Introduction
Special Measures
Due Diligence
Impact on Swiss Banking
Concentration Accounts
Wire Transfers
Conclusion
Postscript
On October 26 2001 US President Bush signed into law an omnibus-type anti-terrorist bill, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, commonly referred to as the USA Patriot Act, to enable various US law enforcement and governmental agencies to combat terrorism more effectively. Embedded within this legislation was a specific title addressing financial crime in general under the auspices of money laundering and terrorism (the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001). This update focuses on the legislative provisions of this title impacting on Swiss banks as regards their contacts with and operations in the US markets.
Broken down into three subparts, this title has been officially designated as 31 USC 5318 and shall be inserted into existing US law under that section. The three subsections are as follows:
- International Counter Money Laundering and Related Measures;
- Banking Secrecy Act Amendments and Related Improvements; and
- Currency Crimes and Protection.
This update addresses the key issues under these subsections as they apply to Swiss banks as foreign financial institutions. (Citations will refer both to the law's placement within the United States Code and in brackets [ ] to the location within the legislation designated [HR 3162], as there may be some delay before these changes appear in the official text of the USC.)
The new law affecting Swiss financial institutions provides for extra-territorial US jurisdiction, US reporting, forfeiture and enhanced due diligence requirements, regulates Switzerland-based US correspondent and interbank accounts, and vests broad powers in the US secretary of the treasury to enact discretionary temporary (120-day) special measure regulations (which may become permanent upon his compliance with current ordinary rule-making authority notice and publication). Further, the law is linked to the blacklists issued by such intergovernmental organizations as the Group-7 Financial Stability Forum (FSF), the Organization for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF). (See Switzerland under Scrutiny from International Financial Sector.)
The most far-reaching elements of the law are in the first subsection relating to international counter-money laundering rules, which grants broad discretion to the US secretary of the treasury to pass temporary 'special measures' that purport to regulate under US law and jurisdiction various aspects of international banking transactions and operations with respect to:
- jurisdictions outside the United States;
- financial institutions as defined in the law, including both US and Swiss banks, operating outside the United States;
- one or more classes of financial transaction within or involving one or more jurisdictions outside the United States; and
- one or more types of bank or financial accounts.
This granting clause specifically states that the secretary "may" enact appropriate anti-money laundering rules, thus clearly vesting broad discretionary powers in the secretary (31 USC 5318A (b); [Title III, Section 311]).
Further, the secretary may pass rules regarding the identification and maintenance by such financial institutions of records relating to one or more financial transactions originating from or aimed towards one or more foreign jurisdictions. This record-keeping duty of the bank or non-bank entity, as defined under the term 'financial institution', includes, but is not limited to, recording and maintaining on record:
- the identity and address of the financial transaction participants (including the identity and address of the originator);
- the legal capacity in which the participants are acting in such transaction;
- the determination of the 'beneficial owner or owners' (the precise definition for this section to be determined by the secretary); and
- descriptions of the transactions (31 USC 5318A (b) (2); [Title III, Section 311]).
It will be interesting to see the extent to which the secretary mandates application in this respect of the Wolfsberg Principles on international banking due diligence, adopted on October 30 2000 by 11 of the world's leading international banks (for further details please see International Cooperation and Swiss Banking Secrecy.)
The secretary may also enact rules, prohibitions and conditions on Switzerland-based US correspondent accounts, private banking accounts, 'payable-through' accounts, 'transaction' accounts and 'concentration' accounts, as defined in the act and elsewhere in US law. For example, Swiss financial institutions with US correspondent and/or 'payable-through' accounts, as stated specifically in the law, must identify, record and maintain (available for production in the United States pursuant to service of a summons or subpoena requesting same) the identity of and information on each customer utilizing the account to the same extent that a US financial institution would be required to do so under the new law. This particular topic receives significant attention in the legislation, and not only allows for stepped-up reporting and required record-keeping in relation to such accounts, but also permits the secretary to prohibit or set conditions on the establishment, maintenance and operation of such accounts by US financial institutions. (31 USC 5318A (a)(1); [Title III, Section 311]). Further, the secretary may target specific foreign jurisdictions as regards this rule-making authority (31 USC 5318A (c)(1 and 2) [Title III, Section 311]), a reference to the act's linkage to the FSF, OECD, and FATF blacklists (31 USC 5318A (c)(2)(A)(v); see also 31 USC 5318 (a)(i)(2)(A)(ii)(I) [Title III, Section 312]).
