Interim Rule that Non-financial Trades Report Certain Currency Transactions
Suspicious Transaction Reporting Rule Effective Date for Money Transmitters
Suspicious Activity Reporting of Broker-Dealers
Proposed Rule on Correspondent Accounts


The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (the USA Patriot Act)(1), passed in the wake of the incidents of September 11 2001, places significant new compliance requirements on financial institutions with respect to the prevention of money laundering.

The act requires the US Department of the Treasury, the Federal Reserve Board and other federal agencies to engage in rulemaking to determine the specific measures which financial institutions must take in order to comply with the act's anti-money laundering provisions. On November 20 2001 the Treasury initially responded to this mandate by issuing interim guidance covering Sections 313(a) and 319(b) of the act.(2) On November 26 2001 the Federal Reserve Board issued a supervisory letter dealing with similar concerns.(3) On December 20 2001 the Treasury issued a press release that referenced three proposed rules, one interim rule and one final rule, and set them forth to be published in the proposed new Part 103.30 and Part 104 to Title 31 of the Code of Federal Regulations.

These new rules are significant because they define the term 'account' broadly enough to require broker-dealers to obtain certificates from foreign individuals and entities having 'accounts' with them, and because suspicious activity reports would now be required from broker-dealers as well as commercial banking entities. Additionally, non-bank trades and businesses will be required to report cash transactions of more than $10,000 (or two related transactions involving more than $10,000). Finally, money transmitters and issuers, sellers and redeemers of money orders and cheques were reminded of the January 1 2002 effective date for a previously adopted requirement to report suspicious transactions.

The Treasury’s proposed rules and changes were not unexpected, as they were mandated by the USA Patriot Act. Nevertheless, the rapid release of proposed and interim rules emphasizes the determination of the Bush administration to deal quickly and effectively with the financial underpinnings of terrorism.

Interim Rule that Non-financial Trades Report Certain Currency Transactions

Section 365 of the USA Patriot Act added a new Section 5331 to the Bank Secrecy Act(4) to require that any person engaged in a trade or business who receives in the course of such business or trade more than $10,000 in one transaction (or two or more related transactions) must file a report about the transaction with the Financial Crimes Enforcement Network (FinCEN). Pursuant to this authority, the Treasury issued an interim rule, set forth at 31 CFR 103.30 and effective January 1 2002, which requires reporting to FinCEN essentially the same types of transactions that are already required to be reported under the Internal Revenue Code and regulations.(5)

For purposes of the interim rule, 'currency' includes foreign currency and any monetary instrument, whether or not in bearer form, with a face amount of not more than $10,000. Currency in excess of $10,000 received by a person for the account of another must be reported under this section. In addition, currency in excess of $10,000 received by agents from a principal must be reported unless the agent uses all of the currency within 15 days in a currency transaction (the 'second currency transaction'), which is reportable under the Banking Secrecy Act. To comply with this exception, the agent must also disclose certain identifying information about the principal to the recipient in the second currency transaction. Where multiple payments relating to a single transaction are concerned, a report must be made within 15 days of receipt of payment if the initial payment exceeds $10,000. If the initial payment is less than $10,000, the report need not be made until the aggregate payments exceed $10,000, and such report is due within 15 days of the payment that caused the aggregate to exceed $10,000. In addition to any other required report, a report must be made each time that previously unreportable payments made within a 12-month period with respect to a single transaction (or two or more related transactions), individually or in the aggregate, exceed $10,000. The report must be made within 15 days of receipt of the payment in excess of $10,000.

The interim rule provides that persons required to report a transaction under Section 365 of the USA Patriot Act must make that report by filing a joint FinCEN/IRS form with the Internal Revenue Service. Only one form is required to be filed under this dual-reporting regime.

Suspicious Transaction Reporting Rule Effective Date for Money Transmitters

The Treasury also released FinCEN Issuance 2001-2 to serve as a reminder of the January 1 2002 effective date of its final rule requiring money transmitters and issuers, sellers and redeemers of money orders and traveller’s cheques to begin reporting suspicious transactions to FinCEN.(6) Reports of suspicious transactions must be filed no later than 30 calendar days after the initial detection of facts that might indicate suspicious activity. These reports are to be filled out on a standardized form called the Suspicious Activity Report—MSB. Until this form is made available, the existing bank suspicious activity report, Form TD F 90-22.47, may be used.

