THE PATRIOT ACT AND OTHER ANTI- MONEY LAUNDERING MEASURES AND THEIR IMPACT ON U.S. BUSINESS

Transcription

1 THE PATRIOT ACT AND OTHER ANTI- MONEY LAUNDERING MEASURES AND THEIR IMPACT ON U.S. BUSINESS By LARRY V. SMITH* Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas (214) (direct) (214) (general) * Copyright 2008 by Larry V. Smith. All rights reserved. (1/18/08)

2 TABLE OF CONTENTS Page I. INTRODUCTION...1 II. EXECUTIVE ORDER A. The Order...1 B. OFAC...2 III. THE PATRIOT ACT...4 A. General Provisions Special Measures That May Be Imposed Upon Financial Institutions Financial Institutions...5 B. Anti Money Laundering Programs in General - Section Background Expansion of Anti-Laundering Programs Under the Act...6 C. Anti Money Laundering Programs for Specific Industries Banks, Savings Associations and Credit Unions Futures Commission Merchants and Introducing Brokers in Commodities Casinos Money Services Businesses Mutual Funds Operators of Credit Card Systems Insurance Companies Unregistered Investment Companies Investment Advisers Commodity Trading Advisers Dealers in Precious Metals, Stones, or Jewels Businesses Engaged in Vehicle Sales Travel Agencies Persons Involved in Real Estate Closings and Settlements Financial Institutions Temporarily Exempted from Section D. Reporting Requirements...32 E. Due Diligence Programs in General Section General Due Diligence Programs for Correspondent Accounts (Banks only) Enhanced Due Diligence for High Risk Foreign Banks (Banks Only) Due Diligence Program for Private Bank Accounts (Banks, Brokers/Dealers, Futures Commissions Merchants and Introducing Brokers)...35 F. Correspondent Accounts for Foreign Shell Banks; Recordkeeping and Termination of Correspondent Accounts for Foreign Banks - Sections 313 and i -

3 TABLE OF CONTENTS Page G. Verification of Identity - Section Generally Customer Identification Programs Clarifications and Definitions Customer Information Comparison with Government Lists Customer Notice Reliance on Another Financial Information...40 H. Suspicious Activity Reports...41 IV. PENALTIES AND FORFEITURE...41 A. The Order...41 B. Kingpin Act...42 C. The Patriot Act Civil Forfeiture Civil and Criminal Penalties...43 V. CONCLUSION ii -

4 GLOSSARY OF ACRONYMS AND ABBREVIATIONS 1940 Act Investment Company Act of 1940 Act Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act AEDPA Antiterrorism and Effective death Penalty Act of 1996 Agencies AMLP(s) Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and the National Credit Union Administration Anti-Money Laundering Program(s) Annex Annex to Executive Order ANPRM Attorney General BSA CEA CFTC CIP CTA(s) FCM(s) FinCEN IB(s) IEEPA IRA(s) Kingpin Act Kingpin List Advance Notice of Proposed Rulemaking Attorney General of the United States Bank Secrecy Act Commodity Exchange Act Commodity Futures Trading Commission Customer Identification Program Commodity Trading Advisors Futures Commission Merchants Financial Crimes Enforcement Network Introducing Brokers in Commodities International Emergency Economic Powers Act Individual Retirement Account(s) The Foreign Narcotics Kingpin Designation Act List of individuals and organizations designated as international narcotics traffickers - i -

5 GLOSSARY OF ACRONYMS AND ABBREVIATIONS Minimum Program Requirements Minimum requirements to be included in an anti-money laundering program pursuant to section 352 of the Patriot Act, including: (a) the development of internal policies, procedures and controls (to detect and report money laundering); (b) the designation of a compliance officer; (c) an ongoing employee training program designed to assist in the detection of money laundering; and (d) an independent audit function to test programs. MSB(s) NASD NFA NPRM NYSE OFAC Money Services Businesses National Association of Securities Dealers National Futures Association Notice of Proposed Rulemaking New York Stock Exchange Office of Foreign Assets Control Order Executive Order Patriot Act REIT(s) SAR(s) SAR-IC SDN List SDNs Secretary SRO Title III Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act Real Estate Investment Trusts Suspicious Activity Report(s) Suspicious Activity Report by Insurance Companies Specially Designated Nationals List Specially Designated Nationals Secretary of the Treasury Self-Regulatory Organization International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, Title III - ii -

6 GLOSSARY OF ACRONYMS AND ABBREVIATIONS Treasury U.S.C. UIC USP(s) United States Treasury Department United States Code Unregistered Investment Company United States Person(s) - iii -

