- FinCEN Issues Guidance on FATF’s Designation of Jurisdictions With AML/CFT Deficiencies
- September 30, 2013 | Author: Christina N. Davilas
- Law Firm: Bingham McCutchen LLP - Boston Office
On September 17, 2013, the Financial Crimes Enforcement Network (“FinCEN”) published an Advisory concerning recent updates by the Financial Action Task Force (“FATF”) to its designation of jurisdictions with strategic anti-money laundering/counter-terrorist financing (“AMC/CTF”) deficiencies.1 FATF’s designations and its associated recommendations, as well as FinCEN’s endorsement of those recommendations, affect the level of due diligence U.S. financial institutions apply to accounts with ties to the relevant jurisdictions.
This Alert summarizes the changes FATF recently made to its designations, as well as FinCEN’s recent guidance on those changes. It also provides some additional context on the larger regulatory framework impacting AML/CTF compliance.
FATF is an inter-governmental body, established in 1989, that currently counts 34 countries (including the U.S.) as well as the European Commission and Gulf Cooperation Council as members.2 The organization has published global standards for combatting money laundering and terrorist financing,3 and also periodically evaluates the quality of AML/CTF enforcement in various jurisdictions.
As part of the latter process, FATF publishes lists of jurisdictions with strategic AML/CTF deficiencies.4 These designations are organized into three categories, as follows, listed in descending order of severity of the AML/CTF deficiencies:
- jurisdictions that are subject to FATF’s call on its members and other countries to apply countermeasures,5
- jurisdictions for which FATF recommends enhanced due diligence procedures,6 and
- jurisdictions that have developed action plans with FATF to address their strategic AML/CTF deficiencies.7
The FATF designations should be used by U.S. financial institutions to assist them with deciding whether to open or maintain an account with owners in, or other ties to, a given jurisdiction. They are further helpful in determining the level of risk-based due diligence appropriate to a given account, including the determination of whether general due diligence or enhanced due diligence procedures are appropriate.
In June 2013, FATF updated its designations from those it had last published in February 2013.8 The FinCEN guidance relates to the June changes.
I. Background on Select Patriot Act Requirements
A. General Due Diligence Requirements
Under the regulations implementing the Patriot Act, whenever a U.S. financial institution9 opens a correspondent account10 for a foreign financial institution, it has a general obligation to establish and follow appropriate and specific due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering.11 While the level of this general due diligence over a given account may vary, it must be calibrated to the level of risk associated with an account. To this end, the regulations specify various risk factors relevant to assessing the risks posed by a correspondent relationship.12 These factors include, among others, the AML and supervisory regime of the jurisdiction in which the foreign financial institution is located, information concerning the foreign financial institution’s own AML record, and the nature of the foreign financial institution’s business and the markets it serves.13
B. Enhanced Due Diligence Requirements
Enhanced due diligence policies, procedures, and controls apply to correspondent accounts for foreign financial institutions opened for (1) banks operating under “offshore banking licenses,” (2) banks operating in foreign countries that have been formally designated by an intergovernmental organization as non-cooperative with international anti-money laundering principles or procedures, if the United States concurs with that designation, and (3) banks that have been designated by the Secretary of the Treasury “as warranting special measures due to money laundering concerns.”14
The third criterion applies to banks in Iran, which is discussed in Section II.A of this Alert, while the second criterion applies to banks in the several jurisdictions discussed in Section II.B.
