ANALYSIS OF ANTI-MONEY LAUNDERING PROVISIONS OF USA PATRIOT ACT

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1 ANALYSIS OF ANTI-MONEY LAUNDERING PROVISIONS OF USA PATRIOT ACT Betty Santangelo Schulte Roth & Zabel LLP December 14, 2001 Copyright 2001 Betty Santangelo. All rights reserved.

2 Summary of Anti-Money Laundering Provisions of USA PATRIOT Act of 2001 Betty Santangelo, * Tim O'Neal Lorah and Megan Elizabeth Murray EXECUTIVE SUMMARY On October 26, 2001, President Bush signed the USA PATRIOT Act, 1 aimed at giving the government new powers in the war on terrorism. Title III of the new legislation, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the Act ), imposes significant new anti-money laundering requirements on all financial institutions, including domestic banks and domestic operations of foreign banks, broker-dealers, futures commission merchants ( FCMs ), and investment companies, and gives the U.S. Treasury Department (the Treasury ) the power to impose potential additional obligations on them as well. It also impacts indirectly on foreign banks. This memo outlines the provisions of Title III and highlights provisions of particular interest to the various affected financial institutions. It also addresses the Interim Guidance on compliance with sections 313 and 319(b) of the USA PATRIOT Act 2 that was issued by the Treasury Department on November 20, First, as a general matter, all financial institutions 3 must be mindful 31 U.S.C. 5312(a)(2), of section 352 of Title III requiring the establishment of Anti-Money Laundering * Betty Santangelo is a litigation partner with the New York City law firm of Schulte Roth & Zabel LLP. Ms Santangelo's area of practice includes, among other things, providing advice with respect to the Bank Secrecy Act, as well as other anti-money laundering issues. Tim O'Neal Lorah and Megan Elizabeth Murray are associates of the firm. 1 See H.R. 3162, "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001," Pub. L. No (2001) 2 See U.S. Department of the Treasury, Interim Guidance Concerning Compliance by Covered U.S. Financial Institutions with New Statutory Anti-Money Laundering requirements regarding Correspondent Accounts Established or Maintained for Foreign Banking Institutions (Nov. 20, 2001). 3 Section 352 amends section 5318 of Title 31. Pursuant to 31 U.S.C. 5312(a)(2), the term ''financial institution'' includes: "(A) an insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h))); (B) a commercial bank or trust company; (C) a private banker; (D) an agency or branch of a foreign bank in the United States; (E) an insured institution (as defined in section 401(a) of the National Housing Act (12 U.S.C. 1724(a))); (F) a thrift institution; (G) a broker or dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); (H) a broker or dealer in securities or commodities; (I) an investment banker or investment company; (J) a currency exchange; (K) an issuer, redeemer, or cashier of travelers' checks, checks, money orders, or similar instruments; (L) an operator of a credit card system; (M) an insurance company; (N) a dealer in precious metals, stones, or jewels; (O) a pawnbroker; (P) a loan or finance company; (Q) a travel agency; (R) a licensed sender of money; (S) a telegraph company; (T) a business engaged in vehicle sales, including automobile, airplane, and boat sales; (U) persons involved in real estate closings and settlements; (V) the United States Postal Service; (W) an agency of the United States Government or of Copyright 2001 Betty Santangelo. All rights reserved.

3 Page 3 Programs. Section 352 requires that all financial institutions by April 24, 2002 establish antimoney laundering programs which include, at a minimum, developing internal policies, procedures, and controls; designating a compliance officer; establishing an ongoing employee training program; and establishing an independent audit function to test programs. Before that time the Secretary is authorized to issue regulations setting minimum standards for the programs and exempting from the requirements those institutions that are not presently subject to implementing regulations under the Bank Secrecy Act, such as investment companies and FCMs. These institutions need to have their responsibilities clarified by the implementing regulations. Second, section 326 amends 31 U.S.C by adding a section entitled Identification and Verification of Accountholders. The new section requires the Secretary to issue regulations setting minimum standards for customer identification that shall apply to accounts for customers opening an account at a financial institution and requires certain minimum standards for both the financial institutions and for their customers as described below. All financial institutions, including banks, broker-dealers and FCMs, should carefully monitor any regulations proposed on this issue. Third, all financial institutions are covered by the provisions of section 351 that were purportedly designed to clarify the terms of the safe harbor for financial institutions from civil liability for filing suspicious activity reports. This section amends the existing safe harbor provision in certain respects, including making the provision applicable to claims filed pursuant to arbitration agreements. As discussed more fully below, in certain limited respects it appears to have the potential unintended effect of narrowing the safe harbor provision. A related section section 355 allows an insured depository institution to disclose in written employment references requested by another insured depository institution information concerning the possible involvement of an employee in potentially unlawful activity without being subject to liability, so long as the disclosure is not made with malicious intent. Fourth, Treasury is permitted to adopt special measures for all domestic financial institutions or domestic financial agencies 4 directed to particular money laundering concerns relating primarily to foreign jurisdictions. The provisions that can be imposed include requiring additional recordkeeping and reporting of certain financial transactions, obtaining and retaining information relating to beneficial ownership of accounts opened by a foreign person, identifying a State or local government carrying out a duty or power of a business described in this paragraph and (X) a casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000 which - (i) is licensed as a casino, gambling casino, or gaming establishment under the laws of any State or any political subdivision of any State; or (ii) is an Indian gaming operation conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming (as defined in section 4(6) of such Act.)" 4 The terms ''domestic financial agency'' and ''domestic financial institution'' are defined in 31 U.S.C. 5312(b)(1) to apply to an action in the United States of a "financial agency or institution." (Emphasis added). The statutory definition of "financial institution" is set forth in footnote 3, above. "Financial agency" means a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold. See 31 U.S.C. 5312(a)(1).

