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AmericasMarch 6 2006

Final cut (but one) of the USA Patriot Act

Foreign correspondent banks will be major losers as a result of further anti-money laundering regulation in the form of Section 312 of the USA Patriot Act, writes Michael Imeson.
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What is it?

It is the long-awaited regulation implementing Section 312 of the draconian USA Patriot Act. The regulation, known as ‘The Final Rule’, imposes strict due diligence requirements on US financial institutions that maintain correspondent accounts with foreign financial institutions and private banking accounts for non-US residents.

The rule will be expensive to implement and increase compliance risks. To counter these effects, US banks are expected to reduce the number of foreign correspondent and foreign private banking accounts they have.

The regulation was published on January 4 and will come into effect within 90 days for new accounts, and within 270 days for existing accounts.

Who dreamed it up?

Congress passed the USA Patriot Act in October 2001 as a response to the terrorist attacks of September 11. Section “three-twelve” of the Act is designed to combat money laundering and terrorist financing through US financial institutions – it became law in 2002 but, like many such laws, it needed a regulation from the relevant government agency to implement it. That agency is FinCEN, the Financial Crimes Enforcement Network of the US Department of The Treasury, and it has taken nearly four years to get the regulation out.

What are its main provisions?

In the words of FinCEN: “Section 312 of the USA Patriot Act requires US financial institutions to perform due diligence and, in some cases, enhanced due diligence, with regard to correspondent accounts established or maintained for foreign financial institutions and private banking accounts established or maintained for non-US persons.”

What’s in the small print?

Although it is called ‘The Final Rule’, it is not the final rule – an additional one was proposed on January 4. This final, final rule will implement another provision in Section 312 requiring US institutions to apply enhanced due diligence in dealings with certain foreign correspondent banks – that is, banks that operate under offshore banking licences.

What does the industry say?

“[It] is going to put foreign banks and their accounts in the US under a magnifying glass,” says Clemente Vazquez-Bello, chairman of the Florida International Bankers Association’s (FIBA) anti-money laundering compliance committee.

As a result, US banks are likely to reduce the number of foreign banks with which they have dealings, mainly because of the costs of carrying out due diligence on so many banks, and partly because they will deem some too risky to deal with.

How much will it cost?

Unknown. But FIBA has commissioned the Washington Economics Group to assess the compliance costs and economic impact, and will publish its findings this spring.

What do the regulators say?

“This rule reflects a significant milestone in our continued progress towards adding transparency to the financial system to help safeguard it from the financing of terror and other illicit money flows,” says William J Fox, FinCEN’s director.

The law of unintended consequences

FIBA believes that smaller US banks will abandon correspondent and overseas private banking altogether because they will not be able to afford the compliance costs or to take on the additional compliance risks. They will become less profitable and may be swallowed up by larger banks.

Could we live without it?

Not really. The US has not been alone in taking tough measures like these. Similar laws will be coming from a regulator near you.

Rating: 5 (but costly)

Rating scale: 5 = Essential 4 = Useful 3 = Neutral 2 = Unnecessary 1 = Waste of time

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Read more about:  Regulations , Americas , US