Willingly or not, the USA Patriot Act in effect makes banks partners with the federal government in combating intentional money laundering. The fact that such a far-reaching law could have been enacted without debate and public input is surprising and stresses the need for a thorough review of this act in the months ahead. In the meanwhile, compliance is essential for our mutual protection and security.

Money Laundering

Osama bin Laden's strength is not military, it's financial. Bin Laden is the fund-raiser and paymaster of terrorism. It is said that he has a personal fortune of $300 million and that he uses illegal and legal enterprises, including charitable organizations, to move funds -- from under-regulated banks and unregulated cash exchange networks in obscure locations -- into and out of more respectable financial institutions.

International money laundering is possible due to a lack of transparency. By the time the funds arrive in New York, London or Frankfurt, it is no longer clear where they came from or who is their beneficial owner. Funding of the terrorist attacks of Sept. 11, 2001, occurred undetected right under our noses.

The well-publicized case of The Bank of New York and illegal Russian funds is a prime example of how money laundering works. In 1999, $7.5 billion of stolen Russian funds moved through that bank. But the money was not wired directly from
Moscow to New York. It moved through other sources first, losing its fingerprints along the way.

Ever hear of Nauru? $3 billion of the $7.5 billion that ended up at The Bank of New York went through a single bank registered in that South Pacific island country. Money laundering does not just facilitate terrorism. It assists drug traffickers and political kleptocrats. Money laundering is estimated by the International Money Fund to be a $1 trillion a year worldwide industry.

Other countries have also made the news as having excessively protective bank privacy laws or an unregulated environment ideal for money launderers.  Traditional havens like Switzerland, Liechtenstein, Monaco, the Isle of Man, Panama, the Bahamas, the Netherland Antilles and the Cayman Islands may be cleaning up their act to some extent, but there is no shortage of new competitors for money-laundered funds. Countries that may surprise you like Israel, Cyprus and the Philippines are said to be money-laundering havens, as are countries you may never have heard of (or thought of as "countries") like Bahrain, the Seychelles, Dominica, Grenada, Antigua and Barbuda, Vanuatu and the aforementioned Nauru.
 

The Act

International money laundering is one of the principal targets of the USA Patriot Act, signed into law by President Bush on Oct. 26, 2001. The name of this law, "USA Patriot" is an acronym for "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism." The act has many titles beyond the scope of this article focusing on intelligence gathering, aliens and expansion of tools available to criminal justice law enforcement officials, such as nationwide search warrants with broad wire-tapping and Internet search authority.

Because the law was rushed through the legislative process without the usual committee hearings and joint conference, and perhaps also because there is hope that the terrorism threat will be under control by then, the act has a sunset provision of Oct. 1, 2005. The title of the act of most direct concern to bankers is Title III -- International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001.

Title III

While the off-the-books cash economy may not flow through banks, international wire transfers do. Recognizing this fact, the act grants the Department of the Treasury vast new authority to regulate dealings with foreign bank customers and relationships, with the goal of ending money laundering through transparency. Title III targets relationships between U.S. financial institutions and financial institutions in poorly regulated jurisdictions, with a focus on requiring U.S. banks to ascertain the true identity of the institutions and individuals with whom they deal, particularly through correspondent and private banking relationships.

Record keeping, records retention and reporting are crucial elements in this effort. A section-by-section analysis of the more pertinent sections of Title III follows.

Section 311 of the act authorizes the secretary of the Treasury to require financial institutions to take special measures with respect to transactions with entities and persons in those foreign jurisdictions of "primary money laundering concern." By regulation, financial institutions will be required to implement procedures to determine the identity of the "beneficial owners" (to be defined by regulation) of accounts, including payable-through accounts and correspondent accounts, opened and maintained by foreign persons and banks. The effect of this section awaits the wording of implementing regulation, as does the effect of most other sections of the act.

