What is the USA Patriot Act?

What is the USA Patriot Act?

The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001) was enacted just after the September 11 attacks to combat terrorism. It aimed to strengthen the U.S. national security by expanding the powers of federal agencies. In this post, we will cover the Act and its effects on AML efforts. 

What Are the Purposes of the Patriot Act?

The main goal of this Act is to deter and punish terrorist acts in both the United States and the world. In order to achieve this, the PATRIOT ACT has multiple objectives:

• To strengthen law enforcement and intelligence tools

• To enhance information sharing and coordination

• To reinforce border and immigration controls

• To combat money laundering and terrorist financing

Is the PATRIOT ACT Still Effective?

While it is true that some parts are no longer in effect, its AML/CFT provisions continue to form one of the pillars of AML efforts in the U.S. Moreover, it still holds a key role in forming new guidelines such as AMLA 2020. 

AML Under the USA Patriot Act

Title III of the Act is called “International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001”, and, as the name suggests, it concerns U.S. AML measures. These measures introduce numerous requirements for covered institutions.  

Key Sections of the Patriot Act for Compliance Teams

Section 311 - Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern: This section specifically expands the power of Treasury. It allows the government to identify foreign countries, banks, and transactions as primary concerns, as well as to restrict their access to the U.S. financial system. 

Section 312 - Special Due Diligence for Correspondent Accounts and Private Banking Accounts: This introduces obligatory due diligence and enhanced due diligence requirements on U.S. financial institutions that have correspondent accounts for foreign financial institutions or private banking accounts for non-U.S. persons. 

Section 313 - Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks: The U.S. Congress implemented this section as a preventive measure against foreign shell banks, which are usually under few regulations. Section 313 restricts these entities from accessing to the U.S. financial system. With this section, if a foreign bank lacks a physical presence in any country, banks and broker-dealers are not allowed to have correspondent accounts on their behalf. 

Section 314(a) - Cooperative Efforts to Deter Money Laundering: In particular, this section is introduced to encourage further cooperation between law enforcement, regulators, and financial institutions so that terrorist acts and money laundering activities can be better identified and prevented. 

Section 319(b) - Bank Records Related to Anti-Money Laundering Programs: This section allows the government to authorize the Attorney General or the Secretary of the Treasury to issue a summons foreign banks with correspondent accounts with ease. Moreover, it also requires U.S. banks to identify an agent for service of legal process for its correspondent accounts. 

Section 325 - Concentration Accounts at Financial Institutions: With Section 325, the Secretary of the Treasury can issue regulations governing maintenance of concentration accounts in order to prevent these accounts from being used to hide the identity of the customers who are the direct or beneficial owners of the funds being moved through the account. 

Section 326 - Verification of Identification: This sets the minimum standards of identity verification that financial institutions must use when onboarding their customers.

Section 351 - Amendments Relating to Reporting of Suspicious Activities: This section further reinforces the requirement of reporting suspicious activities by expanding immunity from liability and prohibition against notification to individuals of SAR filing.

Section 352 - Anti-Money Laundering Programs: Section 352 obligates financial institutions to establish Anti-Money Laundering programs that include internal policies, procedures, and controls; a designated compliance officer; regular employee trainings; and independent audits to test the reliability of their programs. 

Section 356 - Reporting of Suspicious Activities by Securities Brokers and Dealers; Investment Company Study: This required the Secretary to consult with The Securities and Exchange Commission (SEC) and The Board of Governors of the Federal Reserve System before issuing any regulations. Also, it required securities brokers and dealers to file mandatory Suspicious Activity Reports (SARs).

Section 359 - Reporting of Suspicious Activities by Underground Banking Systems: Section 359 expanded the Bank Secrecy Act’s (BSA) definition of money transmitter to include informal and underground banking systems.

Section 362 - Establishment of Highly Secure Network: As a part of strengthening the communication between FinCEN and financial institutions, this section required FinCEN to establish a highly secure network to enable filing BSA reports electronically and permitting FinCEN to provide financial institutions with alerts. 

