UPDATE
Financial Institutions Commentary
NOVEMBER 20, 2001
WINTER 2000
The International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001:
A Primer for Community Banks
I.
INTRODUCTION
On October 26, 2001, President Bush signed into law
the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (“USA PATRIOT Act”). The
USA PATRIOT Act represents a far-reaching expansion
of law enforcement and intelligence agency powers to
apprehend terrorists through increased surveillance of
telecommunications, e-mail and financial transactions
and to detain illegal aliens in direct response to the
terrorist acts against the United States on September 11,
2001.
The key provisions of the USA PATRIOT Act for those
in the financial services industry are contained in
Title III, known as “ The International Money
Laundering Abatement and Anti-Terrorist Financing
Contents
Introduction ....................................................................... 1
Summary of the Act .......................................................... 2
Some Thoughts on Compliance for
Community Banks ............................................................. 2
Compliance Steps for the Community Bank ................. 3
Analysis of the Act ............................................................. 4
...............................................................................................
This Update was produced by K&L’s multi-office, interdisciplinary
anti-money laundering practice, which provides enterprise-wide solutions for financial institutions to help them understand and comply
with newly enacted money-laundering legislation. We invite you to
visit our website at www.kl.com, or to contact a member of our
practice (see last page of this Update) if you have any questions,
would like more information about our services, or if we can provide
you with copies of the legislation. This Update was edited by Stanley
V. Ragalevsky and Rebecca H. Laird.
Act of 2001,” (“2001 IMLA Act”). Simply stated, the
2001 IMLA Act makes it much more difficult for foreign
terrorists and criminals to launder funds through the
U.S. financial system.
In recognizing that stronger anti-money laundering laws
were needed to further limit foreign money laundering
in the United States, Congress specifically found that
the 2001 IMLA Act was necessary because
(1) “effective enforcement of currency
reporting requirements . . . has forced . . .
criminals . . . to avoid using traditional [United
States] financial institutions . . . [and] move
large quantities of currency [which] can be
smuggled outside the United States” (2001
IMLA Act, §371);
(2) certain non-U.S. “offshore” banking
systems provided weak financial supervision
and strong anonymity protection—essential
tools to disguise the ownership and movement
of criminal funds (2001 IMLA Act, §302(a)(4));
(3) certain correspondent banking facilities
have been used by foreign banks and “private
banking” arrangements have been used by
criminals to “permit the laundering of funds by
hiding the identities of real parties in interest
to financial transactions” (2001 IMLA Act,
§302(a)(6–7)).
To address these problems, Congress decided it was
imperative inter alia that: (a) anti-money laundering
laws be strengthened “especially with respect to crimes
by non-United States nationals and foreign financial
institutions”; (b) those foreign jurisdictions, financial
institutions, accounts or transactions that “pose
particular, identifiable opportunities for criminal abuse”
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and therefore are of “primary money laundering
concern” be subjected to “special scrutiny” when
dealing with U.S. financial institutions; (c) the Secretary
of the Treasury be given broad discretion to deal with
money laundering problems presented by foreign
jurisdictions, financial institutions, accounts or
transactions; and (d) the most common form of money
laundering—the smuggling of cash in bulk—needed
strong criminal penalties and forfeiture remedies (2001
IMLA Act, §§302(b) and 371(b)).
The 2001 IMLA Act addresses all of these issues.
II.
SUMMARY OF THE ACT
The most important provisions of the 2001 IMLA Act
are that it:
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gives the Secretary of the Treasury broad discretion
to identify foreign jurisdictions, financial institutions,
transactions and/or accounts that are of “primary
money laundering concern”;
allows the Secretary to require U.S. financial
institutions, including banks, investment companies
and broker/dealers, to undertake certain “special
measures” towards these “areas of primary money
laundering concern,” such as enhanced record
keeping, identification of beneficial owners or
customers, or prohibitions or conditions on opening
and maintaining certain accounts;
requires financial institutions, such as banks,
investment companies and broker/dealers, that
establish, maintain, administer or manage private
banking accounts or correspondent accounts for
non-U.S. persons to establish appropriate, specific
and, where necessary, enhanced due diligence
policies, procedures and controls that are reasonably
designed to detect and report instances of money
laundering through these accounts;
forbids financial institutions from establishing,
maintaining, administering or managing a
correspondent account or other similar account in
the United States for a foreign bank that does not
have a physical presence in any country (a “shell
bank”), unless such bank is an affiliate of certain
entities that have a physical presence in the United
States and is supervised by the regulatory authority
that regulates its affiliate;
requires financial institutions to improve their
verification of account holders and to enhance their
money laundering practices and procedures; and
prohibits the bulk smuggling of cash which is made
a criminal offense.
III. SOME THOUGHTS ON COMPLIANCE
FOR COMMUNITY BANKS
The 2001 IMLA Act will impose additional compliance
burdens on the typical community bank. But banks
have been dealing with money laundering issues since
the passage of the Bank Secrecy Act in 1970. The
2001 IMLA Act adds to that burden but only in an
incremental way by conscripting banks, as financial
intermediaries, into a larger role in the enforcement of
U.S. money laundering laws. It is simply not feasible
for the United States to obtain direct jurisdiction over
all foreign persons or banks interacting with the U.S.
financial system. The only realistic solution is for the
United States to impose additional money laundering
compliance obligations and liability on domestic
financial institutions which are designed to limit or deny
access of certain foreign persons to the U.S. financial
system. It will be a more substantial compliance burden
for American banks and financial institutions to deal
with foreign persons or countries that ignore or take
U.S. anti-money laundering concerns lightly.
Community banks that find the additional compliance
obligations of the 2001 IMLA Act burdensome can
avoid many of them simply by limiting interactions with
foreign banks and financial institutions, particularly
those with a record for secrecy or lack of cooperation.
Avoid (i) “payable-through” accounts, correspondence
accounts, and “concentration” accounts with foreign
banks, (ii) “private banking” accounts or arrangements
with foreign persons, and (iii) accounts for foreign
persons who come from countries or have relationships
with foreign banks which have been designated by
the Secretary of the Treasury as “primary money
laundering concerns,” and most of the specific
compliance issues are eliminated.