If a correspondent account meets one of these three criteria, the U.S. financial institution must apply enhanced due diligence procedures to it, which “shall reflect the risk assessment of the correspondent account and shall include, as appropriate:”15
- obtaining and considering information relating to the foreign bank’s anti-money laundering program to assess the risks of money laundering presented by the foreign bank’s correspondent account;16
- monitoring transactions to, from, or through the correspondent account in a manner reasonably designed to detect money laundering and suspicious activity;17
- obtaining information from the foreign bank about the identity of any person with authority to direct transactions through any correspondent account that is a payable-through account (i.e., a correspondent account maintained by a U.S. financial institution for a foreign bank by means of which the foreign bank permits its customers to engage, either directly or through a subaccount, in banking activities), and the sources and beneficial owner of funds or other assets in the payable-through account;18
- determining whether the foreign bank maintains correspondent accounts for other foreign banks that use its foreign correspondent account, and, if so, taking reasonable steps to obtain relevant information to assess and mitigate money laundering risks, including, as appropriate, the identity of those foreign banks;19 and
- determining, for any correspondent account established or maintained for a foreign bank whose shares are not publicly traded, the identity of each owner of the foreign bank and the nature and extent of each owner’s ownership interest.20
C. Procedures for Accounts Where Appropriate Due Diligence Cannot Be Performed
The regulations further require that a U.S. financial institution’s general due diligence and enhanced due diligence programs for foreign correspondent banks include procedures to be followed in circumstances when the U.S. financial institution cannot perform appropriate diligence, including procedures for determining when and how it should refuse to open an account, suspend transaction activity, file a suspicious activity report (“SAR”), or close an account.21
D. Special Measures, as Directed by the Treasury
Section 311 of the Patriot Act grants the Secretary of the Treasury the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transactions, or type of account is of “primary money laundering concern,” to require domestic financial institutions and domestic financial agencies to take certain “special measures” against the primary money laundering concern.22
Available special measures include requiring: (1) recordkeeping and reporting of certain financial transactions; (2) collection of information relating to beneficial ownership; (3) collection of information relating to certain payable-through accounts; (4) collection of information relating to certain correspondent accounts; and (5) a prohibition or conditions on the opening or maintaining of correspondent or payable-through accounts.23
E. SAR Obligations
U.S. financial institutions are required to file a SAR if certain, specified criteria are met.24 The criteria are sweeping in scope, and as to broker-dealers, for instance, require reporting of virtually “any suspicious transaction relevant to a possible violation of law or regulation.”25 It is not necessary for a broker-dealer to prove that a customer has engaged in illegal activity or to have actual knowledge of illicit or unlawful trading by a customer; rather, it is sufficient for a broker-dealer to have reason to suspect that a transaction or series of transactions involves unlawful activity or lack an apparent lawful purpose.26 Additionally, according to relevant guidance, broker-dealers are not permitted to wait for suspicious activity to come to their attention, but must affirmatively monitor for “red flags” to determine whether activity raises suspicions.27 A statutory safe harbor provides complete immunity from civil liability for the reporting of known or suspected criminal offenses or suspicious activity to appropriate authorities by the use of a SAR or by reporting through other means.28
II. FATF Designations and Corresponding FinCEN Guidance
A. Jurisdictions Subject to FATF’s Call for Countermeasures
In its June guidance, FATF’s list of countries subject to its call for countermeasures has remained unchanged, with Iran and the Democratic People’s Republic of Korea (“North Korea”) comprising the list.29
FinCEN’s guidance cautions U.S. financial institutions to comply with the broad range of existing restrictions and prohibitions in place against Iran and North Korea, including existing FinCEN advisories and guidance concerning Iran, existing U.S. sanctions against Iran and North Korea, and existing United Nations Security Council Resolutions against Iran and North Korea.30 It further reminds U.S. financial institutions of existing FATF guidance aimed at assisting states in implementing their obligations relating to applicable sanctions and United Nations Security Council Resolutions.31
