Kirkpatrick & Lockhart LLP
ANTI-MONEY LAUNDERING
September 18, 2002
Treasury Issues Proposed Rules Addressing Unregistered
Investment Companies (including Hedge Funds),
Life Insurance Companies and Casinos; Final Rules
Addressing Foreign Shell Banks, Information Sharing
This afternoon Treasury issued five sets of rules
under the USA PATRIOT Act. Proposed rules were
issued that cover: unregistered investment
companies (“Proposed Hedge Fund Rules”) and life
insurance companies (“Proposed Life Insurance
Company Rules”). Comments on the proposed rules
are due within 60 days of publication in the Federal
Register (which should be within the next few days).
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Final rules were also issued that cover information
sharing (“Final Information Sharing Rules”), foreign
shell banks (“Final Shell Bank Rules”)’ and casinos
(“Final Casino Rules”).
Key elements include the following:
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The Proposed Hedge Fund Rules would apply
to the following types of investment
companies:
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Companies excluded from the 1940 Act by
virtue of Section 3(c)(1) or Section 3(c)(7);
Commodity pools;
Companies investing primarily in real estate
or interests therein.
The rule would be limited to investment
companies that satisfy each of the following
conditions:
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Permit redemptions within two years of a
purchase;
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Establish policies and procedures designed
to prevent the investment company from
being used for money laundering;
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Provide independent testing;
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Designate an AML compliance officer;
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Are organized under the laws of the US;
organized, operated or sponsored by a US
person; or sell interests to a US person.
The minimum requirements track those for
mutual funds, i.e.:
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PROPOSED HEDGE FUND RULES
Have total assets of at least $1M as of the
most recent calendar quarter;
Provide ongoing training for appropriate
personnel.
Implementation and operation of the AML
program may be contractually delegated,
provided that the investment company remains
fully responsible for the effectiveness of the
program and for ensuring that federal examiners
are able to obtain information and records
related thereto.
The AML program would be required to be
implemented within 90 days after publication of
a final rule.
The AML program must be approved by the
investment company board of directors,
trustees, or, where there is no board, its general
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ANTI-MONEY LAUNDERING
partner, sponsor, organizer, operator or other
person with similar function.
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Each investment company must file a notice
with FinCEN, a form of which is appended to
the Proposed Hedge Fund Rule, providing
basic information about the investment
company.
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The investment company must make its AML
program available for inspection by the
Department of Treasury, or its designee, upon
request.
PROPOSED LIFE INSURANCE COMPANY RULES
Key elements include the following:
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The Proposed Insurance Company Rules
would apply to any life insurance company
engaged in the US in the life, annuity or similar
insurance products with investment features,
and insurance products possessing the ability
to store value and to transfer that value to
another person.
The minimum requirements track those for
mutual funds, i.e.:
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Establish policies and procedures designed
to prevent the insurance company from
being used for money laundering;
Provide independent testing;
Designate an AML compliance officer or
committee;
Provide ongoing training for appropriate
personnel.
Implementation and operation of the AML
program may be contractually delegated,
provided that the insurance company remains
fully responsible for the effectiveness of the
program and for ensuring that federal examiners
are able to obtain information and records
related thereto.
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The AML program must be approved by senior
management.
The insurance company must make its AML
program available for inspection by the
Department of Treasury, or its designee, upon
request.
Insurance agents or brokers would not be
required to independently establish an AML
program, although insurance companies would
be required to assess the money laundering
and terrorist financing risks posed by its
distribution channels and to incorporate
policies, procedures and internal controls
integrating its agents and brokers into its AML
program.
Insurance companies would be excluded from
the Proposed Life Insurance Company Rules to
the extent they are subject to SEC or SRO AML
rules.
FINAL INFORMATION SHARING RULES
Key elements include the following:
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The provisions as adopted are substantially
the same as proposed with the following
differences:
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The rules have been clarified to state that
unless an information request states
otherwise, a financial institution need only
search its records for current accounts
maintained for a named suspect, accounts
maintained for a named suspect during the
preceding twelve months, and transactions
conducted by, and funds transfers
involving, a named suspect during the
preceding six months, and does not, unless
specifically requested, require a financial
institution to report on future customer
activity;
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ANTI-MONEY LAUNDERING
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The universe of financial institutions that
may share information has been expanded to
generally include all financial institutions
that are required to establish and maintain
an AML program;
The original certification requirement has
been replaced with a requirement to provide
notice to FinCEN, a form of which is
appended to the Final Information Sharing
Rules;
Prior to sharing information with another
financial institution, a financial institution
must take reasonable steps to verify that its
counterpart has filed its own notice with
FinCEN.
The rules are effective upon publication in the
Federal Register.
FINAL SHELL BANK RULES
Key elements include the following:
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Treasury has preserved the broad definition of
“correspondent account,” in the context of
banks and broker-dealers, and would include
the following:
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Accounts to purchase, sell, lend or
otherwise hold securities;
Prime brokerage accounts that consolidate
trading done at a number of firms;
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Accounts for trading foreign currency;
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Various forms of custody accounts;
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Over-the-counter derivatives accounts;
and
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Accounts for trading futures or
commodity options, which would be
maintained by broker-dealers that are
dually registered as FCMs.
Treasury has adopted the existing BSA
definition of “foreign bank,” which refers to US
depository institutions (and includes foreign
branches of US banks).
The definition of “foreign shell bank,” “owner”
and “physical presence” generally remain
unchanged.
The certification form for foreign banks has
been revised (as appended to the Final Shell
Bank Rules), and use of the new form operates
as a safe harbor.
The rules are effective 30 days after publication
in the Federal Register.
FINAL CASINO RULES
Key elements include the following:
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Casinos are required to file an SARC
(Suspicious Activity Report by Casinos) with
FinCEN on all transactions of at least $5,000
that the casino “knows, suspects or has reason
to suspect” fall into specific categories, that
generally track the final broker-dealer rules
published July 1, 2002.
The rules are effective 180 days after
publication in the Federal Register.
DIANE E. AMBLER
202.778.9886
dambler@kl.com
ANDRAS P. TELEKI
202.778.9477
ateleki@kl.com
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ANTI-MONEY LAUNDERING
Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help
banking and diversified financial services clients assess their risk, establish and review compliance practices,
investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and
enforcement actions while being sensitive to the privacy of each client and their customers through an
effective attorney-client privilege relationship.
In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory
and legislative developments. The website is located at www.kl.com/aml. In addition to outlining K&L’s
enterprise-wide approach to assisting clients with money laundering compliance issues, the website contains
a resource center with over 100 carefully selected links to various informational resources on money
laundering. The resource center also includes a library of prior K&L publications on money laundering.
We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team
for additional assistance. You may also send general inquiries to antimoney@kl.com.
BOSTON
SAN FRANCISCO
Michael S. Caccese
D. Lloyd Macdonald
Stanley V. Ragalevsky
617.261.3133
617.261.3117
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Eilleen M. Clavere
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sragalevsky@kl.com David Mishel
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202.778.9066
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NEWARK
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
© 2002 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.