Susan J' Galli

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Florida International Bankers Association
(FIBA)/CSBS Compliance Conference Financial
Institutions Perspective Due Diligence and Best
Practices Miami, Florida February 10, 2005


Susan J. Galli


Citigroup, Inc.
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Topics of Interest

• The Practical Implementation Implications for
  Financial Institutions
• Customer Identification Program Section 326
• Certification and Re-Certification under Sections
  313 and 319(b)
• Enhanced Due Diligence for Correspondent Banking
  Section 312
• Special Measures Section 311
• FinCEN Interpretative Guidance for Due Diligence
  on the Foreign Agents and Counterparties of MSBs

3
The Fine Points of Compliance for Global
Organizations

• Real Issues with Implementation of 326 CIP-P on
  a
• Global Basis
• Collection of Customer Information
• Different Forms of ID outside U.S. -
  Additional
• Documents to be used as Primary and Secondary
  I.D. require
• Exception vetting process
• Local Regulations accept certain documents that
  we would
• not view as acceptable under Global CIP
• Verification of Information
• Non-Documentary Methods not readily available in
  all Markets so Alternative Methods may be Needed
• Verification of Remote Account Opening for
  Foreign Individuals
• Understanding when to step out of CIP into KYC
• Trusts/Partnerships/Privately-held Corporations
• Timeframe for Verification of Customer I.D.
• Reliance on Vendors

4
Final Section 313 and Section 319(b) Rules
for Correspondent Accounts for Foreign Banks

• Foreign Bank Re-certifications
• Must obtain a Re-certification or new
  Certification every 3 Years
• Banks already had to go through the renewal
  process and the renewal deadline is approaching
  for Broker Dealers
• Do you have Systems in Place to track aging of
  Certifications?
• What is your Action Plan if a Certification
  expires?

5
Final Section 313 and Section 319(b) Rules
for Correspondent Accounts for Foreign Banks

• Foreign Bank Re-certifications
• What are reasonable steps for nested
  correspondent accounts?
• What are you doing to review the completeness and
  accuracy of your certifications?
• Does your bank put its certification on its
  website?
• Has your correspondent provided an acceptable
  agent for service of legal process (e.g., U.S.
  address and not the embassy or consulate?)

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Final Section 313 and Section 319(b) Rules
for Correspondent Accounts for Foreign Banks

• Foreign Bank Re-Certifications
• Encourage correspondent bank customers to give
  global certifications
• Encourage correspondent banks to post their
  certifications on their websites

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An Example of a Global Certification
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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Interim Practice Tips
• Conduct a geographic risk assessment to identify
  high risk correspondent accounts that require a
  higher level of due diligence.
• 
  

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Interim Practice Tips
• Consider as high risk
• Foreign banks operating under a banking license
  issued by a NCCT (The current list of FATF NCCTs
  can be found at http//www.fatf-gafi-org/NCCT_en.h
  tm)
• Foreign banks operating under an offshore banking
  license
• Any foreign bank operating under a banking
  license issued by a foreign country that the
  Secretary of the Treasury designates as
  warranting special measures because of money
  laundering concerns.
• There are many other countries not on high-risk
  lists per se, yet the rule implies and regulators
  expect enhanced due diligence.
•  

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Interim Practice Tips
• Consider as high risk
• There are many other countries not on high-risk
  lists per se, yet the rule implies and regulators
  expect enhanced due diligence.
•  

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Interim Practice Tips
• Assess the ownership and management structure of
  the client and whether there is any involvement
  by public figures, their families or close
  associates
• For high-risk foreign banks that are not publicly
  traded
• Identify all persons who directly or indirectly
  own, control or have voting power of 5 percent or
  more of any class of securities of the foreign
  bank
• Determine whether the bank offers correspondent
  accounts to other foreign banks, and if so, the
  identity of those foreign banks

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Interim Practice Tips
• Ensure that transaction monitoring procedures for
  identifying and reporting suspicious activity are
  risk-based
• Conduct risk-based periodic account reviews to
  update documentation and when material changes in
  ownership occur in line with new regulatory
  requirements and industry best practices
• Enhance training programs to alert staff to new
  regulatory requirements and procedures and red
  flags related to correspondent banking activity

