Anti-Money Laundering

The Patriot Act, which amends the Bank Secrecy Act (BSA), was adopted in response to the September 11, 2001 terrorist attacks. The Patriot Act is intended to strengthen U.S. measures to prevent, detect, and prosecute international money laundering and the financing of terrorism. These efforts include anti-money laundering (AML) tools that impact the banking, financial, and investment communities.

As a result of the Patriot Act, persons who are or are required to be registered as futures commission merchants (FCMs), introducing brokers (IBs), commodity pool operators (CPOs), and commodity trading advisors (CTAs) are or may become subject to requirements for establishing AML programs, reporting suspicious activity, verifying the identity of customers, and applying enhanced due diligence to certain types of accounts involving foreign persons.

Establishing AML Programs
Reporting Suspicious Activity
Verifying the Identity of Customers
Due Diligence Measures for Certain Accounts Involving Foreign Persons
Special Measures
Transactions in Excess of $10,000 in Currency
Foreign Bank and Financial Accounts
International Transportation of Currency or Monetary Instruments
Information Sharing among Financial Institutions and Law Enforcement
Additional Resources

By order dated September 26, 2002, the Secretary of the Treasury (Treasury) delegated its authority to administer the BSA to the Financial Crimes Enforcement Network (FinCEN).

The Patriot Act amended the BSA to require that financial institutions establish AML Programs. FCMs, CPOs, and CTAs are specifically included in the definition of financial institution in the BSA. IBs are considered to be "brokers or dealers in commodities" within the financial institution definition.

An AML Program must be in writing and must include:

• the development of internal policies, procedures, and controls;
• the designation of a compliance officer;
• an ongoing employee training program; and
• an independent audit function to test programs.

Treasury has adopted interim final rules regarding AML Programs for financial institutions (as subsequently amended in 2008). These rules exempt CPOs and CTAs from the AML Program requirement pending the issuance of final rules. Treasury had proposed rules that would have required unregistered investment companies (UICs), including commodity pools, and commodity trading advisors to establish and implement written anti-money laundering programs, but Treasury withdrew the UIC and CTA proposals. As required by Section 356(c) of the Patriot Act, Treasury has issued a report to Congress that sets forth existing requirements that apply to both registered and unregistered investment companies, including commodity pools, and contains recommendations on additional regulatory requirements that might be imposed. The National Futures Association has adopted Rule 2-9(c) and an accompanying Interpretive Notice regarding AML Programs for its FCM and IB members. Other AML Program rule notices for specified financial institutions include:

• Mutual Funds (interim final rule);
• Operators of a Credit Card System (interim final rule);
• Money Service Businesses (interim final rule);
• Broker-dealer members of the Financial Industry Regulatory Authority (FINRA); (information and guidance)
• Broker-dealer members of the New York Stock Exchange (approval of rule) (amendment of rule);
• Insurance companies (final rule); and
• Dealers in precious metals, stones or jewels (interim final rule).

On March 5, 2010, FinCEN, the Securities and Exchange Commission, and the Banking agencies (the Federal Reserve, Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration) in consultation with the CFTC, issued guidance addressed to the core requirement to develop and implement internal controls, policies and procedures as part of a firm's anti-money laundering program. The guidance clarifies regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships, particularly those that present a high risk for money laundering or terrorist financing. As explained in the guidance: "[i]nformation on beneficial ownership in account relationships provides another tool for financial institutions to better understand and address money laundering and terrorist financing risks, protect themselves from criminal activity, and assist law enforcement with investigations and prosecutions.

The Patriot Act authorizes Treasury to issue rules requiring FCMs, CPOs, and CTAs to file Suspicious Activity Reports (SARs). Treasury has issued a final rule requiring FCMs and IBs to file SARs. Treasury has not yet proposed a rule requiring CPOs and CTAs to file SARs. Treasury also has issued a Form 101, Suspicious Activity Report by the Securities and Futures Industries (SAR-SF) (with instructions), which FCMs and IBs must use to report suspicious transactions, and which CPOs and CTAs may use to report voluntarily. Treasury has also posted guidance on common errors found in filed SARs.

