CTR Exemptions: Phase I and Phase II Exempt Persons

10/13/2026

The CTR exemption system exists so that banks do not spend their days reporting the cash deposits of the grocery chain down the street, the county treasurer's office and the regional hospital system's parking operation. Those reports carry almost no value for law enforcement, and the regulation lets a bank stop filing them if it follows a defined process. Many banks still do not use it, or use it badly, and both choices cost something. Unused exemptions mean thousands of low-value CTRs. Badly managed exemptions mean CTRs that should have been filed and were not, which is a reporting violation.

This guide walks through who can be exempted, the difference between what the industry calls Phase I and Phase II exempt persons, how and when to file the Designation of Exempt Person, the annual review, and the errors that turn an exemption into an examination finding. The governing rule is 31 CFR 1020.315, with FinCEN's 2012 eligibility guidance (FIN-2012-G003) filling in the details.

The starting point: when a CTR is required

A bank must file a currency transaction report for each deposit, withdrawal, exchange of currency or other payment or transfer involving a transaction in currency of more than $10,000 (31 CFR 1010.311). Multiple currency transactions are treated as one when the bank knows they are by or on behalf of the same person and they total more than $10,000 in cash in, or in cash out, during one business day (31 CFR 1010.313). The CTR is due within 15 days after the transaction, and a copy is kept for five years (31 CFR 1010.306).

The exemption rule carves certain customers out of that requirement. Under 31 CFR 1020.315(a), no bank is required to file a CTR for a transaction in currency between an exempt person and the bank, subject to the conditions in the rest of the section. The exemption removes the CTR. It does not remove anything else, which is the most important sentence in this guide and the one this article returns to at the end.

Phase I exempt persons

The terms "Phase I" and "Phase II" come from the order in which FinCEN adopted the exemption categories in the 1990s. They are not in the current regulation text, but every BSA team uses them. Phase I covers the categories in 31 CFR 1020.315(b)(1) through (5):

Banks, to the extent of their domestic operations
Departments or agencies of the United States, any state, or any political subdivision of a state
Entities exercising governmental authority established under federal, state or local law or an interstate compact. The rule explains that an entity generally exercises governmental authority only if its powers include taxing, eminent domain or police powers, and gives the New Jersey Turnpike Authority and the Port Authority of New York and New Jersey as examples.
Listed entities, meaning companies other than banks whose common stock or equivalent equity interests are listed on the exchanges the rule names. The rule text still uses older exchange names (the New York Stock Exchange, the American Stock Exchange, and NASDAQ National Market securities, while excluding the separate NASDAQ Capital Market heading). A listed company that is itself a financial institution other than a bank is exempt only to the extent of its domestic operations.
Subsidiaries of listed entities, other than banks, organized under U.S. or state law and at least 51 percent owned by the listed entity

What the bank has to document for Phase I

The rule lets a bank rely on reasonable evidence:

Government status may be accepted if the customer's name reasonably indicates it is a government department, agency or entity, or if it is generally known in the community to be one.
Listing status may be confirmed from a published stock listing, a commonly accepted stock symbol guide, the SEC's EDGAR system, or the exchange's own website.
Subsidiary status may be supported by a reasonably authenticated officer's certificate, a reasonably authenticated copy of IRS Form 851 (the affiliation schedule), or the parent's annual report or Form 10-K filed with the SEC.

Phase I status ends automatically when the facts change. A listed company stops being an exempt person once it is no longer listed, and a subsidiary stops being exempt once the listed parent's ownership falls below 51 percent (31 CFR 1020.315(i)). The bank does not get a grace period for knowing about the change; the rule's liability protection holds only until the next required review, absent specific information that the customer no longer qualifies.

Phase II exempt persons

Phase II covers ordinary operating businesses that are not listed, and is where most of the real volume, and most of the risk, sits. There are two categories.

Non-listed businesses

Under 31 CFR 1020.315(b)(6), a commercial enterprise may be exempt, to the extent of its domestic operations and only for transactions through its exemptible accounts, if it:

Has maintained a transaction account at the bank for at least two months, or less if the bank conducts and documents a risk-based assessment and forms a reasonable belief that the customer has a legitimate business purpose for frequent currency transactions
Frequently engages in currency transactions with the bank in excess of $10,000
Is incorporated or organized under U.S. or state law, or registered as and eligible to do business in the United States or a state

FinCEN's 2012 guidance interprets "frequently" as five or more reportable transactions in a year. Sole proprietorships can qualify if they meet the same requirements.

Payroll customers

Under 31 CFR 1020.315(b)(7), a customer can be exempt solely for withdrawals for payroll purposes from existing exemptible accounts if it has maintained a transaction account for at least two months (with the same risk-based exception), operates a firm that frequently withdraws more than $10,000 to pay its U.S. employees in currency, and meets the same organization test. The payroll exemption is narrow: it covers payroll withdrawals and nothing else. Cash deposits by the same customer are not exempt under this category.

Ineligible businesses

A business engaged primarily in any of the following cannot be a non-listed business exempt person (31 CFR 1020.315(e)(8)):

Serving as a financial institution or an agent of a financial institution of any type
Selling motor vehicles of any kind, vessels, aircraft, farm equipment or mobile homes
The practice of law, accountancy or medicine
Auctioning goods
Chartering or operating ships, buses or aircraft
Gaming of any kind, other than licensed pari-mutuel betting at race tracks
Investment advisory or investment banking services
Real estate brokerage, pawn brokerage, title insurance and real estate closing
Trade union activities
Any other activity FinCEN specifies

A business with multiple lines of activity can still qualify as long as no more than 50 percent of its gross revenues come from ineligible activities. That test needs evidence in the file: how the bank knows the car wash's used-car lot is a minority of revenue, or that the pharmacy is primarily retail rather than a medical practice. FinCEN's guidance treats medical practices broadly, so a business deriving more than half its revenue from providing medical services is ineligible.

Exemptible accounts

For Phase II customers, the exemption applies only to exemptible accounts: transaction accounts and money market deposit accounts, but not money market deposit accounts held other than in connection with a commercial enterprise (31 CFR 1020.315(e)(9)). A bank may treat all exemptible accounts of a customer as a single account when deciding whether the customer qualifies, but once it does, it must keep treating them that way consistently.

Filing the Designation of Exempt Person

A bank designates an exempt person by filing FinCEN Form 110, the Designation of Exempt Person (DOEP). Under 31 CFR 1020.315(c):

The designation must be filed by the close of the 30-calendar-day period beginning after the day of the first reportable transaction with the customer that the bank wants to exempt.
Who files. Each bank that wants to treat the customer as exempt files its own designation. A bank holding company or one of its bank subsidiaries may file one designation on behalf of all the holding company's bank subsidiaries, provided it lists each bank the designation covers.
No DOEP needed for some. A bank does not file Form 110 for currency transfers to or from the Federal Reserve Banks, or for exempt persons in the first three categories: banks, government departments and agencies, and entities exercising governmental authority.

So in practice, the DOEP is required for listed entities, their subsidiaries, non-listed businesses and payroll customers. CTRs should continue to be filed until the designation is in place.

FinCEN's guidance also notes that banks have never been required to formally revoke an exemption by filing a DOEP. When a customer stops qualifying, the bank stops treating it as exempt and resumes filing CTRs, and documents why.

The annual review

At least once each year, the bank must review the eligibility of every exempt person in the listed-entity, subsidiary, non-listed business and payroll customer categories to confirm it still qualifies (31 CFR 1020.315(d)). For non-listed businesses and payroll customers, the annual review also includes reviewing how the bank's monitoring system applies to each exempt account.

A useful annual review file answers, for each customer:

Is the entity still listed, still 51 percent owned, still operating the same business?
Does it still frequently conduct reportable currency transactions? An exempted customer whose cash volume dropped to two reportable days a year no longer meets the frequency test.
Has its business mix shifted toward an ineligible activity?
Is the cash volume consistent with the business as the bank understands it? A sharp year-over-year increase is a monitoring question, not just a review data point.
Were any suspicious activity referrals, alerts or SARs connected to the account in the past year, and do they affect the decision to keep the exemption?

The review has to be dated and signed by someone with authority, and the evidence has to be in the file, not just a checklist with ticks. A spreadsheet of exempt customers with "reviewed" in the last column and no supporting documentation is the most common way exemption programs fail examination.

The limits that turn exemptions into findings

Agents are not exempt

The exemption does not apply when an exempt person carries out a currency transaction as an agent for someone else who is the beneficial owner of the funds (31 CFR 1020.315(f)). If an exempt business's employee deposits cash that belongs to the business, the exemption applies. If an exempt business is depositing cash on behalf of a third party, it does not, and a CTR is required.

Exemptions never remove SAR obligations

The rule states it directly: nothing in the exemption section relieves a bank of its obligation to file SARs (31 CFR 1020.315(h)). The regulation even gives an example: a sharp increase from one year to the next in the gross total of currency transactions by an exempt customer, or similarly anomalous trends, may trigger the SAR requirement. Banks must maintain a monitoring system reasonably designed to detect transactions in each non-listed business and payroll customer account that would require a SAR.

This is the practical danger of exemptions. Once a customer stops generating CTRs, it can drop out of reports that analysts watch. If the transaction monitoring system uses CTR data as a feed, exempted customers may fall out of scenarios entirely. Check that exempt accounts are still monitored on actual cash activity, not on CTR filings. Our guide to money laundering red flags covers the patterns that should still surface on an exempt account.

Liability protection depends on doing it properly

A bank is not penalized for failing to file a CTR on an exempt person's transaction if the exemption requirements were met, unless it knowingly filed false or incomplete information, or had reason to believe the customer did not meet the criteria or the transaction was not the exempt person's (31 CFR 1020.315(g)). Absent specific information to the contrary, the bank may keep treating the customer as exempt until the next required annual review. Skip the review and the protection is gone.