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Section 312 Interim Guidance
• Treasury will consider a banks due diligence
  program for correspondent accounts reasonable if
  it
• Focuses on correspondent accounts that pose a
  high risk based on an overall risk assessment of
  the money laundering risks and accounts
  identified as high risk under the statute
• Gives priority to deposit or equivalent accounts
  with focus on correspondent accounts that are
  used to provide services to third parties

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Section 312 Interim Guidance
• Treasury will consider a banks due diligence
  program for correspondent accounts reasonable if
  it
• Gives priority to high-risk correspondent
  accounts on non-bank financial institutions such
  as money transmitters
• Gives priority to deposit or equivalent accounts
  with focus on correspondent accounts that are
  used to provide services to third parties
• Comports with industry best practice standards
• Affords priority to accounts on or after July 23,
  2002

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Industry Best Practices for Correspondent
  Accounts Include
• The New York Clearing Houses Guidelines for
  Counter Money Laundering Policies and Procedures
  in Correspondent Banking (www.nych.org)
• The Basel Committee on Banking Supervisions
  paper on Customer Due Diligence for Banks
  (www.bis.org/publ/bcbs85.pdf)
• The Wolfsberg Anti-Money Laundering Principles
  for Correspondent Banking (www.wolfsberg-principle
  s.com)

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Enhanced Due Diligence for Foreign Financial
InstitutionCorrespondent Accounts (Section 312
31 U.S.C. 5318(i))

• Major Open Questions for Banks and Broker Dealers
• How will correspondent account, covered
  financial institution, and foreign financial
  institution ultimately be defined for purposes
  of this section?
• Will foreign branches of insured depository
  institutions be covered financial institutions
  for purposes of this section?
• What constitutes public information which is a
  key concept used to delineate a U.S. financial
  institutions due diligence obligations in
  numerous instances throughout the proposed rule?
• When will final rule be issued?

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Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretative Guidance

• FinCEN recently issued Guidance for MSBs that
  utilize relationships with foreign agents or
  counterparties to facilitate the movement of
  funds into or out of the United Steps.
• MSBs must take Reasonable steps to Guard against
  the flow of illicit funds, or the flow of funds
  from legitimate sources to persons seeking to use
  those funds for illicit purposes, through such
  relationships

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Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretive Guidance for U.S.
Banks

• US Banks that deal with MSBs must contemplate the
  following in their due diligence for MSB clients
• Does the MSB have a risk assessment process that
  considers
• The foreign agent or counterpartys location and
  jurisdiction of organization, chartering or
  licensing?
• The ownership of the foreign agent or
  counterparty, including screening against
  applicable government lists
• The extent to which the foreign agent or
  counterparty is subject to AML requirements in
  its jurisdiction and whether it has established
  such controls

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Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretive Guidance for U.S.
Banks

• US Banks that deal with MSBs must contemplate the
  following in their due diligence for MSB clients
• Does the MSB have a risk assessment process that
  considers
• Any information known or readily available to the
  MSB about the foreign agent or counterpartys
  anti-money laundering record, including public
  information in the public domain
• The nature of the foreign agents or
  counterpartys business, the market it serves,
  and the extent to which its business and the
  markets it services presents an increased risk
  for money laundering or terrorist financing
• The types and purposes of services to be provided
  to, and anticipated activity with, the foreign
  agent or counterparty?
• The nature and duration of the MSBs relationship
  with the foreign agent or counterparty

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Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretive Guidance for U.S.
Banks

• US Banks that deal with MSBs must contemplate the
  following in their due diligence for MSB clients
• Does the MSB have procedures that require that
  due diligence on each new foreign agent or
  counterparty be performed at the inception of the
  relationship commensurate with the risk posed by
  such entities?
• Do these procedures, at a minimum
• Identify the owners of the Money Service
  Business foreign agents and counterparties?
• Evaluate, on an ongoing basis, the operations of
  those foreign agents and counterparties and their
  implementation of policies, procedures, and
  controls reasonably designed to help assure that
  the MSBs products and services are not subject
  to abuse by the foreign agents or counterpartys
  customers, employees or contractors?

