Law.com Subscribers SAVE 30%
Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.
Industry Awaits Regulations under USA Patriot Act
The USA Patriot Act was signed into law by President Bush on October 26, 2001 (the 'Enactment Date'). Its stated purpose is to enable law enforcement officials to track down and punish those responsible for the 9/11 terrorist attacks and to protect against any similar attacks.
The act is officially titled: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001.
This is the first in a series of articles intended to address the impact on non-bank affiliated leasing companies of those provisions of the USA Patriot Act that relate to anti-money laundering and customer identification programs. In general, these provisions will impose compliance requirements on many companies involved in the leasing industry which ' to date ' have not been regulated on these issues. The next article in this series will be published following the issuance by the Treasury Department of regulations relevant to the 'loan and finance company' category of 'financial institution'; these regulations are expected in the next few months.
The provisions of the USA Patriot Act that relate to anti-money laundering and customer identification programs are set forth in Title III of the statute titled International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001. Section 352 relates to anti-money laundering, and Section 326 relates to customer identification programs.
The purpose of this first article is to provide a brief history of anti-money laundering statutes in the United States and a general overview of Sections 326 and 352 of the USA Patriot Act. The true impact of these Sections will depend on the content of regulations to be issued by the Secretary of Treasury, and on the definitions of 'financial institution,' 'monetary instrument' and 'account,' in each case as used throughout the USA Patriot Act and the Bank Secrecy Act (12 U.S.C. 1730d, 1829 and 1951 et seq.) and as clarified in the regulations to be issued by the Secretary of Treasury.
History of Anti-Money Laundering Statutes In the United States
By way of background, the history of anti-money laundering statutes in the United States begins in 1970 with the passage into law of the Bank Secrecy Act and the Racketeer Influenced and Corrupt Organization Act (18 U.S.C. 1961 et seq.) (RICO). These statutes were enacted at a time when organized crime and mob influence were gathering more attention of law enforcement. They are based on the fundamental principle that, if you can find the cash, you can trace the crime. Note, however, the difference between traditional money laundering activity and anti-terrorism money laundering activity. In traditional money laundering activity, profits from illegal activity are 'laundered' into the economy. In anti-terrorism money laundering activity, there exists no motive involving profit. Rather, the motive is to position funds to aid and abet terrorist activity.
By the 1980s, an increased attention on drugs and drug trafficking and on the loopholes in the Bank Secrecy Act and RICO resulted in the adoption of a new wave of money laundering statutes designed to amend prior law to close such loopholes and to bring law enforcement tools in line with criminal activity involving international drug trafficking. The most important of these laws for the purposes of this article, adopted in 1986, is the Money Laundering Control Act of 1986 (Laundering Control Act). Amended in 1992 and 1994, the Laundering Control Act remains the predominant tool used by law enforcement to prosecute the crime of money laundering.
The USA Patriot Act does not reinvent the wheel with respect to money laundering crimes associated with terrorism. Rather, through amendments to the Laundering Control Act, the Bank Secrecy Act, RICO federal forfeiture statutes and other statutes, it brings acts of terrorism on the same level with drug trafficking and mob activity and attempts to provide law enforcement with the tools necessary to detect and prosecute this international activity.
Critical Definitions
As stated above, the application of the anti-money laundering and customer identification provisions of the USA Patriot Act depends on the meanings of the terms 'financial institution,' 'monetary instrument' and 'account,' in each case as used throughout the USA Patriot Act and the Bank Secrecy Act and as clarified in the regulations to be issued by the Secretary of Treasury.
The term 'financial institution' is broadly defined under the Bank Secrecy Act to include in excess of fifteen categories of businesses, such as banks and other depository institutions, casinos, travel agencies, persons involved in real estate closings and settlements. The definition under the Bank Secrecy Act includes 'loan or finance companies' and several 'catchall' categories of businesses designated from time to time by the Secretary of Treasury. Non-bank affiliated leasing companies are captured under either the 'loan and finance company' or 'catchall' categories.
