By: David Williams Russell, Partner

A. Introduction.

In the aftermath of the September 11, 2001, attacks on the World Trade Center in New York, the United States intelligence community put together a laundry list of provisions designed to patch perceived holes in the pastiche of security laws in their arsenal and to grant to the FBI and Justice Department the same sorts of freewheeling intelligence gathering powers at home that the CIA has employed abroad for years. This laundry list, by and large unmodified by Congress, is essentially what passed and was signed into law by President Bush on October 26, 2001, as the USA Patriot Act of 2001 (“Patriot Act”).

While a good deal of attention has been paid to the anti-terrorism aspects of this massive law, such as electronic surveillance and law enforcement access to records, bankers are just beginning to realize that Title III of the Patriot Act, by far the largest portion of the law, places heavy new responsibilities upon financial institutions of all types [even including casinos] to develop and take affirmative measures to track and prevent activities very broadly grouped under the heading “money laundering” by persons within and outside the United States.

This article will briefly outline the Patriot Act, briefly highlight and discuss some of the salient features of some of the major provisions of Title III, and conclude by summarizing some of the pending and final regulations which are being promulgated to implement Title III. The goal is to give you a brief overview of the emerging enhanced intelligence responsibilities of the banking community.

B. A Summary of Certain Provisions of the Patriot Act.

With the foregoing overview as background, let us examine generally some of the major provisions of the Patriot Act.

The Patriot Act is divided into ten subtitles as summarized briefly below:

Title I - Entitled “Enhancing Domestic Security Against Terrorism,” generally provides background authority for the Patriot Act’s initiatives, most significantly including an extra $200,000,000 per year for “technical support and tactical operations,” presumably to assist the FBI in handling all the extra counterterrorism activities, including information handling, requisite under the Patriot Act.

Title II- Entitled “Enhanced Surveillance Procedures” predominantly deals with surveillance of electronic communications, including Internet and computer traffic.
Title III - Entitled “Internet Money Laundering Abatement and Anti-terrorist Financing Act of 2001” predominantly deals with money laundering, principally electronically, but also with currency crimes such as counterfeiting.

Title IV - Entitled “Protecting the Border” relates to immigration and border protection.

Title V - Entitled “Removing Obstacles to Investigating Terrorism” authorizes payment of rewards to combat terrorism, contains measures to coordinate the activities of various federal agencies, and requires disclosure to law enforcement by educational institutions of certain student and survey information.

Title VI - Entitled “Providing for Victims of Terrorism, Public Safety Officers, and Their Families,” authorizes additional financial aid for victims of terrorism.

Title VII - Entitled “Increased Information Sharing for Critical Infrastructure Protection” essentially provides additional funds for the Bureau of Justice to fight domestic terrorism nationwide.

Title VIII- Entitled “Strengthening the Criminal Laws Against Terrorism” creates new domestic terror crimes and redefines old ones in fields, including cyber-terrorism and attacks on communities and transportation facilities.

Title IX - Entitled “Improved Intelligence” grants new security and intelligence gathering powers and rights to the CIA.

Title X - Entitled “Miscellaneous” defines “electronic surveillance” broadly and contains a number of catchall provisions.

C. Some Highlights of Title III of the Patriot Act.

Given that brief summary of the various Titles of the Patriot Act, let us now survey those of its provisions which could have the most significant impacts upon the banking industry.

Perhaps surprisingly, given that the press reports have focused upon the electronic surveillance, “sneak and peak” warrants and other anti-privacy provisions of the Patriot Act, in fact, the money laundering provisions of Title III comprise its bulk . These provisions potentially impact import/export businesses, international business transactions, and financial dealings with foreign banks and foreign officials. The breadth and depth of the provisions is staggering. Bankers might take particular note of the following:

(a) Worldwide Jurisdiction. Sections 317 and 318 of the Patriot Act essentially provide that in money laundering cases, all foreign banks having accounts in the United States are deemed subject to United States jurisdiction, including the power to obtain records and information regarding their customers. Long-arm jurisdiction over money laundering activities is deemed worldwide.

(b) Property Forfeiture. Suspected terrorists may forfeit assets, (Patriot Act Sections 316, 319, 320, 322, 371, 372) even when the assets are in the United States and the judgment against the terrorist is rendered by a foreign court. (Patriot Act Section 323.)

(c) Banking Compliance. The Patriot Act requires banks to establish their own money laundering compliance programs (Privacy Act Section 311) and scrutinize their private banking and customer accounts (Privacy Act Section 312). Offshore banking is to be strictly monitored. (Privacy Act Sections 311, 312, 313).

(d) Financial Industry Compliance.

Broker/dealers will have to report suspicious activities (Patriot Act Section 356).

The definition and scope of currency related crimes is expanded (Patriot Act Sections 371 to 377) and includes a potential 20 year prison penalty for copying and transmitting images of Untied States currency via the Internet.

