UPDATE. Anti-Money Laundering

Transcription

1 Ati-Moey Lauderig JANUARY 2002 UPDATE The Iteratioal Moey Lauderig Abatemet ad Ati-Terrorist Fiacig Act of 2001: What it Meas for Broker-Dealers, Ivestmet Compaies, Baks ad Other Fiacial Istitutios Federal regulators are quickly respodig to the short deadlies imposed i the Iteratioal Moey Lauderig Abatemet ad Ati-Terrorist Fiacig Act of 2001 (the Act ), eacted as part of the USA PATRIOT Act, o October 26, O December 20, 2001, the Departmet of the Treasury ( Treasury ) issued proposed regulatios iteded to clarify applicatio of the ew recordkeepig requiremets ad shell bak prohibitios i the Act to brokerdealers, baks ad other fiacial istitutios, ad to require broker-dealers to report suspicious trasactios. A iterim rule also issued by Treasury o December 20, 2001 requires trades ad busiesses to report cash trasactios of more tha $10,000. Adopted i respose to terrorist attacks i order to strike at the source of terrorist fudig, the Act sets broad parameters ad ambitious goals for fiacial istitutios to idetify ad prevet, i the first istace, possible moey lauderig activity. Similar to the privacy provisios of Gramm-Leach-Bliley, the Act will affect the operatios of virtually every fiacial istitutio ad also require coordiatio amog various federal agecies for implemetatio. Although baks ad bakig regulators have bee attued to moey lauderig problems for may years, o-bak fiacial istitutios ad their regulators have had a far more limited ivolvemet. Cotets Summary... 2 Coverage of the Act... 2 Deadlies... 3 Agecy Review ad Reports; Possible Future Legislatio... 4 Federal Regulators... 5 Obligatios of Covered Fiacial Istitutios... 5 Foreig Shell Baks... 5 Obligatios of Fiacial Istitutios... 6 Ati-Moey Lauderig Programs... 6 Due Diligece Programs... 8 Private Bakig Accouts... 8 Correspodet Accouts... 8 Kow Your Customer Procedures... 9 Broker-Dealer SAR Reportig Primary Moey Lauderig Cocers Pealties for No-Compliace; Expaded Immuity for SAR Reportig Balacig Natioal Security v. Privacy Iformatio Sharig Govermet Surveillace Privacy Cocers This Update was produced by K&L s multi-office, iterdiscipliary ati-moey lauderig practice, which provides eterprise-wide solutios for fiacial istitutios to help them uderstad ad comply with ewly eacted moey-lauderig legislatio. We ivite you to visit our website at or to cotact a member of our practice (see last page of this Update) if you have ay questios, would like more iformatio about our services, or if we ca provide you with copies of the legislatio. This Update was prepared by Diae E. Ambler (dambler@kl.com), James E. Day (jday@kl.com), ad Kathy Kresch Igber (kigber@kl.com).

2 The Act laid dow a umber of substative requiremets. Firms that fail to follow these requiremets could face substatial exposure; the Act imposes severe civil ad crimial pealties for violatios. Part IX idetifies coflictig atioal security ad privacy cocers. suggests guidelies for compliace. Part VII idetifies the substative obligatios of fiacial istitutios ad suggests guidelies for compliace. Part VIII highlights pealties for o-compliace with the provisios of the Act. Part IX idetifies coflictig atioal security ad privacy cocers. I. SUMMARY The purpose of this K&L Update is to discuss the pricipal provisios of the Act i detail ad, more importatly, to highlight the practical impact of the ew provisios o the compliace fuctios ad operatios of the fiacial istitutios affected by the Act. I additio, it idetifies geeral guidelies for compliace. For the time beig, fiacial istitutios particularly o-bak fiacial istitutios may be able to do little more tha assess their busiess relatioships, establish iteral chais of authority ad resposibility, ad begi the process of idetifyig ad educatig affected persoel. Sice more tha oe member of a etity s corporate family may be covered by the Act, fiacial services firms will eed to review the policies ad procedures of their various subsidiaries to develop uiformity ad cosistecy. Throughout this K&L Update, a umber of themes that resoud i the early wake of the Act s eactmet will be highlighted How are fiacial istitutios particularly obak fiacial istitutios affected? What importat deadlies are loomig ad what should fiacial istitutios be doig right ow? What federal regulators are resposible for implemetatio of the Act ad how will jurisdictioal issues work? Part II of this Update idetifies the various fiacial istitutios covered by the Act ad briefly describes the Act s impact o each. Part III sets forth the deadlies established by the Act by which regulators ad fiacial istitutios must take certai actios. Part IV otes the requiremets for agecy review ad reports, as experiece with the provisios of the Act develops. Part V describes the jurisdictio of federal regulators. Part VI idetifies the substative obligatios of covered fiacial istitutios ad II. COVERAGE OF THE ACT Cogress iteded the Act to sweep broadly. Cogress therefore deliberately chose to have the ati-moey lauderig provisios of the Act apply ot just to baks, but also to fiacial istitutios, as defied i the Bak Secrecy Act ad further supplemeted by the Act. Fiacial istitutios, as defied i the Bak Secrecy Act, iclude, amog other thigs, baks, trust compaies, thrift istitutios, private bakers, US agecies or braches of foreig baks, ivestmet bakers, broker-dealers i securities or commodities, ivestmet compaies, ad isurace compaies. 1 The Act elarges the defiitio of fiacial istitutios to iclude futures commissio merchats, commodity tradig advisors, ad commodity pool operators. Certai of these fiacial istitutios, specifically, baks, thrifts, trust compaies, credit uios, US braches or agecies of foreig baks, ad registered broker-dealers, are further desigated as covered fiacial istitutios subject to particular requiremets i the Act related to correspodet accouts with foreig baks. Baks. Baks have bee dealig with extesive atimoey lauderig laws ad regulatios sice the passage of the Bak Secrecy Act i Eve so, the Act icreases their recordkeepig, moitorig ad reportig obligatios. Accordigly, eve baks with up-to-date ati-moey lauderig procedures will have to substatially revise those procedures i light of the ew Act. Broker-Dealers. The additioal burde of the ew Act o broker-dealers ad other o-bak fiacial istitutios is likely to be greater tha o baks. For example, the Act provides that madatory reportig of suspicious activities shall be exteded to brokerdealers. 2 Uder curret regulatios, oly baks, subsidiaries of bak holdig compaies (such as bak broker-dealers), casios, ad moey services busiesses have bee required to file SARs. The Act 2 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

