The USA Patriot Act Creates New Duties

The USA Patriot Act was enacted some six weeks after the tragic terrorist attacks of Sept. 11. The Patriot Act places new or expanded responsibilities on financial institutions, especially those doing business with foreign financial institutions. One purpose of the act is to "prevent, detect, and prosecute international money laundering and the financing of terrorism." The intent is to foster greater cooperation among the banking industry, regulators and law enforcement agencies.

The Patriot Act's definition of financial institutions is broad. It includes securities and commodities dealers and brokers, money transmitters, loan and finance companies, and real estate settlement companies. Some of the act's provisions apply to all financial institutions, while others are more limited in scope. Regardless, all financial institutions should anticipate extensive rulemaking. Note: Some provisions will take effect on a given date even if no rules have been issued.

Is This "Know Your Customer" Revisited?

Not necessarily. "Know Your Customer" was far more reaching because it would have required financial institutions to verify their customers' identities and document specific details about their customers' businesses. With the new Patriot Act, the secretary of the Treasury is required only to establish minimum documentation standards. Financial institutions must verify their customers' identities, maintain records and consult government lists of terrorists and terrorist organizations. Those regulations are required to be in place by Oct. 26, 2002.

The Bank Secrecy Act Amendments and General Provisions

The Bank Secrecy Act is the core of U.S. money-laundering efforts. While its anti-laundering requirements are not new for banks, they may be new to other financial institutions.

Establish Programs: Because the Patriot Act mandates that all financial institutions establish anti-money laundering programs, some bank holding companies will need to export their bank secrecy programs to their subsidiaries. These programs must include formal policies and procedures, appointment of a compliance officer, ongoing employee training and independent audits. After consulting with appropriate regulators, the Treasury secretary may set minimum standards for the programs and exempt certain institutions. The section's provisions will become effective this April.

Expanded Protection: If the government receives a voluntary report of a potential violation of the Bank Secrecy Act, financial institutions will be given expanded protection from civil liability to their customers. Additionally, an insured institution is protected, theoretically, if in good faith it discloses facts related to a Bank Secrecy Act violation in a written employment reference requested by another insured financial institution.

Acquisitions and Mergers: One new statutory requirement is that the primary federal regulator, when acting on an application to acquire or merge banks under the Bank Holding Company Act (BHCA) or the Federal Deposit Insurance Act (FDIA), is required to take into consideration a company's effectiveness in combating money laundering.

Increased Penalties: A separate section increases civil and criminal penalties for certain money-laundering violations to at least twice the amount of the transaction, up to a limit of $1 million.

How Will This Affect International Money Laundering?

Effective Dec. 25, 2001, U.S. financial institutions cannot have correspondent accounts for foreign shell banks. The Treasury's implementing rules (published Dec. 28, 2001) define correspondent accounts very broadly to include every imaginable kind of account. The provision applies to securities brokers as well as to depository institutions. The Treasury is particularly interested in industry comments on its definition of these accounts.

Every U.S. financial institution that has correspondent accounts or private banking accounts maintained in the United States for non-U.S. customers must establish special due diligence procedures for opening and maintaining foreign accounts, and for detecting and reporting money laundering.

Minimum standards also are set for enhanced due diligence on the correspondent accounts of foreign banks operating under an offshore banking license or under a license issued by a country designated as "non-cooperative with international money laundering principles." These standards become effective this July, even if the implementing regulations have not been issued.

The Patriot Act also includes a number of other provisions designed to prevent terrorist organizations from using the U.S. financial system without detection or punishment. While many of the financial institutions that the Federal Reserve supervises have robust compliance programs, the recent tragedy illustrates the importance of due diligence.