On October 5, 2016, the Office of the Comptroller of the Currency (“OCC”) issued guidance to national banks, federal savings associations, and federal branches and agencies regarding their periodic evaluation of the risks related to foreign correspondent accounts. The guidance appears aimed to address widely reported concerns that financial institutions are unnecessarily terminating relationships with foreign correspondent banks, particularly in high-risk jurisdictions, due to regulatory threats of anti-money laundering or terrorist financing (collectively, “AML”) violations. In particular, the guidance encourages OCC-regulated institutions to take a risk-based and individualized approach to closing foreign correspondent accounts rather than terminating entire categories of relationships.
Foreign correspondent accounts are accounts that a domestic financial institution uses to service transactions for a foreign financial institution. Foreign correspondent accounts are used, among other things, for processing transactions domestically for the foreign financial institution’s customers. Foreign correspondent relationships present particular AML risks because domestic financial institutions may lack visibility into the identity of the foreign financial institution’s clients that initiate transactions. As a result, rather than risk an enforcement action or other regulatory sanction related to these accounts, U.S. financial institutions may choose simply to close or not open correspondent accounts for foreign financial institutions, particularly those based in high-risk jurisdictions. This risk-reward calculus can result in the loss of critical financial services, including remittances and trade finance, by customers in those jurisdictions.
The OCC’s guidance sets forth best practices for OCC-regulated institutions to follow when making account retention and termination decisions. These best practices include:
- communicating with foreign financial institutions before terminating their accounts, considering specific mitigating information these institutions may provide, and providing these institutions sufficient time to establish alternative banking relationships before terminating accounts, unless doing so would be contrary to law or pose an additional risk to the OCC-regulated institution, national security, or reveal law enforcement activity;
- considering the extent to which account closures may have an adverse impact on access to financial services for an entire group of customers or potential customers, or an entire geographic location; and
- making termination decisions based on a careful analysis of the risks presented by individual foreign financial institutions, rather than terminating entire categories of foreign correspondent account relationships (unless required by law to do so).
The guidance also makes clear that OCC-regulated institutions, not the OCC, are responsible for the decision to open or close accounts. At the same time, the guidance sets forth new expectations for OCC-regulated institutions’ process for evaluating foreign correspondent accounts. The guidance provides that an OCC-regulated institution should periodically evaluate and reassess the risks arising from foreign correspondent accounts, establish a governance function to oversee these re-evaluations, report decisions to close accounts to senior management, and establish a clear audit trail of the reasons and method used for account closure.
Days after the OCC released its guidance, in a discussion at a World Bank and International Monetary Fund conference on October 7, 2016, U.S. Secretary of the Treasury Jack Lew reportedly urged U.S. financial institutions to strike a balance between conducting prudent risk management and preserving access to services when considering de-risking their foreign correspondent relationships. “Financial institutions around the world have to adhere to high standards to stop the flow of illicit funds. That means anti-money-laundering rules really matter,” Lew said. “On the other hand, if the burden is so high . . . that people withdraw from the financial system or are excluded from it, it ultimately raises the risk of illicit transactions.” Notably, Lew said that “[banks] don’t have a responsibility to know [their] client’s client” and that regulators can “eliminate the excuse that a knowing, willful violation of the law will be treated the same way as an unavoidable, accidental error that’s corrected.”
The OCC’s guidance and Secretary Lew’s comments follow the release of an August 30, 2016 fact sheet by the U.S. Department of the Treasury and the federal banking agencies on foreign correspondent banking, which sought to clarify that (1) U.S. financial institutions are generally not expected to conduct due diligence on the individual customers of the foreign financial institutions for which they provide correspondent services, and (2) the U.S. regulators will not adopt a “zero tolerance” approach to Bank Secrecy Act, AML, and Office of Foreign Asset Control sanctions violations that would result in a public enforcement action for every violation.
These recent statements by U.S. regulators are part of a broader global effort to address observed reductions in correspondent banking relationships:
- The International Monetary Fund released a white paper in June 2016 highlighting a reduction in correspondent banking relationships, particularly in emerging markets and developing economies, and calling for coordinated regulatory efforts, including clarifications on AML standards, to stem the loss of those relationships.
- The Financial Stability Board issued a report to the G-20 in November 2015 describing a four-point action plan to address the loss of correspondent accounts.
- The World Bank conducted a survey in 2015 and found that access to financial services for local and regional banks and remittance providers is contracting in some countries and regions and that business lines such as check clearing, international money transfers, and trade finance are being affected.
- The Financial Action Task Force released a statement on de-risking in October 2015 noting that a risk-based approach to AML supervision should not involve a “zero tolerance” approach or disproportionate enforcement responses to AML violations.