Additionally, the FinCEN guidance reminds U.S. financial institutions that the Treasury has identified Iran as a jurisdiction of “primary money laundering concern” under Section 311 of the Patriot Act.32 In conjunction with the Treasury’s action, FinCEN published a notice of proposed rulemaking to impose special measures against Iran, including a prohibition against the opening or maintaining of correspondent accounts by any domestic financial institution or agency for or on behalf of a foreign banking institution, if the correspondent account involves Iran.33
As of this writing, the proposed regulation has yet to be adopted,34 although many U.S. financial institutions may have already taken steps to comply with the proposal. At a minimum, enhanced due diligence requirements apply to correspondent accounts with owners or other ties to Iran, as a result of the Treasury’s designation of Iran as a jurisdiction warranting special measures.35
B. Jurisdictions Subject to Enhanced Due Diligence
Since the last publication of FATF’s list of jurisdictions for which FATF recommends enhanced due diligence,36 Nigeria has been removed from the list (and added to the list of jurisdictions that has developed an action plan to address their deficiencies, discussed in Section II.C., below), as a result of “its progress in largely addressing its action plan agreed upon with the FATF.”37 Beyond that, the list has remained the same, with FATF continuing to call for enhanced due diligence with respect to Ecuador, Ethiopia, Indonesia, Kenya, Myanmar, Pakistan, São Tomé and Príncipe, Syria, Tanzania, Turkey, Vietnam and Yemen.38
The corresponding FinCEN guidance concurs with this FATF recommendation and directs U.S. financial institutions to apply enhanced due diligence procedures to these jurisdictions.39
C. Jurisdictions That Have Developed an Action Plan to Address Their AML/CFT Deficiencies
FATF has both added and removed countries from its list of jurisdictions that have developed an action plan with the FATF to address their strategic AML/CFT deficiencies. As noted, Nigeria is now identified on this list; Lao PDR has also been added, with FATF noting that Lao PDR has made a “high-level political commitment to work with the FATF and the [Asia/Pacific Group on Money Laundering]” to address these deficiencies.40 FATF removed Bolivia, Brunei Darussalam, Philippines, Sri Lanka and Thailand from the FATF listing and monitoring process due to their respective progress in addressing all or nearly all of their AML/CFT deficiencies.41 In addition to Nigeria and Lao PDR, Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Bangladesh, Cambodia, Cuba, Kuwait, Kyrgystan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Sudan, Tajikistan and Zimbabwe now comprise the list.42
With respect to these jurisdictions, the FinCEN guidance reminds U.S. financial institutions of their obligations to comply with the general due diligence obligations under the Patriot Act regulations, including “appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity. . . .”43 Additionally, it reminds U.S. financial institutions of their obligation to file SARs “[i]f a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation.”44
The FATF designations are an important resource for U.S. financial institutions endeavoring to meet their AML/CTF requirements, especially given FinCEN’s own reliance on and endorsement of those designations. Firms should take care to ensure that their AML compliance programs, including their risk-based due diligence procedures, are informed by the designations, now and as they continue to evolve.
1 Advisory on the FATF-Identified Jurisdictions with AML/CFT Deficiencies, FIN-2013-A006 (Sept. 17, 2013), available at http://www.fincen.gov/statutes&under;regs/guidance/html/FIN-2013-A006.html
2 See, About The FATF, available at http://www.fatf-gafi.org/pages/aboutus/whoweare/; FATF Members and Observers, available at http://www.fatf-gafi.org/pages/aboutus/membersandobservers/
3 International Standards on Combating Money Laundering And The Financing of Terrorism & Proliferation, Financial Action Task Force (Feb. 2012), available at http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF&under;Recommendations.pdf
4 See FATF Public Statement (June 21, 2013), available at http://www.fatf-gafi.org/media/fatf/documents/statements/21%20June%202013.pdf; Improving Global AML/CFT Compliance: On-going Process (June 21, 2013), available at http://www.fatf-gafi.org/media/fatf/documents/statements/Compliance%2021%20June%202013.pdf
5 FATF Public Statement (June 21, 2013), supra note 4.
7 Improving Global AML/CFT Compliance: On-going Process (June 21, 2013), supra note 4.
8 FATF Public Statement (Feb. 22, 2013), available at http://www.fatf-gafi.org/media/fatf/documents/statements/21%20June%202013.pdf ; Improving Global AML/CFT Compliance: On-going Process (Feb. 22, 2013), available at http://www.fatf-gafi.org/media/fatf/documents/statements/Compliance%2022%20february%202013.pdf
9 31 C.F.R. § 1010.605(e) (defining “covered financial institutions” subject to the due diligence and enhanced due diligence requirements to include banks insured by the Federal Deposit Insurance Corporation, commercial bank and trust companies, private bankers, agencies or branches of foreign banks located in the U.S., credit unions, thrift institutions, corporations acting under section 25A of the Federal Reserve Act, and registered broker-dealers).
