Corporate Governance

The Criminal and Regulatory Framework, and Anti-Money Laundering Compliance Programs (Part 3)

This article is a continuation of our most recent corporate governance series. If you missed part 2, you can read it online here: Anti-Money Laundering Part 2

2. The Bank Secrecy Act

The Bank Secrecy Act (or "BSA") (31 U.S.C. 5311 et seq.) is the law that establishes the basic regulatory framework for anti-money laundering regulations.30 Unlike the Money Laundering Control Act, the BSA applies only to certain types of businesses. The types of businesses it applies to are further limited by the implementing regulations issued by the Secretary of the Treasury.

The BSA applies to businesses classified as "financial institutions," and authorizes the U.S. Treasury Department to require that certain anti-money laundering actions, including reporting of large cash (i.e., over $10,000) transactions, making and keeping certain records, implementing a formal, written Anti-Money Laundering Compliance Program, and mandatory reporting of "suspicious activity" to the federal government.

(a) "Financial Institutions" Defined: The term "financial institution" means much more than banks. The term is defined in 31 U.S.C. 18 U.S.C. 5312(a)(2) and (c) to include: (1) an insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)); (2) a commercial bank or trust company; (3) a private banker; (4) an agency or branch of a foreign bank in the United States; (5) any credit union; (6) a thrift institution; (7) a broker or dealer registered with the SEC under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq;); (8) any futures commission merchant, commodity trading advisor, or commodity pool operator registered or required to be registered under the Commodity Exchange Act; (9) a broker or dealer in securities or commodities; (10) an investment banker or investment company; (11) "money services businesses" or "MSBs";31 (13) an operator of a credit card system (14) an insurance company; (15) a dealer in precious metals, stones, or jewels; (16) a pawnbroker; (17) a loan or finance company; (18) a travel agency; (19) a money transmitter; (20) a telegraph company; (21) a business engaged in the sale of automobiles, airplanes, and boats; (22) persons involved in real estate closings and settlements; (23) the U.S. Postal Service; (24) an agency of the U.S. government or of a state or local government carrying out a power or duty of a business described in section 5312; (25) a casino, a gambling casino, or gaming establishment with an annual gaming revenue of more than $1 million annually; (26) any business engaging in an activity the Secretary determines by regulation to be similar to, related to, or a substitute for any business described in section 5312; and (27) any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.

(b) Regulatory Implementation of the Bank Secrecy Act: The Secretary of the Treasury has issued regulations requiring the implementation of anti-money laundering programs only for some of the "financial institutions" listed in the Bank Secrecy Act, and has exempted others. All of the implementing regulations are found at 31 C.F.R. 103.

Currently, the "financial institutions" subject to specific implementing regulations are: all banks regulated by a federal regulatory agency; businesses regulated by the SEC; credit unions regulated by the National Credit Union Administration; mutual funds; "money services businesses;" operators of credit card systems; some dealers in precious metals, precious stones or jewels; and certain life insurance companies.32 All other businesses that fall within the definition of "financial institution" have been exempted from the provisions of the BSA, at least for the time being.33 A careful reading of the BSA regulations is important for all "financial institutions" because some types of businesses that fall within the general description (particularly line insurance companies and dealers in precious metals, stones or jewels) may be excluded from the regulatory definitions.34

(c) General Regulatory Requirements for Subject Financial Institutions: The basic anti-money laundering requirements that the BSA imposes on "financial institution" are: (i) implementing an Anti-Money Laundering Program; (ii) the implementation of "Customer Identification Programs ("CIP"); and (iii) the reporting of "suspicious transactions" to the Treasury Department. Not all of these requirements are equally applicable to subject "financial institutions," and accordingly careful review of the applicable regulations is necessary.

(i) Anti-Money Laundering Programs: All Anti-Money Laundering Programs must be in writing. The Bank Secrecy Act and the implementing regulations further require that institutions subject to implementing such Programs must also: (i) formally appoint an Anti-Money Laundering Compliance Officer who is in overall charge of the Program; (ii) the periodic training of appropriate employees about the institution's anti-money laundering policies and procedures; and (iii) the periodic independent audit of the Anti-Money Laundering Program to ensure it has been implemented and is being followed.35

Anti-Money Laundering Programs must be "risk based." This means that each institution must carefully consider its customer base, products, services, geographic areas of operation and market area in order to determine the degree of money laundering risk the institution faces, and degree of risk associated with each of these various categories. As a practical matter, this involves the preparation of a written "Risk Assessment" covering each of the factors just noted. Then, based upon that assessment, the institution must develop written policies and procedures specifically designed to address the degree of risk and detect, deter and report money laundering or terrorist financing activity.

(ii) Customer Identification Programs (or "CIP") is required only for some "financial institutions." These include banks, savings associations, credit unions, securities broker dealers, futures commission merchants and introducing brokers, mutual funds and "money services businesses."36 The Program must be in writing and, if the institution is also required to have an anti-money laundering program, it must be included as part of that program. CIP must include, at a minimum, procedures to verify the name, date of birth, address or principal place of business and identification number. Verification may be done through documents specifically set forth in the Program (generally, a government-issued photo identification for persons, or documents showing the legal existence of an entity). Verification may be made through non-documentary procedures, but the specific procedures must be specified in the Program. The Program must also prescribe the procedures to be followed by the institution when verification cannot be accomplished, including the circumstances under which an account must be closed for lack of verification. The institution must maintain copies of all records and documents used in the verification process.