KYC and CIP Requirements Under the Patriot Act

One of the most important requirements of the PATRIOT ACT is developing a written Customer Identification Program (CIP) and applying proper Know Your Customer (KYC). 

First of all, the Act sets the minimum of what a proper identity verification must include. Obliged entities or covered institutions must collect and verify four critical information, which are: Their name, date of birth, address and identification number. During this process, institutions must use official documentation such as government IDs and passports.

These institutions are also under obligation to retain copies and details of identification documents for five years, even after the account closure. Furthermore, you must check each customer’s name against government lists of known or suspected terrorists lists.

Industries Governed by the Patriot Act

• Banks and Credit Unions
• Broker-Dealers
• Money Services Businesses
• Futures Commission Merchants (FCMs) and Commodity Trading Advisors
• Insurance Firms
• Mutual Funds
• Loan and Finance Companies

Controversies Around the USA PATRIOT Act

Threats to privacy have been one of the most criticized aspects of the USA PATRIOT Act. Since the Act has expanded the surveillance powers of authorities tremendously, there has been considerable criticism about unreasonable searches and seizures. Furthermore, the data collection and blurred lines between criminal and intelligence investigations have been other main points of criticism. 

Best Practices for Patriot Act Compliance

1. Develop a Comprehensive AML Program

Based on Section 352, you must establish a written Anti-Money Laundering program that includes internal policies and controls, appointed Money Laundering Reporting Officer (MLRO), regular training programs, and independent audits. 

2. Maintain Strict KYC (Know Your Customer) Controls

As outlined in Section 326, you must apply strong identification procedures to customers. For proper identification, the first thing you should do is to verify their personal details through official documents. However, there is more to it. You must also check all customers against watchlists and understand your customer’s purpose. If they turn out to be high-risk, you must swiftly apply Enhanced Due Diligence (EDD). Moreover, do not neglect to keep their records for at least five years, even after their accounts are closed.

3. Be Cooperative and Keep Records

FinCEN, particularly under 314(a) and 314(b), expects financial institutions to respond to law-enforcement requests about specific suspects and asks them to share information voluntarily with other financial institutions. You should also note that you must securely retain records of all shared data, as with other AML documentation. 

4. Keep an Eye On AML Risks

Regularly conducting risk assessments within your organization to evaluate key risk factors such as customer risk, product risk, and geographic risk is also very important. Based on the risk appetite of your institution, adjust policies and monitoring thresholds.

5. Establish a Culture of Compliance

A solid AML program starts from the top. Therefore, all of your higher executives, particularly senior management and board of directors, must be proactively engaged in AML oversight of the institution. Moreover, staff should be trained regularly to keep up with the dynamic landscape of AML/CFT efforts. Also, it is very important to foster an environment, where your employees can report concerns with ease. 

Sanction Scanner Solutions for Compliance

We offer AML solutions that will help you remain compliant with several global frameworks including the USA PATRIOT Act. 

Screening Against Sanctions Lists, PEP Lists, and Adverse Media: With our screening solutions, you can screen your customers against more than 3,000 lists from reliable sources (including Financial Action Task Force and the Office of Foreign Assets Control), which get updated every 15 minutes. Moreover, you can also easily view Ultimate Beneficial Owners of companies. 

Customizable Settings: All of these operations can be performed based on your preference, such as single or batch with options like name, identity, and passport number. This way, you can adhere to USA PATRIOT Act rules by blocking transactions with prohibited persons and companies. 

Customer Risk Assessment: In parallel with the USA PATRIOT Act, we also offer risk assessments to establish a risk level for your customers. Through Risk-Based Scorecard, you can have better compliance control, learn more about your risky customers, and use these risk assessment criteria in your rules with the risk-based scorecard review. Furthermore, we leave it up to you to decide between creating the most appropriate rules and scenarios and integrating with Sanction Scanner’s presets suitable for every sector.

Transaction Monitoring: Suspicious transactions of your customers can be detected in real-time thanks to our transaction monitoring solutions. Then, our software stops and records the transaction for further investigation. You may also create rules and scenarios with the rule-write feature. In addition to being able to reduce false positives by up to 96.99%, these are easy to implement into your existing project with API.