The U.S. banking regulators (the “Agencies”) recently issued a “fact sheet” discussing their supervisory expectations concerning banks’ anti-money laundering (AML) and economic sanctions obligations regarding the correspondent bank accounts they maintain for non-U.S. banks.
Correspondent accounts, the accounts that banks maintain with each other to settle transactions and for other purposes, are vital to the efficient functioning of the world’s financial systems. There are special AML regulations issued by the Financial Crimes Enforcement Network (FinCEN) with respect to a U.S. bank’s correspondent account for a non-U.S. bank, which include monitoring of transactions through these accounts that might require reporting as suspicious transactions. In addition, banks must comply with requirements that prohibit U.S. persons from engaging in financial transactions with persons subject to economic sanctions that are enforced by the Office of Foreign Assets Control (OFAC), an office within the United States Treasury Department.
Lately, there has been increasing concern that U.S. banks were shedding their correspondent banking relationships with non-U.S. banks as part of a “de-risking” exercise to rid themselves of any relationships that might be more prone to being the subject of regulatory scrutiny.
On August 30, 2016, the U.S. federal banking regulators (the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and National Credit Union Administration) along with the Treasury Department, issued a “Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement” to “summarize key aspects of federal supervision and enforcement strategy and practices in the area of correspondent banking,”
In addition, the Treasury Department issued a statement by three senior Treasury officials, including the Under Secretary for International Affairs, announcing the issuance of the Fact Sheet, stating in part that it “dispels certain myths about U.S. supervisory expectations.”
The Agencies reinforce their expectation that banks must have strong AML/economic sanctions compliance program, but also note that they do not have a so-called “zero tolerance policy” regarding AML/economic sanctions enforcement. The Fact Sheet sets out certain “key aspects” of the Agencies’ supervisory and enforcement approach with respect to banks maintaining correspondent bank accounts for non-U.S. banks.
Federal Banking Agencies’ (FBA) Expectations for U.S. Depository Institutions: As noted above, U.S. banks are required to have appropriate risk-based customer due diligence procedures so they can assess and understand their correspondent banks’ risk profiles and expected account activity and how best to manage those risks associated with the accounts. To address the concerns of the banks that they must conduct due diligence on the correspondent bank’s customers as well as the correspondent bank itself, the Agencies flatly state that “there is no general requirement for U.S. depository institutions to conduct due diligence on [a correspondent account’s] customers.” However, the Agencies also state that the due diligence process for a particular correspondent account may in fact require an assessment of the correspondent bank’s type of customers in order to develop an appropriate risk profile to enable the U.S. bank to comply with suspicious transaction reporting and economic sanctions requirements.
FBAs’ Supervisory Examination Processes: The Agencies emphasize they take a risk-based approach to supervision, with the examination process “integral” to compliance with AML and economic sanctions requirements. As a result of the examination process and the communication with the banks as part of that process, many deficiencies uncovered as a result of the examination can be corrected without a formal enforcement action, although the Agencies have a wide range of administrative options available to them if necessary should a more formal action be necessary. The Agencies note that approximately 95% of the AML/economic sanctions deficiencies are corrected without a need for a formal enforcement action.
FBA Enforcement Actions: For those issues that are not able to be resolved informally, the Agencies have a range of actions available, such as memoranda of understanding, written agreements and cease and desist orders, as well as, in limited cases, the authority to assess civil monetary penalties. The Agencies note that civil money penalties “are designed by statute to serve as a deterrent to future violations, practices or breaches of fiduciary duty, to encourage correction of violations, practices or breaches of fiduciary duty, and in the case of individual actions, to emphasize the accountability of individuals.” With respect to several recent major enforcement actions that resulted in large civil money penalties (some of which were in fact issued by the New York State Department of Financial Services), the Agencies note that that it is important to remember these penalties were imposed because of a sustained pattern of serious violations, intentional evasion of requirements and/or failure to respond to warning signs of illegal activity.
FinCEN and OFAC: While not banking statutes per se, the Agencies do examine banks for their compliance with FinCEN and OFAC regulations and coordinate with those agencies when there is a need to issue an enforcement action if violations are found. FinCEN will consider the past performance of the bank in addressing past deficiencies, or if the institution engaged in significant violations in determining whether to assess civil money penalties. OFAC will assess the “quality and effectiveness” of a bank’s compliance program when deciding what enforcement action to take, if any. Again, as noted above, most deficiencies are resolved informally without the need for administrative action.