FinsnciolCrimesEnforcemenfNetwork Deportmenlof the Treosury FACT SHEET Section312 of the USA PATRIOT Act Final Regulationand Notice of ProposedRulemaking December2005 The FinancialCrimesEnforcementNetworktodaysentfor publicationin the Federal Registera final regulationimplementingthe foreign correspondentaccount provisionsand the privatebankingprovisionsof section312 of the USA PATRIOT Act. Simultaneously,the FinancialCrimes EnforcementNetwork sentfor publication a related noticeof proposedrulemakingrelatingto one key provisionof sectionSl2 that requires enhanceddue diligencefor correspondentaccountsmaintainedfor certain foreign banks. The Federal Registerwill publishboth regulationsafterJanuaryl, 2006. This Fact Sheet summarizesthe basicrequirementsof the final rule and the proposedrule as well as the effectivedatesof the final rule. Overview Section312 of the USA PATRIOT Act requiresU.S. financialinstitutionsto perform due diligenceand,in somecases,enhanceddue diligence,with regardto conespondentaccountsestablishedor maintainedfor foreign financial institutions and privatebanking accountsestablishedor maintainedfor non-U.S.persons. The flrnalrule issuedtoday implementsthe generaldue diligencerequirementspertaining to foreign financial institutionsas well as the due diligenceand enhancedscrutiny requirements pertainirrgto private banking accounts.The notice of proposedrulemaking addressesthe enhanceddue diligencerequirementspertainingto correspondentaccountsmaintainedfor certainforeign banks. I. InternationalCorrespondentBankingProvisions GeneralDue Diligence - the Finsl Rule The final rule implementingsection312 requirescefiainU.S. financialinstitutions due diligenceto correspondentaccountsmaintainedfor certain foreign financial apply to institutions. (l) What is a correspondentaccount? The final rule retainsthe statutorydetinition of a correspondentaccountfound in the USA PATRIOT Act, which definesa correspondentaccountbroadly to include any accountestablishedfor a foreign financial institution to receivedepositsfrom, or to make paymentsor other disbursementson behalf of, the foreign financial institution,or to handleother financial transactionsrelatedto suchforeign financial institution. While this is a relativelybroaddcfinition,it requiresa formal relationshipthroughwhich the financialinstitutionprovidesregularservices. (2) Which U.S. financial institutions are coveredby the correspondentbanking portion of the final rule? The following U.S. financialinstitutionsarecoveredby the corre.spondent (2) securities bankingprovisionsof the final rule: (l) bankinginstitutions; brokerdealers;(3) futurescornmissionmerchantsand introducingbrokersin commodities;and (4) mutual funds. (3) Which foreign financial institutions are subject to the due diligencerequired by the correspondentbanking portion of the final rule? The final rule appliesto conespondentaccountsmaintainedfor the following foreignfinancialinstitutions:(l) a foreignbank;(2) a foreignbranchof a U.S.bank;(3) a businessorganizedunder a foreign law that, if it were locatedin the United States, would be a securitiesbroker-dealer,futurescommissionmerchant,introducingbroker in commodities,or a mutual fund; and (4) a money transmitteror currencyexchanger organizedunderforeignlaw. (4) What are the generaldue diligencerequirementsof the correspondent banking portion.of the final rule? U.S. financialinstitutionscoveredby the final rule mustestablisha duediligence programthat includesappropriate,specific, risk-based,and, where necessary,enhanced policies, procedures,and controlsthat are reasonablydesignedto detectand report known or suspectedmoney launderingactivity conductedthrough or involving any conespondentaccountestablished,maintained,administered,or managedin the United States. At a minimum, the due diligenceprogrammust: (1) determinewhetherthe accountis subjectto enhanceddue diligenceundersection312 (seediscussionofthe noticeof proposedrulemakingbelow);(2) assessthe money launderingrisk posed,based on a considerationofrelevant risk factors;and (3) apply risk-basedpolicies,procedures, and controls to eachsuchconespondentaccountreasonablydesignedto detectand report moneylaunderingactivity, includinga periodicreview of the known or suspected correspondentaccountactivity. The final rule provides guidanceto financial institutions the risks posedby a correspondent in assessing relationshipby outlining severalrisk factorsto be consideredas appropriate. EnhancedDue Diligence Requirements- The Notice of ProposedRulemaking Section312 containsa provisionrequiringU.S. financialinstitutionsto apply enhanceddue diligencewhen establishingor maintaininga correspondentaccountfor a foreign bank that is operating:(l) under an offshorelicense;(2) in a jurisdiction found to with internationalanti-moneylaunderingprinciples;or (3) in a be non-cooperative jurisdiction foundto bc of primarymoneylaunderingconcernundersection3l I of thc accountsfbr suchbanks,the statute USA PATRIOT Act. With regardto correspondent requiresU.S. financial institutionsto take reasonablestepsto: (l) conduct appropriate enhancedscrutiny; (2) determinewhetherthe foreign bank itself offers correspondent accountsto other foreign banks(f.e.,nestedaccounts)and, as appropriate,identifu such foreignbank customersandconductadditionalduediligenceon them;and (3) identify the ownersof suchforeignbank,if its sharesarenot publicly traded; The originalproposedrulemakingissuedin 2002soughtto createan exceptionto the enhanceddue diligencerequirementf,orthoseoffshorebanksthat were branchesof well-regulatedforeign banks. Specifically,we proposedto excludefrom enhanceddue diligence thoseforeign banksoperatingunder an offshorebankinglicensethat are branchesof bankslicensedin a jurisdiction whereone or more bankshad been determinedby the FederalReserveto be subjectto comprehensivesupervisionor basis. The noticeof proposedrulemakingissuedtoday takes regulationon a consolidated a different approach,focusinginsteadon clarifying that U.S. financial institutions have on a risk-assessed someflexibility in applyingthe