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Patriot Act Update
For the last two years, asset-based
lenders and factoring companies have been anxiously
awaiting publication of regulations establishing
anti-money laundering requirements for commercial
finance and factoring companies. The regulations,
originally scheduled to be issued in 2002, have
been delayed while the U.S. Treasury Department
continues to study the commercial finance industry
in order to customize the rules to better serve
commercial lenders.
The regulations are required by the U.S.A. Patriot
Act, the wide-ranging anti-terrorism law enacted
by Congress in October 2001 in response to the
terrorist attacks of September 11, 2001. The
stated purpose of the law is to counter terrorism
by enhancing domestic security, expanding surveillance
procedures, broadening the ability of law-enforcement
authorities to detain aliens engaged in terrorist
activities, and expanding the scope of federal
anti-money-laundering regulations to nearly every
sector of the financial services industry, including
commercial finance and factoring companies.
Section
352 of the Patriot Act expands the scope of financial
services businesses subject
to the Bank Secrecy Act to include nearly
all sectors of the financial services industry.
The law requires companies in these sectors
to develop anti-money laundering programs
that will prevent the services they offer
from being used to facilitate money laundering
or the financing of terrorism. Under the
provisions of Section 352, financial institutions
within the jurisdiction of the Patriot Act
must do the following:
•
Develop written procedures
on how to detect possible money laundering
•
Designate an in-house compliance
officer
•
Establish an employee training program
•
Submit to independent testing of
their anti-money laundering program
•
Establish minimum identification
standards for borrowers
To date, the Treasury Department has issued
regulations for a number of industries to bring
them into compliance with the requirements
of Section 352. These include mutual funds;
operators of credit-card systems; money-services
businesses, such as money transfer companies
and check cashers; securities brokers and dealers
registered with the Securities and Exchange
Commission; futures commission merchants and
accompanying introducing brokers registered
with the Commodities Futures Trading Commission;
and a variety of other sectors of the financial
services industry.
Currently, the Treasury Department
has deferred application of the requirements
of Section
352 to commercial finance and factoring companies
as it learns more about the nature of the
industry. The Commercial Finance Association
has worked with Treasury Department officials
to increase the regulators' understanding
of how asset-based lenders and factoring
companies operate and to discuss how these
organizations may be affected by the requirements
of the Patriot Act. In these discussions,
the Treasury Department showed a particular
interest in learning how commercial finance
and factoring companies are equipped to identify
payments received from borrowers that are
made in unusual forms such as money orders,
cash, traveler's checks or payments from
foreign banks.
Treasury Department officials
have indicated that they now expect to publish
proposed
regulations for commercial finance and factoring
companies sometime in 2005. Once the proposed
rules are published, there will be a comment
period to allow interested parties to provide
feedback to the Treasury Department on how
the regulations will affect the asset-based
financial services industry.
The Treasury
Department has indicated that after the regulations
for commercial finance
and factoring companies required by Section
352 are finalized, they expect to issue regulations
for commercial lenders to adopt Customer
Identification Programs (CIP), as required
by Section 326 of the Patriot Act. It is
anticipated that the CIP regulations will
be similar to those already issued for banks,
savings banks, credit unions, securities
brokers and dealers, mutual funds and other
financial services businesses. The CIP regulations
issued for banks and other financial services
sectors require institutions to adopt "reasonable
and practicable" procedures to verify
the identities of new customers opening an
account. The institutions are also required
to maintain records of the information used
to verify the customer's identity and to
determine whether or not the person's name
appears on any list of known or suspected
terrorists or terrorist organization. Two
such lists are the
Treasury Department's
Office of Foreign Asset Control (OFAC) list
and the U.S. Department of Commerce's Bureau
of Industry and Security list.
To meet these
standards, the financial institution would
be required to establish a program
for obtaining identification information
from customers wishing to open a new account.
Information required would include the customer's
name, address, birth date and an appropriate
identification number, such as a Social Security
number or similar number from a government-issued
document.
CFA will work closely with the Treasury
Department on the development of CIP regulations
for commercial finance and factoring companies
to ensure that the regulations take into
account the unique aspects of the asset-based
lending and factoring industries.
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