3 substatially expads this uiverse, ad the Secretary of the Treasury ( Secretary ) has just issued proposed regulatios extedig madatory SAR reportig to all broker-dealers registered with the Securities ad Exchage Commissio ( SEC ) (icludig isurace compaies or their affiliates that are registered broker-dealers solely for the purpose of sellig variable auity cotracts). Thus, to the extet that broker-dealers have ot yet developed ati-moey lauderig policies ad procedures to idetify ad report suspicious activities, they will be expected to do so. I additio, proposed regulatios just issued by Treasury specifically apply the Act s shell bak restrictios to broker-dealers maitaiig correspodet accouts with foreig baks. Treasury has listed examples of such accouts to iclude prime brokerage accouts, foreig currecy accouts, futures accouts, tradig accouts ad custody accouts. Commodities Futures Tradig Commissio ( CFTC ) Regulated Etities. The Act permits the Secretary, i cosultatio with the CFTC, to require etities it regulates, such as futures commissio merchats, commodity tradig advisors, ad commodity pool operators, to file SARs. Isurace Compaies. Isurace compaies are fiacial istitutios, but ot covered fiacial istitutios, uder the Act. There are o provisios i the Act specifically targetig isurace compaies or their activities, although the Act does referece a [s]tate fiacial istitutios supervisory agecy, which would appear to iclude state isurace regulators, as a appropriate recipiet of reports prepared by the Secretary pursuat to the requiremets of the Act. I additio, the Secretary idicated it would remove a iterpretive exemptio from SAR reportig for isurace compaies or their affiliates that are registered broker-dealers solely for the purpose of sellig variable auity cotracts. Ivestmet Advisers. Notably abset from the defiitios of fiacial istitutio or covered fiacial istitutio uder the Act are ivestmet advisers. Therefore, with oe exceptio, the ew madates i the Act do ot appear to apply directly to ivestmet advisers. The Act does require the Secretary to issue regulatios, by April 2002, requirig etities ot icluded i the term fiacial istitutio, which could iclude ivestmet advisers, to file CTRs with Treasury. Iterim regulatios issued by Treasury o December 20, 2001 apply oly to persos egaged i a trade or busiess. Ivestmet Compaies. Ivestmet compaies are fiacial istitutios, but ot covered fiacial istitutios, uder the Act. Although certai of the Act s provisios thereby apply to ivestmet compaies, it is ot clear ecessarily how. I that vei, the Act madates the Secretary, the SEC ad the Federal Reserve Board (the Fed ) to joitly submit a report to Cogress o recommedatios, by October 26, 2002, for effective regulatios to apply the various provisios of the Bak Secrecy Act to ivestmet compaies, icludig private ivestmet compaies fallig withi Sectio 3(c)(1) or Sectio 3(c)(7) of the Ivestmet Compay Act of III. DEADLINES The Act establishes a aggressive compliace schedule for fiacial istitutios ad federal regulators. By December 25, 2001 Covered fiacial istitutios will be prohibited from opeig or maitaiig correspodet accouts with foreig shell baks. Covered fiacial istitutios that maitai correspodet accouts with foreig baks will be required to have records idetifyig the owers of the foreig bak ad providig the ame ad address of persos authorized to accept service of legal process i the US. By December 31, 2001 Federal bakig regulators, whe rulig o a applicatio uder the Bak Holdig Compay Act or the Federal Deposit Isurace Act, must cosider the effectiveess of the fiacial istitutios ati-moey lauderig activities. By Jauary 1, 2002 (issued December 20, 2001) The Secretary, after cosultatio with the SEC ad other federal regulators, is to publish proposed regulatios (to be fialized by July 1, 2002) extedig madatory SAR reportig to broker-dealers registered with the SEC. JANUARY 2002 Kirkpatrick & Lockhart LLP 3

4 By February 23, 2002 The Secretary is to issue regulatios to ecourage further cooperatio amog fiacial istitutios, their regulatory authorities ad law eforcemet authorities for the sharig of fiacial iformatio regardig persos suspected of participatig i moey lauderig activities or terrorist acts. By April 24, 2002 The Secretary, i cosultatio with the appropriate federal fuctioal regulators, is to issue regulatios delieatig the due diligece policies, procedures, ad cotrols required for correspodet accouts ad private bakig accouts for o-us persos. Compliace with these regulatios is required by July 23, Fiacial istitutios will be required to adopt ati-moey lauderig programs that iclude policies, procedures, ad cotrols to detect ad prevet moey lauderig, desigate a compliace officer to oversee the program, provide for employee traiig, ad provide for regular audits of their ati-moey lauderig program, subject to regulatios to be issued by the Secretary related to the size, locatio ad activities of the fiacial istitutios covered. The Secretary is to issue regulatios implemetig ew CTR reportig requiremets. Amog other thigs, these regulatios could require persos ot icluded i the term fiacial istitutio, such as ivestmet advisers, to file CTRs with Treasury. Iterim regulatios issued by Treasury o December 20, 2001 require CTR reportig by persos who, i the course of egagig i a trade or busiess, receive currecy i excess of $10,000 i oe or more related trasactios. By July 1, 2002 The Secretary, after cosultatio with the SEC ad other federal regulators, is to issue fial regulatios (to be proposed by Jauary 1, 2002) extedig madatory SAR reportig to broker-dealers registered with the SEC. By July 23, 2002 Fiacial istitutios will be required to adopt detailed due diligece procedures for correspodet accouts ad private bakig accouts for o-us persos. Implemetig Treasury regulatios are to be fialized by April 24, By July 26, 2002 The Secretary is to establish a secure etwork that allows fiacial istitutios to make SAR filigs o-lie ad that makes timely iformatio available to fiacial istitutios. By October 26, 2002 The Secretary is to submit a report to Cogress joitly with the SEC ad the Fed o recommedatios for effective regulatios to apply the requiremets of the Act to ivestmet compaies, icludig private ivestmet compaies. Fiacial istitutios will be required to adopt kow your customer procedures for opeig customer accouts. I additio, the Secretary is authorized to issue regulatios goverig maiteace of cocetratio accouts by fiacial istitutios. The Secretary also ow has the power to require fiacial istitutios to moitor ad keep records regardig trasactios ivolvig particular foreig jurisdictios, fiacial istitutios, trasactios ad/ or accouts that the Secretary idetifies as primary moey lauderig cocers. There are o deadlies by which the Secretary must issue these regulatios. IV. AGENCY REVIEW AND REPORTS; POSSIBLE FUTURE LEGISLATION Not later tha April 2002, the Secretary, i cosultatio with the federal fuctioal regulators, must submit a report to Cogress with recommedatios for idetifyig foreig atioals. I additio, the Secretary must also by that date submit a report to Cogress relatig to the role of the Iteral Reveue Service i admiisterig the Bak Secrecy Act, icludig possible recommedatios to trasfer fuctios to other govermet agecies. 4 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