Suspicious Activity Reporting of Broker-Dealers

Requirement to file suspicious activity reports
The act also directs the Treasury to promulgate rules requiring registered broker-dealers to submit suspicious activity reports.(7) Proposed Part 103.30 would require broker-dealers to report two categories of suspicious transactions. The first category is transactions that involve or aggregate funds or other assets of at least $5,000 where the broker-dealer knows or suspects that the transaction is being used in any way to facilitate a federal criminal violation or a pattern of criminal violations.(8) The second category has no monetary threshold, but requires reporting of a transaction which the broker-dealer knows or has reason to suspect might involve funds or assets that are:

  • derived from illegal activity;
  • intended to hide or disguise funds or assets derived from illegal activity;
  • designed or structured to evade any requirement or rule promulgated under the Banking Secrecy Act; or
  • seemingly without a business or lawful purpose.(9)
According to the Treasury, whether a report is required to be filed must be “based on all the facts and circumstances relating to the transaction and customer of the broker-dealer in question”.(10)

New Reporting Form SAR-BD
A suspicious activity report must be filed with FinCEN on the forthcoming form Suspicious Activity Report-BD (SAR-BD) and must be filed within 30 days of the broker-dealer becoming aware of the suspicious transaction. For occurrences that require more immediate attention, the Treasury is creating a special provision that will allow broker-dealers to telephone law enforcement authorities and the Securities and Exchange Commission (SEC) to report the transaction. The proposed rules also require broker-dealers to collect and maintain supporting documents concerning the SAR-BD for submission to law enforcement agencies upon request.

Other considerations
Some amendments to the act, designed to facilitate suspicious activity reporting, shield financial institutions from legal liability in any jurisdiction in the United States (including in arbitration proceedings) for reporting the information, and prohibit a broker-dealer from disclosing to any person involved in the transaction the fact that the broker-dealer has filed an SAR-BD concerning the transaction.(11) The law provides and Treasury comments indicate that the prohibition would even forbid disclosing the filing of an SAR-BD to the arbitrator in an arbitration proceeding.(12) Other amendment provisions permit the disclosure of the information contained in an SAR-BD (but not the fact of the filing of an SAR-BD) in a written termination notice (ie, Form BD-5) or employment reference submitted to a self-regulatory organization registered with the SEC or Commodity Futures Trading Commission.(13)

Anti-money laundering compliance programmes
The Treasury also reiterated the act’s requirement that financial institutions are to have an anti-money laundering programme in place by April 24 2002.(14) The Treasury stated that detecting and reporting suspicious activity “should be the focus of a broker-dealer’s anti-money laundering compliance programme”.(15)

Proposed Rule on Correspondent Accounts

The Treasury Department also issued a notice of proposed rulemaking with respect to correspondent accounts. The proposed rule would essentially formalize and finalize key provisions of the guidance issued on November 20 2001.

Broad definition of 'correspondent account'
Section 313(a) of the USA Patriot Act provides that, effective December 25 2001, a covered financial institution “shall not establish, maintain, administer or manage a correspondent account in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country”.(16) The terms 'covered financial institution'(17) and 'correspondent account'(18) are broadly defined the act. Examples of correspondent accounts include:

  • transaction accounts;

  • clearing and settlement accounts; and

  • other accounts maintained by foreign banks with US banks such as 'fiduciary accounts' (ie, escrow and custody accounts), time deposit and money market time deposit accounts, even if used for the limited purpose of transactions processing.

