Financial Institutions Getting Into The Patriot Act

After the Sept. 11 attacks, Congress quickly passed anti-terrorism legislation. The new law titled “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act” is commonly referred to as the USA PATRIOT ACT. That’s a great title for a law, but it imposes major surprise responsibilities for financial institutions. Who would have thought that anti-terrorism legislation would greatly involve the financial world?

The USA PATRIOT ACT was adopted in response to the new dangers posed by modern terrorists. It permits the sharing of information between federal agencies, and it grants law-enforcement officials more authority to combat financial counterfeiting, smuggling and money laundering. In signing the new law, President Bush maintained that the USA PATRIOT ACT will help to dismantle, disrupt and punish terrorists before they strike, while at the same time it will protect our individual civil liberties guaranteed by the U.S. Constitution.

Unfortunately, the USA PATRIOT ACT puts financial institutions in a precarious position. It requires them to gather more information about their customers, to handle more recordkeeping and reporting obligations, and to assume more due-diligence responsibilities. This creates tension for a financial institution when the new law requires it to obtain as much information about its customers as possible while other existing laws require the financial institution to maintain the financial privacy of its customers. Consequently, it becomes a balancing act—the privacy concerns of customers verses the government’s need for information.

Since the USA PATRIOT ACT was adopted on Oct. 26, 2001, there has not been sufficient time for the drafting of regulations to assist financial institutions in complying with their new responsibilities. However, the Treasury Secretary has issued an interim compliance guidance that provides some help. Under this compliance guidance, the Treasury Secretary indicates that the USA PATRIOT ACT covers not only those organizations traditionally thought of as “financial institutions,” such as banks, credit unions, and thrifts, but it also brings into that category SEC registered broker-dealers and non-bank institutions such as financial advisers. This will create new responsibilities for the securities industry and other non-banks.

For many years, banks have been subject to the Bank Secrecy Act which requires the filing of currency transaction reports (CTRs) involving cash transactions of $10,000 or more and the filing of suspicious activity reports (SARs). These reports have played an important role in helping the government identify illegal activities, money-laundering schemes and other criminal acts. The USA PATRIOT ACT now makes the securities industry and other non-banks subject to the filing requirements as well. The good news for these financial institutions is that they receive strengthened immunity from liability for filing the required reports. This means, in general, that financial institutions complying with the act will not be liable to their customers for violation of financial-privacy rules or defamation-of-character lawsuits.

The USA PATRIOT ACT aids the government in its unique fight against terrorism by enlisting the assistance of financial institutions. For banks, the USA PATRIOT ACT greatly intensifies the “know-your-customer” rules. For broker-dealers and other non-banks, the USA PATRIOT ACT imposes substantial new monitoring and reporting obligations. That leaves bank and brokerage customers to wonder what impact this new weapon in the war on terrorism will have on them. Fortunately, the new requirements imposed on financial institutions generally relate only to accounts of over $1 million or to accounts of foreign nationals and foreign institutions. So common consumers should not be concerned that the USA PATRIOT ACT will permit the government to unduly gain access to their confidential financial information—their financial privacy will remain intac.

M. Elizabeth Fast is an attorney in the financial services group of Spencer Fane Britt & Browne LLP. She may be reached by phone at 816.292.8861 or by e-mail at efast@spencerfane.com.