September 23, 2008
On March 12, 2008, Eliot Spitzer resigned in the midst of a scandal from his office as governor of the state of New York. In the months leading up to the resignation, federal officials unearthed information that raised concerns about some of Mr. Spitzer's financial transactions. Specifically, in an effort to disguise payments he made to a prostitution ring, Mr. Spitzer is alleged to have made anonymous transfers of money in suspicious amounts at suspicious intervals among various bank accounts and then made payments to shell corporations, which triggered the filing of a report by his bank, according to reporting in The New York Times in March 2008. As a political figure, Mr. Spitzer's financial activities were subject to extra scrutiny, but it was not until the filing of this report that a federal investigation into those transactions began which eventually led to his resignation.This discovery of a public official's unlawful financial activities was made possible through federal legislation—the USA PATRIOT Act, Pub. L. No. 107-56, 115 Stat. 272 (the Act)—passed largely in response to the events of September 11, 2001, that requires banks and other financial institutions to create systems to monitor and capture suspicious movements of money. Federal anti-money laundering statutes prohibit financial transactions that are designed to conceal or disguise the nature, location, source, ownership or control of proceeds of unlawful conduct. The Act includes a section aimed at rigorous detection of money laundering activities. Some foreign financial institutions have already been affected by these regulations. On September 15, 2005, the U.S. Treasury Department designated Macau-based Banco Delta Asia a primary money laundering concern based on suspicious activities that suggested the bank was a pawn for North Korea to engage in corrupt financial transactions. These suspicious activities by the bank included providing financial services to companies known to be engaged in illicit business and accepting large deposits of cash, which have included counterfeit American currency from North Korean officials. Furthermore, on April 28, 2008, the New York branch of United Bank for Africa, which has its headquarters in Nigeria, was assessed a civil penalty of $15 million for repeatedly failing to create and implement an effective anti-money laundering program.
The Act's anti-money laundering provisions are not limited to banks, but include broker-dealers, credit unions, investment companies, mutual funds, insurance companies, currency exchangers and an agency (or branch) of a foreign bank in the United States. While these anti-money laundering statutes were initially designed to uncover potential terrorist threats, drug cartel activities and human trafficking, they also contain regulatory guidelines related specifically to foreign entities and, in some cases, foreign individuals.
Anti-Money Laundering Regulations under the USA PATRIOT Act: Implications for Foreign Entities
The Act's regulations raise important implications for foreign companies and persons to be aware of when seeking to enter the U.S. financial system. They require identification and verification of customers seeking to open new accounts; restrictions on creating "correspondent accounts" for foreign financial institutions and foreign shell banks; and the reporting of suspicious transactions. Finally, the Act gives the federal government significant authority to obtain information from U.S. financial institutions that relate to foreign entities and extends U.S. jurisdiction over foreign entities, including the ability to seize assets held in U.S. accounts.
Customer Identification Program
Under the Act, banks, savings associations, credit unions, broker-dealers and mutual funds in the United States must implement a customer identification program (CIP). The goal of a CIP is to obtain information about clients to assess their legitimacy and the legitimacy of their transactions. The program must be designed in such a way to allow the financial institution to have a "reasonable belief" about the true identity of each customer who opens a new account. Specifically, there must be procedures for verifying the identity of each customer through personal information. For a non-U.S. entity opening an account in the United States, verification may be required through some government-issued documentation.
As part of its CIP, a financial institution may determine whether a particular entity should receive greater due diligence and consider such factors as whether the entity is a domestic or foreign corporation; whether the customer's business or type of account is one that is likely to be involved in illicit activities; and whether the customer is subject to anti-money laundering or bank secrecy laws in its home jurisdiction. For instance, accounts for customers located in countries designated as "high-risk" may carry additional authentication requirements. Because such identification verification of non-U.S. customers might require more documentation or more time to confirm their accuracy, it is likely that U.S. financial institutions would implement verification procedures of these particular customers even prior to opening an account.
Special Requirements: Private and Correspondent Accounts
Under the Act, certain "covered" financial institutions in the United States (including insured banks, commercial banks, branches of foreign banks, federally insured credit unions, savings associations, registered broker-dealers and mutual funds) that establish, maintain, administer or manage a private banking account or correspondent account for a foreign entity or individual, must have minimum procedures in place designed to detect and report money laundering activities. In some circumstances, enhanced due diligence is required. For both private and correspondent accounts, if a covered U.S. financial institution suspects illicit activity or is unable to perform the appropriate level of due diligence on the non-U.S. entity, it may refuse to open an account, suspend transactions, file a report or close the account.
Private Banking Accounts
For private accounts held by any non-U.S. person, the covered U.S. financial institution must ascertain the identity of the nominal and beneficial owners and the source of funds; review the activity of the account; and determine whether any owner is a senior foreign political figure (SFPF). Transactions of SFPFs relating to private bank accounts are subject to greater scrutiny in order to detect proceeds of foreign corruption. SFPFs are individuals who have substantial authority over policy, operations or the use of government-owned resources. SFPFs include current or former senior officials in the various government branches, including the military and immediate family members or close associates of any such individual. Importantly, regulations define SFPFs to include senior officials of a major foreign political party and a senior executive of a foreign government-owned commercial enterprise (31 C.F.R. 103.175(r)). Enhanced due diligence of these customers might include reviewing publicly available information about SFPFs, verifying the source of funds, scrutinizing the purpose of the account, monitoring account activity to make sure it is consistent with other information and looking beyond the nominal account holder to ascertain the real owners of the account. Immediate reporting of suspected anti-money laundering activities is required when the account is held by an SFPF. One of the factors in assessing $15 million against the New York branch of United Bank for Africa was its failure to implement procedures for identifying SFPFs and managing risks associated with such account relationships, despite the fact that the bank routinely provided services to these types of customers.
