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DEPARTMENT OF THE TREASURY accounts to certain anti-money implement section 5318(i).2 In the laundering measures. In particular, proposed rule, we sought to take the 31 CFR Part 103 financial institutions must establish statutory mandate of section 5318(i) and RIN 1506–AA29 appropriate, specific, and, where to translate it into specific regulatory necessary, enhanced due diligence directives for financial institutions to Financial Crimes Enforcement policies, procedures, and controls that apply. Following the statute, the rule we Network; Anti-Money Laundering are reasonably designed to enable the proposed required certain U.S. financial Programs; Special Due Diligence to detect and report institutions to apply due diligence and Programs for Certain Foreign instances of money laundering through enhanced due diligence procedures to Accounts these accounts. foreign financial institutions 3 that In addition to the general due maintain correspondent accounts as AGENCY: Financial Crimes Enforcement diligence requirements, which apply to well as to non-U.S. persons who Network, Treasury. all correspondent accounts for non-U.S. establish private banking accounts in ACTION: Final rule. persons, section 5318(i)(2) specifies the United States. The 2002 Proposal set additional standards for correspondent forth a series of due diligence SUMMARY: The Financial Crimes accounts maintained for certain foreign procedures that financial institutions Enforcement Network is issuing this . These additional standards apply final rule to implement the covered by the rule may, and in some to correspondent accounts maintained instances must, apply to correspondent requirements contained in section 312 for a foreign operating under an of the Uniting and Strengthening accounts and private banking accounts offshore banking license, under a for non-U.S. persons. America by Providing Appropriate license issued by a country designated Tools Required to Intercept and as being non-cooperative with B. The Interim Final Rule Obstruct Terrorism (USA PATRIOT) Act international anti-money laundering We received comments in response to of 2001 (the Act). Section 312 requires principles or procedures by an the 2002 Proposal that raised many U.S. financial institutions to establish intergovernmental group or organization concerns regarding the numerous due diligence policies, procedures, and of which the United States is a member definitions in the 2002 Proposal, the controls reasonably designed to detect and with which designation the United scope of the requirements of this and report money laundering through States concurs, or under a license issued provision, and the institutions that correspondent accounts and private by a country designated by the Secretary would be subject to them. Section banking accounts that U.S. financial of the Treasury as warranting special 312(b)(2) of the Act provides that institutions establish or maintain for measures due to money laundering section 5318(i) of the Bank Secrecy Act non-U.S. persons. This final rule concerns. A financial institution must took effect on July 23, 2002, regardless supercedes an interim final rule we take reasonable steps to: (1) Conduct of whether final rules had been issued issued on July 23, 2002. The interim enhanced scrutiny of a correspondent by that date. In order to have adequate final rule temporarily deferred account maintained for or on behalf of time to review the comments, to application of the requirements such a foreign bank to guard against determine the appropriate resolution of contained in section 312 for certain money laundering and to report the many issues raised, and to give clear financial institutions and provided suspicious activity; (2) ascertain directions to the affected financial guidance, pending issuance of a final whether such a foreign bank provides institutions, we issued an interim final rule, to those financial institutions for correspondent accounts to other foreign rule (the Interim Rule) 4 on July 23, which compliance with section 312 was banks and, if so, to conduct appropriate 2002, and exercised our authority under not deferred. We are publishing due diligence; and (3) identify the 31 U.S.C. 5318(a)(6) to defer temporarily elsewhere in this separate part of the owners of such a foreign bank if its the application of 31 U.S.C. 5318(i) to Federal Register a Notice of Proposed shares are not publicly traded. certain financial institutions. For those Rulemaking implementing section 312, Section 5318(i) also sets forth financial institutions that were not and focusing exclusively on enhanced minimum due diligence requirements subject to the deferral, we set forth due diligence requirements. for private banking accounts for non- interim guidance for compliance with DATES: This final rule is effective U.S. persons. Specifically, a covered the statute by delineating the scope of February 3, 2006. financial institution must take coverage, duties, and obligations under FOR FURTHER INFORMATION CONTACT: reasonable steps to ascertain the identity that provision, pending issuance of a Regulatory Policy and Programs of the nominal and beneficial owners of, final rule. Division, Financial Crimes Enforcement and the source of funds deposited into, Network, (800) 949–2732. private banking accounts, as necessary C. Consultation With Federal Functional Regulators SUPPLEMENTARY INFORMATION: to guard against money laundering and to report suspicious transactions. The Section 312(b) of the Act provides I. Background institution must also conduct enhanced that the Secretary of the Treasury Section 312 of the Act amended the scrutiny of private banking accounts (Secretary) shall issue implementing Bank Secrecy Act 1 to add new requested or maintained for or on behalf regulations under this section ‘‘in subsection (i) to 31 U.S.C. 5318. This of senior foreign political figures (which consultation with the appropriate provision requires each U.S. financial includes family members or close federal functional regulators (as defined institution that establishes, maintains, associates). Enhanced scrutiny must be administers, or manages a reasonably designed to detect and report 2 Due Diligence Anti-Money Laundering Programs correspondent account or a private transactions that may involve the for Certain Foreign Accounts, 67 FR 37736. banking account in the United States for proceeds of foreign corruption. 3 Foreign financial institutions were defined to include foreign banks and any other foreign person a non-U.S. person to subject such A. The 2002 Proposal that, if organized in the United States, would be required to establish an anti-money laundering 1 Bank Secrecy Act, Pub. L. 91–508 (codified as On May 30, 2002, we published in the program pursuant to 31 CFR 103.120 to 103.169. amended at 12 U.S.C. 1829b, 12 U.S.C. 1957–1959, Federal Register a notice of proposed 4 Due Diligence Anti-Money Laundering Programs and 31 U.S.C. 5311–5314 and 5316–5332). rulemaking (2002 Proposal) to for Certain Foreign Accounts, 67 FR 48348.

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in section 509 of the Gramm-Leach- With respect to the correspondent commenters, adopting such an overly Bliley Act) of the affected financial account provisions, the greatest number broad definition would be institutions.’’ 5 The 2002 Proposal was of comments concerned the definition of counterproductive, requiring U.S. issued in consultation with staff at all of correspondent account and the financial institutions to devote limited these federal functional regulators. The prescribed due diligence requirements resources to a broad range of accounts provisions of this final rule also reflect for such accounts. Commenters also and transactions regardless of the level consultation with each of the federal raised questions about the definitions of of risk associated with them. Some functional regulators or their staff. covered financial institution and foreign commenters urged us to narrow the financial institution, as well as the definition of correspondent account to D. Further Notice of Proposed enhanced due diligence requirements those accounts used to deposit or Rulemaking for correspondent accounts for certain transfer customer funds. Other Section 5318(i)(2) directs covered foreign banks. With respect to the commenters argued that the definition financial institutions to establish proposed provisions concerning private should specifically exclude certain procedures for conducting enhanced banking accounts, commenters raised types of accounts that do not pose a due diligence with regard to concerns about the definitions of meaningful risk of money laundering, correspondent accounts established or beneficial owner, private banking including limited purpose accounts maintained for certain categories of account, and senior foreign political through which funds are received and foreign banks. In light of the extensive figure, and sought clarification disbursed under defined conditions to comments received, we are proposing a regarding the nature and extent of the identified parties such as: escrow, different approach toward the due diligence required for these clearing, and custody accounts; implementation of this provision than accounts. Many commenters also proprietary accounts where the foreign that set forth in the 2002 Proposal. To addressed the required timing for financial institution is acting as ensure adequate notice and opportunity compliance with the various provisions. principal, such as foreign exchange for comment, we have re-noticed the These issues and their resolution are accounts; and accounts held for foreign regulation implementing the enhanced discussed below in the section-by- financial institutions subject to a robust due diligence portion of section 312 section analysis. anti-money laundering regime. with regard to correspondent accounts The congressional commenters urged in its entirety. The proposed rulemaking III. Section-by-Section Analysis us to retain the broad definition of is published elsewhere in this separate A. Section 103.175—Definitions correspondent account, stating that all part of the Federal Register. Until a Relating to Correspondent Accounts categories of accounts falling within the final rule is published and becomes definition should receive an appropriate 1. Correspondent account. The term level of due diligence. effective, banks, savings associations, correspondent account, as used in and federally insured credit unions After considering these comments, we section 5318(i), is defined by reference have decided that the statutory must continue to apply the enhanced to the definition in 31 U.S.C. 5318A, as due diligence requirements of 31 U.S.C. definition of correspondent account added by section 311 of the Act. The contained in the 2002 Proposal is, in 5318(i)(2), while securities broker- definition in the 2002 Proposal was dealers, futures commission merchants, substance, appropriate for the final rule taken verbatim from section as well. The definition of a introducing brokers, mutual funds, and 5318A(e)(1)(B), which defines a trust banks and trust companies that correspondent account under this final correspondent account as ‘‘an account rule mirrors the definition used in the have a federal regulator, remain exempt established to receive deposits from, from such requirements. section 313/319 Rule, although make payments on behalf of a foreign additional U.S. financial institutions are II. Summary of Comments financial institution, or handle other subject to this final rule.8 We are aware financial transactions related to such We received 33 comments regarding of the burden resulting from the institution.’’ application of this broad definition, and the 2002 Proposal. Commenters Many commenters found the included U.S. banks, securities broker- we acknowledge that accounts used to definition to be overly broad, extending hold, transfer, or invest customer funds dealers, other financial institutions, beyond the commonly understood foreign banks, trade associations represent a greater money laundering meaning of correspondent account (and risk than proprietary accounts or representing all the foregoing, a self- even beyond the meaning of the term regulatory organization, an association accounts used for certain specific account). They objected to the phrase purposes, such as custody accounts or of state banking supervisors, and a state ‘‘or handle other financial transactions gaming commission. Eleven financial escrow accounts. Nevertheless, we have related to such institution’’ as concluded that a broad definition is institution trade associations jointly potentially bringing under the rule not signed one of the comments. We also only every kind of account maintained received a joint comment from three and Termination of Correspondent Accounts for 6 for foreign financial institutions, but Foreign Banks; 67 FR 60562, 60563–60564 (Sept. members of Congress. also any transaction performed by a 26, 2002) (hereinafter ‘‘section 313/319 Rule’’). 8 In this final rule we have made technical 5 covered institution on behalf of a Section 509 of the Gramm-Leach-Bliley Act (15 7 changes to conform the definition of correspondent U.S.C. 6809) defines the federal functional foreign institution. According to these account for purposes of this rule with the definition regulators to include the Federal Deposit for purposes of the section 313/319 Rule. The , the Board of Governors of the Federal must request an appointment by telephone at (202) definition for purposes of this final rule includes Reserve System, the Office of the Comptroller of the 354–6400 (not a toll-free number). The comment the phrase ‘‘or other disbursements’’ after Currency, the Office of Thrift Supervision, the letters are also available on our Web site at http:// ‘‘payments,’’ and the definition for purposes of the National Administration Board, and www.fincen.gov/reg_312commentsA.html. section 313/319 Rule is amended by deleting the the Securities and Exchange Commission. We also 7 Commenters representing depository redundant words ‘‘a correspondent account is’’ and consulted with the Commodity Futures Trading institutions and securities broker-dealers in many the unnecessary words ‘‘by a covered financial Commission. cases reiterated the comments submitted in institution.’’ Also, the definition from the section 6 Comments may be inspected at the Financial response to the proposed rule implementing 313/319 Rule, which is limited to accounts for Crimes Enforcement Network reading room in sections 313 and 319(b) of the Act. See Anti-Money foreign banks, applies to paragraphs 103.176(b) and Washington, DC between 10 a.m. and 4 p.m. Laundering Requirements—Correspondent (c) of the final rule, which relate solely to accounts Persons wishing to inspect comments submitted Accounts for Foreign Shell Banks; Recordkeeping for foreign banks.