5 Not later tha April 2002, ad aually thereafter, the Secretary must submit a report to Cogress o methods for improvig compliace with foreig fiacial agecy trasactio reportig requiremets. Not later tha October 26, 2002, the Secretary must submit a report to Cogress o the eed for ay additioal legislatio related to domestic or iteratioal trasfers of moey outside of the covetioal fiacial istitutios system. By the same date, the Secretary must also submit aother report to Cogress regardig the effectiveess of the CTR filig requiremets, i light of the volume of CTR filigs ad the failure of some fiacial istitutios to utilize the exemptios available. Not later tha April 2004, the Secretary, i cosultatio with various federal agecies, icludig the SEC ad federal bakig agecies, must evaluate the operatios of the Act ad make recommedatios to Cogress about possible further legislative actio. I ay evet, the Act is scheduled to suset after September 30, 2004 upo joit resolutio of Cogress. Reports prepared pursuat to the requiremets of the Act are to be made available to state ad federal agecies ad orgaizatios i certai circumstaces upo request, but they are exempt from geeral disclosure uder the Freedom of Iformatio Act. V. FEDERAL REGULATORS The Act appoits a sigle federal agecy, Treasury, to adopt regulatios ad oversee compliace with the Act s requiremets. I several istaces, the Act istructs Treasury to cosult ad coordiate with other federal fuctioal regulators 3 or specific federal agecies. I other istaces, the Act istructs Treasury to adopt joit regulatios with specified other agecies. This arragemet itetioally focuses regulatio ad eforcemet i oe US agecy i order to streamlie ati-moey lauderig efforts tailored to problems preseted by foreig jurisdictios, fiacial istitutios ad accouts. I order to successfully address the busiess issues uique to the various fiacial istitutios ivolved, the Act is structured to require Treasury to work with other appropriate regulators. VI. OBLIGATIONS OF COVERED FINANCIAL INSTITUTIONS Foreig Shell Baks; Recordkeepig Substace of the Requiremet Effective December 25, 2001, covered fiacial istitutios may ot establish, maitai, admiister, or maage a correspodet accout 4 i the US for or o behalf of a foreig bak that does ot have a physical presece 5 i ay coutry kow as a shell bak uless the shell bak is a affiliate of a depository istitutio, credit uio or foreig bak that maitais a physical presece i the Uited States, or a foreig coutry ad is supervised by a bakig authority. 6 The Act requires covered fiacial istitutios that maitai ay foreig bak correspodet accouts i the US to maitai records idetifyig: (i) the owers of the foreig bak; ad (ii) the ame ad address of a perso residig i the US authorized to accept service of process with regard to the correspodet accout. These records must be tured over to a Federal law eforcemet officer withi 7 days of receipt of a request for them. Uder the Act, a covered fiacial istitutio must comply with a request of a appropriate Federal bakig agecy 7 for iformatio ad accout documetatio for ay accout opeed, maitaied, admiistered or maaged i the Uited States ot later tha 120 hours after receipt of the request. The rule applies to all accouts at a covered fiacial istitutio ad ot just accouts of foreig persos or o-citizes. Sice ay requests for iformatio will be made by the appropriate Federal bakig agecy ad ot by law eforcemet officials, o court process (i.e., summos, subpoea or courtapproved warrat) appears to be ivolved. The Act subjects foreig baks that maitai correspodet accouts i the US to subpoea ad summos with respect to records, icludig records maitaied outside the US, relatig to those accouts. A covered fiacial istitutio must termiate ay correspodet relatioship with a foreig bak ot later tha 10 busiess days after receipt of writte otice from the Secretary or the JANUARY 2002 Kirkpatrick & Lockhart LLP 5

