On August 30, 2016, the United States Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Association, and the Office of the Comptroller of the Currency (together “Federal Banking Agencies” or “FBAs”), released a four-page fact sheet outlining their expectations for domestic banks evaluating the regulatory risks posed by foreign financial institutions. U.S. Department of the Treasury and Federal Banking Agencies Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement
(the “Fact Sheet”). The Fact Sheet addresses the obligations of domestic banks to comply with the Bank Secrecy Act (BSA)—including the BSA’s anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements—as well as with U.S. sanctions programs administered by the Office of Foreign Asset Control (OFAC).
The Fact Sheet is an apparent attempt to allay the growing concerns among banks that the FBAs have been effectively using “a zero tolerance philosophy” regarding AML and sanctions enforcement “regardless of the facts and circumstances of the situation.” In the Fact Sheet, the FBAs state that approximately 95 percent of compliance deficiencies identified by federal authorities are corrected without an enforcement action or civil penalty; instead, the deficiencies are addressed via cautionary letters or other means. According to the Fact Sheet, even when an enforcement action is warranted, such action can come in a variety of forms, including informal memoranda of understanding and public agreements. Only in “very limited instances, when corrective action has not been achieved within a reasonable amount of time or serious violations or unsafe or unsound practices or breaches of fiduciary duty have been identified,” do FBAs assess civil money penalties or recommend criminal prosecutions for BSA/AML deficiencies. According to the Fact Sheet, sanctions violations actions are typically brought only when there is “sufficient evidence of willful wrongdoing.”
As a matter of guidance, the Fact Sheet focuses on the level of scrutiny that the FBAs expect U.S. banks to apply to their correspondent clients (foreign financial institutions, or “FFIs,” that establish relationships with U.S. banks in order to process U.S. dollar transactions) and to those institutions’ compliance with AML regulations and the BSA. The Fact Sheet states that “there is no general expectation for U.S. depository institutions to conduct due diligence [on a foreign financial institution]’s customers.”
Instead, to comply with the FBAs’ expectations, U.S. banks need only obtain and review “sufficient information” about the FFIs with which they do business, including the types of customers and markets those FFIs serve. In determining the level of due diligence that is necessary for an FFI relationship, U.S. financial institutions should consider to what extent that diligence is necessary to assess the risks posed by the relationship, satisfy the institution’s obligations to detect and report suspicious activity, and comply with U.S. economic sanctions. Id.
The Fact Sheet is almost certainly intended as a direct response to vocal critics of the current enforcement regime who have argued that the intense pressure of federal regulators and enforcement agencies has had a chilling effect on U.S. banks’ willingness to engage with global markets. Indeed, in July 2016, Republicans in the House of Representatives asked the Treasury Department’s inspector general to investigate allegations that regulators were forcing U.S. banks to close accounts and sever ties with institutions unnecessarily, leading to a potentially damaging de-risking environment. This request pointed to an International Monetary Fund (IMF) report published only weeks earlier that linked the increasingly rigorous enforcement of AML/CFT regimes to the reduction of correspondent banking relationships, and connected that reduction to a “systemic impact” which, if unaddressed, “could disrupt financial services and cross-border flows, including trade finance and remittances, potentially undermining financial stability, inclusion, growth, and developmental goals.” IMF Staff Discussion Note: The Withdrawal of Correspondent banking Relationships: A Case for Policy Action, at 5 (June 2016), https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf
. While we believe the Fact Sheet was a step in the right direction by the FBAs, only time will tell how they enforce their expectations.