But there is one overriding issue presented by the 2001
IMLA Act which is here to stay—financial institutions
are entering into a new regulatory era with new
regulatory issues. Financial institutions must take
compliance with previously existing money laundering
laws more seriously. Regulatory supervision of money
laundering is about to get more intense and “real time”
as the focus of enforcement efforts shifts from
apprehension of past crimes to prevention of future
terrorist acts. Financial institutions will no longer have
the luxury of being somewhat lackadaisical when filing
or deciding to file SARs. The days when bank secrecy
or money laundering compliance was a minor issue for
a lower level officer are over. Financial institutions
should seriously consider having an officer who
spends significant or perhaps full time on money
laundering, privacy and internal record security over
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the next year. New and improved systems, policies and
procedures will need to be put in place in all of these
areas.
Much thought will also need to be devoted at the Board
level to a financial institution’s business postSeptember 11, 2001. Very subtly, the 2001 IMLA Act
signals a possible shift from the traditional role of a
bank as a trusted intermediary to a new role as a
surveillance agent for law enforcement. What is more
important—privacy or security? And how far will a
financial institution need to go in “knowing its
customers”? Customer records are likely to be more
accessible to law enforcement. Will customers tolerate
this?
Given the recent anthrax scares, will bank customers
show a greater willingness to do more of their business
electronically over the internet? Are banks ready for
it? Has the level of risk with internet-based electronic
payment systems been adequately evaluated and
addressed? Are customer records secure? Major
changes in the way financial institutions are regulated
and how they protect themselves and their customers
are coming. The 2001 IMLA Act is probably more
significant as a harbinger of such changes than it is as
the source of additional regulation.
IV. COMPLIANCE STEPS FOR THE COMMUNITY
BANK
Since most community banks and financial institutions
have been dealing with money laundering compliance
for decades, it is difficult to come up with a checklist
for complying with the 2001 IMLA Act which doesn’t
rehash that which is already well known. What follows
is a list of issues for the typical community banking
institutions presented by the Act. Some of them will
not apply to all financial institutions. They are not
ranked by order of importance but by chronological
effective date.
1. Mergers and Acquisitions
Be prepared to discuss the money laundering
compliance efforts in any merger or acquisition
application filed after December 31, 2001. (327)
2. Review Existing Money Laundering Compliance
Programs
Banks should carefully review their existing anti-money
laundering compliance efforts. 31 U.S.C. §5318(h)
already requires financial institutions to have a money
laundering program with (i) internal policies, procedures
and controls, (ii) a designated compliance officer, (iii)
an employee training program, and (iv) an independent
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audit function to test compliance. The Secretary of the
Treasury must promulgate new regulations with
minimum standards for compliance by April 23, 2002.
To respond effectively, it is critical for a financial
institution to designate its compliance officer for money
laundering now so he or she will have time to study the
issues and be ready to comply with the new program
regulations which will be effective by no later than
April 23, 2002. (352)
3. Evaluate Any Relationship with Foreign
Banks
(a) Correspondent accounts with “shell banks”
are prohibited commencing December 26,
2001. These need to be identified and closed
before that date.
(b) “Concentration” (multi-customer) accounts
may be immediately prohibited by the
Secretary of the Treasury by regulation. The
Secretary is not obligated to do so, however.
It is not likely that the Secretary will
completely outlaw concentration accounts
for domestic corporations and their
subsidiaries. Foreign businesses are not as
likely to be so lucky. It is necessary to start
now to identify and decide what to do with
these accounts. (325)
(c) Identify all “payable through,” interbank and
correspondent accounts with foreign banks
by December 25, 2001. If these accounts are
not to be closed, make sure the bank
maintains accurate records in the United
States indicating who owns the foreign bank
and the identity of the person designated
by the foreign bank as an agent for service
of process in the United States. (319) If a
correspondent account is to be kept open,
make sure the enhanced due diligence rules
are followed if the accountholder is from a
“special money laundering concern” or is
operating under an offshore banking license,
or is listed as coming from an
“uncooperative” country by international
money laundering organizations. (312)
4. Evaluate “Private Banking” Accounts with
Foreign Persons
Financial institutions should determine whether they
have “private banking” accounts of over $1,000,000
with foreign persons. If they do, they must determine
whether enhanced due diligence requirements apply
to these accounts by July 26, 2002. (312)
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detect and report suspicious activity in a timely
manner;
5. Assess and Determine Money Laundering
Policy for a Number of Issues
Any financial institution should have its compliance
officer study the 2001 IMLA Act requirements and work
up responses to the following issues by December 25,
2001:
(a) Does the financial institution do business
with foreign banks likely to be designated
“primary money laundering concerns”? If
so, is it prepared to meet the burdensome
due diligence requirements or should these
accounts be closed? (311)
(b) How will the financial institution respond to
summonses or subpoenas issued under the
120-hour response rule? Does it have a
mechanism in place to be able to respond in
timely fashion? (319)
(c) What will the financial institution’s policy
be about voluntary information sharing with
regulators, law enforcement or other banks?
The Secretary of the Treasury has until
February 26, 2002 to promulgate information
sharing regulations.
Each financial
institution should start thinking about how
it will deal with this issue immediately. (314)
(d) Is the financial institution prepared to make
FinCEN filings electronically? It will
probably be required after July 26, 2002 to
make all filings including SARs with FinCEN
electronically. (361)
6. Identify Verification Procedures
Start thinking about identity verification. These
requirements will not take effect before October 26,
2002. The requirements may be more onerous than
getting a copy of a customer’s driver’s license at the
time an account is opened. (326)
7. Get the Board Involved in Money Laundering
Educate Board members and bring them up to speed
quickly.