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appropriate. Limiting the definition scope of the relationships subject to this branches of U.S. banks will be treated as would undermine the purpose of the rule by addressing the functional foreign banks rather than as covered statute by eliminating from the scope of differences among them. In addition, financial institutions. this rule a wide range of account these account definitions, discussed in We noted in the Interim Rule that we relationships that may pose money detail below under ‘‘Account,’’ make it were evaluating whether to include laundering risks. Moreover, it may be clear that this rule does not apply to uninsured national trust banks, non- difficult in some situations to know one-time, isolated, or infrequent federally regulated, state-chartered with certainty whether an account the transactions. uninsured trust companies and trust covered financial institution believes to 2. Covered financial institution. The banks, and non-federally insured credit be proprietary is being used for 2002 Proposal defined covered financial unions under the rule, to the extent that customer transactions.9 institution to mean insured depository these entities maintain correspondent We believe that the better approach is institutions (and their foreign branches), accounts for foreign financial to retain the broad statutory definition U.S. branches and agencies of foreign institutions or private banking accounts of correspondent account while banks, Edge Act , securities for non-U.S. persons.13 We have modifying the due diligence broker-dealers, and all other financial decided to include, as covered financial requirements under the final rule to be institutions subject to an anti-money institutions, uninsured trust banks and more risk-based in nature. This is in laundering program requirement under trust companies that are federally accord with the fact that many of the the Bank Secrecy Act, which at that regulated and that are subject to an anti- commenters, including the time included futures commission money laundering program requirement. congressional commenters, supported merchants and introducing brokers, As for the remaining types of banking the need for a risk-based due diligence mutual funds, certain money services institutions, we do not believe that it is program. This approach should provide businesses, casinos, and operators of appropriate to subject them to the covered financial institutions sufficient credit card systems.11 The 2002 provisions of this rule until they are flexibility to allocate resources and their Proposal also stated that, as additional required to have anti-money laundering due diligence efforts in an appropriate financial institutions become subject to programs. We expect to issue in the manner consistent with the statutory an anti-money laundering program future a proposed rule requiring credit goal. requirement under 31 U.S.C. 5318(h), unions, and trust companies that do not We also understand that the statutory they would be included in the have a federal functional regulator, to definition of a correspondent account definition of covered financial establish anti-money laundering could create uncertainty as to the types institution. programs.14 While we do not anticipate of relationships that are covered, As discussed in greater detail below, that a large number of these financial particularly for non-bank covered we have decided to limit the scope of institutions conduct the types of financial institutions. The term covered financial institutions to those international business or offer the types correspondent account does not have an institutions that we believe offer of accounts that would be affected by established meaning outside of the correspondent services to foreign this rule, we will nonetheless amend banking industry, nor does the statute financial institutions. Those covered by this rule to include those institutions define the term account for those this rule include federally regulated upon adoption of any final rule institutions. Instead, it requires the term banks, savings associations, credit requiring those institutions to establish to be defined by regulation.10 unions, and trust companies subject to anti-money laundering programs. Accordingly, in compliance with the an anti-money laundering program For banks, correspondent accounts statutory mandate, and to provide requirement; branches and agencies of established on behalf of foreign additional clarity as to the scope of the foreign banks; Edge Act corporations; financial institutions include any term correspondent account, we have securities broker-dealers; futures transaction account, savings account, added to the final rule specific commission merchants; introducing asset account or account involving an definitions for the term account as they brokers; and mutual funds. Those not extension of credit, as well as any other apply to the various non-bank covered covered by the rule include foreign relationship with a foreign financial financial institutions that are based on branches of insured depository institution to provide ongoing services. the definitions contained in the final institutions (which are defined as These correspondent accounts include, rules issued under 31 U.S.C. 5318(l). foreign banks under the final rule), but are not limited to, accounts to When read in conjunction with the money services businesses, casinos, and purchase, sell, lend, or otherwise hold correspondent account definition, the operators of credit card systems. securities, including securities industry-specific account definitions • Banking institutions. repurchase arrangements; accounts that should give greater direction to covered The banking institutions that clear and settle securities transactions financial institutions as to the types and addressed this definition urged us to for clients; ‘‘due to’’ accounts; accounts remove their foreign branches from the for trading foreign currency; foreign 9 For example, although commenters argued that definition. We agree that this change is exchange contracts; custody accounts proprietary correspondent accounts where the appropriate for the reasons discussed in for holding securities or other assets in foreign bank or institution is acting as principal should be excluded as being low risk for money the section 313/319 Rule. These include connection with securities transactions laundering, these proprietary accounts can and the plain language of the statute, the as collateral; and over-the-counter have been abused to facilitate money laundering by historical approach taken in other Bank derivatives contracts. These accounts commingling bank funds with individual customer Secrecy Act rules, and the anti- are included even if the U.S. bank does funds in order to portray an individual’s funds and account activity as being that of the foreign competitive impact on foreign branches not maintain a deposit account for the institution. See Minority Report on Correspondent that could result from their inclusion.12 Banking, infra note 24, Part IV, discussing the case Thus, consistent with the definition of 13 Interim Rule, supra note 4, at 48349. of Guardian Bank and Trust. foreign bank used in the section 313/319 14 These types of institutions are included in the 10 Section 311(e)(2) of the Act requires the Rule, for purposes of this rule, foreign definition of bank in the section 326 customer Secretary to define by regulation the term identification rule and are therefore required to ‘‘account’’ for non-bank financial institutions establish customer identification programs. See 31 subject to sections 311, 312, and 313 of the Act. See 11 2002 Proposal, supra note 2. CFR 103.121(a)(2)(ii), and the related analysis at 68 31 U.S.C. 5318A(e)(2). 12 Section 313/319 Rule, supra note 7, at 60565. FR 25090, 25109 (May 9, 2003).

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foreign bank or other foreign financial Securities broker-dealers are defined operate similarly to correspondent institution.15 as covered financial institutions under accounts of banks and securities broker- • Non-bank financial institutions. section 313 of the Act and are subject to dealers in that they can be used to Several commenters urged us to this final rule. Securities broker-dealers receive deposits from or make payments exclude from the proposed definition maintain accounts for foreign financial on behalf of foreign financial certain types of financial institutions, institutions to engage in securities institutions. It is, therefore, appropriate including mutual funds, non-bank funds transactions, funds transfers, or other to include these institutions as covered transmitters, loan or companies, financial transactions, whether for the financial institutions in the final rule. casinos, and credit card operators. In financial institution as principal or for In both the securities and addition, several commenters objected its customers. Such accounts, which commodities context, introducing that the 2002 Proposal was open-ended, would constitute correspondent brokers have been included as covered extending this rule to additional accounts under the final rule, include: financial institutions. We anticipate that financial institutions when they become (1) Accounts to purchase, sell, lend, or introducing brokers may share accounts subject to an anti-money laundering otherwise hold securities, including with clearing brokers and may realize program requirement. The congressional securities repurchase arrangements; (2) efficiencies by apportioning functions comment, on the other hand, stated that accounts that clear and associated with a due diligence program the correspondent account definition in settle securities transactions for clients; under the final section 312 rule the Act was intentionally broad to (3) accounts for trading foreign pursuant to an agreement. To this end, ensure that the relationships maintained currency; (4) custody accounts for these firms may consult and share by a wide spectrum of U.S. financial holding securities or other assets in information with each other to fulfill institutions are subject to the statute’s connection with securities transactions their due diligence obligations under requirements. as collateral; and (5) over-the-counter this section.20 Nonetheless, each The application of the correspondent derivatives contracts. financial institution is responsible for account definition to non-bank financial Mutual funds are also included as ensuring that the requirements of this institutions is one of the most difficult covered financial institutions under this rule are met. interpretative issues in this rulemaking. rule. We understand that mutual funds We do not believe that the other Because the Act has taken a term— maintain accounts for foreign financial financial institutions identified in the correspondent account—that has been institutions (including foreign banks 2002 Proposal offer accounts that fall associated with the banking industry, and foreign securities firms) in which within the correspondent account and has extended it to other account these foreign financial institutions may definition. A commenter representing and account-like relationships hold investments in such mutual funds loan or finance companies stated that maintained by various financial as principals or for their customers, and the definition of correspondent account institutions, the term’s application to which the foreign financial institution should not include accounts payable or non-bank financial institutions is not may use to make payments or to handle accounts receivable maintained for the readily apparent. other financial transactions on the purpose of recording loan and lease The goal of section 312 is to help foreign institution’s behalf. Therefore, payments. We agree. Loan or finance prevent money laundering through we have determined that such accounts companies that extend credit to foreign accounts that give foreign financial have sufficient similarities to financial institutions would obviously institutions a base for moving funds correspondent accounts of banks that maintain accounts receivable for such through the U.S. financial system.16 these entities also should be subject to customers, but these are accounting Thus, the non-bank financial the final rule.18 entries that do not enable a loan or institutions subject to the final rule For futures commission merchants finance company to receive deposits, should be those that offer accounts that and introducing brokers, a make payments, or handle other provide foreign financial institutions a correspondent account would include financial transactions on behalf of a conduit for engaging in ongoing accounts for foreign financial foreign financial institution. transactions in the U.S. financial system institutions to engage in futures or A commenter representing an either on their own behalf or for their commodity options transactions, funds operator of a credit card system noted customers. Based on a review of the transfers, or other financial transactions, that the industry does not maintain financial institutions identified in the including accounts for trading foreign correspondent accounts and Bank Secrecy Act, we have concluded currency and over-the-counter recommended that we exclude operators that, for purposes of this rule, the derivatives transactions, whether for the of credit card systems from the scope of financial institutions that offer financial institution as principal or for the rule. We have decided that this is an customers correspondent accounts (as its customers.19 Such relationships can appropriate change to make. Credit card that term is defined in the Act) include, operators, as described in the interim in addition to depository institutions: 18 Closed-end investment companies, as defined final rule establishing anti-money in section 5(a)(2) of the Investment Company Act securities broker-dealers, Edge Act of 1940 (15 U.S.C. 80a–5(a)(2)), are not included as laundering programs for credit card corporations, mutual funds, and futures covered financial institutions under this rule. operators, serve primarily as a commission merchants and introducing 19 Although orders for futures and options clearinghouse through which are brokers.17 transactions may be transmitted through an settled and payments are made or introducing broker, the funds relating to introduced received. Credit card system operators accounts are held with a futures commission 15 We note that accounts maintained by foreign merchant. Monthly confirmation statements banks for covered financial institutions are not reflecting such transactions must be issued by the activity reporting requirements) (see 31 CFR correspondent accounts subject to this rule, futures commission merchant. Nevertheless, 103.17). regardless of whether there are credit balances in introducing brokers can play an important role in 20 For example, 31 CFR 103.110 sets forth such accounts. preventing money laundering in the futures voluntary procedures for information sharing 16 See 147 Cong. Rec. S10990, 11035 (Oct. 25, industry because they are in a position to know the among Bank Secrecy Act -defined financial 2001) (statement of Sen. Levin). identity of customers they introduce to futures institutions, which, if followed, entitle them to a 17 As set forth in the final rule, the foreign commission merchants and to perform due safe harbor from liability arising under Federal, branches of these entities are treated as foreign diligence on such customers, including monitoring State, or local law or contract for such information financial institutions. trading activity (and are subject to suspicious sharing.

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generally do not receive deposits or Money transmitters, like the financial diligence is the identification of nested make payments; instead, the issuing and institutions that are subject to this rule, correspondent accounts and the acquiring banks process, handle, and plainly facilitate the cross-border flow performance of due diligence on them.26 transfer funds in connection with the of funds into and out of the United We recognize that criminals and use of the credit card. Thus, we have States, but they do so in a manner that terrorists might be able to use money determined that credit card operators do does not resemble the correspondent transmitters to move money through the not have correspondent accounts and accounts that are the focus of section United States, and that it is imperative are not covered financial institutions for 312. There is a relationship that exists that money transmitters conduct due purposes of this rule.21 between the money transmitter and its diligence on their foreign counterparties A state gaming commission foreign institutional counterparties (that to enable them to perform the commented that casinos offer various is, the institutions on the other end of appropriate level of suspicious activity accounts to individual customers, but either a ‘‘send’’ or ‘‘receive’’ and risk monitoring. However, we have do not offer correspondent accounts. transaction). While such relationships addressed this risk separately through The commission recommended that facilitate the flow of funds on behalf of the issuance of specific guidance, as set casinos be excluded from the rule. We customers, as do correspondent forth below. agree with this analysis, and have relationships, there are significant We believe that the obligation for a excluded casinos from the rule. differences that directly implicate the money transmitter to know its foreign focus of this rule. counterparties (as well as its domestic Finally, upon further consideration, The vast majority of money agents and counterparties) is a part of we have decided to exclude money transmitters in the United States operate each money transmitter’s obligation to services businesses from the definition through a system of agents throughout have appropriate policies, procedures of a covered financial institution. Under the world. In fact, we estimate that over and internal controls to guard against existing Bank Secrecy Act regulations, 95 percent of all cross-border money laundering and the financing of money services businesses comprise remittances that are done through terrorist activities and to report five distinct types of financial services money transmitters use this model. suspicious activities.27 To further providers: (1) Currency dealers or Other money transmitters operate delineate these obligations, on exchangers; (2) check cashers; (3) through more informal relationships, December 4, 2004, we issued issuers of traveler’s checks, money such as the trust-based system.23 Interpretive Release No. 2004–1, which orders, or stored value; (4) sellers or Regardless of the form the relationship addressed the due diligence obligations redeemers of traveler’s checks, money takes, these money transmissions are all of a money transmitter with regard to its orders, or stored value; and (5) money initiated by a third party seeking to send foreign counterparties/agents. This transmitters.22 Money services or receive funds and are not directed or interpretative rule was issued to ensure businesses in the first four categories do controlled by the sending or receiving that money transmitters place not maintain account relationships with institutions. Unlike the case of a appropriate controls on cross-border foreign financial institutions. They do covered financial institution, the relationships without attempting to not hold, transfer or transmit the funds establishment of an agency or other force the relationship to fit within this of foreign financial institutions and/or counterparty relationship in the money rule relating to correspondent accounts. their customers and, thus, are outside transmitter industry neither gives the 3. Account. As noted earlier, we have the scope of the definition of agent/counterparty a ‘‘home’’ in the U.S. added to the final rule individualized correspondent account adopted herein. financial institution through which it definitions of the term account for each With respect to money transmitters, we can carry out its own transactions on an type of non-bank covered financial have determined that money ongoing basis, nor carries with it the institution listed above to tailor the term transmitters’ methods of operation and potential for a hub of other parties to be correspondent account to the functions the attendant risks with respect to ‘‘nested’’ within the agent/counterparty. of the various affected industries. These foreign financial institutions and their Section 312 aims at two main industry specific definitions are similar customers differ sufficiently from the congressional concerns with to those contained in the final rules concept and definition of a correspondent banking: the ability of issued under section 326 of the Act,28 correspondent account envisioned by corrupt foreign financial institutions to but with one primary modification.29 the statute and this rule that their transact business in the United States,24 Specifically, we have not adopted the inclusion would not achieve the desired and the ability of customers of a lax transfer exception contained in the result. Rather than attempting to equate foreign correspondent to access the U.S. section 326 definition of account, which the relationship between two money financial system through the excludes accounts acquired by, but not transmitters to the concept of a correspondent account while shielding opened at, a covered financial correspondent account, we instead have their identities.25 Indeed, one of the institution. previously issued guidance which statutory requirements for enhanced due Further, the definition of account for addressed the specific risks posed by each covered financial institution the international flow of funds through 23 See Report to the Congress in accordance with specifically includes the word regular to money services businesses. Using this section 359 of the Patriot Act, available at http:// stress the fact that the scope of section more precisely targeted tool, discussed www.fincen.gov. 312 is intended to be limited to those below, we expect to achieve the same 24 See Minority Staff Report on Correspondent Banking: A Gateway to Money Laundering: Hearing desired results. 26 Before the Subcomm. on Investigations of the See section 312(a)(i)(2)(B)(iii) of the Act. Senate Comm. on Governmental Affairs, 107th 27 See 31 CFR 103.125 and 103.20. We previously 21 Operators of credit card systems are subject to Cong., 277–884 (2001). imposed a due diligence obligation on a money an anti-money laundering program requirement 25 See section 302(a)(6) of the Act (finding that transmitter with respect to its domestic agents. See under section 352 of the Act that is specifically ‘‘correspondent banking facilities are one of the Matter of Western Union Financial Services, Inc., tailored to require increased due diligence banking mechanisms susceptible in some No. 2003–2 (March 6, 2003), available at http:// _ _ regarding any foreign financial institution circumstances to manipulation by foreign banks to www.fincen.gov/western union assessment.pdf. presenting a heightened risk of money laundering permit the laundering of funds by hiding the 28 31 CFR 103.121. or terrorist financing. 67 FR 21121 (April 29, 2002). identify or real parties in interest to financial 29 See 31 CFR 103.122 for the definition of 22 See 31 CFR 103.11 (uu). transactions.’’). account in the broker-dealer context.

