The U.S. Department of the Treasury, together with other U.S. government agencies responsible for enforcing anti-money laundering (AML) and economic sanctions regulations, released guidance on August 30, 2016 in the form of a Joint Fact Sheet on Foreign Correspondent Banking. The guidance highlights the U.S. government’s twin goals of expanding access to the U.S. financial system and protecting it from abuse, and provides transparency with respect to: (i) the expectations of U.S. enforcement authorities regarding due diligence obligations of U.S. depository institutions that maintain correspondent accounts for foreign financial institutions (FFIs); and (ii) the circumstances that merit enforcement actions for violations of AML and sanctions laws.

In a blog post issued contemporaneously with the Fact Sheet, senior U.S. Treasury Department officials1 made clear that the goal of U.S. authorities is to “implement a fair and effective regime when it comes to enforcement of AML and sanctions violations. Importantly, this regime is not one of ‘zero tolerance.’”

Compliance Expectations for U.S. Financial Institutions

The U.S. government expects all U.S. financial institutions – including U.S. depository institutions that maintain correspondent accounts on behalf of FFIs – to have robust AML compliance programs that include customer due diligence. The guidance states that institutions that maintain correspondent accounts for FFIs are expected to have a “clear understanding” of the risk profiles of FFIs and their expected account activity, in order to make risk-based decisions regarding the nature of compliance policies and procedures that should be used to govern the relationship.

The U.S. government highlighted four areas of risk that should be assessed by U.S. institutions that maintain FFI correspondent accounts in order to design and implement effective controls:

  1. the FFI’s business and markets;
  2. the type, purpose and anticipated activity of the FFI;
  3. the nature and duration of the relationship of the U.S. financial institution with the FFI; and
  4. the supervisory regime of the jurisdiction in which the FFI is licensed.
     

The guidance also seeks to dispel certain myths about the U.S. government’s supervisory expectations. Notably, the Fact Sheet confirms that there is no general expectation for banks to conduct due diligence on the individual customers/clients of FFIs. However, in determining the appropriate level of due diligence necessary for an correspondent account relationship with an FFI, U.S. depository institutions are advised to “consider the extent to which information related to the FFI’s markets and types of customers is necessary to assess the risks posed by the relationship, satisfy the institution’s obligations to detect and report suspicious activity, and comply with U.S. economic sanctions. This may require U.S. depository institutions to request additional information concerning the activity underlying the FFI transactions in accordance with the suspicious activity reporting rules and sanctions compliance obligations.”

Enforcement Actions Generally Involve Pattern of Misconduct

The guidance also appears intended to reassure financial institutions regarding the circumstances in which the U.S. government will bring enforcement actions for violations of AML and sanctions laws, noting that high-profile enforcement actions involving such laws generally do not involve small or unintentional mistakes. As noted in the blog post, the “relatively rare but highly visible cases of [AML and sanctions] violations resulting in significant monetary penalties have generally involved a sustained pattern of reckless or willful violations over a period of multiple years and a failure by the institutions’ senior management to respond to warning signs that their actions were illegal.”

Indeed, the Fact Sheet notes that approximately 95 percent of AML and sanctions compliance deficiencies identified by U.S. authorities are corrected through cautionary letters or other guidance provided by the regulators to the institution’s management, without the need for an enforcement action or penalty. The U.S. government therefore urged financial institutions to take prompt corrective actions, including potentially reaching out to U.S. regulators, when they become aware of potential deficiencies in their compliance program.