Following the money trail: new regulations issued by the U.S. Department of the Treasury require a broad array of organizations to ramp up their anti-money-laundering efforts - related article: Who's Required to Fight Money Laundering?

Internal Auditor, Dec, 2002 by Lawrence Richter Quinn

ALTHOUGH MANY financial institutions may say they know their customer, they don't--at least not well enough, as far as the U.S. government is concerned. With the passage of the USA Patriot Act in 2001, the government is telling these institutions, as well as many other organizations that perform major cash and financial transactions, to increase their understanding of the people with whom they do business.

In the aftermath of Sept. II, the U.S. government is greatly expanding its efforts to identify and trace the source of dirty money flowing daily through the country's economy. To accomplish this, it's requiring an extraordinary number of businesses nationwide to report suspicious financial activity and to maintain electronic data and file reports on billions of individual financial transactions. To respond effectively to the new requirements in a way that will satisfy the government, affected businesses inevitably will be increasing their reliance on both internal and external auditors, as well as compliance officers.

Any business subject to the new rules that willfully ignores the government's wishes -- or responds haphazardly -- faces enormous financial penalties and, in some cases, criminal prosecution. "Failure to do [what the government wants] will result in stronger civil penalties than in the past," says John Byrne, senior counsel at the American Bankers Association in Washington, D.C. "The penalties will be much more harsh." Specifically, the Patriot Act increases the terms of imprisonment and monetary penalties allowable for certain financial crimes, expands U.S. criminal law to include additional offenses such as cash smuggling and operating illegal money transmitting businesses, and calls for forfeiture of assets in certain cases.

Should laundered money be discovered passing through their customers' accounts, many financial institutions are worried about later being accused of burying their heads in the sand," says Benito Romano, a partner at New York-based law firm Willkie Fan & Gallagher and former U.S. attorney for the southern district of New York. "They're worried that they will be accused of not following up on questionable information. Even if it's impossible to confirm information you obtain and that information later turns out to be wrong, a prosecutor may come along and say, 'you should have known; you were intentionally indifferent."'

The severity of civil and criminal penalties will depend largely on how thorough financial services institutions and others are in establishing and maintaining effective anti-money-laundering programs. The onus will be on these companies to demonstrate just how aggressive they've been.

"The Patriot Act's requirements remind me of federal sentencing guidelines, where the severity of the penalty may be mitigated by the implementation of effective rules and procedures," says Paul Dopp, a principal at Atlanta-based financial-investigations firm Kroll. "But even when a company does due diligence, if money laundering is discovered, it may still be charged by the government.

A SMORGASBORD OF BUSINESSES TARGETED

Of course, U.S. depository institutions and, to a lesser extent, securities firms have been dealing with money-laundering legislation and concerns for the more than two decades. Most notable among the promulgations affecting these organizations has been the Bank Secrecy Act (BSA) of 1970, which requires financial institutions to file currency transaction reports for multiple cash transactions totaling $10,000 or more in a single business day, as well as Suspicious Activity Reports. U.S. banks also became familiar with the "KnowYourCustomer" guidelines -- which tried to balance the need to protect customer privacy with the government's need to wipe out money laundering -- and have been obligated to employ these procedures for years.

The Patriot Act, however, raises the bar considerably higher. Under the act's current provisions:

* The U.S. Treasury secretary demands that banks and nonbank financial institutions (see "Who's Required to Fight Money Laundering?" on page 51) establish anti-money-laundering programs, requiring the development of policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.

* Any discretion individual banking regulators had in developing and fine-tuning anti-money-laundering programs is effectively stripped away, putting many of these requirements directly into the new statute and significantly increasing the penalties financial institutions and other companies will face.

* Form 8300, which is used to report cash transactions of $10,000 or more to the Internal Revenue Service, must now also be filed with the Financial Crimes Enforcement Network, a unit of the U.S. Treasury Department charged with combating money laundering. This 'requirement gives law enforcement immediate access to these reports, which it did not have before the act was released.