USA PATRIOT Act – Final and Proposed Customer Due Diligence Regulations
Applicable to Banks, Broker Dealers, Futures Commission Merchants and Mutual
View or download the PDF version
of this Alert.
On December 16, 2005, the Financial Crimes Enforcement Network (“FinCEN”)
of the United States Department of the Treasury issued a final regulation
that implements the customer due diligence obligations under Section 312
of the USA PATRIOT Act applicable to banks, broker dealers and certain other
U.S. financial institutions in respect of any foreign correspondent and
foreign private banking accounts that they maintain (the “Final Regulation”).
FinCEN also issued a proposed regulation related to Section 312 that requires
enhanced due diligence for correspondent accounts maintained for certain
foreign banks (the “Proposed Regulation”).
|"…we believe that the
compliance functions of U.S. financial institutions should
carefully review their institution’s existing AML policies and
procedures and update them, as appropriate, to ensure that they
are fully consistent with the strictures of the new Final
While the Final Regulation does not materially alter much of the existing
anti-money laundering (“AML”) “best practices” that many U.S. financial
institutions have followed over the last four years in conducting due diligence
in respect of their non-U.S. correspondent bank and non-U.S. private banking
customers, we believe that the compliance functions of U.S. financial institutions
should carefully review their institution’s existing AML policies and procedures
and update them, as appropriate, to ensure that they are fully consistent
with the strictures of the new Final Regulation.
The Final Regulation and Proposed Regulation are summarized below.
What Entities Must Comply with the Final Regulation?
Under the Final Regulation, the following U.S. “financial institutions”
must conduct general due diligence in respect of correspondent accounts
for foreign financial institution customers and general and enhanced due
diligence in respect of private banking customers: (i) banking institutions,
including U.S. branches and agencies of foreign banks; (ii) securities broker-dealers;
(iii) futures commission merchants and introducing brokers in commodities;
and (iv) mutual funds.
What Diligence Is Due In Respect of Foreign Correspondent Accounts?
The Final Regulation broadly defines a “correspondent account” as an
account that has been established at a U.S. financial institution by a foreign
financial institution to receive deposits from or to make payments or other
distributions on behalf of, the foreign financial institution, or to handle
other financial transactions related to such foreign financial institution.
The following foreign institutions that maintain a correspondent account
with a U.S. financial institution are deemed to be “financial institutions”
for purposes of the Final Regulation: (i) a foreign bank; (ii) a foreign
branch of a U.S. bank; (iii) a business organized under a foreign law that,
if in the United States, would be a U.S. securities broker-dealer, futures
commission merchant, or mutual fund; and (iv) a money transmitter or currency
exchanger organized under foreign law.
At minimum, the U.S. financial institution must conduct the following
general due diligence in respect of any foreign financial institution that
maintains a correspondent account at the U.S. institution:
- Determine whether the account is subject to enhanced due diligence
under Section 312.
- Assess the money laundering risk posed after considering: (a) the
nature of the foreign financial institution’s business and the markets it
serves; (b) the type, purpose and anticipated activity of such correspondent
account; (c) the nature and duration of the relationship with the foreign
financial institution; (d) the AML regime of the home country of the foreign
financial institution; and (e) information known about the AML record of
the foreign financial institution.
- Apply risk-based policies, procedures, and controls to each correspondent
foreign account designed to report and detect money laundering activity,
including a periodic review of the foreign correspondent account activity.
The Final Regulation also guides U.S. financial institutions in determining
the risks posed by a correspondent relationship by outlining several risk
factors to be considered by U.S. institutions as appropriate.
What Diligence Is Due in Respect of Foreign Private Banking Accounts?
The Final Regulation requires U.S. financial institutions to establish
and maintain a general due diligence program for “private banking accounts.”
A “private banking account” is defined in the Final Regulation as an account
that: (1) is maintained for one or more non-U.S. persons; (2) requires a
minimum aggregate deposit of funds or other assets of not less than $1,000,000;
and (3) is assigned to a bank employee who serves as a liaison between the
financial institution and the non-U.S. person.
General Private Banking Due Diligence Requirements
U.S. financial institutions’ private banking accounts due diligence programs,
at a minimum, must:
- Determine the identity of all nominal and beneficial owners of the
private banking account.
- Determine whether an owner is a senior foreign political official,
who is subject to enhanced scrutiny.
- Determine the source of funds deposited into the private banking account
and the purpose and expected use of the account.
- Review the activity of the account to ensure that the activity is
consistent with the information obtained about the source of funds and to
report any suspicious activity.
Enhanced Private Banking Due Diligence Requirements
|"…the Proposed Regulation
allows U.S. financial institutions to have some flexibility in
applying the enhanced due diligence procedures on a
risk-assessed basis by shaping the enhanced due diligence to the
risks connected with the particular account."
Under the Final Regulation, the U.S. financial institution must perform
enhanced due diligence of any private banking account that is maintained
for senior foreign political figures, their immediate family members, or
persons known to be close associates of such individuals. “Senior foreign
political figures” include all current and former senior officials in the
executive, legislative, administrative, military, or judicial branches of
a foreign government, a senior official of a major political party, and
a senior executive of a foreign government-owned commercial enterprise.
This definition also includes any corporation, business, or entity formed
for a senior foreign political figure. Additionally, this definition also
includes a senior foreign political figure’s immediate family members, and
those who are known as close associates of the political figure.
The Final Regulation requires that a U.S. financial institution must
apply enhanced scrutiny to private banking accounts maintained by senior
foreign political figures. Enhanced scrutiny must detect and report transactions
that may involve the proceeds of foreign corruption.
When Must U.S. Financial Institutions Comply with the Final Regulation?
U.S. financial institutions covered by the Final Regulation have until
April 4, 2006 to establish and apply the due diligence requirements to new
foreign correspondent and foreign private bank accounts. For existing accounts
established before April 4, 2006, U.S. financial institutions covered by
the Final Regulation have until October 2, 2006 to comply.
NOTICE OF PROPOSED RULE MAKING
Section 312 requires U.S. financial institutions to apply enhanced due
diligence when establishing or maintaining a correspondent account on behalf
of foreign banks that are operating:
- Under an offshore license;
- In a jurisdiction found to be non-cooperative with international AML
- In a jurisdiction found to be of primary money laundering concern
under section 311 of the USA PATRIOT Act.
With regard to the correspondent accounts, Section 312 requires U.S.
financial institutions to:
- Conduct appropriate enhanced scrutiny;
- Determine whether the foreign bank offers correspondent accounts to
other foreign banks and identity such foreign bank customers; and
- Conduct additional due diligence on them and identify the owners if
the foreign bank is not publicly traded.
The original proposed regulation issued in 2002 created an exception
to the enhanced due diligence requirement. It specifically excluded foreign
banks operating under an offshore banking license that were branches of
banks licensed in a jurisdiction where one or more banks were subject to
comprehensive supervision or regulation on a consolidated basis from enhanced
due diligence requirements. However, the Proposed Regulation allows U.S.
financial institutions to have some flexibility in applying the enhanced
due diligence procedures on a risk-assessed basis by shaping the enhanced
due diligence to the risks connected with the particular account.
This Alert was written by
Carl A. Fornaris and
Beth A. Patterson in the
Miami office. Please contact Mr. Fornaris at 305-579-0626, Ms. Patterson
at 305-579-0610 or your Greenberg Traurig liaison with any questions regarding
the subject matter of this Alert.
© 2006 Greenberg Traurig
For more information, please review our Financial Institutions Practice
description, or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.