The U.S. Treasury Department has announced that the Bush Administration will seek a 12.7% increase in the budget for the Financial Crimes Enforcement Network (FinCEN) as part of the 2005 budget, (U.S. Treasury Department, Press Release JS-1100, January 16, 2004). This announcement, made under the rubric of terrorist financing, certainly means an increase in scrutiny of all international financial transactions and a resulting increase in transaction costs for legitimate banking, investment and commercial transactions. This announcement follows a recent press release that stated the U.S. Treasury Department’s intention to seek an additional set of legislation aimed at so-called "tax avoidance" transactions (U.S. Treasury Department, Press Release JS-1096, January 13, 2004).
In the past three years, there has been an explosion in national regulation of international transactions in a effort to seek out money tainted by terrorists, organized crime, and tax evaders. A vast majority has been driven by the U.S. desire to find and dismantle terrorist organizations. The secondary, but in some cases seemingly primary, purpose is to track money flows, collect economic intelligence, and to increase tax payer compliance.
The increase in anti-money laundering controls and regulation such as the U.S. Qualified Intermediary program, the U.S. Patriot Act, the U.S. Banking Secrecy Act, and application of the O.E.C.D.’s Financial Action Task Force (FATF) 40 Revised Recommendations on Money Laundering and 8 Special Recommendations on Terrorist Financing in all the major financial centers has caused a rise in transaction costs that is being felt throughout the industry. In many cases, common sense has been replaced by rigid and excessive regulatory interference by multiple governmental and quasi-governmental bodies. In the U.S. alone, there has been 22 final, proposed and/or advance notices of rulemaking on anti-money laundering and terrorist financing just under the Patriot Act. Furthermore, there are several proposed bills pending regarding tax avoidance transactions that contemplate further regulation of cross boarder transactions. In addition, the U.S. announced that there have been 472 Grand Jury Subpoenas issued pertaining to suspect transactions under these new rules.
One result of the new regulations has been the rise in due diligence procedures which are in many cases unnecessary and achieve nothing more than an increase in costs to the an institution, client or customer. Banks, brokers, lawyers and other financial intermediaries are compelled in many instances to complete what amounts to a full investigation of all new and long term existing clientele. These investigations require additional staff, long delays in account opening, and a continuing and ongoing duty to maintain current documentary requirements for all persons who even touch a transaction regardless of the significance of said person. A new vocabulary is developing and becoming an integral part of the financial community’s common lexicon with words such as compliance officer, due diligence programs, transaction reporting, information exchange, QI audits, account opening document requirements, suspect transactions, structuring, blacklists, OFAC lists, U.N. lists and Bush lists etc…. All of this is incredibly complex, time consuming, and expensive. The question remains as to its effectiveness and costs to legitimate businesses.
Financial institutions and increasingly other professionals who are frequently involved in cross boarder transactions such as brokers, lawyers and accountants both in the U.S. and overseas need to remain diligent in tracking and monitoring changes in this regulatory framework and its environment. Failure to remain apprised of new and existing duties regarding e.g., U.S. in-bound and out-bound transactions could result in severe penalties and potential criminal liability under U.S. law. Furthermore, it is important to inform clients, whether individual or corporate, of the new regulations, the decrease in legitimate business confidentiality and personal privacy, and the increase in costs associated with any transaction in the international context.
This article has been prepared by Secretan Troyanov for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Readers of this article should not act upon this information without seeking professional legal advice applicable to their specific circumstances.
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