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| #     |   | ##                                                   |   |
| # Sub |   |  USA PATRIOT Act -- Anti-Money-Laundering Provisions |   |
| ject: |   |                                                      |   |
+-------+---+------------------------------------------------------+---+

**TO**: Chief Executive Officers of All National Banks, Federal Branches
and Agencies, Department and Division Heads, and All Examining Personnel

**PURPOSE**

The President signed the USA PATRIOT Act into law on October 26,
2001.[^1] The PATRIOT Act establishes a wide variety of new and enhanced
ways of combating international terrorism. The provisions that affect
national banks (and other financial institutions) most directly are
contained in Title III of the act. In general, Title III amends current
law -- primarily the Bank Secrecy Act (BSA) -- to provide the Secretary
of the Treasury (Treasury) and other departments and agencies of the
federal government with enhanced authority to identify, deter, and
punish international money laundering. This issuance highlights the
anti-money-laundering provisions of Title III that are of most immediate
significance to national banks.

The provisions Title III of the PATRIOT Act will sunset after September
30, 2004, if the Congress enacts a joint resolution to terminate them.
The act requires expedited consideration by the Congress of any such
joint resolution.

**DISCUSSION**

##### [Key Provisions of Title III of the USA PATRIOT Act]{.underline}

Prohibition on United States Correspondent Accounts with Foreign Shell
Banks (Sec. 313)

-   [Effective Date]{.underline}: December 25, 2001.

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-   Section 313 bars covered financial institutions[^2] from
    establishing, maintaining, administering, or managing correspondent
    accounts in the United States for foreign "shell" banks. A foreign
    shell bank is a foreign bank that does not have a physical presence
    in any country. An exception permits covered financial institutions
    to provide correspondent accounts for foreign shell banks that are
    affiliated with depository institutions that have a physical
    presence and that are subject to supervision by a banking
    regulator.[^3]

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-   Section 313 also requires covered financial institutions that
    maintain correspondent accounts in the United States for a foreign
    bank to take reasonable steps to ensure that such accounts are not
    being used by that foreign bank to provide indirect banking services
    to a foreign shell bank. Treasury is directed to issue regulations
    to define these "reasonable steps." Treasury has published guidance
    (copy attached) describing a certification process that covered
    financial institutions may use to comply with section 313 pending
    issuance of regulations by Treasury. *See* 66 Fed. Reg. 59342 (Nov.
    27, 2001) or the Treasury Web site at
    www.treas.gov/press/releases/po813.htm.

Forfeiture of Funds in United States Interbank Accounts; Production of
Bank Records (Sec. 319)

-   [Effective Date]{.underline}: Effective immediately, but the section
    expressly gives covered financial institutions a 60-day grace
    period, that is until **December 25, 2001**, to comply.

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-   *Section 319*: Section (a) provides for forfeiture of a foreign
    bank's interbank account[^4] in the United States under certain
    circumstances. Section (b) contains provisions that enhance the
    ability of bank regulators and law enforcement authorities to obtain
    certain records from covered financial institutions.

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-   *Forfeiture.* Section 319(a) expands the circumstances under which
    funds in a U.S. interbank account may be subject to forfeiture. If a
    deposit of funds in a foreign bank outside of the United States is
    subject to forfeiture, U.S. law enforcement authorities can seize
    the funds in the U.S. account as a substitute for the foreign
    deposit. Law enforcement is not required to trace the funds seized
    in the United States to the deposit abroad.

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-   *Information and Documentation Requests: The 120 Hour Rule.* Section
    319(b) requires U.S. covered financial institutions to comply,
    within 120 hours, with an appropriate federal banking agency's
    request for information and documentation concerning any account
    opened, maintained, administered or managed in the United States by
    that financial institution. The rule also covers requests for
    information and documentation on the nature of a covered financial
    institution's or covered financial institution customer's
    anti-money-laundering compliance.

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-   Foreign banks that maintain correspondent accounts in the United
    States are subject to subpoena and summons with respect to records
    relating to a correspondent account, including records maintained
    outside the United States. U.S. covered financial institutions may
    be required to sever correspondent arrangements with foreign
    financial institutions that do not either comply with or contest any
    such summons or subpoena.

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-   *Records*. Covered financial institutions that maintain
    correspondent accounts in the United States for foreign banks are
    required to keep records that identify the owners of the foreign
    bank and a person authorized to accept service of process in the
    United States. These records must be turned over to federal law
    enforcement authorities within seven days of receipt of a request
    for them. The certification process published by Treasury, referred
    to in the previous section, may be used to comply with this
    requirement. *See* 66 Fed. Reg. 59342 (Nov. 27, 2001) or the
    Treasury Web site at www.treas.gov/press/releases/po813.htm.

Special Due Diligence for Correspondent Accounts and Private Banking
Accounts

(Sec. 312)

-   [Effective Date]{.underline}: Treasury regulations are required to
    be issued, in consultation with the appropriate federal functional
    regulator, by **April 24, 2002**; whether or not regulations are
    issued, this provision is effective on **July 23, 2002.**

-   *General Due Diligence Standards.* Section 312 requires that all
    financial institutions that establish, maintain, administer, or
    manage private banking accounts or correspondent accounts in the
    United States for non-United States persons or their representatives
    have "appropriate, specific and, where necessary, enhanced due
    diligence policies, procedures, and controls that are reasonably
    designed to detect and report instances of money laundering through
    those accounts." Treasury is required to issue regulations
    implementing this special due diligence requirement.

-   *Additional Due Diligence Standards for Certain Correspondent
    Accounts.* Section 312 requires additional due diligence for money
    laundering when a U.S. financial institution maintains correspondent
    accounts or private banking accounts for foreign banks under three
    circumstances:

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-   When the foreign bank operates under an offshore banking
    license;[^5]

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-   When the foreign bank operates under licenses issued by countries
    that have been designated by intergovernmental groups as
    noncooperative with international counter-money-laundering
    principles; or

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-   When the foreign bank operates in a jurisdiction designated by
    Treasury as warranting special measures because of money-laundering
    concerns.

The additional due diligence measures require U.S. financial
institutions to:

-   If the foreign bank is not publicly traded, identify each of its
    owners and the nature and extent of each owner's interest;

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-   Take reasonable steps to conduct enhanced scrutiny of the
    correspondent account and to report suspicious transactions; and

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-   Take reasonable steps to ascertain whether the foreign bank provides
    correspondent accounts to other foreign banks. If so, the U.S.
    financial institution must identify those institutions and conduct
    due diligence on them.

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-   *Minimum Due Diligence Standards for Private Banking Accounts.*
    Private banking accounts are defined as accounts with minimum
    deposits of \$1 million that are assigned to or managed by a bank
    employee who acts as a liaison between the financial institution and
    the beneficial owner. For these accounts, financial institutions
    must at a minimum identify the nominal and beneficial owners of the
    account and the account's source of funds and report suspicious
    transactions. The financial institution must also conduct enhanced
    scrutiny of any account requested or maintained by a "senior foreign
    political figure, or any immediate family member or close associate"
    to detect transactions that may involve proceeds of foreign
    corruption.

Special Measures for Jurisdictions, Financial Institutions, or
International Transactions of Primary Money-Laundering Concern (Sec.
311)

-   [Effective Date]{.underline}: To be determined by future orders and
    regulation.

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-   Section 311 gives Treasury, in consultation with the Federal
    Reserve, the OCC, the other appropriate federal functional
    regulators, the Secretary of State, the Securities and Exchange
    Commission, the Commodity Futures Trading Commission, the National
    Credit Union Administration Board, and other agencies the Secretary
    may find to be appropriate, regulatory authority to require domestic
    financial institutions to perform special recordkeeping and
    reporting (special measures) with respect to foreign jurisdictions,
    foreign financial institutions, international transactions, or types
    of accounts if Treasury determines that such jurisdictions,
    institutions, transactions, or types of accounts are of "primary
    money-laundering concern."

-   The special measures include additional recordkeeping or reporting
    requirements about transactions, participants in transactions, and
    beneficial owners of funds involved in transactions. Special
    measures may also include the identification of customers of a
    foreign financial institution who use an interbank payable-through
    account opened by the foreign financial institution at a domestic
    financial institution and increased due diligence and other
    restrictions concerning opening or maintaining interbank
    correspondent or payable-through accounts.

**Verification of Identification (Sec. 326)**

-   [Effective Date]{.underline}: Treasury must issue regulations by
    **October 26, 2002**.

