September 11 brings new anti-terrorism and anti-money laundering responsibilities to financial institutions.

The need to track down the terrorists after September 11, and to help prevent future attacks, led to a search for a means of uncovering the money trails they used. The USA PATRIOT Act has produced a flood of pronouncements requiring or encouraging financial institutions to establish anti-money laundering programs, file suspicious activity reports, and share information with the federal government and each other.

Introduction

The events of September 11 put financial institutions in the front lines of the war on terrorism, asking them to detect patterns of financial activity that might indicate an objective to engage in terrorist acts (1). Prior to the USA PATRIOT Act, many financial institutions considered their anti-terrorism responsibility to consist of checking names of those opening accounts, or conducting certain transactions, against a list provided by the Treasury Department's Office of Foreign Assets Control (OFAC). This checking was, and is, primarily accomplished with interdiction software, commercially available programs that examine names and identity information in an institution's databases to search for those OFAC has determined to be terrorists, support terrorists, or to have impermissible dealings with governments that support terrorism.

Money laundering was thought by many to be the province of drug kingpins and criminal organizations. Currency transaction reporting generally required filing forms concerning transactions involving more than $10,000 in cash (including cashier's and traveler's checks, money orders or bank drafts) (2). Suspicious activity reports had to be filed where it appeared that customers were attempting to structure transactions to avoid having currency transaction reports filed, and in other situations where suspicions regarding the activity arose or should have arisen (3). Though currency transaction reporting applied to all trades and businesses (4), suspicious activity reporting was generally limited to banks, casinos and money services businesses (check cashers, money transmitters, etc.). Brokerage firms, mutual funds, insurance companies and most other financial institutions that seldom or never received payments in cash had no need to implement an anti-money laundering program or to appoint someone in the compliance or legal department to think about the issue.

Then came September 11.

USA PATRIOT Act

The need to track down the terrorists and to prevent future attacks, led to a search for a means of uncovering the money trails they used. OFAC lists provided names of known terrorists and their organizations, but it was apparent that the terrorists were finding individuals who had no or only minor criminal histories, who would not set off alarms at borders or at teller's windows. The money laundering regulatory system was as close as could easily be found for the purpose, but the fit was not perfect Money launderers are generally trying to cleanse money obtained from illegal enterprises. Terrorists are often moving funds with no criminal roots: the money may come from donations to charities, or as gifts from family members or grants from subversive governments or their agencies. Only the purpose of the transfers is illegal. Still, there is a desire to keep the trail invisible, and the procedures used by terrorists are often the same as those used by more conventional criminal enterprises.

Thus came about the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, known as the USA PATRIOT Act, signed by President Bush on October 26, 2001 (5).

Terrorism and money laundering had intersected legislatively before with the Antiterrorism and Effective Death Penalty Act of 1996 (6), which added terrorist crimes to the list of underlying offenses for money laundering prosecutions. The USA PATRIOT Act, however, interwove the two strands of law to a degree that will unite them forever. The tools that were developed with the Bank Secrecy and Money Laundering Control Acts (7) to trace the proceeds of crime were now enhanced to find terrorists. Since the amounts needed to finance terrorist operations are negligible compared to the cash brought in by criminal organizations, the refinement of governmental powers to detect financial activities of terrorists inevitably reduces the privacy that those dealing with the financial system have come to expect. The constitutional roots of this expectation in the American judicial system will produce conflicts and litigation, that will redefine the limits of government and perhaps change the boundaries of those protections the U.S. Constitution provides to citizens and their enterprises.

The USA PATRIOT Act vastly increases the number of businesses required to maintain anti-money laundering programs and report suspicious activities. Money laundering was long defined as taking cash to a bank or check cashing store. It was often defined as a process that continued alter this initial placement, and involved hiding the origins of the proceeds of crime by adding layers of transactions, then ultimately returning the proceeds to the criminal in a form that bore no detectable connection to the criminal activity that created the wealth in the first place. With the USA PATRIOT Act, financial businesses that might only be involved in these later stages of manipulation are drafted into the war against money laundering. Thus, brokers and dealers now must scrutinize investors to find those whose funds are part of a criminal enterprise, and mutual funds must institute programs to determine if their services are being used by launderers. Virtually any business that conducts financial transactions with custom ers or clients must think about how its resources might become attractive to criminals and terrorists.