4 Page 4 customers of financial institutions opening payable-through accounts and correspondent accounts, and even prohibitions on the opening or maintenance of certain payable-through or correspondent accounts. A comparable provision prohibiting the opening of certain correspondent accounts for shell banks, i.e. foreign banks that do not have a physical presence in any country is contained in section 313, but that provision is effective on December 25, Virtually all of the special measure provisions of Title III would be applicable at a minimum to domestic banks and the U.S. operations of foreign banks in that they either give the Treasury specific authority or direct it to propose regulations that will affect them in differing respects. However, Treasury also has the authority to define its regulations, in consultation with the functional regulator, and can draft them to extend to broker-dealers as well as to other financial institutions. Treasury has already indicated its intent to apply the correspondent bank provisions to broker-dealers. 5 It remains unclear how such regulations would be defined given the definition of payable-through accounts in the Act 6 and given the nature of correspondent accounts that were the subject of prior Congressional hearings. 7 Other financial institutions, including broker-dealers and FCMs, should be mindful of any such proposed regulations to determine whether they could be applicable to their businesses. In addition to the special measures discussed above, section 312 requires a financial institution that engages in correspondent banking or private banking on behalf of a non-u.s. person to adopt due diligence, and in some cases enhanced due diligence, procedures for detecting and reporting money laundering through those accounts. As defined, these provisions are clearly applicable to domestic banks and the U.S. operations of foreign banks. But they too have the potential for being applied to other financial institutions. Minimum standards are established by the statute for private banking accounts, including accounts for senior foreign political figures, their family members or close associates. Minimum standards are also established for correspondent accounts located in offshore jurisdictions or noncooperative jurisdictions. Notably, these provisions are applicable on July 23, 2002, 5 6 See Interim Guidance at 6. A payable-through account includes a transaction account as it is defined in section 19(b)(1)(C) of the Federal Reserve Act, that is, "a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts." 12 U.S.C. 461(b)(1)(C). See also definition of payable-through accounts in Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations Report on Correspondent Banking: A Gateway to Money Laundering, Feb. 5, 2001, at 15 n.14. ("Payable-through accounts 'allow a respondent bank's clients to write checks that draw directly on the respondent bank's correspondent account. '") 7 See generally Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations Report on Correspondent Banking: A Gateway to Money Laundering, Feb. 5, 2001, at 11 ( Correspondent banking is the provision of banking services by one bank to another bank. It is a lucrative and important segment of the banking industry. It enables banks to conduct business and provide services for their customers in jurisdictions where the banks have no physical presence. The Report describes specific types of banks, including shell banks, offshore banks, and banks in non-cooperating jurisdictions, as particularly high money laundering risks. ); see also U.S. House of Representatives, Committee on Banking and Financial Services, Hearing on Private Banking, Testimony of Thomas A. Renyi, Chairman of the Board and Chief Executive Officer, Bank of New York, Sept. 21, 1999.

