3A-3-Bank Secrecy Act of 1970 (BSA)

ii. "Know Your Customer" Requirements

Any financial institution that "establishes, maintains, administers, or manages a private banking account or a correspondent account" in the United States for a foreigner must implement policies and procedures "reasonably designed to detect and report instances of money laundering through those accounts." At a minimum, this requires financial institutions to take reasonable steps to ascertain not just the owner of the account, but also the identity of the nominal or beneficial owner, and the source of funds, for any such account. Additionally, financial institutions must take steps to verify and authenticate the identity of its accountholders. Financial institutions must implement reasonable procedures that, at a minimum, involve: "(A) verifying the identity of any person seeking to open an account to the extent reasonable and practicable; (B) maintaining records of the information used to verify a person's identity, including name, address, and other identifying information; and (C) consulting lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list." The above requirements are sometimes referred to collectively as the "know your customer" requirements. The failure to abide by these compliance requirements may result in a civil penalty of up to a $1,000,000,51 and criminal fines of up to $1,000,000 for certain violations, with each day of non-compliance counting as a separate violation.

Key Points

Applies to "financial institutions," which include 26 types of entities Requires reporting to FinCEN, housed in the Department of Treasury Recordkeeping may be required where there is "a high degree of usefulness" to criminal investigations or national security activities Records to maintain are largely those that are high in dollar value or those necessary to file required reports Records must be kept for five years Suspicious Activity Reports ("SARs") must be filed within 30 days when: (1) An insider has committed a crime (2) There is a crime involving $5,000 or more and there is a "substantial basis" to identify a suspect (3) There is a crime involving $25,000 or more (4) There are currency transactions that violate the BSA or involve money laundering A financial institution may not notify those involved in the transaction that a SAR was filed There are number of additional situations when financial transactions must be reported, even though they are not suspected of criminal wrongdoing Treasury may seek an injunction to enforce this or impose civil penalties; a willful violation can be prosecuted as a crime by DOJ USA-PATRIOT Act amended the BSA to require: (1) Financial institutions maintain an anti-money laundering program (2) "Know Your Customer" Requirements (3) A prohibition on correspondent accounts with foreign banks

i. Anti-Money Laundering Program Development

Financial institutions are now obligated to implement an anti-money laundering program that includes, at a minimum, the following provisions: "(A) the development of internal policies, procedures, and controls; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test programs." Upon request from the Secretary of the Treasury, a covered financial institution must produce within 120-hours (5 days) of any such request information and account documentation for any account opened, maintained, administered, or managed in order ensure anti-money laundering program compliance.

iii. Prohibition on Correspondent Accounts With Foreign Banks

Financial institutions must take steps necessary to prevent a foreign bank from indirectly providing banking services to another foreign bank that does not have a physical presence in the United States.

Additional Reporting Requirements

In addition to reporting suspicious activities, the BSA also imposes a number of additional reporting requirements. These include the following: Financial Institution Transactions Greater Than $10,000. Financial institutions must keep records and make reports to the IRS using a Currency Transaction Report (Form 4789) for any transaction in United States or foreign currency greater than $10,000 USD. Transactions Greater Than $10,000 in Coins or Currency. Any person engaged in a trade or business—not just financial institutions—that receives more than $10,000 in a single transaction (or two or more related transactions) in either coins or currency, including foreign currency, must file a report with FinCEN. Transportation of Financial Instruments. Any person transporting more than $10,000 into or out of the United States must file a report with the Department of Treasury that identifies certain information. This requirement cannot be avoided through the practice known as "structuring," whereby a person engages in many smaller transactions for the purpose of avoiding legal requirements. Failure to file a required report may result in either criminal or civil forfeiture. Purchase of Monetary Instruments Greater Than $3,000. Financial institutions must report purchases of monetary instruments such as bank checks, drafts, cashier's checks, money orders or traveler's checks greater than $3,000. There are exceptions to this requirement if the purchaser is properly identified and verified. Foreign Financial Accounts and Transactions. Any United States citizen, resident or business entity must report any ownership interest in a foreign bank, securities, or other financial account.

Reporting Requirements

Like the record-keeping requirements of the BSA, the reporting requirements are also aimed at information having a "high degree of usefulness" in criminal or counter-terrorism investigations. A number of different types of transactions are subject to reporting. These include transactions involving United States currency, foreign currency, or a change in ownership or control of an entity. Congress provided the Treasury Department with expansive rulemaking and enforcement authority under the BSA. Treasury may summon a financial institution to appear before it and produce records, reports, and other data as may be relevant to a civil investigation. Such summons may be enforced by the U.S. Attorney General in federal court.

