USA PATRIOT Act Update Memorandum: U.S. Treasury Releases ...

TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP
MEMORANDUM
USA PATRIOT Act Update Memorandum: U.S. Treasury Releases
Interim Final Rule to Provide Guidance and Clarification on
Compliance with Section 312 1
________________________________________________________________________
On July 19, 2002, the U.S. Department of Treasury (the “U.S. Treasury”) and the U.S.
Treasury’s Financial Crimes Enforcement Network (“FinCEN”) jointly issued an interim
final rule 2 that temporarily defers compliance with Section 312 of the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) 3 for certain financial
institutions. 4 Moreover, the Interim Final Rule provides guidance for compliance with
Section 312 for those financial institutions (banks, broker-dealers, FCMs, and IBs) that
are required to comply with Section 312 until such final rules are issued. 5 For banks,
broker-dealers, FCMs, and IBs, the effective date of compliance with Section 312 is July
23, 2002.
1 By Roderick J. Cruz. Roderick J. Cruz is an associate in the financial services, capital markets and
derivatives practice group. This memorandum (the “Memorandum”) provides general information on the
subject matter described, and it should not be relied on for legal advice on any matter, which may turn on
specific facts. You should seek specific legal advice before acting with regard to the subjects treated here.
2 See “Treasury Issues Guidance on the USA PATRIOT Act, Pending Issuance of Final Rule” PO-3270
(July 19, 2002); Financial Crimes Enforcement Network; Anti-Money Laundering Programs (interim final
rule); Special Due Diligence Programs for Certain Foreign Accounts, 31 C.F.R. 103.181, Special Due
Diligence Programs for Banks, Savings Associations, and Credit Unions; 31 C.F.R. 103.182, Special Due
Diligence Programs for Securities Brokers and Dealers, Futures Commission Merchants, and Introducing
Brokers; 31 C.F.R. 103.183, Deferred Due Diligence Programs for Other Financial Institutions (referred to
collectively as the “Interim Final Rule”).
3 Pub. L. 107-56 (2001).
4 Under the proposed rules implementing Section 312, the U.S. Treasury originally proposed that the
following financial institutions would be required to comply with Section 312: (i) insured banks; (ii) a
commercial banks; (iii) agency or branch of foreign banks in the United States; (iv) federally insured credit
unions; (v) thrift institutions; (vi) corporations acting under section 25A of the Federal Reserve Act; (vii)
brokers or dealers registered, or required to be registered, with the Securities Exchange Commission (the
“SEC”) under the Securities Exchange Act of 1934, as amended; (viii) futures commission merchants
(“FCMs”) registered, or required to registered under the Commodity Exchange Act (the “CEA”) and
introducing brokers (“IBs”) registered, or required to registered under the CEA; (ix) casinos; (x) mutual
funds; (xi) money services businesses; and (xii) operators of a credit card system. See 31 C.F.R.
103.175(d)(1)(i)-(xii).
5 The U.S. Treasury cautioned financial institutions that “the interim compliance measures set forth in the
[Interim Final Rule] should not be construed as an indication of the obligations that will be imposed by the
final rule.” See U.S. Treasury and FinCEN commentary to Interim Final Rule.
© 2002 Tannenbaum Helpern Syracuse & Hirschtritt LLP.

1. General Requirements Under Section 312 as Originally Proposed
As proposed, Section 312 would require U.S. financial institutions to establish due
diligence policies, procedures and controls reasonably designed to detect and report
money laundering through correspondent accounts 6 and private banking accounts 7 that
U.S. financial institutions establish or maintain for foreign financial institutions and non-
U.S. persons, respectively. 8 In instances when a foreign customer poses a high risk, a
U.S. financial institution would be required to conduct enhanced due diligence. 9
2. Who Must Now Comply with Section 312
Originally, fourteen categories of U.S. financial institutions would have been required to
comply with rules implementing Section 312 of the USA PATRIOT Act. 10 Under the
Interim Final Rule implementing Section 312, the U.S. Treasury has designated the
following four categories of financial institutions as having to comply with Section 312:
(i) Banks 11 ;
(ii) Securities brokers and dealers (registered or required to register with the
SEC);
(iii) FCMs (registered or required to register with the CFTC); and
(iv) IBs (registered or required to register with the CFTC). 12
6 “Correspondent account” is defined to mean 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.” 31 C.F.R. 103.175(c)(1).
