Transcript Anti-Money Laundering Responsibilities of Transfer Agents

Anti-Money Laundering Responsibilities of
Transfer Agents
Securities Transfer Association Annual Conference
Naples, Florida
October 24, 2007
Thomas C. Bogle
Dechert LLP
Washington, DC
© 2007 Dechert LLP
Overview
• Criminal Anti-Money Laundering Laws
• Bank Secrecy Act of 1970 (as amended by the USA PATRIOT
ACT of 2001)
• U.S. Economic and Trade Sanctions Administered by the Office
of Foreign Assets Control (“OFAC”)
CRIMINAL ANTI-MONEY LAUNDERING LAWS
Criminal Anti-Money Laundering Laws
• Unlawful to “knowingly” conduct or attempt to conduct
certain financial transactions with funds “known” to
involve the proceeds of specified unlawful activity.
• Unlawful to transfer funds to/from the United States
from/to a place outside of the United States “knowing”
that the funds involve the proceeds of specified
unlawful activity, and that the transaction is designed
to conceal the funds or avoid transaction reporting
requirements.
Willful Blindness
• Courts have defined the term “knowingly” broadly to
include “willful blindness.”
– “It is well settled that willful blindness or conscious avoidance is the
legal equivalent to knowledge."
• United States v. Rodriguez, 53 F.3d 1439, 1447 (7th Cir. 1996)
– Generally requires proof that a “defendant may have deliberately
closed his or her eyes to what otherwise had been obvious to him or
her."
• United States v. Anderskow, 88 F.3d 245, 252 (3d Cir. 1996).
Avoiding “Willful Blindness”
• Demonstrate sensitivity to anti-money laundering laws.
• Suggestions:
– Corporate policy statement to detect and report money laundering
activity.
– Adoption of anti-money laundering compliance program.
– Addressing anti-money laundering matters at periodic compliance
training sessions for employees.
BANK SECRECY ACT / USA PATRIOT ACT
Bank Secrecy Act of 1970
• Currency and Foreign Transactions Reporting Act of
1970 (a.k.a., the “BSA”).
• Original purpose was “to require certain reports or
records … [that] have a high degree of usefulness in
criminal, tax, or regulatory investigations or
proceedings.”
• The foundation of most U.S. anti-money laundering
reporting and recordkeeping requirements, including
requirements under the USA PATRIOT ACT of 2001.
General BSA Requirements
• Develop and maintain an anti-money laundering compliance
program.
• Verify the identity of accountholders.
• File reports on suspicious transactions.
• Maintain records of certain information in connection with wire
transfers.
• Share information, upon request, with federal regulators
regarding accountholders.
• Conduct due diligence on foreign “correspondent” and “private
banking” accounts.
Application of the Bank Secrecy Act
• Generally applies only to “financial institutions,” as
defined by statute and Treasury regulations.
– Banks
– Broker-Dealers
– Mutual Funds
• Generally does not apply to transfer agents unless
they are banks or registered broker-dealers.
Potential Application of BSA to TAs
• Transfer agents that are “financial institutions” (e.g.,
banks or broker-dealers).
– The definition of “bank” is broad, and includes “agents” of traditional
banks. Applies to subsidiaries of traditional banks.
– Such transfer agents are fully subject to the BSA’s reporting and
recordkeeping requirements.
• Certain financial institutions (e.g., mutual funds) may
delegate responsibility for implementing the financial
institution’s AML program to transfer agents.
– Transfer agents must agree, in writing, to inspection and examination
by federal regulators with respect to the AML activities they perform
for such financial institutions.
AML Program
• AML program must be “reasonably designed” to
prevent money laundering or terrorist financing, and to
cause compliance with applicable BSA requirements.
• Designation of an AML Compliance Officer.
• Employee training (generally performed annually).
• Independent review.
Verify the Identity of Accountholders
• Must obtain certain identifying information from
customers before opening an account.
• Must verify the identity of customers within a
reasonable time after opening the account.
– Documentary verification (e.g., passport, drivers license).
– Non-documentary verification (e.g., Equifax, Lexis)
• Generally no requirement to verify the identity of
existing accountholders.
Suspicious Activity Reports
• File reports on suspicious transactions with the
Financial Crimes Enforcement Network (“FinCEN”).
• Financial institutions must protect the confidentiality of
suspicious activity reports, and avoid “tipping off” the
subjects of such reports.
• Financial institutions enjoy broad statutory protection
from civil liability for matters associated wit the filing of
suspicious activity reports.
