USA PATRIOT ACT ANTIMONEY LAUNDERING REGULATIONS

1
USA PATRIOT ACT ANTI-MONEY LAUNDERING
REGULATIONS

• Gary W. Sutton
• Senior Banking Counsel
• U.S. Treasury Department
• Office of the General Counsel

2
USA PATRIOT ACT

• Uniting and Strengthening America by Providing
  Appropriate Tools Required to Intercept and
  Obstruct Terrorism Act of 2001
• Enacted October 26, 2001
• Title III amends the Bank Secrecy Act to promote
  the detection, prevention, and prosecution of
  money laundering and financing of terrorism

3
TITLE III PRINCIPAL PURPOSES

• Eliminate known risks to the financial system
• Detect and eliminate new risks as they develop
• Increase information sharing

4
BANK SECRECY ACT

• Requires recordkeeping and reporting by numerous
  financial institutions
• Enacted in 1970 - currency transaction reports
  (banks and broker-dealers)
• 1986 Money Laundering Control Act (criminalized
  money laundering)
• 1996 Suspicious Activity Reports for banks
• 2001 USA PATRIOT Act

5
WHAT IS MONEY LAUNDERING?

• Converting money gained from illegal activity
  into money that appears legitimate so that its
  illegal source cannot be traced 
• Placement Introduction of criminal proceeds
  into the financial system
•  Layering Distancing money from its criminal
  source
•  Integration Laundered proceeds distributed
  back to the criminal, creating appearance of
  legitimate wealth

6
CRIMINAL MONEY LAUNDERING

• 18 U.S.C. 1956 crime to knowingly conduct
  financial transaction with proceeds of
  specified unlawful activity
• 18 U.S.C. 1957 crime to knowingly engage in a
  monetary transaction in criminally derived
  property
• willful blindness financial institution may
  not ignore prominent red flags

7
USA PATRIOT ACT PRINCIPAL AML PROVISIONS

• AML Compliance Program - 352 
• Customer Identification Program 326 
• Foreign Shell Bank Prohibition, Process agent
  313, 319 
• Due Diligence for Correspondent and Private
  Banking Accounts for Non-US persons 312 
• Suspicious Activity Reporting - 356 
• Cooperative Efforts - 314

8
ANTI-MONEY LAUNDERING PROGRAMS (352)
Minimum requirements for all Financial
Institutions

• Internal policies, procedures and controls
  designed to assure compliance with BSA
• Designate a compliance officer(s)
• Establish an ongoing employee training program
• Implement independent audit function to test
  program

9
ANTI-MONEY LAUNDERING PROGRAMS (352)

• Depository institutions required since 1987
• Broker-dealers and futures commission merchants
  SROs adopted rules -April 2002
• Mutual funds, MSBs and credit card systems
  April 2002
• Insurance companies Proposed rule issued
  September 2002
• Unregistered investment companies (hedge funds)
  Proposed rule issued October 2002

10
ANTI-MONEY LAUNDERING PROGRAMS (352)

• Dealers in Precious Metals, Stones and Jewels
  NPRM February 2003
• Investment Advisers, CTAs NPRM May 2003
• Loan or Finance Companies - soon
• ANPRMs - Vehicle Sellers and Travel Agents (Feb.
  2003), Persons involved in Real Estate
  Settlements (April 2003)

11
AML PROGRAMS - POLICIES, etc.

• Achieve compliance with BSA and prevent use of
  company for money laundering
• Company must assess BSA requirements and risks
  applicable to it
• Design procedures to meet risks
• Program in writing, approved by board

12
AML PROGRAM OFFICER

• Individual or committee
• Knowledgeable about BSA and money laundering
• Authorized to enforce requirements throughout
  company
• Full or part time

13
AML PROGRAM - TRAINING

• Relevant to functions
• Include employees and service providers
• General awareness of money laundering and
  job-specific requirements

14
AML PROGRAM - TESTING

• Either employee or third party
• Independent - not involved in operation or
  management of program
• Knowledgeable about BSA requirements
• Submit assessment or report

15
CUSTOMER IDENTIFICATION PROGRAMS

• Joint proposed rules issued July 2002 for banks,
  broker-dealers, mutual funds, and futures
  commission merchants
• Final rules issued May 2003
• Compliance required by October 1, 2003

16
CUSTOMER IDENTIFICATION PROGRAMS (326)
Financial institutions must adopt
reasonable procedures to

• Identify customers (persons opening accounts)
• Verify identity of persons opening accounts
• Maintain records of information used for
  verification
• Consult lists of known or suspected terrorists

17
CUSTOMER ID - IDENTIFICATION

• Requires 4 elements
• Name
• Address
• Identification number (TIN), and
• Date of birth (for individuals)

18
CUSTOMER ID - VERIFICATION

• Procedures may be risk-based
• May be documentary or nondocumentary
• Must occur within a reasonable time after account
  opening

19
CUSTOMER ID - RECORDKEEPING

• Include all identifying information
• Description of documents relied on
• Description of methods and result of
  nondocumentary means of verification
• Description of resolution of discrepancies

20
CUSTOMER ID TERRORIST LIST

• Government to provide lists
• Need procedures for checking lists
• Within reasonable time after opening account
  (unless directive requires earlier)

21
SUSPICIOUS ACTIVITY REPORTS (356)

• Required of banks since 1996
• MSBs and casinos since 2002
• Broker-dealers beginning January 2003
• Mutual funds, insurance companies and FCMs
  proposed

22
COOPERATIVE EFFORTS (314)

• Law enforcement gives names to Treasury, who
  transmits to financial institutions
•  Institutions check for any accounts or
  transactions, respond with matches
•  Currently banks and broker-dealers, will be
  expanded
•  Permits institutions to share information with
  each other, after notice to Treasury
•  Provides safe harbor from Gramm-Leach-Bliley
  privacy restrictions

23
PENALTIES

• Banks examined and sanctioned by federal
  regulator for noncompliance
• Loan or finance companies subject to sanction
  under BSA for willful violations
• 31 USC 5321 civil penalties - 25,000
• 31 USC 5322 criminal penalties - 250,000
• Treasury emphasis on education for new industries