Anti-Money Laundering and Terrorist Financing

The Patriot Act, which amends the Bank Secrecy Act (BSA), was adopted in response to the September 11 terrorist attacks. The Patriot Act is intended to strengthen U.S. measures to prevent, detect, and prosecute international money laundering and the financing of terrorism. These efforts include new anti-money laundering (AML) tools that impact the banking, financial, and investment communities.

Under the Patriot Act, persons who are or are required to be registered as futures commission merchants (FCMs), introducing brokers (IBs), commodity pool operators (CPOs), and commodity trading advisors (CTAs) are subject to new requirements for establishing AML programs, reporting suspicious activity, verifying the identity of customers, and dealing with certain types of accounts involving foreign persons.

Establishing AML Programs
Reporting Suspicious Activity
Verifying the Identity of Customers
Due Diligence Measures for Certain Accounts Involving Foreign Persons
Special Measures
Transactions in Excess of $10,000 in Currency
Foreign Bank and Financial Accounts
International Transportation of Currency or Monetary Instruments
Information Sharing among Financial Institutions and Law Enforcement>
Additional Resources

Establishing AML Programs
The Patriot Act amended the BSA to require that financial institutions establish AML Programs. FCMs, CPOs, and CTAs are now included in the definition of financial institution in the BSA. IBs are considered to be “brokers or dealers in commodities” within the financial institution definition.

An AML Program must be in writing and must include:

the development of internal policies, procedures, and controls;
the designation of a compliance officer;
an ongoing employee training program; and
an independent audit function to test programs.

Treasury has adopted interim final rules regarding AML Programs for financial institutions. These rules exempt CPOs and CTAs from the AML Program requirement pending the issuance of final rules. However, Treasury has proposed rules that will require commodity pools and commodity trading advisors to establish and implement written anti-money laundering programs. As required by Section 356(c) of the Patriot Act, Treasury has issued a report to Congress that sets forth existing requirements that apply to both registered and unregistered investment companies, including commodity pools, and contains recommendations on additional regulatory requirements that might be imposed. National Futures Association has adopted Rule 2-9(c) and a related Interpretive Notice regarding AML Programs for its FCM and IB members. Other AML Program rule notices for specified financial institutions include:

Mutual Funds;
Operators of a Credit Card System;
Money Service Businesses;
Broker-dealer members of the National Association of Securities Dealers (NASD);
Broker-dealer members of the New York Stock Exchange;
Insurance companies (proposed rules);
Investment Advisers (proposed rules); and
Dealers in precious metals, stones or jewels (proposed rules).

Reporting Suspicious Activity
The Patriot Act authorizes Treasury to issue rules requiring FCMs, CPOs, and CTAs to file Suspicious Activity Reports (SARs). Treasury has issued a final rule requiring FCMs and IBs to file SARs. The rule applies only to transactions occurring after May 18, 2004. Treasury has not yet proposed a rule requiring CPOs and CTAs to file SARs. Treasury also has issued a SAR SF form and Instructions for the securities and futures industry, which FCMs and IBs must use to report suspicious transactions, and which CPOs and CTAs may use to report voluntarily.

Final BSA rules require that SARS be filed by any broker or dealer in securities; money service business; or bank.
Proposed BSA rules require that SARS be filed by any mutual fund.
Banking agencies with regulations that require the filing of SARs include: Federal Reserve Board; Comptroller of the Currency; Federal Deposit Insurance Corporation; Office of Thrift Supervision; and National Credit Union Administration. The Federal Reserve Board has issued a supervisory letter that provides relief from the Board's SAR filing requirements for nonbank subsidiaries of bank holding companies or state member banks, such as broker-dealers and FCMs, that file suspicious activity reports pursuant to separate Treasury suspicious activity reporting requirements.

Verifying the Identity of Customers
The Patriot Act requires Treasury to issue rules setting forth minimum standards for financial institutions to identify and verify the identity of customers.

Treasury and the CFTC have jointly issued final rules that require FCMs and IBs to have customer identification programs (CIPs) for identifying and verifying the identity of customers. An FCM’s or IB’s procedures must enable it to form a reasonable belief that it knows the true identity of each customer.
The staff of the CFTC and Treasury also have jointly issued guidance, in question-and-answer format, regarding the application of the CIP rule for FCMs and IBs.
These rules permit FCMs and IBs to rely on other financial institutions to perform identification/verification functions; however, the reliance must be reasonable under the circumstances, and the financial institution must enter into a contract requiring it to certify annually to the FCM or IB that it has implemented an AML program and that it will perform specified requirements of the CIP.
Final rules regarding customer identification programs have also been issued for banks, savings associations and credit unions; broker-dealers; mutual funds; and banks without a federal functional regulator. The rules are substantively identical for all affected sectors of the financial services industry.
These rules require that financial institutions have procedures for checking customer’s names against lists of known or suspected terrorists or terrorist organizations that are prepared by any federal agency and made available to the institution. Although no lists have yet been designated, financial institutions are separately required to comply with the rules of the Office of Foreign Assets and Control (OFAC) and must consult OFAC’s lists of sanctioned countries and specially designated nationals and blocked persons.
Sources for complying with OFAC rules:
- The American Bankers Association’s primer on OFAC compliance; and
- OFAC forms for reporting blocked or rejected transactions.