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-   Section 326(a) requires that Treasury prescribe, by regulation,
    minimum standards that financial institutions must follow to verify
    the identity of customers, both foreign and domestic, when a
    customer opens an account. As part of the verification, financial
    institutions must consult lists, provided by a governmental agency,
    of known or suspected terrorists or terrorist organizations and keep
    records of the information used to verify the customer\'s identity.
    Treasury must issue these regulations jointly with the OCC, the
    other banking agencies, and the other functional regulators defined
    in the Gramm-Leach-Bliley Act, plus the Commodity Futures Trading
    Commission.

**Cooperative Efforts to Deter Money Laundering** (**Sec. 314)**

-   [Effective Date]{.underline}: Treasury Regulations to be issued by
    **February 23, 2002.**

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-   Section 314 requires Treasury to issue regulations to encourage
    cooperation among financial institutions, financial regulators, and
    law enforcement officials for the purpose of sharing information
    regarding individuals, entities, and organizations "engaged in or
    reasonably suspected, based on credible evidence, of engaging in"
    terrorist acts or money-laundering activities. Section 314 also
    allows law enforcement and regulatory authorities to share such
    information with financial institutions.

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-   Section 314 allows sharing of information among financial
    institutions concerning possible terrorist or money-laundering
    activity upon notice to Treasury.

**Concentration Accounts at Financial Institutions** (**Sec. 325)**

-   [Effective Date]{.underline}: To be determined by future Treasury
    regulation.

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-   Section 325 authorizes Treasury to issue, at the secretary's
    discretion, regulations concerning the maintenance of "concentration
    accounts," a term not defined in the statute, by financial
    institutions. The purpose would be to prevent an institution's
    customers from anonymously directing funds into or through such
    accounts. The regulations would prohibit a financial institution
    from allowing its clients to move personal funds through
    concentration accounts, prohibit a financial institution from giving
    its customers information about the financial institution's
    concentration accounts, and require a financial institution to have
    written procedures to ensure the documentation of all transactions
    in a concentration account.

**Amendments Relating to Reporting of Suspicious Activities** (**Sec.
351)**

-   [Effective Date]{.underline}: Effective immediately.

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-   These amendments protect financial institutions from potential
    liability in cases where such institutions make voluntary
    disclosures of suspicious activities to government authorities. The
    amendment also provides that financial institutions need not give
    notice to the person who is the subject of the disclosure --
    financial institutions will not be liable for failure to give such
    notice.

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-   Current law protects financial institutions from civil liability for
    reporting suspicious activity. Section 351 states a rule of
    construction that this protection from liability does not apply if
    an action against the institution is brought by a government entity.

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-   Current law prohibits financial institutions and their employees
    from disclosing that a suspicious activity report has been filed.
    The Act amends current law to also prohibit such disclosure by any
    federal, state, or local government employee, except as necessary to
    fulfill that employee's official duties.

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-   Section 351 amends the prohibition on disclosure of SARs and the
    safe harbor for liability so that information that has been reported
    as suspicious may be disclosed by a financial institution in a
    written employment reference or a written termination notice
    provided to a self-regulatory agency. However, while the information
    may be disclosed in these circumstances, the financial institution
    may not disclose the fact that a SAR was filed.

Authorization to Include Suspicions of Illegal Activity in Written
Employment References (Sec. 355)

-   [Effective Date]{.underline}: Effective immediately.

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-   Section 355 permits, but does not require, an insured depository
    institution to include information, in a response to a request for
    an employment reference by a second insured depository institution,
    about the possible involvement of a former institution-affiliated
    party in potentially unlawful activity. The safe harbor from civil
    liability for an insured depository institution that provides
    information to a second insured depository institution applies
    unless the first institution acts with malicious intent.

**Anti-Money-Laundering Programs (Sec. 352)**

-   [Effective Date]{.underline}: **April 24, 2002**; Treasury must
    issue rules by that date as well, after consulting with the
    appropriate federal functional regulators.

Section 352 requires all financial institutions to have a Bank Secrecy
Act (BSA) program that contains the four basic components of a typical
BSA program. [See, e.g.]{.underline}, 12 CFR 21.21(c) (describing
minimum requirements for BSA compliance programs of national banks).[^6]

Reporting of Suspicious Activities by Securities Brokers and Dealers;
Investment Company Study (Sec. 356)

-   [Effective Date]{.underline}: Treasury regulation must be published
    by July 1, 2002.

