U.S. Treasury Department Announces Final Correspondent Banking Regs
By Andrew Cochran
Treasury's Financial Crimes Enforcement Network has finalized the rules for correspondent banking accounts, in accordance with Section 312 of the 2001 USA PATRIOT Act. In February 2001, a Senate subcommittee released a landmark investigative report (Acrobat file) on the abuse of correspondent banking accounts, stating, "U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial frauds." The final rules require U.S. financial institutions to establish risk-based procedures to assess the money laundering risks posed by these accounts, including a periodic review of the activity. The rules also require U.S. financial institutions to closely scrutinize accounts held by "senior foreign political officials," their family members, and close associates. Those types of accounts were at the heart of the Riggs Bank scandal, which resulted in a major fine for lack of anti-money laundering controls and the forced sale of Washington's oldest bank.
The final rules differ from the interim in force since 2002, in that the final rules do not explictly exclude certain foreign banks operating under an offshore banking license as a branch of a U.S. bank. That change will increase compliance costs at major banks over those resulting from the interim rule, but a general risk-based rule is more equitable and easier to enforce. You can read a fact sheet on the new regs from the FinCEN website (Acrobat file). The final rules will be issued in January 2006.
This announcement ends a long, complicated, and politically sensitive process over the past four years. I reported and commented on the process here and here (and in other posts), and Victor Comras commented here. The Treasury Department, particularly the Under Secretary for Terrorism and Financial Crimes, Stuart Levey and FinCEN Director Bill Fox, deserve kudos for finally completing the final rules.