6 Attorey Geeral that the foreig bak has failed to comply with a summos or subpoea issued i relatio to the correspodet accout (uless the foreig bak has iitiated court proceedigs to cotest the summos or subpoea). Proposed Regulatios O December 20, 2001, the Secretary issued proposed regulatios iteded to codify iterim guidace, with some modificatios, published by Treasury o November 27, 2001 with regard to the shell bak prohibitios ad recordkeepig requiremets for correspodet accouts maitaied by foreig baks. The proposed regulatios apply the defiitio of correspodet accout i the Act to all covered fiacial istitutios icludig brokerdealers. I this regard, Treasury stated that brokerdealers must comply with these provisios of the Act with respect to ay accout they provide i the US to a foreig bak that permits the foreig bak to egage i securities trasactios, fuds trasfers, or other fiacial trasactios through that accout. 8 Foreig bak is defied i the proposed regulatios as ay orgaizatio that: (i) is orgaized uder the laws of a foreig coutry; (ii) egages i the busiess of bakig; (iii) is recogized as a bak by the bak supervisory or moetary authority of the coutry of its orgaizatio or pricipal bakig operatios; ad (iv) receives deposits i the regular course of its busiess. Amog other thigs, it icludes a brach of a foreig bak i a US territory but ot a US brach or agecy of a foreig bak. The term ower is also defied i the regulatios ad icludes certai direct ad idirect owers likely to be able to ifluece the foreig bak s operatios. 9 Also adopted by the proposed regulatios are model certificatios for accout holders to state whether they are, or whether they provide bakig services to, a shell bak covered by the prohibitio. Use of the model certificatios provides covered fiacial istitutios a safe harbor for the obligatios uder these provisios. Treasury also idicated that a covered fiacial istitutio may use relevat iformatio provided by a foreig bak that files a Aual Report o Form FR Y 7 with the Fed. The rules propose a requiremet that covered fiacial istitutios verify the iformatio provided by a foreig bak every two years or at ay time a covered fiacial istitutio has reaso to believe that the previously provided iformatio is o loger accurate. A model recertificatio will provide a covered fiacial istitutio a safe harbor i coectio with the verificatio of previously provided iformatio. Iformatio requested by a covered fiacial istitutio uder the proposed rules ad received withi 90 days after publicatio of the fial rules will be deemed to satisfy the rule requiremets util such time as the iformatio must be verified. Guidelies for Compliace Covered fiacial istitutios are required to take reasoable steps to esure that ay correspodet accout established, maitaied, admiistered or maaged by or for a foreig bak is ot, ad is ot beig used idirectly by, a shell bak. At the least, a covered fiacial istitutio should cosider the relatioships it has with foreig baks, review its correspodet accouts with foreig baks, ad have its foreig bak accout holders complete the model certificatios suggested by Treasury. VII. OBLIGATIONS OF FINANCIAL INSTITUTIONS Ati-Moey Lauderig Programs Substace of the Requiremet The Act requires each fiacial istitutio icludig broker-dealers, ivestmet compaies ad isurace compaies to develop ad istitute a ati-moey lauderig program that must, at a miimum: iclude iteral policies, procedures, ad cotrols; desigate a compliace officer to admiister ad oversee the program; provide for ogoig employee traiig; ad iclude a idepedet audit fuctio to test the program. The Secretary is obligated to issue regulatios by 6 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

7 April 24, 2002, the effective date of this provisio, that take ito accout the size, locatio, ad activities of the fiacial istitutios affected. These regulatios may also establish miimum stadards for fiacial istitutios ati-moey lauderig programs. I adoptig these regulatios, the Secretary must cosult with the appropriate federal fuctioal regulator, icludig the SEC ad the CFTC. Guidelies for Compliace Treasury has advised that the focus of a brokerdealer s ati-moey lauderig compliace program should be the developmet of procedures that ca reasoably be expected to promote the detectio ad reportig of suspicious activity. A compliace program that captures oly those trasactios above a set dollar threshold likely would ot be satisfactory. Treasury recogized, however, that compliace programs would ecessarily vary to reflect the size ad ature of a broker-dealer s operatios. I developig their expaded ati-moey lauderig programs, fiacial istitutios may wat to keep the followig guidelies i mid. Much of the followig is derived from SEC staff guidace that predated the Act. While it may be premature to adopt procedures before regulatios are itroduced this sprig, prelimiary thought could be give to the types of procedures that may be appropriate, alog the lies of the followig: Policies ad Procedures. Fiacial istitutios should cosider the ature ad extet of their activities, the types of accouts that they maitai, ad the types of trasactios i which their customers egage. Procedures could Idetify suspicious activities that may eed to be reported o a SAR such as a uusual volume of wire trasfers, wire trasfers to prohibited idividuals, or wire trasfers or trasactios with suspect coutries perhaps through the use of automated systems. Esure that procedures are i place to alert the fiacial istitutio whe the Secretary idetifies a primary moey lauderig cocer ad requires heighteed due diligece for trasactios with such primary moey lauderig cocer. Idetify relatioships that could be comparable to the Act s coverage of correspodet accouts ad private bakig accouts ad potetial areas of risk that raise red flags over ay possible ulawful activities i those types of accouts. Address the added due diligece ad other provisios i the Act, ad esure that procedures prohibit trasactios with idividuals, etities, ad jurisdictios idetified by the Office of Foreig Assets Cotrol ( OFAC ), icludig those idividuals o OFAC s Specially Desigated Natioals ad Blocked Persos List. Compliace Officer. The fiacial istitutio must desigate a ati-moey lauderig compliace officer. Cosistet with SEC statemets i other compliace areas, the officer should have sufficiet resposibility ad authority to implemet ad eforce the fiacial istitutio s ati-moey lauderig policies ad procedures. This provides evidece of seior maagemet commitmet to atimoey lauderig efforts ad, more importatly, provides added isurace that the officer will have sufficiet clout to ivestigate potetially suspicious activities. Employee Traiig. Traiig must ecompass all relevat employees ad be costatly reevaluated ad updated. Employees should be able to recogize sigs of possible moey lauderig ( suspicious activities ) ad kow what to do oce a risk is idetified. Programs will eed frequet reevaluatio to esure that employees are iformed about, ad uderstad their obligatios uder, the ew Act ad its implemetig regulatios. Updatig traiig programs will be particularly importat as regulatios implemetig the provisios of the Act are proposed ad adopted. Idetify customer risk idicators that would trigger additioal scrutiy such as whe a customer refuses to idetify or idicate a legitimate source for his or her fuds ad other assets whe opeig a accout. Audit. A fiacial istitutio s ati-moey lauderig program must provide for a idepedet audit to review ad test implemetatio of the fiacial istitutio s policies ad procedures. JANUARY 2002 Kirkpatrick & Lockhart LLP 7

