The Loan and Finance Company:Facing Compliance With The Usa Patriot Act

• Author: Vicki R. Canales
• Position: JD Candidate
• Pages: 10

Vicki Canales is a third year part-time law student at American University Washington College of Law with a bachelor's degree in History from Wingate University in North Carolina. She has worked for a nationally known lending institution for five years, focusing on due diligence, loan documentation, and UCC perfection. She aspires to a career in international banking or corporate finance and wishes to thank Amy Rudnick and Katherine Lofft for their advice and support with respect to this article.

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ALTHOUGH REGULATIONS PROMULGATED pursuant to the USA Patriot Act (the Act)¹ have not yet been applied to loan and finance companies, the prudent loan and finance company should begin to consider conforming its policies to the minimum requirements set forth in the Act under the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (Title III).² This is not, however, an easy task. The Act is over one hundred pages long, and amends hundreds of existing federal laws. In particular, it has imposed various requirements on the financial community in an attempt to encourage efforts at preventing terrorists from obtaining access to funding. The Act also authorizes, and even requires, the Secretary of the Treasury (Treasury) to promulgate regulations that will implement the purposes of the Act. The Treasury has already put forth regulations aimed at educating financial institutions on the methods in which terrorists manipulate legitimate businesses and the prevention of such manipulation. While the Act may seem like a daunting mass of detail, a financial institution can make compliance easier by keeping abreast of the status of existing regulations; preparing for newly developed regulations; and, most importantly, recognizing that the ultimate goal of the Act and its regulations relating to financial institutions is the prevention of money laundering.

Congress has found that money laundering "provides the financial fuel that permits transnational criminal enterprises to conduct and expand their operations to the detriment of the safety and security of American citizens" and that "money laundering, and the defects in financial transparency on which money launderers rely, are critical to the financing of global terrorism and the provisions of funds for terrorist attacks."³ As a result, Congress enacted Title III for purposes of, among other things, providing the Treasury with broad discretion "to take measures tailored to the particular money laundering problems presented by specific foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts . . . to provide guidance to domestic financial institutions . . . [and] to ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to the proper authorities."⁴ Although Congress can potentially terminate Title III by enacting a joint resolution,⁵ relying on this possibility is not advisable since dishonest borrowers will always exist, and the need to protect the integrity of one's institution should always be considered.

Difficulties in Promulgating Regulations Pursuant to the Patriot Act

MANY OF TITLE III'S PROVISIONS require the government to prescribe regulations giving financial institutions specific guidelines regarding how to implement the requirements of the Act. In prescribing these regulations, Treasury has provided different sets of regulations for different types of financial institutions. Regulations with respect to loan and finance companies are no exception. For example, although Treasury has already issued regulations for banks, securities brokers or dealers, mutual funds, futures commission merchants, and introducing brokers with respect to Section 326 of Title III, regarding minimum standards for the verification of the identification of customers of financial institutions, it is still in the process of preparing regulations that will apply to loan and finance companies.⁶ In addition, Section 352 requires financial institutions to establish anti-money laundering programs that meet specific minimum requirements. Pursuant to this section, Treasury has adopted regulations regarding certain types of financial institutions such as banks, savings associations, registered brokers and dealers in securities, futures commission merchants, and casinos,⁷ but has not yet done so for loan and finance companies, although it is currently in the process of preparing regulations for them.⁸

One might wonder why Treasury does not simply create a universal regulatory system for all financial institutions. In theory, this would be simpler to implement. However, in practice, such a universal approach would be impractical. For instance, imagine a boutique lending company, a real estate settlement company, a Page 42 casino, a precious jewels dealer, a mutual fund, and a nationally known bank worth billions of dollars, all subject to the exact same set of regulations regarding practices for the identification of foreign customers, for preparing anti-money laundering programs and for the administration of concentration accounts. The different institutions will not have the same product offerings, the same customer base, or the same resources. As such, regulations affecting these institutions would have a different impact on each of them, which may or may not be effective or desirable. Therefore, these regulations must be tailored to the idiosyncrasies of each business in order to have maximum effect, because "[a]n inadequate understanding of the affected industries could result in poorly conceived regulations that impose unreasonable regulatory burdens with little or no corresponding anti-money laundering benefits."⁹

Treasury also faces the problem of formulating a workable definition for a loan a finance company that would encompass all necessary businesses without including those that are already covered by other definitions. As its name indicates, a loan and finance company is an institution that extends loans or otherwise finances its borrowers' business. It is also distinguished from a bank, in that it does not accept customers' money for deposit, which means it requires some other source of funds. Should Treasury therefore differentiate among loan and finance companies based on the different sources of funds available to them? And what about...