GT Alert

USA PATRIOT Act – Final and Proposed Customer Due Diligence Regulations Applicable to Banks, Broker Dealers, Futures Commission Merchants and Mutual Funds

January 2006

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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”).

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.

FINAL REGULATION

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:

1. Determine whether the account is subject to enhanced due diligence under Section 312.
2. 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.
3. 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:

1. Determine the identity of all nominal and beneficial owners of the private banking account.
2. Determine whether an owner is a senior foreign political official, who is subject to enhanced scrutiny.
3. Determine the source of funds deposited into the private banking account and the purpose and expected use of the account.
4. 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

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:

1. Under an offshore license;
2. In a jurisdiction found to be non-cooperative with international AML principles; or
3. 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:

1. Conduct appropriate enhanced scrutiny;
2. Determine whether the foreign bank offers correspondent accounts to other foreign banks and identity such foreign bank customers; and
3. 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

Additional Information:

For more information, please review our Financial Institutions Practice description, or feel free to contact one of our attorneys.

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