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Treasury Proposes Rules to Implement PATRIOT Act

Washington, DC, January 8, 2002 - The Department of the Treasury has issued an interim rule and three rule proposals to implement provisions of the recently enacted “USA PATRIOT Act of 2001.” The proposed rules address the following topics:

The first two rule proposals apply to all broker-dealers, including mutual fund principal underwriters. The third rule proposal applies to nonfinancial trades or businesses, including mutual fund transfer agents that are not “financial institutions” as defined under the Bank Secrecy Act.

Broker-Dealer Suspicious Activity Reporting Rule Proposal
Section 356 of the Act required the Treasury Department, in consultation with the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System, to publish by January 1, 2002 proposed rules requiring broker-dealers to report suspicious transactions. Pursuant to this provision and existing authority under the Bank Secrecy Act, the Treasury has issued a proposed rule that would require every “broker or dealer in securities” to file with the Treasury’s Financial Crimes Enforcement Network (FinCEN) a report of any suspicious transaction relevant to a possible violation of law or regulation. The proposed rule states that this includes any known or suspected violation of Federal law, or a suspicious transaction related to a money laundering violation or a violation of the Bank Secrecy Act. The definition of “transaction” is very broad and would expressly include transactions involving any “security,” as defined in Section 3(a)(10) of the Securities Exchange Act of 1934.

Under the proposal, a transaction would be reportable if it is conducted or attempted by, at, or through a broker-dealer; involves or aggregates funds or other assets of at least $5,000; and is either a transaction involving a known or suspected Federal criminal violation committed or attempted against or through a broker-dealer; or a transaction that the broker-dealer knows, suspects, or has reason to suspect:

  • involves funds derived from illegal activity or intended or conducted in order to hide or disguise funds or assets derived from illegal activity;
  • is designed, whether through structuring or other means, to evade the requirements of the Bank Secrecy Act; or
  • appears to serve no business or apparent lawful purpose, and for which the broker-dealer knows of no reasonable explanation after examining the available facts relating to the transaction and the parties.

The proposed rule provides that the new requirements would take effect 180 days after the date on which final regulations are published in the Federal Register. Comments on the proposal must be filed with FinCEN by March 1, 2002.

Requirements for Broker-Dealers Related to Correspondent Accounts for Foreign Banks
The Treasury also has issued a proposed rule to implement provisions of the Act that:

  • prohibit certain financial institutions, including broker-dealers, from providing correspondent accounts to foreign shell banks and require such financial institutions to take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used to indirectly provide banking services to foreign shell banks; and
  • require certain financial institutions that provide correspondent accounts to foreign banks to maintain records of the ownership of such foreign banks and of their agents in the United States designated for service of legal process, and require the termination of correspondent accounts of foreign banks that fail to turn over their account records in response to a lawful request by the Treasury Secretary or the U.S. Attorney General.

The proposed rule would codify, with some modifications, interim guidance that Treasury issued on November 20, 2001 for depository institutions, and extend the same requirements to broker-dealers.

Comments on the proposed rule must be filed with the Treasury by February 11, 2002. The notice of proposed rulemaking seeks comments on a number of topics including, in particular, the breadth of the definition of “correspondent account.” In this regard, it inquires about:

  • the extent to which different types of accounts may be used to provide financial services directly or indirectly to foreign shell banks,
  • the extent to which different types of accounts may be used to facilitate money laundering, terrorist financing, or other criminal transactions,
  • whether particular types of accounts pose so little vulnerability to criminal transactions as to merit exclusion from the broad definition of “correspondent account,” and
  • the adverse business implications, if any of adopting a broad definition of “correspondent account” for purposes of Section 5318(j).

Requirement that Nonfinancial Trades or Businesses Report Certain Currency Transactions
Section 365 of the Act added a currency transaction reporting requirement for nonfinancial trades or businesses to the Bank Secrecy Act. Pursuant to this section, the Treasury has issued identical interim and proposed rules requiring nonfinancial trades and businesses to file reports with the Treasury if they receive more than $10,000 in cash and, in certain circumstances, cash equivalents in a single transaction or two or more related transactions. The rule is substantially similar to the requirements currently imposed on nonfinancial trades or businesses under Internal Revenue Code Section 6050I and its implementing regulation, and should have virtually no practical impact on entities required to file reports under those provisions. Section 6050I remains in effect, and the Internal Revenue Code has been amended to state that the filing of a Form 8300 with the IRS will satisfy reporting requirements under the BSA.

The interim rule took effect on January 1, 2002. Comments on the proposed rule must be filed with FinCEN by March 1, 2002.