Regulatory Agenda. The USA PATRIOT Act set a regulatory agenda for the financial regulatory agencies that has produced a flood of pronouncements requiring or encouraging financial institutions to establish anti-money laundering programs (8), file suspicious activity reports (9) and share information with the federal government (10) and each other (11). Due diligence rules have been designed to detect money laundering through correspondent and private banking accounts (12), and correspondent accounts for foreign shell banks (banks without a physical presence m any country) may not be established at all (13). Additional anti-money laundering program requirements will soon be issued for dealers in precious metals, stones and jewels; pawnbrokers; loan and finance companies; travel agencies; telegraph companies; car, plane and boat dealers; real estate brokers; private bankers; insurance companies; commodity pool operators and commodity trading advisors; and investment companies (14).

The regulations, coming roughly at three-month intervals after the Act was passed, will generally be implemented by October 2002, yet the process will continue past this one-year anniversary as proposed and interim rules are modified and become final, and as administrative and judicial interpretations of the rules require additional revision. Further terrorist acts of significant magnitude, and further experience with the money trails that terrorists leave, may also create new initiatives, both legislative and regulatory.

Financial Crimes Enforcement Network. At least 27 federal agencies have programs that respond to various aspects of the antiterrorism and anti-money laundering initiatives of the USA PATRIOT Act, but the principal coordinator of policy and enforcement is the Financial Crimes Enforcement Network (FinCEN) (15). This agency, which was virtually unknown before October 2001, even to many institutions that deal frequently with the Treasury Department, was established in April 1990 by Treasury Order 105-08 to provide a government-wide, multi-source intelligence and analytical network focused on money laundering and other financial crimes. The USA PATRIOT Act formally made FinCEN a bureau in the Treasury Department (16).

The responsibilities of the agency are large, considering that it has approximately 300 employees and contractors and has to work through other enforcement agencies when its employees are sent outside the Washington, D.C., area FinCEN does not conduct compliance examinations at financial institutions, but receives referrals from agencies that do (17), including the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration. The IRS Examination Division conducts compliance examinations of casinos, money transmitters, check cashers, currency exchangers, security brokers and dealers and issuers or redeemers of money orders and traveler's checks. The Securities and Exchange Commission conducts compliance examinations of securities brokers and dealers, and the Commodity Futures Trading Commission does the same for futures commission merchants and introducing brokers.

FinCEN lists numerous indicators of activities indicating a possible terrorism connection that may require filing a suspicious activity report (18). Some typical indicators suggest how much scrutiny is expected of financial institutions:

* Use of a business account to collect and then funnel funds to a small number of foreign beneficiaries, both individual and business, in a Persian Gulf State

* Use of a business account that would not normally generate the volume of wire transfer activity, into and out of the account, that is occurring

* Large currency withdrawals from a business account not normally associated with cash transactions

* Use of multiple individuals to structure transactions under the reporting threshold, to circumvent reporting requirements, and then funnel funds to a foreign beneficiary

* Same day transactions at the same depository institutions using different tellers

* Shared addresses, which are also business locations, by individuals involved incurrency transactions

* Use of cash-intensive businesses to disguise a source of funds

* Apparent intent to circumvent a money transmitter's presentation-of-identification requirements by purchasing money orders in small amounts

* Charity/relief organizations linked to any suspicious transactions

Clearly, many legitimate businesses and individuals will, on occasion, conduct activities that may look suspicious under these criteria Inevitably, there will be charges of racism, racial profiling, violation of privacy and other constitutional rights, etc.

Penalties and Enforcement More than 170 crimes are listed in the federal money laundering statutes, and others were added by the USA PATRIOT Act, affecting more entities and individuals. The Act significantly increased the penalties for noncompliance with the anti-money laundering statutes and regulations. As just one example of this increased severity, violation of the restrictions on correspondent accounts can lead to a civil or criminal fine of $1 million (19).

International Initiatives

A General Accounting Office Report on money laundering in the securities industry (20) notes that money laundering amounts to somewhere between 2% and 5% of the world's gross domestic product, and may total over $100 billion in the U.S. alone (21). The ability of money launderers to hide the footprints of their financial trails has been assisted by the fluidity of the financial marketplace that follows from legislation, such as the Gramm-Leach-Bliley Act, that removed barriers between banks and securities firms, securities firms and insurance companies, and so forth, and created a diversity of new products in the process (22). By placing assets in conglomerates, the number of identification barriers, and the verification of identification barriers that must be crossed, can be reduced. Just as terrorists can use the weapons and technology developed for defense and commerce, they can use financial tools that were developed with the globalization of finance. The meaning of September 11 for the financial community was that this process, necessary as it was, has come with a price.