5 Page 5 regardless of whether the implementing regulations are adopted. The provisions are applicable to all existing accounts, as well as new accounts. Implementing regulations shall be adopted no later than April 24, Additionally, section 313 prohibits covered financial institutions 8 from maintaining correspondent bank accounts with foreign shell banks or banks that do not maintain a physical presence in any country. Treasury has indicated in the Interim Guidance that this prohibition will also apply to non-bank covered financial institutions, including broker-dealers. A covered financial institution is also required to take reasonable steps to ensure that none of its correspondent accounts is being used by a foreign bank to indirectly service a foreign shell bank. This section does not apply if the foreign bank is an affiliate of a depository institution, credit union, or foreign bank that maintains a physical presence in the United States or a foreign country, and is subject to regulation. The Interim Guidance terms such entities regulated affiliates and adds to the definition entities that are controlled by or are under common control with the depository institution, credit union, or foreign bank. This provision is effective on December 25, Section 325 provides that the Secretary may propose regulations governing the maintenance of concentration accounts at financial institutions in order to ensure that concentration accounts are not used to prevent the association of the identity of an individual customer with the movement of funds of which the customer is the beneficial owner. The term concentration accounts is not defined in the legislation. Although the accounts that were the subject of prior Congressional investigations 9 were accounts at banks, given the political atmosphere, it is possible that Treasury will interpret this section to include broker-dealers. Accordingly, all financial institutions, including broker-dealers and FCMs, should monitor any proposed regulations to identify the accounts that are covered by the regulations. Broker-dealers should pay particular attention to section 356 which requires Treasury to propose, before January 1, 2002, regulations requiring registered brokers and dealers to file reports of suspicious financial transactions (i.e., SAR reports). (Broker-dealers that are subsidiaries of bank holding companies are already required to file SAR reports under the rules of the Bank Supervisory Agencies.) Final implementing regulations are to be published by the Secretary of the Treasury no later than July 1, FCMs should also pay close attention to section 356, which allows the Secretary to impose the same SAR requirement on FCMs, commodities trading advisors, and commodity pool operators. Although broker-dealers in commodities have long been included in the 8 Subsection (j)(1) of this section defines, for the purposes of this subsection, the phrase "covered financial institution" as any "financial institution described in subparagraphs (A) through (G)" of 31 U.S.C. 5312(a)(2). As set forth in footnote 3 above, these include (A) an insured bank; (B) a commercial bank or trust company; (C) a private banker; (D) an agency or branch of a foreign bank in the United States; (E) an insured institution; (F) a thrift institution; and (G) a broker or dealer registered with the SEC under the Securities Exchange Act of See United States General Accounting Office, Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering, Pub. GAO/OSI-99-1, at 9 (Oct. 1998) (describing a concentration account as a business deposit account that commingles funds of a number of bank branches/affiliates and bank customers ).

6 Page 6 definition of financial institutions under 31 U.S.C. 5312, pursuant to section 321 of this Act, FCMs are now specifically included as financial institutions under this section, as are commodity trading advisors and commodity pool operators. Moreover, FCMs should also monitor any regulations imposed pursuant to section 365 since they could theoretically be covered by its provisions, which require reporting of so-called cash transactions 10 over $10,000 received in a trade or business. Investment companies should note that this same section 356 provides for an Investment Company Study not later than one year from the date of enactment of the Act. As more fully discussed below, the section provides that the Secretary, jointly with the Board of Governors of the Federal Reserve System and the SEC, shall submit a report to Congress on recommendations for effective regulations to apply the provisions of the Bank Secrecy Act to investment companies. This same section, subsection (c)(4), which relates to beneficial ownership of personal holding companies, authorizes the Federal Reserve Board and the SEC to recommend that the Secretary promulgate regulations to require any corporation or business or other grantor trust that has 5 or fewer common shareholders or holders of beneficial or other equity interest to disclose their beneficial owners when opening accounts or initiating funds transfers at any domestic financial institution. In addition to the provisions above which cover them, of particular concern to foreign banks and their U.S. bank operations are sections 311, Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern ; 312, Special Due Diligence for Correspondent Accounts and Private Banking Accounts ; 313, Prohibition on United States Correspondent Accounts with Foreign Shell Banks ; 317, Long-Arm Jurisdiction Over Foreign Money Launderers ; 319, Forfeiture of Funds in United States Interbank Accounts ; 328, International Cooperation on Identification of Originators of Wire Transfers ; and 330, International Cooperation in Investigation of Money Laundering, Financial Crimes, and the Finances of Terrorist Groups. These sections either require more scrutiny of foreign banking relationships with domestic financial institutions or impose new obligations on domestic financial institutions as they interact with foreign banks. Specifically, the following provisions impact foreign banks: Section 311 authorizes Treasury to require domestic financial institutions, including an agency or branch of a foreign bank in the United States, to apply special measures to dealings with specific jurisdictions, foreign financial institutions, transactions or types of accounts that the Secretary has determined are of primary money laundering concern. As noted above, such measures can include prohibitions on payable-through and correspondent accounts for foreign banking institutions. 10 These provisions are comparable to the Internal Revenue Code provisions that are presently applicable to FCMs. Pursuant to regulations adopted under the Internal Revenue Code and pursuant to its authorization under section 365 of the Act, respectively, cash has been and can be defined by the Secretary as transactions involving monetary instruments with a face amount of less than $10,000.

