Financial Update (Third Quarter 2002)


Cover Story

Tough Credit Lesson

Accounting Reforms Not Enough

Payment Systems

Patriot Act Implementation

Financial Markets Conference


Data Bank

The Docket

Patriot Act Spurs New Anti-Money-Laundering Regulations

by Alaina Gimbert, assistant counsel

This spring the Financial Crimes Enforcement Network (FinCEN), a unit of the Department of the Treasury, issued several interim regulations that implement the anti-money-laundering directives of the USA PATRIOT Act (Patriot Act). The most significant regulation for banks issued to date implements section 312 of the Patriot Act, which requires financial institutions to establish due diligence programs for correspondent accounts of foreign financial institutions and private banking accounts of “non-U.S. persons” (that is, non-U.S. citizens and those without lawful U.S. residence). As discussed below, the Patriot Act directed that such programs be in place by July 23, 2002, but application of this regulation has been deferred for certain financial institutions until release of the final regulation, which is expected before Oct. 25, 2002.

Correspondent accounts
With regard to correspondent accounts for foreign banks, the proposed regulation requires that a due diligence program must

  • assess whether the foreign institution presents a significant risk of money laundering,
  • consider information from U.S. government agencies and multinational organizations with respect to supervision and regulation of the foreign institution,
  • review guidance from the Treasury and federal regulators regarding risks associated with particular foreign institutions, and
  • review public information to ascertain whether the foreign institution has been the subject of any criminal action or regulatory action relating to money laundering.

There are also enhanced due diligence requirements for certain foreign institutions such as those that operate under licenses issued by countries that have been designated as noncooperative with international anti-money-laundering principles.

Private accounts
With regard to due diligence programs for private accounts of non-U.S. persons, the proposed regulation requires that such programs must

  • ascertain the identity of all nominal holders and beneficial holders of the account, including information on their lines of business or source of wealth,
  • ascertain the source of funds deposited into the account,
  • ascertain whether any holder may be a “senior political figure,” and
  • report any known or suspected violation of law conducted through or involving the account.

If an account holder may be a senior foreign political official, as defined by the regulations, further due diligence is required.

As the July 23 compliance date approached, several trade association groups requested that the date be pushed back. In response to these comments the Treasury exercised its authority to exempt certain entities from the Patriot Act’s requirements. Hence, in another interim rule released on July 22, the Treasury deferred application of the correspondent account due diligence requirements for all financial institutions except banks. Likewise, the Treasury also deferred application of the private account due diligence requirements for all financial institutions except banks, securities brokers and dealers, and futures brokers and merchants.

The July 22 interim regulation acknowledged that the due diligence regulation is the “furthest- reaching” regulation issued under Title III (the anti-money-laundering and terrorist financing provisions) of the Patriot Act. For entities that are now subject to the due diligence requirements of section 312 of the act, the Treasury “does not expect compliance with the terms and conditions of the proposed rule except to the extent that they coincide with the express requirements of [the Patriot Act].” Instead, the Treasury provided “guidance” that sets the standard for compliance with section 312 of the act between July 23 and release of the final rule.

Briefly, the guidance directs that for correspondent accounts, a reasonable due diligence policy is one that “comports with existing best practices standards . . . and evidences good faith efforts to incorporate due diligence procedures for correspondent accounts maintained for foreign financial institutions posing an increased risk for money laundering.” Likewise, a due diligence program for private banking accounts is reasonable if it is “focused on those private banking accounts that present a high risk of money laundering” and complies with existing government guidance for private banking such as SR Letter 97-19, issued by the Federal Reserve in 1997.

If financial institutions discover that suspicious transactions have occurred or that suspicious entities have sought to open an account, the institutions must file a suspicious activity report with federal law enforcement agencies and the Treasury. The reports are entered into a confidential central database — one of the sources that federal agencies, such as the Federal Bureau of Investigation, use to create public lists of suspicious persons or entities. All financial institutions have access to these public lists.