The USA-PATRIOT Act Amendments and the Anti-Money Laundering Provisions

The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, passed as part of the USA-PATRIOT Act, made significant amendments to the BSA. In particular, the USA-PATRIOT Act imposed the following additional requirements on financial institutions: i. Anti-Money Laundering Program Development ii. "Know Your Customer" Requirements iii. Prohibition on Correspondent Accounts With Foreign Banks

Enforcement of Reporting Requirements

The Treasury Department has enforcement authority for any violation of the reporting requirements and may seek an injunction against any violation in federal district court. Civil penalties of up to $25,000 or the amount of the transaction (with a cap of $100,000) may be imposed for willful violations. Additional penalties for negligent violations may result in a $500 penalty per violation. The statute of limitations for the imposition of any fines if six years, and the Treasury Department has an additional two years to file a civil action to force compliance once the civil penalties are imposed. A violation of the BSA may also result in the imposition of criminal penalties for willful violations. Depending on the type of violation, penalties can range up to $500,000 in fines and ten years of imprisonment. It is also a separate crime under the BSA for any person to engage in the "structuring" of transactions for the purpose of evading reporting requirements. Violating the prohibition on structuring may result in 5 years of imprisonment, or up to 10 years of imprisonment if done in connection with another violation of federal law. Lastly, the BSA contains significant whistleblower incentives and protections.

Suspicious Activity Reports (SARs)

The most far-reaching of the Department of Treasury's powers is the ability to require financial institutions "to report any suspicious transaction relevant to a possible violation of a law or regulation." These are referred to as Suspicious Activity Reports ("SARs"). In filing a SAR, the BSA prohibits both the financial institution and any government entity (along with employees, officers, etc.) from notifying any person involved in the transaction that the transaction has been reported. The BSA grants expansive immunity to any financial institution for filing a SAR or failing to notify any person that a SAR has been filed, regardless of any contractual or other purported obligation to the contrary. There are four general situations in which a SAR must be filed: (1) When a financial institution believes that an insider is committing a crime or aiding and abetting the commission of a crime, regardless of how much money is at issue; (2) When the financial institution detects a possible crime involving $5,000 or more and has a "substantial basis" for identifying a suspect; (3) When the financial institution detects a possible crime involving $25,000 or more, regardless of whether there is a substantial basis for identifying a suspect; and (4) When the financial institution believes currency transactions totaling $5,000 or more violate the BSA or involve potential money laundering. Banks required to file a SAR must do so within 30 days after the date of initial detection, subject to a 30-day extension if a suspect cannot be identified. The requirements to file a SAR do not preempt any state law, and the Department of Treasury encourages reporting to state officials. A copy of all SARs must be maintained for a period of five years.

Record-keeping Requirements

Under the BSA, the Treasury Secretary is permitted to adopt record-keeping requirements applicable to financial institutions where such records would have a "a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings." Following the September 11th attacks, Congress expanded upon this authority with the USA-PATRIOT Act by permitting the adoption of record-keeping requirements where such records would have a "high degree of usefulness in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism." The types of records that must be maintained include any extension of credit greater than $10,000 or transactions involving the transfer of more than $10,000 in funds to outside of the United States. Additional record-keeping requirements apply to transmittal of funds greater than $3,000. Most other records necessary to make the required reports and filings under the BSA (discussed below) must also be maintained, such as those related to purchases of $3,000 or more of monetary instruments and records of persons having an interest in a foreign account. Records must generally be kept for a period of five years. The Secretary of the Treasury has the authority to seek a court-ordered injunction for any prior, ongoing, or threatened violation of the record-keeping requirements that it has promulgated. Additionally, the Secretary may impose civil penalties of up to $10,000 for any person found to have violated the regulations in a willful or grossly negligent manner, which may be enforced in federal court. A willful violation is also subject to criminal penalties of up to a $1,000 in fines and imprisonment of up to a year or, if done in furtherance of another felony, $10,000 in fines and imprisonment of up to five years.

Bank Secrecy Act of 1970 ("BSA")

Unlike the Right to Financial Privacy Act of 1978, which is intended to limit government access to financial records, the Bank Secrecy Act of 1970 ("BSA") was passed by Congress with the goal of facilitating the government's access to financial records. The BSA requires that financial institutions maintain records and report certain financial transactions to the Department of the Treasury for the purpose of detecting money laundering, tax fraud, and other financial crimes. The Act is also known as the Currency and Foreign Transactions Reporting Act of 1970. The BSA applies to "financial institutions," the statutory definition of which includes more than twenty-six identified entities that are subject to state or federal bank supervisory authority, such as banks, securities brokers, telegraph companies, casinos, and card clubs. The types of entities covered under the BSA has expanded over time. It should be noted that the definition of "financial institution" used in the BSA is different than the definition used under the Gramm-Leach-Bliley Act ("GLBA"), which applies to entities "significantly engaged" in any "financial activities." There may be some instances, therefore, in which one law applies and the other does not. Various provisions of the BSA permit the Department of Treasury to designate a specific entity to receive reports and regulate conduct of financial institutions. The entity so designated is the Financial Crimes Enforcement Network ("FinCEN"), which is an entity housed within the Department of Treasury.