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Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretive Guidance for U.S.
Banks

• US Banks that deal with MSBs must contemplate the
  following in their due diligence for MSB clients
• Does the MSBs procedures provide for risk-based
  monitoring of foreign agents and counterparties
  that also focus on identifying material changes
  in the agents risk profile, such as a change in
  ownership, business, or the regulatory scrutiny
  to which it is subject?
• Does the MSBs monitoring procedures enable it to
  identify and, where appropriate, report as
  suspicious such occurrences as instances of
  unusual wire activity, bulk sales of purchases of
  sequentially numbered instruments, multiple
  purchase or sales that appear to be structured,
  and illegible or missing customer information.
• Does the MSB have procedures to assure that their
  foreign agents or counterparties are effectively
  implementing an AML program and to discern
  obvious breakdowns in the implementation of the
  program by the foreign agent or counterparty?

22
Foreign Agents and Counterparty Due Diligence
for MSBs FinCEN Interpretive Guidance for U.S.
Banks

• US Banks that deal with MSBs must contemplate the
  following in their due diligence for MSB clients
• Does the MSB have procedures in place to enable
  them to review foreign agent or counterparty
  activity for signs of structuring or
  unnecessarily complex transactions through
  multiple jurisdictions that may be indicative of
  layering?
• Does the MSB have procedures to enable them to
  discern attempts to evade identification or other
  requirements, whether imposed by applicable law
  or the MSBs own internal policies
• Does the MSB have procedures that provide for the
  implementation of corrective action on the part
  of the foreign agent or counterparty or for the
  termination of the relationship with any foreign
  agent or counterparty that the MSB determines
  poses an unacceptable risk, or that has
  demonstrated systemic, willful, or repeated
  lapses in compliance with the MSBs own AML
  procedures or requirements?

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Title III Section 311

• Section 311 Special Measures
• Recordkeeping and Reporting of Certain Financial
  Transactions
• Information Relating to Beneficial Ownership
• Information Relating to Certain Payable-Through
  Accounts
• Information Relating to Certain Correspondent
  Accounts
• Prohibitions or Conditions on Opening or
  Maintaining Certain Correspondent of Payable
  Through Accounts

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Title III Section 311

• Section 311 Special Measures
• Treasury continues to use its authority under
  Sec. 311 of the USA Patriot Act to protect the
  U.S. financial system from corrupt financial
  institutions
• Intent is to alert the global financial community
  about these bad actors
• Puts other financial institutions on notice that
  there will be significant consequences for
  institutions that launder tainted money or engage
  in similar corruption

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Title III Section 311

• Section 311 Imposition of 5th Special Measure
• Jurisdictions of Primary Money Laundering
• Concern
• Myanmar (Burma)
• Nauru

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Title III Section 311

• Section 311 Imposition of 5th Special Measure
• Financial Institutions of Primary Money
  Laundering
• Concern
• Myanmar Mayflower Bank
• Asia Wealth Bank
• Commercial Bank of Syria and its Lebanese sub
• First Merchant Bank of the Turkish Republic of
  North Cyprus and subs
• Infobank of Belarus and its sub, Belmatalnergo

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Title III Section 311

• Section 311 Imposition of 5th Special
• Measure and Special Corollary
• Apply special due diligence to all correspondent
  accounts to ensure that no such account is being
  used indirectly to provide services
• Proposal suggests that current screening
  procedures be adapted to comply with this special
  measure

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Title III Section 311

• Section 311 Imposition of 5th Special
• Measure and Special Corollary
• Proposal would require notification to be
  provided to correspondent account holders that
  they may not provide Sec. 311-designated
  financial institutions with access to the
  correspondent account
• May satisfy this requirement by transmitting
  prescribed notice, and certification is not
  required

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Title III Section 311

• Section 311 Imposition of 5th Special
• Measure and Special Corollary
• Penalty to foreign correspondents for
  non-compliance
• Blocking indirect access, including termination
  of the correspondent account

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Title III Section 311

• Section 311 Imposition of 5th Special
• Measure and Special Corollary
• Issues Pending Regulatory Clarification
• Special Corollary
• Due Diligence on Payments
• Trade
• Block vs. Reject
• Cash Letter
• More efficient Means of Notification

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