Practical Problems with the USA PATRIOT Act
For decades, the US government has, through the Office of Foreign Asset Controls (OFAC), tried to curtail terrorism by, among other things, mandating that domestic financial institutions establish compliance programs to prevent terrorists from using those institutions to fund or otherwise support terrorism. In essence, this has been accomplished by: 1) prohibiting the transaction of business with particular countries (e.g. North Korea, Iran); and 2) prohibiting financial institutions from conducting business with anyone found on OFAC’s master list of ‘Specialty Designated Nationals and Blocked Persons’ (commonly referred to as the ‘OFAC List’). Compliance by financial institutions is accomplished by not only blocking any transactions with anyone appearing on the OFAC List, but also reporting to the government the attempt by the blocked individual to transact business.
Following September 11, 2001, the US government further resolved to combat terrorism through additional directives. On 23 September 2001, President George W. Bush signed Executive Order 13224, which blocks any individual or entity in the US from transacting or dealing in any “property or interests” with any “persons” who “commit, threaten to commit, or support terrorism.” The scope of any such persons is basically anyone designated as such by the US Secretary of the Treasury, the Secretary of State and/or the Attorney General. In October 2001, Bush signed the USA PATRIOT Act, which contained, among other things, the International Money Laundering Abatement and Anti-Terrorist Act of 2001. This Act further compelled financial institutions to establish compliance mechanisms to stop what was perceived as the ongoing illicit use of those institutions to launder money by foreign terrorists.
Taken at face value, these directives seemingly would only curtail the intentional misuse of the US banking system for illegal ends. However, since September 11, 2001, and in light of the charged atmosphere encompassed by the ongoing ‘War on Terror’, some financial institutions have become wary of conducting even fairly routine, above-board transactions because of the concern that some proceeds from the transaction might wind up in the hands of a blocked individual or entity. Unfortunately, it is not at all clear if the intent of the government’s directives was to restrict even these types of lawful transactions in deference to the larger goal of combating global terrorism.
In a recent transaction, a group of US banks considered underwriting the sale of a domestic corporation’s interest in the stock of a Middle-Eastern bank that had failed. Because of this failure, the bank’s depositors were still owed money, and some of the proceeds from the sale would therefore be distributed to the bank’s depositors to partially offset their loss. Even though no-one questioned that the transaction had purely legitimate, lawful aims, or contended that it was part of a scheme by terrorists to launder money or otherwise evade US law, the banks insisted that every one of the thousands of depositors in the failed bank be run through the OFAC List. This was despite the fact that some of the bank’s creditors were to be paid before the depositors collected anything and, even at that point, the depositors were not guaranteed to collect anything. Moreover, given that the bank was effectively in bankruptcy, any monies that the depositors might collect would be a small percentage of their actual deposits. In short, there was nothing about the transaction that would indicate that it was merely a ruse to evade US law. Certainly, no-one was contending that this bank deliberately failed in order to attempt to launder the money of depositors through the US banking system through the sale of a US corporation’s stake in the failed bank.
The transaction stalled because the US banks underwriting the purchase were not sure whether they were required to clear the names of potential ultimate recipients of this money, i.e. the depositors, even though the US banks would not be transferring any money directly to these depositors, but just because the US banks knew that these depositors might receive a portion of this money. Driving the banks was the concern that money, which could be readily traced back to them, would end up in the hands of an individual on the OFAC watch list. The parties spent many hours debating and negotiating solutions, including the issuance of certified statements attesting to all individuals who could conceivably receive any of the proceeds of the sale, as well as specific wire instructions for every individual who would ultimately receive the money. This considerably narrowed the scope of names to be run through the OFAC List, but added considerable time and cost to what would have otherwise been a fairly simple transaction.
What is most troubling about this scenario is that neither the OFAC rules nor the USA PATRIOT Act itself offered any clear guidance to the participants in this transaction, who as a result were left trying to respond to a ‘worst case’ interpretation of these fuzzy rules. Business interests are rightly concerned about their role in combating terrorism, as well as the cost of doing so, and in such an environment even the routine may become suspect. Without in any way detracting from the business world’s obligation to ensure (to the extent possible) that its policies and processes are not hijacked by criminals, one should also not lose sight of the fact that, in the absence of clear guidelines from the government, legitimate business may be curtailed in the name of security. At the very least, businesses should be aware that what they might consider mundane, to another might appear to be the first step to an accusation of harboring terrorism. When calculating the costs of conducting business in the post-9/11 world, this ‘hidden’ one should not be overlooked.