Anti-Terrorism "Patriot Act" of 2001
Strong New Money Laudering Provisions for U.S. and Foreign Financial Institutions
Title III of the antiterrorism law enacted on October 24, 2001, the law dubbed the “Patriot Act”, contains numerous provisions that strengthen the hand of the federal government in preventing the flow of terrorists’ funds through financial institutions, and for the first time, these l aws contain very strong provisions that affect foreign financial institutions . These tough provisions allow the government an array of sanctions ranging from tougher record keeping and disclosures to total shut-down of foreign financial institutions ability to do business in the U.S. The law will be further implemented by regulations to be adopted by the Treasury Department and the bank regulatory agencies.
The basic structure of these new provisions is as follows:
- The Secretary of the Treasury may make findings,
pursuant to criteria summarized below, that a foreign government,
financial institution or types of account is of "primary
money laundering concern." These findings may be made if
the Secretary determines that "reasonable grounds exist."
Once such a finding is made, then certain "special measures”
are triggered and give the government a broad menu of additional
sanctions and remedies.
- The "special measures" may, with some exceptions,
be imposed in any number and sequence, and may be imposed
by regulation or order. If an order is issued without a
rulemaking it may be in effect 120 days unless adopted by
a rulemaking.
- The Secretary must go through a process of
considering various factors before determining that special
measures are warranted.
- The "special measures" that may be imposed
include the following:
(1) additional detailed record keeping requirements on the financial institution, such as reporting each separate account transaction, reporting the identity and address of the participants in a financial transaction, including disclosing the originator of any funds. (These kinds of details are in contrast to bank privacy laws that protect the detailed account information of a depositor).
(2) information relating to beneficial ownership of accounts in the names of others, in order to pierce through to actual accountholders.
(3) requirements that domestic financial institutions that have correspondent relations with foreign financial institutions for purpose of funds transfers to identify each customer of the foreign institution that uses such "payable through" accounts, and to provide detailed depositor information.
(4) prohibitions on opening or maintaining certain correspondent accounts, or conditions on the activities in such accounts. - The Secretary of the Treasury may prohibit
a foreign financial institution from doing business with
a domestic financial institution, or impose conditions on
such business. This is done indirectly by invoking the U.S.
banking agencies supervisory power over U.S. financial institutions
to impose conditions under which U.S. financial institutions
may maintain correspondent accounts with foreign institutions.
- In making a determination that a government or institution is one of "primary money laundering concern" the Secretary shall consider all relevant information including specifically the following statutory factors:
(1) the extent to which the foreign country allows organized terrorist groups to operate in its borders;
(2) the extent to which the foreign country allows secret bank accounts;
(3) the extent to which the foreign country maintains and enforces money-laundering laws;
(4) the extent to which a small country has huge volumes of financial transactions; and
(5) whether the U.S. has a mutual legal assistance treaty with that country and the extent to which the two countries cooperate in law enforcement.
The new law then imposes heightened due diligence duties on U.S. financial institutions with respect to foreign accounts and correspondent relationships. U.S. institutions are expected to ascertain for each foreign bank with which they do business such information as ownership of private banks, and enhanced scrutiny of foreign accounts for suspicious transactions.
With respect to foreign persons who have accounts at U.S. banks, there is also a heightened due diligence effort required, including ascertaining the identiy of beneficial owners, the source of deposited funds, and enhanced suspicious activity duties with respect to depositors such as foreign political figures.
The new law then provides a flat prohibition against correspondent accounts in the U.S. with foreign "shell banks," which are banks that have no physical presence in any country.
To enforce these new laws, a new "long arm" jurisdiction provision gives U.S. federal courts jurisdiction over any foreign person or entity that maintains an account in the U.S. or that violates U.S. money laundering laws.
Among may other new provisions is a provision to enhance international cooperation by requiring the U.S. to enter into negotiations with foreign countries and their banking agencies to ensure mutual exchange of information and to require foreign countries to maintain adequate records of banking transactions.