As a response to September 11, the U.S. Congress passed the *”Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act”*. The legislation is being monitored closely by financial services businesses within and outside the United States, including The Bahamas.
The Central Bank of the Bahamas reports that it is not aware of any Bahamas licensed banks or trust companies whose correspondent banking relations were suspended or cancelled as a result of the Patriot Act. Richard G. Ellis, Inspector of Banks & Trust Companies at the Central Bank, said recently, *”The legislative changes at the end of 2000 and the Central Bank’s physical presence requirements which have followed, have been integral in permitting Bahamian banks and trust companies to conduct business freely with US banks in 2002.”*
Earlier this year, at the signing of an agreement between the Government of the United States and the Government of The Bahamas “for the provision of information with respect to taxes and for other matters”, U.S. Treasury Secretary Paul O’Neill extended sincere gratitude to The Bahamas for the extraordinary cooperation it had provided to US efforts to disrupt the financing of terrorist organisations. It was hoped that the cooperative spirit of The Bahamas would serve as an example for other countries in the Caribbean and around the world. The Secretary further said, *”By signing this agreement, The Bahamas leaves no doubt that it should be counted among the financial centres of the world that are committed to upholding international standards and simply will not tolerate the abuse of its financial institutions for illicit purposes.”*
##A Review of the *USA PATRIOT Act*##
The legislation provides for a number of alterations to the *Bank Secrecy Act*, the US’s primary federal anti-money laundering law. Specifically, it:
* provides federal law enforcement and intelligence officers greater authority to gather and share evidence, particularly with respect to wire and electronic communications;
* amends federal money laundering laws, particularly those involving overseas financial activities;
* creates new federal crimes, increases the penalties for existing federal crimes, and adjusts existing federal criminal procedure, particularly with respect to acts of terrorism;
* modifies immigration law, increasing the ability of federal authorities to prevent foreign terrorists from entering the U.S., to detain foreign terrorist suspects, to deport foreign terrorists, and to mitigate the adverse immigration consequences for the foreign victims of September 11; and
* authorises appropriations to enhance the capacity of immigration, law enforcement, and intelligence agencies to more effectively respond to the threats of terrorism.
The *USA PATRIOT Act* enlarged the range of businesses that are subject to many of the provisions of the *Bank Secrecy Act*. A broad range of financial service providers will be impacted by various provisions as Congress has also used the *USA PATRIOT Act* to expand the definitions of “financial institution” and of “money transmitting business”. In each case, this would include:
– any person who engages as a business in the transmission of funds;
– any person who engages as a business in an informal money transfer system; or
-any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside the conventional financial institutions system
The term “financial institution” has also been expanded to take in any foreign bank, which is defined as “any company organised under the laws of a foreign country, a territory of the United States, Puerto Rico, Guam, American Samoa or the Virgin Islands, which engages in the business of banking, or any subsidiary or affiliate.”
##Regulations and Rules##
Since the introduction of the Act, the US Department of the Treasury has issued rules and rule proposals to implement provisions such as:
-the reporting of suspicious activity by broker-dealers;
-correspondent accounts for foreign banks, including a prohibition against correspondent accounts for foreign shell banks; and
-reporting by non-financial trades or businesses of transactions involving cash and certain cash equivalents.
December, 2001 saw the deadline for cutting off correspondent banking relationships with foreign shell banks and was also the date set for banks to be prepared to respond within 120 hours to requests by banking regulators for records relating to anti-money laundering compliance or a customer’s transactions.
In commenting on this, Mr. Ellis further indicated that the physical presence guidelines issued by the Central Bank in May 2001 meant that all banks and trust companies licensed in The Bahamas which were transitioning to full physical presence (see separate newsletter article on Phasing Out of Managed Banks), could not be viewed as shell banks for the purposes of the Patriot Act.
By July 1, 2002 broker-dealers will be required to have in place a system for reporting transactions that they know, suspect, or have reason to suspect:
-involve funds derived from illegal activity;
-are intended to hide funds or assets derived from illegal activity;
-are designed to evade regulations promulgated under the BSA;
-serve no business or apparent lawful purpose;
and where the firms know of no reasonable explanation for the transactions after examining available facts.
July 23, 2002 is the deadline for enhanced due diligence, with banks having to be prepared to apply *”appropriate, specific and, where necessary, enhanced due diligence”*, pursuant to Treasury Regulations to be issued, for all foreign private banking customers and international correspondent accounts. Specifically, enhanced due diligence will be required for private banking relationships with senior foreign political figures and their immediate family or close associates; correspondent accounts with offshore banks; and for banks from jurisdictions deemed non-cooperative in international efforts to combat money laundering.
Before October 26, 2002 banks must comply with regulations to be issued by the Secretary of the Treasury, setting out reasonable procedures for customer identification at account opening. These include ascertaining the identity of customers, maintaining records used to identify customers, and consulting a government-provided list of known or suspected terrorists.
Speaking at an American Bankers’ Association forum recently, Thomas Fleming, Bank Secrecy Act/AML compliance specialist at the Office of the Comptroller of the Currency, said the new procedures differ from previous know your customer regulations only to the extent that such scrutiny is now a *”regulatory necessity rather than a form of voluntary best practice.”*
##Information Sharing##
The Secretary of the Treasury has drafted regulations relating to cooperation among financial institutions, regulators and law enforcement, for the purpose of sharing information regarding persons engaged in, or suspected of terrorist or money-laundering activities. Already, financial institutions may share such information with one another upon providing notice to the Secretary. A “safe harbour” component allows those financial institutions sharing information under these provisions to be immune from prosecution for abrogating their customers’ rights to privacy or confidentiality under any federal or state law or any contract, including any arbitration agreement.
The regulatory proposal as issued allows the Financial Crimes Enforcement Network (FinCEN) to pass on information requests from any federal enforcement agency to do with “individuals, entities or organisations” to any institution or business defined as a “financial institution” under the *Bank Secrecy Act*.
Effectively, FinCEN would act as a conduit for the information that is to be shared between enforcement agencies and “financial institutions” concerning terrorist activities and/or money laundering.
The American Bankers Association has gone on record as being in support of information sharing among financial institutions and between those institutions and law enforcement. It also feels that Section 314 of the *USA PATRIOT Act{I*} (Cooperative Efforts to Deter Money Laundering) can be the appropriate tool to facilitate that *”worthy and necessary goal”*.
However, in a recent letter to the Financial Crimes Enforcement Network, the ABA states that as currently drafted the regulations issued by the Treasury Department to *”encourage further cooperation”* under terms of this Section will not see the goal of facilitating the sharing of information accomplished. In its correspondence the ABA points out that, in fact, the rule may force financial institutions to turn away from sharing information.
Section 314 is included under Title III of the Act, popularly known as the *”International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001″*. Other titles include: Enhancing Domestic Security Against Terrorism; Enhanced Surveillance Procedures; Protecting the Border; Removing Obstacles to Investigating Terrorism; Providing for Victims of Terrorism, Public Safety Officers, and Their Families; Increased Information Sharing for Critical Infrastructure Protection; Strengthening the Criminal Laws Against Terrorism; and Improved Intelligence.
##Money Laundering##
Section 315 under Title III has expanded the list of Specified Unlawful Activities (SUAs) considered predicate crimes for money laundering. This now covers crimes committed in a foreign country, the proceeds of which are transferred or converted in whole or in part in the US, to include:
-any crime of violence;
-the bribery of a public official;
-the misappropriation, theft or embezzlement of public funds for the benefit of a public official;
-the smuggling of munitions or other specified controlled items;
-any offence which, if committed in the US, would subject the perpetrator to extradition or criminal prosecution.
Activities conducted abroad that would be deemed illegal in the US is a predicate offence for money laundering if the money is generated from such activity and if any portion of it is transferred into, out of, or through the US, even if such activity would not be deemed illegal in the jurisdiction where it happened.