The USA PATRIOT Act has been a highly-polarizing national security initiative since President George W. Bush signed the bill into law, a month following the terrorist attacks of September 11, 2001. An acronym for “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,” this anti-terror measure was chiefly designed to lower the probable cause threshold for obtaining intelligence warrants against suspected spies, terrorists, and other enemies of the United States. But the PATRIOT ACT also impacts the broader U.S. community of financial professionals and banking institutions engaging in cross-border transactions with its Title III provision, entitled "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.”

With a goal of thwarting the exploitation of the American financial system by parties suspected of terrorism, terrorist financing and money laundering, Title III cites International Monetary Fund data estimating that laundered money from drug trafficking and other smuggling activities accounts for 2-5% of the US’s gross domestic product. And by chipping away at these illegal sources of capital, which this law dubs “financial fuel of terrorist operations,” Title III aims to diminish their impact, through a variety of restrictions and controls. (For more, see: Terrorism's Effects On Wall Street.)

A Closer Look at the Books

The main Title III mandate imposes tighter bookkeeping requirements, forcing financial institutions to record aggregate amounts of transactions involving countries where laundering is a known problem for the United States. Such institutions must install methodologies of tracking and identifying beneficiaries of such accounts, as well as individuals authorized to route funds through payable-through accounts.

Title III also expands the authority of the Secretary of the U.S. Treasury to develop regulations that stimulate more robust communication between financial institutions, with an aim of stemming laundering activity and making it harder for launderers to conceal their identities. The Treasury is also empowered to halt the merger of two banking institutions, if both have historically failed to discourage laundering with their own internal safeguards.

In an effort to control suspicious activity abroad, Title III prevents business with offshore shell banks that are unaffiliated with a bank on U.S. soil. Banks must now also investigate accounts owned by political figures suspected of past corruption. And there are greater restrictions on the use of internal bank concentration accounts that fail to effectively maintain audit trails — a money laundering red flag, according to the law.

Expanded Money Laundering Definition

Nomenclature/definitions are also affected under Title III. For example, the definition of “money laundering” was broadened in scope to include computer crimes, the bribing of elected officials, and the fraudulent handling of public funds. And “money laundering” now encompasses the exportation or importation of controlled munitions not approved by the U.S. Attorney General. Finally, any offense where the U.S. is obligated to extradite a citizen under a mutual treaty with another country likewise falls under the broadened “laundering” banner. (Click here for more stories on Anti-Money Laundering.)

The final subtitle under the Title III provision, deals with an effort to rein in the illegal physical transport of bulk currency. This movement builds upon the Bank Secrecy Act of 1970 (BSA) — also known as The Currency and Foreign Transactions Reporting Act — which requires banks to record cash purchases of instruments that have daily aggregate values of $10,000 or more — an amount that triggers suspicion of tax evasion and other questionable practices. Because of the BSA’s success, sharp money launderers now know to bypass traditional banking institutions, and instead move cash into the country using suitcases and other containers. For this reason, Title III makes concealing more than $10,000 on anyone’s physical person an offense punishable by up to five years in prison. (For more, see: Compliance With The Patriot Act: Customer Accounts.)

Practical Implications

For banks, investors, financial advisors, intermediaries, broker/dealers, commodity merchants and the like, the practical result of the PATRIOT Act’s Title III provision effectively translates to a unprecedented levels of due diligence on any corresponding accounts that exist in money laundering jurisdictions throughout the world. However, many believe that the actual methods of achieving this analysis tilt towards the nebulous. And the specific questions that must be asked seem to fluctuate, since there are no concrete levels of information required to satisfy potential inquiries, should a bank or an investor be suspected of violating Title III terms. For this reason, many are taking a “better-safe-than-sorry” approach to gathering as much information as possible. (For related reading, see: How The Ex-PATRIOT Act May Affect You.)

On the banking side, applications for foreign accounts — either directly or indirectly owned by U.S. citizens, have become inordinately complex and onerous. Compliance officers are routinely augmenting applications, with an almost paranoid worry about satisfying broader Patriot Act mandates, and the enforcement agencies that oversee them. (For more, see: How New Offshore Bank Rules Will Affect Americans.)

The Bottom Line

For average investors, anyone who conducts international business is likely to experience added costs and greater hassles with something as mundane as opening a simple foreign checking account. So while the PATRIOT Act initially conjures thoughts of expanded surveillance activity, U.S. investors are more likely to be affected by heightened documentation requirements and due diligence responsibilities. For more information, see the Treasury Department's USA Patriot Act web page.

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