8. Remember the Basics
Do not lose sight of the forest for the trees. Stick to the
basics on money laundering. Well-designed and
implemented money laundering compliance programs:
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have internal controls, including account opening
and documentation procedures and management
information/monitoring systems which adequately
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have audit processes which are risk-based,
specifically target high-risk accounts and services,
and include independent testing of systems,
controls, and CTR and suspicious activity report
filing patterns;
have training programs which address the possibility
of suspicious activity in all departments, with
emphasis on high-risk accounts, products, services,
and geographical locations;
have CTR review procedures which capture and
report suspicious activity;
document and evaluate new high-risk accounts for
money laundering;
establish controls and review procedures for highrisk services like wire transfers;
monitor high-risk accounts for money laundering,
including transactions that far exceed the normal
range of activity for such accounts;
conduct adequate independent testing of high-risk
accounts for the possibility of money laundering;
and
train employees to detect suspicious activity in highrisk areas like pouch and wire transfer transactions,
particularly to or from known drug sources or money
laundering havens.
ANALYSIS OF THE ACT
1. Applicability of 2001 IMLA Act
The 2001 IMLA Act attempts to limit the money
laundering activities of certain high-risk foreign persons
directed against the United States by making it
burdensome for domestic financial institutions to deal
with such persons. Most of the compliance
requirements of the 2001 IMLA Act are imposed upon
domestic “financial institutions.” Although an initial
reading of the 2001 IMLA Act appears to suggest that
the only “financial institutions” covered by the Act are
banks, such is not the case. The definition of “financial
institution” in 31 U.S.C. §5312(a)(2) is very broad and
includes not only banks and thrift institutions but also
broker/dealers, commodity dealers, investment
companies, insurance companies, investment banks,
credit unions, money transmitters and most types of
businesses that deal with the delivery of financial
services. Generally, the new provisions are applied
first to depository institutions, which are presently
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subject to the broadest anti-money laundering
regulations, and then over a six- to twelve-month period
to broker/dealers and investment companies. (See, e.g.,
2001 IMLA Act, §357).
2. A “Primary Money Laundering Concern”
Most industrialized countries have been working
together over the past dozen years to eradicate illegal
money laundering. International groups like the OECD
Financial Action Task Force on Money Laundering,
the Basle Committee on Banking Regulation and the
eleven multinational banks with large private banking
operations known as the Wolfsberg Group regularly
cooperate on anti-money laundering efforts.
Unfortunately, not every nation joins in these efforts
or has a legal system which effectively deters money
laundering. The laundering of tainted money from less
advanced or uncooperative countries into the
industrialized countries is a significant problem in the
fight against terrorism. Recognizing that we now have
a global economy and the jurisdictional reach of U.S.
law cannot reach into other uncooperative sovereign
nations, the key section of the 2001 IMLA Act attempts
to attack the foreign gaps in the U.S. money laundering
control system by allowing the Secretary of the
Treasury to designate a jurisdiction outside of the
United States, one or more financial institutions
operating outside the United States, one or more
classes of transactions within or involving a jurisdiction
outside the United States, or one or more types of
accounts as a “primary money laundering concern.”
(2001 IMLA Act, §311). This determination is at the
discretion of the Secretary of the Treasury, although
consultation with the Attorney General and Secretary
of State is required.
The Secretary is required to take seven factors into
account when designating a jurisdiction as a “primary
money laundering concern”: (i) the presence of
terrorists or organized crime in the jurisdiction; (ii) the
jurisdiction’s use of bank secrecy and tax benefits for
non-residents; (iii) the presence of money laundering
laws; (iv) the volume of transactions in relation to the
size of the economy; (v) whether international
anti-money laundering organizations characterize the
jurisdiction as a money laundering haven; (vi) the
history of cooperation in previous money laundering
cases; and finally (vii) the presence of internal
corruption.
Once a foreign jurisdiction or a bank from a foreign
jurisdiction is deemed a “primary money laundering
concern,” the Secretary may require domestic financial
institutions to comply with any or all of the following
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five “special measures.” First, the Secretary may require
that a financial institution dealing with a primary money
laundering concern keep “know your customer”-type
records detailing who owns the account, their address,
the originator of the funds in the account, the identity
of any beneficial owners, and a record of all account
transactions. Second, the Secretary may require that
any financial institution which opens an account on
behalf of a foreign person which has been deemed a
primary money laundering concern take reasonable and
practicable steps to obtain detailed records regarding
the beneficial owners of that account. Third, the
Secretary may require a domestic financial institution
which maintains payable-through accounts for a foreign
bank in a jurisdiction deemed a primary money
laundering concern or a foreign bank directly deemed
to be a primary money laundering concern to determine
the identity of each customer who is permitted to use
the account, and other information that would be
comparable to the information it would be required to
obtain had the account been opened for a U.S. citizen.
Fourth, the Secretary may require the same information
for correspondent accounts from banks or jurisdictions
deemed to be of primary money laundering concern.
Finally, the Secretary, only through issuing a regulation,
can prohibit the use of, or shut down, an existing
correspondent or payable-through account upon
finding that the accounts were linked to a jurisdiction
designated a primary money laundering concern.
Compliance with the “special measures” detailed above
is the responsibility of any “financial institution” as
defined in 31 U.S.C. §5312(a)(2). In other words, any
financial institution conducting business with a primary
money laundering concern (including a foreign bank
chartered by a country which is a primary money
laundering concern) must strictly follow “know your
customer”-type rules and employ a heightened sense
of due diligence when establishing these types of
accounts to avoid potential problems with law
enforcement or the Department of the Treasury. The
burden of complying with such onerous requirements
is likely to discourage many domestic financial
institutions from doing business with foreign banks in
countries designated by the Secretary as primary
money laundering concerns.
3. Correspondent and Private Banking Accounts—
Special Due Diligence Required
Section 312 of the 2001 IMLA Act requires any domestic
financial institution with private banking or
correspondent accounts in the United States for a
“non-United States person” to establish “appropriate,
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specific, and, where necessary, enhanced due diligence
policies, procedures, and controls that are reasonably
designed to detect and report instances of money
laundering through those accounts.” This requirement
to establish “know your customer”-type due diligence
policies and procedures applies to private banking or
correspondent accounts maintained by a financial
institution for any non-U.S. person and not just
persons from countries designated as primary money
laundering concerns.
Minimum due diligence procedures and controls on
“private banking” accounts (i.e., having minimum
aggregate deposits of funds or assets in excess of
$1,000,000) obligate a financial institution to take
“reasonable steps” to identify the nominal and
beneficial owners of, and source of funds deposited
to, the account. In addition, “enhanced scrutiny” is
required on any private banking account maintained
by senior foreign political figures, their immediate family
members or close associates to detect and report
transactions that “may involve the proceeds of foreign
corruption.”
The 2001 IMLA Act does not specify what are
satisfactory minimum due diligence policies for
correspondent accounts. It does, however, require
“enhanced” due diligence policies, procedures and
controls for any correspondent account maintained by
a foreign bank operating under an “offshore banking
license” (i.e., chartered to conduct banking activities
outside, but not in, the country in which it is chartered)
or operating under a charter issued by a foreign country
designated as a primary money laundering concern by
the Secretary of the Treasury or as “non-cooperative”
by an international anti-money laundering group of
which the United States is a member (e.g., the OECD
Financial Action Task Force on Money Laundering).
If a financial institution is obligated to impose enhanced
due diligence policies, procedures and controls on a
particular correspondent account, it must fulfill three
requirements. First, it must identify each of the owners
of a non-publicly traded foreign bank maintaining the
correspondent account and discern the nature and
extent of their ownership. Second, it must discover if
the foreign bank is conducting correspondent business
with offers of correspondent services to other foreign
banks. Finally, after making this determination, the
domestic financial institution must identify all of those
secondary foreign correspondent banks, and collect
the same due diligence information on those secondary
correspondent banks.
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4. Prohibition on Conducting Business with Shell
Banks
Section 313 of the 2001 IMLA Act prohibits “covered
financial institutions” (i.e., FDIC insured banks and
thrifts, trust companies, private bankers, U.S. branches
of foreign banks, credit unions, and registered broker/
dealers each as described in 31 U.S.C. §5312(a)(2) (A
through G)) from maintaining correspondent accounts
for so-called “shell banks.” A “shell” bank is a foreign
bank without a physical presence in any country. The
shell bank prohibition does not apply to affiliates of a
domestic or foreign bank which maintains a physical
presence and is regulated by a recognized bank
supervisory authority. The “shell bank” prohibition
takes effect on December 25, 2001.
5. Cooperative Efforts to Deter Money
Laundering
Section 314 of the 2001 IMLA Act has several interesting
rules designed to foster a cooperative working
relationship among financial institutions, regulators and
law enforcement authorities. Section 314(a) (1) requires
the Secretary of the Treasury to adopt regulations by
February 23, 2002 to “encourage further co-operation”
among financial institutions, regulators and law
enforcement with the specific purpose of encouraging
regulators and law enforcement authorities “to share
with financial institutions information” regarding
persons “engaged in or reasonably suspected based
on credible evidence of engaging in terrorist acts or
money laundering activities.” At a minimum, it appears
the regulations will require financial institutions to
appoint one person to coordinate information sharing
activities.
Section 314(b) allows financial institutions or any
association of financial institutions to “share
information” with each other about persons suspected
of terrorist or money laundering activities. Any financial
institutions or associations thereof which transmit,
receive or share information for the purpose of
identifying or reporting suspected terrorist or money
laundering activity “shall not be liable” for any such
disclosure or failure to provide notice of such disclosure
under federal, state or local law or any contract to the
subject of disclosure or any other person identified in
the disclosure; provided any disclosure is made in
accordance with Section 314 and its regulations.
Section 314(c) provides a further immunity to financial
institutions or associations thereof which share or
disclose information under Section 314 from any claim
that such acts violate the privacy provisions (Title V)
of the Gramm-Leach-Bliley Act.
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The government-financial industry partnership
encouraged by Section 314 has been criticized in some
circles as an attempt to make financial institutions
agents of a government surveillance apparatus.
Whether this is accurate and whether the 2001 IMLA
Act itself is placing too much of a regulatory
enforcement burden on financial institutions will no
doubt be hotly debated.
6. Section 319—Interbank Accounts; the
120–Hour Rule; Subpoenas for Correspondent
Records; Record Keeping
(a) Interbank Accounts. Section 319 is perhaps
the most problematic section of the 2001
IMLA Act. Subsection (a) amends the civil
forfeiture statute, 18 U.S.C. §981, which
allows the United States to proceed against
property in the United States derived from
or traceable to certain types of criminal
activity. It inserts a new subsection (k) on
“interbank accounts” into 18 U.S.C. §981.
Subsection 981(k)(l) provides that if tainted
funds are deposited into an account at a
foreign bank which has an interbank (or
correspondent) account in the United States
with a “covered financial institution,” the
funds so deposited in the foreign bank “shall
be deemed to have been deposited into an
interbank account in the United States.” The
U.S. government is authorized to seize the
funds in the interbank or correspondent
account “up to the value of the funds
deposited into the account at the foreign
bank.” Subsection 981(k)(2) dispenses with
any requirement that the government prove
that the funds seized in the interbank account
were directly traceable to the tainted funds
deposited into the foreign bank. In other
words, if the local U.S. Attorney is pursuing
the recovery of a $1,000,000 forfeiture
assessment against a convicted Colombian
drug dealer who has $3,000,000 deposited in
a Swiss bank, a civil forfeiture action can be
brought against a $500,000 balance the Swiss
bank has in its interbank account in a Texas
bank and the funds in the interbank account
at the Texas bank can be arrested. Under 18
U.S.C. §981(k)(1)(A), as inserted by
Subsection 319(a) of the 2001 IMLA Act,
the entire $500,000 can be seized even
though (a) the Swiss bank has done nothing
wrong and (b) none of the $500,000 the Swiss
bank had on deposit in its interbank account
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at the Texas bank was traceable to the drug
dealer ’s funds.
The provisions of
Section 319(a) took effect on October 26,
2001.
Prior to the passage of the 2001 IMLA Act,
the attempt of the U.S. Attorney to seize the
$500,000 in the interbank account would
likely have failed. The foreign bank would
assert it owned the funds deposited in the
interbank (or correspondent) account. Under
18 U.S.C. §983(d), it would probably qualify
for the innocent owner defense and the
funds in the account would escape seizure.
