Washington, D.C. – Two new laws have converged with some long-existing statutes to create significant responsibilities for building owners and managers to combat money laundering and terrorism. Are you in compliance?
Immediately following the terrorist attack of 9/11, Congress passed the USA PATRIOT Act (the short name for the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism” Act). This new law essentially amends the 1970 “Bank Secrecy Act” and is the federal statute that gives the U.S. Treasury Department the authority to impose certain anti-money laundering actions. Around the same time, President Bush implemented Executive Order 13224, which prohibits all U.S. individuals and businesses from engaging in any kind of financial transaction with persons or entities designated as terrorists or their associates. In addition to the pre-existing responsibilities imposed by the Money Laundering Control Act of 1986, building owners and managers find themselves serving a new role combating terrorism.
The Money Laundering Control Act (MLCA)
Generally, the MLCA makes it illegal for any person or business that “knows” money or property is derived from “some” illegal activity to engage in a financial transaction involving that money or property if the money or property did, in fact, come from a “specified unlawful activity.” The penalties include jail terms of up to 20 years and substantial fines of either $500,000 or twice the value of the property involved, whichever is greater. Knowledge that the money or property came from “some” illegal activity can be established if the party charged is found to have deliberately ignored facts or circumstances that would raise questions for a reasonable person about the source of the money or property.
This law is now in effect and applies to every person and business in the United States and persons or businesses outside of the United States that are involved in the transaction.
The USA PATRIOT Act
This law requires financial institutions to establish formal anti-money laundering programs, “Know Your Customer” procedures, and suspicious activity reporting. Included among the different classes of “financial institutions” are “persons engaged in real estate settlements and closings.”
Though regulations have not yet been promulgated for our industry, the Treasury Department is empowered to require real estate entities to establish formal written anti-money laundering (AML) programs, appoint AML compliance officers, educate employees about AML procedures, and periodically check the AML program to ensure it is working. AML requirements can also include procedures for obtaining documentation of the identity of customers and checking customers against government lists of terrorists. AML rules can also require that regulated businesses report “suspicious activity” to the government. AML programs must, as a practical matter, include “Know Your Customer” (or “KYC”) procedures to enable employees and businesses to know who their customers are and to identify money laundering and other “suspicious activity.”
Draft regulations implementing the AML requirements are currently under development by Treasury and are expected to be published in the next several months.
Executive Order 13224
All U.S. individuals and businesses are prohibited from engaging in any kind of transaction with persons, groups, or entities designated as terrorists or as their supporters or associates. A list of “Specially Designated Nationals” (SDNs), consisting of “drug kingpins,” terrorists, and others considered a danger to the United States, is kept by the Treasury Department’s Office of Foreign Assets Control (OFAC). Known as the “OFAC List” or the “SDN List,” it contains over 5,000 names and is updated often. No individual or business in the United States, or the foreign subsidiaries of U.S. companies, may conduct any kind of business with anyone on the OFAC list, and companies are expected to keep track of all changes. It can be found on the Treasury Department’s website at (www.treas.gov/offices/eotffc/ofac/sdn/index.html).
Criminal violations of the OFAC regulations can result in corporate and personal fines of up to $1 million per count, and in the case of individuals, a maximum of 10 to 12 years in jail per count. Civil fines can range from $11,000 to $275,000 per count.
The OFAC prohibitions, read literally, mean that, for example, every drug store in the United States should check the name of every customer at the cash register in order to ensure that it is not selling aspirin to a terrorist. While this is neither practical nor commercially feasible, OFAC has refused to identify a de minimus amount below which they will not enforce.
So where does one draw the line? Which transactions really need to be checked? How deeply and how often must one check? Does checking against the OFAC SDN List require that a business must check its clients’ clients?
While there is still some doubt and confusion as to what building owners and managers must do to comply (and much of that will not be made clear until Treasury promulgates its rulemaking on the USA PATRIOT Act), there are some steps you should take to protect yourself and your company:
Include in all contracts certain terms, conditions, representations, and warranties that require the person or business you are contracting with to perform basic anti-money laundering procedures. While this makes good business sense, keep in mind that there is no rule that says a business may rely on the anti-money laundering efforts of others.
Don’t wait for Treasury’s rulemaking on the USA PATRIOT Act. The Money Laundering Control Act and OFAC List regulations are already in effect, and it is clear to law enforcement authorities that real estate is a prime target for money launderers. It is advisable for companies involved in the real estate industry to establish AML programs as soon as possible.
The fastest and most efficient way to check names on the OFAC SDN List is through a reliable computer software system that is integrated into carefully designed compliance procedures. Check every name you can get. Do not check only certain types (or stereotypes) of persons or businesses: Terrorists and other prohibited parties come from all countries; are members of every religious group; and include all races, cultures, and ethnicities.
Document your activities. If questions arise later, you can easily retrieve information that supports your compliance activities.
Guidance and background information for this article was provided by Holland & Knight LLP. For more information on this and other issues, contact BOMA International at (202) 408-2662 or (www.boma.org).