Section 312 deals with special due diligence for correspondent accounts and private banking accounts with non-U.S. persons, with an emphasis on establishing the identity of the true beneficial owners of accounts and the owners of foreign banks. Additional requirements will be imposed with respect to relationships with offshore banks. The secretary of the Treasury is given 180 days after enactment to implement regulations, and the requirements of this section take effect 270 days after enactment. The regulations will apply even to accounts opened prior to enactment.

Section 313, with certain exceptions, prohibits a financial institution from maintaining a correspondent relationship with a "shell" bank (sometimes known as a "brass plate" bank), defined as one which does not have a physical presence in any country. This section takes effect 60 days after enactment.

Section 314 requires the secretary to adopt regulations encouraging cooperation between financial institutions and law enforcement agencies to deter money laundering, with regulations to be adopted within 120 days of enactment.  To protect shared information, banks will be asked to limit access to certain designated individuals.

Recognizing the obvious tension between privacy and transparency, the act provides that the sharing of information pursuant to the act will not constitute a violation of the privacy provisions contained in Title V of the Gramm-Leach-Bliley Act (Pub. L. 106-102).

Section 315 adds to the list of money-laundering crimes funds used to bribe public officials and public funds corruptly stolen by public officials.

Section 316 deals with protective court procedures for innocent owners of property subject to anti-terrorist forfeiture, but permits the introduction of evidence by the United States that is otherwise inadmissible under the Federal Rules of Evidence if compliance with those rules would jeopardize national security.

Section 317 provides for long-arm jurisdiction over foreign money launderers, giving U.S. courts jurisdiction over foreign persons and institutions maintaining a bank account in the United States. Pretrial freezes and seizures of property or assets located in the United States are authorized.

Section 318 deals with laundering money through foreign banks, expanding the definition of "financial institution" to include foreign banks.

Section 319 deals with forfeiture of funds in U.S. interbank accounts. This section contemplates a mechanism for seizing foreign bank funds on deposit in the United States where a targeted money-laundering foreigner has a deposit in that foreign bank overseas, without the requirement to trace funds to the United States. In effect, the foreign money launderer's overseas deposit will be deemed on deposit in his bank's U.S. correspondent bank account, and thus subject to seizure.

Overseas bank records of a foreign bank maintaining a correspondent account in the United States are subject to subpoena. Subpoenas served on U.S. banks regarding these accounts must be complied with within 120 hours if from an "appropriate Federal banking agency." U.S. financial institutions must maintain records identifying the owners of foreign banks maintaining a correspondent account. If the foreign bank fails to comply with a subpoena, the U.S. financial institution may be required to terminate the correspondent relationship and will be shielded for liability for doing so.

Section 320 deals with proceeds of foreign crimes and broadens the range of property subject to civil forfeiture.

Section 321 expands the definition of "financial institution" to include any credit union and registrants under the Commodity Exchange Act.

Section 322 amends the fugitive disentitlement provisions of 28 U.S.C. 2466 to permit a judicial officer to disallow a corporation from using the resources of the U.S. courts in a forfeiture action if a majority shareholder or the individual filing the claim is a fugitive.

Section 323 authorizes a U.S. court to issue a restraining order to preserve property in the United States pending enforcement of a foreign judgment.

Section 325 states that the secretary "may" issue regulations to prevent "concentration accounts" from hiding true beneficial ownership.

Under section 326, the secretary is required to prescribe regulations within one year of enactment setting forth the minimum standards to be followed by financial institutions to verify the identity of customers. Those procedures will require financial institutions to consult lists of known or suspected terrorists or terrorist organizations. The secretary must report to Congress on how best to verify the identification of foreign nationals seeking to open U.S. bank accounts.

Section 327 requires the Federal Reserve Board and other appropriate agencies to take into consideration a bank's money-laundering compliance record when considering merger applications.

Section 328 requires the secretary to take "all reasonable steps" to encourage foreign governments to require the inclusion of the name of the originator in wire transfer instructions sent to the United States "and other countries."

Section 330 authorizes and encourages U.S. enforcement agencies to enter into voluntary information exchanges with foreign financial supervisory agencies and officials.
 

