The USA PATRIOT Act Renewed: Reassessing Money Laundering Risk in Finance Transactions

After almost 2 years of intense debate, President Bush signed the USA PATRIOT Improvement and Reauthorization Act of 2005, H.R. 3199 on March 9, 2006 ('Reauthorization Act'). The Reauthorization Act renewed 16 provisions of the original USA PATRIOT Act, H.R. 3162 ('Act'), called the 'Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001' with some adjustments, just 1 day before such provisions were set to expire. For more on the Act and Reauthorization Act, see Financiers, Vendors May Face New Compliance Requirements Under Renewed USA PATRIOT ACT, Business Leasing News (May 2006) available at www.pattonboggs.com/newsletters/bln/Release/bln_2006_05.htm.

Debate and Empowerment: A Few Limitations in Reauthorization Act

Most of the debate about renewal focused on whether the original Act had gone too far in empowering law enforcement and curtailing individual rights. For example, since enactment of the Act, the Federal Bureau of Investigation has been using its authority to serve more than 30,000 'National Security Letters' ('NSL') each year. A NSL can require a business to turn over sensitive customer financial records and often contains draconian language prohibiting disclosure of the demand to the customer or anyone else. Some experts interpreted the terms of a NSL to forbid even discussing the NSL with counsel of the recipient of the NSL. Accordingly, the Reauthorization Act clarifies that businesses have the right to consult with their counsel before responding and also provides for a right to challenge the nondisclosure orders in court. The Reauthorization Act increased both judicial and Congressional oversight of national security demand letters and searches authorized under '215 of the Foreign Intelligence Surveillance Act of 1978 (as amended).

On the other hand, Congress signaled that it is satisfied with the government's increasingly strong actions in the area of money laundering and terrorist financing. Despite expressions of industry concern that new regulations cast too wide a net, Congress did not amend any of the AML/CFT provisions of the Act. Instead, the Reauthorization Act further strengthened various criminal and forfeiture provisions of both the Act and the Bank Secrecy Act ('BSA'). The BSA is the basic U.S. anti-money laundering law.

Partly as a result of industry resistance, the federal government was slow after passage of the Act in 2001 to issue regulations implementing anti-money laundering and terrorist financing requirements for entities other than traditional financial institutions. Until recently, the Financial Crimes Enforcement Network ('FinCEN'), the U.S. Treasury agency that administers the AML/CFT laws, has been gathering information on how to extend money laundering controls to businesses not traditionally subject to such regulations. Now, it has significantly picked up the pace. Given Congress' intensive re-examination of the Act and the lack of action to roll back its anti-money laundering and terrorist financing provisions, it is expected that FinCEN will move forward with new regulatory initiatives.

New Regulations: More Financial Institutions Affected

AML/CFT compliance is not limited to banks, thrifts, and credit unions. Rather, the Bank Secrecy Act, as amended by the Act, has its own definition of 'financial institution,' and it is extremely broad. It includes insurance companies; persons involved in real estate settlements; car, boat, and aircraft dealers/manufacturers; security and commodity brokers; money services business; and a host of other entities dealing in money and tangible personal property.

More specifically, under the Act, a 'financial institution' includes institutions subject to federal regulations (such as banks, mutual funds, and hedge funds), loan or finance companies, trust and insurance companies, investment banks, commercial banks and leasing companies, vehicle sellers (automobiles, aircraft, and vessels), persons engaged in real estate closings and settlements, and even casinos. See '352 of the Act and 31 U.S.C. '5312(a)(2) and (c)(1) of the Act. This definition leaves little doubt that most (if not all) lessors and lenders qualify as financial institutions. See 31 U.S.C. 5312(a)(2)(P) and (c)(1)(A) of the Act.

FinCEN has not yet defined 'loan or finance company,' but its past practice suggests that when it does so it will sweep broadly. Although leasing companies are not specifically identified as 'financial institutions' under the federal anti-money laundering laws, regulators increasingly view many leases as a form of loan. For that reason, it is reasonable to expect FinCEN to extend anti-money laundering controls to the equipment leasing industry.

Moreover, affected parties should expect to see rules for loan, leasing, and finance companies soon. FinCEN recently told an international AML/CFT oversight body that it has completed its risk analysis of the loan and finance industry and is preparing to issue a proposed regulation shortly. FinCEN made the same representation with respect to automobile, boat, and aircraft dealers. These public statements confirm the view that FinCEN plans to issue regulations covering all the remaining types of financial institutions covered by the BSA.

The scope and type of AML/CFT program FinCEN will require remains the subject of much speculation. In March 2003, the Equipment Leasing Association urged FinCEN to adopt a narrow definition of 'vehicle dealer,' that limited it to businesses 'primarily engaged' in such sales. Unfortunately, FinCEN has rejected similar advice in developing rules for gem dealers, money services businesses, and other industries. Once the rules come out, they will likely cover many members of the equipment leasing and financing industry that may not previously have been required to have an AML/CFT program.