Due Diligence Measures for Certain Types of Accounts Involving Foreign Persons
The Patriot Act requires that financial institutions must establish appropriate, and where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through foreign private banking and correspondent accounts.

Interim final rules require FCMs, IBs, and broker-dealers to immediately take steps to comply with the due diligence statutory requirements with respect to foreign private banking accounts pending issuance of final implementing rules. FCMs, IBs, and broker-dealers must have due diligence programs designed to ensure that the financial institution takes reasonable steps to ascertain the identity of the nominal and beneficial owners and sources of funds deposited into foreign private banking accounts to guard against money laundering and to conduct enhanced scrutiny of private banking accounts maintained by senior foreign political figures (or their immediate family members or close associates) and transactions that may involve the proceeds of foreign corruption.

A private banking due diligence program that is consistent with any applicable government guidance for private banking accounts, such as the guidance on sound practices for private banking (issued by the Federal Reserve) and the guidance on enhanced scrutiny for transactions that may involve the proceeds of foreign corruption (issued by Treasury, the State Department, and the banking regulators) is reasonable, according to Treasury, as long as the program incorporates the statutory requirements.

The interim final rules also temporarily exempt FCMs, IBs, and broker-dealers from the due diligence requirements with respect to foreign correspondent accounts.

Special Measures
The Patriot Act authorizes Treasury to find that a foreign jurisdiction, institution, class of transactions or type of account is of "primary money laundering concern" and to require domestic financial institutions to take certain "special measures" against the primary money laundering concern. The first four special measures impose information gathering, reporting and recordkeeping requirements on those financial institutions dealing, directly or indirectly, with the designated jurisdiction or entity. Under special measure 5, a financial institution may be prohibited from opening or maintaining a correspondent account or a payable-through account. Pursuant to this authority, Treasury has designated each of the following as a primary money laundering concern:

Nauru;
Burma (also known as Myanmar);
Burmese financial institutions, Myanmar Mayflower Bank and Asia Wealth Bank; and
Syrian financial institution, Commercial Bank of Syria, Including Its Subsidiary, Syrian Lebanese Commercial Bank

Pursuant to this authority, Treasury has imposed the following special measures:

Special measure 5, which prohibits certain financial institutions (including FCMs and IBs) from establishing, maintaining, administering or managing correspondent or payable-through accounts in the United States for, or on behalf of, Burmese banking institutions, unless operation of those accounts is not prohibited by Executive Order 13310^[1] and the Burma-related activities of such accounts are solely to effect transactions that are exempt from, or licensed pursuant to, Executive Order 13310. This prohibition extends to correspondent or payable-through accounts maintained for other foreign banks when such accounts are used by the foreign bank to indirectly provide financial services to a Burmese banking institution (final rule); and
Special measure 5, which prohibits certain domestic financial institutions (including FCMs and IBs) from establishing, maintaining, administering, or managing correspondent or payable-through accounts for, or on behalf of, Myanmar Mayflower Bank or Asia Wealth Bank. This prohibition extends to correspondent or payable-through accounts maintained for other foreign banks when such accounts are used to indirectly provide banking services to these banks (final rule).

Treasury also has proposed (but not yet imposed) the following special measures:

Special measure 5, which would prohibit certain financial institutions (including FCMs and IBs) from maintaining correspondent accounts for, or on behalf of, a Nauru financial institution. This prohibition would extend to correspondent accounts maintained for other foreign banks when such accounts are used by the foreign bank to indirectly provide services to a Nauru financial institution (proposed rule); and
Special measure 5, which would prohibit certain domestic financial institutions (including FCMs and IBs) from opening or maintaining any correspondent account for or on behalf of the Commercial Bank of Syria, Including Its Subsidiary, Syrian Lebanese Commercial Bank. As a corollary to this measure, these domestic financial institutions would be required to apply special due diligence to their correspondent accounts to ensure that no such account is being used indirectly to provide services to the Bank (proposed rule).

^[1] The Executive Order generally restricts all U.S. financial institutions from undertaking financial transactions with Burmese financial institutions, subject to certain exemptions.

Transactions in Excess of $10,000 in Currency
A financial institution and any “nonfinancial trade or business” must file a report concerning a transaction (or series of related transactions) in excess of $10,000 or more in currency.