18 U.S.C. §981(k)(3) and (4), as inserted by
Section 319(a) of the 2001 IMLA Act,
changes this result. Section 981(k)(3) and
(4) provides that for purposes of applying
the innocent owner defense in 18 U.S.C.
§983(d), the “owner” of the funds is the
person who deposited the funds in the foreign
bank, and not the foreign bank or any other
intermediary involved in the transfer of the
funds.
Section 319(a) presents substantial risk of
potentially unwarranted disruption to
legitimate
international
banking
relationships. Consider the predicament of
the Swiss bank. Does it shut down the
interbank account at the Texas bank? The
U.S. Attorney is still looking to find another
$500,000 to recover the balance of the
$1,000,000 forfeiture assessment. Does the
Swiss bank continue to maintain interbank
accounts at other U.S. banks? Should it?
Does the Swiss government get perturbed
because large American banks in direct
overseas competition with its banks are not
subject to the same summary seizure and
guilt by association rules? The Justice
Department appears to believe that in most
instances 18 U.S.C. §981(k) will be used to
seize funds which drug dealers deposit in
the United States into correspondent
accounts maintained by foreign banks at U.S.
banks. This may not be an accurate
assessment. The “interbank account”
provisions of Section 319(a) are likely to be
controversial if too aggressively enforced.
Two additional points need to be made.
First, the “interbank account” seizure
provisions of Section 319(a) do not apply to
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all twenty-six classes of “financial
institutions” covered by 31 U.S.C.
§5312(a)(2) (A through Z), but only the first
seven classes which are called “covered
financial institutions,” and are listed in 31
U.S.C. §5312(a)(2) (A through G)—banks,
thrift institutions, trust companies, credit
unions, private bankers, U.S. branches of
foreign banks, and registered securities
broker/dealers. Second, an “interbank
account” is defined in 18 U.S.C. §984(c)(2)(B)
as an “account held by one financial
institution at another financial institution
primarily for the purpose of facilitating
customer transactions.”
(b) The 120–Hour Rule. Section 319(b) of the
2001 IMLA Act adds a new subsection (k)
into 31 U.S.C. §5318 dealing with bank
records in the context of anti-money
laundering programs. Subsection (k) has one
provision of particular concern to financial
institutions—the so-called “120–hour rule”
set forth in 31 U.S.C. §5318(k)(2) which
provides:
“Not later than 120 hours after receiving a
request by an appropriate Federal banking
agency for information related to anti-money
laundering compliance by a covered financial
institution or a customer of such institution,
a covered financial institution shall provide
to the appropriate Federal banking agency
. . . information and account documentation
for any account opened, maintained,
administered or managed in the United States
by the covered financial institution.”
Strikingly broad in scope, the 120–hour rule
presents serious issues for banks and other
“covered financial institutions.” The rule
applies, effective December 25, 2001, to all
accounts at a covered financial institution
and not just accounts of foreign persons or
non-citizens. Since any requests for
information will be made by the “appropriate
Federal banking agency” and not by law
enforcement officials, no court process
(i.e., summons, subpoena or court-approved
warrant) appears to be involved. One
hundred twenty hours, or 5 days, is not a
long time for a financial institution to
8
respond, consult counsel, or take other
appropriate steps to protect itself.
Compliance may be burdensome and
expensive.
(c) Production of Correspondent Account
Records. The 2001 IMLA Act provides the
U.S. government with a new, less
burdensome method to obtain production
of bank records from a foreign bank with an
account in a U.S. correspondent bank.
Section 319(b) adds 31 U.S.C. §5318(k)(3)
which authorizes the Secretary of the
Treasury or the Attorney General to serve a
summons or subpoena upon a foreign bank
maintaining a correspondent account “in the
United States” and to require records related
to such correspondent account to be made
available “including records maintained
outside of the United States relating to the
deposit of funds into the foreign bank.” The
significance of this provision is that,
effective December 25, 2001, it allows the
Justice Department or the Treasury
Department to obtain records from a foreign
bank located outside the United States (but
with a correspondent account in the United
States) without the cooperation of the
foreign bank’s government under a mutual
legal assistance treaty. The Attorney
General or Treasury Secretary can merely
issue a summons or subpoena upon the
person the foreign bank is required to
appoint by 31 U.S.C. §5318(k)(3)(B) for
accepting service of process. If the foreign
bank fails to comply with or contest any
summons or subpoena for records, the
covered financial institution which maintains
the correspondent account for the foreign
bank must, upon notice from the Secretary
of the Treasury or the Attorney General,
close the account within 10 business days
or face civil penalties of up to $10,000 per
day until the correspondent relationship is
terminated.
(d) New Correspondent Bank Record Keeping
Requirements . In addition to the
requirements imposed by Section 312 of the
2001 IMLA Act, Section 319(b) also imposes,
effective December 25, 2001, three additional
record keeping requirements on “covered
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financial institutions” that maintain
correspondent accounts in the United States
for foreign banks. They must:
(i)
maintain records in the United States
identifying the owners of such foreign
bank;
(ii) maintain records in the United States
identifying the name and address of a
person residing in the United States
authorized to accept legal process for
records regarding the correspondent
account; and
(iii) respond within 7 days after receipt of a
written request from a Federal law
enforcement officer for information
required in (i) and (ii) above.
In other words, after December 25, 2001 a covered
financial institution cannot maintain a correspondent
account in the United States for any foreign bank unless
it maintains records in the United States identifying
the owners of the foreign bank and an agent appointed
by the foreign bank to accept service of process. These
record keeping requirements apply to any foreign bank
with a correspondent account in the United States at a
covered financial institution and not just foreign banks
from countries designated as primary money laundering
concerns. Unlike the provisions of Section 312(a) which
exempt all publicly traded foreign banks operating under
offshore licenses or charters from non-cooperative or
primary money laundering concerns from its enhanced
due diligence requirements, Section 319(b) does not
exempt publicly traded foreign banks from its “know
the foreign bank owner” requirements imposed upon
covered financial institutions. This appears to be an
oversight that hopefully will be clarified in the near
future.
