FinCEN: April 4 Key Date for Correspondent Accounts

NEW YORK (HedgeWorld.com)--A partner in the financial services practices of Katten Muchin Rosenman LLP warned Thursday [Jan. 12] that new rules just finalized by the U.S. Treasury's Financial Crimes Enforcement Network impose a significant burden upon broker-dealers, futures commission merchants, introducing brokers, mutual funds, banks, and trust companies.

The partner, Morris Simkin, said that the rules, announced by FinCEN Dec. 21, have been in the works since 2002, he said. The good news (good for some, anyway) is that hedge funds aren't covered.

Some of what FinCEN now mandates would be good practice even without a regulation, Mr. Simkin noted. "You don't want to become known as the instrument that al-Qaeda traded through," he said.

The rule takes effect on April 4 for any new accounts opened by U.S. financial institutions on that date or subsequently. It takes effect on Oct. 2 for any accounts that are already open or will be opened prior to April 4.

Institutions now, or beginning as the rules take effect, will have to collect much more information than they did before. They will need to know and record who or what the customer is, who owns it, who controls it, what business it's in and the market it serves, and the historical relationship of the customer to the account-maintaining institution at issue.

"There also has to be a periodic review of trading in the account, to see whether it's consistent with what they said they'd be doing and whether there's been any activity that looks like laundering," which would require a suspicious activity report, said Mr. Simkin.

How often must this periodic review take place? FinCEN hasn't said, precisely. Mr. Simkin said, "Obviously, it's what's reasonable under the circumstances." An especially relevant circumstance is the frequency of activity in the account.

The new regulation implements the foreign-correspondent banking provisions and the private-banking provisions of Section 312 of the USA Patriot Act. In essence, it requires the covered financial institutions to apply due diligence to correspondent accounts maintained for certain foreign financial institutions.

"We live in an international world. Money is going to flow where it flows most easily," Mr. Simkin said. He is concerned that if investors outside of the United States are limited in their flexibility in entering into transactions with U.S. broker-dealers, futures commission merchants, introducing brokers, etc., they'll keep their money outside the United States.

"If I can't trade in the U.S., I'll go to London," he said, speaking for a hypothetical foreigner or foreign institution.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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