Interim final rules require any nonfinancial trade or business to file currency transaction reports on a Form 8300.
CTAs and CPOs fall within the definition of “nonfinancial trade or business” for purposes of currency transaction reporting and thus are subject to the interim final rule.
Regulations ( 31 CFR 103.22) require that financial institutions file currency transaction reports on a Form 4789, currency transaction report (CTR).
A new final rule, which applies to transactions after May 18, 2004, adds FCMs and IBs to the definition of "financial institution" thereby requiring them to file CTRs.

Foreign Bank and Financial Accounts (FBAR)
The BSA requires each United States person who has a financial interest in, or signature authority over, any financial account in a foreign country to file an FBAR if the aggregate value of the financial account exceeds $10,000 at any time during the calendar year. The term "financial account" includes any commodity interest account. The term "United States person" includes any Commission registrant that is a citizen or resident of the United States, domestic partnership, domestic corporation, or a domestic estate or trust.

International Transportation of Currency or Monetary Instruments (CMIR)
The BSA requires the filing of a CMIR by any person, such as an FCM, who physically transports, mails, ships, or causes to be physically transported, mailed or shipped, currency or other monetary instrument in an aggregate amount exceeding $10,000 on any one occasion, whether that transportation is into or out of the United States. A CMIR also must be filed by any person who receives in the United States currency or other monetary instrument in an aggregate amount exceeding $10,000 that has come from outside the United States and on which no CMIR was filed. A CMIR does not need to be filed, however, if the person is a bank or broker-dealer, and the currency or other monetary instrument is mailed or shipped through the postal service or by a common carrier.

Information Sharing among Financial Institutions and Law Enforcement
Pursuant to the Patriot Act, Treasury has issued final rules that require financial institutions, including FCMs, IBs, CPOs, and CTAs, to comply with information requests received from law enforcement. The final rules require a financial institution to make an expeditious search of its records for accounts and transactions involving named suspects, provide specified information about the named suspects, and prohibit the financial institution from disclosing the fact that a request has been made (other than as necessary to comply with the information request).

CFTC registrants are reminded of the requirement in 31 CFR 103.100 to maintain adequate procedures to safeguard the security and confidentiality of any information request received from FinCEN. Firms may not disclose to any person other than FinCEN or the Federal law enforcement agency on whose behalf FinCEN is requesting information the fact that FinCEN has requested or has obtained information, except to the extent necessary to comply with the information request. There are significant penalties for willful violations of the BSA regulations.

The final rules also permit financial institutions required by the BSA to establish AML Programs and associations of such financial institutions to share information regarding individuals and other persons involved in possible terrorist activity or money laundering. FCMs and IBs are required to establish AML Programs, and thus are permitted to share information with other financial institutions that are required to establish AML Programs, such as other FCMs, IBs, broker-dealers, and banks.

Financial institutions and associations of financial institutions that intend to share information must file, on a yearly basis, a notice with Treasury’s Financial Crimes Enforcement Network (FinCEN). A copy of the notice is included as Appendix A to the final rules.

Additional Resources

FinCEN, which has delegated authority to issue regulations requiring financial institutions to keep records and file reports on certain financial transactions, provides general information and updates about AML and the BSA relevant to all financial institutions. FinCEN also issues advisories that pertain to transactions involving certain jurisdictions.
OFAC administers and enforces economic and trade sanctions against targeted foreign countries, terrorism sponsoring organizations and international narcotics traffickers.
Treasury and the Department of Justice jointly issued their annual National Money Laundering Strategy in July 2002.
The Securities and Exchange Commission (SEC) provides links to AML requirements that pertain to regulated securities firms.
National Futures Association, a registered futures association, issues AML rules applicable to its membership, provides regulatory updates concerning BSA amendments relevant to the futures industry, and offers web-based AML training for FCMs and IBs, under CFTC oversight.
NASD, a national securities association, issues AML rules applicable to its membership, provides regulatory updates concerning BSA amendments relevant to the securities industry, and offers web-based AML training for securities brokers and dealers, under SEC oversight.
The Financial Action Task Force on Money Laundering (FATF), an inter-governmental organization whose members include 29 countries and two international organizations, sets forth the international framework for AML efforts in its Forty Recommendations on money laundering and eight special recommendations on terrorist financing. FATF also maintains a list of non-cooperative countries and territories.
The State Department’s Economic Perspectives – The Fight Against Money Laundering.
United Nations’ International Convention for the Suppression of the Financing of Terrorism.
The Office of the Comptroller of the Currency issued AML Guidance for bankers.
Interpol’s activities in the areas of money laundering and terrorist financing.
The Council of Europe’s Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crimes.
The Wolfsberg Principles for international private banks.
The The Department of State's list of foreign terrorist organizations.

Any questions regarding the content of this page or the AML
requirements applicable to futures professionals may be directed to:

The Commodity Futures Trading Commission
Attn: AML Staff Working Group
Three Lafayette Centre
1155 21^st Street, N.W.
Washington, D.C. 20581

AMLstaff@cftc.gov