How the USA PATRIOT act affects the Credit Union.

How the USA PATRIOT act affects the Credit Union.

Author: Tony

Tony’s Business Series

                                                              Abstract.

This paper focuses on the impact of the USA PATRIOT act on the operations of a credit union. A concise description of credit unions is provided in the introduction. There are descriptions of sections 311, 312, 326, 351, 352, and 362 of Title III of the USA PATRIOT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) act. Thereafter, the effects of the USA PATRIOT act on credit unions (which are derivatives of financial institutions) are analyzed. The penalties imposed due to non-compliance with the act are also stated.

                                                            Introduction.

The September 11, 2001 terrorist attacks on The World Trade Center in New York City changed the world forever. As a result of the deadly attacks, there are now strict regulations that financial agencies and various industries throughout the country must follow. Among those is the USA PATRIOT Act of 2001.  This act affects everyone from aviation to banking to landlords. Business majors entering the banking world need to know the strict regulations that affect each and every daily transaction as well as the fines and penalties that are enforced when those regulations are violated (Panneta, 2011).

A credit union is a co-operative savings and lending financial institution that offers loans to its constituent members at a low interest rate. A person is considered a member of a credit union if he/she has an account in the credit union.  The simple membership process makes a credit union an ideal venue for financial transaction for potential terrorist and their supporters. Such a member can deposit, withdraw and use online banking facilities of credit unions to launder money for terrorist-oriented activities. Credit unions use the one man one vote and he/she can elect board members to manage the credit union.  This can give wealthy terrorists an avenue to control the credit union towards their own malicious ends.  Credit union are society-oriented and hence have a higher moral ground than other lending and saving institutions as their operations are not profit-driven. Thus, law enforcement agencies tend to overlook them when investigating money-laundering operations (CDCU, 2012).

                                             Title III of the USA PATRIOT act.

The USA PATRIOT act facilitates the US war on international Terrorism. It covers a wide scope of activities and is thus divided into ten titles. Title III, also known as the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 is concerned with financial crimes. It confers enormous legal powers to the federal authorities and the Secretary of the Treasury to deter, identify and penalize international money laundering. These laws place strict requirements on banks and credit unions to closely monitor daily transactions of members and potential members alike. Any suspicious activity must be documented and reported. Any person or business conducting a transaction is compared to the OFAC list, which is the Treasury Department’s Office of Foreign Assets Control. Any person or business on that list are considered to be terrorist related and are to be reported to OFAC immediately (Public Law, 2001). The following sections will be discussed because they affect credit unions: 311, 312, 326, 351, 352, and 362.

Section 311 directs credit unions to apply special measures of jurisdictions when conducting domestic and international transactions which can act as conduits for money laundering. The rule making notice issued by the Secretary of the Treasury lays down the foundations of exceptional measures of jurisdiction that is to be used in a credit union. Hence, the credit union must keep records of all transactions and report transactions exceeding a specified amount of money (Public Law, 2001).

Section 312 stipulates that there must be due diligence for correspondent and private banking accounts. According to section 312; a credit union in the USA must establish (who the account owners are), administer and maintain due diligence procedures and policies on banking accounts (or the correspondents thereof) of non-US citizens in order to detect and report any instances of money laundering through such accounts (Public Law, 2001).

Section 326 demands verification of identifications of all customers who open (or intend to open) an account in a credit union. This section thus requires that a credit union must cross-reference the identity of the customer on government databases and/or consult OFAC list (Public Law, 2001).

Section 351 is an amendment of the BSA (Banking Secrecy Act); and it stipulates that an employee associated with a credit union or any government employee is prohibited from notifying a suspected account holder that he/she is under investigation by the federal law enforcement agencies (Public Law, 2001).

Section 352 stipulates that a credit union must implement anti-money laundering programs. The Secretary of the Treasury sets and authorizes the standard anti-money laundering programs; and credit unions are expected to have similar programs which are more stringent. Thus, the credit union is expected to formulate internal policies and control protocols that will regulate transaction procedures, on-job employee training and independent auditing of financial accounts (Public Law, 2001).  

Section 362 stipulates that the U.S. Secretary of Treasury must establish highly secure network that permits electronic submission of financial reports (per the BSA laws) by credit unions. The system must have the capacity to convey secure alerts on possible illegal activities back to the credit union (Public Law, 2001).