8 Fiacial istitutios should esure that the audit takes place o less frequetly tha aually ad covers all aspects of its operatios. Due Diligece Programs The Act imposes substatial ew due diligece procedural requiremets for every fiacial istitutio that establishes, maitais, admiisters, or maages a private bakig accout 10 or a correspodet accout 11 i the US for a o-us perso. While these provisios appear to be most relevat i the cotext of baks ad bakig relatioships, the Secretary is required to clarify these provisios as they apply to other, o-bak fiacial istitutios i cosultatio with the appropriate federal fuctioal regulators. 12 Implemetig regulatios are to be issued by April 24, 2002, ad these provisios take effect o July 23, Private Bakig Accouts Substace of the Requiremet The due diligece procedures for private bakig accouts require the fiacial istitutio to take reasoable steps to: Ascertai the idetity of the omial ad beeficial accoutholders ad the source of fuds deposited ito the accout; ad Coduct ehaced scrutiy of accouts requested or maitaied by or o behalf of a seior foreig political figure, or ay immediate family member or close associate, to detect ad report trasactios that may ivolve the proceeds of foreig corruptio. Cogress iteded that these ew due diligece procedures apply ot oly to private bakig accouts physically located i the US, but also to private bakig accouts that are physically located outside of the US ad maaged by US persoel from iside the US. Guidelies for Compliace These procedures may ot be ovel for baks ad other fiacial istitutios that have had to file SARs uder curret law ad have faced heighteed scrutiy recetly over the use of private bakig accouts by foreig public officials. For brokerdealers ad other o-bak fiacial istitutios, however, the provisios are likely to be ew. Accordigly, broker-dealers ad other o-bak fiacial istitutios may wat to prepare for the issuace of regulatios. They should carefully moitor future prooucemets from the Secretary while also determiig the extet to which they offer private accouts, ad whether the circumstaces surroudig such accouts would trigger the Act s additioal due diligece provisios. If so, they should ascertai whether they could collect the iformatio required by the Act, or idetify the accouts for which such iformatio is ot available. Correspodet Accouts Substace of the Requiremet Reflectig the particular cocer Cogress has expressed over the use of certai correspodet accouts to lauder moey, the Act requires ehaced due diligece procedures for correspodet accouts requested or maitaied by or o behalf of a foreig bak operatig: (a) uder a off-shore bakig licese; or (b) uder a bakig licese issued by a foreig coutry that has bee desigated either as o-cooperative with iteratioal ati-moey lauderig priciples or procedures or by the Secretary as a primary moey lauderig cocer. At a miimum, the Act provides that ehaced due diligece procedures for correspodet accouts will require a fiacial istitutio to take reasoable steps to: Ascertai the owership of the foreig bak; Carefully moitor the accout to detect ad report ay suspicious activity; ad Determie whether the foreig bak maitais correspodet accouts for ay other bak ad, if so, the idetity of those baks ad related due diligece iformatio. These requiremets are ot meat to be comprehesive. Cogress iteded that fiacial istitutios take additioal reasoable steps before opeig or operatig correspodet accouts for 8 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

9 foreig baks, icludig steps to check the foreig bak s past record ad local reputatio, the jurisdictio s regulatory eviromet, the bak s major lies of busiess ad cliet base, ad the extet of the foreig bak s ati-moey lauderig program. Guidelies for Compliace A coutry ca be idetified as o-cooperative uilaterally by the Secretary or by agreemet of the US ad other coutries through the Fiacial Actio Task Force o Moey Lauderig ( FATF ). The FATF has curretly idetified 19 coutries as ocooperative. 13 Some are obvious choices, but others are ot. Moreover, the list chages periodically as the iteratioal commuity, through the FATF, determies that certai additioal coutries are o-cooperative or others previously idetified as o-cooperative med their ways. Thus, broker-dealers ad other fiacial istitutios will eed to keep a close eye o the FATF ad amed their policies ad procedures as the FATF ameds its list or the Secretary idetifies other coutries as o-cooperative. The sweep of these provisios could be quite broad. Oe coutry listed as o-cooperative is Hugary. Thus, uder the ew procedures, listig a coutry as o-cooperative triggers heighteed due diligece for baks operatig i that coutry. Thus, if the accout is opeed by a bak operatig i Hugary, the Act would require the US fiacial istitutio to ascertai the owership of the Hugaria bak ad may require it to evaluate the history of the Hugaria bak, its cliet base, ad the adequacy of its moey lauderig policies ad procedures. It will also eed to determie whether the Hugaria bak offers correspodet accouts to other baks ad perform due diligece o those baks. Kow Your Customer Procedures Substace of the Requiremet The Act requires the Secretary, joitly with federal fuctioal regulators, to issue implemetig regulatios by October 26, 2002, imposig madatory kow your customer procedures for fiacial istitutios to follow i opeig customer accouts. At a miimum, these procedures will require the fiacial istitutio to verify to the extet reasoable ad practical the idetity of ay perso seekig to ope a accout, to maitai records of the iformatio used to verify the perso s idetity, ad to check that the potetial customer does ot appear o ay list of kow or suspected terrorists or terrorist orgaizatios. There is a recogitio that oe size wo t fit all : the Act madates that, i adoptig regulatios, the Secretary take ito cosideratio the various types of accouts maitaied by various types of fiacial istitutios, the various methods of opeig accouts, ad the various types of idetifyig iformatio available. Appropriate federal fuctioal regulators may, by rule or order, exempt fiacial istitutios or types of accouts from the requiremets of these regulatios, i accordace with stadards ad procedures prescribed by the Secretary. Not later tha April 24, 2002 (before issuig fial regulatios), the Secretary must (i cosultatio with the federal fuctioal regulators) issue a study to Cogress recommedig how to require foreig atioals to provide fiacial istitutios the iformatio ecessary for the ew verificatio provisios, apply for or obtai a idetificatio umber similar to a Social Security or tax idetificatio umber, ad establish a system for fiacial istitutios to review lists of kow or suspected terrorists. Guidelies for Compliace Fiacial istitutios should take advatage of the time provided before these provisios become effective to prepare for them. Fiacial istitutios should aalyze the type of iformatio they collect for differet kids of accouts ad idetify the customers, accouts, or types of accouts for which the iformatio required by the Act will be difficult to verify. For those accouts, the fiacial istitutio may wat to cosider whether it is advisable to maitai the accouts ad, if so, devise procedures to obtai the ecessary iformatio. Also, the fiacial istitutio should esure that it ca easily ad frequetly access lists of kow or suspected terrorists or terrorist orgaizatios pricipally the list of Specially Desigated Natioals ad Blocked Persos issued by OFAC. Amog other JANUARY 2002 Kirkpatrick & Lockhart LLP 9