7 Page 7 Section 312 requires that financial institutions apply enhanced due diligence to correspondent accounts requested or maintained by, or on behalf of, a foreign bank operating under an offshore banking license or under a banking license issued by a noncooperative foreign country. The minimum requirements for enhanced due diligence for certain correspondent accounts are that the specified financial institution ascertain information about the foreign bank, including the identity of the owners of the foreign bank; the nature and extent of the interest of each owner; and whether the foreign bank provides correspondent accounts for other foreign banks. If it does provide such accounts, the financial institution must ascertain the identity of those foreign banks and gather related due diligence information. As noted above, section 313 prohibits covered financial institutions 11 from maintaining correspondent bank accounts with foreign banks that do not maintain a physical presence in any country. Covered financial institutions are also required to take reasonable steps to ensure that none of its correspondent accounts is being used by the foreign banks to indirectly service a foreign shell bank. This section does not apply to foreign banks that are regulated affiliates, defined by the Interim Guidance as affiliates of depository institutions, credit unions, or foreign banks that maintain a physical presence in the United States or a foreign country and are subject to supervision by a banking authority in the foreign country, that are controlled by or are under common control with the depository institution, credit union, or foreign bank. Treasury has provided a model certification form with the Interim Guidance that institutions may choose to use an as interim means to assist them in meeting their obligations related to dealing with foreign shell banks under this section. Section 317 provides the U.S. district courts under certain circumstances with long-arm jurisdiction over, among others, foreign financial institutions formed under the laws of a foreign country, if, among other things, the foreign financial institution maintains a bank account at a financial institution in the United States. Section 319 includes provisions broadening the ability of the government to seize and forfeit assets held in a foreign bank, if the foreign bank has an interbank account in the United States. 12 Section 319 also provides that the Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank that maintains a See footnote 8 above. For purposes of this section, interbank account is defined as [a]n account held by one financial institution at another financial institution primarily for the purpose of facilitating customer transactions. See discussion of section 319, below, referencing 18 U.S.C. 984(c)(2)(B).

8 Page 8 correspondent account in the United States and request records related to such an account, including records maintained outside the United States relating to the deposit of funds into the foreign bank. Section 328 directs the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State, to take all reasonable steps to encourage foreign governments to require the inclusion of the name of the originator in wire transfer instructions sent to the United States. In section 330, Congress expresses its sense that the President should direct the Secretary of State, the Attorney General, or the Secretary of the Treasury, in consultation with the Board of Governors of the Federal Reserve, to seek to enter into negotiations with foreign jurisdictions that may be utilized by a foreign terrorist organization in order to further cooperative efforts to ensure that foreign banks and other financial institutions maintain adequate records of transactions and account information relating to any foreign terrorist organization or member thereof. They would also seek to establish a mechanism whereby those records would be made available to United States law enforcement. OTHER MISCELLANEOUS PROVISIONS Section 319 adds a provision to section 5318 of the Bank Secrecy Act entitled Bank Records Related to Anti-Money Laundering Programs, which requires that not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution. While this speaks of covered financial institutions, which is a broader phrase, it appears to be relevant primarily to banks since it involves both bank recordkeeping and procedures for responding to requests by a Federal banking agency. Section 319 also requires covered financial institutions that maintain correspondent accounts for a foreign bank in the United States to maintain records in the United States identifying the owners of the foreign bank and the name and address of a person who resides in the United States and is authorized to accept service of process for records regarding the correspondent account; to produce such information within 7 days after receipt of a written request from a Federal law enforcement officer; and to terminate a correspondent banking relationship within 10 business days of receipt of written notice from the Secretary or the Attorney General of the correspondent bank s failure to comply with or respond to a subpoena. Under the Interim Guidance, the term covered financial institutions as it is used in this section, does not include broker-dealers. As noted

9 Page 9 below, Treasury will be issuing guidance relating to broker-dealers shortly. The model certification provided by Treasury with the Interim Guidance may be used as a means to meet the recordkeeping obligations under this section. Covered financial institutions are required to comply with these requirements by December 25, Although it might appear reasonable to read this section in tandem with section 312, the Interim Guidance specifically states that "no inference may be drawn as to the applicability of the definition [of "owner"] to other provisions of the USA PATRIOT Act, including the enhanced due diligence requirements" set forth in Section 312 (relating to different standards for reporting ownership information). Section 327 requires the Federal Reserve Board to take into consideration the effectiveness of the company or companies in combating money laundering activities, including in overseas branches, in connection with any application submitted to the Board under Section 3 of the Bank Holding Company Act. The section requires a similar review with respect to mergers involving insured depository institutions under the Federal Deposit Insurance Act. Both provisions are applicable after December 31, Section 362, Establishment of Highly Secure Network, provides that the Secretary shall establish such a network in FinCEN to allow financial institutions to file reports and receive alerts electronically. This network shall be in place by July 26, Finally, section 314 provides that regulations shall be adopted by the Secretary to encourage cooperation among financial institutions, regulatory authorities, and law enforcement authorities in combating money laundering. Section 314 also permits financial institutions to share information with each other relating to money laundering or terrorist activity upon notice to the Secretary of the Treasury. The provision appears to be effective immediately without implementing regulations. It is not clear whether this provision will inadvertently limit in any way information routinely shared by financial institutions without notice to the Secretary of the Treasury. TIMELINE All financial institutions need to keep the following timeline in mind. Many of the provisions take effect over the coming year, some without requiring implementing regulations. Others only take effect upon the adoption of implementing regulations, but there are specific time periods set forth in the statute for their adoption. The Prohibition on United States Correspondent Accounts with Foreign Shell Banks contained in section 313 takes effect on December 25, 2001.

