United States: FINCEN Issues New Due Diligence Requirements For Anti-Money Laundering Programs

The Financial Crimes Enforcement Network ("FinCEN") recently has shown an increased assertiveness in its enforcement of anti-money laundering regulations. Both a major bank (ABN AMRO) and securities dealer (Oppenheimer & Company) were assessed penalties in the millions of dollars by FinCEN at the end of last year because of their failure to identify suspicious activities and other systematic defects with their anti-money laundering operations.

FinCEN has followed these enforcement actions with the issuance of new due diligence requirements for banks and other designated financial institutions. Specifically, on January 4, 2006, FinCEN issued its final rule mandating new due diligence procedures for: (1) correspondent accounts established or maintained for foreign financial institutions; and (2) private banking accounts established or maintained for non-U.S. persons (the "Rule"). The Rule fills out the requirements of Article 312 of the USA PATRIOT Act, which generally articulated certain minimum due diligence procedures for each financial institution that establishes, maintains, administers, or manages a private banking account or correspondent account for non-U.S. persons. The Rule further replaces the Interim Final Rule of July 23, 2002, which called on a limited number of financial institutions to implement Article 312’s due diligence procedures without providing much regulatory guidance. The Rule’s implementation now clarifies in greater detail which financial institutions are subject to these due diligence requirements and what they actually entail. As summarized below, banks, future commission merchants and introducing brokers in commodities, broker-dealers, and mutual funds must take this Rule into consideration when administering their anti-money laundering compliance programs.

U.S. Accounts and Financial Institutions Covered under the Rule. The Rule adopts a single broad definition of a "correspondent account" subject to the regulation. The term means an account "established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, a foreign financial institution, or to handle other financial transactions related to such foreign financial institution." Only a limited number of "covered" financial institutions, however, are responsible for implementing the Rule’s due diligence procedures for correspondent accounts, namely: banking institutions, securities broker-dealers; futures commission merchants and introducing brokers in commodities; and mutual funds. Noticeably absent from this list are several financial institutions that are otherwise required to have anti-money laundering compliance programs, such as operators of a credit card system, casinos, and money services businesses. In all three cases, FinCEN concluded that these financial institutions did not offer a correspondent account as that term was defined under the Rule.

The Rule further clarifies what sort of "accounts" actually qualify as a correspondent account for a covered financial institution. For a banking institution, an account includes any formal banking or business relationship established by a bank to provide regular services, dealings, and other financial transactions. For broker-dealers, an account means a formal relationship "to provide regular services to effect transactions in securities, including, but not limited to, the purchase or sale of securities and securities loaned and borrowed activity, and to hold securities or other assets for safekeeping or as collateral." The industry-specific definition of account must be reviewed for each covered financial institution to determine the type and scope of the relationship covered by the Rule.

Covered Foreign Financial Institutions. The Rule applies to correspondent accounts maintained by the following foreign financial institutions: (1) a foreign bank; (2) a foreign branch of a U.S. bank; (3) a business organized under a foreign law that, if it were located in the United States, would be a securities broker-dealer, futures commission merchant, introducing broker in commodities, or a mutual fund; or (4) a money transmitter or currency exchanger organized under foreign law (except if such transactions are merely incidental to a person’s business).

Due Diligence Requirements. Whereas FinCEN previously proposed that due diligence programs under Article 312 should contain certain specific procedures (See 67 FR 37,736 (May 30, 2002) and "FinCEN Issues New Anti-Money Laundering Rule For Dealers in Precious Metals, Precious Stones, And Jewels," Sentinel, Vol II, No. 3 (Summer 2005)), the Rule adopts a more general risk-based approach. Specifically, the review of a correspondent account should consider certain relevant factors, as appropriate to the particular jurisdiction, customer and account. According to FinCEN’s analysis of the Rule, covered financial institutions should direct their resources to those accounts that pose the greatest money-laundering risks. The Rule identifies the following factors to be considered in any risk assessment:

• The nature of the foreign financial institution’s businesses and the markets it serves;

• The type, purpose, and anticipated activity of such correspondent account;

• The nature and duration of the financial institution's relationship with the foreign financial institution;

• The anti-money laundering and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution;

• Information known or reasonably available to the covered financial institution about the foreign financial institution's anti-money laundering record.

The Rule requires that the risk-based analysis take place not only upon the opening of an account, but also periodically thereafter to confirm that the type, purpose, and anticipated activity of the account has not changed. The due diligence procedures should also include procedures to be followed in circumstances in which a covered financial institution cannot perform appropriate due diligence with respect to a correspondent account. Finally, please note that FinCEN has published a Notice of Proposed Rulemaking to address Article 312's requirement to establish enhanced due diligence requirements for offshore banks and banks operating in jurisdictions of primary money laundering concern.

The due diligence procedures described above focus on the foreign financial institution for which the correspondent account is maintained, not the customers of that institution (although that may be considered as part of a risk analysis). In contrast, the Rule’s due diligence requirements for private banking accounts concentrates on foreign individuals, not foreign financial institutions. As discussed below, in addition to conducting due diligence on these private accounts, enhanced due diligence is required for accounts of so-designated senior political figures.

Covered Financial Institutions. The same covered financial institutions subject to the correspondent account provisions requirements discussed above are also subject to the due diligence requirements for private banking accounts. FinCEN recognizes, however, that mutual funds do not currently offer private bank accounts.

Private Banking Accounts. The Rule covers private banking accounts for individuals who are neither a U.S. citizen nor a lawful permanent resident. The Rule stipulates that a private banking account requires a minimum aggregate deposit of funds or other assets of not less than $1 million. If a financial institution offers more than one level of private banking services to its clients, then any account or combination of accounts that require a $1 million aggregate minimum deposit would be subject to the Rule.

Under the Rule, a private banking account also must be established on behalf of one or more individuals who have a direct or beneficial ownership interest in the account. Moreover, the account must be assigned to, or be administered or managed by, in whole or in part, an officer employee or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account. A "liaison" is the financial institution’s employee who develops a long-term relationship with the client and is actively involved in providing different services (i.e., cash management, funds transfer, asset management, financial planning, etc.).

Senior Foreign Political Figures. The rule imposes additional due diligence requirements for senior foreign political figures. The Rule defines such individuals as: (1) current or former senior officials in the executive, legislative, administrative, military, or judicial branches or a foreign government; (2) a senior official of a major foreign political party; and (3) a senior executive of a foreign-government owned commercial enterprise (i.e., individuals with substantial authority over policy, operations, or the use of government-owned resources). Relevant factors to be considered in determining this status include examining official responsibilities of the individual’s office, the nature of the title (honorary or salaried political position), the level of authority the individual has over other officials, and individual access to significant government funds or assets.

The definition of senior foreign political figure also includes immediate family members of such individuals, and those who are widely and publicly known (or actually known) to be close associates of a senior foreign political figure.

General Requirements—The Rule articulates a similar risk-based analysis for private banking accounts as it follows for correspondent accounts. Among the minimum requirements, a financial institution must ascertain the identity of all nominal owners of a private banking account. For example, in its analysis of the Rule, FinCEN states that when an account is opened by a natural person, the financial institution should establish whether the client is acting on his or her behalf and should conduct additional due diligence if doubt exists as to the identity of the beneficial owner(s). FinCEN further states that financial institutions cannot rely on the due diligence conducted by well-regulated foreign intermediaries to satisfy their own due diligence requirements.

Financial institutions are also required to ascertain the source(s) of funds deposited into a private banking account and the purpose and expected use of the account. According to FinCEN, certain types of deposits, such as deposits from a charitable fund or foreign government agency or foreign government agency trust funds, may require further scrutiny. Finally, as with correspondent accounts, financial institutions will need to conduct periodic reviews of the covered private banking accounts to ensure ongoing compliance with U.S. anti-money laundering requirements.

Senior Foreign Political Figures—The Rule requires that a financial institution ascertain whether any person opening a foreign bank account is a senior foreign political figure or a person who is widely and publicly known to be a close associate of such senior political person. In addition to obtaining information directly from the individual regarding his/her possible status as a foreign political figure, a financial institution should contact all references as well as make reasonable efforts to review public sources of information in order to meet its due diligence obligations.

If an individual is designated by a financial institution as a senior foreign political figure, then enhanced due diligence is required to detect and report transactions that may involve the proceeds of foreign corruption. The term "proceeds of foreign corruption" means any asset or property that is acquired by, through, or on behalf of a senior foreign political figure through misappropriation, theft, or embezzlement of public funds; through the unlawful conversion of property of a foreign government; or through acts of bribery or extortion.

Covered financial institutions have 90 days from the publication of the Rule in which to establish and apply the due diligence requirements to "new" correspondent and private banking accounts. A "new" account is one established within 90 days of the Rule’s publication. For existing accounts, the Rule takes effect on October 2, 2006.

In light of FinCEN’s aggressive enforcement of anti-money laundering regulations, banks and other covered financial institutions must ensure that proper procedures are in place to implement the new due diligence requirements.

This article is presented for informational purposes only and is not intended to constitute legal advice.