10 thigs, that list desigates certai idividuals ad etities as kow or suspected terrorists or terrorist orgaizatios. The list is log, ad OFAC has updated it frequetly sice the September 11 attacks. Moreover, may of the idividuals are listed uder several ames ad aliases. The legth ad complexity of the list make it impractical ad iefficiet to rely o a maual review of the list each time a customer accout is opeed. Accordigly, prior to the effective date for this provisio, fiacial istitutios may wat to explore ways to electroically cross-verify the list each time a accout is opeed. Broker-Dealer SAR Reportig Substace of the Requiremet The Act substatially expads the uiverse of etities required to file SARs. SARs are filed with the Fiacial Crimes Eforcemet Network (FiCEN), the agecy withi Treasury resposible for ati-moey lauderig activities. Curret federal regulatios require oly baks, subsidiaries of bak holdig compaies, casios, ad moey services busiesses to file SARs. Thus, broker-dealers, ivestmet advisers, ad ivestmet compaies have geerally ot bee required to make such reports, uless they were subsidiaries of bak holdig compaies. May broker-dealers have, however, filed SARs volutarily. The Act expads the reach of this reportig scheme. The Secretary, after cosultatio with the SEC ad the Fed, issued proposed regulatios o December 20, 2001, requirig registered brokerdealers to file suspicious activity reports. Fial regulatios requirig such reportig must be published before July 1, Uder the proposed regulatios, the SAR reportig requiremets for broker-dealers will be effective 180 days after fial regulatios are published i the Federal Register. These proposed regulatios require broker-dealers to file SARs i certai situatios ad permit additioal volutary filig of SARs. SAR filig would be required for ay trasactio coducted or attempted by, at or through a broker-dealer ivolvig (separately or i the aggregate) fuds or assets of $5,000 or more for which (i) the broker-dealer detects ay kow or suspected federal crimial violatio ivolvig the broker-dealer or (ii) the broker-dealer kows, suspects, or has reaso to suspect that the trasactio (a) ivolves fuds related to illegal activity, (b) is desiged to evade the regulatios, or (c) has o busiess or apparet lawful purpose ad the broker-dealer kows of o reasoable explaatio for the trasactio after examiig the available facts, icludig the backgroud ad possible purpose of the trasactio. The proposed regulatios for SAR reportig uder the Act are cosistet with the suspicious activity reportig stadards of the curret federal regulatios with oe otable exceptio. Curret regulatios ivolve a two-tiered reportig system, uder which SARs must be filed for $5,000 violatios where a suspect ca be idetified ad $25,000 violatios where a suspect caot be idetified. The proposed rules do ot adopt this two-tiered approach. SAR requiremets also may be expaded to other types of etities. I this regard, the Act states that the Secretary may (as opposed to must ) issue regulatios extedig madatory SAR reportig requiremets to CFTC-regulated etities, after cosultatio with the CFTC, ad does ot set ay deadlie for the Secretary to act. I additio, the Secretary, the SEC, ad the Fed must, by October 26, 2002, joitly submit a report to Cogress o recommedatios for effective regulatios extedig SAR reportig to registered ivestmet compaies, icludig private ivestmet compaies uder Sectios 3(c)(1) ad (7) of the Ivestmet Compay Act of Guidelies for Compliace Before the Act was passed, the SEC staff provided some helpful guidace o the ature of suspicious activities i the cotext of the staff s examiatio of broker-dealers. The staff advised that broker-dealers should be wary of the followig practices: The customer wishes to egage i trasactios that lack busiess sese, apparet ivestmet strategy, or are icosistet with the customer s stated busiess/strategy or prior ivestmet history. 10 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

11 The customer exhibits uusual cocer for secrecy, particularly with respect to his idetity, type of busiess, assets or dealigs with firms. Upo request, the customer refuses to idetify or fails to idicate a legitimate source for his fuds ad other assets. The customer exhibits a lack of cocer regardig risks, commissios, or other trasactio costs. The customer appears to operate as a aget for a udisclosed pricipal, ad is reluctat to provide iformatio regardig that etity. The customer has difficulty describig the ature of his busiess. The customer lacks geeral kowledge of his idustry. For o apparet reaso, the customer has multiple accouts uder a sigle ame or multiple ames, with a large umber of iter-accout or third-party trasfers. The customer, or a perso publicly associated with the customer, has a questioable backgroud icludig prior crimial covictios. The customer accout has uexplaied or sudde extesive wire activity, especially i accouts that had little or o previous activity. The customer s accout shows umerous currecy or cashier s check trasactios aggregatig to sigificat sums. The customer s accout has a large umber of wire trasfers to urelated third parties. The customer is from or has accouts i, or has wire trasfers to or from, a bak secrecy have coutry or coutry idetified as a moey lauderig risk. The customer s accout idicates large or frequet wire trasfers, immediately withdraw by check or debit card. The customer s accout shows a high level of accout activity with very low levels of securities trasactios. Determiig whether may of these activities are i fact suspicious is a lie-drawig exercise particularly problematic for o-lie brokers or other brokers who geerally do ot have face-to-face iteractio with customers. Accordigly, broker-dealer traiig programs should sesitize employees to the ew requiremets uder the Act, what moey lauderig is, how it is doe, what activities should raise cocer, ad what steps should be followed whe suspicios arise. SAR reportig may also place additioal strais o broker-cliet relatioships. SAR reports ca ad do trigger govermetal ivestigatios of a cliet, which i tur ca damage a cliet s reputatio ad fiacial relatios. I this coectio, baks, thrifts ad broker-dealers may freeze or close accouts ad refuse further busiess with cliets if they receive subpoeas ivestigatig potetially crimial activity. While it is true that etities filig SARs are prohibited from iformig the customer at the time they make the report, ad broker-dealers makig volutary or madatory SAR disclosures to the govermet ejoy broad immuity from liability, broker-dealers should reevaluate their privacy disclosures to esure that cliets are iformed beforehad of the broker-dealer s geeral reportig obligatios. Primary Moey Lauderig Cocers Oe of the Act s more ovel provisios allows the Secretary, i cosultatio with the Secretary of State ad the Attorey Geeral, to idetify foreig jurisdictios, foreig fiacial istitutios, classes of trasactios withi or ivolvig a foreig jurisdictio, ad types of accouts 14 posig a primary moey lauderig cocer ( PMLC ) ad to impose special measures to require heighteed due diligece for ay trasactio or accout that ivolves a PMLC. Substace of the Requiremet The Act idetifies 5 types of special measures available to the Secretary i dealig with a PMLC. Flexibility is built i to permit the Secretary to impose ay of the special measures (other tha that relatig to the restrictio or prohibitio of accouts) for a JANUARY 2002 Kirkpatrick & Lockhart LLP 11

