|Business Credit Law and Regulations
A Primer to Compliance Requirements
On October 26, 2001, Congress passed the Uniting and Strengt hening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "USA PATRIOT Act"). Although the main purpose of the USA PATRIOT Act is to bolster national security, its practical implications are widespread to financial and non-financial institutions. The USA PATRIOT Act promulgates broad, new requirements for both financial institutions and non-financial institutions. Under the USA PATRIOT Act, a nonfinancial institution is required to report cash and currency transactions. On the other hand, a financial institution, whether domestic or foreign, includes banks, brokers, futures merchants and commodities traders, investment bankers, and insurance companies. Surprisingly, financial institutions also include entities that are not usually associated with traditional financial institutions such as casinos, and real estate brokers, pawnbrokers, travel agencies, jewelers, and automobile and boat retailers.
Non-financial institutions are required to report cash and currency transactions totaling $10,000, or more ("Cash Transactions") to the Financial Crimes Enforcement Network ("FinCEN"). Cash Transactions include monetary instruments such as travelers' checks and other negotiable instruments.
The primary provision affecting financial institutions is Title III of the USA PATRIOT Act, entitled "International Money Laundering Abatement and Anti- Terrorism Financing Act of 2001" ("Title III"). Title III requires an institution to take reasonable steps to safeguard against money-laundering. The primary safeguard measures include: (1) designating a compliance offer; (2) implementing an ongoing training program; (3) adopting an independent audit function; and (4) developing internal policies, procedures, and controls. There are no specific guidelines or procedures to direct compliance; instead, an institution must determine its own particular risks in developing a program, which is likely to include an analysis of its customer base, industry, and location. As in the context of traditional financial institutions, compliance is more a matter of fine tuning and reassessment since anti-money laundering programs are already in place; however, for untraditional financial institutions, a category which is growing, implementing a compliance program will present significant adjustment to operations.
In addition to implementing a compliance program, financial institutions are required to share information and provide Suspicious Activity Reports ("SARS"). The USA PATRIOT Act requires branches of the federal government to share information with financial institutions to assist in the identification of suspected terrorism and money laundering activity. This requires a financial institution to designate an employee to receive information on suspicious activities, and if necessary, monitor suspected accounts. In addition, financial institutions may corroborate amongst one another concerning suspicious activity; however, notice must first be provided to the appropriate government authority. If a governmental authority requests information, then the institution must provide the information within five (5) days of the request. Fortunately, the drafters of the USA PATRIOT Act had the foresight to provide a "safe-harbor" for monitoring and reporting suspicious activity and providing information requested by the federal government.
Currently, the Treasury Department is promulgating regulations that will set forth minimum standards to open an account. As to foreign nationals and foreign companies, contemplated regulations include the issuance of identification numbers, similar to tax identification numbers, as a prerequisite to opening an account. Regulations and compliance procedures should be approved and mainstreamed later this year.
USA PATRIOT Act and the Office of Foreign Assets Control
Despite designation as a financial or non-financial institution, an entity is required to implement due diligence procedures for foreign accounts pursuant to a series of laws imposing sanctions against certain foreign nations. These laws are administered through the Office of Foreign Assets Control ("OFAC"). Generally, diligence procedures include record keeping procedures to identify foreign accounts to assure that any delivered product or services do not benefit a sanctioned foreign nation. A word of caution - a U.S. entity, and its foreign subsidiaries, may violate the law by exporting goods or providing financial services to an otherwise valid third country (e.g., Canada), if that third country directs those goods to a sanctioned country (e.g., Cuba).
Suggestions for the Credit Professional
The underlying purpose of the USA Patriot Act, and other legislation enacted to protect national interests, is identification of customers and their activities. Although this may sound of "big brother" and contrary to the privacy that we've grown to cherish, its purpose is generally benign and targeted toward the threats that we confront in the world today.
A good start to compliance, for non-financial institutions and financial institutions alike, is to know your customer and acquire knowledge of their business operations. In addition, institutions should periodically cross-reference lists published by government agencies listing banned individuals and foreign nations. Other measures should be implemented if your business is determined to be a financial institution.
Sanctions for Non-Compliance
Pursuant to the USA PATRIOT Act, if a financial institution fails to implement a compliance program, then fines may be assessed at $25,000 per day for civil violations, or $250,000 to $500,000 per day if the failure is criminal and based on a pattern of illegal activity. Due diligence violations, or failing to "know" your customer, may result in a penalty equal to double the amount of the transaction. Violations of OFAC regulations range from $10,000 to $1 million per occurrence and 10 to 12 years imprisonment.
In conclusion, the USA Patriot Act is a complex statute with new and developing regulations. It is important to note, that the USA PATRIOT Act was passed in a hurried response to the September 11 terrorist attacks, and as a result, its scope is constantly evolving. As a result, institutions must maintain a sharp eye on its development.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Spring 03