7. Classification of Informal Money Transmitters,
Credit Unions and Commodity Futures Merchants
and Traders as “Financial Institutions”
As noted above, 31 U.S.C. §5312(a)(2) classifies not
only banks but more than 20 other types of business
firms including mutual funds, investment bankers,
insurance companies, travel agencies, businesses
engaged in the sale of cars, planes or boats, persons
involved in real estate closings and casinos as
“financial institutions” for purposes of federal money
laundering laws. Section 321 of the 2001 IMLA Act
adds credit unions and commodity futures merchants
registered under the Federal Commodity Exchange Act
9
to the list of “financial institutions.” Section 359(a)
expands the definition of “licensed sender of money”
to now include any person who “engages as a business
in the transmission of funds,” including those
participating in informal money transfer systems which
transfer money domestically or internationally “outside
of the conventional financial institutions system.”
8. Concentration Accounts
Section 325 of the 2001 IMLA Act amends 31 U.S.C.
§5318(h) to authorize (but not require) the Secretary of
the Treasury to prescribe regulations governing the
maintenance of “concentration accounts” by financial
institutions so that these accounts are not used to
prevent “association of the identity of an individual
customer with the movement of funds of which the
customer is the . . . owner.” The term “concentration
account” is not defined in Section 325. Typically, it is
often used by money center banks to describe a cash
management system in the form of a single bank
account, not unlike a sweep account, held in the name
of a parent corporation. All deposits and withdrawals
of both the parent corporation and all subsidiaries are
maintained and distributed out of the single
“concentration” account. Because proceeds from the
parent corporation and its subsidiaries are pooled and
processed through a single account, there is often
significant confusion in determining the precise
ownership interest of each entity in the concentration
account.
As used in Section 325, the term
“concentration account” is intended to refer to a master
account with numerous sub-accounts for multiple,
unrelated customers. In many cases, the tracing of
wired funds can be made much more difficult if the
funds are wired to a concentration account maintained
in a private banking department of a bank. The
Secretary of the Treasury is required to promulgate
regulations which will prevent the identity of an owner
of a sub-account from being disguised.
9. Verification of Identification
Section 326 of the 2001 IMLA Act requires the Secretary
of the Treasury to prescribe regulations setting forth
the “minimum standards for financial institutions and
their customers regarding the identity of the customer”
in connection with the opening of an account. Those
minimum standards will include: (a) verifying the
identity of any person seeking to open an account to
the extent “reasonable and practicable,” (b) maintaining
records with the actual information (i.e., name, address,
other information) used to verify the person’s identity;
and (c) screening the name of the person opening the
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account against government lists of known terrorists.
Section 326 applies to all accounts at a financial
institution and not just accounts held by foreign
persons. The Secretary must promulgate final
regulations by October 25, 2002. He can exempt certain
financial institutions or types of accounts from the
regulations. The regulations must be jointly
promulgated with any federal functional regulator to
the extent appropriate for any subject financial
institution. Recognizing that verification of the identity
of foreign nationals presents serious problems for U.S.
financial institutions, Section 326(b) of the Act requires
the Secretary of the Treasury, in conjunction with the
other federal functional regulators, to submit a report
to Congress by April 25, 2002 with recommendations
on how to deal with verification of the identity of foreign
nationals.
The verification of account provisions in Section 326
of the 2001 IMLA Act could prove to be a very serious
issue for the financial services industry. Depending
upon the approach of the Secretary of the Treasury to
the issue, the final regulations on this issue could be
quite burdensome. The “verification” process
established by the Secretary of the Treasury in the
Section 326 regulations could impose serious risk of
liability on financial institutions for failure to
authenticate the identity of a customer.
10. Merger and Acquisition Applications—AntiMoney Laundering Record
Section 327 of the 2001 IMLA Act amends both the
Bank Holding Company Act of 1956 and the Federal
Deposit Insurance Act to provide that the anti-money
laundering record of an applicant holding company or
merger applicant in “combating money laundering
activities” will be reviewed as a consideration in any
application to merge or acquire another financial
institution. This requirement will apply to applications
filed after December 31, 2001.
11. Expansion of Suspicious Activity Reporting
Immunity
The Bank Secrecy Act at 31 U.S.C. §5318(g)(3) already
provides an immunity from liability for any financial
institution and its officers, directors, employees or
agents under any federal, state or local law or regulation
for reporting suspicious activity. The immunity
protected both the actual disclosure to law enforcement
and the failure of the financial institution or its
representatives to provide notice of the disclosure to
the subject of the report. Section 351(a) of the 2001
IMLA Act reaffirms and expands this immunity in two
10
respects. First, it expands the immunity from claims
arising under any federal, state or local law to also
cover liability under “any contract or legally enforceable
agreement (including any arbitration agreement).”
Second, the immunity now covers against disclosure
and failure to report the disclosure to both the subject
of the disclosure and “any other person identified in
the disclosure.”
As a corollary to the expansion of the reporting immunity
set forth in Section 351(a), Section 351(b) of the 2001
IMLA Act reaffirms that financial institutions and their
representatives are forbidden from notifying any person
involved in a reported transaction that the transaction
was reported to the federal government. In addition,
Section 351(b) adds a new prohibition which also
forbids any federal, state or local law enforcement
official from disclosing to any person involved in a
transaction that it was reported to the government.
12. Anti-Money Laundering Programs Required
Section 352 of the 2001 IMLA Act modifies the
previously existing requirement of the Bank Secrecy
Act which obligates financial institutions to establish
an anti-money laundering program. Prior to the 2001
IMLA Act, the Bank Secrecy Act at 31 U.S.C. §5318(h)(1)
required each financial institution to have an antimoney laundering program with internal controls, a
designated compliance officer, ongoing employee
training and independent audit testing. Section 352
keeps those requirements in place with the following
modifications. First, the Secretary of the Treasury must
issue new anti-money laundering program regulations
by April 23, 2002. Since those regulations will apply to
broker/dealers and others newly subject to such
regulation by other federal functional regulators under
the Gramm-Leach-Bliley Act, those federal functional
regulators must be consulted by the Secretary of the
Treasury. Second, as noted previously, the definition
of financial institution in the Bank Secrecy Act (31
U.S.C. §5312(a)(2)) includes many non-regulated
service providers such as real estate closing agents
and automobile dealers. The definition of “financial
institution” in the Bank Secrecy Act Regulations (31
C.F.R. §103.11(n)) is significantly narrower and basically
excludes a number of the “financial institution”
categories
set
forth
in
31
U.S.C.