10 Page 10 Financial institutions are required to comply with the provisions of section 319, Forfeiture of Funds in United States Interbank Accounts relating to maintaining records of ownership of foreign banks and authorized person for receipt of service by December 25, The provisions of section 327 require the Federal Reserve Board to take into consideration the money laundering programs of companies in connection with any application submitted to the Board under Section 3 of the Bank Holding Company Act and in connection with any mergers involving insured depository institutions under the Federal Deposit Insurance Act. Both provisions are applicable after December 31, Section 356 requires that proposed broker-dealer SAR regulations be published by Treasury before January 1, 2002 and published in final form no later than July 1, The regulations provided for in section 314, Cooperative Efforts to Deter Money Laundering, shall be adopted by the Secretary within 120 days of enactment of the Act (or by February 25, 2002). Section 352, Anti-Money Laundering Programs, becomes effective in 180 days (or on April 24, 2002). The section requires the Secretary to issue regulations within 180 days as well, but does not condition the effective date on the Secretary s fulfillment of this obligation. Section 365 requires the Secretary of the Treasury to file regulations in final form implementing the provision relating to Reports of Coin or Currency Received in a Nonfinancial Trade or Business before the end of the 6-month period after the enactment of the Act (or by April 26, 2002). The due diligence requirements of section 312, pertaining to correspondent and private banking accounts, apply to accounts opened before, on, or after the date of enactment of this Act. The section is self-executing in that its requirements go into effect 270 days after enactment of the Act (or on July 23, 2002), regardless of whether final regulations have been promulgated. The regulations are to be delineated within 180 days of the enactment of the Act (or April 24, 2002). Section 362 provides for the establishment of a highly secure network by the Secretary to allow financial institutions to file reports and receive alerts electronically, which shall be in place within 9 months of enactment of the Act (or by July 26, 2002). Section 326, Verification of Identification, provides for regulations to be issued by the Secretary setting minimum standards for customer identification. This is a key provision for all financial institutions. The regulations to be promulgated

11 Page 11 under this section are to take effect no later than 1 year after the enactment of the Act (or by October 26, 2002). The Investment Company Study provided for in section 356 is to be completed not later than 1 year from the date of enactment of the Act (or by October 26, 2002). If you have any questions concerning the above, please contact: Betty Santangelo Tim O'Neal Lorah betty.santangelo@srz.com tim.lorah@srz.com

12 Page 12 OUTLINE OF PROVISIONS Set forth below in more detail are the various provisions of Title III. 13 SEC FINDINGS AND PURPOSES. Section 302 states Congressional findings on money laundering, its effects, and how it is accomplished. The findings include statements that: money laundering provides the financial fuel that permits transnational criminal enterprises to conduct and expand their operations to the detriment of the safety and security of American citizens; money laundering and the defects in financial transparency upon which money launderers rely are critical to the financing of global terrorism; money launderers subvert legitimate financial mechanisms and banking relationships by using them as protective covering for the movement of criminal proceeds and the financing of crime and terrorism, thereby threatening the safety of Americans and the integrity of American financial institutions and the global financial and systems upon which growth and prosperity depend; certain foreign jurisdictions that offer offshore banking and related facilities designed to provide anonymity, coupled with weak financial supervisory and enforcement regimes, provide tools to disguise ownership and movement of funds involved in criminal offenses, including narcotics trafficking, terrorism, arms smuggling, trafficking in human beings, and financial fraud; transactions involving such offshore jurisdictions make it difficult for law enforcement to follow the trail of criminal money; correspondent banking systems are susceptible in some circumstances to manipulation by foreign banks to permit the laundering of funds by hiding the identity of the real parties in interest; private banking services are susceptible to manipulation by money launderers, including corrupt foreign government officials; United States anti-money laundering efforts are impeded by outmoded and inadequate statutory provisions that make investigations, prosecutions, and forfeitures more difficult, particularly in cases involving foreign persons, banks, or countries; 13 For those familiar with the legislative history of H.R. 3162, it should be noted that most of the provisions of Title III closely track S. 1510, the Daschle-Sarbanes bill, with some additions from H.R. 3004, the bill introduced by Rep. Oxley.