7 THE PATRIOT ACT AND OTHER ANTI-MONEY LAUNDERING MEASURES AND THEIR IMPACT ON AMERICAN U.S. BUSINESS By Larry V. Smith, Dallas, TX * I. INTRODUCTION In response to the September 11 th attacks on the World Trade Center, the Pentagon and in Pennsylvania, President Bush issued Executive Order (the Order ). In addition, on October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the Act or the Patriot Act ). Following the passage of the Act, the Treasury Department (the Treasury ), through the Financial Crimes Enforcement Network ( FinCEN ), enacted and continues to enact regulations which assist in the implementation of specific provisions of the Act. Both the Order and the Act have significant effects on the way corporate America conducts business. As you will see, the Act extends beyond traditional financial institutions and could potentially apply to attorneys as well. This paper will explore the implications of each of the measures used to combat money laundering and terrorism, and will indicate what steps must or may be required to be taken by financial institutions, U.S. Persons and other entities to become compliant with the such measures. A. The Order II. EXECUTIVE ORDER President Bush issued Executive Order effective September 24, The Order provides that property of particular persons already in the United States or that hereinafter comes into the possession or control of persons in the United States is blocked. Any transaction or dealing by United States persons ( USPs ), or within the United States, in property or interests in property blocked pursuant to the Order is prohibited, including the making or receiving of any contribution of funds, goods or services to or for the benefit of certain individuals described below. To avoid penalties, USPs must block or freeze assets of blocked individuals, organizations and countries. Furthermore, USPs are required to report the blocked transactions to the Office of Foreign Assets Control ( OFAC ) within ten (10) days after such blocking occurs. Persons subject to having their property blocked include everyone listed in the Annex to the Order, which is updated by releases issued by OFAC (the Annex ). The Order also provides for the possibility of including foreign persons who may be named by the Secretary of State or the Secretary of the Treasury in the future because the persons are deemed to have committed, or pose a significant risk of committing, acts of continuing terrorism against the * Copyright 2008 by Larry V. Smith. All rights reserved. (1/18/08) 1

8 United States. Additionally, persons determined to be owned or controlled by persons listed in the Annex, as well as persons who support terrorism or assist persons listed in the Annex, are subject to having their property blocked. Finally, the Order allows for the blocking of assets of persons who associate with persons currently listed or later added to the Annex. The list of known or suspected terrorists is very long and is continually updated. Accordingly, one must constantly check OFAC s website for any amendments or additions to the Annex. Given the length of the list and the continuous changes made to it, one possible (and preferred) solution to assist in the search is the use of interdict software which assists by filtering through the thousands of names on the list. The software is not specifically required by the rules or regulations; however, the high volume of data generated by even small institutions make the software virtually necessary. The software can be expensive, but I have been advised that regulatory banking examiners will likely look favorably upon those who have made the investment. In addition, companies have sprung up which, for a fee, search the list, together with other lists discussed later. The effect of the Order is that no USP (which is virtually anyone transacting business in the U.S.) may enter into a transaction involving the making or receiving of any contribution of funds, goods, services to or for the benefit of those person, organizations and countries described in the SDN List. OFAC interprets the Order to apply to all business transactions as well as to the landlord/tenant, vendor/vendee, third party provider and employer/employee relationships, including the hiring of employees, their continued employment and the employer compensating employees in exchange for the employees providing services to the employer. Therefore, USP s who enter into transactions and relationships with others in connection with their business operations must comply with the Order. B. OFAC All USPs, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all U.S. incorporated entities and their foreign branches, must comply with regulations issued by OFAC. OFAC regulations are tailored to further the requirements and purposes of specific executive orders or statutes. These regulations are written broadly and may include the following property: goods, deposits, fund transfers, loans, letters of credit contracts, drafts, and negotiable shipping documents. The regulations potentially cover all types of transactions and relationships including, various forms of wire transfers, opening of new accounts, cashing and depositing checks and drafts, purchases of cashiers checks or money orders, dispensing of loan proceeds, accepting loan payments entering into contracts with vendors and service providers and employer/employee relationships. As previously mentioned, the Order prohibits any USP from engaging in a transaction with certain parties. As part of its enforcement efforts, OFAC publishes a list of designated individuals, organizations, countries and companies referred to as Specially Designated Nationals ( SDNs ) whose assets are blocked and with whom USPs are generally prohibited from dealing ( SDN List ). As the regulations are so broad, every USP must take great care in determining whether to become involved in any transaction and whether such transaction is subject to the OFAC regulations. In a conversation with an OFAC legal representative several 2