§3512(a)(2). Section 352(a) of the 2001 IMLA Act
authorized the Secretary of the Treasury to exempt the
categories of “financial institution” covered in
31 U.S.C. §5312(a)(1) but omitted from the regulatory
definition of 31 C.F.R. §103.11(n) from the anti-money
laundering program regulations. In other words,
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attorneys, automobile dealers and other businesses
not subject to regulatory examination will not need to
have specific anti-money laundering programs if the
Secretary of the Treasury exempts them. Finally,
Section 352(c) of the 2001 IMLA Act requires the
Secretary of the Treasury to consider “the extent to
which the requirements imposed under this section are
commensurate with the size, location and activities of
the financial institutions to which such regulations
apply.” In other words, Congress expects that the
Secretary of the Treasury may impose less
comprehensive anti-money laundering program
requirements on smaller thrifts with no extensive
international business than on large commercial
banks with no significant overseas operations.
13. Extension of Geographic Targeting Orders
The Bank Secrecy Act, at 31 U.S.C. §5326, authorizes
the Secretary of the Treasury to issue what are
commonly called “targeting orders” upon financial
institutions in a geographic area to provide additional
record keeping and reporting of certain transactions
the Secretary determines necessary. “Targeting orders”
under 31 U.S.C. §5326(d) were effective for a maximum
of 60 days. Section 353 of the 2001 IMLA Act extends
the maximum time period for a geographic targeting
order to 180 days.
15. Suspicious Activity Reporting by Securities
Broker/Dealers Required
Section 356(a) of the 2001 IMLA Act requires registered
securities broker/dealers to file suspicious activity
reports (“SARs”) similar to those currently filed by
banks. The Secretary of the Treasury must publish
proposed regulations by January 1, 2002 and final
regulations by July 1, 2002. The Secretary must consult
with the SEC and the Federal Reserve before
promulgating the regulations. Similar provisions are
contained in Section 356(b) for futures commission
merchants, commodity trading advisors, and
commodity pool operators.
16. Investment Company Study
Section 356(c) of the 2001 IMLA Act obligates the
Secretary of the Treasury, the SEC and the Federal
Reserve Board to submit a report to Congress by
October 26, 2002 with recommendations as to whether
(a) the Bank Secrecy Act reporting requirements should
apply to registered investment companies and hedge
funds, and (b) any corporation or business or trust
whose assets are predominantly securities or other
investments and that has 5 or fewer shareholders or
beneficial owners should be treated as a financial
institution.
17. Disclosure of SARs to Intelligence Agencies
14. Written Employment References
Section 355 of the 2001 IMLA Act amends Section 18
of the Federal Deposit Insurance Act to authorize an
insured FDIC bank and its officers, directors, employees
and agents to disclose “information concerning the
possible involvement of such institution affiliated party
in potentially unlawful activity” in any written
employment reference relating to a current or former
“institution affiliated party” (i.e., employee, officer,
agent) to another insured depository. The immunity
granted in this Section is not limited to reporting of
money laundering activity. It can be any kind of
“potentially unlawful activity.” The immunity provided
in Section 355 is interesting because it appears to allow
a bank that fired a teller for the unexplained
disappearance of significant funds under the teller’s
control and filed a suspicious activity report on the
incident to report the firing (but not the filing of the
suspicious activity report). Section 355 carves out from
the employment reference immunity the disclosure of
potentially unlawful activity made with “malicious
intent.” This exception may eventually eviscerate the
reporting immunity and limit its utility.
11
Section 358 of the 2001 IMLA Act amends 31 U.S.C.
§5319 to authorize the Secretary of the Treasury to
share SAR filings with any U.S. intelligence agency for
a purpose that is “consistent with this Subchapter”
(i.e., Bank Secrecy Act). It also expands the purpose of
the Bank Secrecy Act to require banks to keep records
having a “high degree of usefulness” in “criminal, tax
or regulatory investigations or proceedings” to also
include records having a high degree of usefulness in
the conduct of intelligence or counter-intelligence
activities . . . to protect against international terrorism.
Section 358 also (a) amends the Fair Credit Reporting
Act to require consumer reporting agencies to furnish
credit reports and other information in a consumer’s
file when requested to do so in writing by a government
agency conducting an intelligence, counter-intelligence
or anti-terrorism investigation and (b) amends the Right
to Financial Privacy Act to exempt government
information requests for similar purposes.
18. Underground Money Transmitters
Section 359(c) of the 2001 IMLA Act provides that
anti-money laundering rules promulgated by the FDIC
pursuant to Section 21 of the FDI
Act
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(12 U.S.C. §1892(b)) shall also apply to money
transmitters, including any person who engages as a
business in an informal money transfer system such as
“hawala,” common in the Middle East, or the
Colombian Black Market Peso Exchange in the Western
Hemisphere.
19. FinCEN Expansion
Section 361 of the 2001 IMLA Act formalizes and greatly
expands the role of FinCEN in several respects. First,
FinCEN is elevated to the position of a statutory bureau
within the Department of the Treasury. Second, it is
authorized to collect, maintain, analyze and disseminate
data relating to various types of criminal activity. Third,
it is authorized to maintain a “financial crime
communications center” to furnish law enforcement
authorities with intelligence regarding criminal
investigations. Fourth, it can furnish “informational
services” to financial institutions to help them detect
and prosecute financial crime. Fifth, it is charged with
assisting state and federal law enforcement authorities
with helping break up informal money transfer systems
like hawala networks. In sum, FinCEN’s role is
transformed from a somewhat passive collector of
reports to a more active law enforcement support agency.
20. Electronic Filing of FinCEN Reports
Financial institutions regularly file a number of reports
on currency and other financial crimes with FinCEN.
