March 22, 2002

A New Federal Law May Require Your Business To Have An Anti-Money Laundering Program

Gregory A. Baldwin

Did you know that a new federal law passed last October may require your business to have a formal anti-money laundering program by April 24? An anti-money laundering program requires at least four things: (1) the development of internal policies, procedures and controls designed to prevent money laundering; (2) the formal designation of a compliance officer to oversee and run the program; (3) ongoing employee training about the program; and (4) an independent audit function to test program to make sure it is being followed. And, as a practical matter, it needs to be in writing.

Does this sound new to you? Well, for about fifteen years the Bank Secrecy Act has encouraged Financial Institutions to have exactly this kind of formal program. Now, do not be misled by the terms "Bank Secrecy Act" or "Financial Institution." These terms cover much more than banks, and just because your business is not a bank, or something like a bank, doesn't mean that this law does not apply to you. In addition to banks, "Financial Institution" also includes: securities and commodities brokers; investment companies; issuers or redeemers of travelers' checks or similar instruments; currency exchanges; operators of a credit card system; money transmitters; telegraph companies; pawnbrokers; insurance companies; travel agencies; loan or finance companies; dealers in precious metals, stones or jewels; automobile, boat and airplane dealers, casinos and persons involved in real estate closings and settlements.

Up until last October, the Bank Secrecy Act gave the Secretary of the Treasury the authority to decide exactly which Financial Institutions would be required to have anti-money laundering programs. Well, you say, your business falls under the definition of a Financial Institution but it has never had this kind of program? No need to worry … at least not yet. The key to the old law was that Treasury had the authority to select exactly which Financial Institutions had to have these programs. Unless a specific type of Financial Institution was affirmatively ordered by Treasury to have anti-money laundering programs, they were excused from the requirement. Over the years, Treasury had limited the requirement largely only to banks and their affiliates. Other Financial Institutions were not ordered to have anti-money laundering programs, and so the great majority of them did not.

All this changed on October 26 with the passage of the USA Patriot of 2001. In a much overlooked but potentially sweeping provision, the Patriot Act has amended the Bank Secrecy Act and essentially reversed the former provision about anti-money laundering programs. Instead of Treasury deciding which Financial Institutions to impose the requirement on, the new law now requires that "each financial institution shall establish anti-money laundering programs." Now, only if specific types of Financial Institutions are affirmatively exempted by Treasury will they continue to avoid having to implement anti-money laundering programs. Treasury has until April 24, 2002 to consider exemptions based upon the size, location and activities of the businesses potentially affected, but the intent of Congress is clear: it wants much more than banks and their affiliates to have anti-money laundering programs. After April 24, 2002 the new law goes into effect, and as of that date, every Financial Institution must have an anti-money laundering program unless Treasury has exempted it.

This new mandate applies to potentially hundreds of thousands of US businesses which, up to now, have avoided the requirement through Treasury's benign neglect. Which Financial Institutions will be exempted? At this point, Treasury isn't saying. Given the suspicions that brokerage accounts were used by terrorists to take advantage of market conditions after the September 11 attacks, those securities brokers and dealers which have so far avoided mandatory anti-money laundering programs can hardly expect to be exempted. In any case, in view of the clear intent of Congress, any exemptions issued by Treasury had better be supported by some very compelling reasons. Since it's easier for Treasury to simply let the law take effect than it is for it to issue and justify formal exemptions, it is entirely possible that, if your business is a Financial Institution, it will be expected to have an anti-money laundering program in place within less than eight weeks.

The penalty for violating this section of the Bank Secrecy Act? A civil fine of up to $100,000, a criminal fine of up to $250,000 and up to five years in jail. No matter how you look at it, having an anti-money laundering program for your business is a lot less expensive than that.

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