Treasury Financial Crimes Enforcement Network; Anti-Money Laundering by qdk21196


									                                       496               Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations

                                       DEPARTMENT OF THE TREASURY                              accounts to certain anti-money                         implement section 5318(i).2 In the
                                                                                               laundering measures. In particular,                    proposed rule, we sought to take the
                                       31 CFR Part 103                                         financial institutions must establish                  statutory mandate of section 5318(i) and
                                       RIN 1506–AA29                                           appropriate, specific, and, where                      to translate it into specific regulatory
                                                                                               necessary, enhanced due diligence                      directives for financial institutions to
                                       Financial Crimes Enforcement                            policies, procedures, and controls that                apply. Following the statute, the rule we
                                       Network; Anti-Money Laundering                          are reasonably designed to enable the                  proposed required certain U.S. financial
                                       Programs; Special Due Diligence                         financial institution to detect and report             institutions to apply due diligence and
                                       Programs for Certain Foreign                            instances of money laundering through                  enhanced due diligence procedures to
                                       Accounts                                                these accounts.                                        foreign financial institutions 3 that
                                                                                                  In addition to the general due                      maintain correspondent accounts as
                                       AGENCY:  Financial Crimes Enforcement                   diligence requirements, which apply to                 well as to non-U.S. persons who
                                       Network, Treasury.                                      all correspondent accounts for non-U.S.                establish private banking accounts in
                                       ACTION: Final rule.                                     persons, section 5318(i)(2) specifies                  the United States. The 2002 Proposal set
                                                                                               additional standards for correspondent                 forth a series of due diligence
                                       SUMMARY: The Financial Crimes                           accounts maintained for certain foreign
                                       Enforcement Network is issuing this                                                                            procedures that financial institutions
                                                                                               banks. These additional standards apply                covered by the rule may, and in some
                                       final rule to implement the                             to correspondent accounts maintained
                                       requirements contained in section 312                                                                          instances must, apply to correspondent
                                                                                               for a foreign bank operating under an                  accounts and private banking accounts
                                       of the Uniting and Strengthening                        offshore banking license, under a
                                       America by Providing Appropriate                                                                               for non-U.S. persons.
                                                                                               license issued by a country designated
                                       Tools Required to Intercept and                         as being non-cooperative with                          B. The Interim Final Rule
                                       Obstruct Terrorism (USA PATRIOT) Act                    international anti-money laundering                       We received comments in response to
                                       of 2001 (the Act). Section 312 requires                 principles or procedures by an                         the 2002 Proposal that raised many
                                       U.S. financial institutions to establish                intergovernmental group or organization                concerns regarding the numerous
                                       due diligence policies, procedures, and                 of which the United States is a member                 definitions in the 2002 Proposal, the
                                       controls reasonably designed to detect                  and with which designation the United                  scope of the requirements of this
                                       and report money laundering through                     States concurs, or under a license issued              provision, and the institutions that
                                       correspondent accounts and private                      by a country designated by the Secretary               would be subject to them. Section
                                       banking accounts that U.S. financial                    of the Treasury as warranting special                  312(b)(2) of the Act provides that
                                       institutions establish or maintain for                  measures due to money laundering                       section 5318(i) of the Bank Secrecy Act
                                       non-U.S. persons. This final rule                       concerns. A financial institution must                 took effect on July 23, 2002, regardless
                                       supercedes an interim final rule we                     take reasonable steps to: (1) Conduct                  of whether final rules had been issued
                                       issued on July 23, 2002. The interim                    enhanced scrutiny of a correspondent                   by that date. In order to have adequate
                                       final rule temporarily deferred                         account maintained for or on behalf of                 time to review the comments, to
                                       application of the requirements                         such a foreign bank to guard against                   determine the appropriate resolution of
                                       contained in section 312 for certain                    money laundering and to report                         the many issues raised, and to give clear
                                       financial institutions and provided                     suspicious activity; (2) ascertain                     directions to the affected financial
                                       guidance, pending issuance of a final                   whether such a foreign bank provides                   institutions, we issued an interim final
                                       rule, to those financial institutions for               correspondent accounts to other foreign                rule (the Interim Rule) 4 on July 23,
                                       which compliance with section 312 was                   banks and, if so, to conduct appropriate               2002, and exercised our authority under
                                       not deferred. We are publishing                         due diligence; and (3) identify the                    31 U.S.C. 5318(a)(6) to defer temporarily
                                       elsewhere in this separate part of the                  owners of such a foreign bank if its                   the application of 31 U.S.C. 5318(i) to
                                       Federal Register a Notice of Proposed                   shares are not publicly traded.                        certain financial institutions. For those
                                       Rulemaking implementing section 312,                       Section 5318(i) also sets forth                     financial institutions that were not
                                       and focusing exclusively on enhanced                    minimum due diligence requirements                     subject to the deferral, we set forth
                                       due diligence requirements.                             for private banking accounts for non-                  interim guidance for compliance with
                                       DATES: This final rule is effective                     U.S. persons. Specifically, a covered                  the statute by delineating the scope of
                                       February 3, 2006.                                       financial institution must take                        coverage, duties, and obligations under
                                       FOR FURTHER INFORMATION CONTACT:                        reasonable steps to ascertain the identity             that provision, pending issuance of a
                                       Regulatory Policy and Programs                          of the nominal and beneficial owners of,               final rule.
                                       Division, Financial Crimes Enforcement                  and the source of funds deposited into,
                                       Network, (800) 949–2732.                                private banking accounts, as necessary                 C. Consultation With Federal Functional
                                                                                               to guard against money laundering and                  Regulators
                                       SUPPLEMENTARY INFORMATION:
                                                                                               to report suspicious transactions. The                   Section 312(b) of the Act provides
                                       I. Background                                           institution must also conduct enhanced                 that the Secretary of the Treasury
                                          Section 312 of the Act amended the                   scrutiny of private banking accounts                   (Secretary) shall issue implementing
                                       Bank Secrecy Act 1 to add new                           requested or maintained for or on behalf               regulations under this section ‘‘in
                                       subsection (i) to 31 U.S.C. 5318. This                  of senior foreign political figures (which             consultation with the appropriate
                                       provision requires each U.S. financial                  includes family members or close                       federal functional regulators (as defined
                                       institution that establishes, maintains,                associates). Enhanced scrutiny must be
                                       administers, or manages a                               reasonably designed to detect and report                 2 Due Diligence Anti-Money Laundering Programs

                                       correspondent account or a private                      transactions that may involve the                      for Certain Foreign Accounts, 67 FR 37736.
                                       banking account in the United States for                proceeds of foreign corruption.                          3 Foreign financial institutions were defined to
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                                                                                                                                                      include foreign banks and any other foreign person
                                       a non-U.S. person to subject such                       A. The 2002 Proposal                                   that, if organized in the United States, would be
                                                                                                                                                      required to establish an anti-money laundering
                                         1 Bank Secrecy Act, Pub. L. 91–508 (codified as         On May 30, 2002, we published in the                 program pursuant to 31 CFR 103.120 to 103.169.
                                       amended at 12 U.S.C. 1829b, 12 U.S.C. 1957–1959,        Federal Register a notice of proposed                    4 Due Diligence Anti-Money Laundering Programs

                                       and 31 U.S.C. 5311–5314 and 5316–5332).                 rulemaking (2002 Proposal) to                          for Certain Foreign Accounts, 67 FR 48348.

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                                        497

                                       in section 509 of the Gramm-Leach-                         With respect to the correspondent                    commenters, adopting such an overly
                                       Bliley Act) of the affected financial                   account provisions, the greatest number                 broad definition would be
                                       institutions.’’ 5 The 2002 Proposal was                 of comments concerned the definition of                 counterproductive, requiring U.S.
                                       issued in consultation with staff at all of             correspondent account and the                           financial institutions to devote limited
                                       these federal functional regulators. The                prescribed due diligence requirements                   resources to a broad range of accounts
                                       provisions of this final rule also reflect              for such accounts. Commenters also                      and transactions regardless of the level
                                       consultation with each of the federal                   raised questions about the definitions of               of risk associated with them. Some
                                       functional regulators or their staff.                   covered financial institution and foreign               commenters urged us to narrow the
                                                                                               financial institution, as well as the                   definition of correspondent account to
                                       D. Further Notice of Proposed                                                                                   those accounts used to deposit or
                                                                                               enhanced due diligence requirements
                                       Rulemaking                                                                                                      transfer customer funds. Other
                                                                                               for correspondent accounts for certain
                                          Section 5318(i)(2) directs covered                   foreign banks. With respect to the                      commenters argued that the definition
                                       financial institutions to establish                     proposed provisions concerning private                  should specifically exclude certain
                                       procedures for conducting enhanced                      banking accounts, commenters raised                     types of accounts that do not pose a
                                       due diligence with regard to                            concerns about the definitions of                       meaningful risk of money laundering,
                                       correspondent accounts established or                   beneficial owner, private banking                       including limited purpose accounts
                                       maintained for certain categories of                    account, and senior foreign political                   through which funds are received and
                                       foreign banks. In light of the extensive                figure, and sought clarification                        disbursed under defined conditions to
                                       comments received, we are proposing a                   regarding the nature and extent of the                  identified parties such as: escrow,
                                       different approach toward the                           due diligence required for these                        clearing, and custody accounts;
                                       implementation of this provision than                   accounts. Many commenters also                          proprietary accounts where the foreign
                                       that set forth in the 2002 Proposal. To                 addressed the required timing for                       financial institution is acting as
                                       ensure adequate notice and opportunity                  compliance with the various provisions.                 principal, such as foreign exchange
                                       for comment, we have re-noticed the                     These issues and their resolution are                   accounts; and accounts held for foreign
                                       regulation implementing the enhanced                    discussed below in the section-by-                      financial institutions subject to a robust
                                       due diligence portion of section 312                    section analysis.                                       anti-money laundering regime.
                                       with regard to correspondent accounts                                                                              The congressional commenters urged
                                       in its entirety. The proposed rulemaking                III. Section-by-Section Analysis                        us to retain the broad definition of
                                       is published elsewhere in this separate                 A. Section 103.175—Definitions                          correspondent account, stating that all
                                       part of the Federal Register. Until a                   Relating to Correspondent Accounts                      categories of accounts falling within the
                                       final rule is published and becomes                                                                             definition should receive an appropriate
                                                                                                  1. Correspondent account. The term                   level of due diligence.
                                       effective, banks, savings associations,                 correspondent account, as used in
                                       and federally insured credit unions                                                                                After considering these comments, we
                                                                                               section 5318(i), is defined by reference                have decided that the statutory
                                       must continue to apply the enhanced                     to the definition in 31 U.S.C. 5318A, as
                                       due diligence requirements of 31 U.S.C.                                                                         definition of correspondent account
                                                                                               added by section 311 of the Act. The                    contained in the 2002 Proposal is, in
                                       5318(i)(2), while securities broker-                    definition in the 2002 Proposal was
                                       dealers, futures commission merchants,                                                                          substance, appropriate for the final rule
                                                                                               taken verbatim from section                             as well. The definition of a
                                       introducing brokers, mutual funds, and                  5318A(e)(1)(B), which defines a
                                       trust banks and trust companies that                                                                            correspondent account under this final
                                                                                               correspondent account as ‘‘an account                   rule mirrors the definition used in the
                                       have a federal regulator, remain exempt                 established to receive deposits from,
                                       from such requirements.                                                                                         section 313/319 Rule, although
                                                                                               make payments on behalf of a foreign                    additional U.S. financial institutions are
                                       II. Summary of Comments                                 financial institution, or handle other                  subject to this final rule.8 We are aware
                                                                                               financial transactions related to such                  of the burden resulting from the
                                         We received 33 comments regarding
                                                                                               institution.’’                                          application of this broad definition, and
                                       the 2002 Proposal. Commenters                              Many commenters found the
                                       included U.S. banks, securities broker-                                                                         we acknowledge that accounts used to
                                                                                               definition to be overly broad, extending                hold, transfer, or invest customer funds
                                       dealers, other financial institutions,                  beyond the commonly understood
                                       foreign banks, trade associations                                                                               represent a greater money laundering
                                                                                               meaning of correspondent account (and                   risk than proprietary accounts or
                                       representing all the foregoing, a self-                 even beyond the meaning of the term
                                       regulatory organization, an association                                                                         accounts used for certain specific
                                                                                               account). They objected to the phrase                   purposes, such as custody accounts or
                                       of state banking supervisors, and a state               ‘‘or handle other financial transactions
                                       gaming commission. Eleven financial                                                                             escrow accounts. Nevertheless, we have
                                                                                               related to such institution’’ as                        concluded that a broad definition is
                                       institution trade associations jointly                  potentially bringing under the rule not
                                       signed one of the comments. We also                     only every kind of account maintained
                                       received a joint comment from three                                                                             and Termination of Correspondent Accounts for
                                                                                               for foreign financial institutions, but                 Foreign Banks; 67 FR 60562, 60563–60564 (Sept.
                                       members of Congress.6                                   also any transaction performed by a                     26, 2002) (hereinafter ‘‘section 313/319 Rule’’).
                                                                                                                                                          8 In this final rule we have made technical
                                         5 Section 509 of the Gramm-Leach-Bliley Act (15
                                                                                               covered institution on behalf of a
                                                                                                                                                       changes to conform the definition of correspondent
                                       U.S.C. 6809) defines the federal functional             foreign institution.7 According to these                account for purposes of this rule with the definition
                                       regulators to include the Federal Deposit Insurance                                                             for purposes of the section 313/319 Rule. The
                                       Corporation, the Board of Governors of the Federal      must request an appointment by telephone at (202)       definition for purposes of this final rule includes
                                       Reserve System, the Office of the Comptroller of the    354–6400 (not a toll-free number). The comment          the phrase ‘‘or other disbursements’’ after
                                       Currency, the Office of Thrift Supervision, the         letters are also available on our Web site at http://   ‘‘payments,’’ and the definition for purposes of the
                                       National Credit Union Administration Board, and                   section 313/319 Rule is amended by deleting the
                                       the Securities and Exchange Commission. We also            7 Commenters representing depository                 redundant words ‘‘a correspondent account is’’ and
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                                       consulted with the Commodity Futures Trading            institutions and securities broker-dealers in many      the unnecessary words ‘‘by a covered financial
                                       Commission.                                             cases reiterated the comments submitted in              institution.’’ Also, the definition from the section
                                         6 Comments may be inspected at the Financial          response to the proposed rule implementing              313/319 Rule, which is limited to accounts for
                                       Crimes Enforcement Network reading room in              sections 313 and 319(b) of the Act. See Anti-Money      foreign banks, applies to paragraphs 103.176(b) and
                                       Washington, DC between 10 a.m. and 4 p.m.               Laundering Requirements—Correspondent                   (c) of the final rule, which relate solely to accounts
                                       Persons wishing to inspect comments submitted           Accounts for Foreign Shell Banks; Recordkeeping         for foreign banks.

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                                       498               Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations

                                       appropriate. Limiting the definition                    scope of the relationships subject to this             branches of U.S. banks will be treated as
                                       would undermine the purpose of the                      rule by addressing the functional                      foreign banks rather than as covered
                                       statute by eliminating from the scope of                differences among them. In addition,                   financial institutions.
                                       this rule a wide range of account                       these account definitions, discussed in                   We noted in the Interim Rule that we
                                       relationships that may pose money                       detail below under ‘‘Account,’’ make it                were evaluating whether to include
                                       laundering risks. Moreover, it may be                   clear that this rule does not apply to                 uninsured national trust banks, non-
                                       difficult in some situations to know                    one-time, isolated, or infrequent                      federally regulated, state-chartered
                                       with certainty whether an account the                   transactions.                                          uninsured trust companies and trust
                                       covered financial institution believes to                  2. Covered financial institution. The               banks, and non-federally insured credit
                                       be proprietary is being used for                        2002 Proposal defined covered financial                unions under the rule, to the extent that
                                       customer transactions.9                                 institution to mean insured depository                 these entities maintain correspondent
                                          We believe that the better approach is               institutions (and their foreign branches),             accounts for foreign financial
                                       to retain the broad statutory definition                U.S. branches and agencies of foreign                  institutions or private banking accounts
                                       of correspondent account while                          banks, Edge Act corporations, securities               for non-U.S. persons.13 We have
                                       modifying the due diligence                             broker-dealers, and all other financial                decided to include, as covered financial
                                       requirements under the final rule to be                 institutions subject to an anti-money                  institutions, uninsured trust banks and
                                       more risk-based in nature. This is in                   laundering program requirement under                   trust companies that are federally
                                       accord with the fact that many of the                   the Bank Secrecy Act, which at that                    regulated and that are subject to an anti-
                                       commenters, including the                               time included futures commission                       money laundering program requirement.
                                       congressional commenters, supported                     merchants and introducing brokers,                     As for the remaining types of banking
                                       the need for a risk-based due diligence                 mutual funds, certain money services                   institutions, we do not believe that it is
                                       program. This approach should provide                   businesses, casinos, and operators of                  appropriate to subject them to the
                                       covered financial institutions sufficient               credit card systems.11 The 2002                        provisions of this rule until they are
                                       flexibility to allocate resources and their             Proposal also stated that, as additional               required to have anti-money laundering
                                       due diligence efforts in an appropriate                 financial institutions become subject to               programs. We expect to issue in the
                                       manner consistent with the statutory                    an anti-money laundering program                       future a proposed rule requiring credit
                                       goal.                                                   requirement under 31 U.S.C. 5318(h),                   unions, and trust companies that do not
                                          We also understand that the statutory                they would be included in the                          have a federal functional regulator, to
                                       definition of a correspondent account                   definition of covered financial                        establish anti-money laundering
                                       could create uncertainty as to the types                institution.                                           programs.14 While we do not anticipate
                                       of relationships that are covered,                         As discussed in greater detail below,               that a large number of these financial
                                       particularly for non-bank covered                       we have decided to limit the scope of                  institutions conduct the types of
                                       financial institutions. The term                        covered financial institutions to those                international business or offer the types
                                       correspondent account does not have an                  institutions that we believe offer                     of accounts that would be affected by
                                       established meaning outside of the                      correspondent services to foreign                      this rule, we will nonetheless amend
                                       banking industry, nor does the statute                  financial institutions. Those covered by               this rule to include those institutions
                                       define the term account for those                       this rule include federally regulated                  upon adoption of any final rule
                                       institutions. Instead, it requires the term             banks, savings associations, credit                    requiring those institutions to establish
                                       to be defined by regulation.10                          unions, and trust companies subject to                 anti-money laundering programs.
                                          Accordingly, in compliance with the                  an anti-money laundering program                          For banks, correspondent accounts
                                       statutory mandate, and to provide                       requirement; branches and agencies of                  established on behalf of foreign
                                       additional clarity as to the scope of the               foreign banks; Edge Act corporations;                  financial institutions include any
                                       term correspondent account, we have                     securities broker-dealers; futures                     transaction account, savings account,
                                       added to the final rule specific                        commission merchants; introducing                      asset account or account involving an
                                       definitions for the term account as they                brokers; and mutual funds. Those not                   extension of credit, as well as any other
                                       apply to the various non-bank covered                   covered by the rule include foreign                    relationship with a foreign financial
                                       financial institutions that are based on                branches of insured depository                         institution to provide ongoing services.
                                       the definitions contained in the final                  institutions (which are defined as                     These correspondent accounts include,
                                       rules issued under 31 U.S.C. 5318(l).                   foreign banks under the final rule),                   but are not limited to, accounts to
                                       When read in conjunction with the                       money services businesses, casinos, and                purchase, sell, lend, or otherwise hold
                                       correspondent account definition, the                   operators of credit card systems.                      securities, including securities
                                       industry-specific account definitions                      • Banking institutions.                             repurchase arrangements; accounts that
                                       should give greater direction to covered                   The banking institutions that                       clear and settle securities transactions
                                       financial institutions as to the types and              addressed this definition urged us to                  for clients; ‘‘due to’’ accounts; accounts
                                                                                               remove their foreign branches from the                 for trading foreign currency; foreign
                                          9 For example, although commenters argued that
                                                                                               definition. We agree that this change is               exchange contracts; custody accounts
                                       proprietary correspondent accounts where the            appropriate for the reasons discussed in               for holding securities or other assets in
                                       foreign bank or institution is acting as principal
                                       should be excluded as being low risk for money          the section 313/319 Rule. These include                connection with securities transactions
                                       laundering, these proprietary accounts can and          the plain language of the statute, the                 as collateral; and over-the-counter
                                       have been abused to facilitate money laundering by      historical approach taken in other Bank                derivatives contracts. These accounts
                                       commingling bank funds with individual customer         Secrecy Act rules, and the anti-                       are included even if the U.S. bank does
                                       funds in order to portray an individual’s funds and
                                       account activity as being that of the foreign           competitive impact on foreign branches                 not maintain a deposit account for the
                                       institution. See Minority Report on Correspondent       that could result from their inclusion.12
                                       Banking, infra note 24, Part IV, discussing the case    Thus, consistent with the definition of                  13 Interim  Rule, supra note 4, at 48349.
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                                       of Guardian Bank and Trust.                             foreign bank used in the section 313/319                 14 These  types of institutions are included in the
                                          10 Section 311(e)(2) of the Act requires the                                                                definition of bank in the section 326 customer
                                       Secretary to define by regulation the term
                                                                                               Rule, for purposes of this rule, foreign               identification rule and are therefore required to
                                       ‘‘account’’ for non-bank financial institutions                                                                establish customer identification programs. See 31
                                                                                                 11 2002   Proposal, supra note 2.
                                       subject to sections 311, 312, and 313 of the Act. See                                                          CFR 103.121(a)(2)(ii), and the related analysis at 68
                                       31 U.S.C. 5318A(e)(2).                                    12 Section  313/319 Rule, supra note 7, at 60565.    FR 25090, 25109 (May 9, 2003).

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                                       499

                                       foreign bank or other foreign financial                    Securities broker-dealers are defined               operate similarly to correspondent
                                       institution.15                                          as covered financial institutions under                accounts of banks and securities broker-
                                          • Non-bank financial institutions.                   section 313 of the Act and are subject to              dealers in that they can be used to
                                          Several commenters urged us to                       this final rule. Securities broker-dealers             receive deposits from or make payments
                                       exclude from the proposed definition                    maintain accounts for foreign financial                on behalf of foreign financial
                                       certain types of financial institutions,                institutions to engage in securities                   institutions. It is, therefore, appropriate
                                       including mutual funds, non-bank funds                  transactions, funds transfers, or other                to include these institutions as covered
                                       transmitters, loan or finance companies,                financial transactions, whether for the                financial institutions in the final rule.
                                       casinos, and credit card operators. In                  financial institution as principal or for                 In both the securities and
                                       addition, several commenters objected                   its customers. Such accounts, which                    commodities context, introducing
                                       that the 2002 Proposal was open-ended,                  would constitute correspondent                         brokers have been included as covered
                                       extending this rule to additional                       accounts under the final rule, include:                financial institutions. We anticipate that
                                       financial institutions when they become                 (1) Accounts to purchase, sell, lend, or               introducing brokers may share accounts
                                       subject to an anti-money laundering                     otherwise hold securities, including                   with clearing brokers and may realize
                                       program requirement. The congressional                  securities repurchase arrangements; (2)                efficiencies by apportioning functions
                                       comment, on the other hand, stated that                 prime brokerage accounts that clear and                associated with a due diligence program
                                       the correspondent account definition in                 settle securities transactions for clients;            under the final section 312 rule
                                       the Act was intentionally broad to                      (3) accounts for trading foreign                       pursuant to an agreement. To this end,
                                       ensure that the relationships maintained                currency; (4) custody accounts for                     these firms may consult and share
                                       by a wide spectrum of U.S. financial                    holding securities or other assets in                  information with each other to fulfill
                                       institutions are subject to the statute’s               connection with securities transactions                their due diligence obligations under
                                       requirements.                                           as collateral; and (5) over-the-counter                this section.20 Nonetheless, each
                                          The application of the correspondent                 derivatives contracts.                                 financial institution is responsible for
                                       account definition to non-bank financial                   Mutual funds are also included as                   ensuring that the requirements of this
                                       institutions is one of the most difficult               covered financial institutions under this              rule are met.
                                       interpretative issues in this rulemaking.               rule. We understand that mutual funds                     We do not believe that the other
                                       Because the Act has taken a term—                       maintain accounts for foreign financial                financial institutions identified in the
                                       correspondent account—that has been                     institutions (including foreign banks                  2002 Proposal offer accounts that fall
                                       associated with the banking industry,                   and foreign securities firms) in which                 within the correspondent account
                                       and has extended it to other account                    these foreign financial institutions may               definition. A commenter representing
                                       and account-like relationships                          hold investments in such mutual funds                  loan or finance companies stated that
                                       maintained by various financial                         as principals or for their customers, and              the definition of correspondent account
                                       institutions, the term’s application to                 which the foreign financial institution                should not include accounts payable or
                                       non-bank financial institutions is not                  may use to make payments or to handle                  accounts receivable maintained for the
                                       readily apparent.                                       other financial transactions on the                    purpose of recording loan and lease
                                          The goal of section 312 is to help                   foreign institution’s behalf. Therefore,               payments. We agree. Loan or finance
                                       prevent money laundering through                        we have determined that such accounts                  companies that extend credit to foreign
                                       accounts that give foreign financial                    have sufficient similarities to                        financial institutions would obviously
                                       institutions a base for moving funds                    correspondent accounts of banks that                   maintain accounts receivable for such
                                       through the U.S. financial system.16                    these entities also should be subject to               customers, but these are accounting
                                       Thus, the non-bank financial                            the final rule.18                                      entries that do not enable a loan or
                                       institutions subject to the final rule                     For futures commission merchants                    finance company to receive deposits,
                                       should be those that offer accounts that                and introducing brokers, a                             make payments, or handle other
                                       provide foreign financial institutions a                correspondent account would include                    financial transactions on behalf of a
                                       conduit for engaging in ongoing                         accounts for foreign financial                         foreign financial institution.
                                       transactions in the U.S. financial system               institutions to engage in futures or                      A commenter representing an
                                       either on their own behalf or for their                 commodity options transactions, funds                  operator of a credit card system noted
                                       customers. Based on a review of the                     transfers, or other financial transactions,            that the industry does not maintain
                                       financial institutions identified in the                including accounts for trading foreign                 correspondent accounts and
                                       Bank Secrecy Act, we have concluded                     currency and over-the-counter                          recommended that we exclude operators
                                       that, for purposes of this rule, the                    derivatives transactions, whether for the              of credit card systems from the scope of
                                       financial institutions that offer                       financial institution as principal or for              the rule. We have decided that this is an
                                       customers correspondent accounts (as                    its customers.19 Such relationships can                appropriate change to make. Credit card
                                       that term is defined in the Act) include,                                                                      operators, as described in the interim
                                                                                                  18 Closed-end investment companies, as defined
                                       in addition to depository institutions:                                                                        final rule establishing anti-money
                                                                                               in section 5(a)(2) of the Investment Company Act
                                       securities broker-dealers, Edge Act                     of 1940 (15 U.S.C. 80a–5(a)(2)), are not included as   laundering programs for credit card
                                       corporations, mutual funds, and futures                 covered financial institutions under this rule.        operators, serve primarily as a
                                       commission merchants and introducing                       19 Although orders for futures and options          clearinghouse through which debts are
                                       brokers.17                                              transactions may be transmitted through an             settled and payments are made or
                                                                                               introducing broker, the funds relating to introduced
                                                                                               accounts are held with a futures commission
                                                                                                                                                      received. Credit card system operators
                                          15 We note that accounts maintained by foreign
                                                                                               merchant. Monthly confirmation statements
                                       banks for covered financial institutions are not        reflecting such transactions must be issued by the     activity reporting requirements) (see 31 CFR
                                       correspondent accounts subject to this rule,            futures commission merchant. Nevertheless,             103.17).
                                       regardless of whether there are credit balances in      introducing brokers can play an important role in        20 For example, 31 CFR 103.110 sets forth
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                                       such accounts.                                          preventing money laundering in the futures             voluntary procedures for information sharing
                                          16 See 147 Cong. Rec. S10990, 11035 (Oct. 25,
                                                                                               industry because they are in a position to know the    among Bank Secrecy Act -defined financial
                                       2001) (statement of Sen. Levin).                        identity of customers they introduce to futures        institutions, which, if followed, entitle them to a
                                          17 As set forth in the final rule, the foreign       commission merchants and to perform due                safe harbor from liability arising under Federal,
                                       branches of these entities are treated as foreign       diligence on such customers, including monitoring      State, or local law or contract for such information
                                       financial institutions.                                 trading activity (and are subject to suspicious        sharing.

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                                       generally do not receive deposits or                       Money transmitters, like the financial              diligence is the identification of nested
                                       make payments; instead, the issuing and                 institutions that are subject to this rule,            correspondent accounts and the
                                       acquiring banks process, handle, and                    plainly facilitate the cross-border flow               performance of due diligence on them.26
                                       transfer funds in connection with the                   of funds into and out of the United                       We recognize that criminals and
                                       use of the credit card. Thus, we have                   States, but they do so in a manner that                terrorists might be able to use money
                                       determined that credit card operators do                does not resemble the correspondent                    transmitters to move money through the
                                       not have correspondent accounts and                     accounts that are the focus of section                 United States, and that it is imperative
                                       are not covered financial institutions for              312. There is a relationship that exists               that money transmitters conduct due
                                       purposes of this rule.21                                between the money transmitter and its                  diligence on their foreign counterparties
                                          A state gaming commission                            foreign institutional counterparties (that             to enable them to perform the
                                       commented that casinos offer various                    is, the institutions on the other end of               appropriate level of suspicious activity
                                       accounts to individual customers, but                   either a ‘‘send’’ or ‘‘receive’’                       and risk monitoring. However, we have
                                       do not offer correspondent accounts.                    transaction). While such relationships                 addressed this risk separately through
                                       The commission recommended that                         facilitate the flow of funds on behalf of              the issuance of specific guidance, as set
                                       casinos be excluded from the rule. We                   customers, as do correspondent                         forth below.
                                       agree with this analysis, and have                      relationships, there are significant                      We believe that the obligation for a
                                       excluded casinos from the rule.                         differences that directly implicate the                money transmitter to know its foreign
                                                                                               focus of this rule.                                    counterparties (as well as its domestic
                                          Finally, upon further consideration,                    The vast majority of money                          agents and counterparties) is a part of
                                       we have decided to exclude money                        transmitters in the United States operate              each money transmitter’s obligation to
                                       services businesses from the definition                 through a system of agents throughout                  have appropriate policies, procedures
                                       of a covered financial institution. Under               the world. In fact, we estimate that over              and internal controls to guard against
                                       existing Bank Secrecy Act regulations,                  95 percent of all cross-border                         money laundering and the financing of
                                       money services businesses comprise                      remittances that are done through                      terrorist activities and to report
                                       five distinct types of financial services               money transmitters use this model.                     suspicious activities.27 To further
                                       providers: (1) Currency dealers or                      Other money transmitters operate                       delineate these obligations, on
                                       exchangers; (2) check cashers; (3)                      through more informal relationships,                   December 4, 2004, we issued
                                       issuers of traveler’s checks, money                     such as the trust-based hawala system.23               Interpretive Release No. 2004–1, which
                                       orders, or stored value; (4) sellers or
                                                                                               Regardless of the form the relationship                addressed the due diligence obligations
                                       redeemers of traveler’s checks, money
                                                                                               takes, these money transmissions are all               of a money transmitter with regard to its
                                       orders, or stored value; and (5) money
                                                                                               initiated by a third party seeking to send             foreign counterparties/agents. This
                                       transmitters.22 Money services
                                                                                               or receive funds and are not directed or               interpretative rule was issued to ensure
                                       businesses in the first four categories do              controlled by the sending or receiving                 that money transmitters place
                                       not maintain account relationships with                 institutions. Unlike the case of a                     appropriate controls on cross-border
                                       foreign financial institutions. They do                 covered financial institution, the                     relationships without attempting to
                                       not hold, transfer or transmit the funds                establishment of an agency or other                    force the relationship to fit within this
                                       of foreign financial institutions and/or                counterparty relationship in the money                 rule relating to correspondent accounts.
                                       their customers and, thus, are outside                  transmitter industry neither gives the                    3. Account. As noted earlier, we have
                                       the scope of the definition of                          agent/counterparty a ‘‘home’’ in the U.S.              added to the final rule individualized
                                       correspondent account adopted herein.                   financial institution through which it                 definitions of the term account for each
                                       With respect to money transmitters, we                  can carry out its own transactions on an               type of non-bank covered financial
                                       have determined that money                              ongoing basis, nor carries with it the                 institution listed above to tailor the term
                                       transmitters’ methods of operation and                  potential for a hub of other parties to be             correspondent account to the functions
                                       the attendant risks with respect to                     ‘‘nested’’ within the agent/counterparty.              of the various affected industries. These
                                       foreign financial institutions and their                Section 312 aims at two main                           industry specific definitions are similar
                                       customers differ sufficiently from the                  congressional concerns with                            to those contained in the final rules
                                       concept and definition of a                             correspondent banking: the ability of                  issued under section 326 of the Act,28
                                       correspondent account envisioned by                     corrupt foreign financial institutions to              but with one primary modification.29
                                       the statute and this rule that their                    transact business in the United States,24              Specifically, we have not adopted the
                                       inclusion would not achieve the desired                                                                        transfer exception contained in the
                                                                                               and the ability of customers of a lax
                                       result. Rather than attempting to equate                                                                       section 326 definition of account, which
                                                                                               foreign correspondent to access the U.S.
                                       the relationship between two money                                                                             excludes accounts acquired by, but not
                                                                                               financial system through the
                                       transmitters to the concept of a                                                                               opened at, a covered financial
                                                                                               correspondent account while shielding
                                       correspondent account, we instead have                                                                         institution.
                                                                                               their identities.25 Indeed, one of the
                                       previously issued guidance which                                                                                  Further, the definition of account for
                                                                                               statutory requirements for enhanced due
                                       addressed the specific risks posed by                                                                          each covered financial institution
                                       the international flow of funds through                    23 See Report to the Congress in accordance with    specifically includes the word regular to
                                       money services businesses. Using this                   section 359 of the Patriot Act, available at http://   stress the fact that the scope of section
                                       more precisely targeted tool, discussed       
                                                                                                                                                      312 is intended to be limited to those
                                       below, we expect to achieve the same                       24 See Minority Staff Report on Correspondent

                                       desired results.                                        Banking: A Gateway to Money Laundering: Hearing
                                                                                                                                                        26 See  section 312(a)(i)(2)(B)(iii) of the Act.
                                                                                               Before the Subcomm. on Investigations of the
                                                                                                                                                        27 See  31 CFR 103.125 and 103.20. We previously
                                                                                               Senate Comm. on Governmental Affairs, 107th
                                          21 Operators of credit card systems are subject to   Cong., 277–884 (2001).                                 imposed a due diligence obligation on a money
                                       an anti-money laundering program requirement               25 See section 302(a)(6) of the Act (finding that   transmitter with respect to its domestic agents. See
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                                       under section 352 of the Act that is specifically       ‘‘correspondent banking facilities are one of the      Matter of Western Union Financial Services, Inc.,
                                       tailored to require increased due diligence             banking mechanisms susceptible in some                 No. 2003–2 (March 6, 2003), available at http://
                                       regarding any foreign financial institution             circumstances to manipulation by foreign banks to
                                       presenting a heightened risk of money laundering        permit the laundering of funds by hiding the              28 31 CFR 103.121.

