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On October 26, 2001, President Bush signed into law the USA PATRIOT Act (the "Act"). Among other things, the Act vests the Secretary of the Treasury with broad new discretionary authority to combat money laundering. For example, the Secretary may require U.S. financial institutions to take special measures with respect to any area, entity, or transaction that it finds to be of "primary money laundering concern." The special measures may include stringent "know your customer" requirements and enhanced suspicious activity reporting. Title III of the Act amends the Bank Secrecy Act ("BSA") and imposes significant obligations upon many types of financial institutions, including investment companies and credit card companies, that have not been previously subject to BSA requirements and changes BSA compliance requirements for others, such as money services businesses. This memorandum focuses on Treasury's recent publication of interim rules under the Act governing investment companies and money services businesses.

The Act required financial institutions, including investment companies, to establish anti-money laundering compliance programs ("AML Programs") in compliance with section 352 of the Act by April 24, 2002. The goal of such programs is to prevent financial institutions from being used to facilitate money laundering and the financing of terrorist activity.

Investment Companies

Last week, Treasury adopted an interim final rule covering open-end mutual funds that gives them an additional 90 days (until July 24, 2002) to develop and implement an AML Program. The AML Program must be designed to prevent such mutual funds from being used to launder money or finance terrorist activities, as well as to ensure compliance with applicable requirements of the BSA and Treasury's implementing regulations. At a minimum, an AML Program must include: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the effectiveness of the AML Program.

The Treasury rule implicitly recognizes that given the typical structure of a mutual fund, it is appropriate for a fund to be able to delegate responsibilities to third-party service entities with more direct contact with investors, such as its distributor, transfer agent, and shareholder servicing agents. These parties, however, must consent in writing to any delegation of responsibilities, and the mutual fund must ensure that the delegatees have in place sufficient anti-money laundering policies and procedures. The AML Program also must be approved in writing by the mutual fund's board of directors or trustees no later than the first regularly scheduled meeting after the AML Program is adopted. Additionally, the mutual fund is also required to make its AML Program available for inspection by the Securities and Exchange Commission.

In a separate interim final rule adopted by Treasury on April 24, 2002, Treasury exercised its authority to temporarily exempt investment companies other than open-end mutual funds (e.g., closed-end funds), for up to six months (October 24, 2002), from the requirement that they establish AML Programs. Treasury is also temporarily deferring determining the definition of "investment company" for purposes of the BSA for up to six months. This deferment means that entities such as hedge funds, private equity funds, and venture capital funds are also temporarily exempted, for up to six months, from the requirement that they establish AML Programs. Treasury indicated that it needs additional time to refine the rules for certain financial institutions that have never before been regulated.

This interim final rule requests that written comments (or comments submitted via electronic mail) be submitted to the Financial Crimes Enforcement Network (FinCEN) on or before May 29, 2002.

Money Services Businesses

On April 24, 2002, the Secretary of the Treasury also adopted interim rules to implement section 352 of the Act as it applies to money service businesses. The interim rules require money services businesses to establish an effective anti-money laundering program by July 24, 2002 that is designed to prevent the money services business from being used to facilitate money laundering and the financing of terrorist activity.

Money service businesses range from small, informal arrangements that are often used by immigrants to send funds to their families in foreign countries, to issuers of traveler's checks and money orders and providers of electronic payment services, through brick and mortar offices, over the telephone, and through the Internet. Money services businesses have come under increasing scrutiny in recent years because of the potential that they can be used to launder money outside traditional banking channels. Under prior legislation and regulations, money service businesses were required to register with the Department of the Treasury by December 31, 2001, and to file suspicious activity reports with FinCEN for suspicious activities occurring after that date.

Although section 352 of the Act only requires the establishment of anti-money laundering programs, consistent with the broader purposes of the Act, the proposed rules include not only the prevention of money laundering but also the prevention of terrorist financing. This expansion is significant because, while years of focus on money laundering have yielded an understanding of the types of programs that are effective in identifying and preventing money laundering, programs to prevent terrorist financing are less well developed. Moreover, the prevention of terrorist financing may be more difficult because it may involve relatively small and irregular payments.

The interim rules require that the anti-money laundering program be in writing and available to the Treasury on request. The program should be risk-based and commensurate with the location, size, nature, and volume of the financial services provided by the money services business. As with open-end mutual funds, the AML Program must include: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the effectiveness of the AML Program. The interim rules include an opportunity for comment until May 29, 2002; however, the July 24, 2002 compliance date is near, and money services businesses should begin to develop their programs immediately in order to implement those programs by that date.