The USA PATRIOT Act of 2001: What It Will Mean To Your Institution

by John Byrne, Esq.

With strong bipartisan support, President Bush signed into law the USA PATRIOT ACT on October 26, 2001. Press accounts of this comprehensive package have given short shrift to the important details. There are many sections of the law that will directly benefit domestic financial institutions. This short summary of the key provisions of the money laundering section (Title III of the Act), will focus on those provisions that may impact most financial institutions. For more information, please go to the "Compliance Center" page on www.aba.com.

Special Measures (Section 311)
This section grants to the Secretary of the Treasury, authority to impose so-called "Special Measures" (recordkeeping or reporting) on domestic financial institutions concerning only jurisdictions, financial institutions or international transactions that are of "Primary Money Laundering Concern." Therefore, the potential burdens on all financial institutions are slight, and can only be imposed in very rare circumstances and after a number of steps (such as consulting with the bank and other regulatory agencies) are undertaken.This section is limited only to institutions that have relationships with foreign jurisdictions or foreign accountholders. Most community banks will not be affected by the special measures if they are put into place. The measures cannot be introduced without a "finding" by the Treasury and consultation with a number of agencies. In addition, the measures require a rulemaking if over 120 days in length and the Treasury must define "beneficial ownership" for all purposes under this section.

Due Diligence Standards for Private and Correspondent Bank Accounts (Section 312)
This section requires only financial institutions that have private or correspondent accounts with non-U.S. persons to establish policies and procedures reasonably designed to detect money laundering through those accounts.
This section is limited to correspondent and private bank accounts for non-U.S. persons.

Ban on Correspondent Accounts with Foreign Shell Banks (Section 313)
Financial institutions are barred from maintaining correspondent bank accounts for foreign shell banks (i.e., a bank that does not have a physical presence in any country). This provision does not apply if the foreign bank is an affiliate of a depository institution and subject to supervision by a banking authority in the country that regulates the affiliated depository institution. The Secretary of the Treasury must, by regulation, delineate the reasonable steps necessary for a financial institution to ensure that any correspondent account for a foreign bank is being used to indirectly provide banking services to a shell bank.
The Treasury has just issued their proposed regulations.

Cooperative Efforts to Deter Money Laundering (Section 314)
The Secretary must, within 4 months of October 26, 2001, prescribe regulations on further encouraging cooperation among financial institutions, regulators, and law enforcement to share information with financial institutions on terrorist acts or money laundering activities. This section also permits financial institutions and trade associations, after notice to the Treasury, to share information on suspected terrorists or money laundering activities. This sharing will not be violative of the federal privacy regulations.

This new information sharing capacity has long been sought by financial institution security officials as the most efficient means of deterring organized criminal efforts.

Verification of Customer Identification (Section 326)
This section requires the Secretary to issue regulations (with an effective date of October 26, 2002) to establish minimum procedures for financial institutions to use in verifying the identity of a customer during the account opening process. The regulations should take into consideration situations, such as by mail or electronically, where the customer is not physically present at the financial institution as well as the types of accounts and the types of identifying information that is available.ABA will be coordinating a project on appropriate and reasonable industry options for account opening procedures.

Permits Institutions to Include Suspicions of Illegal Activity in Written Information Employment References (Section 355) This section addresses a long-standing industry concern by permitting depository institutions to provide information, in a written employment reference, to other institutions concerning the possible involvement in potentially unlawful activity by a current or former employee.

The section makes it clear that there is no affirmative duty to provide such information and that there is no protection from liability if the information is provided with malicious intent.

Establishes a Secure Network for SAR/CTR Reporting Purposes (Section 362)
The law directs the Secretary to establish a secure web site to receive Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) as well as to provide institutions with alerts and other information regarding suspicious activity that warrant immediate attention. This provision will have the practical effect of allowing banks to file SARs and CTRs on-line and immediately. This section must be fully operational within 9 months of October 26, 2001.
Financial institutions and law enforcement should both benefit from this change.

John Byrne is Senior Counsel and Compliance Manager at the American Bankers Association in Washington, DC. A veteran of many years of working with government agencies and the legislature, John frequently writes articles for the HOTLINE making sense of new laws and regulations. He has been an advisor to this newsletter for over eleven years.

Copyright © 2002 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 12, No. 1, 1/02