(iii) Reporting of "Suspicious Transactions": Some "financial institutions are required to report in writing "suspicious transactions" to the Treasury Department (specifically, to the Financial Crimes Enforcement Network, or "FinCEN"). The "financial institutions" subject to this requirement are: (i) banks;37 (ii) mutual funds; (iii) insurance companies covered under 31 C.F.R. 103.137; (iv) brokers or dealers in securities; (v) futures commission merchants and introducing brokers in commodities; (vi) "money services businesses;" and (vii) casinos.38

Generally, transactions are considered to be "suspicious" and subject to the reporting requirement where the institution knows, suspects or has reason to suspect that a transaction: (i) involves funds derived from illegal activities; (ii) is intended or conducted in order to hide or disguise funds or assets derived from illegal activities; (iii) is designed to evade any reporting or other requirements of the Bank Secrecy Act or the BSA regulations; (iv) has no business or apparent lawful purpose; or (v) is not normal for the customer involved, and the institution knows of no reasonable explanation for the transaction.

The Bank Secrecy Act provides a "safe harbor" for "financial institutions" (and their officers, directors, employees and agents) reporting suspicious transactions or activity. No "financial institution" may he held liable to any person or entity under and any federal stature or regulation, or under the constitution, law or regulation of any state or political subdivision, for disclosing suspicious activity or for failing to notify the person or entity who is the subject of or named in the report.39

No "financial institution" (or any officer, director, employee or agent) may notify any person or entity involved in the activity or transaction that the transaction or activity has been or is intended to be reported.40

The form used for reporting "suspicious transactions" depends upon the type of institution making the report. In all cases, however, the report must be filed within thirty days after the date of the detection of the facts that constitute grounds for filing. Filing may be delayed an additional thirty days in order to enable the institution to identify a suspect, but in no case may filing be delayed more than sixty days. Transactions involving on-going money laundering schemes or terrorist financing must be verbally reported immediately upon suspicion to an appropriate law enforcement agency.


Anti-Money Laundering - Part 4

Our thanks to this article's author, Greg Baldwin of Holland & Knight.

Holland & Knight is a global law firm with more than 1,150 lawyers in 17 U.S. offices. Other offices around the world are located in Beijing and Mexico City, with representative offices in Caracas and Tel Aviv. Holland & Knight is among the world's 18 largest firms, providing representation in litigation, business, real estate and governmental law. Our interdisciplinary practice groups and industry-based teams ensure clients have access to attorneys throughout the firm, regardless of location.

Greg Baldwin practices in the areas of complex commercial litigation and white collar criminal defense. He specializes in the Foreign Corrupt Practices Act, U.S.A. Patriot Act, the Bank Secrecy Act, the Money Laundering Control Act, and OFAC regulations, as well as anti-money laundering and OFAC compliance program development and implementation. Mr. Baldwin is a Certified Anti-Money Laundering Specialist.

DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article's topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.

30 However, the provisions of the BSA can also be enforced through criminal prosecution against individuals and businesses. A willful violation of the BSA or a regulation prescribed under the BSA is punishable by fine of up to $250,000 and imprisonment for up to five years. Such violations, if committed while violating another law of the United States or as part of a pattern of any illegal activity involving over $100,000 in a one year period are punishable by a fine of up to $500,000 and imprisonment for up to ten years. Violations of sections 5318(i) or (j) (relating to private banking and correspondent accounts), or any regulations or special measures imposed under section 5318(A), are punishable by a fine equal to not less than two times the amount of the transaction, but not more than $1 million. 18 U.S.C. § 5322.
31 MSBs include: currency dealers or exchangers; check cashers; issuers or sellers of cashier's checks, traveler's checks, money orders, or stored value; and money transmitters. 31 C.F.R. 103.11(uu).
32 See variously: 31 C.F.R. 103.120; 103.125; 103.130; 103.135; 103.137; 103.140. Regulations applicable to "dealers in precious metals, precious stones or jewels" are of limited application and generally exempt retail businesses. See 31 C.F.R. 103.140. In regard to insurance companies, only those companies that are engaged within the United States as a business in the issuing of a permanent life insurance policy (other than group policies), annuity contracts (other than group contracts) and "any other insurance product with features of cash value or investment" are required to implement anti-money laundering programs. See 31 C.F.R. 103.137.
33 31 C.F.R. 103.170. These include businesses such as: agencies of federal, state or local government carrying out a duty or power described in the definition of "financial institution;" loan or finance companies; travel agencies; telegraph companies; sellers of automobiles, airplanes and boats; persons involved in real estate closings or settlements; private bankers; commodity pool operators; commodity trading advisors; and investment companies; some insurance companies; and some dealers in precious metals, stones or jewels. However, proposed regulations have been published for "Unregistered Investment Companies" (see, 67 Federal Register, 60617, Thursday, September 26, 2002) and a regulatory scheme for "persons involved in real estate closings or settlements" is apparently under consideration (see, 68 Federal Register, 17569, Thursday, April 10, 2003, ). No final rules have yet been issued for these two categories of "financial institution."
34 The list of exempted "financial institutions" is found at 31 C.F.R. 103.170. 11
35 31 U.S.C. §5318(h).
36 See variously, 31 C.F.R. 103. 121 through 123, and 103.131.
37 "Banks" include all commercial banks, trust companies, savings or building and loan institutions and credit unions organized under federal or state law; private banks; institutions insured under the National Housing Act; savings banks; and foreign banks operating in the United States. 31 C.F.R. 103.11(c).
38 See variously, 31 C.F.R. 103.15 through 103.21.
39 31 U.S.C. § 5312(g)(3). The "safe harbor" applies to any "financial institution" that makes a "voluntary" disclosure. Id, Therefore, the "safe harbor" applies even to all "financial institutions," including those that are not required by regulation to make such reports.
40 31 U.S.C. § 5318(g)(2).


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