                                       or terrorist financing. 67 FR 21121 (April 29, 2002).   identify or real parties in interest to financial         29 See 31 CFR 103.122 for the definition of
                                          22 See 31 CFR 103.11 (uu).                           transactions.’’).                                      account in the broker-dealer context.

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                                       correspondent relationships where there                  the definition currently applicable                      would not fall within this definition.
                                       is an arrangement to provide ongoing                     under that rule, there is no reason to                   We, thus, confirm that the definition of
                                       services, excluding isolated or                          delay the effectiveness of this                          foreign bank does not include any
                                       infrequent transactions (although other                  amendment.                                               foreign central bank or monetary
                                       obligations, such as suspicious activity                    For purposes of futures commission                    authority that functions as a central
                                       reporting and funds transfer                             merchants and introducing brokers, the                   bank, or any international financial
                                       recordkeeping, apply to such                             term account shall mean ‘‘any formal                     institution or regional development
                                       transactions). Thus, for example, one                    relationship established by a futures                    bank formed by treaty or international
                                       time or infrequent securities                            commission merchant to provide regular                   agreement.34
                                       transactions outside of the context of an                services, including, but not limited to,                    5. Foreign financial institution. The
                                       established account relationship would                   those established to effect transactions                 2002 Proposal defined foreign financial
                                       not, by itself, constitute an account                    in contracts of sale of a commodity for                  institution to mean a foreign bank and
                                       under the final rule.                                    future delivery, options on any contract                 any other person organized under
                                          With respect to banking institutions,                 of sale of a commodity for future                        foreign law which, if organized in the
                                       we are adopting the same definition of                   delivery, or options on a commodity.’’                   United States, would be required to
                                       account as contained in the section 313/                    With respect to mutual funds, the                     establish an anti-money laundering
                                       319 Rule. Accordingly, for covered                       term account shall mean ‘‘any                            program. Thus, the proposed definition
                                       banking institutions, account shall mean                 contractual or other business                            of this term mirrored the definition of
                                       ‘‘any formal banking or business                         relationship established between a                       covered financial institution, but
                                       relationship established by a bank to                    person and a mutual fund to provide                      described entities organized outside the
                                       provide regular services, dealings, and                  regular services to effect transactions in               United States.
                                       other financial transactions; and (B)                    securities issued by the mutual fund,                       Commenters raised several objections
                                       includes a demand deposit, savings                       including the purchase or sale of                        to this proposed definition. Many noted
                                       deposit, or other transaction or asset                   securities.’’ 31                                         that a definition tied to U.S. entities
                                       account and a credit account or other                       4. Foreign bank. The 2002 Proposal                    would be difficult to apply due to
                                       extension of credit.’’ 30                                defined foreign bank to mean an                          different terminology and licensing
                                          This definition is in substance very                  organization that: (1) Is organized under                methods used in foreign countries.
                                       similar to the definition of account                     the laws of a foreign country; (2)                       Others noted the difficulties raised by
                                       contained in the final rule issued under                 engages in the business of banking; (3)                  the open-ended nature of the definition,
                                       section 326 for banks. In this regard, we                is recognized as a bank by the bank                      which would be extended to additional
                                       also note that the issuance by a bank of                 supervisory or monetary authority of the                 categories of financial institutions
                                       a funds transfer to, or receipt by a bank                country of its organization or principal                 should they be required to establish
                                       of a funds transfer from, a foreign bank                 operations; and (4) receives deposits in                 anti-money laundering programs in the
                                       does not, by itself, create an account                   the regular course of its business. The                  future. Several commenters expressed
                                       relationship on behalf of the foreign                    definition contained certain exceptions,                 the view that the proposed definition is
                                       bank under the final rule. This is                       including foreign central banks or                       overly broad and should be limited to
                                       consistent with the final rule issued                    monetary authorities functioning as                      the entities typically licensed and
                                       under section 326 of the Act, which                      central banks and certain international                  regulated as financial institutions, such
                                       excludes wire transfers from the                         financial institutions or regional                       as depository institutions, securities and
                                       definition of an account.                                development banks. In this final rule,                   futures firms, mutual funds, and money
                                          As applied to securities broker-                      we have adopted the existing Bank                        transmitters. The congressional
                                       dealers, the term account shall mean                     Secrecy Act definition of foreign bank 32                comment supported the broad proposed
                                       ‘‘any formal relationship established                    (which includes foreign branches of                      definition, stating that it captured the
                                       with a broker or dealer in securities to                 U.S. banks) as we did in the section                     broad scope intended by Congress.
                                       provide regular services to effect                       313/319 Rule.33 We believe that the                         After careful consideration of the
                                       transactions in securities, including, but               existing Bank Secrecy Act definition                     issues raised, we have decided to limit
                                       not limited to, the purchase or sale of                  will include the appropriate foreign                     the definition of foreign financial
                                       securities and securities loaned and                     entities, will be more precise, will result              institutions to those institutions that
                                       borrowed activity, and to hold securities                in fewer interpretive issues, and will not               may pose a more significant risk for
                                       or other assets for safekeeping or as                    require the exceptions contained in the                  money laundering and, thus, will be
                                       collateral.’’                                            2002 Proposal for foreign central banks,                 subject to this requirement, in order to
                                          For purposes of clarity and                           foreign monetary authorities that                        appropriately focus covered financial
                                       consistency, we are amending the                         function as central banks, and                           institutions’ due diligence efforts on the
                                       definition of account in the section 313/                international financial institutions and                 risk posed by the foreign institution
                                       319 Rule to incorporate this definition                  regional development banks, since they                   rather than on the mere form of the
                                       of account as applied to broker-dealers.                                                                          entity. Accordingly, in this final rule,
                                       Because this definition of account,                        31 We are aware that mutual funds do not offer         foreign financial institutions are defined
                                       which is specifically tailored to the                    the types of one-time services, or isolated or
                                                                                                infrequent transactions, that other types of financial     34 Such institutions include, for example, the
                                       securities industry, is no broader, and                  institutions may offer. The reference to providing       Bank for International Settlements, International
                                       may well be somewhat narrower, than                      regular services is included in the definition of        Bank for Reconstruction and Development (World
                                                                                                account for mutual funds for the purpose of              Bank), International Monetary Fund, African
                                          30 The phrase ‘‘by a bank’’ has been added to the     maintaining consistency between definitions.             Development Bank, Asian Development Bank,
                                                                                                  32 Current Bank Secrecy Act regulations define
                                       definition of account to conform to the definitions                                                               European Bank for Reconstruction and
                                       of account applicable to the non-bank covered            foreign bank as ‘‘a bank organized under foreign         Development, Inter-American Development Bank,
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                                       financial institutions. The phrase ‘‘other financial     law, or an agency, branch or office located outside      International Finance Corporation, North American
                                       transactions’’ includes, but is not limited to, the      the United States of a bank.’’ The term does not         Development Bank, International Development
                                       purchase or sale of securities, securities lending and   include an agent, agency, branch, or office within       Association, Multilateral Investment Guarantee
                                       borrowing, and the holding of securities or other        the United States of a bank organized under foreign      Agency, European Investment Bank, Nordic
                                       assets in connection with securities transactions for    law. 31 CFR 103.11(o).                                   Investment Bank, and Council of Europe
                                       safekeeping or as collateral.                              33 Section 313/319 Rule, supra note 7, at 60566.       Development Bank.

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                                       502               Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations

                                       as foreign banks; the foreign offices of                conducting banking activities with the                    rule, and that the remaining elements
                                       covered financial institutions; non-U.S.                citizens of, or in the local currency of,                 should be part of the institution’s risk
                                       entities that, if they were located in the              the jurisdiction that issued the license.                 assessment program. Commenters noted
                                       United States, would be a securities                    This final rule adopts the proposed                       in particular that the fifth proposed
                                       broker-dealer, futures commission                       definition without change.                                element—reviewing public information
                                       merchant, or mutual fund; 35 and non-                                                                             to ascertain whether the foreign
                                                                                               B. Section 103.176—Due Diligence
                                       U.S. entities that are engaged in the                                                                             institution has been the subject of
                                                                                               Programs for Correspondent Accounts
                                       business of, and are readily identifiable                                                                         criminal or regulatory action—is
                                                                                               for Foreign Financial Institutions
                                       as, a currency dealer or exchanger or a                                                                           particularly problematic given the
                                       money transmitter. This reflects our                       1. General due diligence procedures.                   virtually limitless sources of public
                                       belief that such entities operate in a                  Section 103.176(a) of the 2002 Proposal                   information. The comments suggested
                                       manner that both makes them readily                     required that every covered financial                     that, if a requirement to review public
                                       identifiable 36 (despite differences in                 institution maintain a due diligence                      information is retained in the final rule,
                                       terminology or licensing 37) and that                   program that includes policies,                           the financial institution’s obligation be
                                       poses a heightened risk of money                        procedures, and controls reasonably                       limited in some way (e.g., information
                                       laundering because they offer to money                  designed to enable the financial                          disseminated through print media that
                                       launderers outside the United States                    institution to detect and report any                      is readily available and is generally
                                       easy access to the U.S. financial system,               known or suspected money laundering                       regarded as a leading publication and
                                       as a result of their manner of operation                conducted through or involving any                        reliable). Commenters stressed that, if
                                       and their offering of products with a                   correspondent account that it maintains                   the definition of correspondent account
                                       high degree of liquidity. We, however,                  for a foreign financial institution. We                   is broad, financial institutions should be
                                       have included an exception to the                       have revised the language of the final                    given flexibility in conducting due
                                       definition of a foreign financial                       rule to reflect the fact that the due                     diligence, rather than being required to
                                       institution to exclude those entities that              diligence policies, procedures, and                       perform a specified list of inquiries for
                                       engage in currency exchange or money                    internal controls must be appropriate,                    each account. The congressional
                                       transmission only as an incidental                      specific, and risk-based, and that the                    comment also supported the adoption of
                                       aspect of their business. An example of                 rule applies to any correspondent                         a final rule incorporating the principle
                                       this might be a hotel that exchanges                    account that is established, maintained,                  that the due diligence requirement
                                       small amounts of foreign currency for its               administered, or managed in the United
                                                                                                                                                         should be risk-based.
                                       guests or a tax service that cashes tax                 States for a foreign financial institution.
                                                                                                                                                            We agree that this provision should be
                                       return checks as an accommodation.                      This change is consistent with the risk-
                                                                                                                                                         modified to incorporate a risk-based
                                       Although we specifically have excluded                  based approach adopted herein, as well
                                                                                                                                                         approach to the entire rule. Thus, each
                                       money services businesses from this                     as with the congressional comment. The
                                                                                               final rule also includes the requirement                  covered financial institution will be
                                       rule as covered financial institutions,                                                                           required to include in its due diligence
                                       we have included foreign money                          that the due diligence program be part
                                                                                               of the covered financial institution’s                    program procedures for assessing the
                                       transmitters and foreign currency                                                                                 anti-money laundering risks posed by
                                                                                               anti-money laundering program
                                       dealers and exchangers as foreign                                                                                 correspondent accounts it maintains for
                                                                                               otherwise required by this subpart.
                                       financial institutions because of their                    The 2002 Proposal further required                     foreign financial institutions based upon
                                       role as consumers of correspondent                      that all due diligence programs                           a consideration of relevant factors, as
                                       services offered by covered financial                   maintained by covered financial                           appropriate to the particular
                                       institutions such as banks.                             institutions contain five specific                        jurisdiction, customer, and account.
                                          6. Offshore banking license. The 2002                                                                          Given the breadth of the correspondent
                                                                                               procedures.38 Many commenters urged
                                       Proposal proposed the same definition                                                                             account definition, we believe that this
                                                                                               us to adopt a risk-based rule that would
                                       of offshore banking license as that                                                                               requirement will permit covered
                                                                                               enable covered financial institutions to
                                       contained in 31 U.S.C. 5318(i): A license                                                                         financial institutions to assess the risks
                                                                                               better focus their attention and
                                       to conduct banking activities that                                                                                posed by their various non-U.S.
                                                                                               resources on the types of accounts that
                                       prohibits the licensed entity from                      have a greater susceptibility to money                    customers and accounts and to direct
                                                                                               laundering. In particular, some                           their resources most appropriately at
                                          35 For example, the European Union adopted a
                                                                                               commenters suggested that only the first                  those accounts that pose a more
                                       license regime throughout the European Union for
                                       ‘‘undertakings for collective investment in             two elements contained in the 2002                        significant money laundering risk.
                                       transferable securities,’’ similar to mutual funds in   Proposal should be included in the final                  Relevant risk factors, which were not
                                       the United States, under the Directive on                                                                         spelled out in detail in the 2002
                                       Undertakings for Collective Investment in                  38 The five required procedures were: (1)              Proposal, shall include, as appropriate:
                                       Transferable Securities. See Council Directive 85/
                                       611/EE of December 20, 1985 on the coordination
                                                                                               Determining whether the correspondent account is             • The nature of the foreign financial
                                                                                               subject to the enhanced due diligence requirements;       institution’s business and the markets it
                                       of laws, regulations and administrative provisions
                                                                                               (2) assessing whether the foreign financial
                                       relating to undertakings for collective investment in   institution presents a significant risk for money         serves, and the extent to which its
                                       transferable securities, 1985 O.J. (L 375) 3.           laundering; (3) considering information available         business and the markets it serves
                                          36 We note that the definitions of a currency
                                                                                               from U.S. government agencies and multinational           present an increased risk for money
                                       dealer or exchanger and a money transmitter for         organizations with respect to supervision and
                                       purposes of inclusion as a foreign financial            regulation, if any, applicable to the foreign financial
                                       institution under the final rule do not correspond      institution; (4) reviewing guidance we or the                • The nature of the correspondent
                                       to the definitions of 31 CFR 103.11(uu). For            applicable federal functional regulator issued            account, including the types of services
                                       purposes of this rule, we include only those            regarding money laundering risks associated with
                                       businesses that are readily identifiable as such.                                                                 to be provided (e.g., proprietary or
                                                                                               particular foreign financial institutions and
                                          37 We note that, except for mutual funds, the
                                                                                               correspondent accounts for foreign financial              customer), and the purpose and
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                                       definition of foreign financial institution is not      institutions generally; and (5) reviewing public          anticipated activity of the account.
                                       necessarily limited to the corresponding foreign        information to ascertain whether the foreign                 • The nature and duration of the
                                       institutions that are required by their chartering      financial institution has been the subject of criminal
                                       jurisdictions to register as such, but rather is a      action of any nature or regulatory action relating to
                                                                                                                                                         covered financial institution’s
                                       functional definition based on the entity’s primary     money laundering. The 2002 Proposal, supra note           relationship with the foreign financial
                                       activity or activities.                                 2, at 37743.                                              institution (and, if relevant, with any

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                           503

