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

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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. [668425-2] 4
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. [668425-2] 5
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