Christopher A' Myers

1
USA PATRIOT ACT AND OFAC REQUIREMENTS

• Presented by
• Christopher A. Myers
• Holland Knight LLP
• April 29, 2005

2
REAL ESTATE INDUSTRY TARGETED BY MONEY LAUNDERERS
AND TERRORISTS

• Oxon Hill Development Has Ties to Terror
• (Washington Post April 19, 2004)
• Real Estate Was a Laundering Vehicle for
  Florida Mobsters (Money Laundering Alert May
  2004)
• Report Says Real Estate Among Most
  Significant Laundering Tools (Money Laundering
  Alert May 2004)
• Comply with Executive Order on Terrorism to
  Avoid Stiff Penalties (Commercial Lease Law
  Insider July 2004)

3
THE THREE KEY LAWS

• ?The MONEY LAUNDERING CONTROL ACT ?
  (18 U.S.C. 1956 and
  1957)
• ? THE BANK SECRECY ACT ?
  (31 U. S.C. 5311
  through 5354)
• ? THE OFAC SDN LIST ?
  (31 C.F.R.
  500.201)

4
THE THREE KEY LAWS

• Only two of these Three Key Laws deal
  with money laundering ? the
  Money Laundering Control Act ? the Bank
  Secrecy Act
• The OFAC SDN List deals generally with
  terrorists and terrorism
• What about the famous PATRIOT ACT?

5
THE THREE KEY LAWS

• The Patriot Act
• concentrates on anti-money laundering by
• Broadening the Money Laundering
  Control Act
• Expanding the Bank Secrecy Act
• Doing nothing to the OFAC SDN List

6
THE PATRIOT ACT

• The Sunset provisions
• Parts of the Patriot Act automatically expire on
  December 31, 2005
• -- unless Congress decides to extend them
• These deal only with Title II of the Act
  (Enhanced Surveillance Procedures)
• The Anti-Money Laundering provisions are all in
  Title III
• -- these provisions do not automatically expire

7
THE THREE KEY LAWS

• Two of the Three Key Laws apply now, to
  everybody, even to you and your company
  ? the Money
  Laundering Control Act ? the OFAC SDN List
• The third Key Law, the Bank Secrecy Act may apply
  to you, depending on your business and future
  Treasury regulations

8
THE MONEY LAUNDERING CONTROL ACT

• Any person or business that
• ? knows money or property comes from
• ? some criminal activity, and
• ? engages in a financial transaction with that
  money or property
• is a Money Launderer who can be ?
  fined the greater of 500,000 or two times
  the value of the property involved ? put in jail
  for 20 years
• if the money or property did come from certain
  types of illegal activity

9
THE BANK SECRECY ACT

• Gives the Treasury Department the authority to
  issue anti-money laundering regulations to
  Financial Institutions
• 24 types of financial institutions, including
• ? loan and finance companies
• ? investment companies
• ? non-registered investment companies
• ? persons involved in real estate closings
  and settlements

10
THE BANK SECRECY ACT

• The regulations can require
• ? implementing formal Anti-Money Laundering
  Programs
• ? appointing a Compliance Officer
• ? educating employees on the Program
• ? periodic auditing of the Program
• ? reporting of suspicious activity
• ? verifying identity of customers

11
THE BANK SECRECY ACT

• But the regulations covering
• ? loan and finance companies
• ? investment companies
• ? persons involved in real estate closings
  and settlements
• have not been issued yet
• So no one knows yet who is covered by these broad
  terms, or what will be required

12
THE BANK SECRECY ACT

• Regulations have been proposed for some
  Investment Companies
• ?Directed to Unregistered Investment Companies
  
• companies investing primarily in real estate
  or real estate interests
• ? hedge funds ? private equity funds
• ? venture capital funds
• ? commodity pools
• ? REITs

13
THE BANK SECRECY ACT

• An Unregistered Investment Company is
• an issuer (i) not engaged in a public
  offering and beneficially owned by 100 or less
  or (ii) whose investors are all qualified
  investors under Reg. D
• Limitations on definition this only includes
• companies that (i) offer investors any
  redemption rights within 2 years of purchase,
  (ii) have total assets of 1 million or more, and
  (iii) are organized in the US, sell to US
  persons, or are organized, operated by or
  sponsored by a US person

14
THE BANK SECRECY ACT

• Proposed Regulations issued September 2002
• Comments period closed November 2002
• If enacted, will require
• ? implementing formal Anti-Money Laundering
  Programs
• ? appointing a Compliance Officer
• ? educating employees on the Program
• ? periodic auditing of the Program and

15
THE BANK SECRECY ACT

• ? Filing a Notice with FinCEN concerning basic
  information about the company
• name, address, e mail, phone number of the
  company
• name, address, e mail, phone number of any
  investment advisor, organizer or sponsor
• name, e mail, phone number of the anti- money
  laundering compliance officer
• dollar amount of assets
• number of participants

16
THE OFAC SDN LIST

• A list of countries, persons, groups and
  businesses
• considered to be terrorists (or their associates)
  or narcotics traffickers
• whose property and interests in property
• is blocked and may not be transferred, paid,
  exported, withdrawn or otherwise dealt in

17
THE OFAC SDN LIST

• Property and Property Interest means money,
  checks, drafts, debts, notes, securities,
  mortgages, pledges, liens, security interests,
  leases, rents, real estate, insurance policies,
  annuities, contracts and any other property,
  real or personal, tangible or intangible, or
  interests therein
• Blocked means that the property may not be
  transferred, must be reported to Treasury and, if
  funds, must be seized and placed in an interest
  bearing account

18
THE OFAC SDN LIST

• Transfer means any transaction whose purpose is
  to create, convey or alter, directly or
  indirectly, any property or property interest
• This includes making, executing, delivering or
  conveying any assignment, check, deed, lease,
  mortgage, contract, gift, sale, making any
  payment, giving any credit, or providing any
  service
• In short, federal law prohibits any direct or
  indirect business, transaction, service or credit
  to or with anyone on the SDN List

19
THE OFAC SDN LIST

• This applies to everyone, now
• The List is at
• http//www.treas.gov/offices/eotffc/ofac/
  sdn/index.html
• The law comes from
• Trading with the Enemy Act (50 U.S.C. App.
  1-44) International Emergency Economic Powers Act
  (50 U.S.C. 1701-06)
• The regulations are at
• 31 C.F.R. 501 536 594 596 597

20
THE OFAC SDN LIST

• Civil enforcement
• These are strict liability statutes and
  regulations
• Unintentional and inadvertent violations
  can be punished by civil penalties
• 11,000 to 275,000
• Criminal enforcement
• intentional violations can be criminally
  prosecuted 10 years in jail
  50,000 to 1 million fine

21
THE OFAC SDN LIST

• You are responsible for not doing business with
  any person or business on the List
• ? The SDN List is 197 pages long ?
• ? The SDN List contains about 6,000 names ?
• ? The SDN List changes frequently ?
• (Since 9-11, names have been added and removed on
  an average of three times a month)
• The regulations provide no guidance except to say
  YOU MAY NOT DO BUSINESS WITH THESE PEOPLE

22
THE OFAC SDN LIST

• OFAC has not identified any specific amount of a
  transaction it considers de minimis any
  transaction means any transaction
• OFAC has not identified how far one must check
• ? if you deal with a business, do you check
  just its name? its officers? its directors? its
  owners?
• ? What about your customers customer? How far
  does indirect go? Do you have to check the
  name of every tenant in a building?

23
THE OFAC SDN LIST

• The Treasury regulations provide no answers to
  these questions
• Some good practices include
• ? Have OFAC List checking a routine part of
  your compliance program
• ? If you have a name, check it
• ? Use the same due diligence for OFAC List
  checking as you use for financial due diligence

24
THE OFAC SDN LIST

• Who Must Be Checked Against the OFAC List?
• Tenants Vendors
• Employees Agents
• Investors Service Providers

25
INFORMAL GUIDANCE FROM OFAC

• No Absolute Absolution Strict Liability
• But If you have a compliance program and follow
  it, you will be treated with leniency.
• Do at least the level of due diligence you would
  do for your important business decisions.
• How far up or down the ownership chain must you
  check?
• No definitive answer, but 25 or more beneficial
  ownership seems reasonable under most
  circumstances

26
THE OFAC SDN LIST

• How Do I Check the OFAC SDN List?
• Manual Searches a practical impossibility
• 140-plus pages, 3 columns, blindingly small font!
• updated frequently
• large number of aliases and doing business as
  designations
• difficult to track accurately
• Software Programs Many are available

27
THE OFAC SDN LIST

• Which Software Program?
• Choose Wisely
• Important Features to Look For
• Automatic Updates when List is changed
• Electronic Searches
• Process for Adjudicating Potential Matches
• Documentation of Searches and Adjudication
• Ease of Use and Compatibility with Your System

28
OFAC LIST SOFTWARE

• Dont Let the IT Tail wag the Compliance Dog
• Establish Your Compliance Program and Procedures
• Make the Software Fit Your Program, not visa versa

29
THE OFAC SDN LIST

• What if I get a hit?
• Due Diligence
• ? Make sure it is a true SDN List Hit
• ? Adjudicate the quality of the hit
• ? How much of the name matches?
• ? Compare all information you have
• ? Are there grounds to conclude false
  positive?
• ? Call OFACs Compliance Hotline
  800-540-6322

30
THE OFAC SDN LIST

• What to Expect from OFAC
• Contacting OFAC is not always easy
• Patience getting through to the OFAC Hotline
  can take time
• Email Hotline direct link from OFAC website
• OFAC will give you guidance
• If your tenant/customer is a true match, and you
  cannot reach OFACs Hotline, there are other ways
  into OFAC Also call the FBI

31
OTHER COMPLIANCE MEASURES

• Anti-Terrorism Clause
• Add to ALL documents
• Leases
• Amendments
• Purchase and Sale Agreements
• Consents
• Loan Documents
• Construction Agreements
• Vendor Contracts
• Everything!

32
OTHER COMPLIANCE MEASURES

• Establish Anti-Money Laundering Program
• Written Policy and Procedures
• Designate Compliance Personnel
• Train Employees to Recognize and Report Potential
  Money Laundering Activity
• Establish Auditing and Monitoring Program
• Establish Customer Identification Policy

33

• QUESTIONS?

34
Contact Information

• Christopher A. Myers
• Holland Knight LLP
• 1600 Tysons Boulevard
• Suite 700
• McLean, VA 22102-4867
• [phone]
• chris.myers_at_hklaw.com