                                       affiliate of the foreign financial                      103.176. This new provision states                     correspondent bank accounts that a
                                       institution).                                           explicitly the requirement that was                    covered financial institution determines
                                          • The anti-money laundering and                      implicit in the 2002 Proposal: that                    have a high risk of money laundering
                                       supervisory regime of the jurisdiction                  covered financial institutions must                    may necessitate increased due diligence
                                       that issued the charter or license to the               apply ongoing risk-based procedures                    even though they may not specifically
                                       foreign financial institution, and, to the              and controls to each correspondent                     fall within the statutory categories that
                                       extent that information regarding such                  account reasonably designed to detect                  would trigger enhanced due diligence.
                                       jurisdiction is reasonably available, of                and report money laundering.39 We                      This due diligence may include, when
                                       the jurisdiction in which any company                   believe that, as part of ongoing due                   appropriate, transaction testing or one
                                       that is an owner of the foreign financial               diligence, covered financial institutions              or more of the elements of enhanced
                                       institution is incorporated or chartered.               should periodically review their                       due diligence described in section
                                       This factor has been clarified to ensure                correspondent accounts. We do not                      5318(i)(2).
                                       that a covered financial institution                    intend this review, in the ordinary                       Numerous commenters sought
                                       considers, when appropriate, the anti-                  situation, to mean a scrutiny of every                 clarification from us on the extent to
                                       money laundering and supervisory                        transaction taking place within the                    which covered financial institutions can
                                       regime of the foreign financial                         account, but, instead, a review of the                 rely on reputable foreign intermediaries
                                       institution. In addition, the factor is                 account sufficient to ensure that the                  to conduct due diligence of the
                                       designed to ensure that the covered                     covered financial institution can                      intermediaries’ customers because of
                                       financial institution considers, when                   determine whether the nature and                       concerns that the due diligence
                                       appropriate and to the extent that                      volume of account activity is generally                requirements under this section would
                                       information is reasonably available, the                consistent with information regarding                  be particularly burdensome. For
                                       anti-money laundering and supervisory                   the purpose and expected account                       example, one commenter noted that this
                                       regime of the jurisdiction in which a                   activity and to ensure that the covered                requirement would be particularly
                                       corporate owner of the foreign financial                financial institutions can adequately                  onerous for mutual funds, which can
                                       institution is incorporated or chartered.               identify suspicious transactions. For                  have thousands of shareholders, some of
                                       Thus, for example, if a foreign financial               example, we understand that a number                   which purchase their shares directly
                                       institution is owned by an institution                  of covered financial institutions                      and some of which invest through
                                       that is incorporated or chartered in a                  maintain account profiles for their                    intermediaries, including certain foreign
                                       jurisdiction that has a robust anti-money               correspondents in order to anticipate                  financial institutions. These
                                       laundering and supervisory regime, and                  how the account might be used and the                  commenters misunderstand the
                                       the covered financial institution                       expected volume of activity. These                     requirements of 31 U.S.C. 5318(i) and
                                       believes that this is relevant in assessing             profiles can serve as important baselines              this rule.
                                       the risk posed by the foreign financial                 for detecting unusual activity.                           The due diligence requirement under
                                       institution, then the covered financial                    We believe that an effective general                this section of the Bank Secrecy Act
                                       institution should take this information                due diligence program under section                    generally requires an assessment of the
                                       into account in its risk assessment.                    103.176(a) will provide for a range of                 money laundering risks presented by
                                          • Any information known or                           due diligence measures, based on a                     the foreign financial institution for
                                       reasonably available to the covered                     covered financial institution’s risk                   which the correspondent account is
                                       financial institution about the foreign                 assessment of a correspondent account.                 maintained, and not for the customers of
                                       financial institution’s anti-money                      The starting point for financial                       that institution. If, however, a covered
                                       laundering record, including public                     institutions, therefore, should be a                   financial institution’s review of the
                                       information in standard industry guides,                stratification of their money laundering               account identifies activity inconsistent
                                       periodicals, and major publications. The                risk based on a review of the relevant                 with what is expected, then, consistent
                                       scope and depth of such a review will                   risk factors to determine which accounts               with a risk-based due diligence
                                       depend on the nature of the information                 may require increased measures.                        program, the covered financial
                                       uncovered. It should generally include a                Section 103.176(a) does not prescribe                  institution may need to review the
                                       consideration of information that might                 the elements of increased due diligence                account more carefully.
                                       be available from the Department of the                 that should be associated with specific                   2. Enhanced due diligence
                                       Treasury or other federal governmental                  risk factors, but a covered financial                  procedures. Section 5318(i)(2) requires
                                       sources regarding the money laundering                  institution’s general due diligence                    that a covered financial institution
                                       risks associated with particular foreign                program should identify risk factors that              perform enhanced due diligence with
                                       financial institutions and correspondent                would warrant the institution                          regard to a correspondent account
                                       accounts for foreign financial                          conducting additional scrutiny of a                    established or maintained for certain
                                       institutions generally. This information                particular account. The covered                        foreign banks. The 2002 Proposal
                                       could be contained in issuances                         financial institution’s program under                  proposed to implement these
                                       stemming from action taken under                        this rule should address these issues at               requirements in section 103.176(b),
                                       section 311 of the Act, as well as                      a level of specificity and detail                      which specified minimum due diligence
                                       determinations concerning                               appropriate to that institution’s foreign              program requirements applicable to all
                                       comprehensive consolidated                              correspondent account operations and                   foreign banks subject to enhanced due
                                       supervision made by the Federal                         the types of accounts offered. In                      diligence.
                                       Reserve in connection with applications                 addition, the program should take into                    In light of extensive comments
                                       from foreign banks or determinations                    consideration the fact that some foreign               received, we are proposing to take a
                                       concerning consolidated supervised                                                                             different approach toward
                                       entities or supervised investment bank                    39 Covered financial institutions that are not       implementing this provision than that
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                                       holding companies by the Securities                     currently subject to suspicious activity reporting     set forth in the 2002 Proposal. To ensure
                                       and Exchange Commission.                                obligations under the Bank Secrecy Act rules (e.g.,    adequate notice and opportunity for
                                                                                               mutual funds) are encouraged to file voluntary
                                          The final rule includes a new                        reports of known or suspected violations of law
                                                                                                                                                      comment, we have decided to re-notice
                                       subparagraph (3) under the general due                  conducted through or involving a correspondent         the enhanced due diligence portion of
                                       diligence paragraph (a) of section                      account.                                               section 312 with regard to

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                                       correspondent accounts in its entirety.                 This paragraph requires that banks                     (excluding financial interests that do not
                                       The proposed rulemaking is published                    continue to comply with the due                        amount to either $1,000,000 or five
                                       elsewhere in this separate part of the                  diligence requirements for                             percent of either the corpus or income
                                       Federal Register.                                       correspondent accounts in 31 U.S.C.                    of the account).
                                          3. Special procedures. Section                       5318(i) until the 90 and 270-day                          Many commenters stated that the
                                       103.176(d) of the 2002 Proposal                         effective dates described in paragraph                 proposed definition was overly broad
                                       contained special procedures to be                      103.176(e)(1) are triggered. This is                   and unworkable in practice. They noted
                                       included in the covered financial                       consistent with the provisions of the                  that the definition would expand the
                                       institution’s due diligence program.                    Interim Rule found at 31 CFR 103.181.                  breadth of beneficial ownership to
                                       Those procedures addressed what the                     Moreover, consistent with the Interim                  include all individuals with only a
                                       financial institution should do in                      Rule, paragraph (e)(2) provides that                   financial interest in an account (subject
                                       situations where appropriate due                        banks must continue to comply with the                 to the de minimis limitation). Such a
                                       diligence cannot be performed,                          enhanced due diligence requirements of                 definition, they argued, would be
                                       including when the institution should                   31 U.S.C. 5318(i)(2) until a final rule                unworkable, primarily because it would
                                       refuse to open the account, suspend                     based on the Notice is published.                      mean that covered financial institutions
                                       transaction activity, file a suspicious                    Paragraph 103.176(e)(3) contains a                  would be required to identify, and
                                       activity report, or close the account.                  special implementation rule for all other              perform due diligence on, any
                                       There were no comments submitted                        covered financial institutions to ensure               individual with anything other than an
                                       regarding this provision, which is                      consistency with the Interim Rule found                insubstantial interest in an account,
                                       unchanged in this final rule.                           at 31 CFR 103.182 and 103.183. Thus,                   even when such individuals do not
                                          4. Effective dates. Although the 2002                this paragraph provides that securities                assert control, direction, or management
                                       Proposal did not address the issue of an                broker-dealers, futures commission                     over the account.
                                       effective date, many commenters noted                   merchants, introducing brokers, mutual                    Commenters offered various
                                       the difficulty of complying with the                    funds, and trust banks or trust                        suggestions for narrowing the scope of
                                       requirements of 31 U.S.C. 5318(i),                      companies that have a federal regulator                the definition. Several commenters
                                       especially with regard to its application               (1) are not required to comply with the                suggested that we incorporate the
                                       to previously existing accounts, and also               due diligence requirements of 31 U.S.C.                international best practices principles
                                       urged us to allow a sufficient transition               5318(i)(1) until the 90 and 270-day                    on beneficial ownership established by
                                       period. We are mindful of the                           effective dates described in paragraph                 the Wolfsberg Group (Wolfsberg),41
                                       significant burden that will result from                103.176(e)(1) are triggered, and (2) are               which stress the importance of control
                                       the statutory requirement that the                      not required to comply with the                        over the account in determining
                                       provision applies to all correspondent                  enhanced due diligence requirements of                 beneficial ownership.42 The
                                       accounts, regardless of when they were                  31 U.S.C. 5318(i)(2) until otherwise                   congressional comment suggested that
                                       opened.                                                 provided by us in a final rule issued                  we retain the definition as proposed, but
                                          The final rule contains a new section                regarding those requirements.                          clarify that beneficial ownership interest
                                       103.176(e)(1) that provides for the                        Finally, paragraph (e)(4) contains a                would apply only to individuals and not
                                       following effective dates for the                       general exemption from the due                         to legal entities.
                                       obligations under this section: Effective               diligence requirements for                                We agree with commenters that the
                                       90 days after the date of publication of                correspondent accounts contained in 31                 proposed definition is insufficiently
                                       the final rule, the requirements of the                 U.S.C. 5318(i) for all financial                       tailored to the serious risks of money
                                       final rule will apply to correspondent                  institutions that are not defined in the               laundering, and that the term beneficial
                                       accounts opened on or after that date,                  final rule as covered financial                        owner, for purposes of this rule, should
                                       and, effective 270 days after the date of               institutions. This exemption replaces                  apply only to individuals, not legal
                                       publication of the final rule, the rule’s               without substantive change the                         entities.43 Individuals having a
                                       requirements will apply to all                          provisions of the Interim Rule found at                beneficial interest in the assets of an
                                       correspondent accounts opened prior to                  31 CFR 103.183.                                        account without a corresponding ability
                                       the date that is 90 days after the date of                                                                     to control the account should not be
                                                                                               C. Section 103.178—Due Diligence                       deemed beneficial owners.44
                                       publication of the final rule.40
                                          Due to the fact that we are issuing a                Programs for Private Banking Accounts                  Accordingly, this final rule defines the
                                       new Notice of Proposed Rulemaking                       for Non-U.S. Persons—Definitions                       term beneficial owner (rather than
                                       (Notice) with regard to enhanced due                      Section 103.178 of the 2002 Proposal                 ‘‘beneficial ownership interest,’’ the
                                       diligence under section 5318(i)(2), it is               implemented the requirements in 31                     term defined in the 2002 Proposal) to
                                       necessary to ensure that there are no                   U.S.C. 5318(i) regarding due diligence                 mean ‘‘an individual who has a level of
                                       gaps in the relevant implementation                     standards applicable to private banking                control over, or entitlement to, the funds
                                       periods. Consequently, we are deleting                  accounts established, administered,
                                                                                                                                                        41 The Wolfsberg Group is a consortium of 12
                                       31 CFR 103.181 through 103.183 set                      managed, or maintained in the United
                                                                                                                                                      international banks that establishes global anti-
                                       forth in the Interim Rule dealing with                  States for or on behalf of non-U.S.                    money laundering guidelines for the financial
                                       effective dates and are adding the                      persons.                                               services industry.
                                       following two paragraphs to take their                  a. Definitions—In General
                                                                                                                                                        42 Wolfsberg Group, ‘‘Wolfsberg Anti-Money

                                       place.                                                                                                         Laundering Principles: FAQs on Beneficial
                                                                                                  The definitions relating to this section            Ownership,’’ (2005), Q. 1, (hereinafter ‘‘FAQs on
                                          Paragraph 103.176(e)(2) contains a                                                                          Beneficial Ownership’’), available at http://
                                       special implementation rule for banks.                  generated considerable comment and           
                                                                                               are discussed below.                                   ownership.html#2.
                                         40 The due diligence program adopted pursuant to         1. Beneficial ownership. Proposed                     43 For a further discussion of this issue, see infra
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                                       section 103.176 of the final rule, like all programs    section 103.175(b) defined a beneficial                notes 54–55 and accompanying text.
                                       required by Bank Secrecy Act regulations, must be       ownership interest in an account                         44 For example, under the proposed definition,

                                       part of the covered financial institution’s anti-                                                              minor children who are beneficiaries of a trust
                                       money laundering program, and must be approved
                                                                                               generally as the legal authority to fund,              would have been considered to have a beneficial
                                       by its board of directors or an appropriate             direct, or manage the account or a legal               ownership interest despite the fact that they lack
                                       committee thereof, or senior management.                entitlement to the assets of an account                control over the account.

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                                       or assets in the account that, as a                     however, understand that, at this time,                  b. Required Minimum Deposit of
                                       practical matter, enables the individual,               private banking accounts are likely to be                $1,000,000
                                       directly or indirectly, to control, direct              offered primarily by depository                             Many commenters sought clarification
                                       or manage the account. The ability to                   institutions, uninsured trust banks and                  of the meaning of the clause ‘‘requires
                                       fund the account or the entitlement to                  trust companies that are federally                       a minimum aggregate deposit of funds
                                       the funds of the account alone, however,                regulated and are subject to an anti-                    or other assets of not less than
                                       without any corresponding authority to                  money laundering program requirement,                    $1,000,000.’’ Some commenters raised
                                       control, manage or direct the account                   securities broker-dealers, and futures                   concerns that adopting a final rule
                                       (such as in the case of a minor child                   commission merchants and introducing                     containing the statutory threshold of
                                       beneficiary) does not cause the                         brokers. Should any other covered                        $1,000,000 would mean that many high
                                       individual to be a beneficial owner.’’                  financial institutions offer accounts that               value accounts at covered financial
                                       Individuals who have an entitlement to                  meet the definition of a private banking                 institutions, that would otherwise meet
                                       funds in an account or an ability to fund               account in the future, they would be                     the definition of a private banking
                                       the account and who also have the                       required to comply with this section of                  account, would not be subject to this
                                       ability to ‘‘manage or direct’’ the                     the rule.                                                rule simply because the covered
                                       account have the requisite level of                        3. Non-U.S. person. The 2002                          financial institution does not require a
                                       control and must be identified by the                   Proposal defined non-U.S. person as an                   minimum deposit of at least $1,000,000.
                                       financial institution.45                                ‘‘individual who is neither a United                        Although some accounts may not be
                                          We believe that the definition we are                States citizen nor a lawful permanent
                                       adopting in this final rule is consistent                                                                        covered by this rule, we cannot broaden
                                                                                               resident as defined in 26 U.S.C.                         the statutory definition, which was the
                                       with the concept of beneficial                          7701(b)(6).’’ The final rule defines the
                                       ownership set forth in section                                                                                   basis for the definition contained in the
                                                                                               term more appropriately by reference to                  2002 Proposal, in order to reach a
                                       5318A(e)(3), as added by section 311 of                 the Immigration and Nationality Act,
                                       the Act.46 The rule also should provide                                                                          different result.49 The plain language of
                                                                                               but without any change in substance.                     the statute, as well as the legislative
                                       covered financial institutions with a                   We are clarifying that this definition
                                       workable standard for assessing                                                                                  history of section 5318(i),50 upon which
                                                                                               shall apply only to section 103.178 and                  the 2002 Proposal was based, are
                                       beneficial ownership for private banking                does not incorporate or change the
                                       accounts, thereby allowing covered                                                                               unequivocal: a private banking account
                                                                                               definition of person as used in the other                is an account (or combination of
                                       financial institutions to focus their due               sections of this part.
                                       diligence efforts in a risk-based fashion                                                                        accounts) that requires a minimum
                                       on those accounts and individuals                          4. Private banking account. Section                   deposit of not less than $1,000,000.
                                       posing a heightened risk of money                       103.175(n) of the 2002 Proposal                          Section 312 of the Act was intended to
                                       laundering. Private banking accounts                    generally adopted the definition of                      cover those accounts opened by wealthy
                                       may be particularly vulnerable to money                 private banking account that appears in                  foreign individuals making large
                                       laundering because they may afford                      31 U.S.C. 5318(i). Section 5318(i)                       deposits who can avail themselves of
                                       wealthy clients a large measure of                      defines a private banking account as an                  the services of a liaison,51 and we may
                                       anonymity, as well as access to the U.S.                account (or any combination of                           not depart in the final rule from the
                                       financial system.47                                     accounts) that: (1) Requires a minimum                   plain language of the statute. The final
                                          2. Covered financial institution. We                 aggregate deposit of funds or other                      rule is thus unchanged from the 2002
                                       are using the same definition of covered                assets of not less than $1,000,000; (2) is               Proposal, except that the rule uses the
                                       financial institution for both the private              established on behalf of one or more                     statutory term ‘‘deposit’’ in place of the
                                       banking provisions of section 103.178                   individuals who have a direct or                         term ‘‘amount’’ used in the 2002
                                       and the correspondent account                           beneficial ownership interest in the                     Proposal.
                                       provisions of section 103.176. We,                      account; and (3) is assigned to, or is                      Certain covered financial institutions
                                                                                               administered or managed by, in whole                     may offer a wide range of services that
                                          45 Both state and federal law generally impute the   or in part, an officer, employee, or agent               are generically termed private banking,
                                       ownership of ‘‘self-settled’’ trusts—trusts where the   of a financial institution acting as a                   and an institution may require different
                                       settlor (the one who sets up and funds the trust) is    liaison between the financial institution                minimum deposits that are
                                       also the beneficiary—to the settlor-beneficiary. This   and the direct or beneficial owner of the                commensurate with its various types of
                                       situation stands in sharp contrast to that in which
                                       minor children are simply the trust beneficiaries;      account. Commenters generally sought                     private banking services. If an
                                       their interests are, thus, properly excluded from the   further clarification as to the precise                  institution offers more than one level of
                                       definition of beneficial ownership for purposes of      scope of this term, raising issues                       private banking service to its clients,
                                       the final rule. Individuals with the ability to fund    regarding all three elements of the                      then any account or combination of
                                       an account by virtue of being the source of the
                                       assets, however, should be distinguished from           definition.48                                            accounts that require a $1,000,000
                                       individuals such as lawyers and liaisons who
                                       merely perform the ministerial functions of placing        48 We note that, although this final rule applies        49 We intend to review the extent to which the

                                       funds in various investment vehicles.                   to those private banking accounts meeting the            application of the statutory definition could result
                                          46 Section 311(e)(3) of the Act provides, in
                                                                                               definition in the rule, many covered financial           in money laundering risks, and, if warranted,
                                       relevant part, that the Secretary shall promulgate      institutions offer forms of private banking              initiate a rulemaking to require special due
                                       regulations defining beneficial ownership that shall    relationships that should be given a greater level of    diligence for a broader range of private banking
                                       address issues relating to an individual’s ability to   due diligence under the institution’s risk-based         accounts than are subject to section 5318(i) and this
                                       ‘‘fund, direct or manage the account’’ and shall        anti-money laundering program than that generally        final rule. Such a rulemaking would be based on
                                       ensure that the definition does not extend to any       afforded the institution’s retail customers. This is     our authority under sections 5318(a)(2) and (h)(2)
                                       individual with an ‘‘immaterial’’ interest in the       primarily because of the large amounts of money          of the Bank Secrecy Act.
                                       assets of the account. 31 U.S.C. 5318A(e)(3).           that can be managed through such relationships and          50 The legislative history of section 5318(i)
                                          47 See Hearings on Private Banking and Money         the personal contact that is created in connection       supports the plain language reading of the
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                                       Laundering: A Case Study of Opportunities and           with these relationships. See, e.g., Federal Financial   definition. In explaining the definitional
                                       Vulnerabilities, Before the Permanent Subcomm. on       Institutions Examination Council, Bank Secrecy Act       requirements for a private banking account, Senator
                                       Investigations of the Senate Comm. on                   Anti-Money Laundering Examination Manual, June           Levin stated: ‘‘First, the account in question must
                                       Governmental Affairs, 106th Cong., 872 (1999)           2005, available at             require a $1 million minimum aggregate of
                                       (Minority Staff Report) (hereinafter ‘‘Private          bsamanual.pdf (hereinafter Bank Secrecy Act Exam         deposits.’’ 147 Cong. Rec., supra note 16, at 11037.
                                       Banking Report’’).                                      Manual).                                                    51 See id. at 11036.