Common errors

Exempting an ineligible business, most often a car or equipment dealer, a professional practice, or a check casher or other money services business
Filing the DOEP late, or never filing it while staff believed the customer was exempt
Applying a payroll exemption to cash deposits
Exempting accounts that are not exemptible, such as a personal money market account
Missing the annual review, or reviewing without evidence
Failing to notice that a listed company was delisted or acquired
Letting exempt customers drop out of transaction monitoring

Should your bank use exemptions at all?

The exemption is optional. A bank may keep filing CTRs on an exempt-eligible customer; the rule simply requires that a bank that chooses to file stays subject to the normal CTR rules and penalties for those reports (31 CFR 1020.315(g)(3)).

The decision is a cost-benefit judgment:

Consideration	Points toward exempting	Points toward filing
Volume	Customer generates many CTRs a year	Customer barely meets the frequency test
Customer type	Government, listed company, stable retailer	Business with variable cash or a mixed revenue base
Program capacity	Bank can run documented annual reviews	Reviews would be rushed or skipped
Monitoring	Exempt accounts stay in cash monitoring scenarios	Monitoring relies on CTR data

For most community banks, Phase I government and listed customers are an easy decision. Phase II is worth doing for a defined set of high-volume, well-understood businesses, and not for borderline cases where the ongoing review would cost more than the CTRs it saves.

The BSA/Anti-Money Laundering course is the place to start for staff who need the whole BSA framework the exemption sits within, and the Bank Secrecy Act training page lists the related options. For the CTR basics, see our guide to currency transaction reports, and for what examiners do with your exemption file, see BSA/AML examination procedures.

A checklist for the exemption program

A written procedure covering eligibility, documentation, DOEP filing, annual review, monitoring and removal
An exempt customer list that matches the DOEPs actually filed, with the filing dates
For each Phase II customer: account opening date or the documented risk-based assessment, evidence of frequent reportable transactions, the organization test, and the ineligible-business analysis
Annual review evidence for every listed entity, subsidiary, non-listed business and payroll customer
Proof that exempt accounts are covered by transaction monitoring
A process for removing customers who no longer qualify, with CTR filing resumed

Keep the team current

Exemptions sit at the point where CTR operations, customer due diligence and suspicious activity monitoring meet, and they fail when one of those teams does not know what the others are relying on. The BSA/Anti-Money Laundering course gives deposit operations, BSA analysts and branch managers a shared grounding in the rules behind the exemption list.

Frequently Asked Questions

What is a CTR exemption?

A CTR exemption lets a bank stop filing currency transaction reports for an eligible customer's cash transactions over $10,000. The rule is 31 CFR 1020.315. Eligible customers include other banks, government agencies and entities, listed companies and their 51-percent-owned subsidiaries, and qualifying non-listed businesses and payroll customers. Most categories require the bank to file a Designation of Exempt Person and review eligibility every year. The exemption only removes the CTR. The bank must still monitor the customer and file SARs when activity is suspicious.

What is the difference between Phase I and Phase II exemptions?

Phase I covers banks, government departments and agencies, entities exercising governmental authority, listed companies and their subsidiaries. Phase II covers non-listed businesses and payroll customers. The labels come from the order in which FinCEN adopted the categories. Phase II customers must have held a transaction account for at least two months, or the bank must document a risk-based assessment, must frequently conduct currency transactions over $10,000, and must not be primarily engaged in an ineligible business. Phase II exemptions also apply only to exemptible accounts.

How often must a customer transact to qualify as frequent?

FinCEN's 2012 guidance on exemption eligibility (FIN-2012-G003) interprets frequently as five or more reportable currency transactions in a year. The bank should document the count in the exemption file and check it again at each annual review. A customer that no longer meets the frequency test should come off the exempt list, with CTR filing resumed for its reportable transactions.

When must the Designation of Exempt Person be filed?

FinCEN Form 110 must be filed by the close of the 30-calendar-day period beginning after the day of the first reportable transaction with the customer the bank wants to exempt. Until the designation is filed, the bank should continue filing CTRs. No designation is needed for transfers with the Federal Reserve Banks or for banks, government departments and agencies, or entities exercising governmental authority. A holding company or one of its banks may file one designation covering several affiliated banks if it lists each one.

Which businesses cannot be exempted?

A business primarily engaged in any of these activities cannot be a non-listed business exempt person: acting as a financial institution or its agent; selling vehicles, vessels, aircraft, farm equipment or mobile homes; practicing law, accountancy or medicine; auctioning goods; chartering or operating ships, buses or aircraft; gaming other than licensed pari-mutuel betting at race tracks; investment advisory or investment banking; real estate brokerage; pawn brokerage; title insurance and real estate closing; and trade union activities. A business can still qualify if no more than half its gross revenue comes from these activities.

Do we need to file a SAR on an exempt customer?

Yes, if the activity meets the SAR standard. The exemption rule says plainly that it does not reduce any SAR obligation, and it gives the example of a sharp year-over-year increase in an exempt customer's currency volume as something that may require a SAR. Banks must keep a monitoring system reasonably designed to detect suspicious currency activity in every non-listed business and payroll customer account. Check that exempt customers are still covered by your monitoring scenarios.