9 years ago, I was told that OFAC s position is that if you know, have reason to know, have cause or reason to believe that the transaction in which you are involved is subject to the Order, you should err on the side of attempted compliance. The Order imposes strict liability on its violators and as a result I would encourage everyone to take reasonable measures to review each transaction in which they are involved to determine they are not entering into a prohibited transaction. If one makes no attempt to comply with the Order, OFAC will take an unfavorable view for such lack of action. Therefore, prudence dictates that if one is uncertain as to whether a transaction is governed by the Order, he or she should refer to the SDN List to determine if they are engaging in a prohibited transaction and whether they are required to notify OFAC and block assets pursuant to the Order. OFAC has neither established any definitive guidelines for actions which USPs may take in connection with attempted compliance with the Order nor has it published any safe harbor provisions. Nevertheless, OFAC s position is that there is a certain degree of responsibility which USPs (including employers) must take in attempting to comply with the Order and that potential violation of the Order and other anti-terrorism measures may be mitigated by the creation and implementation of a program addressing such USPs business operations including the employer/employee relationship. Notwithstanding the lack of guidelines or any safe harbor provisions, a USP cannot turn its back and not make any efforts to comply with the Order and other applicable measures. Accordingly, OFAC verbally recommended to me that each employer create and implement a due diligence compliance program for its business operations including provisions relating to the employer/employee relationship. Such a program may be part of the employer s company policy manual and/or a separate program/policy which sets forth the employer s objectives to comply with all applicable anti-terrorism/anti-money laundering measures. In addition, if the employer wants to further minimize any potential liability that may arise in connection with these measures and its to-be and existing employees, it should consider (a) adding anti-money laundering/antiterrorism warranties and representations to its employment application as well as checking the SDN List (which can be difficult for an untrained eye to check since there are thousands of names which may be differentiated by the mere location of an accent or a hyphen), (b) obtaining interdict software, described above, for internal use by the employer to determine if a potential or existing employee is on the SDN List, or (c) engaging a company to conduct searches for employers on an as needed basis. In addition, the Foreign Narcotics Kingpin Designation Act (the Kingpin Act ) contains provisions similar to the Order and also publishes a list containing individuals and organizations designated as international narcotics traffickers (the Kingpin List ) and, like the Order, provides for the blocking of assets (which would include the withholding of payment due to any such persons, organizations and countries on the Kingpin List). OFAC also informed me that all names on the Kingpin List also appear in the SDN List. Furthermore, an OFAC representative told me that employers in the States of Texas, New Mexico, Arizona, California and Florida are more likely than employers in other states to discover that their job applicants and/or employees appear on the Kingpin List because of those states proximity to Mexico, Central America and South America. 3

10 On another, but related note, in connection with acquisitions, mergers and sales of assets of entities, it would be prudent and is advisable that warranties and representations be obtained relating to compliance by the opposing party with applicable anti-terrorism/anti-money laundering measures, including, warranties and representations that such party is not an SDN and whether such party has implemented screening devices to determine the background of its employees, including whether any such employees may be on the SDN List and, it is not aware that any of its employees are on such list. In addition, if possible and if the transaction is accepting, consideration should be given to obtaining indemnities from the seller indemnifying the purchaser for any liabilities the purchaser may suffer as a result of violations of the Order and other anti-terrorism/anti-money laundering measures as they relate to the transaction and to individuals or employees of the seller who remain with the purchaser (or, as an alternative, perhaps the purchaser could require all carryover employees to sign a certificate with warranties and representations similar to those recommended above in connection with employee applications). Consideration should also be given to including anti-terrorism/anti-money laundering warranties and representations in third party service/vendor contracts as well as in customer application forms for the opening of an account. Furthermore, I have recommended to clients (and most clients follow my recommendation) that purchase and sale agreements, lease agreements, partnership agreements, limited liability agreements and other instruments relating to investment in real estate contain warranties and representations that the parties are not in violation of the Order, Act and other anti-terrorist/anti-money laundering measures. Today, these types of warranties and representations are commonly found in loan documents issued by various lenders, including banks and financial institutions. III. THE PATRIOT ACT Consisting of over 140 pages of text and amending various existing laws, the Act broadly affects several different areas of trade and commerce. Of primary concern to financial institutions is Title III, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ( Title III ). Title III makes a number of amendments to the antilaundering provisions of the Bank Secrecy Act ( BSA ). The main purpose of Title III is to prevent and detect money laundering, which is a significant source of funding for terrorism. The Act purports to meet this goal mainly through the implementation of anti money laundering programs, sharing of information, customer identification programs, and reporting of certain money transactions and suspicious activities. Treasury and FinCEN have been and continue to be involved in the process of reviewing all categories of U.S. financial institutions and have been and will continue to implement regulations requiring the development of anti money laundering programs ( AMLPs ) tailored to the specific risks presented by the products and services offered by each business industry designated as a financial institution. 4

