United States: How the New Anti-Terrorism Laws Change the Timeshare Business

In response to terrorist attacks on the United States on September 11, 2001, the United States acted swiftly to enact and amend U.S. laws designed to detect and punish terrorists, creating two new separate legal frameworks with which U.S. companies must now comply. The first is grounded in new legislation called the USA PATRIOT Act (the Act),¹ and the second is found in a series of executive branch orders issued by President Bush and the Departments of Treasury and State (Executive Orders). Because it is believed that substantial financial resources are required to fund and operate a terrorist organization, much of the new law focuses on financial transactions. Thus, the Act imposes new prohibitions on certain kinds of financial transactions and mandates new detection responsibilities for vast segments of the U.S. economy involved in financial transactions. Further, in one of the Executive Orders, the President prohibits almost all business dealings with thousands of individuals and entities named in the Order and on lists issued by the Departments of the Treasury and State.

The most striking feature of the new laws is that they apply to and impose new responsibilities on a broad array of U.S. businesses. Anti-money laundering laws have long been on the books but were enforced largely through target banks and other traditional financial institutions with respect to illegal drug proceeds. However, because the Executive Orders already in effect apply to all U.S. businesses, and because under the much broader definition of financial institutions in the Act, timeshare companies that sell deeded timeshares or that provide purchase money financing to buyers would be considered financial institutions, and thus subject to the new laws. Affected timeshare companies should begin compliance with these new laws as soon as possible.

The potential penalties for violation of these two sets of new laws are severe. Under the Act, both civil and criminal money laundering violations by organizations can result in penalties of not less than twice the amount involved in the financial transaction, up to $1 million, per violation. To satisfy these penalties, the court may issue a restraining order against property, thus freezing significant assets of the defendant even prior to a trial on the merits, a sanction otherwise only applied to very serious alleged criminal violations. For individuals, the penalties for money laundering that will apply under the Act include imprisonment of up to 20 years per violation, and fines of at least twice the value of the property involved in the offense, up to $500,000. In addition, the Executive Orders also subject violators to substantial criminal and civil penalties, as well as asset freezes and forfeitures: corporations may be subject to $500,000 in penalties for each violation, and individuals are subject to $250,000 fines and 10 years in jail.

The prohibitions in the Executive Orders apply to all U.S. persons and companies regardless of their trade or business, and thus plainly apply to the timeshare industry. The only practical means of complying with the Orders is to institute a compliance program that implements mechanisms designed to ensure that the company is not doing business with persons or entities appearing on the executive branch lists. Potentially severe consequences can result if the company runs afoul of the Orders. Therefore, instituting a compliance program now is the best course for timeshare companies.

The Act, at first blush, may not seem to have much applicability to the timeshare industry because the statute speaks in terms of monetary transactions and applies to "financial institutions." However, the definition of a "financial institution" under the Act is incorporated from the Bank Secrecy Act, which lists 24 disparate industries as "financial institutions," including such diverse businesses as precious gem dealers, cash transfer companies, credit card issuers, automobile and airplane sellers, and casinos, in addition to traditional banks and securities dealers. Of particular relevance to the timeshare industry, the Bank Secrecy Act’s definition of a "financial institution" also includes any entity acting as a "loan or finance company" and "persons involved in real estate closings and settlements." Thus, companies that develop, market or sell deeded timeshare interests or those that are otherwise considered as real estate interests, and including timeshare companies that provide purchase-money financing to buyers of real estate or personal property timeshare interests, will probably be considered "financial institutions" for purposes of the Act, and will be required to comply with the new mandates.

The new anti-terrorism laws incorporate many important changes in existing U.S. law, from amending the rules relating to grand jury information to increasing penalties for money laundering convictions. However, the new laws create or enhance law enforcement weapons against terrorism in two principal ways that affect the timeshare industry: First, transactions with certain individuals and groups are simply forbidden. Second, the new laws require businesses to implement compliance programs to detect and prevent money laundering.

Prohibited Transactions. The Executive Orders freeze all property and property interests in the United States or that come into the United States of persons, groups or entities listed in the President’s September 23, 2001, Order. In addition, if property owners are determined by the Secretary of State to have committed, or to pose a significant risk of committing, acts of terrorism, or if property owners are determined by the Secretary of the Treasury to be acting for any of the other persons, groups or entities listed in such Order, that property is also subject to freeze and seizure. Further, property belonging to any persons, groups or entities determined by the Secretary of State to assist or support in any way, or to be associated with, any of the other persons, groups or entities listed in the President’s September 23, 2001, Order is also subject to freeze and seizure. Moreover, the Executive Orders prohibit any transaction or dealing by a "United States person" or within the United States in property or property interests that are blocked under the Orders. Finally, the orders prohibit any donations by a "United States person" to any person or entity listed in the Order.