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correspondent relationships where there the definition currently applicable would not fall within this definition. is an arrangement to provide ongoing under that rule, there is no reason to We, thus, confirm that the definition of services, excluding isolated or delay the effectiveness of this foreign bank does not include any infrequent transactions (although other amendment. foreign central bank or monetary obligations, such as suspicious activity For purposes of futures commission authority that functions as a central reporting and funds transfer merchants and introducing brokers, the bank, or any international financial recordkeeping, apply to such term account shall mean ‘‘any formal institution or regional development transactions). Thus, for example, one relationship established by a futures bank formed by treaty or international time or infrequent securities commission merchant to provide regular agreement.34 transactions outside of the context of an services, including, but not limited to, 5. Foreign financial institution. The established account relationship would those established to effect transactions 2002 Proposal defined foreign financial not, by itself, constitute an account in contracts of sale of a commodity for institution to mean a foreign bank and under the final rule. future delivery, options on any contract any other person organized under With respect to banking institutions, of sale of a commodity for future foreign law which, if organized in the we are adopting the same definition of delivery, or options on a commodity.’’ United States, would be required to account as contained in the section 313/ With respect to mutual funds, the establish an anti-money laundering 319 Rule. Accordingly, for covered term account shall mean ‘‘any program. Thus, the proposed definition banking institutions, account shall mean contractual or other business of this term mirrored the definition of ‘‘any formal banking or business relationship established between a covered financial institution, but relationship established by a bank to person and a mutual fund to provide described entities organized outside the provide regular services, dealings, and regular services to effect transactions in United States. other financial transactions; and (B) securities issued by the mutual fund, Commenters raised several objections includes a demand deposit, savings including the purchase or sale of to this proposed definition. Many noted deposit, or other transaction or asset securities.’’ 31 that a definition tied to U.S. entities account and a credit account or other 4. Foreign bank. The 2002 Proposal would be difficult to apply due to extension of credit.’’ 30 defined foreign bank to mean an different terminology and licensing This definition is in substance very organization that: (1) Is organized under methods used in foreign countries. similar to the definition of account the laws of a foreign country; (2) Others noted the difficulties raised by contained in the final rule issued under engages in the business of banking; (3) the open-ended nature of the definition, section 326 for banks. In this regard, we is recognized as a bank by the bank which would be extended to additional also note that the issuance by a bank of supervisory or monetary authority of the categories of financial institutions a funds transfer to, or receipt by a bank country of its organization or principal should they be required to establish of a funds transfer from, a foreign bank operations; and (4) receives deposits in anti-money laundering programs in the does not, by itself, create an account the regular course of its business. The future. Several commenters expressed relationship on behalf of the foreign definition contained certain exceptions, the view that the proposed definition is bank under the final rule. This is including foreign central banks or overly broad and should be limited to consistent with the final rule issued monetary authorities functioning as the entities typically licensed and under section 326 of the Act, which central banks and certain international regulated as financial institutions, such excludes wire transfers from the financial institutions or regional as depository institutions, securities and definition of an account. development banks. In this final rule, futures firms, mutual funds, and money As applied to securities broker- we have adopted the existing Bank transmitters. The congressional dealers, the term account shall mean Secrecy Act definition of foreign bank 32 comment supported the broad proposed ‘‘any formal relationship established (which includes foreign branches of definition, stating that it captured the with a broker or dealer in securities to U.S. banks) as we did in the section broad scope intended by Congress. provide regular services to effect 313/319 Rule.33 We believe that the After careful consideration of the transactions in securities, including, but existing Bank Secrecy Act definition issues raised, we have decided to limit not limited to, the purchase or sale of will include the appropriate foreign the definition of foreign financial securities and securities loaned and entities, will be more precise, will result institutions to those institutions that borrowed activity, and to hold securities in fewer interpretive issues, and will not may pose a more significant risk for or other assets for safekeeping or as require the exceptions contained in the money laundering and, thus, will be collateral.’’ 2002 Proposal for foreign central banks, subject to this requirement, in order to For purposes of clarity and foreign monetary authorities that appropriately focus covered financial consistency, we are amending the function as central banks, and institutions’ due diligence efforts on the definition of account in the section 313/ international financial institutions and risk posed by the foreign institution 319 Rule to incorporate this definition regional development banks, since they rather than on the mere form of the of account as applied to broker-dealers. entity. Accordingly, in this final rule, Because this definition of account, 31 We are aware that mutual funds do not offer foreign financial institutions are defined which is specifically tailored to the the types of one-time services, or isolated or securities industry, is no broader, and infrequent transactions, that other types of financial 34 Such institutions include, for example, the institutions may offer. The reference to providing Bank for International Settlements, International may well be somewhat narrower, than regular services is included in the definition of Bank for Reconstruction and Development (World account for mutual funds for the purpose of Bank), International Monetary Fund, African 30 The phrase ‘‘by a bank’’ has been added to the maintaining consistency between definitions. Development Bank, Asian Development Bank, definition of account to conform to the definitions 32 Current Bank Secrecy Act regulations define European Bank for Reconstruction and of account applicable to the non-bank covered foreign bank as ‘‘a bank organized under foreign Development, Inter-American Development Bank, financial institutions. The phrase ‘‘other financial law, or an agency, branch or office located outside International Finance Corporation, North American transactions’’ includes, but is not limited to, the the United States of a bank.’’ The term does not Development Bank, International Development purchase or sale of securities, securities lending and include an agent, agency, branch, or office within Association, Multilateral Investment Guarantee borrowing, and the holding of securities or other the United States of a bank organized under foreign Agency, European Investment Bank, Nordic assets in connection with securities transactions for law. 31 CFR 103.11(o). Investment Bank, and Council of Europe safekeeping or as collateral. 33 Section 313/319 Rule, supra note 7, at 60566. Development Bank.

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as foreign banks; the foreign offices of conducting banking activities with the rule, and that the remaining elements covered financial institutions; non-U.S. citizens of, or in the local currency of, should be part of the institution’s risk entities that, if they were located in the the jurisdiction that issued the license. assessment program. Commenters noted United States, would be a securities This final rule adopts the proposed in particular that the fifth proposed broker-dealer, futures commission definition without change. element—reviewing public information merchant, or mutual fund; 35 and non- B. Section 103.176—Due Diligence to ascertain whether the foreign U.S. entities that are engaged in the Programs for Correspondent Accounts institution has been the subject of business of, and are readily identifiable for Foreign Financial Institutions criminal or regulatory action—is as, a currency dealer or exchanger or a particularly problematic given the money transmitter. This reflects our 1. General due diligence procedures. virtually limitless sources of public belief that such entities operate in a Section 103.176(a) of the 2002 Proposal information. The comments suggested manner that both makes them readily required that every covered financial that, if a requirement to review public identifiable 36 (despite differences in institution maintain a due diligence information is retained in the final rule, terminology or licensing 37) and that program that includes policies, the financial institution’s obligation be poses a heightened risk of money procedures, and controls reasonably limited in some way (e.g., information laundering because they offer to money designed to enable the financial disseminated through print media that launderers outside the United States institution to detect and report any is readily available and is generally easy access to the U.S. financial system, known or suspected money laundering regarded as a leading publication and as a result of their manner of operation conducted through or involving any reliable). Commenters stressed that, if and their offering of products with a correspondent account that it maintains the definition of correspondent account high degree of liquidity. We, however, for a foreign financial institution. We is broad, financial institutions should be have included an exception to the have revised the language of the final given flexibility in conducting due definition of a foreign financial rule to reflect the fact that the due diligence, rather than being required to institution to exclude those entities that diligence policies, procedures, and perform a specified list of inquiries for engage in currency exchange or money internal controls must be appropriate, each account. The congressional transmission only as an incidental specific, and risk-based, and that the comment also supported the adoption of aspect of their business. An example of rule applies to any correspondent a final rule incorporating the principle this might be a hotel that exchanges account that is established, maintained, that the due diligence requirement administered, or managed in the United small amounts of foreign currency for its should be risk-based. States for a foreign financial institution. guests or a tax service that cashes tax We agree that this provision should be This change is consistent with the risk- return checks as an accommodation. modified to incorporate a risk-based based approach adopted herein, as well Although we specifically have excluded approach to the entire rule. Thus, each money services businesses from this as with the congressional comment. The final rule also includes the requirement covered financial institution will be rule as covered financial institutions, required to include in its due diligence we have included foreign money that the due diligence program be part of the covered financial institution’s program procedures for assessing the transmitters and foreign currency anti-money laundering program anti-money laundering risks posed by dealers and exchangers as foreign otherwise required by this subpart. correspondent accounts it maintains for financial institutions because of their The 2002 Proposal further required foreign financial institutions based upon role as consumers of correspondent that all due diligence programs a consideration of relevant factors, as services offered by covered financial maintained by covered financial appropriate to the particular institutions such as banks. institutions contain five specific jurisdiction, customer, and account. 6. Offshore banking license. The 2002 procedures.38 Many commenters urged Given the breadth of the correspondent Proposal proposed the same definition us to adopt a risk-based rule that would account definition, we believe that this of offshore banking license as that enable covered financial institutions to requirement will permit covered contained in 31 U.S.C. 5318(i): A license better focus their attention and financial institutions to assess the risks to conduct banking activities that resources on the types of accounts that posed by their various non-U.S. prohibits the licensed entity from have a greater susceptibility to money customers and accounts and to direct laundering. In particular, some their resources most appropriately at 35 For example, the European Union adopted a those accounts that pose a more license regime throughout the European Union for commenters suggested that only the first ‘‘undertakings for collective investment in two elements contained in the 2002 significant money laundering risk. transferable securities,’’ similar to mutual funds in Proposal should be included in the final Relevant risk factors, which were not the United States, under the Directive on spelled out in detail in the 2002 Undertakings for Collective Investment in 38 The five required procedures were: (1) Proposal, shall include, as appropriate: Transferable Securities. See Council Directive 85/ Determining whether the correspondent account is • 611/EE of December 20, 1985 on the coordination The nature of the foreign financial subject to the enhanced due diligence requirements; of laws, regulations and administrative provisions institution’s business and the markets it (2) assessing whether the foreign financial relating to undertakings for collective investment in institution presents a significant risk for money serves, and the extent to which its transferable securities, 1985 O.J. (L 375) 3. laundering; (3) considering information available business and the markets it serves 36 We note that the definitions of a currency from U.S. government agencies and multinational dealer or exchanger and a money transmitter for present an increased risk for money organizations with respect to supervision and laundering. purposes of inclusion as a foreign , if any, applicable to the foreign financial institution under the final rule do not correspond institution; (4) reviewing guidance we or the • The nature of the correspondent to the definitions of 31 CFR 103.11(uu). For applicable federal functional regulator issued account, including the types of services purposes of this rule, we include only those regarding money laundering risks associated with to be provided (e.g., proprietary or businesses that are readily identifiable as such. particular foreign financial institutions and 37 We note that, except for mutual funds, the correspondent accounts for foreign financial customer), and the purpose and definition of foreign financial institution is not institutions generally; and (5) reviewing public anticipated activity of the account. necessarily limited to the corresponding foreign information to ascertain whether the foreign • The nature and duration of the institutions that are required by their chartering financial institution has been the subject of criminal covered financial institution’s jurisdictions to register as such, but rather is a action of any nature or regulatory action relating to functional definition based on the entity’s primary money laundering. The 2002 Proposal, supra note relationship with the foreign financial activity or activities. 2, at 37743. institution (and, if relevant, with any