• Final BSA rules require that SARs be filed by any broker or dealer in securities (as amended in 2003); mutual fund; money service business (as amended in 2003); insurance company (as amended in 2006); casino; or bank (as amended in 2000).
• Pursuant to guidance issued by Treasury, FCMs and IBs are permitted to share a SAR with parent entities, regardless of whether the parent is located inside the United States or abroad. Treasury has not yet issued guidance on whether FCMs and IBs may share a SAR with affiliates other than parent entities.
• Banking agencies with regulations that require the filing of SARs: Federal Reserve Board; Comptroller of the Currency; Federal Deposit Insurance Corporation; Office of Thrift Supervision; and National Credit Union Administration. The Federal Reserve Board has issued a supervisory letter that provides relief from the Board's SAR filing requirements for nonbank subsidiaries of bank holding companies or state member banks, such as FCMs and IBs that file suspicious activity reports pursuant to separate Treasury suspicious activity reporting requirements.

The Patriot Act requires Treasury to issue rules setting forth minimum standards for financial institutions to identify and verify the identity of customers.

Treasury and the CFTC have jointly issued final rules (with a subsequent correction) that require FCMs and IBs to have customer identification programs (CIPs) for identifying and verifying the identity of customers. An FCM's or IB's procedures must enable it to form a reasonable belief that it knows the true identity of each customer.

The CIP rules permit FCMs and IBs to rely on other financial institutions to perform identification/verification functions; however, the reliance must be reasonable under the circumstances, the relied-upon financial institution must be subject to an AML program rule under the BSA and be regulated by a Federal functional regulator, and the financial institution must enter into a contract requiring it to certify annually to the FCM or IB that it has implemented an AML program and that it will perform specified requirements of the CIP. Pursuant to a staff no-action letter issued on March 14, 2005, FCMs and IBs may rely upon certain CTAs to perform procedures of the FCM's or IB's CIP even though such CTAs are not yet subject to an AML program rule.

Final rules regarding customer identification programs have also been issued for banks, savings associations, credit unions, and certain non-federally regulated banks; broker-dealers, and mutual funds. The rules are substantively identical for all affected sectors of the financial services industry. These rules require that financial institutions have procedures for checking customer's names against lists of known or suspected terrorists or terrorist organizations that are prepared by any federal agency and made available to the institution. Although no lists have yet been designated, financial institutions are separately required to comply with the rules of the Office of Foreign Assets and Control (OFAC) and must consult OFAC's lists of sanctioned countries and specially designated nationals and blocked persons. Sources for complying with OFAC rules:

• OFAC's "Opening Securities and Futures Accounts from an OFAC Perspective" guidance;
• The American Bankers Association's primer and briefing on OFAC compliance; and
• OFAC forms for reporting blocked or rejected transactions.

The staff of the CFTC and Treasury also has jointly issued guidance, in question-and-answer format, regarding the application of the CIP rule for FCMs and IBs. This guidance covers a number of topics that were not explicitly addressed by the CIP rules.

One important area of staff guidance addresses the situation where an omnibus account or sub-account or relationship is established by or on behalf of a financial intermediary for the purposes of executing transactions that clear or settle at another financial institution. The staff of Treasury and the CFTC has issued guidance that clarifies that if the financial intermediary is the account holder, the intermediary can be treated as the customer for the purposes of the CIP rule.

Another important area of staff guidance addresses the CIP requirements applicable to FCMs engaged in give-up transactions. The staff of Treasury and the CFTC has issued guidance that clarifies that an FCM acting solely as an executing broker in a give-up arrangement is not required to apply its CIP procedures to a customer engaged in a give-up transaction. Conversely, an FCM acting as a clearing broker is required to apply its CIP procedures to a customer engaged in a give-up transaction.

The Patriot Act requires that financial institutions must establish appropriate, and where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through foreign private banking and correspondent accounts.

A final rule (as amended in 2006 and 2007) issued by Treasury requires covered financial institutions, including FCMs and IBs, to establish due diligence programs that include appropriate, specific, risk-based, and where necessary, enhanced policies, procedures and controls that are reasonably designed to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed by such covered financial institution in the United States for a foreign financial institution.

The same rule also requires covered financial institutions, including FCMs and IBs, to maintain due diligence programs that are reasonably designed to detect and report known or suspected money laundering or suspicious activity conducted through or involving any private banking account that is established, maintained, administered, or managed in the United States by such financial institution for a non-U.S. person. The due diligence program must ensure, at a minimum, that the financial institution takes reasonable steps to ascertain the identity of the nominal and beneficial owners of the private account, whether any such person is a senior foreign political figure, the sources of funds deposited into the private banking account and the purpose and expected use of the account. The program also must ensure that the financial institution reviews the activity in the private banking account to ensure it is consistent with the information obtained about the client and reports known or suspected money laundering or suspicious activity conducted to, from or through the private banking account. Where a senior foreign political figure is the nominal or beneficial owner of a private banking account, the program must include enhanced scrutiny of the account that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.