More Enforcement and Penalties Expected

Enforcement of the AML/CFT laws has also toughened in the last 2 years. The penalties imposed have grown exponentially. In one notable case, AmSouth Bank paid $50 million for having a wholly inadequate AML/CFT system and participating in a cover-up. Other entities have faced similar penalties ranging from $10,000 to more than $30 million since 1994. It is not just banks that have been sanctioned. An individual and an Indian Tribe were hit with a $2.5 million penalty because of inadequate AML/CFT controls at a casino. A New York brokerage firm paid $2.8 million, and lesser penalties have been imposed on convenience stores and a jewelry business that provided money services on the side. Just in the past year, FinCEN has required insurance companies and precious metal, stone, and gem dealers to strengthen their AML/CFT controls.

An enforcement action against any financial institution can damage its reputation and endanger its survival. In 1995, Riggs Bank, long one of the most respected financial institutions in the nation's capital, shut its doors after it was revealed to have been the instrument for money laundering for several foreign despots. Many check cashers and money transmitters have gone out of business after losing their banking privileges when some banks decided that such businesses as a class posed too great a money laundering compliance risk to make worthwhile customers.

As the rules have tightened, money launderers have looked for more ways to cleanse their dirty funds. In August this year, investigators uncovered a multi-million dollar scheme in the Southwest to use real estate transactions to launder the proceeds of a prostitution ring. Businesses that just a few years ago believed themselves immune to money laundering need to think again.

Next month's installment will discuss action steps for leasing companies and other financial institutions.

Stephen J. McHale ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office, where he is co-chair of the Homeland Security Practice Group and a member of the Anti-Money Laundering Compliance and Aviation Teams. Before joining Patton Boggs in 2004, he had a 24-year career in the federal government, including assignments as the first Deputy Administrator of the Transportation Security Administration and chief enforcement counsel for the Treasury Department, where he helped draft the original anti-terrorist financing provisions of the Patriot Act. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis in domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include: energy, infrastructure, technology, and aviation.

Part One of a Two-Part Series

The federal government is stepping up its aggressive enforcement of anti-money laundering/combating the financing of terrorism ('AML/CFT'). Enforcement actions have already spread beyond 'traditional' financial institutions, such as banks. Regulations that are expected to be promulgated soon will likely embolden these enforcement actions against leasing companies, equipment vendors, finance companies, and other 'financial institutions.' These parties should reassess their compliance risk under the AML/CFT rules. The consequences of these risks are important. For example, the loss of reputation from being brushed with the taint of money laundering can sink a business.

USA Patriot Act Reauthorized

After almost 2 years of intense debate, President Bush signed the USA PATRIOT Improvement and Reauthorization Act of 2005, H.R. 3199 on March 9, 2006 ('Reauthorization Act'). The Reauthorization Act renewed 16 provisions of the original USA PATRIOT Act, H.R. 3162 ('Act'), called the 'Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001' with some adjustments, just 1 day before such provisions were set to expire. For more on the Act and Reauthorization Act, see Financiers, Vendors May Face New Compliance Requirements Under Renewed USA PATRIOT ACT, Business Leasing News (May 2006) available at www.pattonboggs.com/newsletters/bln/Release/bln_2006_05.htm.

Debate and Empowerment: A Few Limitations in Reauthorization Act

Most of the debate about renewal focused on whether the original Act had gone too far in empowering law enforcement and curtailing individual rights. For example, since enactment of the Act, the Federal Bureau of Investigation has been using its authority to serve more than 30,000 'National Security Letters' ('NSL') each year. A NSL can require a business to turn over sensitive customer financial records and often contains draconian language prohibiting disclosure of the demand to the customer or anyone else. Some experts interpreted the terms of a NSL to forbid even discussing the NSL with counsel of the recipient of the NSL. Accordingly, the Reauthorization Act clarifies that businesses have the right to consult with their counsel before responding and also provides for a right to challenge the nondisclosure orders in court. The Reauthorization Act increased both judicial and Congressional oversight of national security demand letters and searches authorized under '215 of the Foreign Intelligence Surveillance Act of 1978 (as amended).

On the other hand, Congress signaled that it is satisfied with the government's increasingly strong actions in the area of money laundering and terrorist financing. Despite expressions of industry concern that new regulations cast too wide a net, Congress did not amend any of the AML/CFT provisions of the Act. Instead, the Reauthorization Act further strengthened various criminal and forfeiture provisions of both the Act and the Bank Secrecy Act ('BSA'). The BSA is the basic U.S. anti-money laundering law.