Why then have not non-bank affiliated leasing companies been subject to regulation since the inception of the Bank Secrecy Act? In theory, they have. The Treasury Department and its various agencies, including the Financial Crimes Enforcement Network (FinCEN), can require compliance by any 'financial institution' under the USA Patriot Act and the Bank Secrecy Act. In practice, however, the Treasury Department has focused its attention on a more limited number of categories within the definition of 'financial institution,' including regulated banks and registered brokers and dealers in securities. Historically, the Treasury Department has focused its attention on categories of 'financial institutions' which are perceived to be more likely the subject of money laundering activities and which are more capable of being adequately regulated. This practical approach is most recently reflected in the manner in which the Treasury Department has issued proposed and/or final regulations under Sections 326 and 352 of the USA Patriot Act; regulations relating to those categories of 'financial institutions' on which the Treasury Department has historically focused were issued first.
Anti-Money Laundering Provisions
Section 352 of the USA Patriot Act requires financial institutions to establish anti-money laundering programs and includes certain minimum requirements for such programs. It also permits the Secretary of Treasury to (a) prescribe minimum standards for such anti-money laundering programs, and (b) exempt those financial institutions which are exempt from regulations issued under the Bank Secrecy Act. This section is effective 180 days after the Enactment Date. This section requires the Secretary of Treasury, prior to the effective date thereof, to consider whether the impact of this section is appropriate for all sizes, locations and activities of financial institutions.
Last year, the Treasury Department issued various rules under Section 352 for many categories of 'financial institutions,' including banks, savings associations, credit unions, registered brokers and dealers in securities, futures commissions, merchants and casinos, operators of credit card systems, mutual funds, money services businesses, insurance companies and unregistered investment companies. Regulations under Section 352 for the 'loan and finance' category of the term 'financial institutions' are expected in the near future.
Customer Identification Programs
Section 326 of the USA Patriot Act requires the Secretary of Treasury to 'prescribe regulations setting forth the minimum standards for financial institutions and their customers regarding the identity of the customer that shall apply in connection with the opening of an account.' It lists certain factors to be considered by the Secretary of Treasury, and, at a minimum, states that the regulations will require financial institutions to verify the identity of persons seeking to open accounts, maintain records of the information used during the verification process, and consult lists of known or suspected terrorists or terrorist organizations.
Although the statute requires (a) regulations to be in effect before the date which is one year after the Enactment Date and (b) a Congressional report by the Secretary of Treasury regarding an international system of identification, the Secretary of Treasury has yet to fulfill these requirements for all categories of 'financial institution.'
Last year, the Treasury Department issued various rules under Section 326 for many categories of 'financial institution,' including banks, savings associations, credit unions, 'banks' lacking a federal regulator, registered brokers and dealers in securities, mutual funds and futures commission merchants. Regulations under Section 326 for the 'loan and finance' category of the term 'financial institutions' are expected in the near future.
Summary
The broadly-stated purpose of the anti-money laundering provisions of The USA Patriot Act is to 'prevent, detect and prosecute international money laundering and the financing of terrorism.' A more focused, but also broadly-stated, purpose is to 'ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to proper authorities.' In keeping with this purpose, it is anticipated that the term 'financial institutions' will be defined broadly so as to cast as wide a net as possible on transactions involving 'monetary instruments' and 'accounts.' If they are not already subject to previously issued regulations, leasing companies that are affiliated with banks are accustomed to regulation and should be able to quickly assimilate the requirements of the pending regulations into existing compliance/regulatory programs. Previously unregulated leasing companies will need to adjust to the requirements of the USA Patriot Act, as implemented by the pending regulations. Although the 'compliance' requirement may be new to these companies, it is expected that the regulations will acknowledge this fact and will be drafted in such a manner so as to allow for a high level of flexibility for these companies to implement programs that are in line with the level of risk posed by their various business models. This expectation is based on the content of regulations under Sections 326 and 352 for other categories of 'financial institution' on the Treasury Department's historically practical approach and on conversations with officials at the Treasury Department.
The next article in this series will provide an overview of the regulations and explore the definitions of 'monetary instrument' and 'account' under the USA Patriot Act and Bank Secrecy Act.