Notwithstanding the final rule for correspondent accounts, Treasury has issued guidance confirming that an IB is not subject to the correspondent account due diligence requirements where it merely solicits and accepts orders for transactions in commodity futures and options.

Treasury has issued guidance for FCMs and IBs that addresses: (1) whether all five of the risk factors enumerated in the final due diligence rule for correspondent accounts must be applied in every instance; (2) how certain intermediated relationships should be treated for purposes of the correspondent account rule; (3) how the due diligence rule for private banking accounts applies to clearing firms; (4) how firms should determine whether a foreign entity is a "foreign financial institution;" and (5) how futures firms should evaluate the purpose and anticipated activity of a correspondent account.

Treasury also has issued a proposed rule that will require a covered financial institution, including an FCM or IB, to ensure that its due diligence program provides for enhanced due diligence for correspondent accounts that have been established, maintained, administered, or managed for certain foreign banks.

The Patriot Act authorizes Treasury to find that a foreign jurisdiction, institution, class of transactions, or type of account is of "primary money laundering concern" and to require domestic financial institutions to take certain "special measures" against the primary money laundering concern. The first four special measures impose information gathering, reporting, and recordkeeping requirements on those financial institutions dealing, directly or indirectly, with the designated jurisdiction or entity. Under special measure 5, a financial institution may be prohibited from opening or maintaining a correspondent account or a payable-through account. Pursuant to this authority, Treasury has designated each of the following as a primary money laundering concern:

• Burma (also known as Myanmar);
• Burmese financial institutions, Myanmar Mayflower Bank and Asia Wealth Bank;
• Syrian financial institution, Commercial Bank of Syria;
• Belarusian financial institution, Infobank;
• Latvian financial institution, VEF Banka; and
• Macau financial institution, Banco Delta Asia SARL.

Pursuant to this authority, Treasury has imposed the following special measures:

• Special measure 5, which prohibits certain financial institutions (including FCMs and IBs) from establishing, maintaining, administering, or managing correspondent or payable-through accounts in the United States for, or on behalf of, Burmese banking institutions, unless operation of those accounts is not prohibited by Executive Order 13310 [1] and the Burma-related activities of such accounts are solely to effect transactions that are exempt from, or licensed pursuant to, Executive Order 13310. This prohibition extends to correspondent or payable-through accounts maintained for other foreign banks when such accounts are used by the foreign bank to indirectly provide financial services to a Burmese banking institution (final rule);
• Special measure 5, which prohibits certain domestic financial institutions (including FCMs and IBs) from establishing, maintaining, administering, or managing correspondent or payable-through accounts for, or on behalf of, Myanmar Mayflower Bank or Asia Wealth Bank. This prohibition extends to correspondent or payable-through accounts maintained for other foreign banks when such accounts are used to indirectly provide banking services to these banks (final rule);
• Special measure 5, which prohibits certain domestic financial institutions (including FCMs and IBs) from opening or maintaining any correspondent account for or on behalf of the Commercial Bank of Syria, including its subsidiary, Syrian Lebanese Commercial Bank. As a corollary to this measure, these domestic financial institutions are required to apply special due diligence to their correspondent accounts to ensure that no such account is being used indirectly to provide services to the Commercial Bank of Syria (final rule);
• Special measure 5, which prohibits certain domestic financial institutions (including FCMs and IBs) from opening or maintaining any correspondent account for or on behalf of VEF Banka. As a corollary to this measure, these domestic financial institutions are required to apply special due diligence to their correspondent accounts to ensure that no such account is being used indirectly to provide services to VEF Banka (final rule); and
• Special measure 5, which prohibits certain financial institutions (including FCMs and IBs) from maintaining correspondent accounts for, or on behalf of Banco Delta Asia SARL. As a corollary to this measure, these financial institutions are required to apply special due diligence to all of their correspondent accounts to ensure that no such account is being used indirectly to provide services to Banco Delta Asia SARL (final rule).

A financial institution and any "nonfinancial trade or business" must file a report concerning a transaction (or series of related transactions) in excess of $10,000 in currency.

