The Patriot Act, officially known as the USA Patriot Act, was enacted by the United States Congress in response to the 9/11 terrorist attacks. This law significantly expanded the government's authority to combat terrorism and improve national security. One of the areas impacted by the Patriot Act is the financial industry, which plays a critical role in preventing financial crimes and detecting suspicious activity that may be related to terrorism. In this blog, we will explore the various ways in which the Patriot Act affects financial institutions and the measures they must take to comply with the law's regulations.
The Purpose and Scope of the Patriot Act
The primary purpose of the Patriot Act is to strengthen national security measures and prevent future terrorist attacks in the United States. The scope of the law is broad and encompasses many areas, including banking and financial institutions. Financial institutions are required to adhere to the Patriot Act's regulations to help detect and prevent terrorist financing, money laundering, and other financial crimes that may be linked to terrorism.
The Patriot Act gives the government broad powers to access financial records and track the movement of money, which is crucial in identifying and disrupting terrorist activity. The law also establishes new criminal offenses related to terrorism and imposes tougher penalties for those who commit these crimes. In addition, the Patriot Act provides law enforcement agencies with new tools to conduct surveillance and gather intelligence in their efforts to combat terrorism.
Increased Regulatory Requirements for Financial Institutions
The Patriot Act imposes a range of increased regulatory requirements on financial institutions. These requirements are designed to help detect and prevent money laundering and other financial crimes that may be linked to terrorism. The regulatory requirements include:
- Know Your Customer (KYC): Financial institutions must implement a comprehensive KYC program to identify and verify the identity of their customers. This includes obtaining and verifying customer information such as name, address, and date of birth.
- Customer Identification Program (CIP): The CIP requirement mandates that financial institutions implement a program to verify the identity of customers who open accounts. The CIP requires financial institutions to collect and verify specific information about the customer, including name, address, and identification number.
- Suspicious Activity Reporting (SAR): Financial institutions are required to report suspicious activity that may be related to money laundering or terrorist financing to the Financial Crimes Enforcement Network (FinCEN). The SAR requirement requires financial institutions to file a report if they detect any unusual activity that may be suspicious.
- Compliance and Risk Management: The Patriot Act requires financial institutions to implement a compliance program to ensure that they are following all regulatory requirements. Financial institutions must also establish a risk management program to identify and manage potential risks associated with their business activities.
- Enhanced Due Diligence (EDD): Financial institutions must implement an EDD program for customers who pose a higher risk of money laundering or terrorist financing. This includes conducting more in-depth due diligence and monitoring transactions.
The Patriot Act's Affects on Banking
Under the Patriot Act, banks are obliged to change the way control, savings, and loan accounts are handled. The law has obligations to prevent money laundering that affects anyone who signs up or owns a bank account. The main reason for the law to have anti-money laundering obligations is the terrorist financing activities that occurred on September 11, 2001. These activities include Terrorists were easily able to open a bank account within the US and get credit cards with fake identification numbers.
The US Patriot Act has impacted financial institutions at home and abroad in various ways. The parts where the US patriot Act affects financial institutions are briefly as follows:
- According to section 311 of the Patriot Act, information obtained about domestic customers can be compared. Besides, this section aims to prevent the opening of accounts payable in a foreign banking institution.
- Under section 312 of the law, individuals outside the US, foreign entities, and all USA banks must perform customer due diligence and enhanced due diligence.
- Section 314 of the law includes preventing shell banks from accessing the US financial system, which is generally considered unregulated and risk money laundering or terrorist financing. According to this law, Banks cannot open correspondent accounts for any foreign bank that does not have a physical presence in any country.
According to section 352 of the Patriot Act, financial institutions must establish specific anti-money laundering programs. These programs include:
- Institutions should develop internal policies, procedures, and controls.
- Organizations must appoint an AML compliance officer.
- Organizations should have an independent audit function to test programs.
Advantages and Disadvantages of the Patriot Act
After the terrorist attacks on September 11 Law, President George W. Bush signed the bill and enabled it to be put into effect. According to the bill advocates, anti-terrorism efforts have become more efficient and effective. With the law, increasing the access of law enforcement to communication channels and expanding the powers of detecting, handing over, and interrogating criminals also accelerated the detection of suspicious activities.
On the other hand, Opponents of the law state that the US government has full investigative powers. The law makes it possible to investigate anyone the government deems appropriate. This situation abuses American citizens' right to privacy. Also, monitoring citizen activities limits the powers of individuals.
Due diligence responsibilities become very costly for financial institutions. For instance, people and institutions making international trade may have to pay additional costs even when opening a simple checking account. Therefore, especially financial institutions that have global activities are exposed to challenging and costly situations.