Fortunately for the enforcement agencies charged with rooting out terrorism and money laundering, international cooperation has been increasing rapidly. Information exchanges, both across governmental and business sector boundaries, are much more routine, and much less disputed, than used to be the case. The number of tax havens, and the covers they provide to criminals, have decreased dramatically because of international initiatives, particularly those coordinated by the Organization for Economic Cooperation and Development (23).

Financial Action Task Force. International coordination of financial intelligence units (FIUs) has largely fallen to the Financial Action Task Force (FATF), an independent international body whose Secretariat is housed at the OECD (24). The FATF has 29 member countries, including the U.S. The FATF was created as an inter-governmental body to develop and promote policies to combat money laundering.

FATF's Forty Recommendations are the dominant international definition of money laundering enforcement procedures, and have influenced FinCEN and other U.S. and international agencies (25). The first three recommendations provide a general framework encouraging ratification of the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) (26), and suggesting that financial institution secrecy laws should not inhibit implementation of the FATF recommendations. Recommendations four to seven encourage countries to adopt anti-money laundering legislation, including the power to confiscate property involved in laundering. Most of the rest of the recommendations focus on the financial system. Recommendation 10 discourages anonymous accounts "or accounts in obviously fictitious names." Financial institutions should take "reasonable measures" to find the true identity of persons on whose behalf an account is opened. Under Recommendation 12, records should be main tained for five years (U.S. regulations generally follow this retention approach). Special attention should be paid to "complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose." Liability shields are recommended for institutions providing information to a financial intelligence unit, and financial institutions should be precluded from notifying customers that suspicious transaction reports are being filed about them. Recommendation 21 warns that heightened scrutiny should be required where transactions involve countries that do not have adequate anti-money laundering programs. Recommendation 25 states that countries "take notice of the potential for abuse of shell corporations by money launderers and should consider whether additional measures are required to prevent unlawful use of such entities." Recommendations 30 to 40 encourage international cooperation.

The FATF Annual Report 2000-2001 (27) found the U.S. to be in full compliance with only 17 of the recommendations, and in only partial compliance with 14 others due to the failure to extend anti-money laundering measures to insurance companies, and incomplete extension of requirements to certain money services businesses. The U.S. will probably be in better compliance when reviewed by the FATF again.

The FATF identifies non-cooperative countries and territories (NCCTs) in the fight against money laundering. The current list of NCCTs is Cook Islands, Dominica, Egypt, Grenada, Guatemala, Indonesia, Marshall Islands, Myanmar, Nauru, Nigeria, Niue, Philippines, Russia, St Vincent and the Grenadines and Ukraine (28).

In October 2001, the FATF issued eight Special Recommendations (29) on steps countries should take to address terrorist financing:

1. Take immediate steps to ratify and implement the relevant UN instruments, specifically the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism.

2. Criminalize the financing of terrorism, terrorist acts, and terrorist organizations.

3. Freeze and confiscate terrorist assets.

4. Report suspicious transactions linked to terrorism.

5. Provide the widest possible range of assistance to other countries' law enforcement and regulatory authorities for investigations of terrorist financing.

6. Impose anti-money laundering requirements on alternative remittance systems.

7. Strengthen customer identification measures in international and domestic wire transfers.

8. Ensure that entities, in particular non-profit organizations, cannot be misused to finance terrorism. Terrorist organizations may pose as legitimate entities, but may also be able to exploit legitimate entities as conduits for terrorist financing (30).

FATF members agreed to implement the Special Recommendations by June 2002 and called on all other governments to do the same.

Conclusion

The public no doubt hoped that the anti-money laundering initiatives of the 1980s and 1990s would have some value in making life more difficult for drug lords and smugglers, but the anxieties brought on by the terrorist attacks have changed the dynamics and increased the pressure for cooperation at all levels in the fight -- war -- against terrorism. The unsavory spectacle of federal agencies trying to avoid blame for oversights, or to shift that blame to other agencies, will also engulf any financial institution found to have overlooked any significant use terrorists have made of its services (31).

In the post-Enron era, the public has considerable doubt as to whether American corporations have any sense of public responsibility at all. Due diligence can no longer be a two-day training program for a few compliance officers at a golf resort. The requirement that upper-level management and the board of directors be informed, and inform themselves, of anti-money laundering initiatives cannot, and should not, be viewed as a nod to regulatory verbiage. Ordinary conduct of business must now involve a vigilance that might have seemed overly burdensome a few years ago.

