Anti-money laundering regulations: Treasury Department enacts final rules implementing Section 312 of the PATRIOT Act relating to foreign correspondent accounts and private banking accounts.(Law overview)

Abstract

Purpose--To describe and to discuss the implications of the US Department of the Treasury's PATRIOT Act regulations requiring "covered financial institutions" (including broker-dealers, banks, and mutual funds) to maintain risk-based procedures to ensure that: correspondent accounts held on behalf of specified non-US financial institutions; and private banking accounts, are subject to due diligence procedures to ensure that those accounts, and the financial institutions holding those accounts, are not being used for money laundering purposes.

Design/methodology/approach--Summarizes and analyzes the adopted rules.

Findings Since the passage of the USA PATRIOT Act, regulation relating to anti-money laundering has been among the highest profile--and highest priority--activity of securities and financial institution regulation. Consequently, anti-money laundering rules and regulations have become a major aspect of compliance programs at financial institutions such as banks and broker-dealers. The rules that are the subject of this article are noteworthy in part because they continue the trend of widening the universe of "financial institutions" that are now subject to substantial anti-money laundering regulation. The rules described in this article add substantially to the complexity of anti-money laundering regulation at financial institutions for a number of reasons, including: firstly, placing new, broad-based requirements on financial institutions; secondly, requiring those financial institutions to make judgments regarding both the/eve/of risk posed by certain accounts and the appropriate diligence that may be necessary for each such account; and thirdly, interpretive and implementation challenges.

Originality/value--A summary and analysis of new anti-money laundering regulation, which comes at a time when US regulators are placing substantial emphasis on anti-money laundering.

Keywords Money laundering, Financial institutions, Legislation

Paper type Genera/review

I. Introduction

In December 2005, the Financial Crimes Enforcement Network of the Department of the Treasury ("FinCEN") published final regulations [1] implementing the foreign (i.e. non-US) correspondent account provisions and the private banking provisions required by Section 312 of the USA PATRIOT Act of 2001 [2]. The Rules were published in the Federal Register on January 4, 2006 [3]. Generally speaking, the Rules require that certain financial institutions, including banks, securities broker-dealers, and mutual funds, subject certain accounts opened by them to anti-money laundering due diligence procedures that are reasonably designed to ensure that those accounts, and by extension the financial institutions holding those accounts, are not being used for money laundering purposes. The Correspondent Account Rule requires financial institutions to which it applies to undertake due diligence to correspondent accounts held by them for certain foreign financial institutions, and the Private Banking Rule applies to private banking accounts, as defined in that Rule. The Rules require that broker-dealers, mutual funds, and other covered financial institutions (described below) assess the risks of the potential for money laundering and terrorist financing activities involved with each account, and apply due diligence procedures to each account commensurate with the level of risk posed by the account.

At the same time, FinCEN published proposed regulations (the "Proposed Rule") relating to the enhanced diligence procedures that broker-dealers and other covered financial institutions must apply to correspondent accounts maintained for specific, higher-risk foreign banks [4].

The purpose of this article is to describe the Rules and the Proposed Rule, and to provide a general overview of each that will serve as a resource for industry compliance and legal personnel, legal practitioners, students, and other interested persons, especially as the Rules and the Proposed Rule apply to broker-dealers.

II. Executive summary of the rules

The Rules require certain financial institutions, including securities broker-dealers, to apply risk-based due diligence procedures to foreign correspondent accounts and private banking accounts. The Rules become effective for new accounts on July 5, 2006. For existing accounts, the Rules become effective on October 2, 2006. In general, the Rules are summarized as follows:

Definitions of "covered financial institutions" and "foreign financial institution"

1. The Rules apply to "covered financial institutions," a defined term including:

* insured and commercial banks;

* agencies or branches of foreign banks in the United States;

* federally insured credit unions;

* broker-dealers;

* futures commission merchants or introducing brokers; and

* mutual funds.

2. For purposes of the Rules, a "foreign financial institution" is defined as:

* a foreign bank;

* any branch or office located outside the United States of any financial institution, or any other person organized under foreign law, that, if it were in the US, would be a broker-dealer, futures commission merchant or introducing broker, or mutual fund; and

* and any person organized under foreign law that is engaged in the business of, and is readily identifiable as, a currency dealer or money transmitter.

Risk-based procedures for correspondent accounts maintained with foreign financial institutions

* The Correspondent Account Rule requires covered financial institutions, including broker-dealers, to establish and maintain risk-based procedures that are designed to enable such financial institutions to detect and report known or suspected money laundering activity (or suspicious activity) involving any correspondent account established by the financial institution for a foreign financial institution.

* A correspondent account is defined as an account established to "receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution."

Risk-based procedures for private banking accounts, including identification of owners

1. The Private Banking Rule requires each covered financial institution to establish and maintain procedures that are reasonably designed to detect and report known or suspected money laundering activity (or suspicious activity) conducted through or involving any private banking account. This Rule also requires enhanced scrutiny of any private banking account that is held by any senior foreign political figure.

2. "Private banking account" is defined for these purposes as any account or combination of accounts that:

* requires a minimum aggregate deposit of assets of $1,000,000 or …