• New Rules for Anti-Money Laundering Procedures
  • March 1, 2006 | Author: Peter E. Schifsky
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • Beginning on April 4, 2006, mutual funds, broker-dealers, commodities brokers and banks will be required to apply anti-money laundering (AML) procedures to foreign accounts.

    In January, the U.S. Treasury's Financial Crimes Enforcement Network, the nation's chief enforcer of AML regulations, adopted regulations implementing Rule 312 of the USA PATRIOT Act. The Rule applies to all "covered U.S. financial institutions" -- including banking institutions, securities broker-dealers, futures commission merchants and introducing commodities brokers, and mutual funds. They must establish a due diligence program to detect and report money laundering activity conducted through, or involving:

    • correspondent accounts established or managed in the U.S. by a non-U.S. financial institution1
    • private banking accounts established or maintained in the U.S. by a non-U.S. person.

    Correspondent Accounts

    A correspondent account is an account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institutions.

    Under Rule 312, U.S. financial institutions will be required to establish a due diligence program for correspondent accounts that will :

    • determine whether the account is subject to enhanced AML due diligence
    • assess the money laundering risk posed based on a consideration of relevant risk factors, including:
      • the nature of the foreign financial institution's business and the markets it serves
      • the type, purpose and anticipated activity of the correspondent account
      • the nature and duration of the covered financial institution's relationship with the foreign financial institution and its affiliates
      • the anti-money laundering and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution, and, to the extent that information is reasonably available, of the jurisdiction in which any company that is an owner of the foreign financial institution is incorporated or chartered
      • information known or reasonably available to the covered financial institution about the foreign financial institution's anti-money laundering record
    • apply risk-based procedures and controls to each correspondent account reasonably designed to detect and report known or suspected money laundering activity, including a periodic review of the correspondent account activity.

    Private Banking Accounts

    A private banking account is established or maintained for the benefit of one or more non-U.S. persons, requires a minimum aggregate deposit of funds or other assets of not less than $1 million, and is assigned to a bank employee who acts as a liaison between the financial institution and the non-U.S. person.

    Under Rule 312, U.S. financial institutions will be required to establish a risk-based due diligence program for private banking accounts that at a minimum:

    • ascertains the identity of all nominal and beneficial owners of a private banking account
    • ascertains whether any nominal or beneficial owner of a private banking account is a senior non-U.S. political figure
    • ascertains the sources of funds deposited into a private banking account and the purpose and expected use of the account
    • reviews account activity to ensure that it is consistent with the information obtained about the client's source of funds and with the stated purpose and expected use of the account.

    The exact nature of the due diligence conducted varies with each client, depending on the presence of potential risk factors. Due diligence should be commensurate with the size of the account; accounts with more deposits and assets should be subject to greater due diligence, requiring covered financial institutions to conduct extensive investigation into the relevant factors. If the institution at any time learns of information that casts doubt on previous information, further due diligence would be appropriate.

    Covered U.S. financial institutions must establish and apply these new due diligence requirements to new correspondent accounts starting on April 4, 2006. For existing accounts and accounts established before April 4, 2006, the rule takes effect September 11, 2006. These are important developments, and covered institutions should consult with legal counsel about compliance as soon as possible. If you have any questions, please contact a member of Pepper's Investment Management Practice Group.

    1 A "non-U.S. financial institution" is a (1) a non-U.S. bank; (2) a non-U.S. branch of a U.S. bank; (3) a business organized under non-U.S. law that, if it were located in the United States, would be a securities broker-dealer, futures commission merchant, introducing broker in commodities, or a mutual fund or (4) a money transmitter or currency exchanger organized under non-U.S. law.