Endnotes

(1.) [c] Delta Hedge Publications. Portions of this article will appear in the treatise, Money Laundering, Terrorism and Financial Institutions, edited by Raymond Banoun and John J. Ensminger.

(2.) 31 CFR 103. 122; purchases above $3,000 of bank, cashier's or traveler's checks, bank drafts and money orders also require recordkeeping. 31 CFR 103. 129.

(3.) For banks, a transaction is suspicious if it involves at least $5,000 and the bank "knows, suspects, or has reason to suspect" that the transaction involves funds from illegal activities, or is intended to disguise funds from illegal activities "as part of a plan to evade any federal law or regulation or to avoid any transaction reporting requirement," or is designed to avoid regulations promulgated under the Bank Secrecy Act, or "has no business or apparent lawful purpose or is not the sort in which the particular customer would be expected to engage" and the bank can think of no reasonable explanation for the transaction. 31 CFR 103.18(a) (2); 31 CFR 103.20 (a) (2) (money services businesses); Nevada Gaming Commission and State Gaming Control Board, Regulation 6A, Cash Transactions Prohibitions, Reporting, and Recordkeeping, [section] 6A100, Suspicious Activity Reports (available at the Commission's web site, http://gaming.state.nv.us).

(4.) See IRS Form 8300, Report of Cash Payment Over $10,000 Received in a Trade or Business. Separate currency transaction report forms are provided for financial institutions and casinos.

(5.) Pub. L. 107-56.

(6.) Pub. L 104-132.

(7.) The Bank Secrecy Act is the common name for The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, Pub. L. 91-508, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959,31 U.S.C. 5311-5331. Money Laundering Control Act of 1986, Pub. L. 99-570, codified at 18 U.S.C. 1956-1957. The Acts and their codifications have been amended numerous times.

(8.) A series of interim final rules were published in the Federal Register on April 29, 2002: 67 Fed. Reg. 21110 (banks, savings associations, credit unions, registered brokers and dealers in securities, futures commission merchants, and casinos, deemed to have established adequate anti-money laundering programs if they establish programs in accordance with current applicable regulations or as established by their respective federal regulator or self-regulatory organization); 67 Fed. Reg. 21114 (anti-money laundering program requirements for money services businesses); 67 Fed. Reg. 21117 (program requirements for mutual funds); 67 Fed. Reg. 21121 (program requirements for operators of credit card systems). The SEC approved anti-money laundering programs for the New York Stock Exchange and the National Association of Securities Dealers (67 Fed. Reg. 20854, April 26, 2002), and for the Philadelphia Stock Exchange (67 Fed. Reg. 40366, June 12,2002). The National Futures Association proposed a rule requiring ant i-money laundering programs for futures commission merchants and introducing brokers, which was approved by the CFTC (see 67 Fed. Reg. 32072, May 13, 2002).

(9.) 67 Fed. Reg. 9032 (February 27, 2002) (comments requested on new suspicious activity report form for money services businesses); 67 Fed. Reg. 15138 (March 29, 2002) (new suspicious activity reporting standard proposed for casinos and card clubs); 67 Fed. Reg. 44048 (July 1, 2002) (final rule requiring suspicious activity reporting by brokers and dealers in securities).

(10.) 7 Fed. Reg. 9879 (March 4,2002) (proposed rule on information sharing with federal agencies).

(11.) 67 Fed. Reg. 9874 (March 4,2002) (interim rule on information sharing among financial institutions).

(12.) 67 Fed. Reg. 37736 (May 30,2002) (proposed rule requiring due diligence anti-money laundering programs for certain foreign accounts).

(13.) 66 Fed. Reg. 59342 (November 27, 2001) (notice regarding correspondent accounts established or maintained for foreign banking institutions); 66 Fed Reg. 67460 (December 28, 2001) (proposed rule on correspondent accounts for foreign shell banks). Under [section] 319(b) of the Act, the U.S. Attorney General or the Secretary of Treasury may issue a "summons or subpoena to any foreign bank that maintains a correspondent account in the United States and request records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank" (emphasis added).

(14.) 67 Fed Reg. 21113 (April 29, 2002).

(15.) FinCEN has a web site within the Treasury Department site at www.ustreas.gov/fincen, and has an e-mail address ([e-mail]) and hotlines (800-949-2732, 866-566-3974) for reporting suspicious activities.

