On January 21, 2003, the U.S. Treasury Department published a notice (the "Release") of a proposed rule ("Proposed Rule") in the Federal Register, which, if adopted as proposed, would require open-end investment companies ("Mutual Funds") to file suspicious activity reports ("SARs") with the Financial Crimes Enforcement Network ("FinCEN"). The comments on the Proposed Rule must be submitted to the Treasury Department no later than March 24, 2003. The Proposed Rule is similar to the final rule issued by FinCEN mandating that broker-dealers file suspicious activity reports and the proposed rule for suspicious activity reporting by insurance companies.1 The Proposed Rule is a further step by the Treasury Department to develop a comprehensive system for the reporting of suspicious activity by financial institutions operating in the United States.
Applicability
The Proposed Rule applies only to investment companies that Treasury refers to as "Mutual Funds" - - open-end management investment companies as defined in section 5 in the Investment Company Act of 1940 (15 U.S.C. § 80a-5) that are registered or required to register with the Securities and Exchange Commission ("SEC"). Treasury has focused on Mutual Funds because, according to the Release, they represent more that 95% of the assets held in investment companies regulated by the SEC. In addition, Mutual Funds present risks of money laundering because they are widely held, easy to access and can be redeemed quickly.
Reporting Requirements
The Proposed Rule requires a Mutual Fund to file a Suspicious Activity Report for the Securities and Futures Industry ("SAR-SF") with FinCEN regarding any suspicious transaction relevant to a possible violation of law or regulation. Similar to the final SAR reporting rule applicable to broker-dealers and the proposed rule applicable to insurance companies, a reportable transaction is defined in the Proposed Rule as a transaction conducted or attempted by, at, or through a Mutual Fund, or a pattern of transactions of which the transaction is a part, involving funds or other assets of at least $5,000 in the aggregate where the Mutual Fund knows, suspects or has reason to suspect that the transaction:
1) Involves funds derived from illegal activity or is intended to or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirements under federal law or regulation;
2) Is designed to evade, including through structuring, any requirements of the Bank Secrecy Act ("BSA"); 2
3) Has no business or apparent lawful purpose or is an unusual transaction for a particular customer and the Mutual Fund knows of no reasonable explanation for the transaction after an investigation of all available facts, including the background and possible purpose of the transaction; or
4) Involves the use of the Mutual Fund to facilitate criminal activity, including transactions involving legally derived funds that the Mutual Fund suspects are being used for a criminal purpose such as terrorist financing.
SAR-SFs are required to be filed with FinCEN within 30 calendar days after the date the Mutual Fund initially detects facts that may constitute a basis for filing a SAR-SF.3 As in the final rule applicable to broker-dealers, the Proposed Rule makes no dollar threshold reporting distinction for transactions in which no individual causing or related to the suspicious activity has been identified. However, the Proposed Rule, like the broker-dealer rule, permits a Mutual Fund to delay filing a SAR-SF for an additional 30 days to allow the Mutual Fund to attempt to identify a suspect. Reporting, however, may not be delayed more than 60 calendar days from the date of initial detection.
In situations requiring immediate attention, such as an ongoing money laundering scheme or terrorist financing, the Proposed Rule encourages the Mutual Fund to immediately notify appropriate law enforcement agencies by telephone in addition to making a timely filing of a SAR-SF. A Mutual Fund is also permitted, but not required, to contact the SEC in these circumstances. The Proposed Rule also encourages voluntary reporting of suspicious transactions where mandatory reporting is no required such as in the case where a transaction falls below the $5,000 reporting threshold in the Proposed Rule.4
Retention of Records
Mutual Funds are required to maintain a copy of all filed SAR-SFs and the original supporting documentation for a period of five years from the date the SAR-SF is filed. The supporting documentation must be identified as such and retained separately and confidentially from other records of the Mutual Fund. The Proposed Rule requires Mutual Funds to make all supporting documentation available to FinCEN, any other appropriate law enforcement agencies, or federal or state securities regulators upon request.
Delegation
As is permitted under the interim final rule requiring Mutual Funds to establish anti-money laundering programs, Mutual Funds are permitted to contractually delegate performance of their SAR reporting obligations to affiliated or unaffiliated service providers, such as transfer agents. However, the Mutual Fund remains ultimately responsible for compliance with the Proposed Rule and must "actively monitor" the procedures for reporting suspicious transactions.
No Double Reporting
Under the Release only one SAR is required to be filed for each suspicious transaction. In circumstances where a suspicious transaction involves more than one Mutual Fund and/or another financial institution with a SAR reporting obligation, such as a broker-dealer, the Proposed Rule would permit the parties involved in the transaction to designate one institution responsible for filing the SAR so long as the report contains all relevant facts. If the Mutual Funds desire to share information to compile a SAR, the Mutual Funds should consider complying with the voluntary information sharing procedures under Section 314(b) of the USA PATRIOT Act prior to sharing information in order to avail themselves of the information sharing safe harbor contained in Section 314.
Examination Program; Penalties for Violations
Under the Proposed Rule, FinCEN or its delegee will examine Mutual Funds for compliance with the Proposed Rule. Failure to comply with the requirements of the Proposed Rule may constitute a violation of the reporting requirements of the BSA, triggering the BSA penalty provisions.
Effective Date
Treasury proposes that the SAR reporting requirement be effective 180 days after a final rule is issued.
1
See Sutherland Asbill & Brennan LLP, USA PATRIOT Act Legal Alert "Treasury Issues Final Rule for Broker-Dealer SAR Reporting," July 2002; Sutherland Asbill & Brennan LLP, USA PATRIOT Act Legal Alert "Treasury Issues Proposed Rule for Insurance Company SAR Reporting," October 2002.2 Currently, a Mutual Fund is required under the BSA to develop and implement an anti-money laundering program to guard against money laundering or terrorist financing through the Mutual Fund and to report cash or certain currency equivalent transactions involving $10,000 or more in one transaction or two or more related transactions on Form 8300. In July 2002, Treasury and the SEC jointly issued a proposed rule that would require Mutual Funds, pursuant to the BSA, to implement reasonable customer identification and verification programs. See 67 Federal Register 48318 (July 23, 2002) and Sutherland Asbill & Brennan LLP, USA PATRIOT Act Legal Alert "Federal Regulators Issue 5 Proposed Rules for Customer Identification and Verification," July 2002.
3 Under the Proposed Rule, a Mutual Fund is required to report suspicious activity involving its customers. In the case of an omnibus account, the omnibus account, and not the underlying customer accounts maintained at a financial intermediary, is the customer of the Mutual Fund.
4 If a Mutual Fund does voluntarily report suspicious activity, the Mutual Fund may avail itself of the safer harbor from liability for reporting and filing SARs, even if the Mutual Fund was not required by law to file the SAR. Likewise, if a Mutual Fund voluntarily files a SAR it is also prevented by law from disclosing that fact to the person or persons that are the subject of the SAR.
A copy of the Proposed Rule is available at http://a257.g.akamaitech.net/
7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/pdf/03-1174.pdf.
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