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affiliate of the foreign financial 103.176. This new provision states correspondent bank accounts that a institution). explicitly the requirement that was covered financial institution determines • The anti-money laundering and implicit in the 2002 Proposal: that have a high risk of money laundering supervisory regime of the jurisdiction covered financial institutions must may necessitate increased due diligence that issued the charter or license to the apply ongoing risk-based procedures even though they may not specifically foreign financial institution, and, to the and controls to each correspondent fall within the statutory categories that extent that information regarding such account reasonably designed to detect would trigger enhanced due diligence. jurisdiction is reasonably available, of and report money laundering.39 We This due diligence may include, when the jurisdiction in which any company believe that, as part of ongoing due appropriate, transaction testing or one that is an owner of the foreign financial diligence, covered financial institutions or more of the elements of enhanced institution is incorporated or chartered. should periodically review their due diligence described in section This factor has been clarified to ensure correspondent accounts. We do not 5318(i)(2). that a covered financial institution intend this review, in the ordinary Numerous commenters sought considers, when appropriate, the anti- situation, to mean a scrutiny of every clarification from us on the extent to money laundering and supervisory transaction taking place within the which covered financial institutions can regime of the foreign financial account, but, instead, a review of the rely on reputable foreign intermediaries institution. In addition, the factor is account sufficient to ensure that the to conduct due diligence of the designed to ensure that the covered covered financial institution can intermediaries’ customers because of financial institution considers, when determine whether the nature and concerns that the due diligence appropriate and to the extent that volume of account activity is generally requirements under this section would information is reasonably available, the consistent with information regarding be particularly burdensome. For anti-money laundering and supervisory the purpose and expected account example, one commenter noted that this regime of the jurisdiction in which a activity and to ensure that the covered requirement would be particularly corporate owner of the foreign financial financial institutions can adequately onerous for mutual funds, which can institution is incorporated or chartered. identify suspicious transactions. For have thousands of shareholders, some of Thus, for example, if a foreign financial example, we understand that a number which purchase their shares directly institution is owned by an institution of covered financial institutions and some of which invest through that is incorporated or chartered in a maintain account profiles for their intermediaries, including certain foreign jurisdiction that has a robust anti-money correspondents in order to anticipate financial institutions. These laundering and supervisory regime, and how the account might be used and the commenters misunderstand the the covered financial institution expected volume of activity. These requirements of 31 U.S.C. 5318(i) and believes that this is relevant in assessing profiles can serve as important baselines this rule. the risk posed by the foreign financial for detecting unusual activity. The due diligence requirement under institution, then the covered financial We believe that an effective general this section of the Bank Secrecy Act institution should take this information due diligence program under section generally requires an assessment of the into account in its risk assessment. 103.176(a) will provide for a range of money laundering risks presented by • Any information known or due diligence measures, based on a the foreign financial institution for reasonably available to the covered covered financial institution’s risk which the correspondent account is financial institution about the foreign assessment of a correspondent account. maintained, and not for the customers of financial institution’s anti-money The starting point for financial that institution. If, however, a covered laundering record, including public institutions, therefore, should be a financial institution’s review of the information in standard industry guides, stratification of their money laundering account identifies activity inconsistent periodicals, and major publications. The risk based on a review of the relevant with what is expected, then, consistent scope and depth of such a review will risk factors to determine which accounts with a risk-based due diligence depend on the nature of the information may require increased measures. program, the covered financial uncovered. It should generally include a Section 103.176(a) does not prescribe institution may need to review the consideration of information that might the elements of increased due diligence account more carefully. be available from the Department of the that should be associated with specific 2. Enhanced due diligence Treasury or other federal governmental risk factors, but a covered financial procedures. Section 5318(i)(2) requires sources regarding the money laundering institution’s general due diligence that a covered financial institution risks associated with particular foreign program should identify risk factors that perform enhanced due diligence with financial institutions and correspondent would warrant the institution regard to a correspondent account accounts for foreign financial conducting additional scrutiny of a established or maintained for certain institutions generally. This information particular account. The covered foreign banks. The 2002 Proposal could be contained in issuances financial institution’s program under proposed to implement these stemming from action taken under this rule should address these issues at requirements in section 103.176(b), section 311 of the Act, as well as a level of specificity and detail which specified minimum due diligence determinations concerning appropriate to that institution’s foreign program requirements applicable to all comprehensive consolidated correspondent account operations and foreign banks subject to enhanced due supervision made by the Federal the types of accounts offered. In diligence. Reserve in connection with applications addition, the program should take into In light of extensive comments from foreign banks or determinations consideration the fact that some foreign received, we are proposing to take a concerning consolidated supervised different approach toward entities or supervised investment bank 39 Covered financial institutions that are not implementing this provision than that holding companies by the Securities currently subject to suspicious activity reporting set forth in the 2002 Proposal. To ensure and Exchange Commission. obligations under the Bank Secrecy Act rules (e.g., adequate notice and opportunity for mutual funds) are encouraged to file voluntary The final rule includes a new reports of known or suspected violations of law comment, we have decided to re-notice subparagraph (3) under the general due conducted through or involving a correspondent the enhanced due diligence portion of diligence paragraph (a) of section account. section 312 with regard to

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correspondent accounts in its entirety. This paragraph requires that banks (excluding financial interests that do not The proposed rulemaking is published continue to comply with the due amount to either $1,000,000 or five elsewhere in this separate part of the diligence requirements for percent of either the corpus or income Federal Register. correspondent accounts in 31 U.S.C. of the account). 3. Special procedures. Section 5318(i) until the 90 and 270-day Many commenters stated that the 103.176(d) of the 2002 Proposal effective dates described in paragraph proposed definition was overly broad contained special procedures to be 103.176(e)(1) are triggered. This is and unworkable in practice. They noted included in the covered financial consistent with the provisions of the that the definition would expand the institution’s due diligence program. Interim Rule found at 31 CFR 103.181. breadth of beneficial ownership to Those procedures addressed what the Moreover, consistent with the Interim include all individuals with only a financial institution should do in Rule, paragraph (e)(2) provides that financial interest in an account (subject situations where appropriate due banks must continue to comply with the to the de minimis limitation). Such a diligence cannot be performed, enhanced due diligence requirements of definition, they argued, would be including when the institution should 31 U.S.C. 5318(i)(2) until a final rule unworkable, primarily because it would refuse to open the account, suspend based on the Notice is published. mean that covered financial institutions transaction activity, file a suspicious Paragraph 103.176(e)(3) contains a would be required to identify, and activity report, or close the account. special implementation rule for all other perform due diligence on, any There were no comments submitted covered financial institutions to ensure individual with anything other than an regarding this provision, which is consistency with the Interim Rule found insubstantial interest in an account, unchanged in this final rule. at 31 CFR 103.182 and 103.183. Thus, even when such individuals do not 4. Effective dates. Although the 2002 this paragraph provides that securities assert control, direction, or Proposal did not address the issue of an broker-dealers, futures commission over the account. effective date, many commenters noted merchants, introducing brokers, mutual Commenters offered various the difficulty of complying with the funds, and trust banks or trust suggestions for narrowing the scope of requirements of 31 U.S.C. 5318(i), companies that have a federal regulator the definition. Several commenters especially with regard to its application (1) are not required to comply with the suggested that we incorporate the to previously existing accounts, and also due diligence requirements of 31 U.S.C. international best practices principles urged us to allow a sufficient transition 5318(i)(1) until the 90 and 270-day on beneficial ownership established by period. We are mindful of the effective dates described in paragraph the Wolfsberg Group (Wolfsberg),41 significant burden that will result from 103.176(e)(1) are triggered, and (2) are which stress the importance of control the statutory requirement that the not required to comply with the over the account in determining provision applies to all correspondent enhanced due diligence requirements of beneficial ownership.42 The accounts, regardless of when they were 31 U.S.C. 5318(i)(2) until otherwise congressional comment suggested that opened. provided by us in a final rule issued we retain the definition as proposed, but The final rule contains a new section regarding those requirements. clarify that beneficial ownership interest 103.176(e)(1) that provides for the Finally, paragraph (e)(4) contains a would apply only to individuals and not following effective dates for the general exemption from the due to legal entities. obligations under this section: Effective diligence requirements for We agree with commenters that the 90 days after the date of publication of correspondent accounts contained in 31 proposed definition is insufficiently the final rule, the requirements of the U.S.C. 5318(i) for all financial tailored to the serious risks of money final rule will apply to correspondent institutions that are not defined in the laundering, and that the term beneficial accounts opened on or after that date, final rule as covered financial owner, for purposes of this rule, should and, effective 270 days after the date of institutions. This exemption replaces apply only to individuals, not legal 43 publication of the final rule, the rule’s without substantive change the entities. Individuals having a requirements will apply to all provisions of the Interim Rule found at beneficial interest in the assets of an correspondent accounts opened prior to 31 CFR 103.183. account without a corresponding ability the date that is 90 days after the date of to control the account should not be C. Section 103.178—Due Diligence 44 publication of the final rule.40 deemed beneficial owners. Due to the fact that we are issuing a Programs for Private Banking Accounts Accordingly, this final rule defines the new Notice of Proposed Rulemaking for Non-U.S. Persons—Definitions term beneficial owner (rather than (Notice) with regard to enhanced due Section 103.178 of the 2002 Proposal ‘‘beneficial ownership interest,’’ the diligence under section 5318(i)(2), it is implemented the requirements in 31 term defined in the 2002 Proposal) to necessary to ensure that there are no U.S.C. 5318(i) regarding due diligence mean ‘‘an individual who has a level of gaps in the relevant implementation standards applicable to private banking control over, or entitlement to, the funds periods. Consequently, we are deleting accounts established, administered, 31 CFR 103.181 through 103.183 set managed, or maintained in the United 41 The Wolfsberg Group is a consortium of 12 international banks that establishes global anti- forth in the Interim Rule dealing with States for or on behalf of non-U.S. money laundering guidelines for the financial effective dates and are adding the persons. services industry. 42 following two paragraphs to take their a. Definitions—In General Wolfsberg Group, ‘‘Wolfsberg Anti-Money place. Laundering Principles: FAQs on Beneficial The definitions relating to this section Ownership,’’ (2005), Q. 1, (hereinafter ‘‘FAQs on Paragraph 103.176(e)(2) contains a Beneficial Ownership’’), available at http:// special implementation rule for banks. generated considerable comment and www.wolfsberg-principles.com/faq- are discussed below. ownership.html#2. 40 The due diligence program adopted pursuant to 1. Beneficial ownership. Proposed 43 For a further discussion of this issue, see infra section 103.176 of the final rule, like all programs section 103.175(b) defined a beneficial notes 54–55 and accompanying text. required by Bank Secrecy Act regulations, must be ownership interest in an account 44 For example, under the proposed definition, part of the covered financial institution’s anti- minor children who are beneficiaries of a trust money laundering program, and must be approved generally as the legal authority to fund, would have been considered to have a beneficial by its board of directors or an appropriate direct, or manage the account or a legal ownership interest despite the fact that they lack committee thereof, or senior management. entitlement to the assets of an account control over the account.

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or assets in the account that, as a however, understand that, at this time, b. Required Minimum Deposit of practical matter, enables the individual, private banking accounts are likely to be $1,000,000 directly or indirectly, to control, direct offered primarily by depository Many commenters sought clarification or manage the account. The ability to institutions, uninsured trust banks and of the meaning of the clause ‘‘requires fund the account or the entitlement to trust companies that are federally a minimum aggregate deposit of funds the funds of the account alone, however, regulated and are subject to an anti- or other assets of not less than without any corresponding authority to money laundering program requirement, $1,000,000.’’ Some commenters raised control, manage or direct the account securities broker-dealers, and futures concerns that adopting a final rule (such as in the case of a minor child commission merchants and introducing containing the statutory threshold of beneficiary) does not cause the brokers. Should any other covered $1,000,000 would mean that many high individual to be a beneficial owner.’’ financial institutions offer accounts that value accounts at covered financial Individuals who have an entitlement to meet the definition of a private banking institutions, that would otherwise meet funds in an account or an ability to fund account in the future, they would be the definition of a private banking the account and who also have the required to comply with this section of account, would not be subject to this ability to ‘‘manage or direct’’ the the rule. rule simply because the covered account have the requisite level of 3. Non-U.S. person. The 2002 financial institution does not require a control and must be identified by the Proposal defined non-U.S. person as an minimum deposit of at least $1,000,000. financial institution.45 ‘‘individual who is neither a United Although some accounts may not be We believe that the definition we are States citizen nor a lawful permanent adopting in this final rule is consistent covered by this rule, we cannot broaden resident as defined in 26 U.S.C. the statutory definition, which was the with the concept of beneficial 7701(b)(6).’’ The final rule defines the ownership set forth in section basis for the definition contained in the term more appropriately by reference to 2002 Proposal, in order to reach a 5318A(e)(3), as added by section 311 of 49 46 the Immigration and Nationality Act, different result. The plain language of the Act. The rule also should provide but without any change in substance. covered financial institutions with a the statute, as well as the legislative We are clarifying that this definition 50 workable standard for assessing history of section 5318(i), upon which shall apply only to section 103.178 and the 2002 Proposal was based, are beneficial ownership for private banking does not incorporate or change the accounts, thereby allowing covered unequivocal: a private banking account definition of person as used in the other is an account (or combination of financial institutions to focus their due sections of this part. diligence efforts in a risk-based fashion accounts) that requires a minimum on those accounts and individuals 4. Private banking account. Section deposit of not less than $1,000,000. posing a heightened risk of money 103.175(n) of the 2002 Proposal Section 312 of the Act was intended to laundering. Private banking accounts generally adopted the definition of cover those accounts opened by wealthy may be particularly vulnerable to money private banking account that appears in foreign individuals making large 31 U.S.C. 5318(i). Section 5318(i) deposits who can avail themselves of laundering because they may afford 51 wealthy clients a large measure of defines a private banking account as an the services of a liaison, and we may anonymity, as well as access to the U.S. account (or any combination of not depart in the final rule from the financial system.47 accounts) that: (1) Requires a minimum plain language of the statute. The final 2. Covered financial institution. We aggregate deposit of funds or other rule is thus unchanged from the 2002 are using the same definition of covered assets of not less than $1,000,000; (2) is Proposal, except that the rule uses the financial institution for both the private established on behalf of one or more statutory term ‘‘deposit’’ in place of the banking provisions of section 103.178 individuals who have a direct or term ‘‘amount’’ used in the 2002 and the correspondent account beneficial ownership interest in the Proposal. provisions of section 103.176. We, account; and (3) is assigned to, or is Certain covered financial institutions administered or managed by, in whole may offer a wide range of services that 45 Both state and federal law generally impute the or in part, an officer, employee, or agent are generically termed private banking, ownership of ‘‘self-settled’’ trusts—trusts where the of a financial institution acting as a and an institution may require different settlor (the one who sets up and funds the trust) is liaison between the financial institution minimum deposits that are also the beneficiary—to the settlor-beneficiary. This and the direct or beneficial owner of the commensurate with its various types of situation stands in sharp contrast to that in which minor children are simply the trust beneficiaries; account. Commenters generally sought private banking services. If an their interests are, thus, properly excluded from the further clarification as to the precise institution offers more than one level of definition of beneficial ownership for purposes of scope of this term, raising issues private banking service to its clients, the final rule. Individuals with the ability to fund regarding all three elements of the then any account or combination of an account by virtue of being the source of the 48 assets, however, should be distinguished from definition. accounts that require a $1,000,000 individuals such as lawyers and liaisons who merely perform the ministerial functions of placing 48 We note that, although this final rule applies 49 We intend to review the extent to which the funds in various investment vehicles. to those private banking accounts meeting the application of the statutory definition could result 46 Section 311(e)(3) of the Act provides, in definition in the rule, many covered financial in money laundering risks, and, if warranted, relevant part, that the Secretary shall promulgate institutions offer forms of private banking initiate a rulemaking to require special due regulations defining beneficial ownership that shall relationships that should be given a greater level of diligence for a broader range of private banking address issues relating to an individual’s ability to due diligence under the institution’s risk-based accounts than are subject to section 5318(i) and this ‘‘fund, direct or manage the account’’ and shall anti-money laundering program than that generally final rule. Such a rulemaking would be based on ensure that the definition does not extend to any afforded the institution’s retail customers. This is our authority under sections 5318(a)(2) and (h)(2) individual with an ‘‘immaterial’’ interest in the primarily because of the large amounts of money of the Bank Secrecy Act. assets of the account. 31 U.S.C. 5318A(e)(3). that can be managed through such relationships and 50 The legislative history of section 5318(i) 47 See Hearings on Private Banking and Money the personal contact that is created in connection supports the plain language reading of the Laundering: A Case Study of Opportunities and with these relationships. See, e.g., Federal Financial definition. In explaining the definitional Vulnerabilities, Before the Permanent Subcomm. on Institutions Examination Council, Bank Secrecy Act requirements for a private banking account, Senator Investigations of the Senate Comm. on Anti-Money Laundering Examination Manual, June Levin stated: ‘‘First, the account in question must Governmental Affairs, 106th Cong., 872 (1999) 2005, available at http://www.ffiec.gov/pdf/ require a $1 million minimum aggregate of (Minority Staff Report) (hereinafter ‘‘Private bsamanual.pdf (hereinafter Bank Secrecy Act Exam deposits.’’ 147 Cong. Rec., supra note 16, at 11037. Banking Report’’). Manual). 51 See id. at 11036.

