Federal Regulatory Update

Secured Lender, The, Jul/Aug 2004

Patriot Act Update: Commercial Finance Industry Awaits Anti-money Laundering Regulations

For the last two years, asset-based lenders and factoring companies have been anxiously awaiting publication of regulations establishing antimoncy-laundcring requirements for commercial finance and factoring companies. The regulations, originally scheduled to be issued in 2002, have been delayed while the U.S. Treasury Department continues to study the commercial finance industry in an effort to customize the rules to better serve commercial lenders.

The regulations are required by the U.S.A. Patriot Act, the wide-ranging anti-terrorism law enacted by Congress in October 2001 in response to the terrorist attacks of September 11, 2001. The stated purpose of the law is to counter terrorism by enhancing domestic security, expanding surveillance procedures, broadening the ability of law-enforcement authorities to detain aliens engaged in terrorist activities, and expanding the scope of federal antimoney-laundering regulations to nearly every sector of the financial services industry, including commercial finance and factoring companies.

Section 352 of the Patriot Act expands the scope of financial services businesses subject to the Bank Secrecy Act to include nearly all sectors of the financial services industry. The law requires companies in these sectors to develop antimoney-laundering programs that will prevent the services they offer from being used to facilitate money laundering or the financing of terrorism. Under the provisions of Section 352, financial institutions within the jurisdiction of the Patriot Act must do the following:

* Develop written procedures on how to detect possible money laundering

* Designate an in-house compliance officer

* Establish an employee training program

* Submit to independent testing of their antimoney-laundering program

* Establish minimum identification standards for borrowers.

To date, the Treasury Department has issued regulations for a number of industries to bring them into compliance with the requirements of Section 352. These include mutual funds; operators of credit-card systems; money-services businesses, such as money transfer companies and check cashers; securities brokers and dealers registered with the securities and Exchange Commission; futures commission merchants and accompanying introducing brokers registered with the Commodities Futures Trading Commission; and a variety of other sectors of the financial services industry.

Currently, the Treasury Department has deferred application of the requirements of section 352 to commercial finance and factoring companies as it learns more about the nature of the industry. The Commercial Finance Association has worked with Treasury Department officials to increase the regulators' understanding of how asset-based lenders and Factoring companies operate and to discuss how these organizations may be affected by the requirements of the Patriot Act. In these discussions, the Treasury Department showed a particular interest in learning how commercial finance and factoring companies are equipped to identify payments from borrowers received in unusual forms such as money orders, cash, traveler's checks or payments from foreign banks.

Treasury Department officials have indicated that they now expect to publish proposed regulations for commercial finance and factoring companies by the middle of August 2004. Once the proposed rules are published, there will be a comment period to allow interested parties to provide feedback to the Treasury Department on how the regulations will affect the asset-based financial services industry.

The Treasury Department has indicated that after the regulations lor commercial finance and factoring companies required by Section 352 are finalized, they expect to issue regulations for commercial lenders to adopt Customer Identification Programs (CIP), us required by Section 326 ofthe Patriot Act. It is anticipated that the CIP regulations will be similar to those already issued for banks, savings banks, credit unions, securities brokers and dealers, mutual funds and other financial services businesses. The CIP regulations issued for banks and other financial services sectors require institutions to adopt "reasonable and practicable" procedures to verify the identities of new customers opening an account. The institutions are also required to maintain records of the information used to verify the customer's identity and to determine whether or not the person's name appears on any list of known or suspected terrorists or terrorist organization. Two such lists are the Treasury Department's Office of Foreign Asset Control (OFAC) list which can be found at www.ustreas.gov/offices/enforcement/ofac/index.htmlandthe U.S. Department of Commerce's Bureau of Industry and security list located at www.bxa.doc.gov.

To meet these standards, the financial institution would be required to establish a program for obtaining identification information from customers wishing to open a new account. Information required would include the customer's name, address, birth date and an appropriate identification number, such as a Social security number or similar number from a government-issued document.