13 Page 13 the ability to mount effective counter-measures to international money launderers requires national, bilateral, and multilateral action, using tools specifically designed for that effort; and the Basle Committee on Banking Regulation and Supervisory Practices and the Financial Action Task Force on Money Laundering have each adopted international anti-money laundering principles and recommendations. Section 302 also states the purposes of Title III. The purposes stated are to: increase the strength of the United States measures to prevent, detect, and prosecute international money laundering and the financing of terrorism; ensure that banking transactions and financial relationships (and the conduct of them) do not contravene the Federal Deposit Insurance Act or Chapter 2 of Title I of Public Law (84 Stat. 1116) (which has been incorporated into Title 12 and contains bank reporting and recordkeeping rules) or facilitate the evasion of any such provisions and that the purposes of those provisions continue to be fulfilled; strengthen the provisions put into place by the Money Laundering Control Act of 1986, especially with respect to crimes by non-united States nationals and foreign financial institutions; provide a clear national mandate for subjecting to special scrutiny those foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts that pose particular, identifiable opportunities for criminal abuse; provide the Secretary of the Treasury with broad discretion to take measures tailored to the particular money laundering problems presented by specific foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts; ensure that the employment of such measures by the Secretary permits appropriate opportunity for comment by affected financial institutions; provide guidance to domestic financial institutions on dealings with particular foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions that are of primary money laundering concern; ensure that the forfeiture of any assets in connection with the anti-terrorist efforts of the United States permits for adequate challenge consistent with providing due process rights;

14 Page 14 clarify the terms of the safe harbor from civil liability for filing suspicious activity reports; strengthen the authority of the Secretary to issue and administer geographic targeting orders and to clarify that violations of such orders may result in civil or criminal penalties; ensure that all appropriate elements of the financial services industry are subject to appropriate reporting requirements and that jurisdictional disputes do not hinder examination of compliance; strengthen the ability of financial institutions to maintain the integrity of their employee population; and strengthen measures to prevent the use of the United States financial system for personal gain by corrupt foreign officials and to facilitate the repatriation of any stolen assets to the citizens of the countries to whom such assets belong. SEC YEAR CONGRESSIONAL REVIEW; EXPEDITED CONSIDERATION. Section 303 provides that the provisions of this title (and any amendments thereto) shall terminate upon joint resolution of Congress on or after the first day of fiscal year Any joint resolution pursuant to this section should be considered by Congress expeditiously. SEC SPECIAL MEASURES FOR JURISDICTIONS, FINANCIAL INSTITUTIONS, OR INTERNATIONAL TRANSACTIONS OF PRIMARY MONEY LAUNDERING CONCERN. Section 311 creates 31 U.S.C. 5318A, titled Special measures for jurisdictions, financial institutions, or international transactions of primary money laundering concern. It authorizes the Secretary to require domestic financial institutions and domestic financial agencies 14 to take one or more special measures if the Secretary finds that reasonable grounds exist for concluding that a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, one or more classes of transactions within, or involving, a jurisdiction outside of the United States, or one or more types of accounts is of primary money laundering concern. Some of the special measures (requiring additional recordkeeping and reporting of certain financial transactions, obtaining and retaining information relating to beneficial ownership, and identifying customers of financial institutions opening payable-through accounts and correspondent accounts) can be imposed by regulation, order, or otherwise as permitted by law, but may not remain in effect for more than 120 days except pursuant to a rule promulgated 14 See footnotes 3 and 4 above (identifying the entities encompassed within the definition of "domestic financial institutions and domestic financial agencies").