Partly as a result of industry resistance, the federal government was slow after passage of the Act in 2001 to issue regulations implementing anti-money laundering and terrorist financing requirements for entities other than traditional financial institutions. Until recently, the Financial Crimes Enforcement Network ('FinCEN'), the U.S. Treasury agency that administers the AML/CFT laws, has been gathering information on how to extend money laundering controls to businesses not traditionally subject to such regulations. Now, it has significantly picked up the pace. Given Congress' intensive re-examination of the Act and the lack of action to roll back its anti-money laundering and terrorist financing provisions, it is expected that FinCEN will move forward with new regulatory initiatives.

New Regulations: More Financial Institutions Affected

AML/CFT compliance is not limited to banks, thrifts, and credit unions. Rather, the Bank Secrecy Act, as amended by the Act, has its own definition of 'financial institution,' and it is extremely broad. It includes insurance companies; persons involved in real estate settlements; car, boat, and aircraft dealers/manufacturers; security and commodity brokers; money services business; and a host of other entities dealing in money and tangible personal property.

More specifically, under the Act, a 'financial institution' includes institutions subject to federal regulations (such as banks, mutual funds, and hedge funds), loan or finance companies, trust and insurance companies, investment banks, commercial banks and leasing companies, vehicle sellers (automobiles, aircraft, and vessels), persons engaged in real estate closings and settlements, and even casinos. See '352 of the Act and 31 U.S.C. '5312(a)(2) and (c)(1) of the Act. This definition leaves little doubt that most (if not all) lessors and lenders qualify as financial institutions. See 31 U.S.C. 5312(a)(2)(P) and (c)(1)(A) of the Act.

FinCEN has not yet defined 'loan or finance company,' but its past practice suggests that when it does so it will sweep broadly. Although leasing companies are not specifically identified as 'financial institutions' under the federal anti-money laundering laws, regulators increasingly view many leases as a form of loan. For that reason, it is reasonable to expect FinCEN to extend anti-money laundering controls to the equipment leasing industry.

Moreover, affected parties should expect to see rules for loan, leasing, and finance companies soon. FinCEN recently told an international AML/CFT oversight body that it has completed its risk analysis of the loan and finance industry and is preparing to issue a proposed regulation shortly. FinCEN made the same representation with respect to automobile, boat, and aircraft dealers. These public statements confirm the view that FinCEN plans to issue regulations covering all the remaining types of financial institutions covered by the BSA.

The scope and type of AML/CFT program FinCEN will require remains the subject of much speculation. In March 2003, the Equipment Leasing Association urged FinCEN to adopt a narrow definition of 'vehicle dealer,' that limited it to businesses 'primarily engaged' in such sales. Unfortunately, FinCEN has rejected similar advice in developing rules for gem dealers, money services businesses, and other industries. Once the rules come out, they will likely cover many members of the equipment leasing and financing industry that may not previously have been required to have an AML/CFT program.

More Enforcement and Penalties Expected

Enforcement of the AML/CFT laws has also toughened in the last 2 years. The penalties imposed have grown exponentially. In one notable case, AmSouth Bank paid $50 million for having a wholly inadequate AML/CFT system and participating in a cover-up. Other entities have faced similar penalties ranging from $10,000 to more than $30 million since 1994. It is not just banks that have been sanctioned. An individual and an Indian Tribe were hit with a $2.5 million penalty because of inadequate AML/CFT controls at a casino. A New York brokerage firm paid $2.8 million, and lesser penalties have been imposed on convenience stores and a jewelry business that provided money services on the side. Just in the past year, FinCEN has required insurance companies and precious metal, stone, and gem dealers to strengthen their AML/CFT controls.

An enforcement action against any financial institution can damage its reputation and endanger its survival. In 1995, Riggs Bank, long one of the most respected financial institutions in the nation's capital, shut its doors after it was revealed to have been the instrument for money laundering for several foreign despots. Many check cashers and money transmitters have gone out of business after losing their banking privileges when some banks decided that such businesses as a class posed too great a money laundering compliance risk to make worthwhile customers.

As the rules have tightened, money launderers have looked for more ways to cleanse their dirty funds. In August this year, investigators uncovered a multi-million dollar scheme in the Southwest to use real estate transactions to launder the proceeds of a prostitution ring. Businesses that just a few years ago believed themselves immune to money laundering need to think again.

Next month's installment will discuss action steps for leasing companies and other financial institutions.

Stephen J. McHale ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office, where he is co-chair of the Homeland Security Practice Group and a member of the Anti-Money Laundering Compliance and Aviation Teams. Before joining Patton Boggs in 2004, he had a 24-year career in the federal government, including assignments as the first Deputy Administrator of the Transportation Security Administration and chief enforcement counsel for the Treasury Department, where he helped draft the original anti-terrorist financing provisions of the Patriot Act. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis in domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include: energy, infrastructure, technology, and aviation.