11 A. General Provisions 1. Special Measures That May Be Imposed Upon Financial Institutions Section 311 of the Act amends the money and finance provisions of the U.S.C. and gives Treasury the power and authority to issue rules and regulations that require financial institutions to take special measures if Treasury finds reasonable grounds that certain transactions are of primary money laundering concern. These special measures may include, due diligence programs and additional record keeping and reporting of certain financial transactions, as well as the retention of information relating to beneficial ownership of any account. The measures may also require financial institutions to identify customers with certain payable-through accounts and correspondent accounts, as well as prohibiting or imposing conditions on opening such accounts. 2. Financial Institutions Title III requires the 26 covered financial institutions described below to, among other things, establish (a) an AMLP; and (b) in some instances presently, reasonable procedures to verify the identity of their customers. What is surprising is how many businesses are considered to be a financial institution under Title III. Under the Act, a financial institution (as defined in 31 U.S.C. 5312) is: An insured bank; A commercial bank or trust company; A private banker; An agency or branch of a foreign bank in the United States; A credit union; A thrift institution; A broker or dealer registered with the SEC; A broker or dealer in securities or commodities; An investment banker or investment company; A currency exchange; An issuer, redeemer, or cashier of travelers checks, checks, money orders, or similar instruments; An operator of a credit card system; An insurance company; A dealer in precious metals, stones, or jewels A pawnbroker; A loan or finance company; 5

12 A travel agency; A licensed sender of money or any other person who engages as a business in the transmission of funds; A telegraph company; A business engaged in vehicle sales, including automobile, airplane, and boat sales; Persons involved in real estate closings and settlements; The United States Postal Service; An agency of the U.S. Government or of a State or local government carrying out a duty or power of a business described in this paragraph; A casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000; Any business which engages in activities similar to those engaged in by the businesses described above; and Any other business designated by the Secretary of the Treasury whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters. Presently, 11 of the above financial institutions are temporarily exempted from complying with the AMLP requirements of the Act. However, it is likely only a matter of time before final rules will be issued for such exempted institutions. B. Anti Money Laundering Programs in General - Section Background Pursuant to the BSA, certain financial institutions are required to create and maintain AMLPs. Since 1987, all federally insured depository institutions and credit unions have been required to have AMLPs in place. In addition, certain other businesses have been required to maintain AMLPs as required by existing FinCEN regulations, or by their respective regulator or self-regulatory organization. In conjunction with such programs, many such financial institutions have established know your customer procedures which are designed to identify the beneficial owner of an account and the source of funds for accounts opened at their institutions. However, Section 352 of the Act amends the anti money laundering provisions of the BSA and has the potential of applying to hundreds of thousands of U.S. businesses that had previously not been subject to BSA requirements. 2. Expansion of Anti-Laundering Programs Under the Act One of the most significant aspects of the Act is the extensive change in the number of financial institutions that now have duties and responsibilities under the BSA including the requirement to implement AMLPs. As discussed above, the definition of a financial institution includes many different types of businesses, not just banks, and now has significant ramifications for these newly included entities. For example, the definition of a financial institution is broad enough to encompass law firms as it includes persons involved in real estate closings and 6

13 settlements. Furthermore, financial institutions include any businesses or agencies which engage in any activity which the Secretary of the Treasury ( Secretary ) determines, by regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business described above is authorized to engage; or any other businesses designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters. Section 352 of the Act requires all financial institutions AMLPs to include at a minimum, the following (the Minimum Program Requirements ): a. the development of internal policies, procedures and controls (to detect and report money laundering); b. the designation of a compliance officer; c. an ongoing employee training program designed to assist in the detection of money laundering; and d. an independent audit function to test programs. As required by the Act, Treasury has issued regulations to implement Section 352 of the Act. Different types of entities are subject to different regulations and will be discussed separately below. In 2002 the Department of the Treasury published, in the Federal Register, interim final rules dealing with the implementation of Section 352. At that time, Treasury addressed the AMLP requirements for banks, savings associations, registered brokers and dealers in securities, futures commission merchants, casinos, money services businesses (including currency dealers, check cashers, issuers of traveler s checks, money orders, etc.), operators of credit card systems and mutual funds. The interim regulations temporarily excluded all other financial institutions from the requirement that they establish AMLPs until further notice. Subject to some limitations, certain financial institutions are exempt from the requirements for instituting AMLP s under the Act. The financial institutions originally entitled to this temporary exemption include: dealers in precious metals, stones, or jewels (no longer exempt); pawnbrokers; loan or finance companies; travel agencies; telegraph companies; sellers of vehicles, including automobiles, airplanes, and boats; persons involved in real estate closings and settlements; private bankers; insurance companies (no longer exempt); commodity pool operators; commodity trading advisors; and investment companies. It should be noted that the temporary exemption from the requirement to establish an AMLP does not relieve exempted entities from existing requirements that they report transactions in cash or currency that exceed $10,000, as well as otherwise suspicious transactions. These transactions must be reported to FinCEN and the IRS. 7