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aggregate minimum deposit, and also financial transactions to benefit the We have addressed the concerns of satisfy the other elements of the covered financial institution’s client.56 these commenters by clarifying that the definition, including the services of a To provide this type of personalized definition of beneficial owner is limited liaison, would be subject to the rule. service for the client and to understand to individual(s) with control over the account (as opposed to passive c. Liaison the long-term goals and needs of the client, a liaison will routinely gather with only financial interests).58 Commenters also asked us to clarify extensive information about the client, Furthermore, as a general matter, we do the term liaison as it applies to private including the client’s personal, not believe that accounts held by public banking accounts because the term professional, and financial history. corporations, mutual funds, or other potentially could bring within its scope Thus, the meaning of the term liaison in collective investment vehicles would individuals who perform only this rule should not be confused with, qualify as private banking accounts. administrative functions, such as for example, a customer service Such accounts likely would not involve account administrators or customer representative or account manager who a liaison, would not be established on service representatives. In order to may be assigned to a large number of behalf of one or more individuals with articulate the meaning of this term, it is customers (sometimes for a geographical beneficial ownership of (i.e., control helpful to describe briefly what is meant region) to respond to questions over) such an account, and would be by private banking. Although there is no customers may have regarding the viewed as institutional accounts generally accepted definition of private institution’s products and services or to managed by a different unit of the banking, the term refers broadly to the take orders for securities or futures covered financial institution. On the provision of highly personalized transactions. Those persons do not other hand, a private banking account financial and related services to wealthy provide the level of service or obtain the established in the name of a legal entity clients, principally individuals and extent of client information (such as a personal investment company families. Moreover, it is not a single 59 characteristic of private banking. or trust) for the benefit of an activity, but instead comprises a range individual owner would be subject to of different products and services, d. Account Established on Behalf of One the final rule if it also met the other including cash management, funds or More Direct or Beneficial Owners definitional requirements. transfer, asset management, creation of Some commenters asked us to clarify offshore entities, financial planning, Commenters also sought clarification the language of section 5318(i)(1) that lending and custody services.52 Private regarding the requirement in section applies the statutory due diligence banking typically includes the following 5318(i) and the 2002 Proposal that the requirements to private banking key components: Tailoring services to account be ‘‘established on behalf of or accounts that a U.S. financial institution individual client requirements; for the benefit of one or more ‘‘establishes, maintains, administers or anticipation of client needs; long-term individuals who have a direct or manages’’ in the United States for a non- relationship orientation; and personal beneficial ownership interest in the U.S. person.60 The phrase is intended to contact.53 These services may vary account.’’ Reading this phrase in cover not only those accounts that are according to the size of a client’s deposit conjunction with the 2002 Proposal’s established or maintained in the United or account and the institution’s private definition of beneficial ownership States, but also those accounts that are banking program. Section 5318(i) was interest, some commenters were established and maintained outside of intended to cover those accounts concerned that section 5318(i) could the United States but are administered opened by wealthy foreign individuals apply to accounts maintained by public or managed by employees within the making large deposits, who avail corporations, or by mutual funds or United States.61 Private banking themselves of the services of an other collective investment vehicles, on accounts can be established (i.e., employee of the financial institution behalf of numerous investors who could opened) and maintained (i.e., the who can transfer funds, create offshore be viewed as having beneficial records are kept) in branch offices corporations or accounts, or engage in ownership interests in the account. outside of the United States, while the other transactions carrying increased These commenters claimed that the due accounts are administered or managed risks of money laundering.54 diligence burdens resulting from such a by employees of the institution within The liaison is the covered financial reading of this provision would be the United States. For example, the institution’s employee who develops (or excessive and impractical.57 records of a private banking client may continues) a long-term relationship with be physically located at a foreign branch the client and is actively involved in 56 See Private Banking Report, supra note 47, at providing these services.55 To that end, 875. 58 We have modified this element of the private a liaison may, for example, coordinate 57 As a means of creating a ‘‘bright line’’ test to banking account definition in the final rule the efforts of a team of specialists avoid this result, one commenter recommended that accordingly to require an account for those ‘‘who the final rule exclude from the definition of private are direct or beneficial owners of the account.’’ We including investment managers, trust banking account hedge funds and other investment have also replaced ‘‘individuals’’ with ‘‘non-U.S. officers, and estate planners; open vehicles unless they have five or fewer investors, persons’’ to simplify the final rule. accounts on behalf of the client and based on the standard suggested in section 356(c) 59 See Bank Secrecy Act Exam Manual, supra note manage and arrange transactions among of the Act, which requires the submission of an 48. those accounts; and conduct a variety of interagency report to Congress relating to 60 The same geographical scope applies in section investment companies. That section specifically 312 of the Act with respect to correspondent requires the report to address the question of accounts, as well as in section 313 of the Act and 52 Bank Secrecy Act Exam Manual, supra note 48. whether certain personal holding companies with the Section 313/319 Rule. 53 D. Maude and P. Molyneau, Private Banking: five or fewer shareholders or beneficial owners 61 For example, a covered financial institution Maximizing Performance in a Competitive Market should be treated as financial institutions under 31 may establish a personal investment company for at 18 (Euromoney Publications PLC 1996). U.S.C. 5312(a)(2)(I) and should be required to a private banking client in an offshore jurisdiction, 54 147 Cong. Rec. supra note 16, at 11036. disclose their beneficial owners when opening but may manage the account in a U.S. office. See 55 See Private Banking Report, supra note 47, at accounts at U.S. financial institutions. The report Board of Governors of the Federal Reserve System, 875. The Private Banking Report, which served as was issued December 31, 2002. See http:// ‘‘Private Banking Activities’’ (SR Letter 97–19 the basis for the private banking provisions of www.treas.gov/press/releases/po3721.htm. As a (SUP), June 30, 1997), available at http:// section 312 of the Act, illustrates the services that result of the revised definition of beneficial www.federalreserve.gov (hereinafter ‘‘Federal distinguish liaisons from traditional customer ownership in the final rule, no such limit is Reserve Guidance’’). Such a relationship would fall service employees of a financial institution. necessary. within the geographic requirement of the final rule.

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of the covered financial institution, adopted by the international community title (honorary or salaried political while an employee of the institution in regarding politically exposed persons,64 position), the level of authority the the United States exercises control over, including the close associates aspect of individual has over governmental and manages the day-to-day activities the definition that was the primary activities and over other officials, and of, the account.62 focus of most commenters’ objections.65 whether the position affords the Senior foreign political figure. It should also be noted here that, prior individual access to significant Commenters generally found the to accepting any private banking client, government assets and funds. For definition of senior foreign political especially one who will have a high example, as a general matter, we expect figure,63 set forth in § 103.175(o) of the dollar account, a covered financial that individuals holding the equivalent 2002 Proposal, both far-reaching and institution should ordinarily perform of cabinet level positions with their difficult to implement. Commenters sufficient due diligence to ensure that it government would fall within the specifically criticized the inclusion of is comfortable with the prospective definition of a senior official because of persons ‘‘widely and publicly known’’ customer and his or her source of funds. their ability to establish government to maintain a close personal or This type of due diligence should policy and their access to government professional relationship with enable the covered financial institution resources. However, a senior official individuals holding senior official to determine who the customer is, what could also include a governor or the positions. They argued that such a his or her background is, and, mayor of a major city. If, for example, definitional standard would require specifically, whether he or she is a the city has importance nationally or financial institutions to look beyond the senior foreign political figure. internationally, the governor or mayor professional and financial histories of Senior official or executive. The 2002 could have the same type of political their clients and into their personal Proposal defined senior official or influence and access to government relationships. For many commenters, executive to mean an individual with resources as would an official holding the phrase ‘‘widely and publicly substantial authority over policy, the equivalent of a cabinet level known’’ raised questions about the operations, or the use of government- position. Thus, where a covered resource burdens entailed in reviewing owned resources. The final rule adopts financial institution’s due diligence the vast amounts of public information the proposed definition without change. reveals that the nominal or beneficial currently available to ascertain such We believe that the definition of a owner of a private banking account association. Yet another commenter senior official or executive must remain holds some type of government requested that we develop a list of sufficiently flexible to capture the range position, the institution may need to senior foreign political figures similar to of individuals who, by virtue of their make additional inquiries to determine the list issued by the Department of the office or position, potentially pose a risk whether that position or title qualifies as Treasury’s Office of Foreign Assets that their funds may be the proceeds of a senior official or executive. Control in order to ensure that covered foreign corruption. But this flexibility, In defining the terms senior foreign financial institutions apply the according to commenters, has come at political figure and senior official or definition in a uniform fashion. the expense of specificity, and executive, we have sought to provide We continue to believe that the commenters have requested further some guidance and flexibility because proposed definition of senior foreign guidance in identifying such an overly precise and rigid definition is political figure is generally appropriate. individuals. Titles, while helpful, may not feasible and would not adequately implement the statutory intent of this However, we are modifying the not themselves provide sufficient section. In addition, as noted definition to specify that the definition information about the office because previously, through the course of includes a ‘‘person who is widely and governments are organized differently exercising the due diligence that is publicly known * * * to be a close from jurisdiction to jurisdiction and necessary and appropriate for reviewing associate of’’ rather than a ‘‘person who official titles and responsibilities may the acceptability of a high dollar is widely and publicly known * * * to vary accordingly. account for a potential senior foreign maintain a close personal or We believe covered financial political figure or a senior official or professional relationship with’’ any institutions should consider a range of executive, a covered financial such individual. This definition is factors when determining whether a institution should be able to gather the consistent with similar standards particular foreign official is a senior information necessary to comply with official. Relevant factors include 62 this rule. However, the fact that securities issued and examining the official responsibilities of traded in the United States are held in a private Immediate family member. The 2002 banking account would not by itself suggest that the individual’s office, the nature of the Proposal defined immediate family that the account is controlled, managed, or member as ‘‘a spouse, parents, siblings, administered in the United States. On the other 64 See, e.g., Basel Committee on Banking hand, if investment management decisions are Supervision, ‘‘Customer Due Diligence for Banks,’’ children, and a spouse’s parents or made in the United States, this would constitute (Oct. 2001) at 10, which defines politically exposed siblings.’’ We did not receive comments management of the account in the United States. persons as ‘‘individuals who are or have been on this proposed definition and are 63 The proposed rule defined senior foreign entrusted with prominent public functions, adopting it in the final rule without political figure as: ‘‘(i) A current or former senior including heads of state or of government, senior official in the executive, legislative, administrative politicians, senior government, judicial, or military change. or judicial branches of a foreign government officials, senior executives of publicly owned D. Section 103.178—Due Diligence (whether elected or not), a senior official of a major corporations and important political party foreign political party, or a senior executive of a officials.’’ Programs for Private Banking Accounts foreign government-owned commercial enterprise; 65 See Wolfsberg Group, ‘‘Wolfsberg AML 1. Due diligence generally. Section (ii) a corporation, business or other entity that has Principles on Private Banking,’’ (1st revision, May been formed by, or for the benefit of, any such 2002) at 2, available at http://www.wolfsberg- 103.178(a) of the 2002 Proposal required individual; (iii) an immediate family member of any principles.com, which likewise defines politically each covered financial institution to such individual; and (iv) a person who is widely exposed persons as ‘‘individuals holding or having maintain a due diligence program that and publicly known (or is actually known by the held positions of public trust, such as government includes policies, procedures, and relevant covered financial institution) to maintain officials, senior executives of government a close personal or professional relationship with corporations, politicians, important political party controls that are reasonably designed to any such individual.’’ 2002 Proposal, supra note 2, officials, etc., as well as their families and close detect and report any known or at 37743. associates.’’ suspected money laundering or

