Patriot Act compliance: Overview, definition, and example
What is Patriot Act compliance?
Patriot Act compliance refers to the requirements businesses—especially financial institutions—must follow under the USA PATRIOT Act to help detect and prevent money laundering, terrorist financing, and other illicit activities. The Act, passed in 2001, mandates procedures like customer identification, transaction monitoring, and information sharing to strengthen U.S. national security through financial oversight.
Why is Patriot Act compliance important?
Patriot Act compliance is important because it helps maintain the integrity of the financial system and reduces the risk of being used for illegal purposes. Institutions that fail to comply may face regulatory penalties, reputational damage, or legal consequences. For businesses entering into financing or investment agreements, Patriot Act compliance clauses are often included to confirm that both parties are not linked to prohibited or high-risk entities.
Understanding Patriot Act compliance through an example
A private equity firm seeks to invest in a portfolio company. As part of the transaction, the firm asks the company to certify that it complies with the Patriot Act—meaning it has verified the identities of key stakeholders and is not knowingly doing business with any person or entity listed on government watchlists. This gives the investor assurance that the company has basic controls in place to detect and prevent misuse of funds.
Example of how a Patriot Act compliance clause may appear in a contract
Here’s how a Patriot Act compliance clause may appear in a credit or subscription agreement:
"Each Party represents and warrants that it is in compliance with the USA PATRIOT Act and has implemented policies and procedures designed to comply with applicable anti-money laundering laws and regulations, including the identification of its investors or clients as required by Section 326 thereof."
Conclusion
Patriot Act compliance is a key aspect of financial and legal due diligence, especially in transactions involving banks, lenders, or investment funds. It confirms that parties are taking steps to prevent criminal misuse of the financial system. Including a compliance clause in agreements helps ensure transparency and supports broader efforts to detect and deter unlawful activity.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.