14 C. Anti Money Laundering Programs for Specific Industries. 1. Banks, Savings Associations and Credit Unions For the most part, the Act resulted in fewer required changes for existing AMLPs for banks, savings associations and credit unions than for other types of financial institutions. Federal bank regulators have required these entities to have BSA compliance programs since 1987 and the parallel implementing regulations of the various regulators. Over the years, these programs have evolved from BSA compliance programs to anti money laundering compliance programs under guidance issued by the regulators. Accordingly, a financial institution that is subject to regulation by a federal functional regulator is deemed to be in compliance with Section 352 if it complies with the regulations of its regulator governing the establishment and maintenance of AMLPs. 2. Futures Commission Merchants and Introducing Brokers in Commodities Following the passage of the Act, FinCEN issued its final rule requiring futures commission merchants ( FCMs ) and introducing brokers in commodities ( IBs ) to implement AMLPs and comply with BSA reporting requirements. FCMs are defined in the Commodity Exchange Act ( CEA ) and include individuals, associations, partnerships, corporations, or trusts that are engaged in soliciting or accepting orders and funds for the purchase or sale of commodities for future delivery on or subject to the rules of a contract market or derivatives transaction execution facility. IBs are similarly defined, with the exception being that they may not accept money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure trades or contracts. Pursuant to an interim final rule issued on April 29, 2002, FCMs and IBs are required to develop and implement AMLPs to prevent their use for money laundering or for financing terrorist activities. However, the FCMs and IBs will be deemed to have satisfied the final rule if they comply with anti-money laundering rules approved by the Commodity Futures Trading Commission ( CFTC ) and issued by the National Futures Association ( NFA ). FCMs and IBs will be examined for BSA compliance by the CFTC and the relevant designated self-regulatory organizations, such as the New York Stock Exchange ( NYSE ), and the National Association of Securities Dealers ( NASD ). In addition, if a particular FCM or IB has dual registration with the CFTC and the SEC, compliance with one organization will be deemed compliance with the other and the FCM or IB will not be required to make duplicate reports for the same suspicious activity. FCMs and IBs will be required to report suspicious transactions that involve an aggregate of at least $5,000 in funds or other assets and fall into one of four classes of transactions. The transaction must be reported if the FCM or IB knows, suspects, or has reason to suspect that the transaction or pattern of transactions falls into one of these four categories: 1. Transactions involving funds derived from illegal activity or intended or conducted in order to hide or disguise funds or assets derived from illegal activity. 2. Transactions designed to evade the requirements of the BSA. 8

15 3. Transactions appearing to serve no business or apparent lawful purpose. 4. Transactions that involve the use of the FCM or IB to facilitate a criminal transaction. Moreover, examples of activities that would indicate a suspicious activity report ( SAR ) must be filed could include: frequent and large-scale usage of wire transfers, including transfers to or from locations outside the U.S., from an account with nominal futures activity; customers engaging in wash transactions or other fictitious or non-bona fide transactions that violate the CEA; whether the customer unreasonably refuses to provide information necessary for the FCM or IB to make required reports, retain records as required, identify or verify the identity of a customer, or otherwise comply with the BSA; whether the customer has provided information that is determined to be false; whether the customer seeks to change or cancel a transaction after being informed of currency transaction reporting or information verification recordkeeping requirements relevant to the transaction; whether transmission or receipt of funds transfers are without normal identifying information or in a manner indicative of an attempt to disguise or hide the country of origin or destination or the identity of the customer sending the funds or the beneficiary to whom the funds are sent; whether there has been a repeated pattern of unusual activity by the customer, such as frequent unexplainable deposits or withdrawals; and whether there has been repeated use of an account as a temporary resting place for funds from multiple sources without a clear business purpose. FCMs and IBs are prohibited from informing the customer that they intend to file or have filed a SAR. FCMs and IBs are not required file SARs that involve robbery or burglary so long as a report has been made to law enforcement. Additionally, FCMs and IBs will not be required to file SARs based on possible violations of the CEA, the rules promulgated by the CFTC, or the rules of any registered futures association or registered entity provided that the violations are reported to the CFTC, a registered futures association or a registered entity. As later discussed, one should also be reminded that under the Act additional rules and regulations have been enacted and others are proposed that will impose additional requirements on brokers/dealers and futures commission merchants. 9

