How the Patriot Act Affects Project Financings
By Samuel R. Kwon
Lawyers in the Chadbourne offices outside the United States have been asking when and how the USA Patriot Act might come into play in project finance transactions.
The Patriot Act is a law enacted in the wake of the terrorist attacks in the United States on September 11, 2001 to give US law enforcement agencies more tools for tracking down terrorists. The statute has been criticized by civil libertarians in the United States. It has broad reach. There are three separate requirements that might come into play in project finance transactions. They relate to establishment of a private banking or correspondent account, banking with foreign shell banks, and “primary” money laundering.
One goal of the Patriot Act is to cut off the supply of funds to terrorist groups. It does this through comprehensive rules on money laundering and bank secrecy. Participants in project finance transactions should be aware in particular of three rules.
Any “financial institution” that establishes or maintains a “private banking account” or a “correspondent account” in the United States for a non-US person (including a foreign visitor or a representative of a non-US person) must establish internal due diligence procedures designed to detect and report instances of money laundering through these types of accounts.
Financial institutions subject to this requirement include all US banks whose deposits are insured by the Federal Deposit Insurance Corporation. The requirement also applies to trust companies, brokers and dealers registered with the US Securities and Exchange Commission, investment bankers, investment companies within the meaning of the US securities laws, currency exchanges, insurance companies and loan or finance companies. This requirement also applies both to US branches of foreign banks and to foreign branches of US banks.
Any financial institution establishing or maintaining a private banking account or correspondent account must put in place procedures designed to collect two types of information: the identity of the nominal and beneficial owners of the account and the sources of funds deposited into the account “as needed to guard against money laundering.”
If the account is maintained by or on behalf of a senior foreign political figure (or any immediate family member, including the spouse’s parents) or by a close associate of such a figure whose association is publicly known, then the financial institution must take additional steps to detect and report any transactions that may involve the proceeds of foreign corruption. A senior political figure includes a current or former senior government official — a person with substantial authority over policy, operations or the use of government-owned resources — in the executive, legislative, judicial, administrative, or military branches of a government outside the United States, whether elected or not. It also includes a senior executive of a foreign political party or a foreign government-owned commercial enterprise.
A “private banking account” is an account (or a combination of accounts) requiring minimum aggregate deposits of $1 million or more in cash or other assets, and established on behalf of one or more individuals with direct or beneficial ownership interest in the account. A beneficial owner of an account is a person with a contractual or judicial authority to direct funds in and out of the account. It also includes a person entitled to all or any part of the assets in (or the income from) the account so long as the entitlement represents more than $1 million or 5% of the assets in (or the income from) the account, whichever is less.
A “correspondent account” is an account established to receive deposits from or make payments on behalf of a non-US bank. It also includes accounts designed to handle other financial transactions related to such a bank.
Additional requirements are imposed if the correspondent account is requested or maintained on behalf of a foreign bank that operates under an “offshore banking license” or under a banking license issued by a foreign country that the US does not believe has embraced international anti-money laundering principles. An offshore banking license refers to a banking license that prohibits the bank from conducting banking activities with the citizens of the licensing country or in the currency of that country. As of November 2003, nine countries and territories have been designated as uncooperative with international efforts to curb money laundering. They are the Cook Islands, Egypt, Guatemala, Indonesia, Burma (Myanmar), Nauru, Nigeria, the Philippines and the Ukraine. Any financial institution that maintains a correspondent account for a foreign bank from one of these nine countries or territories must identify the nature and extent of the ownership of the account owners — not just the identity of the account owners and the sources of funds. If the foreign bank in one of these nine countries on whose behalf a financial institution is maintaining a correspondent account in turn provides correspondent accounts to other foreign banks, then the identity of those other foreign banks, as well as the identity, nature and extent of ownership of the correspondent accounts in those other foreign banks, must be learned.
Banks do not have to go through all this trouble for a one-off transaction with another bank. However, an account that is used to provide regular service requires a full inquiry. The Treasury Department said an account providing regular service means “an arrangement to provide ongoing services, and would generally exclude infrequent or occasional transactions.” While this relieves those financial institutions engaged in a “one-off” transaction with another bank, the Treasury Department has not made clear how frequent a dealing is “infrequent” for purposes of avoiding this rule.
A narrower class of financial institutions is barred from establishing any correspondent account in the US for or on behalf of a foreign “shell bank.”
This rule applies to banks insured by the Federal Deposit Insurance Corporation, other commercial banks or trust companies, US branches of foreign banks, thrift institutions and brokers and dealers registered with the Securities and Exchange Commission. It does not apply to investment companies, investment bankers, currency exchanges, insurance companies or loan or finance companies.
Financial institutions subject to this rule must also take steps to ensure that any correspondent account it has with a foreign bank that is not itself a shell bank is not used “to indirectly provide banking services” to a shell bank.
A shell bank is a bank that does not have a physical presence in any country. A physical presence requires a fixed place of business with at least one full-time employee. There must be operating records at that office, and the bank must be subject to the oversight of a government agency whose mission is to supervise banks.
“Primary” Money Laundering
The Patriot Act requires that special measures be taken by any financial institution — broadly defined — or any US “financial agency” that does business with a “primary money laundering concern.” The special measures are whatever the US Treasury Department decides to require. A “financial agency” is anyone acting as a “bailee, depository trustee, or agent” in connection with the handling of “money, credit, securities or gold.” Multilateral agencies like the World Bank, International Finance Corporation, Asian Development Bank and Inter-American Development Bank are not subject to this requirement.
The Treasury Department has not issued guidance on how broadly one ought to interpret the term “financial agency.” For instance, it is possible that a law firm acting as an escrow agent for the participants in a project finance transaction may be a “financial agency” since it is an entity acting on behalf of another entity as an agent for money. An attorney at the Treasury Department dealing with the anti-money laundering provisions of the Patriot Act said such a broad reading is possible. However, the attorney also said a law firm may not be a type of institution this rule is meant to govern — banks and other entities typically viewed as financial institutions.
The US Treasury Department has the power to designate “primary money laundering concerns.” A primary money laundering concern can be a jurisdiction outside of the US, a financial institution operating outside the US, a transaction within or involving a jurisdiction outside the US, or any type of account.
To date, two jurisdictions have been designated as “primary money laundering concerns.” They are Nauru and Burma. The Ukraine was designated as one in December 2002, but the designation was rescinded five months later after the Ukraine took steps to fix its anti-money laundering rules. In addition, two financial institutions have so far been identified as primary money laundering concerns. They are Myanmar Mayflower Bank and Asia Wealth Bank, both from Burma.
Once the Treasury Secretary identifies a primary money laundering concern, he can impose additional reporting requirements on financial institutions or agencies doing business with such a concern. The requirements can include maintaining records and filing reports when transactions involving the concern occur, and obtaining and retaining information concerning the beneficial owner of any account opened or maintained in the US by a foreign person (or a representative of a foreign person) involving the concern.
If a US financial institution or agency opens or maintains a “payable-through account” in the US for a foreign financial institution involving the money laundering concern, it has additional reporting requirements. It must take steps to report the identity of each customer (and representative of the customer) of the foreign financial institution who is permitted to use (or whose transactions are routed through) the payable-through account, and any other information that is “substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the US” with respect to that customer.
A “payable-through account” is an account opened at a depository institution by a foreign financial institution through which the foreign financial institution permits its customers to engage in normal banking activities in the US.
The US Treasury can also flatly prohibit opening any correspondent or payable-through account that involves a primary money laundering concern.
US banks (including US branches of foreign banks) should continually monitor the announcements from the Treasury Department for any additions to the list of primary money laundering concerns — a list likely to keep growing — as well as for the specific rules imposed on doing business with such concerns.
When first enacted, the Patriot Act’s anti-money laundering provisions created some panic and an overflow of different forms among US and foreign banks as they attempted to comply with the various due diligence and reporting requirements. Fortunately, as the Treasury Department began issuing detailed regulations implementing these provisions, it also made available various forms that financial institutions can use to satisfy the requirements. It has also published model internal procedures that it suggests financial institutions should adopt to detect money laundering. They are available on a website at www.fincen.gov.