incorporated or organized under U.S. or state law, or registered and eligible to do business domestically.

The business also cannot fall within any of the ineligible categories described below.

Phase II: Payroll Customers

A separate Phase II category covers payroll customers: businesses that frequently withdraw more than $10,000 in cash to pay U.S. employees.1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons This exemption is narrower. It applies only to the payroll withdrawals themselves. Deposits and other cash transactions by the same customer still trigger CTRs unless the customer also qualifies as a non-listed business.

Payroll customers face the same two-month account history (with the same risk-based waiver), the same domestic organization requirement, and the same annual review obligation as non-listed businesses.

Businesses That Cannot Be Exempted

The regulation disqualifies entire industries from Phase II exemption because of their elevated money-laundering risk, regardless of account history or cash volume:1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons

  • Businesses serving as a financial institution or agent of one
  • Dealers in motor vehicles, vessels, aircraft, farm equipment, or mobile homes
  • Law, accounting, or medical practices
  • Auction houses
  • Operators that charter or run ships, buses, or aircraft
  • Casinos and other gaming operations, except licensed parimutuel betting at racetracks
  • Investment advisory and investment banking firms
  • Real estate brokerages, plus title insurance and real estate closing companies
  • Pawn brokerages
  • Trade unions
  • Any other activities FinCEN specifies

Mixed Business Activities

A business with some ineligible revenue is not automatically disqualified. It can still qualify as long as no more than 50 percent of gross revenue comes from the ineligible activities above. A construction company earning 20 percent of its revenue from equipment sales could qualify; one earning 60 percent from the same sales could not. The bank must verify the revenue mix at designation and reconfirm it at each annual review.

Mistakenly exempting a business in a prohibited category is one of the more serious errors examiners look for. If a customer’s operations drift into an ineligible activity after designation, the bank must catch it on review and revoke the exemption.

How to Designate an Exempt Person

A bank designates an exempt person by filing a Designation of Exempt Person (DOEP) report on FinCEN Form 110 through the BSA E-Filing System.5Financial Crimes Enforcement Network. FinCEN Form 110 Electronic Filing Instructions The filing is due within 30 calendar days of the first reportable cash transaction the bank intends to exempt. Missing that window means the bank should have been filing CTRs on every large cash transaction in the meantime.

The form requires the entity’s full legal name as it appears on incorporation documents, its business address, a valid Taxpayer Identification Number, and the specific exemption category and subcategory.

Before filing, pull together the supporting evidence: stock exchange verification for listed companies, corporate registration records for non-listed businesses, and the documented risk-based assessment if the two-month waiting period was waived. Examiners ask for this first. A DOEP filed without supporting records signals the exemption was granted without the required work.

Keeping the Exemption Valid

Banks must review the eligibility of every Phase II exempt person at least once a year.3FFIEC BSA/AML InfoBase. Transactions of Exempt Persons The same annual review applies to Phase I listed companies and their subsidiaries, though not to banks or government agencies. The review checks that the customer still meets each criterion: still domestic, primary activity still outside the ineligible list, cash transaction pattern still frequent enough to justify the exemption.

For Phase II customers, the annual review must also apply the bank’s suspicious activity monitoring system to each of the exempt customer’s existing accounts. Document what was reviewed, what sources were consulted, and the conclusion. Gaps in that documentation are treated as a compliance deficiency.

Retain the DOEP and all supporting records for five years after the exemption ends.1eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons If the bank revokes the exemption, the five-year clock starts from the revocation date.

What the Exemption Does Not Change

Exempting a customer from CTR filing does not touch any other BSA obligation. Banks must still file a Suspicious Activity Report for any transaction of $5,000 or more involving a known or suspected violation of law, regardless of the customer’s exempt status.6FFIEC BSA/AML InfoBase. Suspicious Activity Reporting The SAR duty is universal and no exemption overrides it. Exempt customers can carry their own risks because their large cash activity no longer generates automatic reports. A customer who asks to be exempted, discourages employees from filing required reports, or whose transaction patterns stop matching the business’s stated activity should draw heightened scrutiny.7FFIEC BSA/AML InfoBase. Appendix F – Money Laundering and Terrorist Financing Red Flags

Structuring remains illegal for every customer. Breaking cash transactions into smaller pieces to stay under $10,000 is a standalone federal crime carrying up to five years in prison, or up to ten years if tied to another federal offense or involving more than $100,000 in a 12-month period.8Office of the Law Revision Counsel. 31 USC 5324 – Structuring Transactions to Evade Reporting Requirement Prohibited A customer who should have been exempted but was not might start breaking up deposits out of frustration; that does not make the structuring legal, and employees of exempt businesses who handle cash outside the exempted accounts bear watching too.

Penalties and Fixing Mistakes

Negligent failures to file required CTRs draw civil penalties up to $500 per violation, with an added penalty up to $50,000 for a pattern of negligence.9Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties Willful violations carry much more: the greater of $25,000 or the amount of the transaction, up to $100,000. Willful criminal violations can bring up to $250,000 in fines and five years in prison, doubling to $500,000 and ten years when connected to another federal crime or a pattern involving more than $100,000 in a year.10GovInfo. 31 USC 5322 – Criminal Penalties

A bank that catches its own filing errors can reduce exposure by self-reporting. FinCEN weighs the timeliness and voluntariness of the disclosure, the speed of corrective action, and the quality of cooperation when deciding how to respond.11Financial Crimes Enforcement Network. FinCEN Enforcement Statement When CTRs were missed because an exemption was improper or transactions slipped through, FinCEN has a formal process: file the late CTRs through the BSA E-Filing System using the “FinCEN directed Backfiling” option, then send a confirmation letter to FinCEN with copies to federal and state examiners explaining what went wrong and listing the backfiled reports.12Financial Crimes Enforcement Network. Instructions for Backfiling and Amending Currency Transaction Reports Do not attach the CTRs themselves; FinCEN already has them from the E-Filing submission.