7 “Private banking account” is defined to mean an account that (i) requires a minimum aggregate amount of
funds or other assets of not less than U.S.$ 1 million; (ii) is established on behalf of or for the benefit of
one or more individuals who have a direct or beneficial ownership interest in the account; and (iii) is
assigned to or is administered or managed by the covered financial institution. 31 C.F.R. 103.175(n).
8 See THSH USA PATRIOT Act Update Memorandum: Proposed Regulation to Implement Section 312;
Best Practices Identified by the SEC (discussing the due diligence to conduct with respect to correspondent
accounts and private banking accounts, respectively).
9 See e.g. 31 C.F.R. 103.176(b)-(c) (enhanced due diligence for foreign banks); 31 C.F.R. 103.178(c)
(enhanced due diligence for senior foreign political figures).
10 See supra note 4.
11 The term “banks” includes an insured bank (as defined in section 3(h) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(h)); a commercial bank; an agency or branch of a foreign bank in the United States; a
federally insured credit union; a thrift institution; and a corporation acting under section 25A of the Federal
Reserve Act (12 U.S.C. 611 et seq). See U.S. Treasury and FinCEN commentary to Interim Final Rule.
12 See U.S. Treasury and FinCEN commentary to Interim Final Rule. Accordingly, the following financial
institutions that were originally required to implement due diligence programs pursuant to Section 312 of
the USA PATRIOT Act are now deferred from compliance: casinos, mutual funds, money services
businesses, and operators of a credit card system. See 31 C.F.R. 103.183(a); 31 C.F.R. 103.175(d)(1).
Furthermore, the deferral from compliance with Section 312 continue to apply to: dealers in precious
metals, stones or jewels; 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; commodity pool operators (“CPOs”); commodity
trading advisors (“CTAs”); and investment companies other than mutual funds. See 31 C.F.R. 103.183(a);
U.S. Treasury and FinCEN commentary to Interim Final Rule, note 7.
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3. Extent of Compliance under Section 312 – What is Required For Now
A. Banks
Banks must conduct due diligence on both correspondence accounts and private banking
accounts established, maintained, administered, or managed in the United States. 13
However, rather than list specific procedures for banks to implement, the U.S. Treasury
and FinCEN currently require banks to adopt “best practices” standards discussed in
releases issued by industry associations. Therefore, for correspondent accounts, in the
interim, a bank should adopt the “Guidelines for Counter Money Laundering Policies and
Procedures in Correspondent Banking,” issued by the New York Clearing House
Association, L.L.C. and “Customer Due Diligence for Banks,” issued by the Basel
Committee on Banking Supervision. 14 For private banking accounts, in the interim, a
bank should adopt the “Private Banking Activities” issued by the U.S. Federal Reserve,
the “Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of
Foreign Official Corruption” issued by the U.S. Federal Reserve, and the “Global Anti-
Money Laundering Guidelines for Private Banking: Wolfsberg AML Principles” issued
by the Wolfsberg Group. 15
B. Broker-dealers, FCMs, and IBs
Broker-dealers, FCMs, and IBs are required to conduct due diligence on only private
banking accounts. 16 However, rather than list specific procedures for broker-dealers,
FCMs and IBs to implement, the U.S. Treasury and FinCEN currently require brokerdealers,
FCMs and IBs to adopt “best practices” standards for private banking accounts
discussed in releases issued by industry associations. Therefore, for private banking
accounts, a broker-dealer, FCM or IB likewise should adopt the “Private Banking
Activities” issued by the U.S. Federal Reserve, the “Guidance on Enhanced Scrutiny for
Transactions that May Involve the Proceeds of Foreign Official Corruption” issued by the
13 See 31 CFR 103.181.
14 New York Clearing House Association, L.L.C., “Guidelines for Counter Money Laundering Policies and
Procedures in Correspondent Banking” (March 2002) available at and the Basel
Committee on Banking Supervision, “Customer Due Diligence for Banks” (October 2001) available at
. See U.S. Treasury and FinCEN commentary to Interim Final Rule, note 8.
