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The ostensible goal of the USA Patriot Act, passed a month after Sept. 11, 2001, was to prevent future attacks by cutting off terrorist funding with a powerful new array of anti-money-laundering laws. A year and a half later, many experts say we may never know whether the law is working as intended. Yet effective or not, it is now an expensive fact of life for the financial firms that fall within its gamut. Although still a moving target at this point, the cost of compliance is expected to be staggering. According to research firm TowerGroup in Needham, Mass., securities firms alone will spend nearly $700 million on compliance over the next several years. The list of tasks is long and still growing. On April 30, the Treasury Department, the agency administering the new law, issued seven new sets of Patriot Act regulations. “Financial institutions are scrambling to comply,” says Charles Intriago, publisher of the Miami-based newsletter Money Laundering Alert. At the same time, he says, there are still many open questions: “They’re all wondering how they are going to be examined, and how much it’s going to cost.” The passage of the Patriot Act shows just how powerful an impact the events of Sept. 11 had. A similar money-laundering bill floated the previous year withered on the vine, killed by opposition from the banking industry, privacy advocates, and congressional Republicans. And although banks have had to contend with anti-money-laundering rules for decades, before 2001, most nonbank financial firms had successfully ducked such regulations altogether. “The Patriot Act has completely changed the landscape,” Intriago says. “It is the deepest, most profound, most far-reaching law passed in the 45 rapid-fire days after September 11.” In a first, the law’s anti-money-laundering provisions cover not just banks but securities firms, casinos, credit card agencies, and even life insurers. Private equity funds, who thought they would be exempt, just found out last month that they are covered, says David Goldstein, a partner in the New York office of D.C.’s Akin Gump Strauss Hauer & Feld. And in upcoming months, the Treasury Department will decide whether the act covers travel agents, automobile dealers, mutual funds, dealers in precious metals and stones, and others. MAXIMUM DUE DILIGENCE Of the sectors that must comply with the new law, experts say the securities industry will be hit hardest. Unlike commercial banks, which have had anti-money-laundering programs for years, investment banks are paying the price of enjoying a free ride until now. And since brokerage transactions are typically more complex and less transparent than those of traditional banks, they also require greater due diligence. Large firms such as Merrill Lynch & Co. and Citigroup’s Smith Barney can expect to spend between $25 million and $30 million to get up to speed, according to the TowerGroup. Overall, the industry is looking at a $700 million tab. This is all for a law the industry claims is not really necessary. Alan Sorcher, associate general counsel of the Securities Industry Association, Wall Street’s main trade group, says that money laundering has never been a big problem for the sector “because firms typically don’t take cash.” Yet he says the group “continue[s] to support the Patriot Act.” “It’s a job we have to do, and our mission is to do it as cost-effectively as possible,” he says, adding that he considers the rules to be more “prophylactic.” The public expression of support for a law that will cost nearly three-quarters of a billion dollars is indicative of how wary of adverse press the industry is these days, according to the TowerGroup study. In the wake of charges of widespread fraud and other unethical behavior, securities firms are loath to criticize the act, for fear of being perceived as yet again attempting to line their pockets at the public’s expense. Some experts also say the rules make sense. “The securities industry handles three times more money than banks,” Intriago says, “and the commission system encourages a willful blindness on the part of broker-dealers.” MIXED BAG FOR BANKS As for the banking industry, it claims the Patriot Act is largely redundant of laws it already lived under, especially the 1970 Bank Secrecy Act. For instance, banks were required to track customer transactions to detect and report unusual patterns indicative of criminal activity. Indeed, the act is expected to cost banks far less than other financial firms. The TowerGroup estimates that commercial banks will spend about $60 million this year for compliance-related technology. Bankers are also openly thrilled that the new law includes others in the financial industry. For years they argued that they were being unfairly singled out for anti-money-laundering police work. “The real public policy impact here is on the nonbank financial institutions,” says John Byrne, senior counsel at the American Bankers Association in Washington, the industry’s major trade group. He says including them was absolutely appropriate: “It’s something we’ve been talking about for 15 years.” But even for banks, requirements are tougher and stakes are higher under the Patriot Act. The act already bars banks from doing business with certain foreign shell banks. It also imposes broad new duties to scrutinize correspondent bank accounts, which permit overseas banks to transfer funds and conduct transactions in the United States. Another major change are new customer verification regulations, which came out last month and go into effect Oct. 1. Under this rule, banks and other financial firms must verify the identity of every customer, keep records of the verifying data, and cross-reference each customer against lists of known or suspected terrorists. Of all the new regulations, this rule is potentially the most encompassing and most burdensome, Byrne says. COOPERATION AND COMPLAINTS Whether they like it or not, the Patriot Act is now a fact of life for both regulator and regulated. And each side has won kudos from the other for the manner in which it has tackled the massive job the Patriot Act has handed it. “We have found the financial institutions to be very cooperative,” says Treasury Department spokesman Taylor Griffin. For its part, the financial sector has commended the agency for its willingness to adjust proposed rules in light of criticism. For instance, the agency recently scrapped a proposal that financial firms keep a photocopy of a customer’s photograph on file, which had raised the eyebrows of privacy advocates and banks concerned with discrimination lawsuits. The agency also axed a proposed rule that financial firms reverify the identity of long-standing customers. This distressed small local banks “who didn’t want to offend their customer base,” says Byrne. To be sure, behind the public back-patting, some degree of private grumbling goes on. “The initial enthusiasm has faded a bit,” says Gregory Wallance, a partner at Kaye Scholer. Compliance officers have found themselves being asked to trace transactions where the agency, unsure of the precise spelling of the person’s name, would give them 10 different variations, he says. Responding to such a request “takes up a tremendous amount of time and resources,” he says, adding, “Some of these financial institutions are huge.” Griffin of the Treasury Department says he is not aware of any complaints along these lines. There has been some public criticism, too. Intriago of Money Laundering Alert says that he, for one, is not too encouraged by how the agency is handling its tasks. “God save us from FinCEN [the Financial Crimes Enforcement Network, the arm of the Treasury Department in charge of administering the Patriot Act],” Intriago says. “They are negligent and incompetent.” He says the agency routinely ignores its legal responsibilities, citing as an example a requirement under the Bank Secrecy Act that it annually issue a staff commentary on certain subchapters. “Have they issued a single one in nine years? No,” he says. Intriago says the agency’s failures have forced financial firms to turn to private companies selling Patriot Act “expertise” that have sprung up around the new rules. “I fear that the law has drawn in a lot of charlatans,” he says, adding that while large companies have the expertise to evaluate them, “it’s the little guys who take in the first guy who comes through the door.” This article was distributed by the American Lawyer Media News Service. Tamara Loomis is a staff reporter at New York Law Journal.

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