United States: Overview of Relevant KYC/CDD Laws and Regulation

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In the United States, the most significant AML laws and regulations are 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, more commonly known as the USA PATRIOT Act, or just Patriot Act. 

United States Bank Secrecy Act 1970 

The Currency and Foreign Transactions Reporting Act of 1970 commonly referred to as Bank Secrecy Act or BSA, which was substantially amended by the Patriot Act in 2001, provides the basis for most of the preventative measures applied to the financial sector and other businesses. The Bank Secrecy Act was intended to prevent the use of secret foreign bank accounts and assist law enforcement agencies by legislating for regulatory reporting and record keeping by financial institutions. 

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The Act requires the United States organizations especially the financial institutions, including branches and subsidiaries of foreign banks working in the US, too: 

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  • File reports of cash transactions exceeding $10,000 daily aggregate amount cash transaction reports (CTRs).
  • Report suspicious activity that might signify money laundering, tax evasion, or other criminal activities, suspicious activity reports (SARs).
  • Maintain a paper trail by keeping appropriate records for financial transactions. It is interesting to note that the definition of ’financial institution’ in the BSA includes casinos. 

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. 

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.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (USA PATRIOT Act or the ‘Patriot Act’) was signed by President George W. Bush on 26 October 2001, barely seven weeks after the September 11 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. 

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 AML legislation, as well as imposing a raft of new obligations about customer due diligence (CDD) procedures for US 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. 

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The Act confers on the US 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 US 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 a financial institution 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. 

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 US courts over any person or organization that commits a money laundering offense involving a financial transaction that occurs in the US. 

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

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

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Final Thoughts

The Bank Secrecy Act was passed by Congress in 1970 as one of the first laws to combat money laundering in the United States. Businesses are required by the BSA to keep records and file reports that are determined to be highly useful in criminal, tax, and regulatory matters. The documents filed by businesses under the BSA requirements are heavily used by domestic and international law enforcement agencies to identify, detect, and deter money laundering, whether it is in furtherance of a criminal enterprise, terrorism, tax evasion, or other unlawful activity.