Wire Transfer Regulations
• Generally apply to banks and broker-dealers
(including transfer agents that are banks or brokerdealers).
• Provide that certain information on wire transfers must
be collected and retained by financial institutions.
• Require certain information about wire transfers to
“travel” with the wire transfer.
Information Sharing
• Section 314(a) of the USA PATRIOT Act requires
financial institutions to search accounts for persons
that may be involved in money laundering or terrorist
financing.
• FinCEN typically requests this information every two
weeks.
• Subject to strict confidentiality.
• Section 314(b) of the USA PATRIOT Act provides a
safe harbor to financial institutions that engage in
“voluntary information sharing”
Due Diligence on Certain Foreign Accounts
• Banks and broker-dealers must ensure that they do
not maintain a “correspondent account” for a “foreign
shell bank,” and conduct due diligence on foreign
correspondent banking accounts.
• All financial institutions must conduct initial and
ongoing due diligence on all “correspondent accounts”
maintained for foreign financial institutions, and on all
foreign “private banking” accounts.
Certain BSA Requirements Apply to All
Transfer Agents
• Although most BSA requirements apply only to
“financial institutions,” certain BSA requirements apply
to all U.S. persons – including transfer agents:
– Reports on transactions involving currency (and certain other
monetary instruments).
– Reports on certain cross-border transactions involving currency and
certain other monetary instruments.
– Reports on certain foreign financial accounts.
Currency Transactions
• Banks and broker-dealers are required to file a
Currency Transaction Report on currency transactions
that aggregate to $10,000.
– Applies only to transactions involving coin and currency.
• All other persons must file FinCEN/IRS Form 8300 on
the “receipt” of more than $10,000 in a transaction or
related transactions.
– Applies to transactions in both coin and currency, as well as certain
bearer instruments.
Cross-Border Currency Transactions
• All persons must file a “Currency or Monetary
Instruments Report” (FinCEN Form 105) if they
transport or ship currency and certain bearer
instruments exceeding $10,000.
• Exception for banks or broker-dealers that ship
currency or monetary instruments through the postal
service or by common carrier.
Reports on Foreign Financial Accounts
• Any United States person who has a financial interest
in or signature authority over any financial account in a
foreign country must file a FBAR if the aggregate
value of these accounts exceeds $10,000 at any time
during the calendar year.
• FBAR compliance by financial institutions is
historically low.
• Generally filed in connection with individual tax
returns.
OFAC
Office of Foreign Assets Control
• Bureau of the U.S. Treasury Department that
administers most U.S. economic and trade sanctions.
• Charged with administering a variety of sanctions
regimes imposed by statute, regulation or executive
order.
Relevant Statutes
• Trading with the Enemy Act
– Basis of U.S. embargoes against Cuba and North Korea.
– Generally applies to both U.S. persons and “persons subject to the
jurisdiction of the United States,” including foreign subsidiaries of
U.S. persons.
• International Emergency Economic Powers Act
– Basis of most other sanctions regimes, including sanctions against
terrorist entities and drug traffickers, and various countries such as
Iran, Sudan, and Burma.
– Generally applies only to U.S. persons.
What Does OFAC Require?
• OFAC does not require transfer agents or other U.S.
persons to adopt compliance procedures, check lists,
or take any action designed to cause compliance with
OFAC-administered sanctions.
• However, U.S. persons generally face strict liability for
any violation of OFAC-administered sanctions.
• Even financial institutions with the best OFACcompliance programs are liable if they inadvertently
effect a prohibited transaction.
Examples of Prohibited Transactions
• Persons on the SDN List.
– Generally what you get when you “search the OFAC list.”
• Cuban nationals (wherever located).
• Prohibited governmental entities (e.g., Sudan and
Iran).
• Individuals or entities located in Iran.
Problem of Beneficial Ownership
• Property generally is blocked if a prohibited person
has an “interest” in the property.
• Recommended that financial institutions develop a
risk-based approach to ensuring that they are not
dealing in property in which a prohibited person has
an interest.
• Certain sanctions regimes also prohibit “facilitating” a
prohibited transaction.
OFAC Compliance
• Develop an OFAC Compliance Program.
– Conduct a risk assessment and apply stronger controls to areas of
heightened risk.
– Perform periodic back-testing to ensure compliance and modify
compliance programs as appropriate.
• Seek and obtain representations and warranties from
counterparties regarding OFAC compliance.
QUESTIONS?