Correspondent Accounts: Foreign Financial Institutions
The correspondent account rule applies to certain foreign financial institutions, including foreign banks; any branch or office located outside the United States; any U.S. securities broker-dealer, futures commission merchant or mutual fund; any entity organized under foreign law that would be a securities broker-dealer, futures commission merchant or mutual fund in the United States; and any entity organized under foreign law that is engaged in the business of currency dealing or exchanging or money transmission. The due diligence program of U.S. financial institutions includes an assessment of the foreign financial institution's business and anti-money laundering record; the type, purpose and anticipated activity of the correspondent account; and the anti-money laundering regulations of the foreign jurisdiction.
Correspondent Accounts: Foreign Banks
The Act also prohibits covered financial institutions in the United States from providing correspondent accounts for foreign shell banks, which are defined as foreign banks without a physical presence in any country. Furthermore, enhanced due diligence is required if the foreign bank is operating under an offshore banking license or under a banking license issued by a foreign country that either raises concerns about money laundering activities or is uncooperative with international anti-money laundering principles issued by an intergovernmental organization of which the United States is a member. Such enhanced due diligence includes keeping records of owners of the foreign bank whose shares are not publicly traded and ensuring that the foreign bank is not using that account to provide services to a foreign shell bank. Compliance by the foreign bank can be met by producing a certification every three years to the U.S. financial institution. However, if the U.S. financial institution knows or suspects information in a foreign bank's certification or recertification is incorrect, the financial institution must request that the foreign bank make the necessary corrections or verify the information. Failure of the foreign bank to cooperate requires closure of the correspondent accounts and termination of further transactions.
Reporting Requirements
In addition to verifying customer identities and performing the requisite level of due diligence of certain foreign customers, U.S. financial institutions are required to report known or suspected illegal transactions that might involve money laundering (31 C.F.R. 103.18(a)). Regulations require a transaction to be reported if it is conducted or attempted by, at, or through the financial institution, meets a certain monetary threshold of funds or other assets, and the financial institution knows, suspects or has reason to suspect illegality. Reporting is done in the form of a Suspicious Activity Report (SAR), which is filed with the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department, no later than 30 calendar days from the date of detection. In the case involving United Bank for Africa, the $15 million penalty was assessed in part because the New York branch's policies and procedures for investigating and reporting suspicious activity were too general and did not provide adequate instructions to branch personnel. The lack of effective internal processes resulted in the bank's failure, over a three year period, to timely file 140 SARs that involved a total of $197 million.
Power to Obtain Information From and Jurisdiction Over Non-U.S. Entities
The anti-money laundering provisions of the Act provide substantial access to information about foreign entities with accounts in U.S. financial institutions. Regarding foreign banks, the Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank that maintains a correspondent account in the United States. This includes records maintained outside the United States relating to the deposit of funds into the foreign bank. If the foreign bank fails to either comply with or challenge the summons or subpoena, the covered U.S. financial institution is required to close the correspondent account.
Furthermore, the Act confers jurisdiction over foreign persons committing money laundering offenses in the United States and over foreign banks with accounts in U.S. financial institutions. Finally, the Act provides for the seizure of funds in a U.S. account if those funds are held for a foreign bank and the foreign bank has received the proceeds of unlawful activity in its accounts outside the United States.
Guidelines for Foreign Entities
Many of these same procedures were in place at Mr. Spitzer's financial institutions and allowed them to detect his suspicious movements of money. Navigating the intricacies of these anti-money laundering statutes can be daunting for not only domestic organizations and individuals, but also for foreign companies or persons engaged in financial transactions in the United States. The following provides a checklist for foreign entities to consider so they do not run afoul of federal anti-money laundering regulations.
Private Accounts:
- Disclose the identities of all owners of the account.
- If the owner of the account is an SFPF, be aware of enhanced due diligence requirements of the U.S. financial institutions.
- If the SFPF is the nominal owner of the account, become familiar with and perform due diligence on the real owners of the account.
- Keep apprised of account activity.
- Be aware of the source of any funds received and deposited into the private account.
- Become familiar with threshold amounts of funds or assets that trigger reporting requirements.
- Be transparent and cooperative in dealings with the U.S. financial institution.
- Determine if your foreign financial institution is subject to regulations of correspondent accounts with U.S. financial institutions.
- Determine if your jurisdiction is considered "high-risk" for anti-money laundering and would be subject to enhanced due diligence. Information may be obtained through FinCEN's website (www.fincen.gov).
- Become familiar with your jurisdiction's anti-money laundering requirements or bank secrecy laws.
- Readily provide accurate information about the purpose of the account.
- Ensure that any information provided for purposes of identification verification is accurate and current.
- Engage in transparent and cooperative communications with the U.S. financial institution and its requests for information.
- Be aware of and prepared to resolve issues that may lead to refusal to open an account, filing of a report, termination of transactions or closure of the account.
- Ensure that the account is being used to benefit legitimate goals and not to serve foreign shell banks.
- If you are operating under an offshore or foreign banking license, be aware of possible enhanced due diligence requirements.
- Become familiar with the subpoena and summons power of the U.S. government to obtain information from the foreign bank.
- Timely deliver certification or recertification forms.
- Ensure information on the certification or recertification form is accurate and current.
