Dealerships Seek Compliance Solutions for USA Patriot Act Regulations

Keith Whann

Following the September 11th attacks on America and a flurry of legislative activity, the President signed into law the USA Patriot Act on October 26, 2001, making a number of amendments to the anti-money laundering provisions of the Bank Secrecy Act and the Money Laundering Control Act of 1986. The amendments were intended to make it easier to detect, prevent, and prosecute international money laundering and the financing of terrorism. Given the seriousness of the subject matter, it is not surprising that civil and criminal penalties for non-compliance have been increased to a range between twice the amount of the transaction and not more than $1 million dollars for any one violation, and may include complete forfeiture of accounts and property involved in the transaction. Dealers should begin taking steps to comply now because the emerging regulations will impact their policies, procedures and overall dealership operations.

Title III of the USA Patriot Act applies to all “financial institutions”. Like the Privacy Rules implemented by the FTC, the Rules adopted by the Financial Crimes Enforcement Network (FinCEN), a Bureau under the Department of Treasury, clarify that the Act expanded the scope of the Bank Secrecy Act to include a number of businesses not formerly covered, including motor vehicle dealerships. Section 352 of the Act mandates that all covered industries establish anti-money laundering programs that, at a minimum, include: (1) the development of internal policies, procedures and controls; (2) the appointment of a compliance officer to oversee the program; (3) training employees to follow the program; and (4) conducting an independent audit to make sure the program is followed.

The Rules and Regulations implementing the Act are still evolving, with new requirements and compliance procedures being added periodically by the Department of the Treasury and other Departments and Agencies responsible for clarifying what regulated industries must do to comply with the Act’s various requirements. They impact the kinds of business that financial institutions are authorized to engage in, how that business is conducted, anti-money laundering policies and procedures, and the penalties for non-compliance.

Under Section 352 of the Act, all industries were required to establish their anti-laundering programs by April 24, 2002, but Regulatory Agencies were given some latitude to extend that deadline for not more than six months. An Interim Rule released by the FinCEN addresses how and when financial institutions in various categories must comply with the Act. Registered securities brokers were required to comply with the Interim Rules by April 23, 2002; banks, savings associations and credit unions by April 24, 2002; and money service businesses, mutual funds and operators of credit card systems had until July 24, 2002.

The Department of Treasury exercised its authority to defer the application of the Rules to the remaining categories of financial institutions in order to conduct additional research on the potential risks of money laundering. The Department recognized that many of the remaining financial institutions are small businesses that have never been subject to Federal Anti-Money Laundering Regulations and that the risks inherent in their operations will vary considerably. While the remaining financial institutions, including loan or finance companies and motor vehicle dealerships, have been temporarily exempted, they will be required to establish anti-laundering programs by October 24th. The temporary exemption does not affect, however, the ongoing cash reporting requirements with which all financial institutions must comply.

Section 365 of the Act states that persons engaged in a business who receive more than $10,000 in cash in one transaction (or two or more related transactions) must file a report with the FinCEN. Since motor vehicle dealers already report cash transactions over $10,000 to the IRS to comply with cash reporting requirements designed to trace money laundered from drug trafficking, they will now report to the FinCEN as well. In December of 2001, the FinCEN published an Interim Rule and a companion Proposed Rule which state that there is no change to the Rules governing cash reporting other than the re-designation of the IRS Form 8300 as “IRS Form 8300/FinCEN Form 8300”. The form is virtually identical to IRS Form 8300 and imposes no new reporting or record-keeping requirements. Motor vehicle dealerships were required to begin using the new form on January 1, 2002.

In addition to the reporting requirements, Section 314(a) of the USA Patriot Act and Rules proposed by the FinCEN in March of 2002 requires motor vehicle dealers to respond to requests for information from regulatory authorities on persons with whom the dealership has entered into transactions or maintain an account. The intent of the Rules is to establish a link between Federal law enforcement agencies and financial institutions and reduce barriers to the sharing of financial information concerning accounts and transactions that may involve terrorist activity or money laundering. Federal law enforcement agencies will have the ability to provide the names and identifying information about suspected terrorists to FinCEN, which will then send that information, both electronically and by fax, to financial institutions so that a check of accounts and transactions can be made. If matches are found, law enforcement agencies can then follow up with the financial institutions directly.

On July 17, 2002, the Department of the Treasury and seven Federal Financial Regulatory Agencies issued Proposed Rules that would require banks and trust companies, savings associations, credit unions, securities brokers, mutual funds, futures commission merchants and futures brokers to establish minimum procedures for identifying and verifying the identify of customers seeking to open new financial accounts. These financial institutions would be required to establish programs specifying procedures for (1) verifying the identity of any person seeking to open an account, to the extent reasonable and practicable; (2) maintaining records of the information used to verify the person’s identity and (3) determining whether the person appears on any list of known or suspected terrorists or terrorist organizations. This identifying information would be essentially the same information currently obtained by most financial institutions, such as the customer’s name, address, date of birth and an identification number (i.e. social security number or a similar number from a government-issued document). The program would also have to contain procedures to verify the identity of customers within a reasonable period of time. The proposed Rules contemplate that financial institutions will generally use the same forms of identity verification that are already in place, such as examining driver’s licenses, passports, credit reports, and other similar means. The institutions also have the flexibility to tailor their procedures as appropriate, taking into consideration their size, location and type of business.

Although the implementing regulations will provide additional guidance when promulgated, there are actions that motor vehicle dealerships could begin taking now. Such actions include reviewing current anti-money laundering policies and implementing procedures to verify the identity of customers and compare customer information in the dealership files against lists provided by law enforcement agencies. Given the significance of the issue and the current political climate, enforcement in this area is likely to be at the top of the Regulator’s priority lists. As a result, dealers would be well advised to get a jump on implementing appropriate anti-money laundering policies, procedures and controls.

This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application. © Keith Whann September, 2006.