New USA Patriot Act Regulations That Apply to Banks, Broker Dealers,
and Other Financial Institutions
By Alan B. Horn and
Carl A. Fornaris, Greenberg
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On September 18, 2002, the United States Department of the Treasury issued
final regulations related to the implementation of the USA PATRIOT Act’s:
(A) shell banking prohibition and related record-keeping obligations; and
(B) information sharing provisions.
The final regulations applicable to the shell banking prohibition and
its related record-keeping obligations become effective 30 days after the
date of their publication in the Federal Register. The final regulations
applicable to information sharing between financial institutions become
effective the date of their publication in the Federal Register.
Both of the final regulations – which apply to and will result in additional
compliance burdens for banks, securities broker dealers, U.S. branches and
agencies of foreign banks, Edge corporations, trust companies and other
financial institutions – are discussed below.
A. The Shell Banking Prohibition and Related Record-Keeping Obligations
1. Background — PATRIOT Act Provisions and Proposed Regulations
The final regulations implement Sections 313 and 319(b) of the USA PATRIOT
Act. Those statutory provisions require depository institutions to:
(a) cease maintaining a "correspondent account" in the United States
on behalf of a non-U.S. bank that either (i) lacks a physical presence in
its country of licensing with at least one full-time employee, or (ii) is
not a "regulated affiliate" (i.e., is not affiliated by another bank
with a physical presence whose home country regulator has supervisory authority
over the non-U.S. correspondent bank in the correspondent’s country of licensing);
(b) maintain a record regarding the ownership of each non-U.S. bank that
maintains a correspondent account with the U.S. institution; and
(c) maintain a record regarding the agent for service of process in the
United States designated by each non-U.S. bank that maintains a correspondent
account with the U.S. institution.
On November 20, 2001, the Treasury Department issued interim guidance
on these provisions and provided a certification form that depository institutions
were authorized to use as an interim means to assist them in meeting their
statutory compliance obligations under Sections 313 and 319(b). On December
28, 2001, the Treasury Department published proposed regulations to codify
the Interim Guidance and proposed to apply the requirements of Sections
313 and 319(b) to securities broker dealers in the same manner as those
requirements apply to depository institutions.
2. Final Regulations
"Correspondent Account" Definition. The most controversial portion
of the regulations in their proposed form surrounded the definition of "correspondent
account," which is the touchstone in determining whether the shell bank
prohibition and its record-keeping obligations apply. Not surprisingly,
Treasury adopted a very broad interpretation of "correspondent account"
from the PATRIOT Act.
Under the final regulation, a "correspondent account" is an account established
by a U.S. bank for a non-U.S. bank to receive deposits from, make payments
or other disbursements on behalf of, or handle other "financial transactions"
related to the non-U.S. bank. "Account," in turn, is any "formal"
banking or business "relationship" established to provide "regular"
services, dealings, and other financial transactions. The use of the term
"regular" in the definition requires the provision of ongoing services,
and generally excludes infrequent or one-time transactions. The Treasury
Department commentary to the proposed regulation states that "most isolated
or occasional transactions that a covered financial institution conducts
with a foreign bank would not constitute a correspondent account
. . . ."
Accordingly, it appears that virtually any regular and ongoing formal
relationship memorialized through an account between a covered financial
institution and a non-U.S. bank would be subject to compliance with the
shell bank prohibition and the record-keeping requirement obligations under
the PATRIOT Act, requiring the covered financial institution to obtain a
completed certification from its non-U.S. correspondent bank customer. Examples
of "correspondent accounts" that would be subject to the final regulations
include savings accounts, time deposit accounts, loan accounts, credit accounts,
transaction accounts, money market accounts, clearing and settlement accounts,
fiduciary accounts, foreign exchange accounts, accounts to trade securities,
foreign currency trading accounts, derivatives accounts, custody accounts,
and accounts for trading futures or commodity options.
Certification. The final regulations continue to authorize
U.S. depository institutions, U.S. branches and agencies of foreign banks,
securities broker dealers, trust companies, Edge corporations, thrifts and
credit unions (collectively, "covered financial institutions") to use a
Treasury Department-prescribed form of certification in order to comply
with the shall bank prohibition and its related record-keeping obligations.
Although covered financial institutions are not required to use the
form, a completed certification in the form prescribed in the final regulations
by the Treasury Department constitutes a safe harbor from non-compliance
The certification form, which if used is sent by a covered financial
institution to each of its non-U.S. bank customers with one or more "correspondent
accounts" at the covered institution, requires the non-U.S. bank to:
(a) certify that the non-U.S. bank is not a shell bank;
(b) certify that the non-U.S. bank will not permit shell banks access
to the U.S. correspondent account;
(c) disclose the 25%-or-greater shareholders of the non-U.S. bank; and
(d) identify a U.S.-based service of process agent (U.S.-located embassies
or consular offices are not acceptable).