CTRs and SARs

 

Subtitle B of Title III, sections 351 through 366, deals with Bank Secrecy Act amendments and "improvements." Under the Bank Secrecy Act, 31 U.S.C. 5311 et seq., and related laws and regulations, financial institutions must report all cash deposits and withdrawals over $10,000, including structural transactions aggregating above that amount, on currency transaction reports. Suspicious activity of $5,000 or more must be reported on suspicious activity reports.

The CTR reporting requirements, particularly, result in transmission to the government of a mountain of information so enormous that the government seems incapable of doing much of anything with it. Yet the $10,000 threshold has not be increased since the 1970s. Little though their value might be, banks that do not file CTR reports as required are routinely fined enormous sums. U.S. Trust Company of New York, for example, recently had to pay a $10 million fine for faulty CTR reporting procedures and other compliance problems.

Subtitle B at least pays some lip service to the obvious observation that too much information can overwhelm and obscure useful information by urging banks to make greater use of the filing exemptions available. Section 365 authorizes the secretary to study whether further expansion of CTR reporting exemptions is warranted to prevent the volume of reports from interfering with law enforcement.

Although CTRs would appear to be of limited value when weighed against the enormous cost of compliance, SARs are more valuable, if properly analyzed and dealt with by the government. The act improves governmental analysis mechanisms and clarifies that financial institutions shall not be liable for voluntary disclosures of suspicious activities.

By introducing a new government bureau and facilitating government-bank information sharing, the act recognizes the fact that the government has done a poor job of coping with all the information filed with it to date and contemplates the implementation of procedures improving the government's use of information supplied to it. The act also recognizes that much money laundering occurs, not so much at highly regulated banks, as at "underground banks" such as unlicensed money transmitters and cash exchanges.

Section 351 contains amendments relating to reporting on SARs. This section bars a financial institution from telling the subject of the SAR about the report. Except with request to governmental action, the section shields from liability any person reporting suspicious activity.

Section 352 of Subtitle B requires each financial institution to establish an anti-money-laundering program within 180 days of enactment and sets minimum standards for those programs.

Section 354 requires a national strategy for combating money laundering, which strategy must address funding of terrorist acts.

Section 355 allows but does not require the inclusion of references to suspected illegal activity in written employment references. Disclosure with malicious intent is not shielded.

Section 356 adds securities brokers and dealers to the list of entities required to file SARs, effective no later than July 1, 2002.

Section 357 gives the secretary six weeks after enactment to report to Congress on the administration of the Bank Secrecy Act.

 

Section 358 states that consumer reporting agencies may furnish consumer reports under the Fair Credit Reporting Act, 15 U.S.C. 1681 et seq., to government agencies for counter-terrorism purposes and allows U.S. intelligence to use CTRs and SARs to fight international terrorism.

Section 359 adds money transmitters, whether licensed or "underground," to the list of entities required to file SARs.

Section 361 deals with FinCen (the "Financial Crimes Enforcement Network"). This entity, previously established by executive branch order, is given legislative authority and status as a bureau in the Department of the Treasury.
 

Currency Crimes and Protection

Subtitle C of the act deals with currency crimes and protection. Sections 371 and 372 provide for the forfeiture of cash involved in bulk cash smuggling into or out of the United States. It is a criminal offense to knowingly conceal more than $10,000 in currency or monetary instruments being carried into or sent out of the United States.

Section 373 makes the unlicensed conduct of a money-transmitting business illegal. Sections 374 and 375 deal with counterfeit U.S. and foreign currency and obligations.

With the signing of the act into law, banks are responsible to monitor the true identity of their customers and owners of correspondent banks, the source of funds deposited with them and, for the first time, the use of funds flowing out of them to payees. Banks have in a sense been deputized as federal law enforcement agencies.

The implications these new powers and responsibilities have for civil liberties, compliance burden and privacy have yet to be explored and await implementing regulations to flush out their full scope.