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                                       aggregate minimum deposit, and also                     financial transactions to benefit the                       We have addressed the concerns of
                                       satisfy the other elements of the                       covered financial institution’s client.56                these commenters by clarifying that the
                                       definition, including the services of a                 To provide this type of personalized                     definition of beneficial owner is limited
                                       liaison, would be subject to the rule.                  service for the client and to understand                 to individual(s) with control over the
                                                                                               the long-term goals and needs of the                     account (as opposed to passive investors
                                       c. Liaison
                                                                                               client, a liaison will routinely gather                  with only financial interests).58
                                          Commenters also asked us to clarify                  extensive information about the client,                  Furthermore, as a general matter, we do
                                       the term liaison as it applies to private               including the client’s personal,                         not believe that accounts held by public
                                       banking accounts because the term                       professional, and financial history.                     corporations, mutual funds, or other
                                       potentially could bring within its scope                Thus, the meaning of the term liaison in                 collective investment vehicles would
                                       individuals who perform only                            this rule should not be confused with,                   qualify as private banking accounts.
                                       administrative functions, such as                       for example, a customer service                          Such accounts likely would not involve
                                       account administrators or customer                      representative or account manager who                    a liaison, would not be established on
                                       service representatives. In order to                    may be assigned to a large number of                     behalf of one or more individuals with
                                       articulate the meaning of this term, it is              customers (sometimes for a geographical                  beneficial ownership of (i.e., control
                                       helpful to describe briefly what is meant               region) to respond to questions                          over) such an account, and would be
                                       by private banking. Although there is no                customers may have regarding the                         viewed as institutional accounts
                                       generally accepted definition of private                institution’s products and services or to                managed by a different unit of the
                                       banking, the term refers broadly to the                 take orders for securities or futures                    covered financial institution. On the
                                       provision of highly personalized                                                                                 other hand, a private banking account
                                                                                               transactions. Those persons do not
                                       financial and related services to wealthy                                                                        established in the name of a legal entity
                                                                                               provide the level of service or obtain the
                                       clients, principally individuals and                                                                             (such as a personal investment company
                                                                                               extent of client information
                                       families. Moreover, it is not a single                                                                           or trust) 59 for the benefit of an
                                                                                               characteristic of private banking.
                                       activity, but instead comprises a range                                                                          individual owner would be subject to
                                       of different products and services,                     d. Account Established on Behalf of One                  the final rule if it also met the other
                                       including cash management, funds                        or More Direct or Beneficial Owners                      definitional requirements.
                                       transfer, asset management, creation of                                                                             Some commenters asked us to clarify
                                       offshore entities, financial planning,                    Commenters also sought clarification                   the language of section 5318(i)(1) that
                                       lending and custody services.52 Private                 regarding the requirement in section                     applies the statutory due diligence
                                       banking typically includes the following                5318(i) and the 2002 Proposal that the                   requirements to private banking
                                       key components: Tailoring services to                   account be ‘‘established on behalf of or                 accounts that a U.S. financial institution
                                       individual client requirements;                         for the benefit of one or more                           ‘‘establishes, maintains, administers or
                                       anticipation of client needs; long-term                 individuals who have a direct or                         manages’’ in the United States for a non-
                                       relationship orientation; and personal                  beneficial ownership interest in the                     U.S. person.60 The phrase is intended to
                                       contact.53 These services may vary                      account.’’ Reading this phrase in                        cover not only those accounts that are
                                       according to the size of a client’s deposit             conjunction with the 2002 Proposal’s                     established or maintained in the United
                                       or account and the institution’s private                definition of beneficial ownership                       States, but also those accounts that are
                                       banking program. Section 5318(i) was                    interest, some commenters were                           established and maintained outside of
                                       intended to cover those accounts                        concerned that section 5318(i) could                     the United States but are administered
                                       opened by wealthy foreign individuals                   apply to accounts maintained by public                   or managed by employees within the
                                       making large deposits, who avail                        corporations, or by mutual funds or                      United States.61 Private banking
                                       themselves of the services of an                        other collective investment vehicles, on                 accounts can be established (i.e.,
                                       employee of the financial institution                   behalf of numerous investors who could                   opened) and maintained (i.e., the
                                       who can transfer funds, create offshore                 be viewed as having beneficial                           records are kept) in branch offices
                                       corporations or accounts, or engage in                  ownership interests in the account.                      outside of the United States, while the
                                       other transactions carrying increased                   These commenters claimed that the due                    accounts are administered or managed
                                       risks of money laundering.54                            diligence burdens resulting from such a                  by employees of the institution within
                                          The liaison is the covered financial                 reading of this provision would be                       the United States. For example, the
                                       institution’s employee who develops (or                 excessive and impractical.57                             records of a private banking client may
                                       continues) a long-term relationship with                                                                         be physically located at a foreign branch
                                       the client and is actively involved in                    56 See   Private Banking Report, supra note 47, at
                                       providing these services.55 To that end,                875.                                                        58 We have modified this element of the private

                                       a liaison may, for example, coordinate                    57 As  a means of creating a ‘‘bright line’’ test to   banking account definition in the final rule
                                       the efforts of a team of specialists                    avoid this result, one commenter recommended that        accordingly to require an account for those ‘‘who
                                                                                               the final rule exclude from the definition of private    are direct or beneficial owners of the account.’’ We
                                       including investment managers, trust                    banking account hedge funds and other investment         have also replaced ‘‘individuals’’ with ‘‘non-U.S.
                                       officers, and estate planners; open                     vehicles unless they have five or fewer investors,       persons’’ to simplify the final rule.
                                       accounts on behalf of the client and                    based on the standard suggested in section 356(c)           59 See Bank Secrecy Act Exam Manual, supra note

                                       manage and arrange transactions among                   of the Act, which requires the submission of an          48.
                                                                                               interagency report to Congress relating to                  60 The same geographical scope applies in section
                                       those accounts; and conduct a variety of                investment companies. That section specifically          312 of the Act with respect to correspondent
                                                                                               requires the report to address the question of           accounts, as well as in section 313 of the Act and
                                         52 Bank  Secrecy Act Exam Manual, supra note 48.      whether certain personal holding companies with          the Section 313/319 Rule.
                                         53 D. Maude and P. Molyneau, Private Banking:         five or fewer shareholders or beneficial owners             61 For example, a covered financial institution
                                       Maximizing Performance in a Competitive Market          should be treated as financial institutions under 31     may establish a personal investment company for
                                       at 18 (Euromoney Publications PLC 1996).                U.S.C. 5312(a)(2)(I) and should be required to           a private banking client in an offshore jurisdiction,
                                          54 147 Cong. Rec. supra note 16, at 11036.           disclose their beneficial owners when opening            but may manage the account in a U.S. office. See
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                                          55 See Private Banking Report, supra note 47, at     accounts at U.S. financial institutions. The report      Board of Governors of the Federal Reserve System,
                                       875. The Private Banking Report, which served as        was issued December 31, 2002. See http://                ‘‘Private Banking Activities’’ (SR Letter 97–19
                                       the basis for the private banking provisions of As a            (SUP), June 30, 1997), available at http://
                                       section 312 of the Act, illustrates the services that   result of the revised definition of beneficial  (hereinafter ‘‘Federal
                                       distinguish liaisons from traditional customer          ownership in the final rule, no such limit is            Reserve Guidance’’). Such a relationship would fall
                                       service employees of a financial institution.           necessary.                                               within the geographic requirement of the final rule.

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                               507

                                       of the covered financial institution,                    adopted by the international community                  title (honorary or salaried political
                                       while an employee of the institution in                  regarding politically exposed persons,64                position), the level of authority the
                                       the United States exercises control over,                including the close associates aspect of                individual has over governmental
                                       and manages the day-to-day activities                    the definition that was the primary                     activities and over other officials, and
                                       of, the account.62                                       focus of most commenters’ objections.65                 whether the position affords the
                                          Senior foreign political figure.                         It should also be noted here that, prior             individual access to significant
                                       Commenters generally found the                           to accepting any private banking client,                government assets and funds. For
                                       definition of senior foreign political                   especially one who will have a high                     example, as a general matter, we expect
                                       figure,63 set forth in § 103.175(o) of the               dollar account, a covered financial                     that individuals holding the equivalent
                                       2002 Proposal, both far-reaching and                     institution should ordinarily perform                   of cabinet level positions with their
                                       difficult to implement. Commenters                       sufficient due diligence to ensure that it              government would fall within the
                                       specifically criticized the inclusion of                 is comfortable with the prospective                     definition of a senior official because of
                                       persons ‘‘widely and publicly known’’                    customer and his or her source of funds.                their ability to establish government
                                       to maintain a close personal or                          This type of due diligence should                       policy and their access to government
                                       professional relationship with                           enable the covered financial institution                resources. However, a senior official
                                       individuals holding senior official                      to determine who the customer is, what                  could also include a governor or the
                                       positions. They argued that such a                       his or her background is, and,                          mayor of a major city. If, for example,
                                       definitional standard would require                      specifically, whether he or she is a                    the city has importance nationally or
                                       financial institutions to look beyond the                senior foreign political figure.                        internationally, the governor or mayor
                                       professional and financial histories of                     Senior official or executive. The 2002               could have the same type of political
                                       their clients and into their personal                    Proposal defined senior official or                     influence and access to government
                                       relationships. For many commenters,                      executive to mean an individual with                    resources as would an official holding
                                       the phrase ‘‘widely and publicly                         substantial authority over policy,                      the equivalent of a cabinet level
                                       known’’ raised questions about the                       operations, or the use of government-                   position. Thus, where a covered
                                       resource burdens entailed in reviewing                   owned resources. The final rule adopts                  financial institution’s due diligence
                                       the vast amounts of public information                   the proposed definition without change.                 reveals that the nominal or beneficial
                                       currently available to ascertain such                    We believe that the definition of a                     owner of a private banking account
                                       association. Yet another commenter                       senior official or executive must remain                holds some type of government
                                       requested that we develop a list of                      sufficiently flexible to capture the range              position, the institution may need to
                                       senior foreign political figures similar to              of individuals who, by virtue of their                  make additional inquiries to determine
                                       the list issued by the Department of the                 office or position, potentially pose a risk             whether that position or title qualifies as
                                       Treasury’s Office of Foreign Assets                      that their funds may be the proceeds of                 a senior official or executive.
                                       Control in order to ensure that covered                  foreign corruption. But this flexibility,                  In defining the terms senior foreign
                                       financial institutions apply the                         according to commenters, has come at                    political figure and senior official or
                                       definition in a uniform fashion.                         the expense of specificity, and                         executive, we have sought to provide
                                          We continue to believe that the                       commenters have requested further                       some guidance and flexibility because
                                       proposed definition of senior foreign                    guidance in identifying such                            an overly precise and rigid definition is
                                       political figure is generally appropriate.               individuals. Titles, while helpful, may                 not feasible and would not adequately
                                       However, we are modifying the                                                                                    implement the statutory intent of this
                                                                                                not themselves provide sufficient
                                       definition to specify that the definition                                                                        section. In addition, as noted
                                                                                                information about the office because
                                       includes a ‘‘person who is widely and                                                                            previously, through the course of
                                                                                                governments are organized differently
                                       publicly known * * * to be a close                                                                               exercising the due diligence that is
                                                                                                from jurisdiction to jurisdiction and
                                       associate of’’ rather than a ‘‘person who                                                                        necessary and appropriate for reviewing
                                                                                                official titles and responsibilities may
                                       is widely and publicly known * * * to                                                                            the acceptability of a high dollar
                                                                                                vary accordingly.
                                       maintain a close personal or                                                                                     account for a potential senior foreign
                                                                                                   We believe covered financial
                                       professional relationship with’’ any                                                                             political figure or a senior official or
                                                                                                institutions should consider a range of
                                       such individual. This definition is                                                                              executive, a covered financial
                                                                                                factors when determining whether a
                                       consistent with similar standards                                                                                institution should be able to gather the
                                                                                                particular foreign official is a senior
                                                                                                                                                        information necessary to comply with
                                                                                                official. Relevant factors include
                                          62 However, the fact that securities issued and                                                               this rule.
                                                                                                examining the official responsibilities of                 Immediate family member. The 2002
                                       traded in the United States are held in a private
                                       banking account would not by itself suggest that         the individual’s office, the nature of the              Proposal defined immediate family
                                       that the account is controlled, managed, or                                                                      member as ‘‘a spouse, parents, siblings,
                                       administered in the United States. On the other            64 See, e.g., Basel Committee on Banking

                                       hand, if investment management decisions are             Supervision, ‘‘Customer Due Diligence for Banks,’’      children, and a spouse’s parents or
                                       made in the United States, this would constitute         (Oct. 2001) at 10, which defines politically exposed    siblings.’’ We did not receive comments
                                       management of the account in the United States.          persons as ‘‘individuals who are or have been           on this proposed definition and are
                                          63 The proposed rule defined senior foreign           entrusted with prominent public functions,              adopting it in the final rule without
                                       political figure as: ‘‘(i) A current or former senior    including heads of state or of government, senior
                                       official in the executive, legislative, administrative   politicians, senior government, judicial, or military   change.
                                       or judicial branches of a foreign government             officials, senior executives of publicly owned
                                                                                                corporations and important political party
                                                                                                                                                        D. Section 103.178—Due Diligence
                                       (whether elected or not), a senior official of a major
                                       foreign political party, or a senior executive of a      officials.’’                                            Programs for Private Banking Accounts
                                       foreign government-owned commercial enterprise;            65 See Wolfsberg Group, ‘‘Wolfsberg AML
                                                                                                                                                          1. Due diligence generally. Section
                                       (ii) a corporation, business or other entity that has    Principles on Private Banking,’’ (1st revision, May
                                       been formed by, or for the benefit of, any such          2002) at 2, available at http://www.wolfsberg-
                                                                                                                                                        103.178(a) of the 2002 Proposal required
                                       individual; (iii) an immediate family member of any, which likewise defines politically      each covered financial institution to
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                                       such individual; and (iv) a person who is widely         exposed persons as ‘‘individuals holding or having      maintain a due diligence program that
                                       and publicly known (or is actually known by the          held positions of public trust, such as government      includes policies, procedures, and
                                       relevant covered financial institution) to maintain      officials, senior executives of government
                                       a close personal or professional relationship with       corporations, politicians, important political party
                                                                                                                                                        controls that are reasonably designed to
                                       any such individual.’’ 2002 Proposal, supra note 2,      officials, etc., as well as their families and close    detect and report any known or
                                       at 37743.                                                associates.’’                                           suspected money laundering or

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                                       suspicious activity conducted through                    forth in section 103.178(b).68 As                  However, to comply with the
                                       or involving any private banking                         discussed in the preamble to the 2002              requirement that a covered financial
                                       account that the financial institution                   Proposal, the nature and extent of the             institution perform sufficient due
                                       establishes, maintains, administers, or                  due diligence conducted will likely vary           diligence with regard to its private
                                       manages in the United States for or on                   with each client depending on the                  banking accounts to guard against
                                       behalf of a non-U.S. person. This section                presence of potential risk factors. More           money laundering and to report any
                                       of the final rule contains technical                     extensive due diligence, for example,              suspicious activity, part of an
                                       modifications,66 and also includes the                   may be appropriate for new clients;                institution’s due diligence may often
                                       requirement that the due diligence                       clients who operate in, or whose funds             include a review of the individual’s
                                       program shall be part of the covered                     are transmitted from or through,                   lines of business and sources of wealth.
                                       financial institution’s anti-money                       jurisdictions with weak anti-money                 The final rule is also modified by
                                       laundering program otherwise required                    laundering controls; and clients whose             employing the term beneficial owner
                                       by the subpart.                                          lines of business may be cash-based                instead of beneficial ownership interest
                                          2. Minimum due diligence                              (such as casinos or currency exchanges).           so that it is consistent with the
                                       requirements. Section 103.178(b) of the                  Due diligence should also be                       definition as it appears in section
                                       2002 Proposal set forth minimum due                      commensurate with the size of the                  103.175(b) of the final rule.
                                       diligence requirements for private                       account. Accounts with relatively more             Accordingly, this final rule requires
                                       banking accounts. This section required                  deposits and assets should be subject to           covered financial institutions to take
                                       that the covered financial institution’s                 greater due diligence, requiring covered           reasonable steps to ascertain the identity
                                       due diligence program include                            financial institutions to conduct more             of all nominal and beneficial owners of
                                       reasonable steps to ensure that the                      extensive investigation into the relevant          private banking accounts and to apply
                                       institution: (1) Ascertain the identity of               factors. In addition, if the institution at        due diligence measures to those
                                       all nominal and beneficial owners,67 as                  any time learns of information that casts          individuals.
                                       well as information on their lines of                    doubt on previous information, further                Commenters maintained that the
                                       business and sources of wealth; (2)                      due diligence would be appropriate.                compliance burdens under this
                                       ascertain the source of funds deposited                     We have largely retained the language           provision would be excessive,
                                       into the private banking account; (3)                    of section 103.178(b) as contained in the          particularly as it is applied to all
                                       ascertain whether any account holder is                  2002 Proposal, but have clarified the              beneficial owners of private banking
                                       a senior foreign political figure; and (4)               requirements of paragraph (b)(2). This             accounts. As this final rule adopts a
                                       report, in accordance with applicable                    paragraph will now require covered                 narrower definition of beneficial owner
                                       law and regulation, any suspected                        financial institutions to ascertain for            than that contained in the 2002
                                       money laundering or suspicious                           private banking accounts information               Proposal, we anticipate that the
                                       activity. Commenters generally raised                    regarding the purpose of the account as            compliance burdens associated with
                                       concerns about the burdens involved in                   well as the anticipated account activity.          this section will be reduced. The
                                       complying with section 103.178(b) in                     To assist covered financial institutions           definition of beneficial owner centers on
                                       several respects. These included the                     in meeting their compliance obligations,           actual rather than nominal control.
                                       difficulty of identifying the beneficial                 we are providing additional guidance               Therefore, covered financial institutions
                                       owners given the 2002 Proposal’s                         regarding the specific requirements set            will need to make a specific factual
                                       definition; the difficulty of obtaining all              forth below.                                       determination as to the beneficial
                                       the required information about such                                                                         owners (i.e., individuals with actual
                                       persons, and the level of intrusiveness                  a. Nominal and Beneficial Owners                   control) of an account on a case-by-case
                                       required; the problems associated with                      Section 103.178(b)(1) of the 2002               basis. We expect that covered financial
                                       identifying senior foreign political                     Proposal required covered financial                institutions will look through the
                                       figures given the breadth of the                         institutions to take reasonable steps to           nominal owner of the account to
                                       definition; and the extent, if any, to                   ascertain the identity of all nominal (i.e., determine who has effective control
                                       which financial institutions could rely                  named) holders and any beneficial                  over the account. For example, when an
                                       on due diligence conducted by well-                      owners of the private banking account,             account is opened by a natural person,
                                       regulated intermediaries to satisfy their                as well as information on those holders’ the financial institution should establish
                                       obligations under this provision.                        lines of business and sources of wealth.           whether the client is acting on his or her
                                          The final rule requires that covered                  The final rule modifies this provision to own behalf and should perform
                                       financial institutions implement a risk-                 more accurately reflect the wording of             additional diligence if doubt exists as to
                                       based due diligence program that                         the statute, which does not refer to lines the identity of the beneficial owner(s).69
                                       incorporates the minimum standards set                   of business or sources of wealth.                  For an account holder that is a legal
                                                                                                                                                   entity that is not publicly traded (such
                                          66 For example, the clause ‘‘by or on behalf of a       68 As with correspondent accounts, where
                                                                                                                                                   as a private investment company), a
                                       non-U.S. person’’ has been deleted because that          multiple financial institutions maintain a private
                                       limitation has been included in the final rule’s         banking account for a customer—e.g., securities
                                                                                                                                                   financial institution should ensure that
                                       definition of a private banking account. Because the     clearing and introducing brokers and futures       it has sufficient information about the
                                       final rule applies to private banking accounts for       commission merchants and introducing brokers—      structure of the entity, including its
                                       non-U.S. persons, covered financial institutions         each is independently responsible for ensuring the directors, shareholders, and those with
                                       will need to determine whether a client is a non-        requirements of this rule are met. Any
                                       U.S. person. We do not believe that such a               apportionment of functions between such entities
                                                                                                                                                   control over the account, and should
                                       determination should be difficult given the amount       should include adequate sharing of information to  determine which individual (or
                                       of information that private bankers typically obtain     ensure that each institution can satisfy its       individuals) constitutes the beneficial
                                       about their clients.                                     obligations under this rule. For example, an       owner(s) for purposes of due
                                          67 Covered financial institutions also are required   introducing firm would be responsible for
                                                                                                                                                   diligence.70 Likewise, in the case of a
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                                       to implement a customer identification program           informing the clearing firm of the customers
                                       pursuant to section 326 of the Act and its               holding private banking accounts and for obtaining
                                                                                                                                                        69 See, e.g., Wolfsberg Group, ‘‘FAQs on
                                       implementing regulations; private banking accounts       the necessary information from and about these
                                       opened after October 1, 2003, are generally subject      customers, while both firms would be responsible      Beneficial Ownership,’’ supra note 42, at 2–3;
                                       to that requirement as well. See 68 FR 25089–25162       for establishing adequate controls to detect          Federal Reserve Guidance, supra note 61, Part III.
                                       (May 9, 2003).                                           suspicious activity.                                    70 Id.

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                                       trust, the financial institution should                   of a private banking relationship                     identification of accounts that warrant
                                       ascertain which individual (or                            requires that financial institutions                  additional scrutiny. For example, a
                                       individuals) controls the funds of the                    obtain extensive information about their              single, large deposit may warrant
                                       trust, should identify the source of the                  clients in order to provide them with                 additional scrutiny if it is unusual,
                                       funds, and should perform due                             personalized financial services.                      given the information a client has
                                       diligence as appropriate.71 The reason                                                                          provided about the account’s purpose
                                       for the focus on nominal and beneficial                   b. Source of Funds and Purpose and                    and anticipated activity and other
                                       owners is to ensure that covered                          Expected Use of Account                               expected sources of funds. Likewise, a
                                       financial institutions are adequately and                    Section 103.178(b)(2) of the 2002                  deposit that comes from an unusual
                                       comprehensively addressing the risk                       Proposal required covered financial                   source, such as a charitable fund or
                                       involved in accepting and handling a                      institutions to take reasonable steps to              foreign government agency trust funds
                                       large dollar private banking account for                  ascertain the source of funds deposited               or aid grants, may also warrant further
                                       a non-U.S. person.                                        into the private banking account. The                 scrutiny. In addition to contacting the
                                          Some commenters suggested that we                      final rule retains this language, but adds            client, the financial institution may
                                       allow covered financial institutions to                   the requirement that covered financial                consider contacting the financial
                                       rely on the due diligence conducted by                    institutions take reasonable steps to                 institution that transmitted the funds
                                       well-regulated foreign intermediaries                     ascertain the purpose for which the                   and the organization that was the source
                                       (e.g., institutions regulated by                          private banking account is being                      of the funds.
                                       jurisdictions that are members of the                     established, as well as the anticipated
                                       Financial Action Task Force) that open                                                                          c. Senior Foreign Political Figures
                                                                                                 account activity. As discussed below,
                                       private banking accounts on behalf of                     we believe that the additional                           Section 103.178(b)(3) of the 2002
                                       their clients. We have determined that                    obligations of ascertaining the purpose               Proposal required covered financial
                                       covered financial institutions may not                    and expected account activity are                     institutions to take reasonable steps to
                                       rely on foreign intermediaries to satisfy                 elements of the 2002 Proposal’s                       ascertain whether any nominal or
                                       their due diligence obligations under                     requirement to verify the source of                   beneficial account owner may be a
                                       this rule. Because of the unique                          funds in an account and to monitor for                senior foreign political figure.75 Many
                                       vulnerabilities for money laundering                      suspicious activity, and, more generally,             commenters argued that the definition
                                       that exist in the private banking context,                are fundamental elements of a sound                   of a senior foreign political figure was
                                       it is critical that covered financial                     due diligence program.74 Such                         vague and overly broad and that the
                                       institutions conduct their own due                        information, which we believe most                    2002 Proposal failed to provide
                                       diligence with respect to the beneficial                  covered financial institutions currently              sufficient guidance on implementing the
                                       owners of private banking accounts.72 In                  obtain in the normal course of business               definition. Commenters particularly
                                       the event that an intermediary                            when opening a private banking                        found the requirement to ascertain a
                                       maintains a single private banking                        account, establishes a baseline for                   client’s close association with senior
                                       account on behalf of two or more foreign                  account activity that will enable a                   foreign political figures burdensome,
                                       individuals, due diligence would be                       covered financial institution to better               and questioned whether the phrase
                                       required with regard to all individuals                   detect suspicious activity and to assess              ‘‘widely and publicly known’’ would
                                       that meet the definition of beneficial                    situations where additional verification              require financial institutions to review
                                       owner.73                                                  regarding the source of funds may be                  vast amounts of public information. One
                                          In addition, we note that due                          necessary.                                            commenter suggested waiving altogether
                                       diligence is an ongoing obligation.                          Commenters sought explanation of                   the enhanced due diligence
                                       Covered financial institutions will be in                 the due diligence requirement to                      requirements for senior foreign political
                                       the best position to monitor accounts for                                                                       figures from Financial Action Task
                                                                                                 ascertain the source of funds deposited
                                       suspicious transactions and possible                                                                            Force member countries, while allowing
                                                                                                 into the private banking account, and
                                       money laundering if they are involved                                                                           covered financial institutions to rely on
                                                                                                 specifically questioned the extent to
                                       in obtaining information about their                                                                            a certification from citizens of non-
                                                                                                 which verification was required. We do
                                       clients directly. Further, the very nature                                                                      Financial Action Task Force member
                                                                                                 not expect covered financial
                                         71 See, e.g., Wolfsberg Group, ‘‘FAQs on
                                                                                                 institutions, in the ordinary course, to              countries regarding whether they are
                                       Beneficial Ownership,’’ supra note 42, at 3.              verify the source of every deposit placed             senior foreign political figures unless
                                         72 Senator Levin specifically discussed accounts        into every private banking account.                   information to the contrary is received.
                                       opened in the name of investment advisers, shell          However, they should monitor deposits                    We recognize that the term senior
                                       corporations, or trusts on behalf of other persons,       and transactions as necessary to ensure               foreign political figure is broadly
                                       noting that ‘‘[they] are exactly the types of accounts                                                          defined in the Act to include immediate
                                       that terrorists and criminals use to hide their           that the activity is consistent with
                                       identities and infiltrate U.S. financial institutions.    information the institution has received              family members and close associates,
                                       And thus they are exactly the accounts for which          about the client’s source of funds and                and that reasonable efforts to ascertain
                                       U.S. financial institutions need to verify and                                                                  an individual’s status within this
                                       evaluate the real beneficial owners.’’ 147 Cong.          with the stated purpose and expected
                                       Rec., supra note 16, at 11036. See also Federal           use of the account, as needed to guard                category will require robust due
                                       Reserve Guidance, supra note 61, n. 2.                    against money laundering, and to report               diligence procedures that need to go
                                         73 We understand that some financial institutions
                                                                                                 any suspicious activity. Such                         beyond reliance on a certification. We
                                       do not permit intermediaries to open pooled                                                                     believe that the due diligence that
                                       accounts for unrelated persons within the private
                                                                                                 monitoring will facilitate the
                                       banking units; instead, they treat the account as an
                                                                                                                                                       covered financial institutions currently
                                       institutional account. If a covered financial                74 See Basel Committee on Banking Supervision,     conduct with respect to private banking
                                       institution chooses to allow intermediaries to open       supra note 64 at 6: ‘‘The bank should always ask      clients usually incorporates (or can
                                       these types of accounts within the private banking        itself why the customer has chosen to open an         readily incorporate) reasonable steps to
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                                       unit (and if they fall within the definition of private   account in a foreign jurisdiction.’’ See also,
                                       banking account in the final rule), it may want to        Wolfsberg AML Principles on Private Banking,          ascertain a client’s status as a senior
                                       require the intermediary to establish separate            supra note 65, at 2, which identifies the ‘‘purpose
                                       accounts in the name of each beneficial owner to          and reasons for opening the account’’ and               75 The final rule adopts this provision without

                                       ease the logistical burdens involved in conducting        ‘‘anticipated account activity’’ among the elements   change, other than substituting ‘‘is’’ for ‘‘may be’’
                                       due diligence.                                            of an effective due diligence program.                for clarity.

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                                       foreign political figure.76 We also                         diligence procedures to identify senior                     political figure. One of the first steps is
                                       believe that institutions that provide                      foreign political figures. As we believe                    to seek confirmation from the
                                       private banking services as defined in                      most covered financial institutions                         individual. If the individual denies
                                       this rule, particularly to foreign                          already do, the procedures should                           holding or having held a political
                                       individuals, currently obtain                               require obtaining information regarding                     position or being closely associated with
                                       considerable information about their                        employment and other sources of                             or in the immediate family of someone
                                       clients. For example, in conducting                         income. First, the institution should                       who has held or currently holds a
                                       related due diligence on a client’s                         seek information directly from the                          political position, it still may be
                                       financial and professional background, a                    individual regarding possible senior                        necessary to take further reasonable
                                       financial institution typically will                        foreign political figure status. Second,                    steps. These additional steps may
                                       review the sources of income of a client,                   the institution should check references,                    include, for example, making more
                                       which may entail reviewing past 77 and                      as appropriate, to determine whether                        pointed inquiries of other references,
                                       present employment history and                              the individual holds or has previously                      obtaining additional information from
                                       references from professional associates.                    held a senior political position or may                     branches of the covered financial
                                       This information should generally                           be a close associate of a senior foreign                    institution that may be operating in the
                                       uncover the client’s status as a current                    political figure. Third, the institution                    home country of the client, and making
                                       or former senior official.                                  should also make reasonable efforts to                      reasonable efforts to consult publicly
                                          We understand that ascertaining a                        review public sources of information in                     available sources of information, as
                                       client’s close association with a senior                    meeting this obligation.                                    described above. If, after reasonable
                                       foreign political figure will be more                          Many commenters sought clarification                     diligence, the covered financial
                                       difficult than identifying whether the                      as to the 2002 Proposal’s reference to                      institution does not learn of any
                                       client holds a senior political position.                   publicly available sources of                               information indicating that a nominal or
                                       However, in our view, the term ‘‘widely                     information, and as to what would                           beneficial owner may be a senior foreign
                                       and publicly known’’ serves as a                            constitute reasonable steps to review                       political figure, it may conclude that the
                                       reasonable limitation on a covered                          such information. The range of publicly                     individual is not a senior foreign
                                       financial institution’s obligation to                       available sources that should be                            political figure.80
                                       identify close associates who would be                      consulted will vary depending upon the                         The Act and this final rule require
                                       readily apparent from a review of                           circumstances of the particular case. In                    that covered financial institutions
                                       publicly available information, as                          virtually all cases, covered financial                      establish controls and procedures that
                                       discussed below. Certainly, if a covered                    institutions will have an obligation to                     include reasonable steps to ascertain the
                                       financial institution has actual                            check the name of the prospective                           status of an individual as a senior
                                       knowledge of such a close associate, the                    private banking client against databases                    foreign political figure and to conduct
                                       individual also falls within the                            of public information that are                              enhanced scrutiny of accounts held by
                                       definition. Covered financial                               reasonably accessible and available.                        these individuals. We recognize that
                                       institutions, in fact, may become aware                     These include U.S. Government                               covered financial institutions applying
                                       of a client’s close association with a                      databases, major news publications and                      reasonable due diligence procedures in
                                       senior official simply in the course of                     commercial databases available on the                       accordance with this rule may not be
                                       gathering financial and professional                        Internet, and fee-based databases, as                       able to identify in every case
                                       information about a client.78 However,                      appropriate. The country of residence of                    individuals who qualify as senior
                                       we do not expect a covered financial                        the private banking client is also                          foreign political figures, and, in
                                       institution to undertake an unreasonable                    relevant. We do not expect that, as a                       particular, their close associates (nor
                                       amount of due diligence or to be aware                      general procedure, a covered financial                      does the rule require that they detect
                                       of unknown associations that could not                      institution will need to review the local                   this fact in every case), and thus may
                                       be expected to have been uncovered                          language newspapers in every country                        not apply enhanced scrutiny to all such
                                       through the exercise of due diligence                       in which its private banking clients                        accounts. Rather, the rule requires a
                                       ordinarily undertaken when opening or                       reside, although reviewing such                             program that ensures that the institution
                                       monitoring a private banking account as                     newspapers could be prudent in an                           take reasonable steps to ascertain
                                                                                                   unusual situation, such as when the                         whether a private banking account
                                       defined by this rule.
                                          Covered financial institutions, thus,                    financial institution is not familiar with                  client is a senior foreign political figure.
                                       should be guided by the following basic                     the country that the private client is
                                                                                                                                                                  80 Section 103.178(c)(1) of the 2002 Proposal
                                       procedures when drafting their due                          from and the country is not generally
                                                                                                                                                               stated that, in performing the required due
                                                                                                   covered in the press. Finally, we note                      diligence,
                                          76 The Department of the Treasury, the Federal           that there are existing and developing                         ‘‘(i) If a covered financial institution learns of
                                       banking regulators, and the Department of State             databases of foreign political figures that                 information indicating that a particular individual
                                       jointly issued ‘‘Guidance on Enhanced Scrutiny for          may assist covered financial institutions                   may be a senior foreign political figure, it should
                                       Transactions That May Involve the Proceeds of                                                                           exercise reasonable diligence in seeking to
                                       Foreign Official Corruption’’ in January 2001,              with this inquiry.79                                        determine whether the individual is, in fact, a
                                       available at              In the event that the covered financial                  senior foreign political figure.
                                       ls1123.htm.                                                 institution learns (either during the                          (ii) If a covered financial institution does not
                                          77 Past employment history may be relevant in                                                                        learn of any information indicating that an
                                                                                                   initial establishment of the account or
                                       determining source of income to the extent a client                                                                     individual may be a former senior foreign political
                                       is receiving a pension or some other income.
                                                                                                   thereafter) of information indicating that                  figure, and the individual states that he or she is
                                          78 For example, when conducting due diligence            a client may be a senior foreign political                  not a former senior foreign political figure, the
                                       on a client and his or her lines of business, a             figure as defined in the rule, it should                    financial institution may rely on such statement in
                                       covered financial institution may uncover the fact          exercise additional, reasonable diligence                   determining whether the account is subject to the
                                       that a client is a business partner of a senior official.                                                               due diligence requirements of paragraph (c)(2) of
                                                                                                   in seeking to confirm whether the
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                                       This would likely qualify the individual as a close                                                                     this section.’’ 2002 Proposal, supra note 2, at 37744.
                                       associate. Likewise, foreign clients may be referred        individual is, in fact, a senior foreign                       Because the substance of this subparagraph is in
                                       to a covered financial institution by an existing                                                                       effect subsumed within a covered financial
                                       client. If the existing client is a senior foreign             79 For example, a list of high level foreign officials   institution’s obligations under section
                                       political figure, that may be an indication that the        is available at:                   103.178(b)(2), it has been eliminated from the text
                                       prospective client is a close associate.                    publications/chiefs/index.html.                             of the final rule.

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                                       Moreover, if the institution’s program is                 accounts held by senior foreign political                 detect and report transactions that may
                                       reasonably designed to make this                          figures that included policies and                        involve the proceeds of foreign
                                       determination, and the institution                        procedures reasonably designed to                         corruption.’’
                                       administers the program effectively,                      detect transactions that may involve the                     As with the minimum due diligence
                                       then the institution should generally be                  proceeds of foreign corruption. As noted                  program prescribed under section
                                       able to detect, report, and take                          in the preamble to the 2002 Proposal,                     103.178(b), we expect that covered
                                       appropriate action where suspected                        covered financial institutions should                     financial institutions will apply a risk-
                                       money laundering is occurring with                        involve senior management when                            based enhanced scrutiny program.
                                       respect to these accounts, even in cases                  deciding to accept a senior foreign                       Reasonable steps to perform enhanced
                                       where the financial institution has not                   political figure as a private banking                     scrutiny may include the following:
                                       been able to identify the account holder                  client and should ensure that                             consulting publicly available
                                       as a senior foreign political figure                      information regarding the account is                      information regarding the home
                                       warranting enhanced scrutiny.                             available for review not only by the                      jurisdiction of the client; 83 contacting,
                                                                                                 liaison but also by senior management.                    where applicable, branches of the U.S.
                                       d. Reporting Known or Suspected                              Such internal controls are particularly                financial institution operating in the
                                       Money Laundering                                          important in the private banking context                  home jurisdiction of the client to obtain
                                          Section 103.178(b)(4) of the 2002                      because of the potentially close                          additional information about the client
                                       Proposal required that the due diligence                  relationships managers may develop                        and the political environment; and
                                       program of covered financial                              with private banking customers. In fact,                  conducting greater scrutiny of the
                                       institutions ensure that the institution                  money laundering has been shown to                        client’s employment history and sources
                                       take reasonable steps to report, in                       occur through private banking accounts                    of income. For example, wire transfers
                                       accordance with applicable law and                        established for senior foreign political                  from a government account to the
                                       regulation, any known or suspected                        figures when financial institutions have                  personal account of a government
                                       violation of law conducted through or                     failed to apply internal controls,                        official with signature authority over the
                                       involving a private banking account                       allowing liaisons to apply insufficient,                  government account should raise an
                                       with a non-U.S. citizen. For example, if                  non-impartial scrutiny to the activities                  institution’s suspicions of possible
                                       a covered financial institution detects                   of their private banking clients.82                       political corruption.84 If a covered
                                       activity that is unusual for the account                     We received two comments on this                       financial institution’s review of major
                                       and client, and cannot obtain a                           section. One commenter sought specific                    news sources indicates that a client may
                                       satisfactory response from the client                     guidance as to how covered financial                      be or is involved in political corruption,
                                       and/or other sources, it may ‘‘know,                      institutions can detect the proceeds of                   the institution should review that
                                       suspect, or have reason to suspect’’ that                 foreign corruption, while a                               client’s account for unusual activity.
                                       money laundering or activity with ‘‘no                    congressional commenter asked us to                          In addition, when the client is a
                                       apparent lawful purpose’’ is occurring,                   specify in the rule that covered financial                former senior foreign political figure, a
                                       prompting the filing of a suspicious                      institutions are required to conduct                      risk-based program should involve
                                       activity report.81 Other appropriate                      enhanced scrutiny of accounts held by                     weighing such factors as the length of
                                       action may include suspending account                     senior foreign political figures in                       time the client has been out of office,
                                       activity or closing the account.                          accordance with the statutory                             the size of the account, and any
                                          In accord with the modification and                    provisions of 31 U.S.C. 5318(i). In                       information obtained from public
                                       clarification discussed above pertaining                  response to the latter comment, we have                   sources, as well as other information
                                       to source of funds in connection with                     amended the text of this provision                        obtained through the due diligence
                                       section 103.178(b)(2), we have similarly                  (redesignated as section 103.178(c)(1) of                 process. Thus, if a former official has
                                       clarified section 103.178(d).                             this final rule) to specifically require                  been out of office for a substantial
                                       Specifically, we have incorporated the                    enhanced scrutiny, as follows ‘‘In the                    length of time, and a review of major
                                       fact that, in order to adequately review                  case of a private banking account for                     news publications provides no
                                       for possible money laundering and                         which a senior foreign political figure is                indication of political corruption or
                                       suspicious activity, a covered financial                  a nominal or beneficial owner, the due                    continued involvement in politics, then
                                       institution must take reasonable steps to                 diligence program required by                             less scrutiny would be reasonable.
                                       ensure that the information it obtains                    paragraph (a) of this section shall                          Section 103.178(c)(3) of the 2002
                                       about the source of funds, as well as                     include enhanced scrutiny of such                         Proposal set forth the definition of
                                       about the stated purpose and the                          account that is reasonably designed to                    ‘‘proceeds of foreign corruption.’’ No
                                       expected use of the account, is                                                                                     comments were submitted regarding
                                       consistent with the actual activity in the                   82 We recently imposed a civil penalty against a       this proposed definition, and it
                                       account. This paragraph otherwise                         bank for, among other things, its failure to              (redesignated as section 103.178(c)(2)) is
                                                                                                 implement internal controls in its private banking
                                       remains unchanged in the final rule,                      department. Lax supervision by the bank enabled
                                                                                                                                                           unchanged in the final rule.
                                       except that the phrase ‘‘money                            the relationship manager to engage in suspicious             4. Special procedures. Section
                                       laundering or suspicious activity’’                       transactions involving a private banking account          103.178(d) of the 2002 Proposal
                                       replaces the phrase ‘‘violation of law’’                  held by a senior foreign political figure. See Matter     contained special procedures to be
                                                                                                 of Riggs Bank, N.A., No. 2004–01 (May 13, 2004),          included in the covered financial
                                       for consistency with section 103.178(a)                   available at
                                       and with 31 U.S.C. 5318(i).                               riggsassessment3.pdf. In another publicized case, a       institution’s due diligence program for
                                          3. Enhanced scrutiny. Section                          liaison pled guilty to helping to launder over $11        private banking accounts, addressing
                                       103.178(c) of the 2002 Proposal                           million in narcotics proceeds through private             situations where appropriate due
                                                                                                 banking accounts she managed for an influential
                                       established certain special requirements                  Mexican governor. The liaison admitted to helping
                                                                                                                                                           diligence cannot be performed,
                                       with respect to senior foreign political                  to disguise the identity of her client and the source
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                                                                                                                                                             83 For example, AAA FLASH, a weekly electronic
                                       figures. Section 103.178(c)(2) generally                  of these funds by establishing accounts in the
                                                                                                 names of fictitious nominee account holders. She          newsletter sponsored by United States Agency for
                                       required covered financial institutions                                                                             International Development, details corruption
                                                                                                 also admitted to intentionally avoiding asking
                                       to establish due diligence programs for                   questions of her client or informing her superiors        around the world and can be accessed at http://
                                                                                                 regarding these activities. U.S. v. Madrid, et al., No.
                                         81 See   31 CFR 103.17 to 103.19.                       02 CR 0414 (S.D.N.Y. August 25, 2005).                      84 See Matter of Riggs Bank, supra n. 82.

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                                       512               Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations

                                       including when the institution should                   exemption replaces without substantive                 § 103.175   Definitions.
                                       refuse to open the account, suspend                     change the provisions of the Interim                      Except as otherwise provided, the
                                       transaction activity, file a suspicious                 Rule found at 31 CFR 103.183.                          following definitions apply for purposes
                                       activity report, or close the account. No                  In light of the special implementation              of §§ 103.176 through 103.185:
                                       comments were submitted regarding                       provisions contained in the text of the                   (a) Attorney General means the
                                       this provision, which is unchanged in                   final rule, the Interim Rule, codified at              Attorney General of the United States.
                                       this final rule.                                        31 CFR 103.181 through 31 CFR 103.183                     (b) Beneficial owner of an account
                                          5. Effective dates. Although the 2002                will no longer be effective on February                means an individual who has a level of
                                       Proposal did not address the issue of an                3, 2006.                                               control over, or entitlement to, the funds
                                       effective date, as with correspondent                                                                          or assets in the account that, as a
                                       accounts, many commenters noted the                     IV. Regulatory Flexibility Act                         practical matter, enables the individual,
                                       difficulty of complying with the                                                                               directly or indirectly, to control, manage
                                       requirements of 31 U.S.C. 5318(i)                          Pursuant to the Regulatory Flexibility              or direct the account. The ability to fund
                                       pertaining to private banking accounts,                 Act (5 U.S.C. 610 et seq.), it is hereby               the account or the entitlement to the
                                       especially with regard to their                         certified that this final rule will not                funds of the account alone, however,
                                       application to previously existing                      have a significant economic impact on                  without any corresponding authority to
                                       accounts, and urged us to allow a                       a substantial number of small entities.                control, manage or direct the account
                                       sufficient transition period. We are                    The final rule provides guidance to                    (such as in the case of a minor child
                                       mindful of the burden that will result                  financial institutions concerning the                  beneficiary), does not cause the
                                       from the statutory requirement that the                 mandated due diligence and enhanced                    individual to be a beneficial owner.
                                       provision applies to all private banking                due diligence requirements in section                     (c) Certification and recertification
                                       accounts, regardless of when they were                  312 of the Act. Moreover, most of the                  mean the certification and
                                       opened. The final rule contains a new                   financial institutions covered by the                  recertification forms described in
                                       section 103.176(e) that provides for the                rule tend to be larger institutions.                   appendices A and B, respectively, to
                                       effective dates of the obligations under                Accordingly, a regulatory flexibility                  this subpart.
                                       this section: effective 90 days after the               analysis is not required.                                 (d) Correspondent account. (1) The
                                       date of publication of the final rule, the              V. Executive Order 12866                               term correspondent account means:
                                       requirements of the final rule will apply                                                                         (i) For purposes of § 103.176(a), (d)
                                       to private banking accounts opened on                     This final rule is not a ‘‘significant               and (e), an account established for a
                                       or after that date; and, effective 270 days             regulatory action’’ as defined in                      foreign financial institution to receive
                                       after the date of publication of the final              Executive Order 12866, and, as such, a                 deposits from, or to make payments or
                                       rule, the rule’s requirements will apply                regulatory assessment is not required.                 other disbursements on behalf of, the
                                       to all private banking accounts opened                                                                         foreign financial institution, or to
                                                                                               List of Subjects in 31 CFR Part 103
                                       prior to the date that is 90 days after the                                                                    handle other financial transactions
                                       date of publication of the final rule.                    Banks and banking, Brokers, Counter                  related to such foreign financial
                                          For all of the reasons explained above               money laundering, Counter-terrorism,                   institution; and
                                       in section III.B.4., the final rule contains            Currency, Foreign banking, Reporting                      (ii) For purposes of §§ 103.176(b) and
                                       additional applicability rules to ensure                and recordkeeping requirements.                        (c), 103.177 and 103.185, an account
                                       consistency with the requirements of                                                                           established for a foreign bank to receive
                                       the Interim Rule until the effective dates              Authority and Issuance                                 deposits from, or to make payments or
                                       of the final rule are triggered.                                                                               other disbursements on behalf of, the
                                          Paragraph 103.178(e)(2) contains                     I For the reasons set forth in the                     foreign bank, or to handle other
                                       special applicability dates requiring                   preamble, 31 CFR part 103 is amended                   financial transactions related to such
                                       banks, broker-dealers, futures                          as follows:                                            foreign bank.
                                       commission merchants, and introducing                                                                             (2) For purposes of this definition, the
                                                                                               PART 103—FINANCIAL
                                       brokers to continue to apply the                                                                               term account:
                                                                                               RECORDKEEPING AND REPORTING
                                       requirements of 31 U.S.C. 5318(i)(3) to                                                                           (i) As applied to banks (as set forth in
                                                                                               OF CURRENCY AND FOREIGN
                                       private banking accounts until the 90                                                                          paragraphs (f)(1)(i) through (vii) of this
                                       and 270-day implementation dates of                                                                            section):
                                       paragraph 103.178(e)(1) are triggered.                  I 1. The authority citation for part 103                  (A) Means any formal banking or
                                       This preserves the status quo created by                continues to read as follows:                          business relationship established by a
                                       the provisions of the Interim Rule found                                                                       bank to provide regular services,
                                       at 31 CFR 103.181 and 103.182 until the                   Authority: 12 U.S.C. 1829b and 1951–1959;            dealings, and other financial
                                       provisions of this final rule go into                   31 U.S.C. 5311–5314 and 5316–5332; title III,          transactions; and
                                                                                               secs. 311, 312, 313, 314, 319, 326, 352, Public
                                       effect.                                                                                                           (B) Includes a demand deposit,
                                                                                               Law 107–56, 115 Stat. 307.
                                          Paragraph 103.178(e)(3) continues to                                                                        savings deposit, or other transaction or
                                       exempt trust banks or trust companies                   I  2. Section 103.120 of Subpart I of part             asset account and a credit account or
                                       that have a federal regulator, and mutual               103 is amended as follows:                             other extension of credit;
                                       funds from the requirements of 31                       I a. Paragraph (b) is amended by adding                   (ii) As applied to brokers or dealers in
                                       U.S.C. 5318(i)(3) until the 90 and 270-                 ‘‘the requirements of §§ 103.176 and                   securities (as set forth in paragraph
                                       day implementation dates of paragraph                   103.178 and’’ immediately after the                    (f)(1)(viii) of this section) means any
                                       103.178(e)(1) are triggered.                            words ‘‘complies with’’.                               formal relationship established with a
                                          Finally, paragraph 103.178(e)(4)                                                                            broker or dealer in securities to provide
                                                                                               I b. Paragraph (c)(1) is amended by
                                       contains a general exemption from the                                                                          regular services to effect transactions in
                                                                                               adding ‘‘the requirements of §§ 103.176
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                                       due diligence requirements for private                                                                         securities, including, but not limited to,
                                                                                               and 103.178 and’’ immediately after the
                                       banking accounts contained in 31 U.S.C.                                                                        the purchase or sale of securities and
                                                                                               words ‘‘complies with’’.
                                       5318(i)(3) for all financial institutions                                                                      securities loaned and borrowed activity,
                                       which are not defined in the final rule                 I 3. Subpart I of part 103 is amended by               and to hold securities or other assets for
                                       as covered financial institutions. This                 revising § 103.175 to read as follows:                 safekeeping or as collateral;

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                             513

                                          (iii) As applied to futures commission               register, with the Securities and                      Code. For purposes of this paragraph (j),
                                       merchants and introducing brokers (as                   Exchange Commission pursuant to the                    the definition of person in § 103.11(z)
                                       set forth in paragraph (f)(1)(ix) of this               Investment Company Act.                                does not apply, notwithstanding
                                       section) means any formal relationship                     (2) For purposes of §§ 103.177 and                  paragraph (m) of this section.
                                       established by a futures commission                     103.185:                                                  (k) Offshore banking license means a
                                       merchant to provide regular services,                      (i) An insured bank (as defined in                  license to conduct banking activities
                                       including, but not limited to, those                    section 3(h) of the Federal Deposit                    that prohibits the licensed entity from
                                       established to effect transactions in                   Insurance Act (12 U.S.C. 1813(h)));                    conducting banking activities with the
                                       contracts of sale of a commodity for                       (ii) A commercial bank or trust                     citizens of, or in the local currency of,
                                       future delivery, options on any contract                company;                                               the jurisdiction that issued the license.
                                       of sale of a commodity for future                          (iii) A private banker;                                (l) Owner. (1) The term owner means
                                       delivery, or options on a commodity;                       (iv) An agency or branch of a foreign               any person who, directly or indirectly:
                                       and                                                     bank in the United States;                                (i) Owns, controls, or has the power
                                          (iv) As applied to mutual funds (as set                 (v) A credit union;                                 to vote 25 percent or more of any class
                                       forth in paragraph (f)(1)(x) of this                       (vi) A savings association;                         of voting securities or other voting
                                       section) means any contractual or other                    (vii) A corporation acting under                    interests of a foreign bank; or
                                       business relationship established                       section 25A of the Federal Reserve Act                    (ii) Controls in any manner the
                                       between a person and a mutual fund to                   (12 U.S.C. 611 et seq.); and                           election of a majority of the directors (or
                                       provide regular services to effect                         (viii) A broker or dealer in securities             individuals exercising similar functions)
                                       transactions in securities issued by the                registered, or required to be registered,              of a foreign bank.
                                                                                               with the Securities and Exchange                          (2) For purposes of this definition:
                                       mutual fund, including the purchase or                                                                            (i) Members of the same family shall
                                       sale of securities.                                     Commission under the Securities
                                                                                               Exchange Act of 1934 (15 U.S.C. 78a et                 be considered to be one person.
                                          (e) Correspondent relationship has the                                                                         (ii) The term same family means
                                       same meaning as correspondent account                   seq.), except persons who register
                                                                                               pursuant to section 15(b)(11) of the                   parents, spouses, children, siblings,
                                       for purposes of §§ 103.177 and 103.185.                                                                        uncles, aunts, grandparents,
                                          (f) Covered financial institution                    Securities Exchange Act of 1934.
                                                                                                  (g) Foreign bank. The term foreign                  grandchildren, first cousins,
                                       means: (1) For purposes of §§ 103.176                                                                          stepchildren, stepsiblings, parents-in-
                                       and 103.178:                                            bank has the meaning provided in
                                                                                               § 103.11(o).                                           law, and spouses of any of the foregoing.
                                          (i) An insured bank (as defined in                                                                             (iii) Each member of the same family
                                       section 3(h) of the Federal Deposit                        (h) Foreign financial institution. (1)
                                                                                               The term foreign financial institution                 who has an ownership interest in a
                                       Insurance Act (12 U.S.C. 1813(h)));                                                                            foreign bank must be identified if the
                                          (ii) A commercial bank;                              means:
                                                                                                  (i) A foreign bank;                                 family is an owner as a result of
                                          (iii) An agency or branch of a foreign
                                                                                                  (ii) Any branch or office located                   aggregating the ownership interests of
                                       bank in the United States;
                                                                                               outside the United States of any covered               the members of the family. In
                                          (iv) A federally insured credit union;
                                          (v) A savings association;                           financial institution described in                     determining the ownership interests of
                                          (vi) A corporation acting under                      paragraphs (f)(1)(viii) through (x) of this            the same family, any voting interest of
                                       section 25A of the Federal Reserve Act                  section;                                               any family member shall be taken into
                                       (12 U.S.C. 611 et seq.);                                   (iii) Any other person organized                    account.
                                          (vii) A trust bank or trust company                                                                            (iv) Voting securities or other voting
                                                                                               under foreign law (other than a branch
                                       that is federally regulated and is subject                                                                     interests means securities or other
                                                                                               or office of such person in the United
                                       to an anti-money laundering program                                                                            interests that entitle the holder to vote
                                                                                               States) that, if it were located in the
                                       requirement;                                                                                                   for or to select directors (or individuals
                                                                                               United States, would be a covered
                                          (viii) A broker or dealer in securities                                                                     exercising similar functions).
                                                                                               financial institution described in                        (m) Person has the meaning provided
                                       registered, or required to be registered,               paragraphs (f)(1)(viii) through (x) of this            in § 103.11(z).
                                       with the Securities and Exchange                        section; and                                              (n) Physical presence means a place of
                                       Commission under the Securities                            (iv) Any person organized under                     business that:
                                       Exchange Act of 1934 (15 U.S.C. 78a et                  foreign law (other than a branch or                       (1) Is maintained by a foreign bank;
                                       seq.), except persons who register                      office of such person in the United                       (2) Is located at a fixed address (other
                                       pursuant to section 15(b)(11) of the                    States) that is engaged in the business                than solely an electronic address or a
                                       Securities Exchange Act of 1934;                        of, and is readily identifiable as:                    post-office box) in a country in which
                                          (ix) A futures commission merchant                      (A) A currency dealer or exchanger; or              the foreign bank is authorized to
                                       or an introducing broker registered, or                    (B) A money transmitter.                            conduct banking activities, at which
                                       required to be registered, with the                        (2) For purposes of paragraph                       location the foreign bank:
                                       Commodity Futures Trading                               (h)(1)(iv) of this section, a person is not               (i) Employs one or more individuals
                                       Commission under the Commodity                          ‘‘engaged in the business’’ of a currency              on a full-time basis; and
                                       Exchange Act (7 U.S.C. 1 et seq.), except               dealer, a currency exchanger or a money                   (ii) Maintains operating records
                                       persons who register pursuant to section                transmitter if such transactions are                   related to its banking activities; and
                                       4(f)(a)(2) of the Commodity Exchange                    merely incidental to the person’s                         (3) Is subject to inspection by the
                                       Act; and                                                business.                                              banking authority that licensed the
                                          (x) A mutual fund, which means an                       (i) Foreign shell bank means a foreign              foreign bank to conduct banking
                                       investment company (as defined in                       bank without a physical presence in any                activities.
                                       section 3(a)(1) of the Investment                       country.                                                  (o) Private banking account means an
                                       Company Act of 1940 (‘‘Investment                          (j) Non-United States person or non-                account (or any combination of
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                                       Company Act’’) (15 U.S.C. 80a–3(a)(1)))                 U.S. person means a natural person who                 accounts) maintained at a covered
                                       that is an open-end company (as defined                 is neither a United States citizen nor is              financial institution that:
                                       in section 5(a)(1) of the Investment                    accorded the privilege of residing                        (1) Requires a minimum aggregate
                                       Company Act (15 U.S.C. 80a–5(a)(1)))                    permanently in the United States                       deposit of funds or other assets of not
                                       and that is registered, or is required to               pursuant to title 8 of the United States               less than $1,000,000;

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                                       514               Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations

                                          (2) Is established on behalf of or for                  (ii) Immediate family member means                  account reasonably designed to detect
                                       the benefit of one or more non-U.S.                     spouses, parents, siblings, children and               and report known or suspected money
                                       persons who are direct or beneficial                    a spouse’s parents and siblings.                       laundering activity, including a periodic
                                       owners of the account; and                                 (s) Territories and Insular Possessions             review of the correspondent account
                                          (3) Is assigned to, or is administered               has the meaning provided in                            activity sufficient to determine
                                       or managed by, in whole or in part, an                  § 103.11(tt).                                          consistency with information obtained
                                       officer, employee, or agent of a covered                   (t) United States has the meaning                   about the type, purpose, and anticipated
                                       financial institution acting as a liaison               provided in § 103.11(nn).                              activity of the account.
                                       between the covered financial                           I 4. Subpart I of part 103 is amended by                  (b) Enhanced due diligence for certain
                                       institution and the direct or beneficial                adding § 103.176 to read as follows:                   foreign banks. [Reserved]
                                       owner of the account.                                                                                             (c) Foreign banks to be accorded
                                          (p) Regulated affiliate. (1) The term                § 103.176 Due diligence programs for                   enhanced due diligence. [Reserved]
                                                                                               correspondent accounts for foreign                        (d) Special procedures when due
                                       regulated affiliate means a foreign shell               financial institutions.
                                       bank that:                                                                                                     diligence cannot be performed. The due
                                          (i) Is an affiliate of a depository                     (a) In general. A covered financial                 diligence program required by
                                       institution, credit union, or foreign bank              institution shall establish a due                      paragraph (a) of this section shall
                                       that maintains a physical presence in                   diligence program that includes                        include procedures to be followed in
                                       the United States or a foreign country,                 appropriate, specific, risk-based, and,                circumstances in which a covered
                                       as applicable; and                                      where necessary, enhanced policies,                    financial institution cannot perform
                                          (ii) Is subject to supervision by a                  procedures, and controls that are                      appropriate due diligence with respect
                                       banking authority in the country                        reasonably designed to enable the                      to a correspondent account, including
                                       regulating such affiliated depository                   covered financial institution to detect                when the covered financial institution
                                       institution, credit union, or foreign                   and report, on an ongoing basis, any                   should refuse to open the account,
                                       bank.                                                   known or suspected money laundering                    suspend transaction activity, file a
                                          (2) For purposes of this definition:                 activity conducted through or involving                suspicious activity report, or close the
                                                                                               any correspondent account established,                 account.
                                          (i) Affiliate means a foreign bank that
                                                                                               maintained, administered, or managed                      (e) Applicability rules. The provisions
                                       is controlled by, or is under common
                                                                                               by such covered financial institution in               of this section apply to covered
                                       control with, a depository institution,
                                                                                               the United States for a foreign financial              financial institutions as follows:
                                       credit union, or foreign bank.                                                                                    (1) General rules—(i) Correspondent
                                                                                               institution. The due diligence program
                                          (ii) Control means:                                                                                         accounts established on or after April 4,
                                                                                               required by this section shall be a part
                                          (A) Ownership, control, or power to                                                                         2006. Effective April 4, 2006, the
                                                                                               of the anti-money laundering program
                                       vote 50 percent or more of any class of                                                                        requirements of this section shall apply
                                                                                               otherwise required by this subpart. Such
                                       voting securities or other voting                                                                              to each correspondent account
                                                                                               policies, procedures, and controls shall
                                       interests of another company; or                                                                               established on or after such date.
                                          (B) Control in any manner the election                                                                         (ii) Correspondent accounts
                                                                                                  (1) Determining whether any such
                                       of a majority of the directors (or                                                                             established before April 4, 2006.
                                                                                               correspondent account is subject to
                                       individuals exercising similar functions)                                                                      Effective October 2, 2006, the
                                                                                               paragraph (b) of this section;
                                       of another company.                                        (2) Assessing the money laundering                  requirements of this section shall apply
                                          (q) Secretary means the Secretary of                 risk presented by such correspondent                   to each correspondent account
                                       the Treasury.                                           account, based on a consideration of all               established before April 4, 2006.
                                          (r) Senior foreign political figure. (1)             relevant factors, which shall include, as                 (2) Special rules for certain banks.
                                       The term senior foreign political figure                appropriate:                                           The enhanced due diligence
                                       means:                                                     (i) The nature of the foreign financial             requirements of 31 U.S.C. 5318(i)(2)
                                          (i) A current or former:                             institution’s business and the markets it              shall continue to apply to any covered
                                          (A) Senior official in the executive,                serves;                                                financial institution listed in
                                       legislative, administrative, military, or                  (ii) The type, purpose, and anticipated             § 103.175(f)(1)(i) through (vi). In
                                       judicial branches of a foreign                          activity of such correspondent account;                addition, until the requirements of this
                                       government (whether elected or not);                       (iii) The nature and duration of the                section become applicable as set forth in
                                          (B) Senior official of a major foreign               covered financial institution’s                        paragraph (e)(1) of this section, the due
                                       political party; or                                     relationship with the foreign financial                diligence requirements of 31 U.S.C.
                                          (C) Senior executive of a foreign                    institution (and any of its affiliates);               5318(i)(1) shall continue to apply to any
                                       government-owned commercial                                (iv) The anti-money laundering and                  covered financial institution listed in
                                       enterprise;                                             supervisory regime of the jurisdiction                 § 103.175(f)(1)(i) through (vi).
                                          (ii) A corporation, business, or other               that issued the charter or license to the                 (3) Special rules for all other covered
                                       entity that has been formed by, or for                  foreign financial institution, and, to the             financial institutions. The due diligence
                                       the benefit of, any such individual;                    extent that information regarding such                 requirements of 31 U.S.C. 5318(i)(1)
                                          (iii) An immediate family member of                  jurisdiction is reasonably available, of               shall not apply to a covered financial
                                       any such individual; and                                the jurisdiction in which any company                  institution listed in § 103.175(f)(1)(vii)
                                          (iv) A person who is widely and                      that is an owner of the foreign financial              through (x) until the requirements of
                                       publicly known (or is actually known by                 institution is incorporated or chartered;              this section become applicable as set
                                       the relevant covered financial                          and                                                    forth in paragraph (e)(1) of this section.
                                       institution) to be a close associate of                    (v) Information known or reasonably                 The enhanced due diligence
                                       such individual.                                        available to the covered financial                     requirements of 31 U.S.C. 5318(i)(2)
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                                          (2) For purposes of this definition:                 institution about the foreign financial                shall not apply to any covered financial
                                          (i) Senior official or executive means               institution’s anti-money laundering                    institution listed in § 103.175(f)(1)(vii)
                                       an individual with substantial authority                record; and                                            through (x) until otherwise provided by
                                       over policy, operations, or the use of                     (3) Applying risk-based procedures                  the Financial Crimes Enforcement
                                       government-owned resources; and                         and controls to each such correspondent                Network in a final rule published in the

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                                                         Federal Register / Vol. 71, No. 2 / Wednesday, January 4, 2006 / Rules and Regulations                                                515

                                       Federal Register with respect to these                     (4) Review the activity of the account              requirements of this section shall apply
                                       requirements.                                           to ensure that it is consistent with the               to each private banking account
                                          (4) Exemptions—(i) Exempt financial                  information obtained about the client’s                established on or after such date.
                                       institutions. Except as provided in this                source of funds, and with the stated                      (ii) Private banking accounts
                                       section, a financial institution defined                purpose and expected use of the                        established before April 4, 2006.
                                       in 31 U.S.C. 5312(a)(2) or (c)(1), or                   account, as needed to guard against                    Effective October 2, 2006, the
                                       § 103.11(n) is exempt from the due                      money laundering, and to report, in                    requirements of this section shall apply
                                       diligence and enhanced due diligence                    accordance with applicable law and                     to each private banking account
                                       requirements of 31 U.S.C. 5318(i)(1) and                regulation, any known or suspected                     established before April 4, 2006.
                                       (2) pertaining to correspondent                         money laundering or suspicious activity
                                       accounts.                                               conducted to, from, or through a private                  (2) Special rules for certain banks and
                                          (ii) Other compliance obligations of                 banking account.                                       for brokers or dealers in securities,
                                       financial institutions unaffected.                         (c) Special requirements for senior                 futures commission merchants, and
                                       Nothing in paragraph (e)(4) of this                     foreign political figures. (1) In the case             introducing brokers. Until the
                                       section shall be construed to relieve a                 of a private banking account for which                 requirements of this section become
                                       financial institution from its                          a senior foreign political figure is a                 applicable as set forth in paragraph
                                       responsibility to comply with any other                 nominal or beneficial owner, the due                   (e)(1) of this section, the requirements of
                                       applicable requirement of law or                        diligence program required by                          31 U.S.C. 5318(i)(3) shall continue to
                                       regulation, including title 31, United                  paragraph (a) of this section shall                    apply to a covered financial institution
                                       States Code, and this part.                             include enhanced scrutiny of such                      listed in § 103.175(f)(1)(i) through (vi),
                                       I 5. Subpart I of part 103 is amended by                account that is reasonably designed to                 (viii), or (ix).
                                       adding § 103.178 to read as follows:                    detect and report transactions that may                   (3) Special rules for federally
                                       § 103.178 Due diligence programs for                    involve the proceeds of foreign                        regulated trust banks or trust
                                       private banking accounts.                               corruption.                                            companies, and mutual funds. Until the
                                          (a) In general. A covered financial                     (2) For purposes of this paragraph (c),             requirements of this section become
                                       institution shall maintain a due                        the term proceeds of foreign corruption                applicable as set forth in paragraph
                                       diligence program that includes                         means any asset or property that is                    (e)(1) of this section, the requirements of
                                       policies, procedures, and controls that                 acquired by, through, or on behalf of a                31 U.S.C. 5318(i)(3) shall not apply to a
                                       are reasonably designed to detect and                   senior foreign political figure through                covered financial institution listed in
                                       report any known or suspected money                     misappropriation, theft, or                            § 103.175(f)(1)(vii), or (x).
                                       laundering or suspicious activity                       embezzlement of public funds, the                         (4) Exemptions—(i) Exempt financial
                                       conducted through or involving any                      unlawful conversion of property of a                   institutions. Except as provided in this
                                       private banking account that is                         foreign government, or through acts of                 section, a financial institution defined
                                       established, maintained, administered,                  bribery or extortion, and shall include                in 31 U.S.C. 5312(a)(2) or (c)(1) or
                                       or managed in the United States by such                 any other property into which any such                 § 103.11(n) is exempt from the
                                       financial institution. The due diligence                assets have been transformed or                        requirements of 31 U.S.C. 5318(i)(3)
                                       program required by this section shall                  converted.                                             pertaining to private banking accounts.
                                       be a part of the anti-money laundering                     (d) Special procedures when due
                                                                                               diligence cannot be performed. The due                    (ii) Other compliance obligations of
                                       program otherwise required by this                                                                             financial institutions unaffected.
                                       subpart.                                                diligence program required by
                                                                                               paragraph (a) of this section shall                    Nothing in paragraph (e)(4) of this
                                          (b) Minimum requirements. The due
                                                                                               include procedures to be followed in                   section shall be construed to relieve a
                                       diligence program required by
                                                                                               circumstances in which a covered                       financial institution from its
                                       paragraph (a) of this section shall be
                                                                                               financial institution cannot perform                   responsibility to comply with any other
                                       designed to ensure, at a minimum, that
                                                                                               appropriate due diligence with respect                 applicable requirement of law or
                                       the financial institution takes reasonable
                                                                                               to a private banking account, including                regulation, including title 31, United
                                       steps to:
                                          (1) Ascertain the identity of all                    when the covered financial institution                 States Code, and this part.
                                       nominal and beneficial owners of a                      should refuse to open the account,                     I 6. Subpart I of part 103 is amended by
                                       private banking account;                                suspend transaction activity, file a                   removing §§ 103.181, 103.182, and
                                          (2) Ascertain whether any person                     suspicious activity report, or close the               103.183.
                                       identified under paragraph (b)(1) of this               account.
                                                                                                                                                        Dated: December 15, 2005.
                                       section is a senior foreign political                      (e) Applicability rules. The provisions
                                       figure;                                                 of this section apply to covered                       William J. Fox,
                                          (3) Ascertain the source(s) of funds                 financial institutions as follows:                     Director, Financial Crimes Enforcement
                                       deposited into a private banking                           (1) General rules—(i) Private banking               Network.
                                       account and the purpose and expected                    accounts established on or after April 4,              [FR Doc. 06–5 Filed 1–3–06; 8:45 am]
                                       use of the account; and                                 2006. Effective April 4, 2006, the                     BILLING CODE 4810–02–P
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