"Due Diligence" requirements

General Rule

[Sec. 312, codified at 31 USC 5318(i)] In general, the requirements of this section apply to any financial institution that holds a private banking account or a correspondent account in the U.S. for a non-U.S. person. The financial institution must adopt “appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.” [31 USC 5318(i)(1)]

This general requirement applies to:

(a) An insured bank (as defined in Section 3(h) of the Federal Deposit Insurance Act [12 USC 1813(h)];

(b) A commercial bank;

(c) An agency or branch of a foreign bank in the United States;

(d) A federally insured credit union;

(e) A savings association; or

(f) A corporation acting under Section 25A of the Federal Reserve Act [12 USC 611 et seq.].

[31 CFR 1010.605(e))]

Due diligence for private banking accounts

A “private banking account” is defined as:
(i) requires a minimum aggregate deposit of funds or other assets of not less than $1,000,000;
(ii) is established on behalf of one or more non-U.S. persons who have a direct or beneficial ownership interest in the account; and
(iii) is assigned to, or is administered or managed by, in whole or in part, an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.

[31 USC 5318(i)(3) and 31 CFR 1010.605(m)]

The following rules apply to a private banking account if it was established on or after July 5, 2006. Starting October 2, 2006, the rules also apply to accounts established before July 5, 2006.

You must maintain a program that is “reasonably designed to detect and report any known or suspected money laundering or suspicious activity conducted through or involving any private banking account….”

More specifically, you must take reasonable steps to:
  • Ascertain the identity of all nominal and beneficial owners of a private banking account;
  • Ascertain whether any owner is a “senior foreign political figure;”
  • Ascertain the source(s) of funds deposited into the account and the purpose and expected use of the account; and
  • Review the activity of the account 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, as needed to guard against money laundering, and to report, in accordance with applicable law and regulation, any known or suspected money laundering or suspicious activity conducted to, from, or through a private banking account.

[31 CFR 1010.620(b)]

Your program should also include procedures that you will follow in circumstances where you don’t think you’ll be able to perform the due diligence. Your procedures could describe when you would refuse to open an account, suspend activity in the account, close the account, or file a suspicious activity report. [31 CFR 1010.620(d)]

The second bullet above refers to “senior foreign political figure,” which is defined as:
  • A current or former:
    • Senior official in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not);
    • Senior official of a major foreign political party; or
    • Senior executive of a foreign government-owned commercial enterprise;

[31 CFR 1010.605(p)]

If the owner is a “senior political figure,” your due diligence program must include enhanced scrutiny of the account so as to detect and report transactions that involve foreign corruption. [31 CFR 1010.620(c)]

Due diligence for correspondent accounts

The statute also spells out additional standards for a “correspondent” account, which is defined as
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 institution .

[31 CFR 1010.605(c)]

The rules below apply only if the correspondent account is requested or maintained by, or on behalf of, a foreign financial institution. [31 CFR 103.176(a)] The rules apply to a correspondent account if it was established on or after July 5, 2006. Starting October 2, 2006, the rules also apply to correspondent accounts established before July 5, 2006. [31 CFR 1010.610(e)]

If you have such an account, you are required to:
…establish a due diligence program that includes appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to enable the covered financial institution to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed…for a foreign financial institution.

[31 CFR 1010.610(a)]

As part of your assessment of the money laundering risk, you are required to determine:
  • The nature of the foreign financial institution’s business and the markets it serves;
  • The type, purpose, and anticipated activity of such correspondent account;
  • The nature and duration of the covered financial institution’s relationship with the foreign financial institution (and any of 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 regarding such jurisdiction is reasonably available, of the jurisdiction in which any company that is an owner of the foreign financial institution is incorporated or chartered; and
  • Information known or reasonably available to the covered financial institution about the foreign financial institution’s anti-money laundering record; and

[31 CFR 1010.610(a)]

In addition to making these determinations, you are required to apply risk-based procedures and controls to the account reasonably designed to detect and report known or suspected money laundering activity. And you must make a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose, and anticipated activity of the account. [31 CFR 1010.610(a)]

Your program should also include procedures that you will follow in circumstances where you don’t think you’ll be able to perform the due diligence. Your procedures could describe when you would refuse to open an account, suspend activity in the account, close the account, or file a suspicious activity report. [31 CFR 1010.610(d)]