12 period of 120 days by order or ay other maer permitted by law. Otherwise, the special measures ca oly be imposed by regulatio. Record Keepig ad Reportig. The Secretary may require a fiacial istitutio to maitai records ad/ or file reports documetig trasactios ivolvig a desigated PMLC. This could require fiacial istitutios to create ad maitai records at the time, i the maer, ad for the period of time determied by the Secretary. I accordace with procedures established by the Secretary, such records must, at a miimum, iclude: (i) the idetity ad address of the participats i a trasactio or relatioship, icludig the idetity of the origiator of ay fuds trasfer; (ii) the legal capacity i which a participat i ay trasactio is actig; (iii) the idetity of the beeficial ower of the fuds ivolved i ay trasactio; ad (iv) a descriptio of ay trasactio. Iformatio Relatig to Beeficial Owership. The Secretary may require a fiacial istitutio to take reasoable steps to idetify the beeficial owers of a accout held i the US by a foreig perso or its represetative (other tha publicly traded foreig etities) that ivolves a PMLC. The Act directs the Secretary to issue regulatios defiig beeficial owership of a accout, as used i the Act, that address a idividual s authority to fud, direct or maage the accout, as well as a idividual s material iterest i the accout. Iformatio Relatig to Payable-Through Accouts. The Secretary may require ay fiacial istitutio that opes or maitais i the US a payable-through accout 15 for a PMLC to: (A) idetify each customer, ad its represetative, who is permitted to use or whose trasactios are routed through such payable-through accout; ad (B) obtai iformatio that is substatially comparable to that which the depository istitutio obtais i the ordiary course of busiess with respect to domestic customers. This icludes iformatio such as the ame, address, ad a taxpayer idetificatio umber ad, for a busiess accout, accout authorizatio resolutios, icumbecy certificates, ad busiess idetificatio iformatio. Iformatio Cocerig Certai Correspodet Accouts. The Secretary may require ay fiacial istitutio that opes or maitais i the US a correspodet accout for a PMLC to: (A) idetify each customer, ad its represetative, who is permitted to use or whose trasactios are routed through such correspodet accout; ad (B) obtai iformatio that is substatially comparable to that which the depository istitutio obtais i the ordiary course of busiess with respect to domestic customers. This icludes the ame, address, ad a taxpayer idetificatio umber ad, for a busiess accout, accout authorizatio resolutios, icumbecy certificates, ad busiess idetificatio iformatio. Prohibitios or Coditios o Opeig or Maitaiig Certai Correspodet or Payable- Through Accouts. The Secretary may, i cosultatio with the Secretary of State, the Attorey Geeral ad the Chairma of the Fed, prohibit or impose coditios upo the opeig or maitaiig i the US of a correspodet accout or a payablethrough accout by ay domestic fiacial istitutio or domestic fiacial agecy for or o behalf of a foreig bakig istitutio if such correspodet accout or payable-through accout ivolves ay jurisdictio, fiacial istitutio or class of trasactio that has bee desigated a PMLC. Guidelies for Compliace What makes compliace with these provisios particularly difficult is the absece of ay helpful guidace i the Act or its legislative history as to what is meat by a trasactio ivolvig a PMLC. Broadly costrued, this cocept could iclude ay trasactio with ay etity i a foreig jurisdictio desigated a PMLC, or it could be costrued arrowly to mea ay trasactio with a govermetal authority i a foreig jurisdictio. From a practical stadpoit, it will be up to the Secretary to clearly describe each type of trasactio so desigated i order for a fiacial istitutio to implemet the appropriate respose. Cogress istructed the Secretary, i fashioig regulatory guidace, to require all US fiacial istitutios to use greater care whe allowig ay 12 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE

13 foreig fiacial istitutio iside the US fiacial system. Hece, it will be icumbet upo o-bak fiacial istitutios, such as broker-dealers ad ivestmet compaies, to iclude i their ati-moey lauderig programs systems to moitor for PMLC desigatios ad implemet the special measures that the Secretary may impose. For correspodet accouts ad payable-through accouts, a fiacial istitutio s procedures should require the maiteace of records idetifyig each customer who is permitted to use the accout ad records icludig accout iformatio that is typically obtaied by the fiacial istitutio i the course of busiess with domestic customers. Atimoey lauderig programs should require a fiacial istitutio to maitai trasactio records ad beeficial owership iformatio for accouts held by foreig jurisdictios ad foreig fiacial istitutios. VIII. PENALTIES FOR NON-COMPLIANCE; EXPANDED IMMUNITY FOR SAR REPORTING Failure to follow the ew provisios of the Act could carry severe cosequeces. The Act authorizes the impositio of a civil moey pealty or crimial fie of up to $1,000,000. Sice these pealties appear to apply separately to each violative trasactio, there could be substatial potetial exposure should a fiacial istitutio, for example, allow a prohibited shell bak to fuel multiple trasactios through a correspodet accout or allow a fiacial istitutio coected with a PMLC jurisdictio to ope ad maitai a correspodet accout. At the same time, the Act clarifies the extet of the immuity from liability for disclosure for SAR reportig i two respects. First, it makes explicit that such immuity exteds to volutary reports to a govermetal authority. This should provide added comfort to broker-dealers ad other fiacial istitutios that decide to volutarily report suspicious activities before madatory SAR reportig is imposed o them. The Act exteds this immuity to liability uder ay cotract or other legally eforceable agreemet (icludig ay arbitratio agreemet). Agai, this should provide added comfort to broker-dealers that have arbitratio clauses i customer accout opeig documets. IX. BALANCING NATIONAL SECURITY V. PRIVACY Iformatio Sharig The Act provides, effective immediately, that fiacial istitutios ad fiacial trade associatios, after givig otice to Treasury, may share iformatio with oe aother regardig idividuals, etities, orgaizatios, ad coutries suspected of possible terrorist or moey lauderig activities. The Act further provides that compliace with the iformatio sharig provisios of the Act geerally will ot costitute a violatio of the privacy provisios of Gramm-Leach-Bliley. The Act requires Treasury to issue regulatios, by February 23, 2002, to ecourage further cooperatio amog fiacial istitutios, their regulatory authorities ad law eforcemet authorities, for the purpose of sharig iformatio regardig idividuals, etities, ad orgaizatios egaged i or suspected of terrorist acts or moey lauderig activities. Amog other thigs, the regulatios may require fiacial istitutios to desigate poits of cotact for iformatio sharig ad accout moitorig. They may also require fiacial istitutios to develop ad implemet procedures for protectig iformatio. Govermet Surveillace Other provisios of the USA Patriot Act direct the head of the US Secret Service to take appropriate actios to develop a atioal etwork of electroic task forces throughout the coutry. The mai thrust of this iitiative is the prevetio, detectio ad ivestigatio of various forms of electroic crimes, icludig potetial terrorist attacks agaist critical techological ifrastructures ad fiacial systems. The USA Patriot Act also broades presidetial authority uder the Iteratioal Emergecy Powers Act, eablig the govermet to seize the property of ay foreig perso, orgaizatio or coutry that the presidet determies was used to pla, authorize, aid or egage i armed hostilities or attacks agaist the US. Uder this provisio, the Presidet may cofiscate ot oly fiacial assets ad real property of suspected terrorists, but also computers ad other hardware, computer files ad related software, ad whatever other compoets of techological JANUARY 2002 Kirkpatrick & Lockhart LLP 13

