Foreign correspondent accounts have long been used by financial institutions to facilitate cross-border transactions. However, as a result of its susceptibility to money laundering and terrorist financing, this practice is encountering heightened concern among U.S. banking regulators. In this rigorous environment, it is increasingly important for financial institutions to take positive actions designed both to safeguard their operations against illicit transactions and, in the event their correspondent business comes under regulatory scrutiny, to establish a defensible position.
What is a foreign correspondent account?
A “correspondent account” is statutorily defined as “an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.”1 Laying the foundation for its Anti-Money Laundering (AML) guidance on foreign correspondent accounts, the Federal Financial Institutions Examination Council (FFIEC) adds some detail explaining, “An ‘account’ means any formal banking or business relationship established to provide regular services, dealings, and other financial transactions. It includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit.”2 Moving from that neutral view, the FFIEC later takes a more positive tone, stating, “Foreign financial institutions maintain accounts at U.S. banks to gain access to the U.S. financial system and to take advantage of services and products that may not be available in the foreign financial institution’s jurisdiction. These services may be performed more economically or efficiently by the U.S. bank or may be necessary for other reasons, such as the facilitation of international trade.”3
The Good: Benefits of foreign correspondent banking
The concept of foreign correspondent banking is an accepted practice that can be very beneficial to financial institutions and their customers. Correspondent banks essentially act as a domestic bank’s agent abroad in order to service transactions originating in foreign countries. Championing a positive view, the Bank for International Settlements observes, “Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion”.4
The Bad: Challenges of foreign correspondent banking
Notwithstanding the benefits related to foreign correspondent banking, this practice also presents significant challenges, with regulatory burden featured prominently. Extensive rules governing foreign correspondent accounts implement the provisions found in USA PATRIOT Act sections 312 (imposing due diligence and enhanced due diligence requirements on U.S. financial institutions maintaining foreign correspondent accounts), 313 (preventing foreign shell banks from having access to the U.S. financial system) and 319(b) (authorizing federal law enforcement to investigate any foreign bank maintaining a U.S. correspondent account). The decline in correspondent banking relationships has much to do with the challenge of regulatory compliance, as recently noted by the American Bankers Association, “[O]ne key factor leading to the decline in correspondent/respondent banking relationships is the heightened regulatory burden on banks related to anti-money laundering and counter terrorism compliance.”5
The Ugly: Foreign correspondent banking as a means to launder money and finance terrorism
The regulatory strictures are not without good reason. There have been instances of foreign correspondent accounts being used to launder money and to potentially finance terrorism. Even in the early rush to implement the USA PATRIOT Act, the OCC, though taking a balanced view, expressed its concern, stating, “Although [correspondent] accounts were developed and are used primarily for legitimate purposes, international correspondent bank accounts may pose increased risk of illicit activities.”6 In recent years, the U.S. government has sent a strong message to financial institutions that fail to create a process to prevent criminal behavior. Financial institutions that disregard their obligations under the Bank Secrecy Act or operate without effective anti-money laundering programs have been the subject of enforcement actions resulting in hefty penalties. In 2012, a Virginia-based bank that allowed itself to be used to launder drug money flowing out of Mexico agreed to pay a record $1.92 billion to U.S. authorities, including hundreds of millions of dollars in civil money penalties to the Office of the Comptroller of the Currency, the Federal Reserve, and the Treasury Department.7 In 2015, a German-based bank and its U.S. branch accused of violating laws barring transactions with Iran, Sudan, Cuba and Myanmar, as well as abetting a multi-billion dollar securities fraud, agreed to pay $1.45 billion in fines.8 In both of these high-profile cases, government authorities cited Bank Secrecy Act violations including: (1) failure to have an effective AML program, (2) failure to conduct adequate due diligence or to obtain “know your customer” information with respect to foreign correspondent bank accounts, and (3) failure to detect and adequately report evidence of money laundering and other illicit activity. Mirroring the U.S. actions, the international Financial Action Task Force has sounded this stern warning in addressing the cross-border financial activities of Iran and North Korea: “Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices … .”9
The Solution: How financial institutions can best protect themselves from a harmful correspondent banking relationship
In order to meet its obligations to measure, monitor and control risks, a financial institution should consider the following actions:
1. Ensure BSA/AML policies and procedures are reviewed at least annually and adjusted to address any new risks related to correspondent banking activities.
2. Perform an annual risk assessment to determine the adequacy of its BSA/AML/OFAC program, especially as it relates to correspondent banking.
3. Conduct due diligence on counterparties to understand the nature and extent of the various aspects of the correspondent’s business, including, but not limited to, ownership, products, services, customers, locations, etc. Due diligence should be ongoing based upon the nature and scope of the correspondent activities and should include periodic validation of the counterparties and their activities by the correspondent bank.
4. Ensure that adequate expertise and resources are available to establish a BSA/AML/OFAC program capable of effectively and timely monitoring the volume and nature of activities processed through the correspondent account.
5. Ensure that the correspondent bank, and not the initiating bank, administers the systems used to process correspondent banking transactions, thus allowing the correspondent bank to independently identify exceptions, generate reports and analyze data to support its BSA/AML/OFAC program.
6. Perform monitoring of processed correspondent banking transactions in a timely manner, preferably through the use of an automated system that can effectively aggregate transactions and create “alerts” in order to identify potentially suspicious transactions.
7. Ensure that the correspondent bank establishes an enhanced due diligence (EDD) protocol that will be followed for investigative purposes when transactions trigger a BSA/AML alert in the monitoring system.
Steven Szaroleta and Walter Donaldson are co-authors of this article.
1 31 U.S. Code § 5318A(e)(1)(B)