USA Patriot Act

The USA Patriot Act is a law passed shortly after the Sept. 11, 2001, terrorist attacks in the United States giving law enforcement agencies broad powers to investigate and indict and bring terrorists to justice. It also led to increased penalties for committing and supporting terrorist crimes. An acronym for “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,” this anti-terror measure was chiefly designed to lower the probable cause threshold for obtaining intelligence warrants against suspected spies, terrorists, and other enemies of the U.S.

BREAKING DOWN 'USA Patriot Act'

The USA Patriot Act deters and punishes terrorist attacks in the United States and abroad through enhanced law enforcement and strengthened money laundering prevention. It also allows the use of investigative tools designed for organized crime and drug trafficking prevention for terrorist investigations. For example, federal agents can use court orders to obtain business records from hardware stores or chemical plants to determine who may be buying materials to make bombs, or bank records to determine who is sending money to terrorists or suspect organizations. Police officers, FBI agents, federal prosecutors and intelligence officials are better able to share information and evidence on individuals and plots, thus enhancing their protection of communities.

Patriot Act's Effect on Finance

While the Patriot Act initially conjures thoughts of expanded surveillance activity, it also impacts the broader U.S. community of financial professionals and financial institutions engaging in cross-border transactions with its Title III provision, entitled "International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.”

With a goal of thwarting the exploitation of the American financial system by parties suspected of terrorism, terrorist financing and money laundering, Title III cites International Monetary Fund data estimating that laundered money from drug trafficking and other smuggling activities accounts for 2-5% of the US’s gross domestic product. And by chipping away at these illegal sources of capital, which this law dubs “financial fuel of terrorist operations,” Title III aims to diminish their impact, through a variety of restrictions and controls. (For more, see: Terrorism's Effects On Wall Street.)

A Closer Look at the Books

The main Title III mandate imposes tighter bookkeeping requirements, forcing financial institutions to record aggregate amounts of transactions involving countries where laundering is a known problem for the United States. Such institutions must install methodologies of tracking and identifying beneficiaries of such accounts, as well as individuals authorized to route funds through payable-through accounts.

Title III also expands the authority of the Secretary of the U.S. Treasury to develop regulations that stimulate more robust communication between financial institutions, with an aim of stemming laundering activity and making it harder for launderers to conceal their identities. The Treasury is also empowered to halt the merger of two banking institutions, if both have historically failed to discourage laundering with their own internal safeguards.

In an effort to control suspicious activity abroad, Title III prevents business with offshore shell banks that are unaffiliated with a bank on U.S. soil. Banks must now also investigate accounts owned by political figures suspected of past corruption. And there are greater restrictions on the use of internal bank concentration accounts that fail to effectively maintain audit trails — a money laundering red flag, according to the law.

Expanded Money Laundering Definition

Nomenclature/definitions are also affected under Title III. For example, the definition of “money laundering” was broadened in scope to include computer crimes, the bribing of elected officials, and the fraudulent handling of public funds. And “money laundering” now encompasses the exportation or importation of controlled munitions not approved by the U.S. Attorney General. Finally, any offense where the U.S. is obligated to extradite a citizen under a mutual treaty with another country likewise falls under the broadened “laundering” banner.

The final subtitle under the Title III provision deals with an effort to rein in the illegal physical transport of bulk currency. This movement builds upon the Bank Secrecy Act of 1970 (BSA) — also known as The Currency and Foreign Transactions Reporting Act — which requires banks to record cash purchases of instruments that have daily aggregate values of $10,000 or more — an amount that triggers suspicion of tax evasion and other questionable practices. Because of the BSA’s success, sharp money launderers now know to bypass traditional banking institutions, and instead move cash into the country using suitcases and other containers. For this reason, Title III makes concealing more than $10,000 on anyone’s physical person an offense punishable by up to five years in prison. (For more, see: Compliance With The Patriot Act: Customer Accounts.)

Practical Implications

For banks, investors, financial advisors, intermediaries, broker/dealers, commodity merchants and the like, the practical result of the Patriot Act’s Title III provision effectively translates to a unprecedented levels of due diligence on any corresponding accounts that exist in money-laundering jurisdictions throughout the world. However, many believe that the actual methods of achieving this analysis tilt towards the nebulous. And the specific questions that must be asked seem to fluctuate, since there are no concrete levels of information required to satisfy potential inquiries, should a bank or an investor be suspected of violating Title III terms. For this reason, many are taking a “better-safe-than-sorry” approach to gathering as much information as possible.

On the banking side, applications for foreign accounts — either directly or indirectly owned by U.S. citizens, have become inordinately complex and onerous. Compliance officers are routinely augmenting applications, with an almost paranoid worry about satisfying broader Patriot Act mandates, and the enforcement agencies that oversee them.

Advantages of the USA Patriot Act

The Act has been a highly-polarizing national security initiative since President George W. Bush signed the bill into law, a month following the terrorist attacks of September 11. Advocates feel the Act has made anti-terrorism efforts more streamlined, efficient and effective. Federal agents use roving wiretaps while tracking international terrorists trained to avoid surveillance by rapidly changing locations and communication devices. A reasonable delay in notifying terrorist suspects of a search warrant gives law enforcement time to identify the criminal’s associates, eliminate immediate community threats and coordinate the arrests of individuals without tipping them off first.

Faster inquiries are made about suspicious activities, strengthening terrorism prevention. Surveillance is easier because companies have a clear definition of who investigates terrorist activities. Increased wiretapping lets investigators listen to conversations potentially threatening to national security. Because law enforcement has more unity through multiple communication channels, investigating officers can act quickly before a suspected attack is completed.

Disadvantages of the USA Patriot Act

Opponents of the Act argue it effectively lets the U.S. government investigates anyone it sees fit, colliding directly with one of the U.S.' most cherished values:  citizens’ rights to privacy. Questions of misusing government funds arise when limited resources are used in tracking American citizens, especially those moving overseas. It is unclear what federal authorities plan to do with information discovered through tracking public records, raising concerns about the government’s autonomy and power.

Suspected terrorists have been imprisoned on Guantanamo Bay without always explaining why or allowing legal representation, violating their right to due process; some prisoners have been proven, subsequently, to not even have any ties to terrorism.

The business, finance and investment communities are more likely to be affected by heightened documentation requirements and due diligence responsibilities. Though the impact is more on institutions than individual investors, anyone who conducts international business is likely to experience added costs and greater hassles with something as mundane as opening a simple foreign checking account.

For more information, see the Treasury Department's USA Patriot Act web page .