CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.11 July 29, 2002

Vol 2002 No. 11 July 29, 2002

Interim Rules on USA PATRIOT Act Compliance

The Treasury Department and the Financial Crimes Enforcement Network (FinCEN) have issued an interim final rule under the USA PATRIOT Act (Act), which among other things, requires financial institutions to establish policies and procedures to report money laundering through correspondent and private banking accounts. New section 5318(i) of the Bank Secrecy Act (BSA), added by the Act, encompasses these obligations and must take effect on July 23, 2002 regardless of whether Treasury has issued a final rule by that date. A proposed rule was issued on May 30 setting forth enhanced due diligence procedures with respect to such accounts, but it is not anticipated to be effective until October.

The interim rule suspends application of the Act's due diligence provisions for certain institutions, but not banks, which must comply with section 5318(i) pending Treasury's issuance of a final rule. Generally, a bank's due diligence policy would be deemed reasonable if it comports with existing best practices standards and complies with specific directives contained in the Act. The guidance included in the interim rule comes with the caveat that the guidance is not necessarily indicative of the upcoming final rules, which are subject to public comment.

Due diligence for correspondent accounts. Prior to issuance of a final rule, a due diligence program under section 5318(i)(1) of the Act applicable to foreign correspondent accounts (that is, those opened for foreign financial institutions) are deemed reasonable if the bank focuses on accounts that pose a high risk of money laundering based on an "overall assessment" of the risks of money laundering posed by the foreign institution. Particular attention must be paid to accounts used to provide services to third parties, accounts maintained for foreign financial institutions other than banks (such as money transmitters), and accounts opened on or after July 23, 2002.

High risk foreign banks. Specific guidance is provided with respect to opening and maintaining correspondent accounts for certain foreign banks designated as high risk, as described in new BSA section 5318(i)(2). These are accounts requested by or maintained for a foreign bank that (1) operates under an offshore banking license; (2) operates under a banking license issued by a country that has been designated as non- cooperative with international anti-money laundering principles or procedures; or (3) the Treasury Department designates as warranting special measures due to money laundering concerns.

A bank's monitoring program as applied to such high risk accounts must include provisions set forth in BSA Section 5318(i)(2)(B)(i) through (iii). These include identifying the owners of the foreign bank whose shares are not publicly traded and the nature and extent of such ownership interest of each owner, monitoring the account for money laundering and reporting suspicious transactions, and determining whether the foreign bank provides correspondent accounts to other foreign banks and, if so, their identity and related due diligence information. An owner, for purposes of a high risk foreign bank, is deemed to be any person who directly or indirectly owns, controls, or has voting power over 5 percent or more of any class of the bank's (non publicly traded) securities. See text of Section 312(a)(i)(2)(B)(i) through (iii) of the Act provided with this Bulletin.

Private banking accounts for non-US persons. Private banking accounts covered under the Act are those (1) opened for persons who are neither citizens nor permanent residents of the US; (2) that require minimum aggregate deposits of at least $1 million; and (3) that are handled by a representative of the institution who acts as liaison between the institution and the account owner. Enhanced scrutiny is also required of private banking accounts maintained by or on behalf of senior foreign political figures, their immediate family members, and close associates. A monitoring program must focus on money laundering and the existence of the proceeds of foreign corruption. Treasury cites as best practice standards those contained in the Federal Reserve's SR 97-19 (SUP) "Private Banking Activities" (June 30, 1997) available at www.federalreserve.gov), related guidance issued jointly by Treasury, the federal bank regulators, and the State Department in January 2001 (available at www.treas.gov/press/releases/ docs/guidance.htm), and Wolfsberg Group, "Global Anti-Money-Laundering Guidelines for Private Banking: Wolfsberg AML Principles" (1st Revision May 2002), available at www.wolfsberg-principles.com. Again, particular scrutiny must be given to accounts opened on or after July 23, 2002.

