Correspondent Banking
Broker-Dealers
Non-financial Traders or Businesses
The US Department of the Treasury has issued a notice of proposed rulemaking 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 (for further information on this act, please see Impact of USA Patriot Act on Swiss Financial Institutions). This took the form of three concurrent notices published regarding proposed rulemaking, amendments to the regulations and interim rules. These notices not only cover the certification, designation of and agent for service of process, and bank ownership disclosure, but also create a positive duty on securities brokers and/or dealers, and non-financial traders and businesses that deal in currency, to report all suspicious transactions.
Under the new rules, Swiss banking institutions must disclose the identity of the person or persons who is/are the owner(s) of the bank. 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' - 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 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 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 Swiss banking institutions to become liable in the United States even for the production of documentary bank account evidence held in Switzerland in respect of customer deposits of funds related to the bank's US correspondent account. To this end, the Swiss 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. Swiss 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 Swiss bank of correspondent accounts with US financial institutions (see Counter Money Laundering Requirements - Correspondent Accounts for Foreign Shell Banks; Record-Keeping and Termination of Correspondent Accounts for Foreign Banks).
These new proposed regulations place a positive duty on brokers and/or dealers in US securities to report suspicious transactions to the Financial Crimes Enforcement Network (a unit of the US Treasury). This may be significant for Swiss banks due to the spin off of increased due diligence that will accompany trading in US securities. Now, brokers and dealers must use heightened due diligence, as they can no longer merely rely on others to verify the origin and nature of funds used to purchase US securities (see Proposed Amendment the to Banking Secrecy Act Regulations- Requirement of Broker Dealers in Securities to Report Suspicious Transactions).
Non-financial Traders or Businesses
An interim rule requires all non-financial business or traders to report transactions of more than $10,000 in currency or bearer instruments to the US Treasury Department. This is significant due to the fact that all monetary and financial transactions are included within the new regulatory framework. Swiss banks should take note that US currency could merely by its use in a transaction create a necessary nexus for jurisdictional claims. (see Amendment to the Bank Secrecy Act Regulations -Requirement that Non-financial Trades or Businesses Report Certain Currency Transactions).
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.