Transactional Reporting for Financial Institutions and Money Service Businesses as Required by the USA Patriot Act and the Bank Secrecy Act

by Matthew L. Dunn

Several changes to money laundering laws have occurred within the past year that not only affect traditional financial institutions such as banks and investment banks, but also other businesses previously unaffected by legislation such as the Bank Secrecy Act.  Some of the businesses affected by recently enacted legislation include check cashers, currency dealers, auto, boat, and plane dealers, and precious gem and metal dealers.  These changes have occurred through the passage of the USA Patriot Act and through amendments to the Bank Secrecy Act.  Compliance with these new regulations is essential, as severe civil and criminal penalties can result.

PATRIOT ACT
 
In the aftermath of September 11, 2001, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, also known as the USA Patriot Act (the “Patriot Act”), to deal in part with the threat of terrorism.  Several smaller acts comprised the Patriot Act, but Title 3 of the Patriot Act, known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, addressed money laundering and the role of financial institutions in preventing it.  These new statutes strengthened existing money laundering provisions of the Bank Secrecy Act and the Money Laundering Control Act of 1986.

One provision of the Patriot Act requires financial institutions to provide the U.S. government with assistance “in the conduct of intelligence or counterintelligence activities…to protect against international terrorism.” The Patriot Act defined “financial institutions” very broadly, to include banks, credit unions, investment banks, insurance companies, securities brokers, currency traders, precious gems and metal dealers, gaming institutions, auto, boat, and plane dealers, and travel agencies. To avoid liability, the Patriot Act essentially requires financial institutions to compare its customers and other parties engaging in financial transactions with lists of suspected terrorists and terrorist organization periodically released by the Office of Foreign Assets Control (“OFAC”), the agency authorized to enforce the Patriot Act. Furthermore,  financial institutions must notify OFAC if a transaction appears suspicious. 

The statute requires financial institutions to implement an adequate compliance program, which if not implemented, can result in large civil or criminal fines. Furthermore, fines up to $500,000 can be imposed if a compliance program has not been implemented and the business engages in criminal activity. A compliance program should at least meet the following minimum standards: 

• Develop internal anti-money laundering procedures, policies, and controls designed to detect and prevent money laundering;
• Designate an internal compliance officer;
• Institute an ongoing employee training program which covers legal requirements; and
• Implement an independent audit function to test and review the company’s due diligence programs.

Note that these standards do not serve as a safe harbor for financial institutions to avoid potential liability, and that financial institutions can be penalized for violations despite a vigorous compliance program.  The compliance program serves to reduce the likelihood of violations, not to shield the financial institution from liability. 

BANK SECRECY ACT
 
The Bank Secrecy Act, 12 U.S.C. § 1951 et seq., has as its stated purpose “to require the maintenance of appropriate types of records and the making of appropriate reports…where such reports have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.  This mandate applies not only to financial institutions as defined in 31 U.S.C. § 5312(a)(2), but also applies to “Money Services Businesses,” effective December 31, 2001.  Under the new regulations, certain Money Service Businesses are required to register with the Secretary of Treasury and provide a list of agents available on request.  

Money Services Businesses include check cashers, currency dealers or exchangers, sellers or redeemers of traveler’s checks, money orders or stored value, and money transmitters.  The regulations broadly define money transmitter to include “[a]ny person…who engages as a business in accepting currency, or funds denominated in currency, and transmits the currency or funds…by any means through a financial agency or institution.” However, the regulations exempt certain money transmitters who “accept and transmit funds as an integral part of the execution and settlement of a transaction other than the funds transmission itself.”

The regulations require the registration of Money Services Businesses with the Secretary of Treasury, even if licensure is not required by states in which the Money Service Business operates.  Furthermore, Money Service Businesses must maintain a listing of their registered agents.  The registration must be on the form specified by the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCen”) and must be sent to the designated IRS Computing Center.  Registration of existing Money Service Businesses was required by December 31, 2001 for the two-year period commencing on January 1, 2002, while new businesses have a 180 day window in which to file.  Registration remains valid for a two-year period beginning with the calendar year in which the registration was filed.   A change of ownership or the transfer of more than 10 percent of the voting power or equity interests also requires a renewed registration, as does an increase of 50 percent of a business’s registered agents. 

Violations of this act include filing false or materially incomplete information in connection with the registration. Violations of these requirements can subject the party to fines for each offense, with each day of non-compliance constituting a separate offense. 

The regulations require that a Money Service Business file a report with the Treasury Department “regarding any suspicious transaction relevant to a possible violation of law or regulation.”  This filing must occur within 30 calendar days of discovery of the potential violation on a Suspicious Activity Report-Money Services Businesses, or SAR-MSB. The type of activities the Money Service Businesses must report include the following:

• Transactions in which funds may be derived from illegal activity or transactions that are intended or conducted in order to hide or disguise funds…derived from illegal activity;
• Transactions designed…to evade any requirements of this part of the regulations promulgated under the Bank Secrecy Act; and
• Transactions which serve no business or apparent lawful purpose.

Thus, the revisions to the Bank Secrecy Act significantly expanded the regulations of businesses previously not covered under the Act, and require such businesses to not only register with the Secretary of Treasury but also report suspicious activities.

The amendments to the Bank Secrecy Act and the Patriot Act have increased the self-policing duties required of banks and other traditional financial institutions, as well as affecting business previously ignored under Federal money laundering regulations.  This letter is intended to provide general information regarding the recent changes and to provide highlights, but does not offer legal advice, which, of course, may only be given in response to specific questions posed and particular facts present. 

If you have any questions regarding these decisions or would like a copy of the cases, please contact any member of our Consumer or Commercial Lending Groups.

This is an advertisement.  Certification as a Specialist in Commercial Lending Law by the Tennessee Commission on Continuing Legal Education and Specialization is not currently available.  None of the attorneys listed in this communication are certified in any area of Specialization.

© 2002 Chambliss, Bahner & Stophel, P.C.