Issue #43
Last Update December 24, 2005
Finance Patriot Act and Investing by Sten Grynir The USA Patriot Act, passed in October 2001 in the wake of the 9/11 attacks, has provisions to combat money laundering, with the intention of cutting off funds to terrorists. Many of those provisions take effect this April.
Although final rules have not yet been promulgated, the Act requires financial institutions, including unregistered investment funds (see Hedge Funds in this New York Stringer issue) to develop procedures for identifying and verifying the identity of accountholders. Anyone who has tried to open a business or personal bank account in the last year can vouch for the fact that banks, at least, are taking this requirement seriously.
For the first time, unregistered investment companies (including hedge funds, commodity pools and similar operations) will have to develop and document an anti money laundering (AML) program, have it approved by the company board of directors, and make it available to designated regulators upon request. The AML program must include a training component and provide for independent testing of compliance.
The critical components of an AML program include the establishment of a customer identification and verification program and development of procedures for detecting and reporting suspicious activity. Identifying the source and beneficial owners of funds is key. And there is now in place a prohibition against doing business with shell banks, such as those established in offshore tax havens.
It is expected that, besides verifying the identity of investors, these investors (and their relatives) should be checked against the Treasury Department's Specially Designated Nationals and Blocked Persons list. Entities located in countries already under scrutiny by the Federal Government as money laundering havens require particular care.
Companies like Smith Brandon International, Inc., exhibiting at the Managed Funds Association Network 2003 conference, have begun to offer investigatory services to the financial community for verification of investor identity, and will provide consulting services assisting in the development and review of anti money laundering programs.
How effective these Patriot Act provisions will prove to be in stripping terrorist organizations of their funding remains to be seen. If these provisions are implemented halfheartedly, their impact will be minimal. As it is, loopholes exempting funds with less than $1,000,000 in assets, or that are organized, managed and offered exclusively offshore, or owned by a single family provide plenty of leeway for the movement of terrorist money.
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