Money Laundering Measure Enacted

By Peter E. Feltman, M.A., CCH Washington News Bureau, contributing author, CCH FOCUS.

ongress has passed and the President has signed money laundering legislation as part of a broader anti-terrorism measure. The legislation is the result of bipartisan consultation and review. The money laundering provisions, Title III of P.L. 107-56, known as the USA PATRIOT, were worked out by an agreement between the House and Senate Leadership and the White House. The money laundering provisions are aimed at closing loopholes that allow terrorists to fund their operations and keep their money safe. It works by prohibiting U.S. banks from dealing with “shell” banks, which are institutions with no physical presence; by increasing the requirements of the Bank Secrecy Act, which is designed to prevent the smuggling of currency; and by stepping up supervision on correspondent banks, among other things. Foreign banks that accept dollar deposits often use correspondent banks. In some cases, foreign banks that take dollars deposits place these in a correspondent bank in the United States, and this legislation attempts to make it easier for the authorities to seize such assets or prevent their use. Furthermore, financial institutions will have to take more care about identifying customers.

Previously, money laundering was covered by the Bank Secrecy Act and the Money Laundering Control Act of 1986. It is a crime to knowingly engage in financial transactions that involve profit from certain illegal activity.

MAIN DEFENSES

The legislation addresses the three main defenses against money laundering. The first is the Bank Secrecy Act, which requires financial institutions to keep standardized transaction records and report large currency transactions and suspicious transactions. The second line of defense consists of statutes making it a crime to launder money and allowing criminal and civil forfeiture of the proceeds of crime. The third defense is a statutory framework allowing information to be communicated to and between law enforcement officials. A number of improvements are made to the suspicious activity reporting rules. Technical changes strengthen the safe harbor from civil liability for institutions that report suspicious activity to the Treasury Department. The provisions not only add to the protection for reporting institutions, but they also address individual privacy concerns by making it clear that government officers may not disclose suspicious transaction report information except in the conduct of their official duties.

SUNSET

As a compromise over whether these provisions should have a sunset date, the money laundering provisions could be cancelled in the year 2005 if both the House and Senate pass a resolution to that effect. Such a resolution would not have to be signed by the President.

ADDITIONAL CURBS

This measure does not include curbs on Internet gambling, which some members of Congress believe is a potential vehicle for money laundering. The legislation does, however, place additional curbs on the “private banking” services that financial institutions often offer to customers with large balances.

RULEMAKING

The legislation leaves many of the details to the agency rulemaking process, which will be guided by the Treasury Department, in consultation with numerous federal agencies, such as the banking agencies, the State Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Some of the provisions in the legislation are already under way via agency rulemaking, such as an expansion of the Bank Secrecy Act. This 1970 law requires banks to keep microfilm copies of many checks and to report to the IRS, or in the case of international transactions the Customs Service, cash transactions in excess of $10,000. Furthermore, banks must report any suspicious activity, such as a number of transactions less than $10,000 that may be intended to avoid the Currency Transaction Reports required for $10,000 and higher exchanges. The legislation would require the Treasury Department to issue regulations to bring broker-dealers under the suspicious activities reporting requirements and give the Treasury the authority to apply these standards to institutions regulated by the Commodity Futures Trading Commission.

EXPANDING THE REACH

Treasury is already considering expanding the Bank Secrecy Act to broker-dealers and intends to have a rule issued for public comment by the end of 2001.

While banks have quite a bit of experience in dealing with money laundering, securities firms have much less. A General Accounting Office study on money laundering sent to Congress October 10, 2001, and released to the public on October 24 notes that federal agencies believe that securities firms are not often used as an entry or exit point by money launderers but may be used once illicit funds are inside the U.S. financial system. GAO reports that 90 percent of the broker-dealers and mutual funds that responded to a GAO survey indicate that they never accept cash, underscoring the belief that securities firms are not a door that criminals often use to access the U.S. financial system. In addition, while broker-dealers do not currently have the same strict guidelines that banks must follow, the SEC and the self-regulatory organizations conduct periodic exams to ensure that broker-dealers are in compliance with the guidelines that cover them.