Electronic and wire transfers soon will be examined under the same money-laundering magnifying glass that the government has trained on cash transactions over the past decade.
Effective Jan. 1, 1996, new wire transfer regulations will broaden federal regulatory attention to include the monitoring of institutions such as securities broker-dealers and other nonbanks that commonly deal not in cash but in electronic money transfers.
The new regulations are only one among many indications that the government is submitting Wall Street to strict scrutiny in its renewed efforts to fight money laundering and underlying criminal activities.
The wire transfer regulations are being promulgated in an increasingly and alarmingly aggressive law enforcement environment.
For example, in a recent, widely noted federal prosecution in Texas involving American Express Bank International - United States v. Giraldi and Reategui - two American Express employees were convicted for willful participation in a money-laundering scheme.
That conviction came despite the fact that the government had only the sketchiest evidence that the employees knew the source of their depositors' funds.
Even though the depositors represented themselves to be engaged in a lawful business, the government argued that certain inaccuracies in account documentation demonstrated an illegal source of funds. The government concluded that the employees at a minimum willfully avoided knowledge that the funds were the proceeds of criminal activity.
The results of the American Express trial were dire. One American Express employee was sentenced to a prison term of 10 years. The other received a term of 3#1/2 years. On Nov. 21, 1994, the company agreed to settle Justice Department charges for $36 million, which included the largest reported penalty ever imposed against a U.S. financial institution.
By focusing on the employees of the financial institution rather than on drug traffickers, the government is demanding that financial institutions assume a watchdog role.
The American Express prosecution, related statements by enforcement officials, and the adoption of the wire transfer regulations all signal the government's heightened commitment to holding financial institutions to a high standard of self-policing and penalizing those that fail to meet that measure.
By extending regulation beyond cash transactions into noncash transfers, the new regulations require broker-dealers and other noncash institutions to get up to speed on rules in which banks and other depository institutions have become expert.
At the same time, banks and other depository institutions will have to ensure that their compliance programs cover more sophisticated transactions involving wire transfers.
Compliance will be most onerous for institutions that handle fund transfers for nonaccount holders, including broker-dealers, since they probably will need to develop record-keeping procedures from scratch. Banks and broker-dealers handling wire transfers for regular customers will be able to rely primarily on record-keeping systems they likely already have in place.
As a practical matter, the new regulatory focus is on wire transfer transactions involving noncustomers and the institutions that serve them.
The logic is obvious: Sophisticated criminals are most likely to seek to launder funds through financial institutions where they do not have an account and related records. Thus, the regulations impose what might be dubbed a "know your noncustomer" rule for financial institutions.
Whether bank or nonbank, institutions must retain the records required by the new regulations for five years after the date of the original order.
History teaches two lessons about institutions under investigation: First, government tends to look favorably upon institutions that demonstrate "good citizenship" by maintaining effective compliance programs, and second, such programs are often measured by rules that have been adopted but have yet to take effect.
Although the effective date of the regulations is still nine months away, both banks and broker-dealers would be well advised to get their compliance programs in shape now.
This will involve updating compliance and other relevant written policies, assigning supervisory responsibility to ensure the requirements are met, implementing a system to capture and maintain the necessary information, and training personnel involved with the flow of funds in the nuances of the new laws.
Most important, financial institutions must take seriously the risk of being held responsible when they are used by money launderers to transfer funds.
Institutions must properly shoulder the added burdens by adopting responsible policies directed at detecting and preventing any misuse of their services. Otherwise, as in the American Express case, the penalties may be severe.
Mr. Meister, an associate with Rogers & Wells in New York, is in the white collar crime defense practice group.