The Treasury further indicated that if a US bank engages in transactions with a foreign bank in securities, derivatives, repurchase agreements or foreign exchange, and such transactions involve an account, such transactions would also be covered by the definition of 'correspondent account'.(19)

Certification requirements.
Section 312(a) of the USA Patriot Act (adopting new Banking Secrecy Act Section 5318(i)) requires a covered financial institution to take reasonable steps to ensure that the correspondent accounts it maintains on behalf of foreign banks are not used indirectly to provide banking services to foreign shell banks that are not regulated affiliates. This section also directs the Treasury to specify what would be considered 'reasonable steps'.(20) Pursuant to this mandate, the Treasury introduced in the guidance a model certification form that could be used to satisfy the 'reasonable steps' diligence.(21) Proposed Part 104 enhances this compliance standard by requiring that information obtained by a covered financial institution from a foreign bank be verified at least once every two years, and immediately if the covered financial institution has reason to believe that any of the previously obtained information is no longer correct.(22) A modified version of the model certification and a separate form that can be used for biennial and interim verification compliance needs - a 'recertification form' - are incorporated into Part 104.(23) Timely use of these forms by a covered financial institution is considered by the Treasury to be a 'safe harbour' for purposes of compliance under Section 312(a) of the USA Patriot Act.(24)

Application of correspondent account rules to broker-dealers
One unresolved issue is the regulation of 'accounts' maintained by foreign financial institutions at registered broker-dealers. Although Congress defined 'correspondent accounts' broadly for the purposes of Sections 312(a) and 313(a) of the USA Patriot Act, the term as statutorily defined seemed to apply only in the context of the relationship between a domestic bank and a foreign financial institution. At the same time, however, Congress included a provision in the act which directed the Treasury to define by rule which, if any, 'accounts' maintained by broker-dealers are similar to 'correspondent accounts', and if so, to bootstrap them into the relevant provisions of the act.(25) The Treasury proposes to do exactly this, and has stated that it “intends to maintain parity in treatment” between banks and broker-dealers concerning “functionally equivalent accounts” held at these covered financial institutions by foreign banks.(26) Thus, under the proposed rule, an 'account' held at a broker-dealer by a foreign bank that is similar to an account at a bank would be viewed as a 'correspondent account' by the Treasury and regulated in the same manner. Under the proposed rule, the term 'account' would be broadly defined to include the following:

  • accounts to purchase, sell, lend or otherwise hold securities for or on behalf of the foreign bank or its customers;

  • prime brokerage accounts that consolidate trading done at a number of firms;

  • accounts for trading foreign currency;

  • custody accounts;

  • over-the-counter derivatives accounts; and

  • futures accounts maintained by broker-dealers that are dually registered as futures commission merchants.(27)

The Treasury did not go as far as its statutory authority allowed in this area, in that these proposed rules apply only to accounts held at broker-dealers by foreign banks (ie, depository institutions). It is possible that future proposed regulations may seek to apply similar rules to accounts held by non-bank financial institutions (ie, trusts and mutual or hedge funds).

Required ownership records for correspondent accounts.
Section 319(b) of the USA Patriot Act (adopting new Banking Secrecy Act Section 5318(k)) requires covered financial institutions to maintain records in the United States that identify the owners of each foreign bank for which it holds a correspondent account, and the name and address of a person who resides in the United States who has agreed to accept service of legal process with respect to the account.(28) In the guidance and in its definition under Part 104, the Treasury gives the term 'owner' three different constructions: 'large direct owner',(29) 'reportable small direct owner'(30) and 'indirect owner'.(31) These constructions are designed to take into account the complexity of ownership relationships to include any person who has the ability to exert influence over the operations of a foreign bank.(32) If the person’s ownership relationship with a foreign bank falls within one of the three constructions, and if the foreign bank holds a correspondent account with the covered financial institution, then the covered financial institution must “maintain records” on the person under Section 319(b).

The Treasury avoided proposing rules that would describe what specific measures taken by a covered financial institution would meet the requirement to 'maintain records'. However, the proposed rules do contain a provision that allows covered financial institutions to comply with the certification 'safe harbour' as a way of satisfying the requirement.(33) Alternatively, in cases where a foreign bank maintains a US branch or agency and files an Annual Report (FR Y-7) with the Federal Reserve, the Treasury stated that a covered financial institution may rely on the relevant information contained therein to meet its 'maintain records' compliance obligations.(34) A covered financial institution that does not obtain sufficient information from a foreign bank in order to satisfy Section 319(b) of the act is required by the Treasury to terminate its correspondent account relationship with the foreign bank.(35)

For further information on this topic please contact Connie Friesen at Sidley Austin Brown & Wood LLP by telephone (+1 212 906 2000) or by fax (+1 212 906 2021) or by email ([email protected]).


(1) Pub L 107-56 (October 26 2001). Unless otherwise stated, all section citations refer to the act.

(2) 66 FR 59342 (November 20 2001).

(3) See SR 01-29 (November 26 2001).

(4) 31 USC Section 5311 et seq.

(5) 31 CFR 103.30. See also, companion piece, "Notice of Proposed Rulemaking by Cross-Reference to Interim Rule" (requesting comments for final rule).

(6) See 31 FR 13683 (March 14 2000).

(7) Section 356(a).

(8) 31 CFR 103.19(2)(i).

(9) 31 CFR 103.19(2)(ii).

(10) See 31 CFR 103.30 (supplementary information to proposed rule).

(11) Section 351(a) (new Banking Secrecy Act Section 5318(g)(3)).

(12) See 31 CFR 103.30 (supplementary information to proposed rule).

(13) Section 351(b) (new Banking Secrecy Act Section 5318(g)(2)).

(14) See Section 352 (new Banking Secrecy Act Section 5318(g)).

(15) See 31 CFR 103.30 (supplementary information to proposed rule).

(16) 31 CFR 313(a).

(17) See Section 313(a) (new Banking Secrecy Act Section 5318 (j)(1) (defining 'covered financial institution' to include US financial institutions set forth in 31 USC 5312(a)(2) (A) through (G): insured banks, commercial banks or trust companies, private bankers, agencies or branches of foreign banks in the United States, credit unions, thrift institutions and registered brokers and dealers; also includes corporations organized under Section 25A of the Federal Reserve Act).

(18) See Section 311(a) (new Banking Secrecy Act Section 5318A(e)(1) (defining 'correspondent account' to include an account “established to receive deposits from, make payments on behalf of a foreign bank, or handle other financial transactions related to such banks”).

(19) See 31 CFR 104 (supplementary information to proposed rule).

(20) Section 311(a) (new Banking Secrecy Act Section 5318A(e)(2)).

(21) 31 CFR 104.40(a)(2)(iv).

(22) 31 CFR 104.40(a) and (b).

(23) 31 CFR 104 (appendices A and B) (displaying form of “Certification Regarding Correspondent Accounts” and form of “Recertification Regarding Correspondent Accounts”).

(24) 31 CFR 104.40(d) (outlining caveats to the safe harbour with respect to the effective date of the final version of the proposed rules and the date of the opening of a correspondent account of a foreign bank by the covered financial institution).

(25) See 31 USC Section 5318A(e)(2).

(26) See 31 CFR 104 (supplementary information to proposed rule).

(27) Separately, the Treasury seeks comments on several aspects of its proposed rules concerning correspondent accounts, including comments on the breadth of its definition of 'correspondent accounts', possible adverse business implications stemming from the breadth, and whether some types of accounts should be excluded from the definition because they are not so susceptible to being used in criminal transactions.

(28) See Section 319(b) (Banking Secrecy Act Section 5318(k).

(29) See 31 CFR 104.10(g)(1) (defining a 'large direct owner' as a person who owns, controls, or has the power to vote 25% or more of any class of voting shares (or other voting interests), or controls in any manner the election of a majority of the directors (or individuals exercising similar functions) of a foreign bank).

(30) See 31 CFR 104.10(g)(3) (defining a 'reportable small owner' as a person who is not a large direct owner but who in association with others in the aggregate owns 25% or more of any class of voting shares or other voting interests of the foreign banks and is majority owned by the same person or by the same chain of majority owned persons, to include each such person who is majority owned by another such person and where all such persons in the aggregate own 25% or more of any of the voting shares (or other voting interests) of a foreign bank, excluding all such persons who own or control less than 5% of the voting shares (or other interests) of the foreign bank).

(31) See 31 CFR 104.10(g)(4) (defining an 'indirect owner' as any person in the ownership chain of any large direct owner who is not majority owned by another person or any person who meets the definition of a reportable direct owner in the ownership chain of any reportable small direct owner who is not majority owned by another person).

(32) See 31 CFR 104 (supplementary information to proposed rule).

(33) 31 CFR 104.40(b).

(34) 31 CFR 104 (supplementary information to proposed rule).

(35) 31 CFR 104 (supplementary information to proposed rule).