USA PATRIOT Act

The USA PATRIOT Act was a turning point in American national security policy, particularly with regards to foreign terrorism. The law is mostly known for its provisions expanding the investigative powers of US law enforcement and intelligence agencies – a number of which have proven to be controversial. 

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However, the “Patriot Act” – as it’s commonly referred to – also addresses the need for stricter financial regulations to prevent money from making its way into the hands of terrorist organizations and other bad actors.

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So what is the Patriot Act? What is its purpose? And why is it important that financial institutions know about it? Read on for the answers.

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“USA PATRIOT Act” is an acronym for the official title of the act, which is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.

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The USA PATRIOT Act is a law designed to prevent and punish acts of terrorism in the United States by expanding investigation resources available to law enforcement agents. It also tightens requirements on financial institutions to prevent corruption, money laundering, and terrorism financing.

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When Was the PATRIOT Act Passed?

The USA PATRIOT Act was enacted in October of 2001 by President George W. Bush. It was reauthorized in 2005, 2006, and in 2011 by President Barack Obama. It was set to be reauthorized again in 2020, but Congress has indefinitely postponed the vote on it.

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Though the law is now expired, many provisions of it are still in effect through other laws such as:

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• Foreign Intelligence and Surveillance Act (FISA)
• Money Laundering Control Act
• Bank Secrecy Act (BSA)
• Right to Financial Privacy Act

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The USA PATRIOT Act serves three main purposes: 

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1. Allow US law enforcement officials to legally use more methods to monitor communications, both inside the United States and internationally
2. Remove barriers to US government agencies sharing information and resources, for the purpose of coordinating counter-terrorism efforts.
3. Classify additional activities as terrorism, and increase the penalties associated with terrorism crimes.

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These three goals aimed to improve US national security following a series of plane hijacking and bioterrorism attacks in September of 2001, later known as the 9/11 terrorist attacks and Amerithrax.

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The Patriot Act’s purpose is to make it easier for US law enforcement and intelligence agencies to uncover and stop terrorist plots. However, the law has generated much debate regarding whether or not it violates Americans’ constitutional rights – particularly surrounding privacy and due process. Here’s a quick summary of the Patriot Act’s pros and cons:

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The USA PATRIOT Act’s money laundering provisions are found in Title III, so this is the part of the law most relevant to financial institutions. In particular, Section 326 of the USA PATRIOT Act involves establishing minimum standards for FIs to verify customers' identities. 

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This primarily applies to checking if prospective clients are known terrorists, or belong to known terrorist organizations. It also involves maintaining and verifying the accuracy of information related to the identities of existing customers.

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Commonly termed the “know your customer” section of the Patriot Act, Section 326 requires that financial institutions include a Customer Identification Program (CIP) as part of their AML compliance framework. 

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Each CIP must explain the procedures for opening a new account at the institution, as well as what types of identifying information will be collected from the customer in the process. A CIP also has to outline a risk-based process for verifying customers’ identities that considers:

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• What types of accounts the institution offers
• The procedure involved in opening a particular type of account
• What types of identifying information are legally available to the institution
• Where in the US the institution is located
• How large the institution’s client base is
• The overall risk profile of the institution’s customer base

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Finally, it’s important to note that USA PATRIOT Act requirements regarding KYC were amended in July 2016 to add provisions related to beneficial ownership. So when a person opens an account, they must disclose information regarding anyone who has at least 25% of ownership rights, voting rights, or rights to capital gains for either the assets in the account or the company serving as the legal owner of the account. This information typically includes:

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• Full name
• Date of birth
• Home address
• Social security number
• Passport number and issuing country
• Any other ID issued by a federal government

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A summary of the USA PATRIOT Act, as it pertains to US financial institutions, is as follows:

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• Restrictions on correspondent banking: Allows US banks to prohibit (or place conditions on) a person opening an account in the US that corresponds to a foreign banking institution, especially one with no physical presence in any country (i.e. “shell bank”). It also allows US banks to collect identifying information of customers using correspondent banking services, including information on a designated representative for the sake of legal processes. In addition, it allows the US government to subpoena transaction records from foreign banks regarding corresponding US accounts.
• Increased monitoring of high-risk accounts: Requires US banks to perform enhanced due diligence checks on US accounts that correspond to foreign financial institutions, as well as private accounts held by non-US citizens.
• More efficient information sharing: Facilitates increased cooperation between US law enforcement, financial regulators, and banks in sharing information regarding suspected terrorists or money launderers.
• Stricter concentration account regulations: Places tighter requirements on financial institutions to ensure money moved through a concentration account can be traced to the legal or beneficial owner(s).
• Identity verification standards: Section 326, the “know your customer” rule in the USA PATRIOT Act, establishes minimum guidelines for authenticating a customer’s identity from the moment they apply to open an account at a US bank.
• SAR amendments: Stiffens regulations and penalties related to unnecessarily notifying parties involved in a transaction if said transaction was reported as suspicious. However, it also enhances immunity from liability for those who report suspicious financial activity. Furthermore, it mandates the creation of a system for easier and more secure communications between US financial institutions and the US government regarding suspicious financial activity.
• Internal bank AML programs: Requires US banks to establish AML systems, including designating a compliance officer, regularly training employees, and undergoing periodic independent program audits.
• Classification of informal or underground banks: Counts informal/underground banking systems as financial institutions for the purpose of suspicious activity reporting requirements.

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Though some of the USA PATRIOT Act’s provisions are no longer in force, the ones related to preventing financial crime have stayed in effect through amendments to other US laws. At a high level, they require financial institutions to build more effective anti-fraud and AML programs with more stringent KYC and SAR policies.

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Unit21’s platform makes this regulatory compliance simple with pre-made KYC check rule sets, data integration with reliable KYC/KYB sources, and automated SAR filing. Book a demo today to see what it can do for your financial organization.

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