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Nearly two years after passage of the USA Patriot Act, another piece of the law kicked in last week, as new regulations designed to combat the financing of terrorist activity and international money laundering began being enforced. The rules are meant to implement � 326 of the Patriot Act, which amended the Bank Secrecy Act to require the establishment of minimum standards for identifying customers who open accounts at financial institutions. The regulations, codified at 13 C.F.R. 103.121, became effective on June 9 but subject banks and financial institutions had until Oct. 1 to comply. Banks, savings associations, credit unions, and foreign bank agencies and branches are now required to adopt a customer identification program, approved by the board of directors, to identify new customers and check customer names against lists of known or suspected terrorists. Separate but parallel rules apply to broker-dealers, mutual funds, futures commission merchants and introducing brokers. The impact of the rules is being felt not just by lawyers who represent banks and other entities but by lawyers who set up bank accounts for themselves, their firms and their clients. Mary Kathryn Roberts, general counsel to the New Jersey Bankers Association, says she has been advising the organization of what steps to take to satisfy the rules’ requirements. The need to verify identities is not a huge change in what banks already are required to do, says Roberts, a partner with Riker Danzig Scherer Hyland & Perretti. “We all have account opening procedures” but now they need to be “tightened and refined,” she says. Section 326 is a much bigger deal for securities dealers who “have never had to file this stuff,” she says. At minimum, banks must collect a name, address, birth date and taxpayer identification number from each person who opens an account, including corporations, partnerships and trusts. Existing customers who open new accounts escape the scrutiny, as long as the bank believes it knows the true identity of the person. The rules apply to the issuing of credit cards but not to occasional transactions like cashing checks, wiring money or purchasing checks or money orders. Exceptions also apply to accounts opened by government agencies or as part of an ERISA plan. For trust or escrow accounts or others where the customer is not an individual, the bank must verify the identity of the account holder but not that of beneficiaries or account signatories. In some cases, banks might need to seek additional information about those who control the account. The rules do not specify verification procedures but leave it to the banks to develop risk-based procedures that “must enable the bank to form a reasonable belief that it knows the true identity of each customer.” Assessment of risk is to be based on the types of accounts available at the bank, the methods for opening accounts, the types of identifying information available and the bank’s size, location, and customer base. The customer identification program has to take into account the heightened challenge in verifying accounts that are not opened in person, including online accounts and credit card accounts. Banks are expected to check the information provided for those accounts against third party and nondocumentary sources. The rules suggest types of documents to use for verifying identity, including drivers’ licenses, certified articles of incorporation, government-issued business licenses, partnership agreements or trust instruments. Non-U.S. citizens have to provide some sort of government-issued document showing nationality or residence and bearing a photograph or similar safeguard, usually a passport or green card. Records of what information was used to verify an account must generally be retained for at least five years after the account closes. Banks do not, however, have to keep photocopies of drivers’ licenses or other identifying documents, a contentious issue that was resolved only on Sept. 18, after concerns were raised about the burden it would create and the fact that security features on some forms of identification thwart copying. The rules also require banks to check new customers against a terrorist list to be designated by the Treasury Department, but no such list had been identified as of last week, says agency spokesman Taylor Griffin. Banks still will have to check names, as before, against the Specially Designated Nationals List issued by the Office of Foreign Asset Control, a list of terrorists and drug traffickers in place since the 1970s. Notice of the bank’s customer identification program requirements has to be provided to customers before they open an account. Depending on how an account is opened, notice posted in the lobby, on a Web site or on an account application, or some other form of written oral notice, can suffice. GRAY AREAS Failure to comply with the rules will expose banks and others to significant financial penalties. That prospect has banks nervous about adhering to rules that do not spell out procedures for verifying identity in favor of a risk-based approach. The uncertain requirements of the rules also increase the risk of overzealous efforts at compliance that can especially affect those with common names, particularly common Middle Eastern names. “It can be a nightmare for a human to be named Mohammed or Ramirez,” acknowledges banking lawyer Geoffrey Connor, a partner with Reed Smith in Princeton, N.J. One New York lawyer, Omar Mohammedi, believes he was singled out on the basis of his name by a bank trying to comply with � 326. The Manhattan solo practitioner says he opened an escrow account with HSBC about two years ago for use in real estate closings. In June, HSBC began demanding information about where the money in the account came from and where it went, as well as additional identifying information about him, saying it was needed to comply with the Patriot Act. The bank advised him it was asking the same questions of everyone who wires money. But another lawyer with a non-Muslim-sounding name who shares office space and also wires money for closings told Mohammedi he had not received such a letter. Not only is Mohammedi’s name not on the Specially Designated Nationals List, but he used the account at issue solely for closings he handled on behalf of HSBC as lender, he says. He is not even able to access the money without authorization from HSBC, he says. When he met with HSBC personnel and told them that, they dropped the request, says Mohammedi. He adds that he has not done any closings for HSBC since then because he was so upset over what happened that he asked them not to send him cases. Though Mohammedi had done civil rights work before, and was part of the Amadou Diallo defense, he says it did not sink in as much until it happened to him. He is now representing others with complaints about � 326 enforcement. HSBC spokeswoman Pamela Plehn says the bank has “a zero tolerance policy for discrimination and has been recognized for its commitment to diversity.” Christopher Dunn, an attorney with the New York Civil Liberties Union, says that during the past five months the group has received about a dozen similar complaints involving different banks asking for information and in some cases, closing accounts or refusing to open them. Most but not all of the complainants have Middle Eastern-sounding names. No one disputes that banks have the right to verify information about their customers, says Dunn, but “the general vagueness of the law, combined with the level of hysteria being created by the Justice Department is predictably leading banks to take what might be completely inappropriate measures.” Dunn is meeting this week with the head of a major bank on Patriot Act concerns. He would not name the bank but says there were multiple complaints about it. He expects to schedule meetings with other banks, too, to try to persuade them to agree to “a reasonable set of practices.” Meanwhile, law firms in New York, Boston, Chicago and Washington, D.C., are considering class action suits, says Khurrum Wahid, a legal adviser to the Council on American-Islamic Relations and a staff attorney at the Neighborhood Defender Service of Harlem. Wahid is in touch with other attorneys around the country — though none in New Jersey — who have received dozens of complaints. “People are very angry about treatment by banks they’ve had a relationship with over the years,” he says. No litigation has yet been filed while lawyers try to figure out a basis for liability given what Wahid refers to as protections afforded banks by the law. “If it was ‘John Smith’ on the SDN list, they would come up with a better way,” says Wahid.

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