FinCEN issues interpretive guidance regarding securities broker-dealer compliance with private banking and correspondent account rules issued under [section] 312 of the USA PATRIOT Act.(Financial Crimes Enforcement Network of the Department of the Treasury)

Publication: Banking & Financial Services Policy Report

Publication Date: 01-SEP-06

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COPYRIGHT 2006 Aspen Publishers, Inc.

On May 10, 2006, the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) issued guidance regarding its recent regulations on the due diligence obligations of broker-dealers, futures commission merchants, and introducing commodities brokers (Securities and Futures Firms) in relation to correspondent and private banking accounts maintained for foreign financial institutions. FinCEN issued the interpretive guidance to assist securities broker-dealers and futures commission merchants in their compliance with the Final Rules. (1)

The guidance generally provides that: (1) the money laundering risks associated with foreign financial institution correspondent accounts should be assessed holistically, such that the five factors listed in the final rules should be viewed as representative of only some of the possible considerations of a covered financial instituion's anti-money laundering procedures; (2) firms that do not have "formal relationships" with foreign financial institutions will generally not be required to look through an omnibus account held for the foreign financial institution; (3) securities and futures firms are not required to reach a legal conclusion as to whether a foreign customer is a "financial institution," but should conduct a reasonable inquiry into the nature of a foreign customer's business; and (4) securities and futures firms must consider more than just the potential "money movements" of a foreign customer's account in making its risk assessment of an account's purpose and anticipated activity.

In separate guidance, the staffs of both the Department of the Treasury and the Securities Exchange Commission (SEC) offered additional direction regarding the Customer Identification Program (CIP) responsibilities of a US bank or broker-dealer (agent lender) that arranges a loan of securities to a broker-dealer under the Agency Lending Disclosure Initiative. (2) This article briefly discusses FinCEN's recently issued guidance regarding correspondent and private banking accounts and the newly refined CIP obligations of a US bank or broker-dealer under the Agency Lending Disclosure Initiative.

Summary of Final Private Banking and Correspondent Account Rules

In January 2006, FinCEN issued new rules under [section] 312 of the USA PATRIOT Act (3) requiring financial institutions, including securities broker-dealers, to implement due diligence procedures for the correspondent and private banking accounts of non-US persons (Final Rules). (4) The Final Rules are among the most far-reaching and controversial anti-money laundering regulations promulgated under the USA PATRIOT Act requiring, among other things, extraordinary diligence and information-gathering to satisfy a financial institution's compliance obligations. Although the Final Rules were originally going to become effective in April 2006, FinCEN extended the deadline to July 2006 to give affected financial institutions more time to prepare their internal compliance procedures.

The Final Rules cover US banks, broker-dealers, futures commission merchants, certain commodities brokers, and mutual funds. Each of these entities is expected to implement appropriate enhanced due diligence procedures to identify instances of money laundering activity through both correspondent accounts maintained on behalf of certain foreign financial institutions and private banking accounts established or maintained for non-US persons.

Correspondent Accounts

The Final Rules broadly define a "correspondent account" to include any account established on behalf of a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of the foreign financial institution or to handle other financial transactions related to such foreign financial institution. (5) Although broad,...

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