Know Your Customer Patriot Act and Banking Regulations in the US

The US Patriot Act is a law that requires financial institutions to verify the identity of their customers. This law was enacted in 2001 in response to the 9/11 terrorist attacks.

Financial institutions are required to implement anti-money laundering (AML) and know your customer (KYC) policies to prevent illicit activities. These policies involve verifying a customer's identity and reporting suspicious transactions.

To comply with the US Patriot Act, financial institutions must obtain a customer's name, address, date of birth, and Social Security number. They must also verify the customer's identity through government-issued documents such as a driver's license or passport.

Financial institutions must also report suspicious transactions to the Financial Crimes Enforcement Network (FinCEN).

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Customer identification and verification are crucial steps in ensuring that financial institutions comply with the USA Patriot Act. Financial institutions have a duty to verify their customers' identities, which involves verifying personal details, maintaining records, and checking customers against lists of known or suspected terrorists.

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To verify personal details, financial institutions must collect and verify four pieces of identifying information, including name, date of birth, address, and identification number. This is in accordance with the Customer Identification Program (CIP) requirements.

Financial institutions must also screen their customers against lists of known or suspected terrorists, such as the Specially Designated Nationals List (SDNL) maintained by the United States' Office of Foreign Assets Control (OFAC). This is a critical step in preventing money laundering and terrorism financing.

Here are the key steps in customer identification and verification:

A Customer Identification Program (CIP) is required for financial firms to obtain four pieces of identifying information about a client, including name, date of birth, address, and identification number. This ensures that financial institutions have a thorough understanding of their clients.

The CIP process involves verifying personal details as accurately as possible, maintaining records to facilitate ongoing identification, and checking customers against lists of known or suspected terrorists and terrorist organizations. This helps prevent money laundering and terrorism financing.

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Financial institutions must develop and implement their own CIP to comply with regulations. The program should be tailored to the institution's unique needs and vulnerabilities, as well as the risk profiles of its clients.

Here are the four pieces of identifying information required for a CIP:

By implementing a CIP, financial institutions can ensure they are complying with regulations and protecting themselves against potential financial and reputational damage.

Section 314(a) is a crucial part of the USA Patriot Act that requires financial institutions to take action when they receive a list of suspected individuals or entities involved in money laundering or terrorism financing.

This list, known as the USA Patriot Act Section 314(a) list, is provided by FinCEN to financial institutions during criminal investigations. The list includes names of individuals or entities suspected of AML/CFT offenses or other criminal activities.

Financial institutions must conduct a record search for any accounts currently maintained by the suspected individual or that have been active within the past 12 months, and for any transactions carried out by (or on behalf of) the suspected individual during the past 6 months.

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Here's what financial institutions must do if they identify an account or transaction activity associated with the listed individual:

Financial institutions must submit reports to FinCEN and designate a contact to handle similar requests in the future. These reports are highly confidential and do not require financial institutions to close accounts or refuse to do business with a listed suspect.

Financial institutions must develop and implement their anti-money laundering program, which emphasizes several mandatory checks and screening capabilities. This program must be built around specific criteria, including developing internal policies, procedures, and controls.

An AML Compliance Officer must be appointed to oversee the anti-money laundering program, and employees must receive ongoing anti-money laundering training. The anti-money laundering program must also be independently audited regularly.

There is no one-size-fits-all solution to the USA Patriot Act anti-money laundering compliance requirements. Each financial institution must tailor its program to its unique needs and vulnerabilities, as well as the risk profiles of its clients.

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An effective anti-money laundering program protects its firm against financial and reputational damage that results from association with criminal activities. It also helps prevent illegal activity, specifically money laundering.

Here are the key components of an anti-money laundering program:

Financial institutions must also consider factors like the size and location of their institution and the business activities of their customers when developing their anti-money laundering program. This program must be flexible enough to adapt should those factors change.

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Financial institutions must submit a Suspicious Activity Report (SAR) to the Financial Crimes Enforcement Network if they detect suspicious activity in a customer's account.

The SAR must be submitted using the Bank Secrecy Act (BSA) e-filing system.

Financial institutions must also complete a Currency Transaction Report (CTR) when a single individual makes a transaction worth more than $10,000 in a single business day.

CTR requirements were implemented by the BSA.

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Financial institutions must use reasonable diligence when opening and maintaining client accounts and know and keep records on the profile of each customer, as stated in FINRA Rule 2090.

FINRA Rule 2111 requires broker-dealers to have a reasonable basis to believe that a recommendation is suitable for a customer based on their financial situation and needs.

The Financial Crimes Enforcement Network (FinCEN) has the authority to assess civil penalties, as delegated by the Secretary of the Treasury.

State regulatory agencies, such as the New York State Department of Financial Services, also have the power to impose civil penalties.

