I. USA PATRIOT Act, Title III
On October 23, 2001 President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act," or "Patriot Act"). [1] Since its enactment in 2001 and subsequent partial reauthorization in 2005, many financial institutions have struggled with the high cost of complying with Title III of the Patriot act and the stiff civil and criminal penalties for those who fail to comport to its requirements. [2] The Act's adoption of an expansive definition of the phrase "financial institution" has increased its range of regulation with portions of the Patriot Act affecting a profusion of entities ranging from commercial banks to travel agencies to casinos. [3]
Of primary concern for financial institutions is Title III of the Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ("Title III"). [4] Title III substantially amends the Bank Secrecy Act of 1970 ("BSA") by enhancing reporting obligations, toughening standards for transaction structuring, and requiring the implementation and oversight of customer identification and anti-money laundering programs. [5] While Title III has certainly increased law enforcement's ability to investigate the records of individuals and organizations suspected of financing terrorist organizations, its capacity to thwart an attack similar to the disaster of September 11, 2001 is debatable.
II. Sections 314 and 326: Customer Identification Programs
Section 326 of the Patriot Act establishes minimum requirements for customer verification applicable to the opening of new accounts with financial institutions. [6] Covered entities must collect, at a minimum, names, addresses, tax identification or social security numbers, and birthdates from all new customers. [7] This provision is not particularly onerous on most banks, as it simply requires collection and retention of basic information that many institutions voluntarily collected prior to the Title III mandate. [8] The primary change for banks under these provisions is that they are now required to check information obtained from customers against a list of approximately 9,000 names of individuals and organizations suspected of having ties to terrorist organizations pursuant to section 314(a) of the Patriot Act. [9] If a customer appears on the compiled list, the bank must report their finding to the Financial Crimes Enforcement Network ("FinCEN"), a division of the Department of the Treasury. [10] Financial institutions are insulated from liability stemming from sharing private information related to section 326 with FinCEN or other qualifying financial institutions and are expressly prohibited from informing customers that they have been reported. [11]
III. Reporting Requirements and Transaction Structuring
Title III of the Patriot act amends the BSA to require both financial and non-financial institutions engaged in a trade or business to file a Currency Transaction Report ("CTR") with FinCEN for all transaction exceeding $10,000 in coins, currency, or other equivalent monetary instruments. [12] The Patriot Act criminalizes structuring a transaction for the purpose of avoiding the reporting requirement threshold amount and provides steep penalties for violators. [13] Section 356 of the act provides the Department of the Treasury with the authority to establish similar provisions regarding securities and various other financial instruments. [14]
IV. Financing 9/11 and Flaws With the Title III Reporting Obligations
The September 11 terrorist attacks were the catalyst for the Patriot Act's creation, but it appears as though the financial transactions leading up to the attacks likely would have evaded detection even under the heightened scrutiny of Title III. [15] It is estimated that the entire attack was financed with approximately $400,000-$500,000 primarily using checking accounts with balances averaging only around $3,000. [16] Most of the transactions involved would not have triggered the reporting requirements of Title III had the act been in place at the time. [17] The majority of the accounts used were held in the names of students and were established using legitimate documents that likely would have been deemed unremarkable under the standards of sections 314 and 326 of the Patriot Act. [18] It appears as though the only unusual activity concerning these accounts was a high frequency of account balance inquiries, which is not a reportable irregularity subject to Title III. [19]
According to the 9/11 Commission Report, the transactions that transpired prior to the terrorist attacks were, "essentially invisible amidst the billions of dollars flowing around the world every day." [20] The Commission suggested that tracking such small accounts would be overly arduous particularly because terrorist financing transactions are generally quite routine in appearance. [21] Although a tracking program based on balance inquiries may have raised suspicions regarding the hijackers' bank accounts, there is no such provision in the Patriot Act and there is a general consensus that such a program is impracticable. [22]
V. The Impact of Title III
While Title III of the Patriot Act may very well be a valuable tool in the prevention of identity theft and other financial related crimes, it appears unlikely that the act would significantly aid law enforcement in evading another September 11 type of an attack. Because it is the nature of terrorist-related financing to deal in small and relatively routine transactions, it seems counterintuitive to postulate that regulations scrutinizing accounts that engage in large transactions with regularity will abate terrorism.
Another concern about the Patriot Act is that the cost of Title III compliance overshadows the true benefit to regulatory agencies. Proponents of the Act argue that the amendments to the BSA enable obstruction of organizations funding international terrorism. While it is colorable that Title III is an effective measure to quash grandiose money laundering schemes, the act misses the mark in relation to anti-terrorism financing.
[1] Benjamin Mojuye, What Banks Need to Know About the PATRIOT Act, 124 Banking L.J. 258, 258 (2007).
[2] Id.
[3] 31 U.S.C. § 5312(a)(2) (2000).
[4] Mojuye, supra note 1, at 258.
[5] Id.
[6] Douglas L. Hodge, USA PATRIOT Act (Section 326), bai.org, http://www.bai.org/operations/PDF/Hodge.pdf (last visited Feb. 10, 2008).
[7] Id.
[8] Id.
[9] Id.
[10] Mojuye, supra note 1, at 260.
[11] Id.
[12] Id. at 262.
[13] Id.
[14] Id.
[15] John J. Byrne, Banks and the USA PATRIOT Act, eJournal USA: Economic Perspectives, Sept. 2004, http://usinfo.state.gov/journals/ites/0904/ijee/byrne.htm.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.