Originally published in Financial Services Advisory Update, Volume 3, No. 1 February 2006

Among other provisions, the 2001 USA PATRIOT Act required the US Treasury Department to issue regulations regarding due diligence and enhanced due diligence with respect to correspondent accounts established or maintained by US financial institutions for non-US financial institutions and private banking accounts established or maintained for non-US persons. In 2002, the Treasury Department issued an interim rule requiring only certain financial institutions such as banks to comply with the due diligence provisions in the statute. On January 4, 2006, the Treasury Department published final rules on the topic. The regulations are effective February 3, 2006, but carry a delayed effective date of April 4, 2006, for new accounts and October 2, 2006, for accounts established prior to April 4. US financial institutions covered by these rules are banking organizations, broker-dealers, futures commission merchants and introducing brokers in commodities, and certain types of mutual funds.

A covered financial institution must establish a due diligence program that includes risk-based policies, procedures and controls "reasonably designed" to detect money laundering through or involving any correspondent account established or maintained for non-US financial institutions, which generally are defined as institutions similar to the US financial institutions subject to the rule, as well as money transmitters and currency dealers or exchangers. When assessing the money laundering risk posed by a particular account, the following factors should be considered:

  • Nature of the correspondent’s business and the markets it serves.
  • Type, purpose and anticipated activity of such account.
  • Nature and duration of the financial institution’s relationship with the correspondent and any of its affiliates.
  • The anti-money laundering and supervisory regime of the jurisdiction that issued the charter or license to the correspondent, and, to the extent reasonably available, of the jurisdiction where the owner of the correspondent is licensed or chartered.
  • Information known or reasonably available regarding the correspondent’s own anti-money laundering record.

Covered financial institutions also must establish similar due diligence programs for private banking accounts (defined in part as accounts with a required minimum balance of $1 million in funds or assets) maintained for non-US persons. At a minimum, the US financial institution must:

  • Ascertain the identity of all nominal and beneficial owners of a private banking account.
  • Ascertain whether any owner is a senior foreign political figure.
  • Ascertain the source of funds deposited into the account and the expected use of the account.
  • Review the activity of the account to ensure that it is consistent with information obtained about the client’s source of funds, stated purpose and expected use of the account.

Additional requirements also would apply to accounts for or benefiting senior foreign political figures, defined as including senior foreign government or political party officials and their immediate families. US financial institutions must undertake enhanced due diligence reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption, a defined term including assets obtained through misappropriation or embezzlement of public funds.

Both due diligence programs must contain procedures to be followed when the US financial institution cannot perform the required due diligence on the proposed correspondent or private banking client, including criteria on when such accounts are to be refused or closed.

The final rules can be accessed at

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