The Bank Secrecy Act of 1970 was enacted to restrict secret overseas bank accounts and aid law enforcement by requiring financial firms to disclose and retain records. This law has been extensively revised by the Patriot Act in 2001.

Financial institutions in the US are required to file reports of cash transactions exceeding $10,000, known as cash transaction reports (CTRs). They must also report suspicious activity that could indicate money laundering, tax evasion, or other criminal activities, known as suspicious activity reports (SARs).

The Bank Secrecy Act's definition of a "financial institution" includes casinos, highlighting the law's broad scope.

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In the banking sector, KYC requirements are in place to identify customers and beneficial owners of businesses, review accounts for suspicious activity, and maintain accurate records.

Banks must file cash transaction reports for transactions exceeding $10,000 and report suspicious activity that could indicate money laundering or tax evasion.

KYC involves reviewing the nature and purpose of customer relationships to ensure compliance with regulations.

Banks in the banking sector are required to identify their customers, beneficial owners of businesses, and the nature and purpose of customer relationships.

To do this, banks must collect and verify customer information, which helps prevent money laundering and other financial crimes.

Banks must also review customer accounts for suspicious and illegal activity, such as large cash transactions or unusual account behavior.

The BSA introduced the CTR requirements for financial institutions, which require them to file a report in the proper format for transactions greater than $10,000 made by one person in one business day.

This includes aggregated transactions where the financial institution believes they are on behalf of the same person, and the report must be filed even if the transaction is not suspicious.

Banks must maintain and ensure the accuracy of customer accounts, which involves keeping records of customer transactions and updating customer information as needed.

The USA Patriot Act expanded the Bank Secrecy Act's legislative scope, adding new AML/CFT provisions, including BSA compliance.

To comply with the Bank Secrecy Act, financial institutions must implement anti-money laundering and combating the financing of terrorism measures.

The Bank Secrecy Act requires financial institutions to maintain records of all transactions, including cash transactions exceeding $10,000.

BSA compliance involves reporting suspicious activity to the Financial Crimes Enforcement Network (FinCEN).

KYC compliance is crucial for financial institutions to verify customers and know their risk and financial profiles.

Two rules governing KYC include FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability).

FINRA Rule 2090 requires broker-dealers to use reasonable diligence when opening and maintaining client accounts and to know and keep records on the profile of each customer.

FINRA Rule 2111 requires broker-dealers to have a reasonable basis to believe that a recommendation is suitable for a customer based on the client's financial situation and needs.

The SEC requires that each new customer provide detailed financial information before opening an investment or banking account.

The SEC requires that each new customer provide detailed financial information before opening an investment or banking account, which includes a customer identification program (CIP).

Three components of KYC include the customer identification program (CIP), customer due diligence (CDD), and enhanced due diligence (EDD).

The customer identification program (CIP) requires customers to provide a personal identification profile.

Customer due diligence (CDD) involves reviewing the customer's financial information and risk profile.

Enhanced due diligence (EDD) is required for high-risk customers or transactions.

Here is a summary of the key takeaways for KYC compliance:

Cryptocurrency platforms are considered money services businesses (MSBs) and must comply with anti-money laundering (AML) laws, which require customer identification programs and certain reporting and recordkeeping procedures.

These platforms must implement special measures, including additional record keeping for and reporting of certain transactions, to prevent money laundering.

The collection of information relating to beneficial ownership of accounts is also a key requirement for cryptocurrency platforms.

Here are some specific special measures that cryptocurrency platforms must implement:

Fiat-to-crypto exchanges, which facilitate transactions involving fiat currencies and cryptocurrencies, also employ a measure of KYC and financial institutions would have vetted their customers according to KYC requirements.

Cryptocurrency is a decentralized medium of exchange that promotes confidentiality, but it also presents challenges in preventing money laundering. Criminals see cryptocurrency as a vehicle to launder money.

Most cryptocurrency platforms are considered money services businesses (MSBs) and must comply with anti-money laundering (AML) laws. These laws require customer identification programs and certain reporting and recordkeeping procedures.

Fiat-to-crypto exchanges facilitate transactions involving fiat currencies and cryptocurrencies, and most of these exchanges employ a measure of KYC. They would have vetted their customers according to KYC requirements.

The penalty for violating anti-money laundering laws can be severe, as seen in the case of Bitcoin mixer Larry Dean Harmon.

The Patriot Act requires financial institutions to implement special measures for foreign jurisdictions, financial institutions, and transactions that are of primary money laundering concern.

These special measures include additional record keeping for, and reporting of, certain transactions.

Financial institutions must also collect information relating to beneficial ownership of accounts, as well as certain 'payable through' accounts.

The collection of information relating to correspondent accounts is also a part of these special measures.

Financial institutions may be prohibited from opening correspondent or 'payable-through' accounts, or may be required to impose conditions on their opening.

Here are some of the specific special measures that financial institutions must implement: