BSA: OFAC, BSA, and New Rules

Compliance responses to the September acts of terrorism continue. It was a busy enough year without any extras, but now both OFAC compliance and Bank Secrecy programs must be priorities - along with everything else.

Several provisions of the new Patriot Act took effect on December 25, 2001. In the holiday compliance package are immediate projects for compliance managers and everyone in the bank.

The new provisions establish new requirements for documenting relationships with foreign banks and restrict dealings with shell banks. The FFIEC published guidance in the Federal Register on November 27, 2001. On December 28, 2001, the FDIC issued FIL-110-2001, highlighting the latest guidance for anti-money laundering measures. It summarizes the changes made to Bank Secrecy by the Patriot Act relating to foreign banks and "shell banks."

Foreign shell banks are institutions that do not have a physical presence in any country. Presumably, a shell bank exists exclusively for the purpose of moving funds and creating a complicated trail or laundering the real trail of funds. American financial institutions are bared from handling any account relationship (establishing, maintaining, administering or managing correspondent accounts) with any foreign shell bank. The only exception permits banks to have a relationship with a shell bank IF it is affiliated with a depository institution that does have a physical presence and is subject to banking supervision.

Financial institutions must take "reasonable steps" to ensure that correspondent accounts with foreign banks are not being used to conceal transactions with shell banks. Treasury is to issue regulations that define what constitutes reasonable steps. Financial institutions must also maintain records that document the ownership of foreign banks for all foreign bank correspondent accounts and certify the ownership of foreign banks. A form for this certification is included in the Federal Register publication beginning at page 59346. (56 Fed. Reg., No. 228, Tuesday, Nov. 27, 2001)

The Patriot Act enhances the government's ability to obtain financial records from financial institutions. This provision was effective immediately but institutions were provided with a grace period for compliance. The grace period ended on December 25, 2001.

U.S. financial institutions must now produce requested records within 120 hours (5 calendar days - NOT 5 business days). The records requested would relate to information and documentation on any account opened, maintained, administered, or managed in the U.S. by that institution.

Any foreign bank that maintains a correspondent account in the United States must subject itself to legal process by designating who is designated to accept service of process in the U.S. financial institutions must now keep records on the ownership of foreign institutions and the designees for legal process.

These new procedures provide investigators with enhanced powers and tools for investigation of financial transactions involving terrorism or other crimes. Compliance with these provisions will need to be a high priority for financial institutions.One additional provision that is effective immediately provides a safe harbor from civil liability for institutions that provide information to a second insured depository institution about the possible unlawful activity of a former institution-affiliated party.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 16, 1/02