Overview Of CDD And KYC Key Regulation And Requirements In The United States

The Bank Secrecy Act of 1970 (BSA) and the Uniting (and) Strengthening America (by) Providing Appropriate Tools Required (to) Intercept (and) Obstruct Terrorism Act of 2001, also known as the USA PATRIOT Act or simply the Patriot Act, are the most important anti-money laundering laws and regulations in the United States. This article elaborates on ‘Overview Of CDD And KYC Key Regulation And Requirements In The United States’.

Bank Secrecy Act 1970

Most of the preventative measures used in the financial industry and other organisations are based on the Currency and Foreign Transactions Reporting Act of 1970 (often referred to as the Bank Secrecy Act or BSA), which was extensively revised by the Patriot Act in 2001. The Bank Secrecy Act was enacted to restrict the use of secret overseas bank accounts and to aid law enforcement authorities by requiring financial firms to disclose and retain records. 

The Act requires United States organisations, particularly financial institutions, to file reports of cash transactions exceeding $10,000 (daily aggregate amount) (cash transaction reports (CTRs); report suspicious activity that could indicate money laundering, tax evasion, or other criminal activities (suspicious activity reports (SARs), and maintain a paper trail by keeping appropriate records for financial transactions. It’s worth noting that the BSA’s definition of “financial institution” includes casinos. 

Implementation of CTR requirements

The Currency Transaction Report (CTR) requirements for financial institutions were implemented by the BSA. The CTR is a report that must be completed in the proper format when a single individual makes a transaction worth more than $10,000 in a single business day (which include aggregated transactions where the financial institution believes they are on behalf of the same person). 

The BSA introduced the CTR requirements for financial institutions. The CTR is a report that must be filed in the appropriate format, on transactions greater than $10,000 made by one person in one business day (which include aggregated transactions where the financial institution believes they are on behalf of the same person). 

Transactions to be reported

The types of transactions required to be reported include:

  • Cash withdrawals and deposits
  • Foreign currency exchange
  • Cashing a cheque
  • Cash payments
  • Cash purchase of monetary instruments
  • ATM cash transactions, and;
  • Incoming/outgoing wire transfers paid in cash.
Cdd And Kyc Key Regulation And Requirements In The United States

Signing of The Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (USA PATRIOT Act or just the “Patriot Act”) was signed by President George W. Bush on October 26th, 2001, barely seven weeks after the September 11th terrorist attacks. A powerful, unusually speedy reaction to the attacks, the Patriot Act, which comprises over 900 pages of legislation, has had far-reaching consequences for financial institutions both within the US and throughout the world. 

Enhancements of AML legislation

The Patriot Act introduced the need for certain financial institutions to have Customer Identification Programs (CIPs) for new customers as well as specifying Enhanced Due Diligence (EDD) measures for correspondent banking and private banking customers, especially for non-US persons. The Act made several significant enhancements to pre-existing US Anti-Money Laundering (AML) legislation, as well as imposing a raft of new obligations about Customer Due Diligence (CDD) procedures for United States private banking and correspondent bank accounts involving non-US persons. 

The most significant requirements relating to AML/CFT and the provision of financial services covered in the Patriot Act concern a variety of special measures, the facilitation of cooperative AML measures, the prohibition of unlicensed money transmitters, and the creation of significant extraterritorial powers. 

Patriot Act’s special measures

The Act confers on the United States Treasury the power to name foreign jurisdictions, financial institutions, and transactions that are of primary money laundering concern and require financial institutions to implement “special measures” for them.

These special measures include:

  • Additional record keeping for, and reporting of, certain transactions.
  • The collection of information relating to beneficial ownership of accounts
  • The collection of information relating to certain ’payable through’ accounts (an account maintained by a respondent that permits the respondent’s customers to engage either directly or through a sub-account, in banking activities).
  • The collection of information relating to certain correspondent accounts
    The prohibition of, or imposition of conditions on, the opening of correspondent or ‘payable-through’ accounts. 

These sections of the Act encourage and create a formal process to enable government agencies and financial institutions to share information on suspected money launderers and terrorists. The formal process enables the United States Financial Intelligence Unit (FIU) of FinCEN to advise financial institutions about such suspects and require searches to be conducted for accounts of such persons. Additionally, it enables an organization to advise FinCEN of intentions to share information on suspected money laundering or terrorist financing with other financial institutions. This does not allow a financial institution to disclose the filing of a SAR, although the underlying customer information and transactional data can be shared. 

The aspects of the Patriot Act

Perhaps the most significant aspects of the Patriot Act for both non-US institutions and persons are as follows.: 

  • United States banks must take reasonable steps to identify the beneficial owners of accounts beneficially owned by foreign persons; 
  • United States banks must identify foreign persons whose funds move through payable or correspondent bank accounts held with them; 
  • United States banks must sever correspondent banking relationships with all foreign shell banks.
  • international correspondent accounts and correspondent relationships with offshore banks and banks in jurisdictions deemed to be non-cooperative in the international effort against money laundering; 
  • the Act extends the “long-arm jurisdiction” of the United States courts over any person or organization that commits a money laundering offense involving a financial transaction that occurs in the United States. 

The Act extends the extraterritorial criminal jurisdiction of the United States over any person outside the jurisdiction who engages in any act involving United States currency which, if it had been committed in the United States, would constitute an offense.

Delegation of FinCEN

The Financial Crimes Enforcement Network (FinCEN), delegated by the Secretary of the Treasury, and the other primary federal regulators or self-regulatory organizations (such as Financial Industry Regulatory Authority (FINRA) and the United States Securities Exchange Commission (SEC) have the authority to assess civil penalties. 

Owing to the federal arrangements in the US, there are also state regulatory agencies such as the New York State Department of Financial Services, which was created in 2011 by transferring the functions of the New York State Banking Department and the New York State Insurance Department into a new department. Before this, the New York State Banking Department (created by the New York Legislature on April 15th 1851) was the oldest bank regulatory agency in the United States and could also impose civil penalties.

Final Thoughts

Seven weeks following the September 11th terrorist attacks, The Patriot Act was signed. This Act aims to further develop CDD and KYC regulations in the fight to prevent money laundering and financing of terrorism crimes. The Act also introduced the need for certain financial institutions to have CIP for new customers.

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