Tightening Up on Correspondent Accounts for Non-US Persons

By Victor Comras

Senator Shelby, Chairman of the Senate Banking Committee, used the Nomination Hearing for new Assistant Treasury Secretary for Terrorism Financing Patrick O�Brien to express his concern that the US is still not doing enough to stem the flow of funds to Iraqi insurgents and terrorist groups overseas. Some of these funds, he said, may even come from US sources. In written questions following the hearing he focused on continuing weaknesses associated with correspondent accounts, suspicious transaction reports, and due diligence. He put Treasury on notice that it was due time for it to finalize its BSA Section 312 regulations and to take steps to rationalize and revalue the use of suspicious transaction reports. The reader will recall that Section 312 requires regulations to tighten due diligence requirements over correspondent accounts or private banking accounts held by US institutions for non US persons, especially offshore and shell banks. Treasury initially proposed such regulations in May 2002, and Interim Final Rules, now in effect, were issued in July 2002. But these rules have turned out to be a much more controversial matter than originally envisaged, and have provoked the ire of banking managers across the country.

The rationale behind the proposed Treasury 312 regulations is to use expanded due diligence requirements to mitigate the risks that US accounts are used or manipulated by persons working through foreign financial institutions to mask their money laundering, terrorism financing or for other crime-related activities. There are a number of overseas jurisdictions that lack effective AML/Terrorism financing controls. Financial institutions in these countries, which maintain correspondent accounts in the United States pose special due diligence problems. Such banks can provide cover directly (or through nesting accounts) for their own customers, who might otherwise be closed off from using US banking facilities. The risk is that the accounts maintained by the foreign bank can then be used by them anonymously, thus avoiding the US banks due diligence measures. Congressional concern over such use of correspondent accounts stems in part from an extensive congressional study conducted prior to 9/11. It showed that US banks had failed to take adequate measures to prevent such accounts from being used for money laundering purposes.

The Conference of State Bank Supervisors (�CSBS�), a national organization of state officials responsible for chartering, regulating and supervising the nation�s 6,868 state-chartered commercial and savings banks and 419 state-licensed branches and agencies of foreign banks, was one of the first groups to complain about the new 312 requirements. They expressed strong concerns that the new regulations arens, if implemented would impose undue burdens without gaining any meaningful AML/terrorism financing benefit. The regulations were too broad, they said, and had to be more carefully and narrowly crafted.

�The proposed definition goes beyond traditional notions of correspondent banking and will encompass a wide range of businesses that do not engage in �correspondent banking� activities or maintain �correspondent accounts� with U.S. financial institutions. In addition, the accounts, activities, sources of funds and ownership of these businesses are already covered by the �know your customer� policies and procedures of U.S. financial institutions. The final rule should carefully weigh the added costs and responsibilities of implementing enhanced due diligence procedures for these non-traditional types of �foreign financial institutions.� to ensure that the additional law enforcement benefits will result in effective and meaningful anti-money laundering strategies.�

The number of Suspicious Activity Reports (SARs) filed in recent years has burgeoned beyond proportion. FinCen had to wade through some 14.8 million reports from financial institutions last year, including 663,655 SARs, an increase of over 250,000 in one year. Most of these are generated by computer programs and subjected to only minimal manual review. Only a very small handful of these SARs actually lead to any further investigation, giving rise to concern that the �wheat is being lost in the chafe� (See my earlier Blog). Shelby wants to know if there isn�t a more effective way for banks to monitor and indicate their concerns with overseas related transactions. These are tasks that the new Assistant Secretary for Terrorism Financing will have to address off the bat.

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