15 Federal Reserve (SR 97-19 (SUP)), “Private Banking Activities” (June 30, 1997) available at
, Federal Reserve (SR 01-03
SUP)), “Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign
Official Corruption” (January 16, 2001) available at
, and Wolfsberg Group,
“Global Anti-Money Laundering Guidelines for Private Banking: Wolfsberg AML Principles” (1 st
Revision May 2002) available at . See U.S. Treasury and FinCEN
commentary to Interim Final Rule, note 11.
16 See 31 CFR 103.182. For broker-dealers, FCMs, and IBs, the U.S. Treasury and FinCEN has exercised
its authority to temporarily defer the application of all other requirements under Section 312. See 31 CFR
103.182(b); U.S. Treasury and FinCEN commentary to Interim Final Rule.
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U.S. Federal Reserve, and the “Global Anti-Money Laundering Guidelines for Private
Banking: Wolfsberg AML Principles” issued by the Wolfsberg Group. 17
C. Banks, Broker-Dealers, FCMs, and IBs: Evidencing a Reasonable Due Diligence
Policy and Compliance with Section 312
The U.S. Treasury stated that “in the interim, a reasonable due diligence policy, in
Treasury’s view, is one that comports with existing best practices standards.” 18
Moreover, by adopting existing best practices standards, it “evidences good faith efforts”
of compliance. 19 It appears though that the U.S. Treasury expects banks, broker-dealers,
FCMs, and IBs to adopt existing best practice standards in a wholesale fashion based on
the U.S. Treasury’s comment that a financial institution should have a justification for
not adopting a particular best practice or standard. 20 As such, banks, broker-dealers,
FCMs, and IBs should consider adopting best practices standards in their entirety as a
means of demonstrating that it has implemented a reasonable due diligence policy until
final rules are issued.
Furthermore, even though there is no specific guidance as to the due diligence measures
to exercise when screening a non-U.S. person or a non-U.S. financial institution, the U.S.
Treasury expects banks, broker-dealers, FCMs, and IBs to accord priority to conducting
due diligence on high risk customers. 21 In particular, the U.S. Treasury expects banks,
broker-dealers, FCMs, and IBs to conduct enhanced due diligence on those high risk
customers seeking to open on or after July 23, 2002. 22 By focusing its efforts on non-
U.S. persons/entities that pose a high risk of money laundering, a bank’s, broker-dealer’s,
FCM’s, and IB’s due diligence program will be deemed to be reasonable in the U.S.
Treasury’s view. 23
17 Federal Reserve (SR 97-19 (SUP)), “Private Banking Activities” (June 30, 1997) available at
, Federal Reserve (SR 01-03
SUP)), “Guidance on Enhanced Scrutiny for Transactions that May Involve the Proceeds of Foreign
Official Corruption” (January 16, 2001) available at
, and Wolfsberg Group,
“Global Anti-Money Laundering Guidelines for Private Banking: Wolfsberg AML Principles” (1 st
Revision May 2002) available at . See U.S. Treasury and FinCEN
commentary to Interim Final Rule, note 11.
18 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
19 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
20 “A due diligence program that does not adopt all of the best practices and standards described in industry
and other available guidance also could be considered reasonable if there is a justifiable basis for not
adopting a particular best practice or standard, based on the particular type of accounts held by he
institution.” See U.S. Treasury and FinCEN commentary to Interim Final Rule, note 8. See also U.S.
Treasury and FinCEN commentary to Interim Final Rule, note 11.