15 Page 15 on or before the end of the 120-day period beginning on the date of issuance of such order. The special measure of prohibitions or conditions on opening or maintaining certain correspondent or payable-through accounts may only be imposed by regulation. In selecting which special measure or measures to take, the Secretary is directed to consult with the Chairman of the Board of Governors of the Federal Reserve System, any other appropriate Federal banking agency, as defined in section 3 of the Federal Deposit Insurance Act, the Secretary of State, the SEC, the CFTC, the National Credit Union Administration Board, and in the sole discretion of the Secretary, such other agencies and interested parties as the Secretary may find to be appropriate. The Secretary is also directed to consider whether similar action has been or is being taken by other nations or multilateral groups; whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States; the extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular jurisdiction, institution, or class of transactions; and the effect of the action on United States national security and foreign policy. This section specifically provides that it does not supersede or restrict any other authority held by the Secretary or any other agency. The special measures that the Secretary can impose by rule, regulation, or otherwise as provided by law, are: Recordkeeping and Reporting of Certain Financial Transactions The Secretary of the Treasury may require any domestic financial institution or domestic financial agency to maintain records, file reports, or both, concerning the aggregate amount of transactions, or concerning each transaction, with respect to a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, one or more classes of transactions within, or involving, a jurisdiction outside of the United States, or one or more types of accounts if the Secretary finds any such jurisdiction, institution, or class of transactions to be of primary money laundering concern. Such records and reports shall be made and retained at such time, in such manner, and for such period of time, as the Secretary shall determine, and shall include such information as the Secretary may determine, including: (i) the identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds transfer; (ii) the legal capacity in which a participant in any transaction is acting;

16 Page 16 (iii) the identity of the beneficial owner of the funds involved in any transaction, in accordance with such procedures as the Secretary determines to be reasonable and practicable to obtain and retain the information; and (iv) a description of any transaction. For purposes of this section and subsections (i) and (j) of section 5318 as added by sections 312 and 313, below, the term account is defined as a formal banking or business relationship established to provide regular services, dealings, and other financial transactions; and includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit. Comment: The reference in this section to one or more types of accounts could arguably be read to apply to domestic accounts, although such a reading would not appear to be consistent with the underlying intent of the section, which appears to be focused on activity arising in or related to jurisdictions outside the United States. Information Relating To Beneficial Ownership The Secretary may require any domestic financial institution or domestic financial agency to take such steps as the Secretary may determine to be reasonable and practicable to obtain and retain information concerning the beneficial ownership of any account opened or maintained in the United States by a foreign person (other than a foreign entity whose shares are subject to public reporting requirements or are listed and traded on a regulated exchange or trading market), or a representative of such a foreign person, that involves a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, one or more classes of transactions within, or involving, a jurisdiction outside of the United States, or one or more types of accounts if the Secretary finds any such jurisdiction, institution, transaction or type of account to be of primary money laundering concern. The Secretary is required to promulgate regulations defining beneficial ownership of an account for purposes of this section and subsections (i) and (j) of section 5318 as added by sections 312, Special Due Diligence for Correspondent Accounts and Private Banking Accounts, and 313, Prohibition on United States Correspondent Accounts with Foreign Shell Banks. =Such regulations shall address issues related to an individual s authority to fund, direct, or manage the account (including, without limitation, the power to direct payments into or out of the account), and an individual s material interest in the income or corpus of the account, and shall ensure that the identification of individuals under this section does not extend to any individual whose beneficial interest in the income or corpus of the account is immaterial.

17 Page 17 Information Relating To Certain Payable-Through Accounts If the Secretary finds a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, or one or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary may require any domestic financial institution or domestic financial agency that opens or maintains a payable-through account in the United States for a foreign financial institution 15 involving any such jurisdiction or any such financial institution operating outside of the United States, or a payable-through account through which any such transaction may be conducted, as a condition of opening or maintaining such account: (A) to identify each customer (and representative of such customer) of such financial institution who is permitted to use, or whose transactions are routed through, such payable-through account; and (B) to obtain, with respect to each such customer (and each such representative), information that is substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the United States. For purposes of this section and subsections (i) and (j) of section 5318 as added by sections 312 and 313, below, the term payable-through account means an account, including a transaction account (as defined in section 19(b)(1)(C) of the Federal Reserve Act), 16 opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States. Information Relating To Certain Correspondent Accounts If the Secretary finds a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, or one or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary may require any domestic financial institution or domestic financial agency that opens or maintains a correspondent account in the United States for a foreign financial institution involving any such U.S.C. 5312(b)(2) defines "foreign financial agency" and "foreign financial institution" to "apply to an action outside the United States of a financial agency or institution." (Emphasis added). The terms "financial agency" and "financial institution" are defined in footnotes 3 and As defined in that section, "transaction account" means "a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts." 12 U.S.C. 461(b)(1)(C).

