Bank Secrecy Act
Correspondent Accounts (Foreign)—Overview
Objective. Assess the adequacy of the U.S. bank’s systems to manage the risks associated with foreign correspondent banking and management’s ability to implement effective due diligence, monitoring, and reporting systems. This section expands the earlier core review of statutory and regulatory requirements of foreign correspondent account relationships in order to provide a broader assessment of the AML risks associated with this activity.
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. Services may include:
- Cash management services, including deposit accounts.
- International funds transfers.
- Check clearing.
- Payable through accounts.
- Pouch activities.
- Foreign exchange services.
- Overnight investment accounts (sweep accounts).
- Loans and letters of credit.
Each relationship that a U.S. bank has with a foreign correspondent financial institution should be governed by an agreement or a contract describing each party’s responsibilities and other relationship details (e.g., products and services provided, acceptance of deposits, clearing of items, forms of payment, and acceptable forms of endorsement). The agreement or contract should also consider the foreign financial institution’s AML regulatory requirements, customer base, due diligence procedures, and permitted third-party usage of the correspondent account.
Some foreign financial institutions are not subject to the same or similar regulatory guidelines as U.S. banks; therefore, these foreign institutions may pose a higher money laundering risk to their respective U.S. bank correspondent(s). Investigations have disclosed that, in the past, foreign correspondent accounts have been used by drug traffickers and other criminal elements to launder funds. Shell companies are sometimes used in the layering process to hide the true ownership of accounts at foreign correspondent financial institutions. Because of the large amount of funds, multiple transactions, and the U.S. bank’s potential lack of familiarity with the foreign correspondent financial institution’s customer, criminals and terrorists can more easily conceal the source and use of illicit funds. Consequently, each U.S. bank, including all overseas branches, offices, and subsidiaries, should closely monitor transactions related to foreign correspondent accounts.
Without adequate controls, a U.S. bank may also set up a traditional correspondent account with a foreign financial institution and not be aware that the foreign financial institution is permitting some customers to conduct transactions anonymously through the U.S. bank account (e.g., payable through accounts162 and nested accounts).
Nested accounts occur when a foreign financial institution gains access to the U.S. financial system by operating through a U.S. correspondent account belonging to another foreign financial institution. If the U.S. bank is unaware that its foreign correspondent financial institution customer is providing such access to third-party foreign financial institutions, these third-party financial institutions can effectively gain anonymous access to the U.S. financial system. Behavior indicative of nested accounts and other accounts of concern includes transactions to jurisdictions in which the foreign financial institution has no known business activities or interests and transactions in which the total volume and frequency significantly exceeds expected activity for the foreign financial institution, considering its customer base or asset size.
U.S. banks that offer foreign correspondent financial institution services should have policies, procedures, and processes to manage the BSA/AML risks inherent with these relationships and should closely monitor transactions related to these accounts to detect and report suspicious activities. The level of risk varies depending on the foreign financial institution’s products, services, customers, and geographic locations. The Clearing House Payments Co., LLC. and The Wolfsberg Group have published suggested industry standards and guidance for banks that provide foreign correspondent banking services.163 Also, additional information relating to risk assessments and due diligence is contained in the core overview section, "Foreign Correspondent Account Recordkeeping and Due Diligence," pages 117 to 124. The U.S. bank’s policies, procedures, and processes should:
- Specify appropriate account-opening procedures, which may include minimum levels of documentation to be obtained from prospective customers; an account approval process independent of the correspondent account business line for potential higher-risk customers; and a description of circumstances when the bank will not open an account.
- Assess the risks posed by a prospective foreign correspondent customer relationship utilizing consistent, well-documented risk-rating methodologies, and incorporate that risk determination into the bank’s suspicious activity monitoring system.
- Understand the intended use of the accounts and expected account activity (e.g., determine whether the relationship will serve as a payable through account).
- Understand the foreign correspondent financial institution’s other correspondent relationships (e.g., determine whether nested accounts will be utilized).
- Conduct adequate and ongoing due diligence on the foreign correspondent financial institution relationships, which may include periodic visits.
- Establish a formalized process for escalating suspicious information on potential and existing customers to an appropriate management level for review.
- Ensure that foreign correspondent financial institution relationships are appropriately included within the U.S. bank’s suspicious activity monitoring and reporting systems.
- Ensure that appropriate due diligence standards are applied to those accounts determined to be higher risk.
- Establish criteria for closing the foreign correspondent financial institution account.
As a sound practice, U.S. banks are encouraged to communicate their AML-related expectations to their foreign correspondent financial institution customers. Moreover, the U.S. bank should generally understand the AML controls at the foreign correspondent financial institution, including customer due diligence practices and recordkeeping documentation.