21 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
22 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
23 “In the interim period before the issuance of a final rule, a due diligence program under section
5318(i)(1) will be reasonable in Treasury’s view if it focuses compliance efforts on the correspondent
accounts [and private banking accounts] that pose a high risk of money laundering based on an overall
assessment of the money laundering risk…” See U.S. Treasury and FinCEN commentary to Interim Final
Rule.
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4. Effective Date of Compliance
For banks, broker-dealers, FCMs, and IBs, the effective date of compliance with Section
312 of the USA PATRIOT Act is July 23, 2002, regardless of whether the U.S. Treasury
has issued final rules implementing Section 312. 24 Moreover, application of the due
diligence measures prescribed in Section 312 applies regardless of when a correspondent
account or a private banking account was opened. 25
The U.S. Treasury anticipates issuing a final rule implementing Section 312 no later than
October 25, 2002. 26
5. Significance of the Interim Final Rule for Section 312
The significance of this release is that the U.S. Treasury recognizes the complexity of
implementing Section 312 of the USA PATRIOT Act and therefore has adopted a more
studied approach towards compliance. A strict application of the proposed rules would
have been unrealistic and counterproductive in light of the unique business practices of
each financial industry. 27 As such, the U.S. Treasury acknowledges the need for further
study as to how each industry should comply with Section 312. 28
Furthermore, the Interim Final Rule implementing Section 312 is significant because it
demonstrates that the U.S. Treasury is being responsive to comments and concerns from
the financial services industry. 29 A primary concern that the financial industry has
expressed to the U.S. Treasury is that neither Title III of the USA PATRIOT Act nor the
proposed rule implementing Section 312 defined key terms that establish the parameters
of compliance with Section 312 for U.S. financial institutions. 30 Even if certain terms are
defined, the criticism is that such defined terms are “overly broad and difficult to
implement.” 31 In response to these concerns and difficulties, the U.S. Treasury has taken
the position that additional time “is necessary and appropriate” to consider the definitions
and the text of the proposed rule in light of comments received to determine whether the
terms used in Section 312 should be further defined with respect to each financial
institution. 32
24 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
25 See U.S. Treasury and FinCEN commentary to Interim Final Rule. See also THSH USA PATRIOT Act
Update Memorandum: Proposed Regulation to Implement Section 312; Best Practices Identified by the
SEC (discussing retroactive effect of Section 312).
26 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
27 See U.S. Treasury and FinCEN commentary to Interim Final Rule: “Were Treasury to require strict
compliance with the proposed rule, not only would it undermine the administrative process, but also it
might require financial institutions to incur substantial costs comply with provisions of the proposed rule
that may be altered or eliminated.”
28 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
29 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
30 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
31 See U.S. Treasury and FinCEN commentary to Interim Final Rule. In its commentary, the U.S. Treasury
and FinCEN noted that commenters consistently criticized the definitions of “correspondent account,”
“covered financial institution,” and “foreign financial institution” as being overly broad.
32 See U.S. Treasury and FinCEN commentary to Interim Final Rule.
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The Interim Final Rule and its commentary indicate that the application of the antimoney
laundering rules are not likely to be uniform but instead are likely to be tailored to
each industry. As such, the hedge fund industry should view this release as an
encouraging sign that the U.S. Treasury is willing to listen to the concerns of financial
institutions. Therefore, the hedge fund industry should be pro-active when proposed rules
for hedge funds are released for comment and collaborate with the U.S. Treasury on how
anti-money laundering should be accomplished in the industry.
* * * * * * *
If you have any questions or comments regarding compliance with the USA PATRIOT
Act and about the U.S. Treasury’s press release and the accompanying Interim Final Rule
implementing Section 312 of the USA PATRIOT Act, please feel free to contact Michael
G. Tannenbaum at (212) 508-6701, Ricardo W. Davidovich at (212) 508-6710 or
Roderick J. Cruz at (212) 702-3149.
July 30, 2002
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