Regarding item (b) above, the Treasury Department has taken the position
that the certification will be viewed to mean that the non-U.S. bank is
not using its correspondent account to provide banking services to a foreign
shell bank that is the non-U.S. bank’s direct customer. Therefore,
indirect customers down the chain of correspondent relationships would not
In addition, the Treasury Department has clarified that:
- certifications may be distributed, completed, returned and stored
in electronic form;
- non-U.S. correspondent banks may post and update their certifications
on their Web site;
- non-U.S. correspondent banks may complete one omnibus certification
to cover all the correspondent accounts such banks maintain with their
U.S. correspondent financial institution;
- non-U.S. correspondent banks that are publicly-traded or file annual
reports with the Board of Governors of the Federal Reserve System would
be exempt from completing the ownership portion of the certification;
- completed certifications are due no later than 30 days (measured 30
days after publication of the regulations in the Federal Register)
for new accounts and 90 days for existing accounts;
- if the U.S. financial institution does not receive a completed certification
within the applicable time frames, all correspondent accounts of the non-responsive,
non-U.S. bank must be closed "within a commercially reasonable time";
- failure to terminate a non-U.S. correspondent relationship will subject
the non-terminating U.S. financial institution to a civil money penalty
of up to $10,000 per day until the relationship is terminated.
B. Information Sharing Among Financial Institutions
1. Background — PATRIOT Act Provision and Proposed Regulations
Section 314 of the USA PATRIOT Act provides for information sharing between
the government and financial institutions (Section 314(a)), and between
financial institutions themselves (Section 314(b)).
On March 4, 2002, the Treasury Department published proposed regulations
to implement the information sharing provisions of the PATRIOT Act. The
proposed regulations applicable to information sharing between financial
institutions, among other things, would have required a financial institution
to provide the Treasury Department with a certification prior to sharing
2. Final Regulations
Information Sharing With the Government – "Information Requests."
Under the new final regulations implementing Section 314(a), a federal law
enforcement agency investigating terrorist activity or money laundering
activity may request that the Treasury Department solicit, on the investigating
agency’s behalf, certain information from a financial institution (e.g.,
insured depository institutions, broker dealers, U.S. branches and agencies
of foreign banks, Edge corporations, trust companies, savings associations
and credit unions). When submitting the "information request" to
the Treasury Department, the law enforcement agency must, among other things,
certify to the Treasury Department that the law enforcement agency has "credible
evidence" that a suspected individual or organization is engaged in
terrorist activity or money laundering.
Upon receiving an "information request" from the Treasury Department,
the receiving financial institutions must "expeditiously" search
its records for information responsive to the request. However, under the
final regulations, a financial institution must only search for:
- any current account maintained for a named suspect;
- any account maintained for a named suspect during the preceding one
- any transaction conducted on behalf of the named suspect, or any transmittal
of funds in which a named suspect was either the transmittor or the recipient,
during the preceding six months that is required under law to be recorded
by the financial institution or is recorded and maintained electronically
by the institution.
Each financial institution must maintain "adequate procedures"
to protect the confidentiality of information requests issued pursuant to
Section 314(a). In addition, the receipt of an information request cannot
be viewed by the recipient financial institution as requiring it to close
the account of the named suspect.
Information Sharing Between Financial Institutions. Under the new
final regulations implementing Section 314(b), a financial institution that
is required under the Bank Secrecy Act, as amended by the USA PATRIOT Act,
to maintain an anti-money laundering program may, under the protection of
certain safe harbors discussed below, share information with any other financial
institution regarding individuals or organizations for the purpose of identifying
suspects that may involve possible terrorist activity or money laundering
as long as:
- the financial institution submits to the Treasury Department a notice
in a form prescribed by the new regulations which is effective for a one-year
period and which can be filed on-line;
- before sharing information, the financial institution takes "reasonable
steps" to verify that the other financial institution with which it intends
to share information has submitted the same notice to the Treasury Department;
- the financial institution maintains the shared information confidential;
- for information after the anniversary of the filing of the initial
notice, the financial institution has submitted a new notice.
Financial institutions that engage in information-sharing with each other
are protected from liability for such sharing, or for any failure to provide
notice of such sharing to the individual or organizations that is the subject
of such sharing, as long as the financial institution has: (i) filed a notice
with the Treasury Department; (ii) verified that the other financial institution
has submitted a notice; and (iii) maintained shared information confidential.
* * *
Enforcement and supervisory actions initiated in September 2002 alone
by the Treasury Department and the Office of the Comptroller of the Currency
make clear that compliance with the USA PATRIOT Act and the related Bank
Secrecy Act have become a top priority. On September 4, 2002, a U.S. insured
depository institution was fined $100,000 for alleged willful violations
of suspicious activity report filing requirements. And on September 17,
2002, the Office of the Comptroller of the Currency ordered another U.S.
insured depository institution to establish "comprehensive procedures to
identify and report" transactions such as frequent, large-volume cash deposits
and wire transfers.
While it remains to be seen exactly how the Treasury Department, the
federal banking agencies, the SEC, and other supervisory authorities will
audit compliance by the institutions they supervise with the final regulations
implementing the USA PATRIOT Act’s shell bank ban and its related record-keeping
obligations, covered financial institutions that do business with non-U.S.
correspondent banks can expect to experience from their regulators during
examinations heightened scrutiny regarding their policies, procedures, internal
controls and record-keeping in respect of the statutory obligations imposed
by Sections 313 and 319(b).
The Treasury press release and final regulations are available on the
Treasury website at
1 Since December 2001, virtually all covered
financial institutions have used the interim form of certification, causing
the form to be well-recognized by non-U.S. correspondent banks in Europe,
Latin America and other parts of the world.
© 2002 Greenberg Traurig
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