Treasury Department Proposes Due Diligence Rules for Correspondent and Private Banking Accounts

By Peter E. Feltman, M.A., CCH Washington News Bureau, contributing author, CCH FOCUS.

According to the Treasury Dept., this proposal would not require banks to implement or develop any new programs. Rather, it would be an addition to the current Bank Secrecy Act money laundering requirements. The proposal is made to fill in gaps in current reporting and, in general, will require nothing new when U.S. banks accept correspondent accounts from foreign-owned, U.S.-chartered banks. As such, U.S. institutions would not need to make changes to how they deal with a nationally chartered bank, even if a controlling share of that bank’s stock is foreign owned.

DUE DILIGENCE PROGRAMS

Under the proposal, which would implement Title III of the USA PATRIOT Act of 2001, certain U.S. financial institutions—including banks and non-banks such as securities broker-dealers, futures commission merchants and introducing brokers—would be required to establish a due diligence program for correspondent accounts they maintain for specified foreign financial institutions. These programs would be designed to detect and report money laundering and to conduct enhanced due diligence for accounts maintained for foreign banks from certain jurisdictions considered to be of higher risk for money laundering.

The proposal also would require banks to keep track of accounts that may contain funds that are the proceeds of corruption. To this end, banks would need to take a special look at accounts held by senior foreign political figures and their relatives or close associates. Senior officials in government-owned projects also are included in the list of customers requiring special attention. Furthermore, U.S. banks would need to take steps outlined in the proposal to determine the owners or controllers of banking institutions to ensure that the U.S. banking system is not working with foreign banking companies that are fronts for or involved with terrorism, corruption, drug dealing or other illicit activities.

Components

The proposal has five separate due diligence components for dealing with correspondent accounts from foreign sources. U.S. institutions covered by this rule would be required to: 1. determine whether their foreign correspondent partners are operating under certain offshore banking licenses or under banking licenses issued by certain jurisdictions to help track money from areas with a history of money laundering; 2. assess whether the correspondent is at risk for money laundering based on factors that include lines of business, size, customer base, location, products and services, the nature of the correspondent account and the transactions the account is used for; 3. use publicly-available information from a wide variety of sources, such as government agencies and multilateral organizations, to help determine whether their correspondent accounts are a money laundering risk; 4. avail themselves of all money laundering guidance issued by the Treasury Dept. and other government agencies to help determine risk; 5. take steps to determine whether foreign correspondent account holders have been the subject of criminal or regulatory action for money laundering activity.

Licenses

Further requirements also would be in place under the proposal for foreign banks operating under certain types of licenses, which are outlined in the proposal and include offshore banking licenses and banks from countries that are not cooperating with international anti-money laundering principles or that have been designated by the Treasury Dept. to warrant further attention. In such cases, U.S. institutions would be required to: 1. enhance scrutiny, which could include evaluating the sources of the funds placed in correspondent accounts and identifying the individuals who can direct transactions involving these funds; 2. determine whether correspondent account holders in turn take correspondent accounts of their own to ensure that “dirty” banks are not placing their funds in less-suspicious foreign banks prior to the deposit of these funds in U.S. banks; and 3. determine bank ownership in cases where a foreign bank is not owned through publicly traded securities. U.S. banks would need to take steps such as obtaining a statement of ownership, detailing the names of anyone with more than a 5-percent share and determining whether these shares are held directly or indirectly.

U.S. banks will need to have policies in place to deal with situations where the due diligence steps cannot be taken, for example, where ownership cannot be determined. Steps could include the U.S. bank’s policy for refusing to accept an account, suspending an account’s transactions, filing suspicious activity reports, or closing the account.

PRIVATE BANKING

The proposal also sets up standards for dealing with private banking services performed for non-U.S. citizens. These provisions are similar to those for correspondent accounts, with emphasis on not allowing the “proceeds of foreign corruption” to end up in U.S. banks. The proposed private banking regulations would apply only to private banking accounts in excess of $1 million.