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suspicious activity conducted through forth in section 103.178(b).68 As However, to comply with the or involving any private banking discussed in the preamble to the 2002 requirement that a covered financial account that the financial institution Proposal, the nature and extent of the institution perform sufficient due establishes, maintains, administers, or due diligence conducted will likely vary diligence with regard to its private manages in the United States for or on with each client depending on the banking accounts to guard against behalf of a non-U.S. person. This section presence of potential risk factors. More money laundering and to report any of the final rule contains technical extensive due diligence, for example, suspicious activity, part of an modifications,66 and also includes the may be appropriate for new clients; institution’s due diligence may often requirement that the due diligence clients who operate in, or whose funds include a review of the individual’s program shall be part of the covered are transmitted from or through, lines of business and sources of wealth. financial institution’s anti-money jurisdictions with weak anti-money The final rule is also modified by laundering program otherwise required laundering controls; and clients whose employing the term beneficial owner by the subpart. lines of business may be cash-based instead of beneficial ownership interest 2. Minimum due diligence (such as casinos or currency exchanges). so that it is consistent with the requirements. Section 103.178(b) of the Due diligence should also be definition as it appears in section 2002 Proposal set forth minimum due commensurate with the size of the 103.175(b) of the final rule. diligence requirements for private account. Accounts with relatively more Accordingly, this final rule requires banking accounts. This section required deposits and assets should be subject to covered financial institutions to take that the covered financial institution’s greater due diligence, requiring covered reasonable steps to ascertain the identity due diligence program include financial institutions to conduct more of all nominal and beneficial owners of reasonable steps to ensure that the extensive investigation into the relevant private banking accounts and to apply institution: (1) Ascertain the identity of factors. In addition, if the institution at due diligence measures to those all nominal and beneficial owners,67 as any time learns of information that casts individuals. well as information on their lines of doubt on previous information, further Commenters maintained that the business and sources of wealth; (2) due diligence would be appropriate. compliance burdens under this ascertain the source of funds deposited We have largely retained the language provision would be excessive, into the private banking account; (3) of section 103.178(b) as contained in the particularly as it is applied to all ascertain whether any account holder is 2002 Proposal, but have clarified the beneficial owners of private banking a senior foreign political figure; and (4) requirements of paragraph (b)(2). This accounts. As this final rule adopts a report, in accordance with applicable paragraph will now require covered narrower definition of beneficial owner law and regulation, any suspected financial institutions to ascertain for than that contained in the 2002 money laundering or suspicious private banking accounts information Proposal, we anticipate that the activity. Commenters generally raised regarding the purpose of the account as compliance burdens associated with concerns about the burdens involved in well as the anticipated account activity. this section will be reduced. The complying with section 103.178(b) in To assist covered financial institutions definition of beneficial owner centers on several respects. These included the in meeting their compliance obligations, actual rather than nominal control. difficulty of identifying the beneficial we are providing additional guidance Therefore, covered financial institutions owners given the 2002 Proposal’s regarding the specific requirements set will need to make a specific factual definition; the difficulty of obtaining all forth below. determination as to the beneficial the required information about such owners (i.e., individuals with actual persons, and the level of intrusiveness a. Nominal and Beneficial Owners control) of an account on a case-by-case required; the problems associated with Section 103.178(b)(1) of the 2002 basis. We expect that covered financial identifying senior foreign political Proposal required covered financial institutions will look through the figures given the breadth of the institutions to take reasonable steps to nominal owner of the account to definition; and the extent, if any, to ascertain the identity of all nominal (i.e., determine who has effective control which financial institutions could rely named) holders and any beneficial over the account. For example, when an on due diligence conducted by well- owners of the private banking account, account is opened by a natural person, regulated intermediaries to satisfy their as well as information on those holders’ the financial institution should establish obligations under this provision. lines of business and sources of wealth. whether the client is acting on his or her The final rule requires that covered The final rule modifies this provision to own behalf and should perform financial institutions implement a risk- more accurately reflect the wording of additional diligence if doubt exists as to based due diligence program that the statute, which does not refer to lines the identity of the beneficial owner(s).69 incorporates the minimum standards set of business or sources of wealth. For an account holder that is a legal entity that is not publicly traded (such 66 For example, the clause ‘‘by or on behalf of a 68 As with correspondent accounts, where as a private investment company), a non-U.S. person’’ has been deleted because that multiple financial institutions maintain a private financial institution should ensure that limitation has been included in the final rule’s banking account for a customer—e.g., securities definition of a private banking account. Because the clearing and introducing brokers and futures it has sufficient information about the final rule applies to private banking accounts for commission merchants and introducing brokers— structure of the entity, including its non-U.S. persons, covered financial institutions each is independently responsible for ensuring the directors, shareholders, and those with will need to determine whether a client is a non- requirements of this rule are met. Any control over the account, and should U.S. person. We do not believe that such a apportionment of functions between such entities determination should be difficult given the amount should include adequate sharing of information to determine which individual (or of information that private bankers typically obtain ensure that each institution can satisfy its individuals) constitutes the beneficial about their clients. obligations under this rule. For example, an owner(s) for purposes of due 67 Covered financial institutions also are required introducing firm would be responsible for diligence.70 Likewise, in the case of a to implement a customer identification program informing the clearing firm of the customers pursuant to section 326 of the Act and its holding private banking accounts and for obtaining implementing regulations; private banking accounts the necessary information from and about these 69 See, e.g., Wolfsberg Group, ‘‘FAQs on opened after October 1, 2003, are generally subject customers, while both firms would be responsible Beneficial Ownership,’’ supra note 42, at 2–3; to that requirement as well. See 68 FR 25089–25162 for establishing adequate controls to detect Federal Reserve Guidance, supra note 61, Part III. (May 9, 2003). suspicious activity. 70 Id.

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trust, the financial institution should of a private banking relationship identification of accounts that warrant ascertain which individual (or requires that financial institutions additional scrutiny. For example, a individuals) controls the funds of the obtain extensive information about their single, large deposit may warrant trust, should identify the source of the clients in order to provide them with additional scrutiny if it is unusual, funds, and should perform due personalized financial services. given the information a client has diligence as appropriate.71 The reason provided about the account’s purpose for the focus on nominal and beneficial b. Source of Funds and Purpose and and anticipated activity and other owners is to ensure that covered Expected Use of Account expected sources of funds. Likewise, a financial institutions are adequately and Section 103.178(b)(2) of the 2002 deposit that comes from an unusual comprehensively addressing the risk Proposal required covered financial source, such as a charitable fund or involved in accepting and handling a institutions to take reasonable steps to foreign government agency trust funds large dollar private banking account for ascertain the source of funds deposited or aid grants, may also warrant further a non-U.S. person. into the private banking account. The scrutiny. In addition to contacting the Some commenters suggested that we final rule retains this language, but adds client, the financial institution may allow covered financial institutions to the requirement that covered financial consider contacting the financial rely on the due diligence conducted by institutions take reasonable steps to institution that transmitted the funds well-regulated foreign intermediaries ascertain the purpose for which the and the organization that was the source (e.g., institutions regulated by private banking account is being of the funds. jurisdictions that are members of the established, as well as the anticipated c. Senior Foreign Political Figures Financial Action Task Force) that open account activity. As discussed below, private banking accounts on behalf of we believe that the additional Section 103.178(b)(3) of the 2002 their clients. We have determined that obligations of ascertaining the purpose Proposal required covered financial covered financial institutions may not and expected account activity are institutions to take reasonable steps to rely on foreign intermediaries to satisfy elements of the 2002 Proposal’s ascertain whether any nominal or their due diligence obligations under requirement to verify the source of beneficial account owner may be a this rule. Because of the unique funds in an account and to monitor for senior foreign political figure.75 Many vulnerabilities for money laundering suspicious activity, and, more generally, commenters argued that the definition that exist in the private banking context, are fundamental elements of a sound of a senior foreign political figure was it is critical that covered financial due diligence program.74 Such vague and overly broad and that the institutions conduct their own due information, which we believe most 2002 Proposal failed to provide diligence with respect to the beneficial covered financial institutions currently sufficient guidance on implementing the owners of private banking accounts.72 In obtain in the normal course of business definition. Commenters particularly the event that an intermediary when opening a private banking found the requirement to ascertain a maintains a single private banking account, establishes a baseline for client’s close association with senior account on behalf of two or more foreign account activity that will enable a foreign political figures burdensome, individuals, due diligence would be covered financial institution to better and questioned whether the phrase required with regard to all individuals detect suspicious activity and to assess ‘‘widely and publicly known’’ would that meet the definition of beneficial situations where additional verification require financial institutions to review 73 owner. regarding the source of funds may be vast amounts of public information. One In addition, we note that due necessary. commenter suggested waiving altogether diligence is an ongoing obligation. Commenters sought explanation of the enhanced due diligence Covered financial institutions will be in the due diligence requirement to requirements for senior foreign political the best position to monitor accounts for ascertain the source of funds deposited figures from Financial Action Task suspicious transactions and possible into the private banking account, and Force member countries, while allowing money laundering if they are involved specifically questioned the extent to covered financial institutions to rely on in obtaining information about their which verification was required. We do a certification from citizens of non- clients directly. Further, the very nature not expect covered financial Financial Action Task Force member institutions, in the ordinary course, to countries regarding whether they are 71 See, e.g., Wolfsberg Group, ‘‘FAQs on Beneficial Ownership,’’ supra note 42, at 3. verify the source of every deposit placed senior foreign political figures unless 72 Senator Levin specifically discussed accounts into every private banking account. information to the contrary is received. opened in the name of investment advisers, shell However, they should monitor deposits We recognize that the term senior corporations, or trusts on behalf of other persons, and transactions as necessary to ensure foreign political figure is broadly noting that ‘‘[they] are exactly the types of accounts defined in the Act to include immediate that terrorists and criminals use to hide their that the activity is consistent with identities and infiltrate U.S. financial institutions. information the institution has received family members and close associates, And thus they are exactly the accounts for which about the client’s source of funds and and that reasonable efforts to ascertain U.S. financial institutions need to verify and an individual’s status within this evaluate the real beneficial owners.’’ 147 Cong. with the stated purpose and expected Rec., supra note 16, at 11036. See also Federal use of the account, as needed to guard category will require robust due Reserve Guidance, supra note 61, n. 2. against money laundering, and to report diligence procedures that need to go 73 We understand that some financial institutions any suspicious activity. Such beyond reliance on a certification. We do not permit intermediaries to open pooled monitoring will facilitate the believe that the due diligence that accounts for unrelated persons within the private covered financial institutions currently banking units; instead, they treat the account as an institutional account. If a covered financial 74 See Basel Committee on Banking Supervision, conduct with respect to private banking institution chooses to allow intermediaries to open supra note 64 at 6: ‘‘The bank should always ask clients usually incorporates (or can these types of accounts within the private banking itself why the customer has chosen to open an readily incorporate) reasonable steps to unit (and if they fall within the definition of private account in a foreign jurisdiction.’’ See also, banking account in the final rule), it may want to Wolfsberg AML Principles on Private Banking, ascertain a client’s status as a senior require the intermediary to establish separate supra note 65, at 2, which identifies the ‘‘purpose accounts in the name of each beneficial owner to and reasons for opening the account’’ and 75 The final rule adopts this provision without ease the logistical burdens involved in conducting ‘‘anticipated account activity’’ among the elements change, other than substituting ‘‘is’’ for ‘‘may be’’ due diligence. of an effective due diligence program. for clarity.

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foreign political figure.76 We also diligence procedures to identify senior political figure. One of the first steps is believe that institutions that provide foreign political figures. As we believe to seek confirmation from the private banking services as defined in most covered financial institutions individual. If the individual denies this rule, particularly to foreign already do, the procedures should holding or having held a political individuals, currently obtain require obtaining information regarding position or being closely associated with considerable information about their employment and other sources of or in the immediate family of someone clients. For example, in conducting income. First, the institution should who has held or currently holds a related due diligence on a client’s seek information directly from the political position, it still may be financial and professional background, a individual regarding possible senior necessary to take further reasonable financial institution typically will foreign political figure status. Second, steps. These additional steps may review the sources of income of a client, the institution should check references, include, for example, making more which may entail reviewing past 77 and as appropriate, to determine whether pointed inquiries of other references, present employment history and the individual holds or has previously obtaining additional information from references from professional associates. held a senior political position or may branches of the covered financial This information should generally be a close associate of a senior foreign institution that may be operating in the uncover the client’s status as a current political figure. Third, the institution home country of the client, and making or former senior official. should also make reasonable efforts to reasonable efforts to consult publicly We understand that ascertaining a review public sources of information in available sources of information, as client’s close association with a senior meeting this obligation. described above. If, after reasonable foreign political figure will be more Many commenters sought clarification diligence, the covered financial difficult than identifying whether the as to the 2002 Proposal’s reference to institution does not learn of any client holds a senior political position. publicly available sources of information indicating that a nominal or However, in our view, the term ‘‘widely information, and as to what would beneficial owner may be a senior foreign and publicly known’’ serves as a constitute reasonable steps to review political figure, it may conclude that the reasonable limitation on a covered such information. The range of publicly individual is not a senior foreign financial institution’s obligation to available sources that should be political figure.80 identify close associates who would be consulted will vary depending upon the The Act and this final rule require readily apparent from a review of circumstances of the particular case. In that covered financial institutions publicly available information, as virtually all cases, covered financial establish controls and procedures that discussed below. Certainly, if a covered institutions will have an obligation to include reasonable steps to ascertain the financial institution has actual check the name of the prospective status of an individual as a senior knowledge of such a close associate, the private banking client against databases foreign political figure and to conduct individual also falls within the of public information that are enhanced scrutiny of accounts held by definition. Covered financial reasonably accessible and available. these individuals. We recognize that institutions, in fact, may become aware These include U.S. Government covered financial institutions applying of a client’s close association with a databases, major news publications and reasonable due diligence procedures in senior official simply in the course of commercial databases available on the accordance with this rule may not be gathering financial and professional Internet, and fee-based databases, as able to identify in every case information about a client.78 However, appropriate. The country of residence of individuals who qualify as senior we do not expect a covered financial the private banking client is also foreign political figures, and, in institution to undertake an unreasonable relevant. We do not expect that, as a particular, their close associates (nor amount of due diligence or to be aware general procedure, a covered financial does the rule require that they detect of unknown associations that could not institution will need to review the local this fact in every case), and thus may be expected to have been uncovered language newspapers in every country not apply enhanced scrutiny to all such through the exercise of due diligence in which its private banking clients accounts. Rather, the rule requires a ordinarily undertaken when opening or reside, although reviewing such program that ensures that the institution monitoring a private banking account as newspapers could be prudent in an take reasonable steps to ascertain whether a private banking account defined by this rule. unusual situation, such as when the Covered financial institutions, thus, financial institution is not familiar with client is a senior foreign political figure. should be guided by the following basic the country that the private client is from and the country is not generally 80 Section 103.178(c)(1) of the 2002 Proposal procedures when drafting their due stated that, in performing the required due covered in the press. Finally, we note diligence, 76 The Department of the Treasury, the Federal that there are existing and developing ‘‘(i) If a covered financial institution learns of banking regulators, and the Department of State databases of foreign political figures that information indicating that a particular individual jointly issued ‘‘Guidance on Enhanced Scrutiny for may assist covered financial institutions may be a senior foreign political figure, it should Transactions That May Involve the Proceeds of 79 exercise reasonable diligence in seeking to Foreign Official Corruption’’ in January 2001, with this inquiry. determine whether the individual is, in fact, a available at http://www.treas.gov/press/releases/ In the event that the covered financial senior foreign political figure. ls1123.htm. institution learns (either during the (ii) If a covered financial institution does not 77 Past employment history may be relevant in initial establishment of the account or learn of any information indicating that an determining source of income to the extent a client thereafter) of information indicating that individual may be a former senior foreign political is receiving a or some other income. figure, and the individual states that he or she is 78 For example, when conducting due diligence a client may be a senior foreign political not a former senior foreign political figure, the on a client and his or her lines of business, a figure as defined in the rule, it should financial institution may rely on such statement in covered financial institution may uncover the fact exercise additional, reasonable diligence determining whether the account is subject to the that a client is a business partner of a senior official. in seeking to confirm whether the due diligence requirements of paragraph (c)(2) of This would likely qualify the individual as a close this section.’’ 2002 Proposal, supra note 2, at 37744. associate. Likewise, foreign clients may be referred individual is, in fact, a senior foreign Because the substance of this subparagraph is in to a covered financial institution by an existing effect subsumed within a covered financial client. If the existing client is a senior foreign 79 For example, a list of high level foreign officials institution’s obligations under section political figure, that may be an indication that the is available at: http://www.odci.gov/cia/ 103.178(b)(2), it has been eliminated from the text prospective client is a close associate. publications/chiefs/index.html. of the final rule.

