No Due Diligence Needed on Foreign Financial Institutions' Customers, Says Treasury

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September 1, 2016

Under existing U.S. regulations, "there is no general requirement for U.S. depository institutions to conduct due diligence on a [foreign financial institution]'s customers," according to a August 30 fact sheet issued by the U.S. Department of the Treasury and federal banking agencies, Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement, and a blog posted on Treasury's website. The fact sheet is intended to dispel the myth that banks must know their foreign financial customers' customers, and to clarify the agencies' "supervisory and enforcement posture regarding AML/CFT sanctions in the area of correspondent banking."    

As the fact sheet notes, U.S. depository institutions that maintain corresondent accounts for foreign financial institutions (FFIs) are required to establish appropriate, specific and risk-based due diligence policies, procedures and processes that are "reasonably designed to assess and manage the risks inherent with these relationships." This is not, the blog explains, a "zero tolerance" policy. The policies, procedures and processes implemented will depend on the level of risk posed by the correspondent FFI, which can vary depending on its strategic profile, including its size and geographic locations, the products and services it offers, and the markets and cusomer bases it serves. 

Correspondent banking relationships have been declining in recent years as banks sever ties with FFIs they deem to be "high-risk," for fear of running afoul of U.S. anti-money laundering and counter-terror finance regulations. Severe penalties imposed in recent enforcement actions against banks have contributed to this climate of fear and a recalculation of the risk-benefit analysis in favor of dropping these FFIs. As a result, banks are unable to serve clients such as charities seeking to transfer money to global hot spots where humanitarian aid is urgently needed. Wire transfers may be delayed for months at a time or ultimately canceled. In the end, it is the at-risk populations overseas that feel the brunt of these banking decisions. 

In determining the appropriate level of due diligence necessary for FFI relationship, the fact sheet explains, U.S. depository institutions should consider the "extent to which information related to the FFI's markets and types of customers is necessary to assess the risks posed by the relationship, satisfy the institution's obligations to detect and report suspicious activity, and comply with U.S. economic sanctions." This may require requesting additional information about the activity underlying the FFI's transactions in accordance with suspicious activity reporting rules as well as sanctions compliance obligations. 

The fact sheet goes on to state the the federal banking agencies apply a risk-based approach to supervision, including the examination process. In 95% of cases, deficiencies identified are resolved after they're brought to the attention of the depository institution's management via confidential reports of examination and supervisory letters. If prompt remedial action is not implemented or the deficiencies are more serious, federal agencies may consider a range of enforcment steps. Enforcement actions may be brought by federal banking agencies, the Financial Crimes Enforcment Network (FinCEN, for noncompliance with the Bank Secrecy Act) or Treasury's Office of Foreign Assets Control (OFAC). 

The blog post is authored by Nathan Sheets, Under Secretary for International Affairs, Adam Szubin, Acting Under Secretary for Terrorism and Financial Intelligence, and Amias Gerety, Acting Assistant Secretary for Financial Institutions at U.S. Treasury.The fact sheet was issued by U.S. Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. 

The full fact sheet can be found here

The blog post is here