14 ifrastructures ad etwork systems that the govermet believes were used to facilitate terrorist activity. The USA Patriot Act ameds the pricipal federal privacy ad surveillace laws to allow the govermet greater access to the public s persoal iformatio i the furtherace of ivestigatios, both for terrorism ad otherwise, ad to allow greater sharig of this iformatio amog ivestigative agecies at federal, state ad local levels. It also ameds existig search warrat law to allow for rovig warrats to itercept wire, oral ad electroic commuicatios, amog other thigs. The govermet ow may exercise broad ivestigative authority uder the USA Patriot Act to itercept commuicatios by ay suspected terrorist or terrorism accomplice, with access to ay fiacial, telephoe or computer system or etwork used by such suspects. Privacy Cocers The iterrelatioship betwee permissible iformatio sharig uder the Act ad the privacy provisios uder Gramm-Leach-Bliley preset difficult issues for fiacial istitutios, both i terms of recogizig a proper balace of these competig public policies as well as maitaiig strog customer relatios. Fiacial istitutios should be midful of the Act s requiremets for iformatio sharig i establishig ad eforcig their privacy policies, ad should be flexible as legal requiremets cotiue to evolve i this area. The USA Patriot Act, i its etirety, presets a multitude of ew weapos to aid itelligece ad law eforcemet commuities i the fight agaist terrorism. At the same time, it also presets a ew set of cocers for every busiess ower participatig i today s techology drive marketplace. Geerally, every US fiacial istitutio, telecommuicatios provider, e-busiess ad high-tech compay should operate uder the assumptio that its etwork could be susceptible to covert search by law eforcemet agecies. Further, all such etities should assume that every foreig cliet who raises a suspicio of questioable ties to terrorist activity or fudig may subject them to such ivestigatio ad scrutiy ad pla accordigly. Edotes: 1 The Bak Secrecy Act defiitio of a fiacial istitutio icludes: a isured bak; a commercial bak or trust compay; a private baker; a US agecy or brach of a foreig bak; a isured istitutio (replaced i the Act by credit uio ); a thrift istitutio; a registered broker or dealer; a broker or dealer i securities or commodities; a ivestmet baker or ivestmet compay; a currecy exchage; a issuer, redeemer, or cashier of traveler s checks, checks, moey orders, or similar istrumets; a operator of a credit card system; a isurace compay; a dealer i precious metals, stoes, jewels; a pawbroker; a loa or fiace compay; a travel agecy; a licesed seder of moey; a telegraph compay; a busiess egaged i vehicle sales, icludig automobile, airplae, ad boat sales; persos ivolved i real estate closigs ad settlemets; the Uited States Postal Service; certai govermetal agecies; a casio, gamblig casio, or gamig establishmet with a aual gamig reveue of more tha $1,000,000; other busiesses desigated by regulatio. 2 Up to ow, the federal govermet pricipally has relied o two reportig regimes to detect ad prevet moey lauderig: (a) reportig of currecy trasactios over $10,000 o Currecy Trasactio Reports ( CTRs ) with the Departmet of the Treasury ( Treasury ) or o Form 8300 with the IRS (which also icludes trasactios i cash equivalets i certai circumstaces) ad (b) reportig of suspicious activities to Treasury through filig Suspicious Activity Reports ( SARs ). 3 Gramm-Leach-Bliley defies federal fuctioal regulator as meaig: the Board of Goverors of the Federal Reserve System; the Office of the Comptroller of the Currecy; the Board of Directors of the Federal Deposit Isurace Corporatio; the Director of the Office of Thrift Supervisio; the Natioal Credit Uio Admiistratio Board; the Securities ad Exchage Commissio. The Act also icludes the Commodities Futures Tradig Commissio i the defiitio of federal fuctioal regulator for purposes of the Act oly. 4 The Act defies a correspodet accout with respect to a bak as a accout established to receive deposits from, or make paymets o behalf of, a foreig fiacial istitutio or hadle other fiacial trasactios related to such istitutio. 5 Physical presece is defied i the Act as a place of busiess that (i) is maitaied by a foreig bak; (ii) is located at a fixed address (other tha solely a electroic address) i a coutry i which the foreig bak is authorized to coduct bakig activities, at which locatio the foreig bak employs oe or more idividuals o a fulltime basis ad maitais operatig records related to bakig activities; ad (iii) is subject to ispectio by the bakig authority which licesed the foreig bak to coduct bakig activities. 6 Cogress icluded this exceptio to the shell bak prohibitio to permit US fiacial istitutios to do busiess with shell braches of large, established baks o the uderstadig that the bak regulator of the large, established bak will also supervise the established bak s brach offices worldwide, icludig ay shell brach. I 14 KIRKPATRICK & LOCKHART LLP ANTI-MONEY LAUNDERING UPDATE