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Moreover, if the institution’s program is accounts held by senior foreign political detect and report transactions that may reasonably designed to make this figures that included policies and involve the proceeds of foreign determination, and the institution procedures reasonably designed to corruption.’’ administers the program effectively, detect transactions that may involve the As with the minimum due diligence then the institution should generally be proceeds of foreign corruption. As noted program prescribed under section able to detect, report, and take in the preamble to the 2002 Proposal, 103.178(b), we expect that covered appropriate action where suspected covered financial institutions should financial institutions will apply a risk- money laundering is occurring with involve senior management when based enhanced scrutiny program. respect to these accounts, even in cases deciding to accept a senior foreign Reasonable steps to perform enhanced where the financial institution has not political figure as a private banking scrutiny may include the following: been able to identify the account holder client and should ensure that consulting publicly available as a senior foreign political figure information regarding the account is information regarding the home warranting enhanced scrutiny. available for review not only by the jurisdiction of the client; 83 contacting, liaison but also by senior management. where applicable, branches of the U.S. d. Reporting Known or Suspected Such internal controls are particularly financial institution operating in the Money Laundering important in the private banking context home jurisdiction of the client to obtain Section 103.178(b)(4) of the 2002 because of the potentially close additional information about the client Proposal required that the due diligence relationships managers may develop and the political environment; and program of covered financial with private banking customers. In fact, conducting greater scrutiny of the institutions ensure that the institution money laundering has been shown to client’s employment history and sources take reasonable steps to report, in occur through private banking accounts of income. For example, wire transfers accordance with applicable law and established for senior foreign political from a government account to the regulation, any known or suspected figures when financial institutions have personal account of a government violation of law conducted through or failed to apply internal controls, official with signature authority over the involving a private banking account allowing liaisons to apply insufficient, government account should raise an with a non-U.S. citizen. For example, if non-impartial scrutiny to the activities institution’s suspicions of possible a covered financial institution detects of their private banking clients.82 political corruption.84 If a covered activity that is unusual for the account We received two comments on this financial institution’s review of major and client, and cannot obtain a section. One commenter sought specific news sources indicates that a client may satisfactory response from the client guidance as to how covered financial be or is involved in political corruption, and/or other sources, it may ‘‘know, institutions can detect the proceeds of the institution should review that suspect, or have reason to suspect’’ that foreign corruption, while a client’s account for unusual activity. money laundering or activity with ‘‘no congressional commenter asked us to In addition, when the client is a apparent lawful purpose’’ is occurring, specify in the rule that covered financial former senior foreign political figure, a prompting the filing of a suspicious institutions are required to conduct risk-based program should involve activity report.81 Other appropriate enhanced scrutiny of accounts held by weighing such factors as the length of action may include suspending account senior foreign political figures in time the client has been out of office, activity or closing the account. accordance with the statutory the size of the account, and any In accord with the modification and provisions of 31 U.S.C. 5318(i). In information obtained from public clarification discussed above pertaining response to the latter comment, we have sources, as well as other information to source of funds in connection with amended the text of this provision obtained through the due diligence section 103.178(b)(2), we have similarly (redesignated as section 103.178(c)(1) of process. Thus, if a former official has clarified section 103.178(d). this final rule) to specifically require been out of office for a substantial Specifically, we have incorporated the enhanced scrutiny, as follows ‘‘In the length of time, and a review of major fact that, in order to adequately review case of a private banking account for news publications provides no for possible money laundering and which a senior foreign political figure is indication of political corruption or suspicious activity, a covered financial a nominal or beneficial owner, the due continued involvement in politics, then institution must take reasonable steps to diligence program required by less scrutiny would be reasonable. ensure that the information it obtains paragraph (a) of this section shall Section 103.178(c)(3) of the 2002 about the source of funds, as well as include enhanced scrutiny of such Proposal set forth the definition of about the stated purpose and the account that is reasonably designed to ‘‘proceeds of foreign corruption.’’ No expected use of the account, is comments were submitted regarding consistent with the actual activity in the 82 We recently imposed a civil penalty against a this proposed definition, and it account. This paragraph otherwise bank for, among other things, its failure to (redesignated as section 103.178(c)(2)) is implement internal controls in its private banking unchanged in the final rule. remains unchanged in the final rule, department. Lax supervision by the bank enabled except that the phrase ‘‘money the relationship manager to engage in suspicious 4. Special procedures. Section laundering or suspicious activity’’ transactions involving a private banking account 103.178(d) of the 2002 Proposal replaces the phrase ‘‘violation of law’’ held by a senior foreign political figure. See Matter contained special procedures to be of Riggs Bank, N.A., No. 2004–01 (May 13, 2004), included in the covered financial for consistency with section 103.178(a) available at http://www.fincen.gov/ and with 31 U.S.C. 5318(i). riggsassessment3.pdf. In another publicized case, a institution’s due diligence program for 3. Enhanced scrutiny. Section liaison pled guilty to helping to launder over $11 private banking accounts, addressing 103.178(c) of the 2002 Proposal million in narcotics proceeds through private situations where appropriate due banking accounts she managed for an influential diligence cannot be performed, established certain special requirements Mexican governor. The liaison admitted to helping with respect to senior foreign political to disguise the identity of her client and the source figures. Section 103.178(c)(2) generally of these funds by establishing accounts in the 83 For example, AAA FLASH, a weekly electronic required covered financial institutions names of fictitious nominee account holders. She newsletter sponsored by United States Agency for also admitted to intentionally avoiding asking International Development, details corruption to establish due diligence programs for questions of her client or informing her superiors around the world and can be accessed at http:// regarding these activities. U.S. v. Madrid, et al., No. www.respondanet.com/english. 81 See 31 CFR 103.17 to 103.19. 02 CR 0414 (S.D.N.Y. August 25, 2005). 84 See Matter of Riggs Bank, supra n. 82.

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including when the institution should exemption replaces without substantive § 103.175 Definitions. refuse to open the account, suspend change the provisions of the Interim Except as otherwise provided, the transaction activity, file a suspicious Rule found at 31 CFR 103.183. following definitions apply for purposes activity report, or close the account. No In light of the special implementation of §§ 103.176 through 103.185: comments were submitted regarding provisions contained in the text of the (a) Attorney General means the this provision, which is unchanged in final rule, the Interim Rule, codified at Attorney General of the United States. this final rule. 31 CFR 103.181 through 31 CFR 103.183 (b) Beneficial owner of an account 5. Effective dates. Although the 2002 will no longer be effective on February means an individual who has a level of Proposal did not address the issue of an 3, 2006. control over, or entitlement to, the funds effective date, as with correspondent or assets in the account that, as a accounts, many commenters noted the IV. Regulatory Flexibility Act practical matter, enables the individual, difficulty of complying with the directly or indirectly, to control, manage requirements of 31 U.S.C. 5318(i) Pursuant to the Regulatory Flexibility or direct the account. The ability to fund pertaining to private banking accounts, Act (5 U.S.C. 610 et seq.), it is hereby the account or the entitlement to the especially with regard to their certified that this final rule will not funds of the account alone, however, application to previously existing have a significant economic impact on without any corresponding authority to accounts, and urged us to allow a a substantial number of small entities. control, manage or direct the account sufficient transition period. We are The final rule provides guidance to (such as in the case of a minor child mindful of the burden that will result financial institutions concerning the beneficiary), does not cause the from the statutory requirement that the mandated due diligence and enhanced individual to be a beneficial owner. provision applies to all private banking due diligence requirements in section (c) Certification and recertification accounts, regardless of when they were 312 of the Act. Moreover, most of the mean the certification and opened. The final rule contains a new financial institutions covered by the recertification forms described in section 103.176(e) that provides for the rule tend to be larger institutions. appendices A and B, respectively, to effective dates of the obligations under Accordingly, a regulatory flexibility this subpart. this section: effective 90 days after the analysis is not required. (d) Correspondent account. (1) The date of publication of the final rule, the V. Executive Order 12866 term correspondent account means: requirements of the final rule will apply (i) For purposes of § 103.176(a), (d) to private banking accounts opened on This final rule is not a ‘‘significant and (e), an account established for a or after that date; and, effective 270 days regulatory action’’ as defined in foreign financial institution to receive after the date of publication of the final Executive Order 12866, and, as such, a deposits from, or to make payments or rule, the rule’s requirements will apply regulatory assessment is not required. other disbursements on behalf of, the to all private banking accounts opened foreign financial institution, or to List of Subjects in 31 CFR Part 103 prior to the date that is 90 days after the handle other financial transactions date of publication of the final rule. Banks and banking, Brokers, Counter related to such foreign financial For all of the reasons explained above money laundering, Counter-terrorism, institution; and in section III.B.4., the final rule contains Currency, Foreign banking, Reporting (ii) For purposes of §§ 103.176(b) and additional applicability rules to ensure and recordkeeping requirements. (c), 103.177 and 103.185, an account consistency with the requirements of established for a foreign bank to receive the Interim Rule until the effective dates Authority and Issuance deposits from, or to make payments or of the final rule are triggered. I other disbursements on behalf of, the Paragraph 103.178(e)(2) contains For the reasons set forth in the foreign bank, or to handle other special applicability dates requiring preamble, 31 CFR part 103 is amended financial transactions related to such banks, broker-dealers, futures as follows: foreign bank. commission merchants, and introducing PART 103—FINANCIAL (2) For purposes of this definition, the brokers to continue to apply the RECORDKEEPING AND REPORTING term account: requirements of 31 U.S.C. 5318(i)(3) to OF CURRENCY AND FOREIGN (i) As applied to banks (as set forth in private banking accounts until the 90 TRANSACTIONS paragraphs (f)(1)(i) through (vii) of this and 270-day implementation dates of section): paragraph 103.178(e)(1) are triggered. I 1. The authority citation for part 103 (A) Means any formal banking or This preserves the status quo created by continues to read as follows: business relationship established by a the provisions of the Interim Rule found bank to provide regular services, at 31 CFR 103.181 and 103.182 until the Authority: 12 U.S.C. 1829b and 1951–1959; dealings, and other financial provisions of this final rule go into 31 U.S.C. 5311–5314 and 5316–5332; title III, transactions; and secs. 311, 312, 313, 314, 319, 326, 352, Public (B) Includes a demand deposit, effect. Law 107–56, 115 Stat. 307. Paragraph 103.178(e)(3) continues to savings deposit, or other transaction or exempt trust banks or trust companies I 2. Section 103.120 of Subpart I of part asset account and a credit account or that have a federal regulator, and mutual 103 is amended as follows: other extension of credit; funds from the requirements of 31 I a. Paragraph (b) is amended by adding (ii) As applied to brokers or dealers in U.S.C. 5318(i)(3) until the 90 and 270- ‘‘the requirements of §§ 103.176 and securities (as set forth in paragraph day implementation dates of paragraph 103.178 and’’ immediately after the (f)(1)(viii) of this section) means any 103.178(e)(1) are triggered. words ‘‘complies with’’. formal relationship established with a Finally, paragraph 103.178(e)(4) broker or dealer in securities to provide I b. Paragraph (c)(1) is amended by contains a general exemption from the regular services to effect transactions in adding ‘‘the requirements of §§ 103.176 due diligence requirements for private securities, including, but not limited to, and 103.178 and’’ immediately after the banking accounts contained in 31 U.S.C. the purchase or sale of securities and words ‘‘complies with’’. 5318(i)(3) for all financial institutions securities loaned and borrowed activity, which are not defined in the final rule I 3. Subpart I of part 103 is amended by and to hold securities or other assets for as covered financial institutions. This revising § 103.175 to read as follows: safekeeping or as collateral;

