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 Chennai: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act was passed on 26 October 2001. Though the deadline for complying with the regulation has been extended to 1 October 2003, the Act has been mired in controversy during its journey so far.
It has been regarded as one of the most stringent measures taken up by any government to trace and limit the financial resources fuelling terrorist activities. The 9/11 disaster has somehow awakened the world that was in slumber until that date. The obligations
The financial services industry had to comply with several regulations even before the Patriot Act. But now the industry has to focus its attention on its internal operations, not only for its own reputation but also to safeguard the whole country. According to reports, money laundering is estimated to be the world's largest business at $1 trillion annually with 50 per cent of the funds passing through the US at some point of time. The Patriot Act was enacted to detect and restrict illegal financial transactions that are affecting the financial community worldwide. The Act was passed with the message, 'Know your customers', to all financial institutions for a safe and secured business environment. Financial firms such as banks and credit unions, securities dealers, investment bankers, commodity traders, money transfer agents and non-financial institutions are mandated to abide by the Act. Here's a brief synopsis of what the Patriot Act requires the firms to do:
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Examine data of all customers from sources, both internal and external to the organisation
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Determine the customer's behavioural patterns that might affect business and national security
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Appoint a compliance officer to lead the anti-money laundering (AML) programme
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Create internal AML policies and procedures and institute training programmes
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Create an independent audit process to test internal procedures
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Establish minimum procedures to identify verifications when new customers open accounts
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Crosscheck accountholder names against all government lists of known or suspected terrorist organisations
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Record the owner of an account, originator of a transaction, the person who approved the transaction and any other individual involved in approving an account The side-effects
The risks of non-compliance can be both monetary and personal. Apart from possible regulatory fines up to $1 million, there can be criminal charges against officers for violations of rules. The organisation can also have negative corporate publicity for failure to comply, which again will damage its corporate image in the industry. Some of the implications of the Act in the financial services industry as well as in the society:
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Smaller money-transfer agencies are going out of business as they are unable to afford robust compliance systems
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Low cash and regulatory compliance obligations have compelled many banks to take a step-brotherly attitude towards updating their legacy systems
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The US brokerages will spend nearly $700 million through 2005 on technology solutions to comply with the Patriot Act - three quarters of which will be directed towards software and integration, said TowerGroup
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Growing resentment among the common people as they feel the Act has encroached on their civil liberties
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Huge investment in technology, staff, software, record keeping communications, monitoring, consultants and lawyers to meet regulatory requirements
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Reports say that broker/dealers, futures-commission merchants, investment companies, banks and insurance companies in the US will collectively spend a total of $10.9 billion on AML initiatives through 2005. Software and hardware will account for 6 per cent of that total ($695 million), while IT maintenance will account for 30 per cent ($3.3 billion). The remaining 64 per cent of AML spending will be allocated to employee training, reporting and compliance
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US banks will be subjected to more economic strains and competitive pressures in 2004 and beyond, due to bombardment of new compliance obligations including the Patriot Act, expects Forrester The challenges
The securities and investment firms facing the most difficult AML challenges are the Hedge Funds and 'the private client part of investment banks.' The private-client divisions of banks face an uphill task of scrutinising and investigating funds, since a lot of what they do involve offshore banking, tax sheltering and overseas trading. Hedge funds, on the other hand, have to start from ground zero on AML, since they previously were not subjected to any money-laundering norms.  Moreover, in a recent research by the TowerGroup Securities & Capital Markets practice on the Act's impact on Wall Street, it has been found that identifying, interpreting and integrating data residing in multiple locations is the most challenging task facing broker/dealers in complying with the Patriot Act. On the other hand, for broker/dealers, non-compliance with AML mandates carries huge downsides including exposing firms to monetary and reputation risks.
"The critical task for each firm in meeting this challenge is the identification of all relevant business processes used within that firm," says Mark Engelhardt, director, Pinnacle Systems Inc, a US-based business solutions provider to the capital markets firms. Understanding these processes will help to identify and understand the relevant data that needs to be analysed for AML compliance. Furthermore, this facilitates the situation, where new processes must be added in order to become compliant with the Patriot Act. Top shops like Merrill Lynch, Citigroup and UBS have engaged fully functional external software and have committed tens of billions of dollars to meet short-term objectives while preparing for the longer haul. But these investments will not go in vain as experts predict that current investments will pay off in coming years by increasing intra-firm communication, as well as serving as a catalyst for individual firms to improve their enterprise-wide compliance systems - bringing customer data together with trade monitoring and surveillance. The advantages
Perhaps Lee Kidder, the director of wholesale marketing, TowerGroup, was right in saying in a recent report that ideally a bank would want to use Patriot Act compliance as an opportunity to upgrade old systems as well as to meet the requirements of Basel II. Engelhardt also agrees with this assessment adding that the knowledge of a firm's business processes facilitates the development of a coherent operational risk measurement strategy for that firm. Those firms that invest in identifying the details of their operational processes for AML compliance can hope to recoup some of these costs by also complying with the Basel II requirements necessary for lowering the firm's operational risk capital charges. The Act has also been identified as a very good medium of improving customer relationship management, as it wants firms to keep track of every piece of information that goes into opening and maintaining an account. As such, the firm needs to maintain smooth interaction between disparate systems containing all the information about processing the account, which results in an effective customer management system.  For financial organisations like banks, the Patriot Act has not inflicted too much pressure, as they have already been required to employ AML procedures since the Bank Secrecy Act of 1970. Instead, it serves as an opportunity to review, refresh and boost their existing practices. But for the other non-banking organisations such as insurance firms, broker/dealers, mutual funds, and hedge funds, the Act has provided a difficult goal, as they have to start from scratch.
Conclusion
The USA Patriot Act has almost rattled the financial services industry in terms of the total reshuffling of internal documentation regarding archiving of all customer-related information. In order to reach the goal, there is an additional investment on technology and manpower. Above all else, this Act has made one thing very clear by bringing to light the fact that complacency may prove detrimental to growth and security. Security enhancement in an organisation is a dynamic process and it needs to be revised again and again. Thus, the Patriot Act has given organisations a chance to remain patriots not only to the country but also to 'security.'
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