Correspondent banking is a service provided by U.S. banking
organizations to foreign banks that do not have a U.S. banking
subsidiary or branch. Without such a U.S. presence, a foreign bank
must look to a correspondent banking relationship to clear its U.S.
Foreign correspondent banking relationships have come under
significant strain over the past decade, but particularly in recent
years, as U.S. financial regulators and law enforcement agencies
have more closely scrutinized these relationships and pursued
enforcement actions with respect to anti-money laundering
("AML") compliance. Increased enforcement risk and
regulatory compliance burdens have led many banks to
"de-risk" their foreign correspondent banking activities,
sometimes terminating foreign correspondent accounts entirely from
certain countries with unsatisfactory AML standards. In turn,
account closures have led to "financial inclusion"
concerns about the lack of access to critical financial services by
certain categories of customers (including nonprofit organizations)
in developing countries. In addition, in remarks today at the
International Money Fund and World Bank Annual Meetings in
Washington, D.C., U.S. Treasury Secretary Jack Lew recognized that
"if the [AML compliance] burden is so high . . . that people
withdraw from the financial system or are excluded from it, it
ultimately raises the risk of illicit transactions."
On October 5, 2016, the Office of the Comptroller of the
Currency ("OCC")—the primary federal banking
regulator for national banks, federal savings associations, and
federal branches and agencies (collectively,
"banks")—released guidance setting forth
supervisory expectations for banks' periodic risk reevaluations
of their foreign correspondent account customer relationships. The
OCC noted that, until this issuance, it had not issued specific
guidance on this topic.
As part of its guidance, the OCC identified the following
"best practices" that banks should consider when deciding
to retain or terminate foreign correspondent banking
Establish and maintain an effective
governance function to review the method for risk reevaluation and
to monitor the appropriateness of recommendations regarding foreign
correspondent account retention or termination.
Communicate foreign correspondent
account termination decisions regularly to senior management.
Communicate with foreign financial
institutions, consider specific mitigating information these
institutions may provide, and provide sufficient time to establish
alternative banking relationships before terminating accounts,
unless doing so would be contrary to law or pose an additional risk
to the bank, national security, or reveal law enforcement
Ensure a clear audit trail of the
reasons and method used for account closure.
The OCC reiterated that decisions whether to retain or terminate
banking relationships reside with the bank. In doing so, the OCC
sought to clarify that it does not direct banks to terminate entire
categories of customer accounts without regard to the risks
presented by the particular customer or the bank's ability to
manage the risk.
The OCC's guidance follows a recent move by regulators to
"dispel certain myths" relating to correspondent banking
relationships. On August 30, 2016, the OCC and the other federal
banking agencies, as well as the U.S. Department of the Treasury,
issued guidance—styled as a "joint fact
sheet"—summarizing key aspects of federal supervisory
and enforcement strategy and practices in the area of correspondent
banking. They explicitly stated that they do not have a "zero
tolerance" policy that requires the "strict imposition of
formal enforcement action regardless of the facts and circumstances
of the situation." Rather, they noted that approximately 95%
of BSA/AML compliance deficiencies identified by the federal
banking agencies and the Treasury Department (through its FinCEN
and OFAC units) are resolved without the need for an enforcement
action. Nevertheless, it is clear that banks' foreign
correspondent banking relationships will continue to be an area of
supervisory concern. The OCC's release of "best
practices" for banks is just the latest example.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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