• Interim final rules require any nonfinancial trade or business to file currency transaction reports on a Form 8300.
• CTAs and CPOs fall within the definition of "nonfinancial trade or business" for purposes of currency transaction reporting and thus are subject to the interim final rule.
• Regulations (31 CFR 103.22) require that financial institutions file currency transaction reports on a Form 104, Currency Transaction Report (CTR). FCMs and IBs are defined as "financial institutions" and thus must file CTRs.

The BSA requires each United States person who has a financial interest in, or signature authority over, any financial accounts in a foreign country to file a Form TD F 90-22.1, Report of Foreign and Financial Accounts (FBAR) if the aggregate value of the financial accounts exceeds $10,000 at any time during the calendar year. The term "financial account" includes any commodity interest account. The term "United States person" includes any Commission registrant that is a citizen or resident of the United States, domestic partnership, domestic corporation, or a domestic estate or trust.

The BSA requires the filing of a Form 105, Report of International Transportation of Currency and Monetary Instruments (CMIR) by any person, such as an FCM, who physically transports, mails, ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instrument in an aggregate amount exceeding $10,000 on any one occasion, whether that transportation is into or out of the United States. A CMIR also must be filed by any person who receives in the United States currency or other monetary instrument in an aggregate amount exceeding $10,000 that has come from outside the United States and on which no CMIR was filed. A CMIR does not need to be filed, however, if the person is a bank or broker-dealer, and the currency or other monetary instrument is mailed or shipped through the postal service or by a common carrier.

Pursuant to the Patriot Act, Treasury has issued a final rule that requires financial institutions, including FCMs, IBs, CPOs, and CTAs, to comply with information requests received from law enforcement. The final rule requires a financial institution to make an expeditious search of its records for accounts and transactions involving named suspects, provide specified information about the named suspects, and prohibit the financial institution from disclosing the fact that a request has been made (other than as necessary to comply with the information request).

CFTC registrants are reminded of the requirement in 31 CFR 103.100 to maintain adequate procedures to safeguard the security and confidentiality of any information request received from FinCEN. Firms may not disclose to any person other than FinCEN or the Federal law enforcement agency on whose behalf FinCEN is requesting information the fact that FinCEN has requested or has obtained information, except to the extent necessary to comply with the information request. There are significant penalties for willful violations of the BSA regulations.

The final rule permits financial institutions required by the BSA to establish AML Programs and associations of such financial institutions to share information regarding individuals and other persons involved in possible terrorist activity or money laundering. FCMs and IBs are required to establish AML Programs, and thus are permitted to share information with other financial institutions that are required to establish AML Programs, such as other FCMs, IBs, broker-dealers, and banks.

Financial institutions and associations of financial institutions that intend to share information must file, on a yearly basis, a notice with Treasury's Financial Crimes Enforcement Network (FinCEN). A copy of the notice is included as Appendix A to the final rules relating to information sharing that are discussed above.

• FinCEN, which administers the BSA and is charged with safeguarding the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity has delegated authority to issue regulations requiring financial institutions to keep records and file reports on certain financial transactions. FinCEN's website provides general information and updates about AML and the BSA relevant to all financial institutions. FinCEN also issues advisories that pertain to transactions involving certain jurisdictions.
• OFAC administers and enforces economic and trade sanctions against targeted foreign countries, terrorism sponsoring organizations, and international narcotics traffickers.
• National Futures Association, a registered futures association, issues AML rules applicable to its membership, provides regulatory updates concerning BSA amendments relevant to the futures industry and offers web-based AML training for FCMs and IBs, under CFTC oversight.
• FINRA, a national securities association, issues AML rules applicable to its membership, details the AML requirements applicable to members, provides AML regulatory updates, and offers AML training for securities brokers and dealers, under SEC oversight.
• The Financial Action Task Force on Money Laundering (FATF), an inter-governmental organization whose members include 32 countries and two international organizations, sets forth the international framework for AML efforts in its Forty Recommendations on money laundering and nine special recommendations on terrorist financing.
• The Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual.
• United Nations instruments and related international standards relating to the suppression of money laundering and terrorist financing.
• The Office of the Comptroller of the Currency issued AML booklet and general AML guidance for bankers.
• Interpol's activities in the areas of money laundering and terrorist financing.
• The Council of Europe's Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crimes.
• The Wolfsberg Principles for international private banks.
• The Department of State's list of foreign terrorist organizations.

[1] The Executive Order generally restricts all U.S. financial institutions from undertaking financial transactions with Burmese financial institutions, subject to certain exemptions.