enhancedduediligenceprocedures with the particular basis,tailoringthe enhanceddue diligenceto the risks associated account.Commentsaresoughton all aspectsof this proposedrulemaking. II. Private Banking Provisions The final rule requirescertainU.S. financialinstitutionsto establishand maintain a due diligenceprogramfor private banking accountsthat is reasonablydesignedto detectand report any known or suspectedmoney launderingor suspiciousactivity. Included in this requirementis the duty to conductenhancedscrutiny of any private banking accountthat is maintainedfor senior foreign political figures,their immediate of such family members,or personswidely andpublicly known to be closeassociates individuals. (l) What is a private banking account? The final rule reflectsthe statutorydefinition found in the USA PATRIOT Act, which definesa private banking accountas an accountthat is establishedor maintained for the benefitof oneor morenon-U.S.persons,requiresa minimum aggregatedepositof fundsor otherassetsof not lessthan$1,000,000,and is assignedto a bank employeewho is a liaisonbetweenthe financialinstitutionand the non-U.S.person. Significantly, if an accountotherwisesatisfiesthe definition of a private banking accountas describedabove,but the institution doesnot reqaire a minimum balanceof $1,000,000,thenthe accountdoesnot qualifu as a privatebankingaccountunderthis rule. However, the accountis subjectto the internalcontrolsand risk-baseddue diligence includedin the institution's generalanti-moneylaunderingprogram. (2) Which U.S.financial institutionsare coveredby the private banking portion of the final rule? The private banking rule coversthe samefinancial institutionsas the correspondentbanking final rule, namely: (l) banking institutions;(2) securitiesbrokerdealers;(3) futurescommissionmerchantsand introducingbrokersin commodities;and (4) murual funds (althoughthe FinancialCrimesEnfbrcementNetwork understandsthat mutualfundsdo not currentlyoffer privatebankingaccounts). (3) What are the generaldue diligencerequirementsof the privnte banking portion of the final rule? U.S. financial institutionscoveredby the final rule are requiredto establishand maintain a due diligenceprogramthat includespolicies, procedures,and controls that are reasonablydesignedto detectand report any known or suspectedmoney launderingor suspiciousactivity conductedthrough or involving any private banking accountthat is established,maintained,administered,or managedin the United States. Specifically,financial institutionscoveredby the final rule must take reasonable stepsto: (1) determinethe identityof all nominaland beneficialownersof the private bankingaccount;(2) determinewhetherany suchowner is a seniorforeignpolitical official and,thus,is subjectto enhancedscrutiny(describedbelow); (3) determinethe source(s)of fundsdepositedinto the private banking accountand the purposeand expecteduseof the account;and (4) review the activity of the accountto ensurethat the activity is consistentwith the information obtainedaboutthe sourceof funds, the stated purposeand the expecteduse of the account,as neededto guard againstmoney laundering,and to report any suspiciousactivity. (4) Who are Senior Foreign Figures? The final rule definesa "senior foreignpolitical figure" as: a Grurentor former seniorofficial in the executive,legislative,administrative,military, or judicial branches of a foreign government,whetheror not they are or were electedofficials; a senior official of a major foreign political party; and a senior executiveof a foreign governmentownedcommercialenterprise. This definition also includesa corporation,business,or other entity formedby or for the benefit of suchan individual. Senior executivesare individualswith substantialauthority over policy, operations,or the use of governmentownedresources. Also includedin the definition of a seniorforeign political figure are immediate family membersof such individuals, and thosewho are widely and publicly known (or of a seniorforeignpolitical figure. actuallyknown)closeassociates (5) Enhanced scrutiny for Senior Foreign Political Figures. The final rule requiresthe applicationof enhancedscrutiny to private banking accountsmaintainedfbr seniorforeign political figures. Enhancedscrutiny must include that may involve the proceduresreasonablydesignedto detectandrepofi transactions "proceeds of foreigncomrption" to proceedsof foreigncorruption.The final rule def,tnes include any assetacquiredby, through,or on behalf of a seniorforeign political tigure through misappropriation,theft, or embezzlementof public funds,the unlawful conversionof property of a foreign govefflment,or through actsof bribery or extortion, and include any other propertyinto which any suchassetshave beentransformedor converted. III. Implementation Financial institutionscoveredby the final rule have90 days from the time the regulation is publishedtnthe Federal Registerto establishand apply the due diligence requirementsto "new" correspondentand private banking accounts. A new accountis one establishedat least90 daysafter the dateof the regulation'spublication. For existing accountsand thoseaccountsestablishedbeforethe 90-day time frame describedabove, the final rule takeseffect 270 daysfrom the time the regulationis publishedin the Federal Register. Specialnote: In July of 2002,the FinancialCrimesEnforcementNetwork issued an interim rule requiring banking institutionsto apply the correspondentand private bankingdue diligenceprovisionsof section3 12pendingissuanceof a final rule. Additionally, the interim rule requiressecuritiesbroker-dealersand futurescommission merchantsand introducingbrokersin commoditiesto apply the private banking due diligenceprovisions of section3 l2 pendingissuanceof a final rule. Thosestatutory requirementsremain effectiveuntil the final rule takeseffect in 90 and 270 days, respectively,as describedabove. Furthermore,banking institutionsmust continueto apply the enhanceddue diligenceprovisionsof section312 to their correspondent accountsuntil a final rule relating to enhanceddue diligence is issuedand becomes effective.