NASD and NYSE Issue Joint Release on Section 311 of the Patriot Act
On August 14, 2006, NASD and NYSE issued a joint release reminding member organizations that, effective August 14, 2006, the Financial Crimes Enforcement Network (FinCEN) has imposed a special measure pursuant to Section 311 of the USA PATRIOT Act against the Latvian bank, VEF Banka, and its subsidiaries, including Veiksmes lizings. A comparable special measure was imposed against the Commercial Bank of Syria and its subsidiaries, including Syrian Lebanese Commercial Bank effective April 14, 2006. FinCEN imposed special measures against these entities and their subsidiaries (the Specified Banks) based on findings that they are financial institutions of primary money laundering concern. As a result of the special measures imposed against the Specified Banks, NASD and NYSE member organizations, as well as other “covered financial institutions,” are (1) prohibited from facilitating the direct use of correspondent accounts by the Specified Banks and (2) required to undertake due diligence to prevent the indirect use of correspondent accounts by the Specified Banks.
In this regard, NASD and NYSE member organizations are prohibited from opening or maintaining a correspondent account in the United States for, or on behalf of, the Specified Banks. Not only is this requirement relevant to the opening of new accounts, but it also requires a review of account records to ensure that no accounts are maintained directly for, or on behalf of, the Specified Banks.
Further, the special measures impose obligations on NASD and NYSE member organizations to apply due diligence to its correspondent accounts reasonably designed to guard against indirect use by the Specified Banks. The joint release indicates that the obligation to perform such due diligence must include the following two elements:
- Member organizations must notify correspondent accountholders that the account may not be used to provide the Specified Banks with access to the member organization. The method of providing such notification is flexible and may include sending a notification by mail with the next regularly occurring transmittal (e.g., customer account statement) or sending a separate notification by facsimile or email; however, compliance with the notification requirement must be documented. The joint release includes a sample notification that may be used for this purpose.
- Member organizations must identify any indirect use of correspondent accounts by the Specified Banks, using a risk based approach. This means that NASD and NYSE member organizations, when determining what additional due diligence measure should be adopted to guard against the indirect use of correspondent accounts by the Specified Banks, should consider the type of services offered by, and geographic locations of, its correspondents. NASD and NYSE noted that the obligation to identify all correspondent account services that may be provided directly or indirectly to the Specified Banks is ongoing.
View NASD Notice to Members 06-41
View NYSE Information Memo 06-58
View additional information regarding the final rule issued against VEF Banka and its subsidiaries
View information on all special measures issued by FinCEN
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
Washington, D.C.
Christian J. Mixter
202.739.5575
cmixter@morganlewis.com
Anne Flannery
212.309.6000
aflannery@morganlewis.com
Beth Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com