Simply stated, the Executive Orders bar any business of any kind with, and any donations of any kind to, any person or entity on the lists, and bars any support for or association with any person or entity on the lists, with heavy penalties for those who transgress these prohibitions. Further, the lists of barred persons and entities in the Executive Orders is extensive. It currently consists of more than 60, single-spaced pages with three columns per page, comprising more than 4,000 names, as well as aliases, "also known as" and "doing business as" names.² In addition, some companies may be required to report these transactions or attempted transactions with persons identified on the lists depending upon the specific circumstances. The list can be changed at any time by the Departments, and has been updated at least 11 times thus far, both by adding and eliminating names from the list.3

Mandatory Compliance Programs. In addition, Section 352 of the Act makes it mandatory that all "financial institutions," including loan and finance companies, and persons involved in real estate transactions, have anti-money laundering compliance programs in place by April 24, 2002. Previous law permitted the Secretary of the Treasury to issue regulations concerning compliance programs, but the Secretary had not done so.

Under the new mandate to implement compliance programs, however, the Secretary has begun issuing guidance to all "financial institutions" regarding the requirements of the new compliance programs. In fall 2001, the Secretary began issuing a series of separate regulations, each tailored to one of the 24 "financial institution" categories listed in the Bank Secrecy Act, beginning with banks and securities brokers and dealers. In addition, the Secretary issued four sets of regulations in April 2002. Three applied to additional categories of financial institutions: credit card issuers, money exchange businesses and mutual fund companies. Each regulation describes the specific industry to which it applies, outlines the anti-money laundering issues particular to that industry, and sets forth guidance for the creation of an anti-money laundering compliance program for that industry. While the regulations vary in scope and complexity based upon the peculiarities of the specific industry, all the regulations include the core elements of a compliance program that are statutorily required by the Act:

• internal policies, procedures and controls

• a designated Compliance Officer

• ongoing employee training programs, and

• an independent audit function

The fourth regulation issued on April 22, 2002, was a tolling regulation stating that the vast majority of the remaining categories of "financial institutions," under the Act, including the two categories likely to include some companies in the timeshare business, a "loan and finance company" and "persons involved in real estate closings and settlements," are subject to a temporary reprieve from the statutory mandate to implement anti-money laundering compliance programs, pending the issuance of further regulations specific to each industry by the Treasury. The tolling regulation suspends the Act’s mandatory compliance program requirement for "up to six months" for these industries until October 24, 2002. However, Treasury is believed to already be working on the remaining sets of regulations, and is expected to issue all of them well before its October deadline. Thus, it is no longer a question of whether Treasury will issue regulations that will apply the Act to the timeshare industry. Although we know from the Treasury regulations issued in April generally what the requirements will be for timesharing, the regulations to be issued by late October 2002 will provide important detail. Note that the scope of the reprieve until October does not include any delay in the obligation of immediate compliance with the Executive Orders.

In light of the facts that the Executive Orders are already effective, and that the new regulations applying the Act to timesharing will become effective immediately upon issuance in October 2002, timeshare companies would be well advised to begin implementation of a core anti-money laundering compliance program well in advance of the new October deadline. Based on the regulations already issued by Treasury with respect to the Act, at a minimum an effective compliance program will require the company to implement the four core elements outlined in the Act, tailored to industry practice, and engage in reasonable due diligence before engaging in any financial transactions. In practical terms, this will require a "Know Your Customer" program that will enable the timeshare company to identify its customers and the sources of their funds.

Undoubtedly, timeshare companies will take the new compliance program requirements seriously, as under present case law, the penalty for alleged violation of the money laundering laws is substantial if a compliance program is not put into place. Currently, prosecution need prove merely "willful blindness" by the organization to satisfy the intent needed for conviction. The mere failure to implement the mandatory compliance program could be viewed as willful blindness, and is, therefore, proof of intent to violate the money laundering statutes if an illegal transaction takes place. Conversely, the existence of an effective compliance program may persuade authorities that the business is not guilty of any criminal conduct, and may reduce penalties in the event noncompliance is shown.

