May 01, 2002

Time Is Running Out for Those Required to Have Anti-money Laundering Programs under the USA PATRIOT Act

4 min

In the aftermath of September 11, FinCEN (the Treasury Department's Financial Crimes Enforcement Network) has further flung its regulatory net to include businesses potentially having information about money laundering activities as well as those with clearly identifiable money laundering risks. The interim final rules released on April 24, 2002, clearly show this trend. Now, many businesses that never before had to worry about complying with anti-money laundering (AML) regulations must adopt AML programs by July 24, 2002. These businesses include money services businesses, operators of credit card systems, and mutual funds.

Money services businesses include all types and sizes of businesses that provide any of the following services: (i) check cashing, (ii) issuing traveler's checks, money orders, or stored value coupons or cards, (iii) selling or redeeming traveler's checks, money orders, or stored value coupons or cards, and (iv) money transmitting. Money services business range from a corner store issuing money orders to large multi-national retailers with sophisticated stored value coupon programs and from small check cashers to complex intentional money transmitters. For many of the newly affected enterprises, the financial activities that make them money services businesses are only incidental services offered along with their main products.

Money services businesses are required to establish a written AML program that is risk appropriate for its size, location, and financial service activities. Money services businesses will have to verify customer identification, report suspicious transactions, and respond to information requests from law enforcement agencies. The AML rules mandate certain minimum standards including documentation of policies, training, designation of a compliance officer, and program review.

Right now, issuers of stored value cards, like gift cards, are considered money services businesses if they can issue in aggregate more than $1,000 in cards per day to the same person. Because many retailers do not limit the number of cards that can be purchased, they will be treated as money services businesses under the new rules. FinCEN is expected to issue additional guidance on AML programs of money services businesses.

Mutual funds must also develop and implement an AML program which is approved in writing by its board of directors. Each family of mutual funds should identify its vulnerabilities to money laundering and terrorist financing activity, recognize risk factors, design the procedures and controls required to reasonably assure compliance with applicable requirements, and periodically assess the effectiveness of the procedures and controls. In addition, the program must require training, independent testing, and a compliance officer empowered with full responsibility and authority to develop and enforce appropriate policies and procedures. Mutual funds will also likely become subject to additional future requirements, including accountholder identification and suspicious activity report filing.

Operators of credit card systems, of which there are few in the United States, not only control which entities may issue or process transactions involving their cards but also serve as clearinghouses. Issuers of merchant cards, such as department store charge cards, are not credit card system operators. The AML programs must be designed to ensure that operators of credit card systems know the entities that they allow to issue or accept their cards. An operator's AML program must also be designed to ensure that the institutions it authorizes to issue and accept its card as a form of payment have been assessed for the risk they pose in connection with the operator's credit card.

Banks, savings banks, credit unions, broker/dealers, futures commission merchants, and casinos are already required to have an AML program. Under this rule, they are now not in violation of the Act as long as they have a compliant AML program in place.

Any casino that is in compliance with preexisting AML program regulations now fulfills the requirements of the Act. In addition, on March 29, 2002, FinCEN proposed a rule requiring casinos to file suspicious activity reports. If this proposal is adopted, casinos will have to modify their AML programs.

All other types of financial institutions, including loan or finance companies, insurance companies, travel agencies, persons engaged in real estate closings and settlements, and investment bankers are temporarily exempted (until not later than October 24, 2002) from the requirement that they have an AML program. This temporary exemption does not relieve any business from the existing requirements that they report transactions in cash or currency over $10,000. FinCEN expects to issue regulations concerning insurance companies and may also require programs of other financial institutions.

This update is intended to highlight legal issues of interest to financial institutions and not to substitute for legal or other professional advice with respect to particular matters. For additional information, please contact Wallace Christner, (202) 962-4988.