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(iii) As applied to futures commission register, with the Securities and Code. For purposes of this paragraph (j), merchants and introducing brokers (as Exchange Commission pursuant to the the definition of person in § 103.11(z) set forth in paragraph (f)(1)(ix) of this Investment Company Act. does not apply, notwithstanding section) means any formal relationship (2) For purposes of §§ 103.177 and paragraph (m) of this section. established by a futures commission 103.185: (k) Offshore banking license means a merchant to provide regular services, (i) An insured bank (as defined in license to conduct banking activities including, but not limited to, those section 3(h) of the Federal Deposit that prohibits the licensed entity from established to effect transactions in Insurance Act (12 U.S.C. 1813(h))); conducting banking activities with the contracts of sale of a commodity for (ii) A commercial bank or trust citizens of, or in the local currency of, future delivery, options on any contract company; the jurisdiction that issued the license. of sale of a commodity for future (iii) A private banker; (l) Owner. (1) The term owner means delivery, or options on a commodity; (iv) An agency or branch of a foreign any person who, directly or indirectly: and bank in the United States; (i) Owns, controls, or has the power (iv) As applied to mutual funds (as set (v) A credit union; to vote 25 percent or more of any class forth in paragraph (f)(1)(x) of this (vi) A savings association; of voting securities or other voting section) means any contractual or other (vii) A corporation acting under interests of a foreign bank; or business relationship established section 25A of the Federal Reserve Act (ii) Controls in any manner the between a person and a mutual fund to (12 U.S.C. 611 et seq.); and election of a majority of the directors (or provide regular services to effect (viii) A broker or dealer in securities individuals exercising similar functions) transactions in securities issued by the registered, or required to be registered, of a foreign bank. (2) For purposes of this definition: mutual fund, including the purchase or with the Securities and Exchange Commission under the Securities (i) Members of the same family shall sale of securities. be considered to be one person. (e) Correspondent relationship has the Exchange Act of 1934 (15 U.S.C. 78a et seq.), except persons who register (ii) The term same family means same meaning as correspondent account parents, spouses, children, siblings, for purposes of §§ 103.177 and 103.185. pursuant to section 15(b)(11) of the Securities Exchange Act of 1934. uncles, aunts, grandparents, (f) Covered financial institution grandchildren, first cousins, means: (1) For purposes of §§ 103.176 (g) Foreign bank. The term foreign bank has the meaning provided in stepchildren, stepsiblings, parents-in- and 103.178: law, and spouses of any of the foregoing. (i) An insured bank (as defined in § 103.11(o). (h) Foreign financial institution. (1) (iii) Each member of the same family section 3(h) of the Federal Deposit who has an ownership interest in a Insurance Act (12 U.S.C. 1813(h))); The term foreign financial institution means: foreign bank must be identified if the (ii) A commercial bank; family is an owner as a result of (iii) An agency or branch of a foreign (i) A foreign bank; aggregating the ownership interests of bank in the United States; (ii) Any branch or office located the members of the family. In (iv) A federally insured credit union; outside the United States of any covered (v) A savings association; financial institution described in determining the ownership interests of (vi) A corporation acting under paragraphs (f)(1)(viii) through (x) of this the same family, any voting interest of section 25A of the Federal Reserve Act section; any family member shall be taken into (12 U.S.C. 611 et seq.); (iii) Any other person organized account. (iv) Voting securities or other voting (vii) A trust bank or trust company under foreign law (other than a branch interests means securities or other that is federally regulated and is subject or office of such person in the United interests that entitle the holder to vote to an anti-money laundering program States) that, if it were located in the for or to select directors (or individuals requirement; United States, would be a covered (viii) A broker or dealer in securities exercising similar functions). financial institution described in (m) Person has the meaning provided registered, or required to be registered, paragraphs (f)(1)(viii) through (x) of this in § 103.11(z). with the Securities and Exchange section; and (n) Physical presence means a place of Commission under the Securities (iv) Any person organized under business that: Exchange Act of 1934 (15 U.S.C. 78a et foreign law (other than a branch or (1) Is maintained by a foreign bank; seq.), except persons who register office of such person in the United (2) Is located at a fixed address (other pursuant to section 15(b)(11) of the States) that is engaged in the business than solely an electronic address or a Securities Exchange Act of 1934; of, and is readily identifiable as: post-office box) in a country in which (ix) A futures commission merchant (A) A currency dealer or exchanger; or the foreign bank is authorized to or an introducing broker registered, or (B) A money transmitter. conduct banking activities, at which required to be registered, with the (2) For purposes of paragraph location the foreign bank: Commodity Futures Trading (h)(1)(iv) of this section, a person is not (i) Employs one or more individuals Commission under the Commodity ‘‘engaged in the business’’ of a currency on a full-time basis; and Exchange Act (7 U.S.C. 1 et seq.), except dealer, a currency exchanger or a money (ii) Maintains operating records persons who register pursuant to section transmitter if such transactions are related to its banking activities; and 4(f)(a)(2) of the Commodity Exchange merely incidental to the person’s (3) Is subject to inspection by the Act; and business. banking authority that licensed the (x) A mutual fund, which means an (i) Foreign shell bank means a foreign foreign bank to conduct banking investment company (as defined in bank without a physical presence in any activities. section 3(a)(1) of the Investment country. (o) Private banking account means an Company Act of 1940 (‘‘Investment (j) Non-United States person or non- account (or any combination of Company Act’’) (15 U.S.C. 80a–3(a)(1))) U.S. person means a natural person who accounts) maintained at a covered that is an open-end company (as defined is neither a United States citizen nor is financial institution that: in section 5(a)(1) of the Investment accorded the privilege of residing (1) Requires a minimum aggregate Company Act (15 U.S.C. 80a–5(a)(1))) permanently in the United States deposit of funds or other assets of not and that is registered, or is required to pursuant to title 8 of the United States less than $1,000,000;

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(2) Is established on behalf of or for (ii) Immediate family member means account reasonably designed to detect the benefit of one or more non-U.S. spouses, parents, siblings, children and and report known or suspected money persons who are direct or beneficial a spouse’s parents and siblings. laundering activity, including a periodic owners of the account; and (s) Territories and Insular Possessions review of the correspondent account (3) Is assigned to, or is administered has the meaning provided in activity sufficient to determine or managed by, in whole or in part, an § 103.11(tt). consistency with information obtained officer, employee, or agent of a covered (t) United States has the meaning about the type, purpose, and anticipated financial institution acting as a liaison provided in § 103.11(nn). activity of the account. between the covered financial I 4. Subpart I of part 103 is amended by (b) Enhanced due diligence for certain institution and the direct or beneficial adding § 103.176 to read as follows: foreign banks. [Reserved] owner of the account. (c) Foreign banks to be accorded (p) Regulated affiliate. (1) The term § 103.176 Due diligence programs for enhanced due diligence. [Reserved] correspondent accounts for foreign (d) Special procedures when due regulated affiliate means a foreign shell financial institutions. bank that: diligence cannot be performed. The due (i) Is an affiliate of a depository (a) In general. A covered financial diligence program required by institution, credit union, or foreign bank institution shall establish a due paragraph (a) of this section shall that maintains a physical presence in diligence program that includes include procedures to be followed in the United States or a foreign country, appropriate, specific, risk-based, and, circumstances in which a covered as applicable; and where necessary, enhanced policies, financial institution cannot perform (ii) Is subject to supervision by a procedures, and controls that are appropriate due diligence with respect banking authority in the country reasonably designed to enable the to a correspondent account, including regulating such affiliated depository covered financial institution to detect when the covered financial institution institution, credit union, or foreign and report, on an ongoing basis, any should refuse to open the account, bank. known or suspected money laundering suspend transaction activity, file a (2) For purposes of this definition: activity conducted through or involving suspicious activity report, or close the any correspondent account established, account. (i) Affiliate means a foreign bank that maintained, administered, or managed (e) Applicability rules. The provisions is controlled by, or is under common by such covered financial institution in of this section apply to covered control with, a depository institution, the United States for a foreign financial financial institutions as follows: credit union, or foreign bank. institution. The due diligence program (1) General rules—(i) Correspondent (ii) Control means: required by this section shall be a part accounts established on or after April 4, (A) Ownership, control, or power to of the anti-money laundering program 2006. Effective April 4, 2006, the vote 50 percent or more of any class of otherwise required by this subpart. Such requirements of this section shall apply voting securities or other voting policies, procedures, and controls shall to each correspondent account interests of another company; or include: established on or after such date. (B) Control in any manner the election (1) Determining whether any such (ii) Correspondent accounts of a majority of the directors (or correspondent account is subject to established before April 4, 2006. individuals exercising similar functions) paragraph (b) of this section; Effective October 2, 2006, the of another company. (2) Assessing the money laundering requirements of this section shall apply (q) Secretary means the Secretary of risk presented by such correspondent to each correspondent account the Treasury. account, based on a consideration of all established before April 4, 2006. (r) Senior foreign political figure. (1) relevant factors, which shall include, as (2) Special rules for certain banks. The term senior foreign political figure appropriate: The enhanced due diligence means: (i) The nature of the foreign financial requirements of 31 U.S.C. 5318(i)(2) (i) A current or former: institution’s business and the markets it shall continue to apply to any covered (A) Senior official in the executive, serves; financial institution listed in legislative, administrative, military, or (ii) The type, purpose, and anticipated § 103.175(f)(1)(i) through (vi). In judicial branches of a foreign activity of such correspondent account; addition, until the requirements of this government (whether elected or not); (iii) The nature and duration of the section become applicable as set forth in (B) Senior official of a major foreign covered financial institution’s paragraph (e)(1) of this section, the due political party; or relationship with the foreign financial diligence requirements of 31 U.S.C. (C) Senior executive of a foreign institution (and any of its affiliates); 5318(i)(1) shall continue to apply to any government-owned commercial (iv) The anti-money laundering and covered financial institution listed in enterprise; supervisory regime of the jurisdiction § 103.175(f)(1)(i) through (vi). (ii) A corporation, business, or other that issued the charter or license to the (3) Special rules for all other covered entity that has been formed by, or for foreign financial institution, and, to the financial institutions. The due diligence the benefit of, any such individual; extent that information regarding such requirements of 31 U.S.C. 5318(i)(1) (iii) An immediate family member of jurisdiction is reasonably available, of shall not apply to a covered financial any such individual; and the jurisdiction in which any company institution listed in § 103.175(f)(1)(vii) (iv) A person who is widely and that is an owner of the foreign financial through (x) until the requirements of publicly known (or is actually known by institution is incorporated or chartered; this section become applicable as set the relevant covered financial and forth in paragraph (e)(1) of this section. institution) to be a close associate of (v) Information known or reasonably The enhanced due diligence such individual. available to the covered financial requirements of 31 U.S.C. 5318(i)(2) (2) For purposes of this definition: institution about the foreign financial shall not apply to any covered financial (i) Senior official or executive means institution’s anti-money laundering institution listed in § 103.175(f)(1)(vii) an individual with substantial authority record; and through (x) until otherwise provided by over policy, operations, or the use of (3) Applying risk-based procedures the Financial Crimes Enforcement government-owned resources; and and controls to each such correspondent Network in a final rule published in the

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Federal Register with respect to these (4) Review the activity of the account requirements of this section shall apply requirements. to ensure that it is consistent with the to each private banking account (4) Exemptions—(i) Exempt financial information obtained about the client’s established on or after such date. institutions. Except as provided in this source of funds, and with the stated (ii) Private banking accounts section, a financial institution defined purpose and expected use of the established before April 4, 2006. in 31 U.S.C. 5312(a)(2) or (c)(1), or account, as needed to guard against Effective October 2, 2006, the § 103.11(n) is exempt from the due money laundering, and to report, in requirements of this section shall apply diligence and enhanced due diligence accordance with applicable law and to each private banking account requirements of 31 U.S.C. 5318(i)(1) and regulation, any known or suspected established before April 4, 2006. (2) pertaining to correspondent money laundering or suspicious activity accounts. conducted to, from, or through a private (2) Special rules for certain banks and (ii) Other compliance obligations of banking account. for brokers or dealers in securities, financial institutions unaffected. (c) Special requirements for senior futures commission merchants, and Nothing in paragraph (e)(4) of this foreign political figures. (1) In the case introducing brokers. Until the section shall be construed to relieve a of a private banking account for which requirements of this section become financial institution from its a senior foreign political figure is a applicable as set forth in paragraph responsibility to comply with any other nominal or beneficial owner, the due (e)(1) of this section, the requirements of applicable requirement of law or diligence program required by 31 U.S.C. 5318(i)(3) shall continue to regulation, including title 31, United paragraph (a) of this section shall apply to a covered financial institution States Code, and this part. include enhanced scrutiny of such listed in § 103.175(f)(1)(i) through (vi), I 5. Subpart I of part 103 is amended by account that is reasonably designed to (viii), or (ix). adding § 103.178 to read as follows: detect and report transactions that may (3) Special rules for federally § 103.178 Due diligence programs for involve the proceeds of foreign regulated trust banks or trust private banking accounts. corruption. companies, and mutual funds. Until the (a) In general. A covered financial (2) For purposes of this paragraph (c), requirements of this section become institution shall maintain a due the term proceeds of foreign corruption applicable as set forth in paragraph diligence program that includes means any asset or property that is (e)(1) of this section, the requirements of policies, procedures, and controls that acquired by, through, or on behalf of a 31 U.S.C. 5318(i)(3) shall not apply to a are reasonably designed to detect and senior foreign political figure through covered financial institution listed in report any known or suspected money misappropriation, theft, or § 103.175(f)(1)(vii), or (x). laundering or suspicious activity embezzlement of public funds, the (4) Exemptions—(i) Exempt financial conducted through or involving any unlawful conversion of property of a institutions. Except as provided in this private banking account that is foreign government, or through acts of section, a financial institution defined established, maintained, administered, bribery or extortion, and shall include in 31 U.S.C. 5312(a)(2) or (c)(1) or or managed in the United States by such any other property into which any such § 103.11(n) is exempt from the financial institution. The due diligence assets have been transformed or requirements of 31 U.S.C. 5318(i)(3) program required by this section shall converted. pertaining to private banking accounts. (d) Special procedures when due be a part of the anti-money laundering (ii) Other compliance obligations of program otherwise required by this diligence cannot be performed. The due diligence program required by financial institutions unaffected. subpart. Nothing in paragraph (e)(4) of this (b) Minimum requirements. The due paragraph (a) of this section shall section shall be construed to relieve a diligence program required by include procedures to be followed in financial institution from its paragraph (a) of this section shall be circumstances in which a covered responsibility to comply with any other designed to ensure, at a minimum, that financial institution cannot perform applicable requirement of law or the financial institution takes reasonable appropriate due diligence with respect regulation, including title 31, United steps to: to a private banking account, including (1) Ascertain the identity of all when the covered financial institution States Code, and this part. nominal and beneficial owners of a should refuse to open the account, I 6. Subpart I of part 103 is amended by private banking account; suspend transaction activity, file a removing §§ 103.181, 103.182, and (2) Ascertain whether any person suspicious activity report, or close the 103.183. identified under paragraph (b)(1) of this account. Dated: December 15, 2005. section is a senior foreign political (e) Applicability rules. The provisions figure; of this section apply to covered William J. Fox, (3) Ascertain the source(s) of funds financial institutions as follows: Director, Financial Crimes Enforcement deposited into a private banking (1) General rules—(i) Private banking Network. account and the purpose and expected accounts established on or after April 4, [FR Doc. 06–5 Filed 1–3–06; 8:45 am] use of the account; and 2006. Effective April 4, 2006, the BILLING CODE 4810–02–P

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