United States: Developments In Tri-Border Area Post New Risk To Correspondent Banking

Last Updated: October 10 2019
Article by Claiborne (Clay) W. Porter

It is no secret that U.S. correspondent banking relationships are indispensable to global commerce. Indeed, access to the U.S. financial system through correspondent banking is integral to foreign banks and to their customers, who often depend on the U.S. dollar as the anchor currency for their deals. At the same time, U.S. banks are under intense pressure (more than ever before) by regulators and law enforcement to quickly detect and report suspicious activity, and ensure that they are not conduits for illicit funds originating in foreign jurisdictions, and passing through correspondent accounts held for foreign banks.

To that end, in what is certainly not a new phenomenon, U.S. banks are keeping a close watch over their correspondent banking relationships, and quickly moving to exit relationships at the hint of impropriety. Moreover, it is well documented that some U.S. banks are "de-risking" not because of a specific event but because of the overall financial crime risk a foreign-located bank might pose. U.S. banks in some instances may not be interested in managing that risk, and would rather avoid the risk altogether by exiting the relationship. This process led some U.S. banks to terminate correspondent relationships with Latin and South American banks. While there has been significant discussion around the negative impacts of de-risking by U.S. government officials, it is still prevalent.

Recent developments in the Tri-Border Area may accelerate the trend for banks in Latin America and South America. Also known as the Triple Frontier, the Tri-Border Area is a free-trade zone linking Argentina, Brazil, and Paraguay, and it has long been regarded as a haven for smuggling and narcotics. More recently, instability in Venezuela and stepped-up money-laundering enforcement in Panama and the Caribbean have made the region an attractive alternative for transnational criminal organizations looking to launder illicit funds.1 To that end, news reports indicate that the Department of Justice has targeted the Tri-Border Area as part of a global effort to weaken Hezbollah.2 Hezbollah is reported to have long-standing ties to the region.3 In 2018, the Department of Justice designated Hezbollah as a transnational criminal organization. And in June of this year, Paraguay extradited Nader Mohamed Farhat from the Tri-Border Area to the U.S. to face charges of laundering money for drug cartels and other transnational organizations.4 Although the indictment remains sealed, media reports link Farhat to Hezbollah.5 This was the second such extradition since 2017, and suggests increasing cooperation between the Department of Justice and authorities in Paraguay and Argentina.6

The reported link between Hezbollah and the Tri-Border Area, along with its reputation for harboring willful participants in illicit finance, will place additional pressure on correspondent bank relationships in the region and throughout South America and Latin America. As U.S. banking regulators examine U.S. bank AML programs (both domestic banks and foreign banks with U.S. branches), including examinations of their correspondent relationships, and law enforcement focus on SARs relating to the Tri-Border Area, now is the time to shore up AML controls around these relationships. Section 312 of the USA PATRIOT ACT, 31 U.S.C. §5318(i), and its implementing regulation, 31 CFR §1010.60, require banks operating in the United States to establish effective risk-based due diligence programs for correspondent accounts. The due diligence required is not limited strictly to the correspondent account. Banks are also expected to scrutinize the relationship between a correspondent bank and its customers.7 The Financial Crimes Enforcement Network ("FinCEN") has recently penalized banks in the United States for failing to conduct adequate due diligence in this context. For example, on November 1, 2017, FinCEN imposed a $2 million penalty on Lone Star National Bank for having inadequate Know Your Customer ("KYC") procedures for correspondent accounts, failing to risk-rate correspondent transactions, and failing to adopt rigorous anti-money laundering ("AML") compliance measures.8

If the U.S. focus on the Tri-Border Area continues to expand, the consequences are likely to ripple across the landscape of Latin and South American banking. U.S. banks that offer correspondent services in Latin and South America may feel even greater pressure to de-risk and avoid scrutiny from FinCEN, banking regulators, and the Department of Justice. It may be just a matter of time before U.S. banks push even harder on their South American and Latin American correspondent partners to demonstrate robust AML compliance, and proactive measures to prevent Tri-Border Area funds from making their way to the U.S. National and regional banks in Latin America who hold the correspondent relationships may pass these requirements on to their smaller downstream customers.

These potential consequences combined with the heightened scrutiny of the Tri-Border Area highlight the need for banks in South America and Latin America to take steps to assess their exposure to Tri-Border Area funds (money to and from the Tri-Border area), focusing on transactions connected to the Middle East and Asia, and identifying potential shell corporations and customers potentially involved in the movement of illicit funds. Additionally, Latin and South American banks should consider taking proactive measures to avoid having their correspondent relationship "de-risked", by strengthening their AML and sanctions compliance programs, and ensuring that their AML and sanctions policies and procedures are robust, effective, and comport with U.S. expectations. Moreover, national and regional banks who provide correspondent services to smaller regional banks would do well to work with those smaller banks to enhance their AML programs. Access to correspondent services is a vital component of modern banking. Without these services, banks in South America and Latin America will be unable to participate in the dollar-based global economy, including, for example, accessing a steady supply of US dollars for customers or processing remittances from emigres. Implementation of an effective, risk-based AML compliance program may mitigate potential exposure to the Tri-Border Area, and also allow banks in South and Latin America to more effectively collaborate with U.S. banks to establish or maintain these vital relationships.

Footnotes

1 See Dr. R. Evan Ellis, The Paraguayan Military and the Struggle against Organized Crime and insecurity, Military Review Online, January 2019, available at https://www.armyupress.army.mil/Journals/Military-Review/Online-Exclusive/2019-OLE/Jan/Paraguayan-Military/.

2 See Ian Talley, Hezbollah Said to Be Laundering Money in South American Tri-Border Region," The Wall Street Journal, May 15, 2018.

3 Id.

4 See Jay Weaver, Paraguayan extradited to Miami for key role in huge money laundering schemes, feds say, The Miami Herald, June 21, 2019, available at https://www.miamiherald.com/news/local/crime/article231810213.html.

5 See Emanuele Ottolenghi, To Fight Terrorists, Follow the Money, Foreign Policy, July 19, 2019, available at https://foreignpolicy.com/2019/07/19/to-fight-terrorists-follow-the-money/.

6 See Emanuele Ottolenghi, Suspected Hezbollah Financier Extradited to the U.S., Policy Brief, Foundation for Defense of Democracies, June 11, 2019; available at https://www.fdd.org/analysis/2019/06/21/suspected-hezbollah-financier-extradited-to-the-u-s/.

7 See, e.g., 31 C.F.R. §1010.610(a)-(c) (requiring U.S. banks to implement due diligence programs that detect and prevent money laundering in correspondent accounts, and to develop enhanced due diligence procedures for correspondent banking in jurisdictions that do not cooperate with international AML standards (e.g., the recommendations of the Financial Action Task Force).)

8 See Assessment of Civil Monetary Penalty, IN THE MATTER OF: Lone Star National Bank, Department of the Treasury, Number 2017-04.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions