Risk Management Manual of Examination Policies - FDIC

BANK SECRECY ACT, ANTI-MONEY LAUNDERING,
AND OFFICE OF FOREIGN ASSETS CONTROL
Financial institutions should ensure, through independent
review, that private banking account officers have adequate
documentation for accepting new private banking account
funds and are performing the responsibilities detailed
above.
Enhanced Due Diligence for Non-U.S. Persons
Maintaining Private Banking Accounts
Section 312 of the USA PATRIOT Act, implemented by
31 CFR 103.181, requires U.S. financial institutions that
maintain private banking accounts for non-U.S. persons to
establish enhanced due diligence policies, procedures, and
controls that are designed to detect and report money
laundering.
Private banking accounts subject to requirements under
Section 312 of the USA PATRIOT Act include:
• Accounts, or any combination of accounts with a
minimum deposit of funds or other assets of at least $1
million;
• Accounts established for one or more individuals
(beneficial owners) that are neither U.S. citizens, nor
lawful permanent residents of the U.S.; or
• Accounts assigned to or managed by an officer,
employee, or agent of a financial institution acting as a
liaison between the financial institution and the direct
or beneficial owner of the account.
Regulations for private banking accounts specify that
enhanced due diligence procedures and controls should be
established where appropriate and necessary with respect
to the applicable accounts and relationships. The financial
institution must be able to show it is able to reasonably
detect suspicious and reportable money laundering
transactions and activities.
A due diligence program is considered reasonable if it
focuses compliance efforts on those accounts that represent
a high risk of money laundering. Private banking accounts
of foreign customers inherently indicate higher risk than
many U.S. accounts; however, it is incumbent upon the
financial institution to establish a reasonable level of
monitoring and review relative to the risk of the account
and/or department.
A financial institution may use its own risk assessment or
incorporate industry best practices into its due diligence
program. Specific due diligence procedures required by
Section 312 of USA PATRIOT Act include:
• Verification of the identity of the nominal and
beneficial owners of an account;
Section 8.1
• Documentation showing the source of funds; and
• Enhanced scrutiny of accounts and transactions of
senior foreign political figures, also known as
“politically exposed persons” (PEPs).
Identity Verification
The financial institution is expected to take reasonable
steps to verify the identity of both the nominal and the
beneficial owners of private banking accounts. Often,
private banking departments maintain customer
information in a central confidential file or use code names
in order to protect the customer’s privacy. Because of the
nature of the account relationship with the bank liaison and
the focus on a customer’s privacy, customer profile
information has not always been well documented.
Other methods used to maintain customer privacy include:
• Private Investment Corporation (PIC),
• Offshore Trusts, and
• Token Name Accounts.
PICs are established to hold a customer’s personal assets in
a separate legal entity. PICs offer confidentiality of
ownership, hold assets centrally, and provide
intermediaries between private banking customers and the
potential beneficiaries of the PICs or trusts. A PIC may
also be a trust asset. PICs are incorporated frequently in
countries that impose low or no taxes on company assets
and operations, or are bank secrecy havens. They are
sometimes established by the financial institution for
customers through their international affiliates – some high
profile or political customers have a legitimate need for a
higher degree of financial privacy. However, financial
institutions should exercise extra care when dealing with
beneficial owners of PICs and associated trusts because
they can be misused to conceal illegal activities. Since
PICs issue bearer shares, anonymous relationships in which
the financial institution does not know and document the
beneficial owner should not be permitted.
Offshore trusts can operate similarly to PICs and can even
include PICs as assets. Beneficial owners may be
numerous; regardless, the financial institution must have
records demonstrating reasonable knowledge and due
diligence of beneficiary identities. Offshore trusts should
identify grantors of the trusts and sources of the grantors’
wealth.
Furthermore, OFAC screening may be difficult or
impossible when transactions are conducted through PICs,
offshore trusts, or token name accounts that shield true
identities. Management must ensure that accounts
DSC Risk Management Manual of Examination Policies 8.1-25 Bank Secrecy Act (12-04)
Federal Deposit Insurance Corporation