Hence, it is evident that Title III of the USA PATRIOT act confers unprecedented legal authority to the Secretary of the Treasury and the federal law enforcement agencies to request and obtain certain pieces of financial information pertaining to correspondent accounts owned by foreign persons and foreign banks from US credit unions.

Effects of the USA PATRIOT act on Credit Unions.

Sections 312 of the Title III of the USA PATRIOT act requires that credit unions must exercise due diligence in their transactions and banking activities. Compliance to this stipulation has increased the operation costs. Some credit unions are medium-sized; and the attendant cost of hiring professional experts (to monitor and ensure compliance with the act) is quite high and this increases the recurrent expenditures of these credit unions (BORDC, 2009). Failure of compliance attracts stiff penalties, fines and indictments, and thus the credit unions must provide information about their members to federal agencies (Jorgensen, 2003).

E-commerce is adversely affected by the disclosure of confidential files, since both respect and trust (the two most important foundations of e-commerce) are undermined (BORDC, 2009). The loss of revenue from e-commerce translates into loss of profit and weak financial foundation of the credit union. Hence, some credit unions choose to collect only the basic minimal financial information from their members (or potential members) (Jorgensen, 2003).

Extensive sharing and reporting of financial information as required by the patriot act has conflicted with foreign privacy laws such as the EU EPD (European Union Data Protection Directive). The ambiguous definition of suspicious and/or unusual financial transaction has forced most credit unions to provide surplus information to the government (BORDC, 2009).

Lack of judicial supervision over section 311 of Title III of the USA PATRIOT act predisposes the act to be used as a political tool against credit unions by certain segments of the population. The special measure stipulated in section 311 allows the government to gain access to and enquire about all the financial records; including confidential files and unabridged financial statements of the credit union. Also, it provides an opportunity for the government to interfere and restrict legitimate financial transaction (Jorgensen, 2003).

Compliance with the patriot act risks cutting off the bulk of an entire segment of the population (for instance, foreign workers and foreign investors) from the US financial system. This in turn reduces the potential customer base for credit unions. Increased government intrusion into the financial undertakings of credit unions impedes transnational movement of financial resources among financial institutions; and this has the adverse effect of destabilizing the economic infrastructure in the US (Jorgensen, 2003).

Compliance with the patriot act requires that Credit unions must regularly update their reports and store them in easily retrievable electronic media.  Although this increases backroom expenses, it also provided adequate financial data for research and construction of novel financial models (Jorgensen, 2003).

    Penalties for Non-Compliance.

Penalties for non-compliance are extremely severe; for example a financial institution could be fined up to $1,000,000 for each incident of non-compliance. This has ensured that credit unions comply with the act or risk bankruptcy. Moreover, civil fines of not less than $200,000 may also apply. Other forms of penalties are fines imposed on credit union executives, imprisonment of credit union executives, and, forfeiture of financial assets and accounts under investigation. The overall effect of these penalties is that they create a negative public image of the implicated credit union; and this predisposes the institution to ultimate collapse(Jorgensen, 2003).

Most credit unions outsource some of the legwork associated with compliance to the patriot act to third parties; in order to ensure that they undertake all the precaution and provide their reports in a timely manner (Jorgensen, 2003).

Conclusion.

The USA PATRIOT act was enacted in 2001 and it facilitates the global war on terror. Under this act, a credit union is classified as a financial institution which must conform to the laid down stipulations of the patriot act. The sections of Title III of the USA PATRIOT act that directly apply to credit unions are 311, 312, 326, 351, 352, and 362. The effects of the patriot act on credit unions are: increase in operation costs and recurrent expenditures, decline of e-commerce, restrict business among financial institutions and government interference with legitimate financial transactions. The penalties for non-compliance include fines, imprisonment and forfeiture of the implicated accounts. Most credit union outsources their activities to third parties in their attempts to conform to the patriot act.

References.

Public Law. (2001). Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT act) act of 2001. Washington, DC: U.S. Government Printing Office.

Jorgensen, P. (2003). The Patriot Act-An Impact Analysis. Grand Valley State University, Michigan.

Bill of Rights Defense Committee (BORDC). (2009). The USA PATRIOT Act and American Businesses. Washington, DC: Author.

Panneta, T. (2011). The Patriot Act. Human Rights & Human Welfare, 7, 163-182.

Community Development Credit Union, CDCU. (2012). What is a CDCU?[Data File]. Retrived from http://www.cdcu.coop/i4a/pages/index.cfm?pageid=261.