The Devil’s in the Details: Complying With the PATRIOT Act

In December, the Financial Crimes Enforcement Network (FinCEN) issued a final rule to implement the provisions of Section 312 of the USA PATRIOT Act dealing with foreign correspondent accounts and private banking. The new provisions become effective April 4, 2006.

Under the rule, financial institutions must take "reasonable steps" to identify the owners of a private banking account and determine whether any of its owners are senior foreign political figures. Furthermore, financial institutions will have to ensure that account activity matches up with the purpose and expected uses of the account.

Similar provisions cover correspondent accounts, which foreign financial institutions use to resell the capabilities of U.S. banks to their own clients. Now, U.S.-based banks that open correspondent accounts for a foreign institution will have to do their homework—on the foreign financial enterprise, its customers and even the anti-money laundering supervisory regime overseeing that institution.

The provisions of the final rule are focused on "enhancing what you're already doing," suggests Agnes Bundy-Scanlan, counsel in the financial services practice of Goodwin Procter (Boston). "You want to ensure that your policies and procedures, and your internal controls are appropriate for your institution and your customer base," she adds.

A New Level of Creative Monitoring

"Monitoring has to be taken to a new level," continues Bundy-Scanlan. "It'll take time, creativity and some dollars."

Part of the creative process is incorporating monitoring into profitability models. "The leading institutions are refining their models as to what makes a customer a risky customer," says Jeff Lavine, partner in the regulatory advisory services group at PricewaterhouseCoopers. "From the time a customer walks in the door, through the monitoring of that customer, through the investigation of any suspicious activities—ultimately, that ends in an evaluation of whether that customer is still worth doing business with."

Because of the nature of their accounts, private banking clients require more hands-on evaluation than do retail banking clients. "Because there is the hope for a profitable relationship and a reasonably good profit margin on the customer, you can afford to do detailed due diligence on that customer, and are expected to do so," says Lavine.

In response, third-party service providers offer intelligence about not only foreign individuals, but also about the correspondent banks. "Our capabilities can help those organizations monitor the riskiness of correspondent banks," explains Frank Caruana, director of product management for anti-money laundering, Experian (Costa Mesa, Calif.). "You have to know the banks' management, audit capabilities, controls in place and the type of customers they have."

However, while banks can outsource the tasks, they cannot pass off the responsibility involved with due diligence. Thus, the ideal approach is personal. "When new customers approach you, there's no substitute for consulting some of your contacts and long-trusted customers in the marketplace, and checking them out," relates PwC's Lavine.

Indeed, monitoring technology can only go so far in a compliance operation. "You need live bodies," says Goodwin Procter's Bundy-Scanlan. "It's still not yet at the point where this can all be done through technology." --Ivan Schneider