For further information, contact: Office of the Assistant General Counsel for Banking & Finance (Treasury), (202) 622-0480; the Office of the Assistant General Counsel for Enforcement (Treasury), (202) 622-1927; or the Office of the Chief Counsel (FinCEN), (703) 905-3590.

Text of Section 312 of the USA PATRIOT Act, which corresponds with new 31 USC 5318(i) of the BSA.

SEC. 312. SPECIAL DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS.

(a) IN GENERAL- Section 5318 of title 31, United States Code, is amended by adding at the end the following:

`(i) DUE DILIGENCE FOR UNITED STATES PRIVATE BANKING AND CORRESPONDENT BANK ACCOUNTS INVOLVING FOREIGN PERSONS-

`(1) IN GENERAL- Each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.

`(2) ADDITIONAL STANDARDS FOR CERTAIN CORRESPONDENT ACCOUNTS-

`(A) IN GENERAL- Subparagraph (B) shall apply if a correspondent account is requested or maintained by, or on behalf of, a foreign bank operating--

`(i) under an offshore banking license; or

`(ii) under a banking license issued by a foreign country that has been designated--

`(I) as noncooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member, with which designation the United States representative to the group or organization concurs; or

`(II) by the Secretary of the Treasury as warranting special measures due to money laundering concerns.

`(B) POLICIES, PROCEDURES, AND CONTROLS- The enhanced due diligence policies, procedures, and controls required under paragraph (1) shall, at a minimum, ensure that the financial institution in the United States takes reasonable steps--

`(i) to ascertain for any such foreign bank, the shares of which are not publicly traded, the identity of each of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner;

`(ii) to conduct enhanced scrutiny of such account to guard against money laundering and report any suspicious transactions under subsection (g); and

`(iii) to ascertain whether such foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information, as appropriate under paragraph (1).

`(3) MINIMUM STANDARDS FOR PRIVATE BANKING ACCOUNTS- If a private banking account is requested or maintained by, or on behalf of, a non-United States person, then the due diligence policies, procedures, and controls required under paragraph (1) shall, at a minimum, ensure that the financial institution takes reasonable steps--

`(A) to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, such account as needed to guard against money laundering and report any suspicious transactions under subsection (g); and

`(B) to conduct enhanced scrutiny of any such account that is requested or maintained by, or on behalf of, a senior foreign political figure, or any immediate family member or close associate of a senior foreign political figure that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.

`(4) DEFINITION- For purposes of this subsection, the following definitions shall apply:

`(A) OFFSHORE BANKING LICENSE- The term `offshore banking license' means a license to conduct banking activities which, as a condition of the license, prohibits the licensed entity from conducting banking activities with the citizens of, or with the local currency of, the country which issued the license.'.

`(B) PRIVATE BANKING ACCOUNT- The term `private banking account' means an account (or any combination of accounts) that--

`(i) requires a minimum aggregate deposits of funds or other assets of not less than $1,000,000;

`(ii) is established on behalf of 1 or more individuals who have a direct or beneficial ownership interest in the account; and

`(iii) is assigned to, or is administered or managed by, in whole or in part, an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.'.

(b) REGULATORY AUTHORITY AND EFFECTIVE DATE-

(1) REGULATORY AUTHORITY- Not later than 180 days after the date of enactment of this Act, the Secretary, in consultation with the appropriate Federal functional regulators (as defined in section 509 of the Gramm-Leach-Bliley Act) of the affected financial institutions, shall further delineate, by regulation, the due diligence policies, procedures, and controls required under section 5318(i)(1) of title 31, United States Code, as added by this section.

(2) EFFECTIVE DATE- Section 5318(i) of title 31, United States Code, as added by this section, shall take effect 270 days after the date of enactment of this Act, whether or not final regulations are issued under paragraph (1), and the failure to issue such regulations shall in no way affect the enforceability of this section or the amendments made by this section. Section 5318(i) of title 31, United States Code, as added by this section, shall apply with respect to accounts covered by that section 5318(i), that are opened before, on, or after the date of enactment of this Act.