FinCEN Issues Patriot Act Rule Mandating Enhanced Due Diligence for Certain Correspondent Bank Accounts

Contents:

FinCEN Issues Patriot Act Rule Mandating Enhanced Due Diligence for Certain Correspondent Bank Accounts

GAO Issues Report on Issues Relating to Firms that Advise Institutional Investors on Proxy Voting

FRB Determines Non-Control in Private Equity Arrangements

Federal Banking Agencies Propose Illustrations for Subprime ARMs

ICI Publishes White Paper on Role of Chief Risk Officers

SEC Finalizes Amended Rules on Short Sale Delivery Requirements under Regulation SHO

NASD Amends Rule 3013 and Interpretive Material 3013 to Permit Members to Designate Co-Chief Executive Officers and Multiple Chief Compliance Officers

Developments of Note

FinCEN Issues Patriot Act Rule Mandating Enhanced Due Diligence for Certain Correspondent Bank Accounts

The Financial Crimes Enforcement Network ("FinCEN") published a final rule (the "Final Rule") under Section 312 of the USA PATRIOT Act ("Patriot Act") governing the enhanced due diligence procedures required for correspondent accounts maintained by U.S. covered financial institutions for certain foreign banks. See 72 Federal Register 44,768 (Aug. 9, 2007). The Final Rule completes FinCEN's Section 312 rulemaking.

Section 312 of the Patriot Act requires U.S. covered financial institutions - including U.S. depository institutions, broker-dealers registered with the Securities and Exchange Commission, and mutual funds - to establish due diligence and, where necessary, enhanced due diligence policies and procedures reasonably designed to detect and report money laundering through correspondent and private banking accounts established and maintained for, respectively, foreign financial institutions and foreign persons. On January 4, 2006, FinCEN issued final rules implementing (a) the due diligence provisions of Section 312 applicable to correspondent accounts, and (b) both the due diligence and enhanced due diligence provisions of Section 312 applicable to private banking accounts. At that time, FinCEN published, and invited comment on, a proposal to implement the enhanced due diligence provisions of Section 312 with respect to correspondent accounts maintained for certain types of foreign banks.

The enhanced due diligence procedures of the Final Rule apply to "correspondent accounts" maintained for three classes of foreign "respondent banks." As we have previously noted in the December 20, 2005 and January 30, 2006 Alerts, the term "correspondent account" is defined so broadly as to include essentially all accounts. Accordingly, the enhanced due diligence procedures apply to all accounts maintained for non-U.S. "respondent" banks operating under (a) an "offshore banking license" - that is, a license that prohibits the bank from generally conducting banking activities in the jurisdiction that issued the license; (b) a license issued by a country designated as non-cooperative with international money laundering principles by an international organization (such as the Financial Action Task Force) of which the United States is a member and with which designation the United States concurs; and (c) a license issued by a country that has been designated by the U.S. Treasury Department as warranting "special measures" (under Patriot Act Section 311) due to money laundering concerns.

In the case of such accounts, the Final Rule requires enhanced due diligence procedures that encompass multiple steps. First, U.S. covered financial institutions must conduct risk-based "enhanced scrutiny" of correspondent accounts maintained for the above-noted classes of respondent banks. The level and nature of the enhanced scrutiny must be calibrated to reflect the covered financial institution's risk assessment of the respondent bank's correspondent account. The scrutiny may include, "as appropriate," obtaining and assessing the respondent bank's anti-money laundering program; monitoring transactions through the account; and obtaining information from the respondent bank about any persons with authority to pass transactions through a correspondent account that is a "payable-through" account and the sources and beneficial owners of funds or other assets in payable-through accounts. (Payable-through accounts allow a foreign respondent bank's customers to conduct transactions, either directly or through a sub-account, in the United States through the respondent bank's correspondent account.)

Second, U.S. covered financial institutions must take reasonable steps to determine whether a foreign respondent bank maintains correspondent accounts for other foreign banks and, if so, whether such second-tier foreign banks may conduct transactions through the respondent bank's correspondent account maintained with the U.S. covered financial institution. In adopting this requirement, FinCEN clarified that it does not expect U.S. covered financial institutions will, in each case, obtain lists of foreign bank customers from their respondent banks. Instead, FinCEN requires a risk-based approach, pursuant to which a U.S. covered financial institution will make appropriate inquires about the nature of (and types of transactions engaged in by) the foreign banks that a respondent bank serves. Only in the highest risk situations will it be necessary for a U.S. covered financial institution to obtain the identity of foreign bank customers from a respondent bank.

Third, U.S. covered financial institutions must take reasonable steps to identify the owners of a foreign respondent bank if that bank's shares are not publicly traded. An owner is any person who directly or indirectly owns or controls 10% or more of any class of securities (whether voting or non-voting) of a respondent bank. For this purpose, members of a family generally are treated as one person.

The enhanced due diligence procedures mandated by the Final Rule will need to be applied to new correspondent accounts established on or after February 5, 2008. In addition, those procedures will need to be retroactively applied to pre-existing accounts (that is, accounts established prior to February 5, 2008) no later than May 5, 2008.

GAO Issues Report on Issues Relating to Firms that Advise Institutional Investors on Proxy Voting

The GAO issued a report that examines the use by institutional investors of proxy voting advisory firms. The principal topics addressed in the report are: (a) potential conflicts of interest that may exist with proxy voting advisory firms that advise institutional investors on how...