Taking Sides: As Patriot Act takes effect, will life imitate art imitating life?

The telephone is ringing; George Jung is on the line.

In an age when every company from Charles Schwab to Goldman Sachs is trying to wrap its arms around the high-net-worth market, he’s the quintessential dream client.

After all, he’s got a house that looks like a small hotel, more exotic cars in the driveway than he can possibly drive and an investible net worth of about $30 million.

Having Mr. Jung on your client list puts your business on the fast track. There are only a few small problems.

Most of his money is offshore in a bank in Panama, and it needs to be moved into the country, shall we say, discreetly.

As for his export-import business, it turns out that its most profitable product happens to be cocaine.

You know this, his lawyer knows this and his doctor knows this. But as his registered investment adviser, you are the one required by law to report his activities to the federal government.

Enlistees

That’s one of the new requirements of the USA Patriot Act, a measure signed into law last October by President Bush. The law was one of the most immediate reactions to the terror attacks on the World Trade Center and Pentagon.

It’s designed to provide the government with the financial information it needs to track down potential terrorists or anyone, including drug dealers, who might be trying to launder dirty money. To that end, the act enlists the financial services industry as a footsoldier in the war.

And, next week, the law hits home.

As InvestmentNews reporter Sarah O’Brien noted in a story last week, broker-dealers have until next Wednesday to adopt procedures that bring them into compliance with the Patriot Act.

Among the most troubling sections of the law is the so-called know-your-customer provision. To meet its requirements, broker-dealers may be forced to ask their brokers – even if they’re merely affiliated with the firm – for heretofore-confidential information about clients.

As Ms. O’Brien noted, industry insiders are debating exactly how much information reps will have to provide. Suffice it to say that many in the industry are concerned.

It’s debatable how many advisers might have a George Jung for a client or, for that matter, an Osama bin Laden. But it’s not as far-fetched as it may seem.

As any astute moviegoer can tell you, George Jung is real. His rise and fall as a true-life drug kingpin was featured in last year’s intriguing Ted Demme movie “Blow.”

At the height of his illegal career, Mr. Jung bore all the trappings of a coveted high-net-worth client. The house, the cars and the bank account were real.

He probably would have been more than welcome at Goldman Sachs or any other top firm – until now, that is.

Would a Goldman Sachs broker report Mr. Jung to the FBI?

Highly unlikely in times past, but under the Patriot Act, brokers now appear to be compelled to report such a client – or face possible penalties themselves.

Of course Mr. Jung is an extreme example, but therein lies the problem. Many situations that might be covered by the act won’t be so clear-cut. Yet brokers may well be forced to play detective.

The Securities Industry Association, which represents the brokerage industry, has issued some “best-practices” guidelines, but even they seem problematic. Are brokers really going to report clients because they seem indifferent to investment objectives, risks, fees or commissions as the guidelines suggest?

The Securities and Exchange Commission, the Department of the Treasury and the National Association of Securities Dealers are all reported to be in the process of finalizing guidance to help broker-dealers comply with the new law.

If the Patriot Act is to have any meaning at all, they’ll need to make that effort a top priority.