While CTRs tend to be filed electronically, suspicious
activity reports generally are not. The usefulness of
these reports and the information contained in them
would be vastly improved if they were all filed promptly,
in electronic format and with opportunity for interactive
communication. Congress recognized this and, in
Section 362 of the 2001 IMLA Act, directed the Secretary
of the Treasury to establish a “highly secure network”
by July 25, 2002 which will (a) enable financial
institutions to file SARs, CTRs and other FinCEN forms
electronically and (b) allow FinCEN to send bulletins
and alerts to financial institutions on suspicious
activities that warrant “immediate and enhanced
scrutiny.”
and correspondent accounts) and 313 (prohibition on
dealing with “shell banks”) of the 2001 IMLA Act.
22. New Currency Reporting Requirements for
Nonfinancial Businesses
Prior to the 2001 IMLA Act, only “financial institutions”
were obligated to file currency transaction reports with
FinCEN pursuant to 31 U.S.C. §5330. However,
26 U.S.C. §60501obligated persons engaged in a trade
or business who received $10,000 or more in cash in a
single transaction to file a return for the transaction
with the Secretary of the Treasury (I.R.S.) on their tax
return. The required return was made on I.R.S. Form
8300, which could not be shared under 26 U.S.C. §6103
with law enforcement agencies but had to be furnished
to the person paying the cash. Section 365 of the 2001
IMLA Act changes that by inserting a new Section 5331
into Title 31 of the United States Code requiring any
person engaged in a nonfinancial trade or business to
report to FinCEN any transaction in which the subject
person or business receives more than $10,000 in coins
or currency in one transaction. The term “currency”
includes foreign currency as well as U.S. currency.
Transactions occurring entirely outside the United
States are not covered, nor are wholly personal (i.e.,
nonbusiness related on either side) transactions.
The Secretary of the Treasury must promulgate final
regulations implementing Section 365 by April 26, 2002.
By making the nonfinancial businesses report cash
transactions of over $10,000 to FinCEN pursuant to
Title 31, Section 365 significantly expands the utility of
such cash reporting requirements because FinCEN can
share filings by all nonfinancial businesses with other
law enforcement agencies. Any business which
receives more than $10,000 in cash to pay for services
or merchandise will be obligated to report the receipt of
the cash to FinCEN. Pursuant to 26 U.S.C. §60501(c),
the Secretary of the Treasury is empowered to dispense
with the filing of the required return to the I.R.S. on
Form 8300 where the business receiving more than
$10,000 in cash makes a filing to FinCEN pursuant to 31
U.S.C. §5331.
23. Bulk Cash Smuggling
21. Increased Penalties
Section 363 of the 2001 IMLA Act provides new,
significant civil and criminal penalties of up to
$1,000,000 for each violation by a financial institution
of Sections 311 (“special measures” imposed upon
“primary money laundering concerns”), 312 (special
due diligence obligations on certain private banking
12
It is well documented that criminals, particularly drug
dealers, generally attempt to launder the cash derived
from their criminal activities by smuggling it out of the
United States, depositing the cash overseas to an
account at a foreign bank and having the foreign bank
send the proceeds of the account back to the United
States into a correspondent account at a domestic bank.
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Until the 2001 IMLA Act was passed, the bulk
smuggling of cash was not a criminal offense. In 1998,
the Supreme Court held that the forfeiture of smuggled
(and unreported) currency was inappropriate as a
remedy because it was “grossly disproportional to the
gravity of the offense” (i.e., failure to report) in the
absence of any showing that the unreported currency
was involved in other criminal activity. United States
v. Bajakajian, 524 U.S. 321 (1998). To avoid similar
occurrences, Congress, in Section 371 of the Act, made
it a crime for any person, with the intent to evade
currency reporting requirements, to conceal more than
$10,000 in currency and to transport or attempt to
transport that currency into or out of the United States.
Forfeiture is the mandatory penalty for smuggled
currency which is confiscated or any other property
traceable to it.
13
24. Illegal Money Transmitting Businesses
18 U.S.C. §1960, as enacted in 1992, made it a federal
crime to conduct a money transmitting business without
a state license. The statute was little used since the
government had to show a defendant knew his business
was unlicensed and intended to operate it without the
necessary licenses. Section 373 of the 2001 IMLA Act
dispenses with the element of specific intent and allows
the government to prosecute based upon a showing of
a generalized intent to operate a money transmitting
business “whether or not the defendant knew that the
operation was required to be licensed.” Section 373
expands the scope of 18 U.S.C. §1960 to include the
operation of any money transmitting business (i.e.,
licensed or unlicensed) that involves the transport of
funds the defendant knows (i) were derived from a
criminal offense or (ii) are intended to be used to
promote or support unlawful activity.
Kirkpatrick & Lockhart LLP
Kirkpatrick & Lockhart LLP has diverse experience in issues involving or related to money laundering to
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.
If you have any questions about how the 2001 IMLA Act applies to community banks, please contact
one of the members of our interdisciplinary anti-money laundering practice team. While the group has
over 50 attorneys firmwide, the selected members below focus their practice on financial institution
compliance issues.
PITTSBURGH
BOSTON
Michael S. Caccese
D. Lloyd Macdonald
Stanley V. Ragalevsky
617.261.3133
617.261.3117
617.261.9203
412.355.6419
412.355.8333
SAN FRANCISCO
HARRISBURG
Raymond P. Pepe
Heather Hackett
Mark A. Rush
717.231.5988
LOS ANGELES
Jonathan David Jaffe
David Mishel
415.249.1023
415.249.1015
WASHINGTON
William J. Bernfeld
William P. Wade
310.552.5014
310.552.5071
NEW YORK
Richard D. Marshall
Diane E. Ambler
Rebecca H. Laird
Ira L. Tannenbaum
Robert A. Wittie
202.778.9886
202.778.9038
202.778.9350
202.778.9066
212.536.3941
Kirkpatrick & Lockhart LLP
Challenge us.
BOSTON n DALLAS n HARRISBURG n LOS ANGELES n MIAMI n NEWARK n NEW YORK n PITTSBURGH n SAN FRANCISCO n WASHINGTON
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should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.
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© 2001 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.