(16.) Act Section 361(a).

(17.) The most detailed sources for FinCEN procedures are a series of GAO reports on FinCEN. See GAO Report, FinCEN Needs to Better Manage Bank Secrecy Act Civil Penalty Cases (June 1988), available at www.gao.gov.

(18.) SAR Bulletin, January 2002 (www.ustreas.gov/fincen/sarbul0201-f.pdf). Inevitably, many of these indicators may also suggest money laundering. FinCEN issues Suspicious Activity Report Bulletins describing suspicious activity in the phone card business, casinos, exempt persons, etc. SAR Activity Reviews present trends, tips, and issues on suspicious activity reporting. FinCEN also issues advisories to the financial community on specific activities, often involving specific countries, that may come to the attention of financial institutions. SAR Bulletins and Advisories are at www.ustreas.gov/fincen/pub_main.html.

(19.) USA PATRIOT Act, [section] 363.

(20.) Anti-Money Laundering Efforts in the Securities Industry, p. 7 (GAO-02-111, October 2001).

(21.) The 2001 National Money Thundering Strategy, prepared by Treasury's Office of Enforcement in consultation with the Department of Justice (September 2001, available at numerous web sites, including that of the Financial Crimes Enforcement Network, at www.ustreas.gov/fincen/pub_extemal_reports.html) p. ix, fn. 2, follows the IMF in estimating that money laundering is between 2% and 5% of the world's gross domestic product, thus between $600 billion and $1.8 trillion. A report of the UK National Criminal Intelligence Service estimated that money laundering might account for as much as 13% of the UK economy. See 2001 UK Threat Assessment, Money Laundering, which can be downloaded from www.ncis.co.uk/downloads/ML_High_Tech.Crime.pdf.

(22.) Congressman Kenneth E. Bentsen, Jr. (Dem.-TX), Congressional Record, October 21, 2001, p. H6769. See UN Office for Drug Control and Crime Prevention, "Ten Fundamental Laws of Money laundering," at www.odccp.org/money_laundering_10_laws.html. This UN organization observes that the "greater the progress towards the financial services supermarket and the greater the degree to which all manner of financial services can be met within one integrated multi-divisional institution, the more difficult it is to detect money laundering."

(23.) The OECD's website devoted to tax havens, www.oecd.org/EN/document/0,, EN-document-22-nodirectorate-no-4-4393-22,00.html, currently lists seven jurisdictions as un-cooperative tax havens (Andorra, Liechtenstein, Liberia, Monaco, Marshall Islands, Nauru and Vanuato). In 2000, the OECD listed 35 jurisdictions that were tax havens and had not signed commitments with the OECD to address harmful tax practices.

(24.) The FATF web site is also within the OECD's site, at www1.oecd.org/fatf/.

(25.) Available on the FATF web site, www1.oecd.org/fatf/40Recs_en.htm.

(26.) Available at the web site of the International Narcotics Control Board, at www.incb.org/e/conv/1988/cover.htm.

(27.) June 22, 2001, available at www1.oecd.org/fatf/FATDocs_en.htm#Annual. Though compliance figures will undoubtedly improve due to the September 11, 2001, events, only Canada had a worse compliance record than the U.S. among countries surveyed. The assessments were, admittedly, self-assessments.

(28.) Third Review of Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures (June 21, 2002), at www1.oecd.org/fatf/pdf/NCCT2002_en.pdf.

(29.) These Special Recommendations, in conjunction with the 40 Recommendations on money laundering, are sometimes referred to as the FATF 40+8 Recommendations.

(30.) Recently, the U.S. Dept. of Justice stated that the Islamic Concern Project and the World and Islam Studies Enterprise, which among other things, raised money for orphans in Palestine, "are front organizations that raised funds for militant Islamic-Palestinian groups such as the Palestinian Islamic Jihad and Hamas." Dana Canedy, "Professor to Be Deported After Secret Evidence Case," The New York Times, November 27, 2001, p. B-7.

(31.) See James Risen, "Sept. 11 Hijackers Said To Fake Data On Bank Accounts," The New York Times, July 10, 2002, p. 1. ("With no scrutiny from the financial institutions or government regulators, the hijackers were able to move hundreds of thousands of dollars from the Middle East into the United States through a maze of bank accounts beginning more than a year before their attacks." The article states that $325,000 was moved through 14 accounts at SunTrust Banks.)