John F. State is a partner in the law firm of Hahn & Hessen LLP and is co-chair of the firm's Leasing Practice Group. Mr. State is located in the firm's Albany, NY office and specializes in equipment leasing and finance.
The USA Patriot Act was signed into law by President Bush on October 26, 2001 (the 'Enactment Date'). Its stated purpose is to enable law enforcement officials to track down and punish those responsible for the 9/11 terrorist attacks and to protect against any similar attacks.
The act is officially titled: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001.
This is the first in a series of articles intended to address the impact on non-bank affiliated leasing companies of those provisions of the USA Patriot Act that relate to anti-money laundering and customer identification programs. In general, these provisions will impose compliance requirements on many companies involved in the leasing industry which ' to date ' have not been regulated on these issues. The next article in this series will be published following the issuance by the Treasury Department of regulations relevant to the 'loan and finance company' category of 'financial institution'; these regulations are expected in the next few months.
The provisions of the USA Patriot Act that relate to anti-money laundering and customer identification programs are set forth in Title III of the statute titled International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001. Section 352 relates to anti-money laundering, and Section 326 relates to customer identification programs.
The purpose of this first article is to provide a brief history of anti-money laundering statutes in the United States and a general overview of Sections 326 and 352 of the USA Patriot Act. The true impact of these Sections will depend on the content of regulations to be issued by the Secretary of Treasury, and on the definitions of 'financial institution,' 'monetary instrument' and 'account,' in each case as used throughout the USA Patriot Act and the Bank Secrecy Act (
History of Anti-Money Laundering Statutes In the United States
By way of background, the history of anti-money laundering statutes in the United States begins in 1970 with the passage into law of the Bank Secrecy Act and the Racketeer Influenced and Corrupt Organization Act (
By the 1980s, an increased attention on drugs and drug trafficking and on the loopholes in the Bank Secrecy Act and RICO resulted in the adoption of a new wave of money laundering statutes designed to amend prior law to close such loopholes and to bring law enforcement tools in line with criminal activity involving international drug trafficking. The most important of these laws for the purposes of this article, adopted in 1986, is the Money Laundering Control Act of 1986 (Laundering Control Act). Amended in 1992 and 1994, the Laundering Control Act remains the predominant tool used by law enforcement to prosecute the crime of money laundering.
The USA Patriot Act does not reinvent the wheel with respect to money laundering crimes associated with terrorism. Rather, through amendments to the Laundering Control Act, the Bank Secrecy Act, RICO federal forfeiture statutes and other statutes, it brings acts of terrorism on the same level with drug trafficking and mob activity and attempts to provide law enforcement with the tools necessary to detect and prosecute this international activity.
Critical Definitions
As stated above, the application of the anti-money laundering and customer identification provisions of the USA Patriot Act depends on the meanings of the terms 'financial institution,' 'monetary instrument' and 'account,' in each case as used throughout the USA Patriot Act and the Bank Secrecy Act and as clarified in the regulations to be issued by the Secretary of Treasury.
The term 'financial institution' is broadly defined under the Bank Secrecy Act to include in excess of fifteen categories of businesses, such as banks and other depository institutions, casinos, travel agencies, persons involved in real estate closings and settlements. The definition under the Bank Secrecy Act includes 'loan or finance companies' and several 'catchall' categories of businesses designated from time to time by the Secretary of Treasury. Non-bank affiliated leasing companies are captured under either the 'loan and finance company' or 'catchall' categories.
Why then have not non-bank affiliated leasing companies been subject to regulation since the inception of the Bank Secrecy Act? In theory, they have. The Treasury Department and its various agencies, including the Financial Crimes Enforcement Network (FinCEN), can require compliance by any 'financial institution' under the USA Patriot Act and the Bank Secrecy Act. In practice, however, the Treasury Department has focused its attention on a more limited number of categories within the definition of 'financial institution,' including regulated banks and registered brokers and dealers in securities. Historically, the Treasury Department has focused its attention on categories of 'financial institutions' which are perceived to be more likely the subject of money laundering activities and which are more capable of being adequately regulated. This practical approach is most recently reflected in the manner in which the Treasury Department has issued proposed and/or final regulations under Sections 326 and 352 of the USA Patriot Act; regulations relating to those categories of 'financial institutions' on which the Treasury Department has historically focused were issued first.
Anti-Money Laundering Provisions
Section 352 of the USA Patriot Act requires financial institutions to establish anti-money laundering programs and includes certain minimum requirements for such programs. It also permits the Secretary of Treasury to (a) prescribe minimum standards for such anti-money laundering programs, and (b) exempt those financial institutions which are exempt from regulations issued under the Bank Secrecy Act. This section is effective 180 days after the Enactment Date. This section requires the Secretary of Treasury, prior to the effective date thereof, to consider whether the impact of this section is appropriate for all sizes, locations and activities of financial institutions.
Last year, the Treasury Department issued various rules under Section 352 for many categories of 'financial institutions,' including banks, savings associations, credit unions, registered brokers and dealers in securities, futures commissions, merchants and casinos, operators of credit card systems, mutual funds, money services businesses, insurance companies and unregistered investment companies. Regulations under Section 352 for the 'loan and finance' category of the term 'financial institutions' are expected in the near future.
Customer Identification Programs
Section 326 of the USA Patriot Act requires the Secretary of Treasury to 'prescribe regulations setting forth the minimum standards for financial institutions and their customers regarding the identity of the customer that shall apply in connection with the opening of an account.' It lists certain factors to be considered by the Secretary of Treasury, and, at a minimum, states that the regulations will require financial institutions to verify the identity of persons seeking to open accounts, maintain records of the information used during the verification process, and consult lists of known or suspected terrorists or terrorist organizations.
Although the statute requires (a) regulations to be in effect before the date which is one year after the Enactment Date and (b) a Congressional report by the Secretary of Treasury regarding an international system of identification, the Secretary of Treasury has yet to fulfill these requirements for all categories of 'financial institution.'
Last year, the Treasury Department issued various rules under Section 326 for many categories of 'financial institution,' including banks, savings associations, credit unions, 'banks' lacking a federal regulator, registered brokers and dealers in securities, mutual funds and futures commission merchants. Regulations under Section 326 for the 'loan and finance' category of the term 'financial institutions' are expected in the near future.
Summary
The broadly-stated purpose of the anti-money laundering provisions of The USA Patriot Act is to 'prevent, detect and prosecute international money laundering and the financing of terrorism.' A more focused, but also broadly-stated, purpose is to 'ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to proper authorities.' In keeping with this purpose, it is anticipated that the term 'financial institutions' will be defined broadly so as to cast as wide a net as possible on transactions involving 'monetary instruments' and 'accounts.' If they are not already subject to previously issued regulations, leasing companies that are affiliated with banks are accustomed to regulation and should be able to quickly assimilate the requirements of the pending regulations into existing compliance/regulatory programs. Previously unregulated leasing companies will need to adjust to the requirements of the USA Patriot Act, as implemented by the pending regulations. Although the 'compliance' requirement may be new to these companies, it is expected that the regulations will acknowledge this fact and will be drafted in such a manner so as to allow for a high level of flexibility for these companies to implement programs that are in line with the level of risk posed by their various business models. This expectation is based on the content of regulations under Sections 326 and 352 for other categories of 'financial institution' on the Treasury Department's historically practical approach and on conversations with officials at the Treasury Department.
The next article in this series will provide an overview of the regulations and explore the definitions of 'monetary instrument' and 'account' under the USA Patriot Act and Bank Secrecy Act.
John F. State is a partner in the law firm of
Strategy vs. Tactics: Two Sides of a Difficult Coin
With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.
'Huguenot LLC v. Megalith Capital Group Fund I, L.P.': A Tutorial On Contract Liability for Real Estate Purchasers
In June 2024, the First Department decided Huguenot LLC v. Megalith Capital Group Fund I, L.P., which resolved a question of liability for a group of condominium apartment buyers and in so doing, touched on a wide range of issues about how contracts can obligate purchasers of real property.
CoStar Wins Injunction for Breach-of-Contract Damages In CRE Database Access Lawsuit
Latham & Watkins helped the largest U.S. commercial real estate research company prevail in a breach-of-contract dispute in District of Columbia federal court.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.