18 Page 18 jurisdiction or any such financial institution operating outside of the United States, or a correspondent account through which any such transaction may be conducted, as a condition of opening or maintaining such account: (A) to identify each customer (and representative of such customer) of any such financial institution who is permitted to use, or whose transactions are routed through, such correspondent account; and (B) to obtain, with respect to each such customer (and each such representative), information that is substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the United States. For purposes of this section and subsections (i) and (j) of section 5318 as added by sections 312 and 313, below, a correspondent account [with respect to banking institutions] is 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. This definition is reiterated in the Interim Guidance as pertaining to subsection (j) of section 5318 as added by section 313. Comment: As discussed below, the Act creates several provisions relating to correspondent accounts that appear to overlap to a certain extent. Some of the provisions require implementing regulations; others are effective immediately. These overlapping provisions create a certain degree of confusion as to whether each statute is creating a different obligation or simply ensuring that the Secretary of the Treasury is provided with broad powers. The Interim guidance recognizes that the definitions set forth in the statute do not necessarily apply for each section. The special measure which can only be implemented by regulation is: Prohibitions or Conditions on Opening or Maintaining Certain Correspondent or Payable-Through Accounts If the Secretary finds a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, or one or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary, in consultation with the Secretary of State, the Attorney General, and the Chairman of the Board of Governors of the Federal Reserve System, may prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution, if such correspondent account or payablethrough account involves any such jurisdiction or institution, or if any such transaction may be conducted through such correspondent account or payablethrough account.

19 Page 19 Section 311 directs the Secretary to consult certain officials and consider specific information when determining whether jurisdictions, institutions, types of accounts, or transactions to be of primary money laundering concern. Section 311 also provides that in making a finding that reasonable grounds exist for concluding that a jurisdiction outside of the United States, one or more financial institutions operating outside of the United States, one or more classes of transactions within, or involving, a jurisdiction outside of the United States, or one or more types of accounts is of primary money laundering concern, the Secretary shall consult with the Secretary of State and the Attorney General. The Secretary is also directed to consider (in regard to a particular jurisdiction) evidence that organized criminal groups, international terrorists, or both, have transacted business in that jurisdiction; the extent to which that jurisdiction or financial institutions operating in that jurisdiction offer bank secrecy or special regulatory advantages to nonresidents or nondomiciliaries of that jurisdiction; the substance and quality of administration of the bank supervisory and countermoney laundering laws of that jurisdiction; the relationship between the volume of financial transactions occurring in that jurisdiction and the size of the economy of the jurisdiction; the extent to which that jurisdiction is characterized as an offshore banking or secrecy haven by credible international organizations or multilateral expert groups; whether the United States has a mutual legal assistance treaty with that jurisdiction; the experience of United States law enforcement officials and regulatory officials in obtaining information about transactions originating in or routed through or to such jurisdiction; and the extent to which that jurisdiction is characterized by high levels of official or institutional corruption. When making that determination as to a specific institution, the Secretary is instructed to consider the extent to which such financial institutions, transactions, or types of accounts are used to facilitate or promote money laundering in or through the jurisdiction; the extent to which such institutions, transactions, or types of accounts are used for legitimate business purposes in the jurisdiction; and the extent to which such action is sufficient to ensure, with respect to transactions involving the jurisdiction and institutions operating in the jurisdiction, that the purposes of this subchapter continue to be fulfilled, and to guard against international money laundering and other financial crimes. Notification To Congress When the Secretary imposes special measures, the Secretary is required by section 311 to notify in writing within 10 days the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate.

20 Page 20 Additional Definitions Applicable to Institutions Other Than Banks With respect to institutions other than banks, the Secretary shall, after consultation with the appropriate Federal functional regulators (as defined in section 509 of the Gramm-Leach-Bliley Act and for purposes of this act including the CFTC), define by regulation the term account, and shall include within the meaning of that term, to the extent, if any, that the Secretary deems appropriate, arrangements similar to payable-through and correspondent accounts. In the Interim Guidance, Treasury states that it intends to issue a rule further defining account to (1) prohibit non-bank covered financial institutions (including [broker-dealers]) from establishing or maintaining an account for a foreign shell bank that is not a regulated affiliate and (2) to require non-bank covered financial institutions to take reasonable steps to ensure that any account established, maintained, administered, or managed by such institution in the United States for a foreign bank is not being used by that foreign bank to indirectly provide banking services to a foreign shell bank that is not a regulated affiliate. This section also gives the Secretary authority to define other terms by regulation. SEC SPECIAL DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS. Section 312 requires that each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-united States person, including a foreign individual visiting the United States, or a representative of a non-united States person, shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts. Private banking accounts held by or on behalf of a non-united States person require at a minimum that the financial institution take reasonable steps to: (i) ascertain the identity of the nominal and beneficial owners of and the source of funds deposited into the account as needed to guard against money laundering and report suspicious transactions; and (ii) conduct enhanced scrutiny of any private banking account requested or maintained by or on behalf of a senior political figure, any member of the figure s immediate family, or any close associate of the figure to detect and report transactions that may involve the proceeds of foreign corruption. Private banking account is defined as an account or combination of accounts that requires a minimum aggregate deposit of funds or other assets of not less than $1,000,000, is established on behalf of one or more individuals who have a direct or beneficial ownership interest in the account, and is assigned to or administered by an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the owner of the account.