16 3. Casinos In 1993, FinCEN issued regulations requiring casinos, gambling casinos or gaming establishments to establish AMLPs. Accordingly, such entities in compliance with these regulations will be deemed in compliance with the AMLP rules requirements of the Act. A detailed discussion of this subject and how the Act impacts it can be furnished on request. 4. Money Services Businesses Money services businesses ( MSBs ) are financial institutions under the Act and thus are subject to its requirements. The interim final rule for MSB s addresses the compliance issues posed by applying the standard Minimum Program Requirements to the wide range of types and sizes of MSBs whose compliance roles and capabilities vary widely. The regulations provide that MSBs are to implement, develop and maintain an effective AMLP that is reasonably designed to prevent MSBs from being used to facilitate money laundering or to finance terrorist activities. Existing MSBs were to implement their programs no later than July 24, 2002, and those businesses coming into existence after July 24, 2002, must implement their programs at the end of the 90 day period beginning on the day following the date the business is established. The program must be in writing and is to be commensurate with the size and location of the business. The Minimum Program Requirements shall include policies, procedures, and internal controls reasonably designed to ensure compliance with the applicable regulations, including filing reports, maintaining records, verifying customer identification, responding to law enforcement requests and using existing automated systems to enhance compliance. If the business has automated data processing systems, the systems should integrate into the business systems compliance procedures such as record keeping and monitoring transactions subject to reporting requirements. The independent review required by the regulation may be by an officer or employee of the MSB other than the person designated as responsible for compliance. This provision is designed to address the issue of how mom and pop MSBs, like independent grocery stores, convenience stores and gas stations that sell money orders, can satisfy the statutory requirement for an independent audit without going to the expense of hiring an outside auditor. MSBs with independent selling outlets (or agents), such as issuers of money orders and travelers checks and money transmitters, may allocate responsibility for developing the required policies, procedures and internal controls. However, all MSBs from the largest money transmission company to the drug store that sells money orders over the corner, remain liable for establishing and maintaining effective programs. Probably in recognition of the great diversity among MSBs, there is no requirement for the compliance program to be approved by senior management. MSB compliance programs must be provided to FinCEN for inspection upon request. In December, 2004, FinCEN issued a final rule offering guidance to assist MSBs in establishing policies and procedures to be in compliance with the Act. However, the guidelines are limited and apply only to MSBs that may have a relationship with a foreign agent or 10

17 counterparty. Specifically, MSBs that qualify are to take reasonable steps to guard against the flow of illicit funds, or the flow of funds from legitimate sources to persons seeking to use those funds for illicit purposes, through such relationships. MSBs are required to institute policies and procedures that will aid them in identifying whether foreign agents or counterparties are themselves complicit in illicit activity and to ensure that they have in place appropriate antimoney laundering controls. At a minimum an MSB should conduct due diligence that includes reasonable procedures to identify the owners of the MSBs foreign agents and counterparties and evaluate, on an ongoing basis, the operations of those foreign agents and counterparties, as well as their implementation of policies, procedures, and controls to ensure that the MSBs products and services are not subject to abuse. The extent of due diligence will depend on factors specific to each foreign agent or counterparty. The MSB should assess the risks and perform due diligence in a manner consistent with the level of risk involved in light of the available information. In addition to the above due diligence, an MSB must establish policies and procedures to aid them in their detection and reporting of suspicious activity. The procedures should enable the MSB to identify material changes in an agent s risk profile, such as a change in ownership, business or the regulatory scrutiny to which it is subject. In addition, a review of transactions should enable the MSB to identify and, if appropriate, report the following suspicious occurrences: instances of unusual wire activity; bulk sales or purchases of sequentially numbered instruments; multiple purchases or sales that appear to be structured; illegible or missing customer information; the foreign agent or counterparty has engaged in activity indicative of structuring; the foreign agent or counterparty has engaged in unnecessarily complex transmissions through multiple jurisdictions that indicate layering; and attempts to evade identification or other requirements, whether imposed by applicable law or by the MSB s own internal policies. 5. Mutual Funds Although an investment company is included in the definition of a financial institution under the Act, Treasury has presently decided to limit the application of an interim rule for AMLPs to those investment companies who fall within the category of open-end companies, which are commonly referred to as mutual funds. Under the Act, Treasury has the authority to exempt certain entities from the new AMLP requirements. FinCEN has exercised this power and temporarily exempted other types of investment companies from the requirement to establish AMLPs. 11

18 It should be noted that nearly one-third of all assets managed by mutual funds are held in retirement accounts, including both employer sponsored plans and Individual Retirement Accounts ( IRAs ). Because retirement accounts qualify as mutual funds, they have not been exempted and therefore are subject to the AMLP requirements as outlined below. A mutual fund is required to develop a written AMLP which includes the Minimum Program Requirements, as well as achieving and monitoring compliance with Form 8300 reporting requirements and upcoming requirements for verification of account holder identity. The program must be approved in writing by the funds board of directors or trustees. The program should be tailored to fit the mutual fund s business, taking into account its size, location, activities and money laundering risks and vulnerabilities. Treasury states that a mutual fund may contractually delegate, in writing, its anti money laundering compliance functions to affiliates or unaffiliated service providers, e.g., transfer agents, but the mutual fund remains responsible for compliance with the regulations. The regulation imposes no duties on mutual funds to obtain additional information regarding individual transactions processed through another entity s omnibus account, e.g., where a mutual fund contracts with a broker-dealer to sell its products and the shares are traded through an account in the name of the broker-dealer without the mutual fund necessarily knowing the identity of the individual shareholders (who are clients of the broker-dealer). However, Treasury suggests that a mutual fund should analyze the money laundering risks posed by an omnibus account and conduct due diligence on the account holder, including the viability of the omnibus accountholder s AMLP. Treasury provides examples of activities that may be indicative of money laundering, including: the use of fraudulent checks; checks drawn on the accounts of unrelated third parties; wire transfers from unrelated third parties; frequent wire transfers to and from a cash reserve account; large deposits with smaller fund investments; frequent purchases of fund shares followed by redemptions, particularly that involve sending funds to unrelated third parties and foreign banks; and wire transfers to drug producing and other high-risk countries. Mutual funds are also subject to SAR reporting pursuant to a FinCEN s final rule issued in Many complex compliance issues exist for mutual funds. For example, the issuance and sale of shares by mutual funds frequently involve numerous legal entities and service providers which may or may not be financial institutions under the BSA regulations with their own 12

19 reporting requirements. Consequently, entities involved in the issuance and sale of shares in the same fund may have different recordkeeping and reporting obligations. Treasury states that mutual funds are subject to Form 8300 reporting requirements and has allowed for mutual funds that are part of complex related funds, as well as mutual funds that involve other financial institutions, such as broker-dealers, with reporting requirements to file a single joint report. FinCEN recognizes the wide variety of mutual funds and acknowledges that a one-sizefits-all program is not feasible for all mutual funds. Accordingly, mutual funds are allowed to create individualized programs which take into account many factors, including location, size, activities, and vulnerabilities of the fund to money laundering activities. Treasury allows for this flexibility to ensure that all mutual funds, from the largest to the smallest, may implement effective and appropriate AMLPs which comply with the requirements of the Act. 6. Operators of Credit Card Systems The Act requires that operators of credit card systems implement AMLPs. FinCEN has enacted regulations to guide operators in creating their programs and also opted to adopt the definition of credit cards provided in the Truth in Lending Act. Accordingly, the Act broadly defines the term credit card to include a card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor, or services on credit, as well as a traditional charge card requiring payment in full on a monthly basis. The regulations distinguish between two types of credit card systems, general purpose credit cards and merchant or vendor cards. General purpose credit cards include cards issued by members of VISA or MasterCard systems, among others. The operators of these systems determine which entities may serve as issuing institutions and which entities may serve as acquiring institutions (or merchant institutions). The operators also prescribe rules that member institutions must follow. The operators of the system control which entities may issue or process transactions and also serves as a clearinghouse where debts are settled and from which payments are made and received. Consequently, an operator of a credit card system is a business that issues general purpose cards that can be used at any merchant linked to the system, e.g., VISA, MasterCard and American Express. The term does not cover businesses or banks that issue merchant or vendor credit cards that may be used to purchase goods or services at a particular merchant or vendor or companies that do not contract with other issuers. It does include operators of a credit card system where the balance must be paid at the end of the month and debit cards that also can function as a credit card (i.e., dual use cards). Merchant or vendor cards are issued by the merchant or vendor and only allow for purchases from that particular merchant or vendor. Common examples of these types of credit cards include department store credit cards or oil company cards. At times a bank will issue cards on behalf of the merchant or vendor. Regardless of who issues the card, operators of these systems do not fall within the FinCEN regulations requiring the implementation of AMLPs because they do not fall within the definition of operators of credit card systems. It should be noted, however, that banks which issue merchant or vendor cards already fall within the anti money laundering regulations enforced by the BSA discussed above and are not exempted from those regulations by virtue of their inclusion in this regulation. In addition, if the bank issues 13

