Global Policy Forum

New federal money-laundering rules will cover a broader swath of the financial-services industry than previously disclosed, going beyond new requirements on banks and securities firms to cover credit-card companies, mutual funds, wire-transfer firms and commodities dealers.

The new rules that the Treasury plans to announce Tuesday will require firms to implement comprehensive money-laundering compliance programs by designating a special compliance officer, training employees to detect money laundering, commissioning independent audits, and establishing policies and procedures to identify risks and minimize opportunities for abuse. The rules go into effect Wednesday, although some industries will get a 90-day window to implement them.

Now, with the latest announcements and the portent of further measures later this year, this administration stands to far outdo its predecessors.

The moves have prompted outcries from critics on the right and left who say financial privacy is being eviscerated. "The concern we have is that the legitimate need to go after terrorists is being used by the opponents of privacy as an excuse to roll back privacy laws," says Edmund Mierzwinski, a consumer advocate at the U.S. Public Interest Research Group.

While Tuesday's announcement is limited in scope, the full range of antiterror measures taken by the administration makes it likely that enormous quantities of additional records will be created on the financial lives of Americans. This poses new risks that the most personal of undertakings, from credit-card purchases to mutual-fund redemptions, could ultimately be subjected to government scrutiny.

MAJOR CHANGES

While banks are already accustomed to strict anti-money-laundering measures, the new rules will mean major changes for much of Wall Street, for credit-card firms such as Visa International, and for money-service businesses such as Western Union. Money-laundering experts long have complained that such sectors are vulnerable to organized criminal activity, and probes arising from Sept. 11 have shown that terrorists use both credit cards and wire services to move money.

Money laundering is the process by which criminals disguise their ill-gotten gains as legitimate income.

"Many institutions are unaware they are going to be covered by this," says Brian Smith, a senior partner with Mayer Brown Rowe & Maw who has worked extensively with a number of financial companies seeking to comply with the USA Patriot Act, enacted shortly after Sept. 11. "Banks and securities companies get these kinds of inspections all the time," says Mr. Smith, "but for hedge-fund operators and money-transfer firms, this is going to be quite a shock."Among major finance sectors, only the insurance industry won a reprieve, thanks in part to an intensive lobbying campaign and the intercession of a powerful member of Congress, though the Treasury plans to revisit the question in six months. Treasury also is considering new anti-laundering rules for other corporate sectors, including travel agents, hedge funds and dealers in automobiles, planes, boats, gems and precious metals.

FLURRY OF ACTIVITY

The moves are part of a flurry of activity by Treasury this week on the interrelated issues of money laundering and tax evasion. Treasury also is expected to send Congress reports outlining possible new initiatives on foreign bank accounts held by U.S. citizens, on the use of U.S. bank accounts by foreign nationals and on the role of the Internal Revenue Service in combating money laundering.

Hedge funds, money-transfer companies and others have so far been spared some of the more-onerous requirements that already loomed for banks and broker-dealers. Banks have for some time been required to devote resources to policing their customer base, and reporting suspicious activity to authorities. More recently, the Treasury announced that securities firms will be required under the new rules to file these so-called suspicious activity reports themselves, on transactions of $5,000 or greater, the same threshold that is currently applied to banks. A Treasury official said additional details of the new rules for securities firms will be drafted by various industry self-regulatory bodies such as the New York Stock Exchange, the National Association of Securities Dealers and the National Futures Association.

No so-called SAR new requirements will be imposed on the credit-card and money-service industries in the new rules, but the other requirements will apply to them.

Few of the affected firms complained publicly about the coming rules, noting that it would be impolitic to question measures intended to combat terrorism in addition to money laundering.

‘PREPARED TO COMPLY'

"The money-service industry is prepared to comply with any compliance programs mandated by Treasury," said Ezra Levine, a Washington lawyer who represents the wire-transfer industry. "The money-service industry wants to cooperate with the fight against money laundering and terrorism."

The insurance industry, however, which endures little regulation at the federal level, is perhaps the least prepared to take on complex new burdens and made its case to Treasury in several recent meetings.

Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, backed the industry in an April 11 letter to the Treasury.

"I am particularly concerned about the application of [the Patriot Act] to certain sectors of the insurance industry," Rep. Oxley wrote. "There has been little evidence of money laundering being conducted through insurance products. It would be particularly difficult to launder money through property-casualty products, or life products without cash value. The commensurate requirements placed on underwriters and agents of these products should be correspondingly less."

A Treasury official said devising rules for the insurance industry required more time because it is so varied. While there have been anecdotal signs of money-laundering abuses in life-insurance annuities, the official said, dealers in products such as dental insurance don't seem vulnerable. Likewise, while the jewelry industry has been the subject of reports alleging it was used by terrorists, officials said it makes no sense to apply the full weight of the rules to small dealers who operate in malls and other retail centers.

A Visa spokeswoman, Rhonda Bentz, said the company hasn't seen the rules but the firm has "a history of cooperating with government authorities on things of this nature and obviously we will work with them."

Financial-industry participants familiar with the legislation say that it was thrown together quickly without a great deal of deliberation among industry representatives, treasury officials and lobbyists. As a result, the details of the original Oct. 26 legislation were vague, particularly about what sort of firms will have to comply.

Regulators in various financial industries have already been doing what they can to raise awareness of the coming rules. Last month, for example, Paul F. Roye, director of the mutual-fund division of the Securities and Exchange Commission, told an industry conference in Florida that the mutual-fund industry will "have to take a much more activist role with respect to the government's anti-money-laundering effort."

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