Another subsection of the law calls for upgraded due diligence procedures to be required of US financial institutions, and new requirements for US financial institutions that establish, maintain or operate correspondent, private banking and/or payable-through accounts for Swiss banks.
For example, the act requires any US financial institution that establishes, maintains, administers or manages a US correspondent or private bank account for a non-US person, including an individual visiting the United States, to use affirmatively appropriate, specific and where necessary enhanced due diligence procedures in order to detect and deter money laundering involving all foreign persons or their representatives (31 USC 5318 (i); [Title III, Section 312]).
Moreover, enhanced standards have been established for certain correspondent accounts defined as those held by foreign banks under an 'offshore' banking licence or a banking licence issued by a foreign country that has been designated as either: (i) non-cooperative with international money laundering principles or procedures by an intergovernmental group (eg, FSF, OECD or FATF) or an international organization of which the United States is a member (eg, United Nations, International Monetary Fund or the World Bank); or (ii) warranting special measures due to money laundering concerns by the secretary (31 USC 5318 (a)(i)(2)(A)(ii)(I&II); [Title III, Section 312]).
The law stipulates that within 120 days new rules shall be enacted by the secretary to provide for information sharing between financial institutions and the US federal authorities, as well as to require that each financial institution designate one or more persons to receive information concerning and to monitor accounts of individuals, entities and organizations identified pursuant to the new law. A 'safe harbour' is also created under the legislation, shielding from criminal and civil liability any financial institution making disclosures pursuant to rules or legislation of suspected activity regarding financial transactions.
Of obvious concern to Swiss banks is the effect which the new law will have on their day-to-day US and international banking activity. This question cannot be completely answered at this time due to the wide rule-making discretion vested in the US secretary of the treasury under the legislation. As such, the impact of this new law in terms of US compliance measures required of Swiss financial institutions could be anywhere from very light to overly burdensome, depending on the approach adopted by the various US governmental agencies, and especially the US Treasury, in order to implement their newly legislated mandates in the fight against international money laundering and financing of terrorism.
However, there will clearly be several immediate effects on Swiss financial institutions' US correspondent banking relationships and the financial transactions occurring on such accounts (eg, pay-through, wire transfers, clearing, private banking, deposits, withdrawals and transfer operations) in respect of mandatory enhanced due diligence measures, record-keeping requirements and the need to appoint a US resident agent for service of process requesting production of the foreign bank's US and foreign bank records in respect of same. In addition, new US regulations may be issued by the secretary at any time, in the form of either or both temporary special measures valid for 120 days, unless renewed, or by ordinary rule-making regulatory authority. Swiss banks must also take into account the risks of non-compliance on their US operations in this respect.
Forfeiture
The first such risk is that of forfeiture. The new law enacts a forfeiture clause that gives the US government the ability to restrain, seize or arrest the interbank account, (ie, the US correspondent account(s) of foreign banks located in the United States) if the funds that the United States is seeking to seize are located or deposited in that foreign bank's accounts abroad. This means that the United States may now seize a Swiss bank's US interbank account in lieu of the actual funds located abroad. 'Interbank account' is defined in 18 USC Section 984 (c)(2)(B) as an account held by one financial institution at another financial institution primarily for the purpose of facilitating customer transactions. The forfeiture clause goes further, stating that there is no requirement to 'trace' said funds as being part of the funds deposited in the foreign bank's accounts abroad. (18 USC 981 (k); [Title III, Section 319 (a)]).
Records and correspondent accounts
The second risk relates to the enforced production in the United States of Swiss bank documents covered by banking secrecy. Under the same subsection governing seizure of a foreign bank's US correspondent banking assets, the law sets forth conditions concerning the production of bank records by foreign banks. It provides that the US secretary of the treasury or the US attorney general may issue a summons or subpoena to any Swiss bank or financial institution maintaining one or more correspondent accounts in the United States and request records related to any such account(s), including records maintained outside the United States relating to the deposit of funds into the Swiss bank or financial institution. (31 USC 5318 (k) (3) (A) (i); [ Title III, Section 319 (b),(c)]).
The law states that within 60 days of enactment, any US financial institution maintaining a correspondent account in the United States must require that the Swiss bank or financial institution designate the name and address of a person resident in the US authorized to accept service of legal process on behalf of the Swiss bank or financial institution requesting production of records regarding the correspondent account. (31 USC 5318 (k) (3) (B) (i); [Title III, Section 319(b),(c)]). This appears to impose a positive duty on US financial institutions providing custodial, clearing, withholding, payment, collection, transfer, letters of credit, commercial, agency, private banking and/or correspondent services to Swiss financial institutions to assure that their foreign correspondents have designated a US person for service of process, as a condition in order to maintain their US correspondent accounts.
In addition, within 10 days of receipt of notice from the secretary of the treasury, a US financial institution must terminate its correspondent relationship with a Swiss financial institution, based on the latter's failure to comply with a summons or subpoena issued under this law, where the Swiss bank or financial institution has failed to file proceedings in a US court contesting the subpoena or summons (31 USC 5318 (k)(3)(C)(i); [Title III, Section 319(b)]). This means that a Swiss bank or financial institution will either have to comply with the subpoena or summons for production of its US correspondent banking records and/or customer identification and transactional records in respect of the correspondent account, or file in a US court contesting the subpoena or summons. In essence, the Swiss bank or financial institution will have to either produce the banking records requested, including the possibility of home-jurisdiction banking records subject to foreign law and banking secrecy, or face the termination of its banking relationship(s) with the United States and/or US contempt charges. Moreover, should the Swiss bank or financial institution challenge the subpoena or summons by filing in the US courts, this action - if not permitted by special motion or appearance under US rules - might be considered a waiver of US jurisdiction and subject the bank to a valid adverse US decision and therefore foreign judgment enforceable in its home jurisdiction, and/or entailing further judicial actions and liabilities. As such, these are issues which any Swiss bank or financial institution active in the US markets will have to consider carefully in its response to any US request for production of its banking records related to its US correspondent account(s).
The US laws governing termination of US correspondent banking relationships also provide a safe harbour to US financial institutions, shielding them from liability arising from terminating a correspondent bank account based on failure of the Swiss bank or financial institution to produce its banking records pursuant to service on it of a summons or subpoena. The new law on the other hand imposes a $10,000 per day fine on the US financial institution for failure to terminate a correspondent bank relationship, if so ordered by the US secretary of the treasury or attorney general (31 USC 5318 (k) (3)(C) (ii), (iii); [ Title III, Section 319(b)]).
The law also sets minimum requirements relating to so-called 'concentration' accounts. At present, this term is defined neither in the new law nor elsewhere in US regulations or the USC. However, by negative reference the new law stipulates that financial institutions shall ensure that such accounts are not used to prevent association of the identity of an individual bank customer with the movement of funds of which that customer is the direct or beneficial owner (31 USC 5318 (h)(3); [Title III, Section 325]). The new law states that financial institutions - that is, both domestic and foreign financial institutions - shall prohibit clients from directing transactions that move their funds into, out of or through concentration accounts. The new law further requires that financial institutions establish written procedures governing the documentation of all transactions involving a concentration account, such that where funds of one or more customers are commingled, the identity of and specific amount belonging to each customer is documented. (31 USC 5318 (h)(3)(C); [Title III, Section 325]). Once again, the secretary may issue more stringent regulations governing such accounts as per its discretionary powers.
Wire transfers have been addressed by placing a duty on the secretary of the treasury, in consultation with the attorney general and the secretary of state, to take all reasonable steps to encourage foreign governments to require the inclusion of the originator's name on all wire transfer instructions, with this information to remain with the transfer until disbursement [Title III, Section 328(1)]. As a corollary, wire transfer information disclosure was mentioned as one of the means to combat the financing of terrorism during the emergency session of the FATF in Washington that concluded on October 31 2001 (see also FATF Expands Role to Include Terrorist Assets).
The USA Patriot Act represents a major shift in US policy as regards the attention focused on international correspondent banking, and in particular US correspondent banking, as a tool to combat international money laundering and the financing of terrorism in response to the terrorist attacks of September 11. The full effects of this law will not be known for some time since specific regulations still need to be enacted by the US secretary of the treasury.
However, several key areas of Swiss and foreign banking in the United States will change immediately.
In particular, forfeiture provisions hang over Swiss bank US 'interbank' accounts, a term which would appear to be a generic use of what are otherwise, with respect to Swiss banks and financial institutions active in the United States, their US correspondent bank accounts, given the definition in 31 USC 5318 (i),(j)(1)(A)(i),(ii) of the term 'account' as meaning any formal banking or business relationship established to provide regular services, dealings and other financial transactions, including a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit. Further, in this sense the term 'transaction account' referred to above and in the definition of a 'payable-through' account subject to the new law is defined in 12 USC 461 as a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instruments, payment orders of withdrawal, telephone transfers or other similar items for the purpose of making payments or transfers to third persons or others, such term including demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers and share draft accounts. These definitions are to be contrasted with the definition of 'correspondent account' under 31 USC 5318(e)(1)(B), and as defined in the new law, as an account established to receive deposits from or make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution. Such broad language in the USA Patriot Act concerning the attributes of foreign bank assets subject to potential seizure and forfeiture orders must give rise to serious concern and caution on the part of Swiss bankers doing banking business in the United States. The use and maintenance by Swiss banks and financial institutions of their correspondent accounts in the United States will have to be reviewed in light of such provisions.
Secondly, the use of such US correspondent accounts by Swiss banks and financial institutions will henceforth require the designation by them of a US resident person for service of process, entailing their potential exposure to US judicial requests for both local and home-jurisdiction banking records and due diligence information on the identities of bank customers, and possible exposure to US criminal contempt charges for failure to produce these records, thus assuring innumerable occasions for the conflict of US with Swiss laws with respect to jurisdictional issues and issues of banking secrecy.
The USA Patriot Act of 2001 could develop much further as regards to its likely impact on Swiss financial institutions; monitoring of current developments will be required. Further, there are many issues in the legislation which have not been addressed in this update. Finally, impending regulations are expected and will be shortly forthcoming, which hopefully will flesh out many as yet unclear provisions in the legislation currently giving rise to uncertainty. The law also calls for several studies which, upon completion, may result in further rule-making and regulation in yet other areas affecting Swiss banks and financial institutions in relation to their activities in the US markets.
On November 20 2001 the US Department of the Treasury issued interim guidelines for the implementation of 31 USC 5318(j) [Title III, Section 313] and 31 USC 5318(k) [Title III, Section 319 (b)] of the USA Patriot Act. These guidelines took the form of a notice numbered 4810-25 issued by the US Treasury (see US Treasury Notice 4810-25) and a sample form OMB 1505-0184 (see OMB Form 1505-0184).
The notice requires all covered institutions - that is, US banks and financial institutions, excluding US broker/dealers, who will be regulated at a later date - to obtain from all their Swiss bank respondents (ie, their Swiss bank customers with US correspondent accounts) a completed certification form stating, among other things, whether the Swiss bank is a shell bank and whether any of its customers using its US correspondent account are so classified.
Further, Swiss banking institutions must disclose the person or persons who is/are owner(s) of the bank as defined in the notice accompanying the form. Under these rules, disclosure will include so-called 'large owners', defined as holders of 25% or more of a voting class of stock or other voting interests ('small owners' - that is, holders of less than 25% - are not required to be listed unless in aggregate two or more control at least 25% and are themselves owned by the same 'indirect owner'), and so-called 'indirect owners'.
In addition, the Swiss financial institution must designate a US resident person as agent for service of legal process on it in connection with its US correspondent account(s).
This one point may be the most significant as far as the long-term effect of compliance by Swiss and foreign banks with this law is concerned. For all practical purposes, this particular section would appear to have the ability to circumvent all current mutual assistance treaties by causing foreign banking institutions to become liable in the United States even for the production of documentary bank account evidence held overseas in their home jurisdictions in respect of customer deposit of funds related to the bank's US correspondent account. To this end, the foreign bank could become civilly and criminally liable in the United States for failure to comply with service of a subpoena or summons requesting the same. Foreign banks are given the option of contesting the summons or subpoena by making an appearance in the US courts, but the extent to which they will be allowed to make a special appearance to challenge the order without waiving jurisdiction remains to be seen. Moreover, if the Swiss financial institution fails to produce the documents requested in connection with its US correspondent account, then it risks becoming effectively barred from further access to the US markets by the closure of said account and precluding the establishment or continuation by the foreign bank of correspondent accounts with US financial institutions.
For further information on this topic please contact David Forbes-Jaeger or John McBrayer at Secretan Troyanov by telephone (+41 22 789 70 00) or by fax (+41 22 789 70 70) or by email ([email protected] or [email protected]). The Secretan Troyanov website can be accessed at www.secretantroyanov.com.