20 both merchant or vendor cards and general purpose cards, it will not be exempted from this regulation. These regulations also apply to debit cards issued by banks that function as credit cards. These cards are often inscribed with the logo of the operator of the system such as VISA or MasterCard. Generally the cards require the use of a personal identification number or PIN at the point of sale. Operators of credit card systems were required to develop and implement AMLPs no later than April 24, The programs are to be reasonably designed to prevent the system from being used to launder money or finance terrorist activities. The purpose of these AMLPs is to ensure that operators of credit card systems conduct sufficient due diligence before authorizing, issuing or allowing acquiring institutions to act on behalf of the operator. The AMLP must include the Minimum Program Requirements, be in writing and approved by senior management. The program must be designed to ensure that the operator does not authorize any person to serve as an issuing or acquiring institution without taking appropriate steps to guard against the issuance or acceptance of the operator s credit card in circumstances that facilitate money laundering or the financing of terrorist activities. Operators must also designate a compliance officer. The audit may be conducted by an officer or employee of the operator, so long as the auditor is not the person designated as the compliance officer and is not a person involved in the operation of the program. The main focus of operators of a credit card system s AMLP should be to ensure that the program s policies and procedures provide for due diligence on prospective and existing banks or other businesses that it authorizes to issue cards or acquire merchants, especially foreign issuing or acquiring institutions. Operators are required to take appropriate steps based on the operator s assessment of the money laundering or terrorist financing risk posed by the issuing or acquiring institution. The risk, the extent of due diligence, and the frequency of due diligence will depend on the location, the regulatory environment and the anti money laundering controls of the issuing or acquiring institution. The regulation lists as guidance criteria under which an issuing or acquiring institution is presumed to be high risk, e.g., the institution is a foreign shell bank, on an OFAC Control list, or licensed by or located in a jurisdiction (1) designated as non-cooperative in money laundering, (2) that the Secretary determines warrants special measures, or (3) which sponsors international terrorism, or the institution is a foreign bank with an offshore license not subject to consolidated bank supervision (supervised by a bank regulatory authority whose institutions have not been approved to operate agencies or branches in the United States by the Federal Reserve). Credit card operators are not prohibited from having relationships with banks or other institutions that meet these criteria (except those on OFAC lists), but must conduct due diligence appropriate to the risks prior to authorizing or maintaining authorization for an institution and must minimize the risk by controlling access to the system, including, in appropriate cases, by denying access to institutions posing an unreasonable risk of money laundering or terrorist activity. Treasury states that the due diligence measures could build upon current anti fraud screening and that in some situations information about the institution s own money 14

21 laundering controls may need to be obtained. Treasury also suggests that the policies, procedures and internal controls should include requirements that licensing or membership agreements assure that institutions participating in the system fulfill their obligations to assist the operators in preventing money laundering. Of some comfort to credit card operators, Treasury indicates that it does not expect credit card system operators to be placed in the role of regulating the issuing or acquiring institutions or the role of guaranteeing that no issuing or acquiring institution will permit money laundering or terrorist financing through the use of the operator s card. Operators of a credit card system are encouraged to have procedures for voluntarily reporting suspected terrorist activity to FinCEN. In addition, the operator of a credit card system must make its AMLP available to the Department of the Treasury or the appropriate federal regulator (unspecified) for inspection. 7. Insurance Companies On October 31, 2005, Treasury and FinCEN issued two final rules under Section 352 of the Patriot Act prescribing minimum standards for AMLPs applicable to certain insurance companies which theretofore had been temporarily exempted from complying with the AMLP requirements of the Act. Insurance companies subject to these final rules must (1) establish an AMLP, and (2) file a SAR within 30 days after the insurance company becomes aware of a reportable suspicious transaction. The final rules do not apply to all insurance companies. FinCEN divides the U.S. insurance industry into three major sectors: (a) life; (b) property/casualty; and (c) health. FinCEN believes that the most significant money laundering and terrorist financing risks in the insurance industry are found in life insurance and annuity products because such products allow a customer to place large amounts of funds into the financial system and seamlessly transfer such funds to disguise their true origin. FinCEN believes that such insurance products present a high degree of risk for money laundering or the financing of terrorism or other illicit activity. Generally, these precarious elements do not exist to the same degree in property insurance and casualty insurance nor do they exist in title insurance, health insurance or in products offered by charitable organizations such as charitable annuities. As a result, FinCEN intimates that the final rules only apply to insurance companies that issue or underwrite certain life insurance policies, annuity contracts, and other products containing investment features with cash value or products possessing the ability to store value and to transfer that value to another person. Group life insurance policies, group annuity contracts, and reinsurance or retrocession contracts or treaties are expressly excluded from FinCEN s list of insurance products and are, therefore, not subject to the two final rules. Life insurance and annuity contracts pose significant risks of money laundering and are, therefore, included in the final rules. Life insurance policies that have a cash surrender value are particularly inviting money laundering vehicles since the cash value can be redeemed by a money launderer or can be used as a source of further investment of tainted funds for example, by taking loans out against such cash value. Similarly, annuity contracts pose a significant money-laundering risk because they allow a money launderer to exchange illicit funds for an immediate or deferred income stream. 15