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-   Section 356(a) requires Treasury, after consultation with the
    Securities and Exchange Commission and the Federal Reserve Board, to
    issue regulations that require registered securities brokers and
    dealers to file suspicious activity reports. These regulations must
    be published as proposed rules by January 1, 2002 and in final form
    by July 1, 2002.

Penalties for Violations of Geographic Targeting Orders and Certain
Recordkeeping Requirements, and Lengthening Effective Period of
Geographic Targeting Orders (Sec. 353)

-   [Effective Date]{.underline}: Effective for future violations.

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-   Section 353 provides that penalties for violation of the Bank
    Secrecy Act also apply to violations of Geographic Targeting Orders
    issued under 31 USC 3526 and to certain recordkeeping requirements
    relating to funds transfers.

**Increase in Civil and Criminal Penalties for Money Laundering**
(**Sec. 363)**

-   [Effective Date]{.underline}: Effective for future violations.

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-   Section 363 increases from \$100,000 to \$1,000,000 the maximum
    civil and criminal penalties for a violation of provisions added to
    the Bank Secrecy Act by sections 311 and 312 of the PATRIOT ACT.

**Establishment of Highly Secure Network** (**Sec. 362)**

-   [Effective Date]{.underline}: Network to be operational by **July
    26, 2002**.

Section 362 directs Treasury to establish a secure network within FinCEN
that will allow financial institutions to file suspicious activity
reports on line. The new network will also make information regarding
suspicious activities available to financial institutions.

**Consideration of Anti-Money-Laundering Record** **in Certain
Applications** (**Sec. 327)**

-   [Effective Date]{.underline}: Effective for applications submitted
    after **December 31, 2001**.[^7]

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-   Section 327 amends the Federal Reserve Act and the Bank Merger Act
    to require that the Federal Reserve Board, the OCC, and the other
    federal banking regulators consider the effectiveness of a bank
    holding company or a financial institution in combating
    money-laundering activities (including in overseas branches) in
    ruling on an application by a financial institution or bank holding
    company under these acts.

Questions concerning this advisory may be directed to the Legislative
and Regulatory Activities Division at (202) 874-5090 or the Enforcement
and Compliance Division at (202) 874-4800.

Daniel P. Stipano

Deputy Chief Counsel

[^1]: The USA PATRIOT Act is an acronym for The Uniting and
    Strengthening America by Providing Appropriate Tools Required to
    Intercept and Obstruct Terrorism Act, Pub. L. No. 107-56 (October
    26, 2001).

[^2]: Section 313 defines "covered financial institution" by cross
    reference to 31 USC 5312(a)(2)(A) through (G). These include insured
    banks, under 12 USC 1813(h); commercial banks or trust companies;
    private bankers; branches, and agencies of foreign banks in the
    United States; credit unions; thrifts; and registered brokers and
    dealers.

[^3]: The act defines an "affiliate" as a foreign bank that is
    controlled by or under common control with another institution. A
    bank has a "physical presence" in a jurisdiction if it maintains a
    place of business at a fixed address, other than a solely electronic
    address, employs full-time staff, maintains operating records, and
    is subject to inspection by the bank's licensing authority.

[^4]: The act uses the definition of "interbank account" in 18 USC
    984(c)(2)(B), which is "an account held by one financial institution
    at another financial institution primarily for the purpose of
    facilitating customer transactions."

[^5]: Section 312 defines an "offshore banking license" as a license to
    conduct banking activities, with a condition of the license being
    that the bank may not offer banking services to citizens of, or in
    the local currency of, the jurisdiction issuing the license.

[^6]: The term "financial institution" is defined in Subchapter II of
    Chapter 53 of USC Title 31 to include brokers, dealers, MSBs,
    currency exchanges, insurance companies, travel agencies, car
    dealers, casinos, and realtors.

[^7]: By the terms of the statute, the new requirement applies to any
    application "submitted to the responsible agency . . . after
    December 31, 2001, which has not been approved by all appropriate
    responsible agencies before the date of enactment of \[the USA
    PATRIOT Act\]." This provision, apparently drafted in contemplation
    of a later enactment date than the actual enactment date, appears to
    mean that the new requirement applies to all applications submitted
    after December 31, 2001.