On October 5, 2016, the Office of the Comptroller of the Currency (OCC) issued guidance (the OCC Guidance) to national banks, federal savings associations, and federal branches and agencies regarding periodic evaluation of the risks related to foreign correspondent accounts. This follows a joint fact sheet issued on August 30, 2016, by the U.S. Department of Treasury, the OCC and other prudential regulators (the Fact Sheet) that summarized the federal enforcement approach toward anti-money laundering (AML), Bank Secrecy Act (BSA) and Office of Foreign Assets Control (OFAC) compliance in the area of foreign correspondent banking. The OCC Guidance is the first of its kind related to the management of foreign correspondent accounts that would provide assistance to banks when conducting risk reevaluations and making account retention or termination decisions.
Context – Tensions between Financial Inclusion and Regulatory Compliance
US banks enter into correspondent banking accounts with foreign banks that do not have a US presence in order to make and receive deposits, payments or engage in other transactions with foreign entities. This arrangement allows those foreign banks to engage in US dollar transactions. These foreign correspondent banking relationships have been pressured by OCC, Treasury and other banking regulators’ continued investigation and enforcement of AML, anti-terrorism and OFAC regulations. As a result, in some cases US banks have pulled back from certain foreign correspondent accounts given the higher risk they may be viewed (whether such risk is justifiable or not is a question that may take additional diligence, and expense, to resolve). As the OCC notes in the OCC Guidance, this reaction may negatively affect access to financial services in certain countries, potentially resulting in “financial inclusion” concerns for that country. In addition, because the processes used by US banks to determine when a foreign correspondent account is terminated may not be clear to foreign customers, those terminations may be perceived as arbitrary.
Both the Fact Sheet and the OCC Guidance appear to be an attempt to address this underlying tension between enforcement of AML, BSA and OFAC regulations and providing continued US dollar access to foreign banks by allaying concerns among US banks that financial regulators have a no-tolerance approach. Rather, the Fact Sheet and the OCC Guidance set out best practices and supervisory expectations that US banks should be aware of when engaging in foreign correspondent banking.
The OCC Guidance – Best Practices and Supervisory Expectations
The OCC Guidance reiterates that banks should periodically engage in periodic risk reevaluation of their customer portfolios, including foreign correspondent accounts. These reevaluations should consider risks present in the foreign financial institutions’ business and markets, as well as the anticipated account activity and the supervisory regime of the geographic location in which the foreign financial institution is licensed. Banks should give foreign financial institutions an opportunity to provide sufficient and transparent information to allow informed risk assessment decisions. The OCC expects banks to include the following practices in risk reevaluations:
Ensure that periodic risk reevaluations are conducted and decisions regarding the treatment of foreign correspondent accounts are based on the periodic risk reevaluations.
Banks should have established processes for periodic risk reevaluations and account decisions resulting from the updated risk assessments, including account terminations, that:
- address the bank’s risk appetite with respect to the quantity of BSA/AML compliance risk the bank is willing to accept and can effectively manage;
- identify the risk factors to consider when reevaluating foreign correspondent account relationships, including an assessment of the risks posed by the foreign correspondent account relationship, based on a consistent, risk-rating methodology, and determine whether the bank can effectively manage the risk;
- address ongoing due diligence processes for foreign correspondent account relationships, which may include periodic site visits based on risk;
- provide for follow-up by bank personnel on activity that does not comport with the foreign financial institution’s risk profile, customer due diligence information, or expected account activity;
- provide for an assessment of the implications of account closure on managing overall exposure to BSA/AML compliance risk that is consistent with the bank’s articulated risk appetite; and
- specify the length of time that foreign correspondent accounts can remain dormant before being subject to closure.
Confirm that procedures for reevaluating foreign correspondent account risks and making account-related decisions are implemented.
In determining whether to close an account based on BSA/AML compliance risk or any other risk category or level of risk the bank finds to be unacceptable, banks should:
- perform periodic risk reevaluations for all foreign correspondent accounts;
- make reasonable determinations about the bank’s exposure to BSA/AML compliance risk, taking into account the bank’s risk appetite for each foreign correspondent account relationship;
- escalate recommendations for foreign correspondent account closure to appropriate levels of management;
- execute foreign correspondent account closure processes.
Ensure that decisions to terminate foreign correspondent accounts resulting from risk reevaluation are based on analysis of the risks presented by individual foreign financial institutions and the bank’s ability to manage those risks.
- Account termination decisions should be based on the unique facts and circumstances of each bank and foreign financial institution, such as the level of risk that the bank’s systems and controls are designed to manage or mitigate, strength of the bank’s systems and controls, and specific foreign financial institution attributes, including the AML and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution.
- Account termination practices that lack the appropriate risk assessment and consideration include: (i) terminating foreign correspondent account relationships without a careful analysis of the risks presented by the individual foreign financial institution and the bank’s ability to manage those risks and (ii) terminating entire categories of foreign correspondent account relationships without regard to the risks presented by individual foreign financial institutions, unless specifically required by law.
Banks that maintain foreign correspondent accounts should consider the following best practices when updating their customer risk assessments. These considerations may be applicable to active and dormant foreign correspondent accounts that the bank has decided to terminate.
The OCC highlights the following best practices in risk reevaluations of foreign correspondent accounts:
- Establishing and maintaining an effective governance function to review the method for periodic risk reevaluation and to monitor the appropriateness of recommendations regarding foreign correspondent account retention or termination.
- Communicating foreign correspondent account termination decisions regularly to senior management, with consideration given to the extent to which account closures may have an adverse impact on access to financial services for an entire group of customers or potential customers, or an entire geographic location.
- Communicating with foreign financial institutions, considering specific mitigating information these institutions may provide, and providing them sufficient time to establish alternative banking relationships before terminating accounts, unless doing so would be contrary to law, or pose an additional risk to the bank or national security, or reveal law enforcement activity.
- Ensuring a clear audit trail of the reasons and method used for account closure.
Community banks and federal savings associations, which have different risk management considerations than banks with large correspondent banking portfolios, may warrant modifications to these best practices in line with the bank’s particular risk considerations.