In the month after the terrorist attacks on September 11, 2001, Congress passed the USA Patriot Act. This act primarily served to broaden the United States’ domestic powers to investigate and surveil terrorist actions such as money laundering. It did so through regulations requiring financial institutions to develop anti-money laundering (AML) programs of their own.
These AML programs that institutions develop are unique to their particular needs. For example, the firm’s size and specific location factor into the program’s approach.
Under the Patriot Act, financial institutions must verify the identity of their customers. This process is called Customer Due Diligence (CDD) or Know Your Customer (KYC). In brief, CDD/KYC mandates that financial institutions collect basic personal information. This process ensures that criminals engaging in money laundering or terrorist financing do not go unnoticed.
To assist with CDD/KYC, firms cross-check customer identities against the Specially Designated Nationals (SDN) List. This list, provided by the Office of Foreign Assets Control (OFAC), contains known terrorists.
Failure to comply with the Patriot Act’s AML standards leads to criminal penalties. Additionally, the United States government levies fines of either $1 million or twice the value of the illegal transaction, depending on which one is greater.
What is Section 314 of the USA Patriot Act?
The Patriot Act contains one crucial section for financial institutions to understand and comply with: Section 314. This section contains two subsections.
Section 314(a) refers to a chain of information through which the Financial Crimes Enforcement Network (FinCEN) can obtain information on financial transactions of suspicious individuals or known criminals. This chain of information begins with law enforcement agencies, who supply FinCEN with a list of entities suspected of nefarious activities like terrorist financing. Both individuals and organizations may appear on this list.
Through this Section 314(a) list, FinCEN can request financial institutions to check the accounts and transaction history of the suspected entities to verify any suspicious activity. The financial institution then drafts a Section 314(a) report of the entity’s personal information and financial records to submit to FinCEN for analysis. The financial institution can continue to conduct business with the suspect, but the Section 314(a) report is treated as highly confidential.
Section 314(b) exists to facilitate information sharing between financial institutions regarding information pertaining to the identification and reporting of suspicious individuals. Therefore, by invoking Section 314(b) when sharing a client’s suspicious but confidential information, the financial institution protects itself from criminal liability.
In order to guarantee this safety, both financial institutions must notify FinCEN that the sharing is for AML purposes. Both institutions must be registered with FinCEN’s Secure Information Sharing System (SISS). Despite the ability to share a client’s information with each other, the firms must still treat the information as highly confidential and with the utmost privacy.