Unlicensed money transmitting businesses commit federal offenses. (Patriot Act Section 373.)

The Foreign Corrupt Practices Act is amended to include the use of funds to bribe foreign officials within the definition of “money laundering.” (Patriot Act Section 315.)

* * *
A quick review of the above by-no-means comprehensive summary of some aspects of Title III of the Patriot Act reveals two main aspects of the proposed regulatory scheme.

The first aspect is that banks and financial institutions are charged with the duties of establishing internal procedures and programs which will change somewhat the way banks relate to and monitor their customers, accounts and transactions. These changes are likely to have a much more profound impact upon non-bank financial institutions.

The second thrust is to cause such banks and financial institutions to become information gatherers sharing their information with the government to aid in its antiterrorism efforts.

D. A Brief Overview of the Emerging Banking
Regulations Impacting Title III of the Patriot Act.

Emerging regulations under Title III have had five major foci. First, anti-money laundering programs are to be adopted and enforced.

Second, the customer identification rules (“know your customer” rules) and programs are to be put into effect.

Third, special due diligence procedures for foreign accounts are to be established.

Fourth, certain currency and other transactions are to be reported to government.

Fifth, “suspicious activities” are to be reported to government.

Happily, for banks, only two of these five foci are really new. Since 1987, all federally insured depository institutions and credit unions have been required to maintain anti-money laundering programs of a type generally consistent with the Patriot Act. In addition, banks have long had the duty to report currency transactions aggregating over $10,000 pursuant to the existing money laundering law (18 United States Code Sections 1956 and 1957). Since 1996, the Bank Secrecy Act has required “suspicious activity” reporting by banks. In these areas, the Patriot Act Title III regulations have primarily sought to bring other institutions dealing in cash or financial instruments, such as the securities industries, casinos and insurers closer to the level of bank regulatory and compliance, while focusing banks more specifically upon their relationships with overseas accounts and correspondents.

1. Anti-Money Laundering.

Turning to the emerging regulations of most current interest to bankers, there now are new federal anti-money laundering requirements for correspondent accounts for foreign banks and new rules for record keeping and terminating accounts for such banks.

(a) Foreign Shell Bank Prohibition.

New regulations, effective September 26, 2002, prohibit United States banks from maintaining, directly or indirectly, correspondent accounts for any foreign banks “without a physical presence in any county.” Related regulations impose requirements for record keeping, certifications, designation of United States agents for service of process and jurisdiction in the United States over any foreign correspondent banks not already subject to United States jurisdiction. (103 Code of Federal Regulations Sections 103.175 through 103.185).

(b) Credit Card Operator Regulations.

These new regulations, not yet final (to be codified at 103 Code of Federal Regulations Section 103.135), seek to prevent operators of United States credit card systems from authorizing foreign banks to issue credit cards or accept credit cards usable in the United States without taking steps to prevent usage by terrorists.

2. “Know Your Customer” Rules. The proposed “know your customer” rules (to be codified for banks at 103 Code of Federal Regulations Section 103.121) would require all banks to adopt a written customer identification program. The program must contain the requirements that new customers identify themselves by name, address and some sort of national identity number (e.g. social security number, taxpayer identification number), should provide for documenting and non-documenting procedures for identifying such information, should contain record keeping provisions, should require matching customer lists against government “bad boy” lists, and should provide for notices to customers of the bank’s verification efforts.

3. Information Sharing. The final rule on information sharing, at 103 Code of Federal Regulations Sections 103.90 to 103.110, provides that the federal law enforcement agencies may, through the Treasury Department, demand information from financial institutions, including banks, about identified individuals or entities certified to be suspected of terrorism or money laundering. Banks will need to designate their contact person for such treasury requests, and to conduct record searches in response to these treasury requests. In addition, banks may voluntarily enter into agreements with other financial institutions for one year periods to share information about suspected terrorists and money launderers.

E. Conclusion.

The USA Patriot Act and its implementing rules will put certain additional regulatory and administrative burdens upon the banking industry. However, seasoned banking professionals will recognize that most of these burdens represent only a moderately increased regulatory load - an increase in the degree, rather in the kind - of anti-terrorism, anti-money laundering actions which increasingly have been expected from the banking industry over the past two decades.

What is revolutionary about these provisions is that they are being applied not just to banks, but across a broad spectrum of the financial services industry, ranging from insurance agencies, to broker dealers, and from unregulated investment companies to mutual funds and even casinos. Although the Patriot Act will increase the regulatory burden borne by banks, bankers can take some comfort in the knowledge that banks are much closer to compliance than their counterparts elsewhere in the financial services industry and that the regulatory burdens imposed by efforts against terrorism and money laundering will be shared more equitably by all participants in the financial services industry than they have been in the past.