10 A “correspondent account” is “an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.” 31 U.S.C. § 5318A(e)(1)(B).
11 31 C.F.R. § 1010.610(a)(1).
12 31 C.F.R. § 1010.610(a)(2).
14 31 C.F.R. § 1010.610(c).
15 31 C.F.R. § 1010.610(b)(1).
16 31 C.F.R. § 1010.610(b)(1)(i).
17 31 C.F.R. § 1010.610(b)(1)(ii).
18 31 C.F.R.§ 1010.610(b)(1)(iii).
19 31 C.F.R.§ 1010.610(b)(2).
20 31 C.F.R. § 1010.610(b)(3)(i).
21 31 C.F.R. § 1010.610(d).
22 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”), Pub. L. No. 107-56, 115 Stat.296 (2001), §311, available at http://www.sec.gov/about/offices/ocie/aml/patriotact2001.pdf; 31 U.S.C. § 5318A(b)(1)-(5).
24 See 31 U.S.C.§ 5318(g); 31 C.F.R. § 1023.320 (governing SAR reporting by broker-dealers); 12 C.F.R. § 21.11 (governing SAR reporting by national banks); 12 C.F.R. § 163.180 (governing SAR reporting by federal savings associations); 12 C.F.R. § 208.62 (governing SAR reporting by state member banks); 12 C.F.R. § 353 (governing SAR reporting by state nonmember banks and savings banks); 12 C.F.R. § 390.355 (governing SAR reporting by state savings associations); 12 C.F.R.§ 748.1(c) (governing SAR reporting by credit unions).
25 31 C.F.R. § 1023.320.
26 E.g., FINRA Letter of Acceptance, Waiver and Consent to Penson Financial Services, Inc., No. 2008011615801 (Dec. 14, 2009), at 3.
27 Id.; Anti-Money Laundering: NASD Provides Guidance to Member Firms Concerning Anti-Money Laundering Compliance Programs Required by Federal Law, Notice to Members 02-21, at 10, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003704.pdf (emphasizing members’ duties to detect red flags and, if detected, to perform additional due diligence before proceeding with a suspicious transaction); Anti-Money Laundering: Treasury Issues Final Suspicious Activity Reporting Rule for Broker/Dealers, Notice to Members 02-47, at 459, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003515.pdf (same).
28 31 U.S.C. § 5318(g)(3); 31 C.F.R. § 1023.320(f).
29 FinCEN Advisory, supra note 1, at 1; see also FATF Public Statement (June 21, 2013), supra note 4; FATF Public Statement (Feb. 22, 2013), supra note 8.
30 FinCEN Advisory, supra note 1, at 2.
33 Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations-Imposition of Special Measure Against the Islamic Republic of Iran as a Jurisdiction of Primary Money Laundering Concern, 76 Fed. R. 72878, available at: http://www.gpo.gov/fdsys/pkg/FR-2011-11-28/pdf/2011-30331.pdf
34 Section 311 - Special Measures, Financial Crimes Enforcement Network, available at http://www.fincen.gov/statutes&under;regs/patriot/section311.html (cataloguing status of Section 311 measures).
35 Patriot Act, supra note 22 at §312; 31 C.F.R. § 1010.610(c).
36 FATF Public Statement (Feb. 22, 2013), supra note 8.
37 FATF Public Statement (June 21, 2013), supra note 4, at 1.
38 FinCEN Advisory, supra note 1, at 3.
39 Id; see also, 31 C.F.R. § 1010.610(c).
40 Improving Global AML/CFT Compliance: On-going Process (June 21, 2013), supra note 4 at 4.
41 FinCEN Advisory, supra note 1, at 2.
43 Id. at 3.
44 Firms are also reminded that U.S. law may place other restrictions on the legality of doing business with certain jurisdictions, or certain individuals or entities in certain jurisdictions. E.g., Specially Designated Nationals List, Office of Foreign Assets Control, available at www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx