When Congress passed the USA Patriot Act in October 2001, it came with a host of new anti-laundering provisions with which financial institutions (FIs) must now comply. But that's not all it included. Within the fine print are new definitions of what types of businesses are considered FIs, and increases in the responsibility for transactions with correspondent banks.
What does this mean for those affected by the Act? It means they immediately need to have processes and flexible technology in place to comply with the USA Patriot Act and new anti-money laundering legislation as it passes into law.
It's important to note that money laundering, once exclusively defined as the laundering of proceeds from illicit activity -- primarily drug trafficking -- is now being expanded to include funds used in the financing of terrorism. These funds may not originate from illicit activity, a requisite element of most money laundering offenses. The transaction patterns inherent in terrorism funding may not conform to common money laundering techniques. Without a sophisticated software system capable of automatically identifying these types of patterns, FIs will find it extremely challenging to comply with the latest legislation.
The USA Patriot Act
The USA Patriot Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act provides a number of provisions that FIs should look for when evaluating money laundering detection software.
For example, the act delves into how FIs transact with others by requiring that they enhance their scrutiny of correspondent and private banking accounts - in addition to accounts maintained by senior foreign political figures, their immediate family members and close associates.
A correspondent banking account is one through which another bank is conducting business including receiving deposits or make payments. Private banking accounts are accounts with minimum deposits of US$1 million and have an assigned bank employee who acts as a liaison between the bank and the account owner. Money laundering detection software should be capable of specifically targeting these accounts for heightened evaluation of transactions relating to these accounts.
Another type of account that is affected by the USA Patriot Act is concentration accounts. While concentration accounts are not specifically defined in the Act, fundamentally they are accounts through which funds are transmitted and commingled without personally identifying the originator. The purpose of these provisions in the Act is to prevent anonymity by transmitting funds into or through these accounts.
The regulations would prohibit financial institutions from allowing clients to transmit funds through concentration accounts, prohibit financial institutions from providing information about their concentration accounts to clients, and require financial institutions to have written procedures ensuring documentation of all transactions through concentration accounts.
By July 1, 2002, the Patriot Act legislation also will require that securities brokers and dealers file Suspicious Activity Reports (SARs).
At the very least, money laundering detection software should identify transactions conducted through concentration accounts for further scrutiny by compliance officials, ensure correspondent banks are compliant with the USA Patriot Act and evaluate securities transactions for potential money laundering.
Jurisdictions, Financial Institutions or International Transactions of Primary Money Laundering Concern
Because some financial institutions, jurisdictions and countries are known to have critical deficiencies in their anti-money laundering detection capabilities, special emphasis has been placed upon these by the U.S. Treasury Department. The concern may arise as a result of lax money laundering detection systems or a demonstrated unwillingness to co-operate in anti-money laundering efforts (such as the Non-Cooperative Countries and Territories (NCCTs) as identified by the Financial Action Task Force.)
Special measures required may include: additional record keeping or additional reporting requirements; identification of customers of foreign financial institutions who use an interbank payable-through account at a domestic financial institution; and increased scrutiny and restrictions concerning opening or maintaining interbank correspondent or payable-through accounts.
Verification of Identification
The U.S. Treasury Department also is required to establish minimum account opening standards that financial institutions must follow to verify the identity of both foreign and domestic customers. As part of the verification, FIs must maintain records of the information used to identify the customer. They also must consult government issued lists of known or suspected terrorists and terrorist organizations.
To ensure efficiency and ease of complying with these regulations, money laundering detection software should be capable of maintaining files containing NCCTs and other identified jurisdictions as well as government issued lists of terrorists and terrorist organizations. These files should be easily maintained and updated.
Anti-Money Laundering Programs
The Act requires financial institutions to establish anti-money laundering programs that, at a minimum, establish: internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and an independent audit function to test programs. Money laundering detection software should, at a minimum, provide an independent method of testing employee education and training.
By identifying suspicious transactions for evaluation by compliance officers, money laundering detection software provides the mechanism to evaluate completion of Currency Transaction Reports (CTRs) and SARs in accordance with regulatory guidelines. In addition, by identifying employee compliance with regulation, the software should enable an automated, independent evaluation of the effectiveness of the training regimen, targeted training needs and employee compliance. The software also has the potential to detect collusive employees and "willful blindness".