Practically speaking, the requirements of the anti-terrorism laws apply to the timeshare business in three main ways. First, at the point of sale of the timeshares themselves, the timeshare company must ensure that it is not doing business with those suspected by the government of being involved in terrorism, i.e., those on the lists announced by the Departments of State and Treasury and listed on the Web site cited in footnote³.While the possibility of a terrorist buying a timeshare interest may seem an unlikely prospect at first, upon further reflection it is perhaps not so remote. As we know, there is an expanding timeshare resale market that would permit such purchasers to funnel funds into timeshare products and then extract them, "laundered," at resale. In a similar fashion, international criminals have used the purchase and resale of items such as cars, refrigerators, stereo equipment and appliances to "clean" monies as part of the Black Market Peso Exchange, which in turn, has encouraged the federal government to enlist major U.S. companies in its enforcement efforts. Note as well that the purchase of a timeshare opens up a worldwide network of lodging for the purchaser, thus potentially making it easier to gain access to certain locations with perhaps a reduced degree of scrutiny. Therefore, ensuring that the company is not doing business with those on the lists will require a system to permit routine searching of the lists, and/or a means of linking the lists with purchaser information so that warning signals are triggered in appropriate circumstances.

Also consider that, because timeshare development companies often function as lenders for the financing of the timeshare units, they must implement an anti-money laundering compliance program. In it, they must establish criteria against which all purchase applications can be compared to ensure that prospective purchasers are not laundering illegal funds through the timeshare purchase. Of course, these measures must be based on objectively established criteria and applied to all prospective purchasers, as the goal is not to discriminate against potential owners, based on subjective or stereotypical factors, but rather to ensure that the source of funds used by any and all customers is free from illegal monies. After the loans are finalized, if the timeshare company bundles its loans and sells them to banks, these banks probably will be seeking representations and warranties from the timeshare companies that the loans are clean of any money laundering proceeds. The presence and implementation of a compliance program will enable the timeshare company to properly and accurately make these representations.

Third, many timeshare companies are involved in developments of resort properties both in the U.S. and overseas. These developments potentially represent opportunities for those wishing to launder money in a legitimate business in foreign countries where there may be less enforcement of money laundering crimes. In this regard, it is significant that the Act for the first time includes violations of the Foreign Corrupt Practices Act as a money laundering violation. Thus, timeshare companies will be required to obtain sufficient information from their overseas investors, joint venture partners, contractors and agents to ensure that they are not doing business with terrorists or others involved in money laundering.

These are three of the main ways in which the new anti-terrorism laws will require changes in the way a timeshare company does business; many other functional areas of the business, including employment screening, training, auditing and even telemarketing are also affected. Essentially the only way to meet the requirements of the new anti-terrorism laws is to implement a compliance program that includes all elements of the new requirements.

The recent and sweeping changes in federal law mandate compliance and monitoring programs for most U.S. companies, including important elements of the timeshare industry. By failing to implement such programs, businesses will run the risk of violating the new anti-terrorism laws, subjecting themselves to not only considerable financial and legal hazards, but very likely unwanted publicity as well. In consultation with experienced compliance counsel, timeshare companies should plan and implement compliance programs that can efficiently address all elements of the new requirements and integrate compliance steps into the ordinary activities of the company including use of integrated software databases where feasible.

1. USA PATRIOT Act is an acronym for "United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act."

2. To ease compliance with the Executive Orders prohibiting dealing with certain persons and entities, Holland & Knight LLP’s subsidiary Holland & Knight Consulting has developed a computer-based search engine that can automatically search and update the various government lists of prohibited transactions, persons and entities, and integrate the search function into the timeshare company’s existing software to facilitate seamless compliance with the executive branch orders.

3. The list can be found at the Treasury Department’s Web site: http://www.treas.gov/ofac/. (Scroll down home page of Treasury Department, Office of Foreign Assets Control, to red block, "SDN List," and open).

All companies must comply with the anti-terrorism Executive Orders of President Bush. Companies selling and financing timeshare interests and involved with closing and settlement of timeshare interests also must comply with the associated USA PATRIOT Act enacted in late 2001.

The core elements of the compliance program called for by the laws include: (1) internal policies, procedures and controls, (2) a designated Compliance Officer who effectively drives implementation and monitors and documents the program and its results, (3) ongoing employee training programs, and (4) an independent audit function.

To root out possible untoward financial insinuation and contribute to our country’s fight against terrorism, the law calls for timeshare companies, among others, to engage in organized, systematic and properly documented due diligence before dealing with any party as a customer, employee, investor or joint venturer.

Important functional areas of the timeshare business that will be affected are list purchasing and use, Internet contacts, marketing and sales, consumer financing, investor and joint venture due diligence, employment screening procedures, training, auditing and telemarketing. For timeshare companies, compliance with the Executive Orders must be effectuated immediately and with respect to the USA PATRIOT Act, compliance procedures should be in place and operating by October 2002.