The greatest challenge in complying with U.S. bank secrecy and anti-money laundering laws is the frequent absence of clearly defined rules. This is particularly true with respect to the requirement that banks know their customers and monitor their accounts for suspicious activities. Rather than imposing bright line regulatory mandates, U.S. law requires each institution to assess the risk posed by particular types of customers and tailor policies and procedures reasonably designed to address that risk.
Making this risk assessment is challenging for any bank. It is even more sensitive for international banks operating in the U.S., who frequently come into contact with customers and transactions that U.S. regulators consider "high-risk." The difficulty is further compounded for banks based in the Middle East, whose anti-money laundering measures will draw extraordinary scrutiny from even the most well-meaning examiner.
The recently released interagency Bank Secrecy Act Anti-Money Laundering Examination Manual provides new guidance about how to identify and address risks posed by certain types of customers that, in the view of U.S. regulators, pose a heightened risk of money laundering and criminal activity. This article discusses the guidance with respect to particular types of "high-risk" customers that international banks are likely to encounter. The full manual is available at http://www.ffiec. gov/bsa_aml_infobase/.
NON RESIDENTALIENS AND FOREIGNINDIVIDUALS
A nonresident alien (NRA) is a non-U.S. citizen who (1) is not a lawful permanent resident of the U.S. and has not been physically present in the U.S. for a specified amount of time, and (2) has not been issued a green card. In the view of U.S. regulators, such a customer poses an elevated risk because the bank may find it more difficult to verify and authenticate his or her identification, source of funds, and source of wealth. A nonresident alien is also more likely to engage in international fund transfers or use of foreign automated teller machines (ATMs), which regulators view as high-risk transactions. Regulators are especially concerned about nonresident aliens whose home countries have bank secrecy and antimoney laundering regimes that the U.S. considers inadequate. In assessing the risk posed by a particular nonresident alien customer, banks should consider the following factors:
The customer's home country
The types of products and services the customer uses
Forms of identification the customer offers
The source of the customer's wealth and funds
Any unusual account activity
For purpose of U.S. knowyour- customer rules, "account" means any formal banking relationship established to provide or engage in services, dealings, or other financial transactions.
It is not limited to deposit accounts. The bank should implement policies and procedures to address any special risks identified by the assessment.
If the customer has a private banking relationship, the bank should also ensure that it complies with the enhanced due diligence requirement applicable to such relationships.
POLITICALLY EXPOSED PERSONS
A Politically Exposed Person (PEP) is a "senior foreign political figure," and any "immediate family" and "close associates" of such a figure. (These terms are defined by regulation.) In several recent high-profile cases, PEPs have used banks as conduits for their illegal activities, including corruption, bribery, and money laundering. According to U.S. regulators, banks that conduct business with dishonest PEPs face substantial reputation risk, enhanced scrutiny, and possible supervisory action.
The following information is important to assessing the risk posed by a PEP customer:
The identity of the customer, as well as of the beneficial owners of any accounts
The source of the customer's funds
The source of the customer's wealth
Information on immediate family members or close associates having transaction authority over the account
The purpose of the account and the expected volume and nature of account activity Different PEP accounts pose different degrees of risk. Senior management should be involved in assessing the risk and deciding whether or not to establish a relationship with such a customer. Once an account is established, the bank should monitor it on an ongoing basis to ensure it is being used as anticipated. If the relationship involves private banking, U.S. law imposes further due diligence requirements.
EMBASSY AND FOREIGN CONSULATE ACCOUNTS
According to U.S. regulators, embassy or consulate accounts may pose a higher risk in the following circumstances:
Accounts are from countries that U.S. regulators have designated as "high-risk"
Substantial currency transactions occur in the accounts
Account activity is not consistent with the purpose of the account
Accounts directly fund personal expenses of foreign nationals, including but not limited to expenses for college students
Official embassy business is conducted through personal accounts.
The bank should conduct comprehensive due diligence on any embassy and consulate account relationships.
Management should fully understand the purpose of the account, and the expected volume and nature of account activity. The bank should monitor the account on an ongoing basis to ensure it is being used as anticipated.
NON - GOVERNMENTAL ORGANIZATIONS AND CHARITIES
As several recent high-profile cases indicate, U.S. authorities have increased their scrutiny of non-governmental organizations (NGOs) and charities as vehicles of money laundering and terrorist financing. The authorities are particularly focused on NGOs and charities with connections to the Middle East. U.S. regulators recommend that any risk assessment for NGO and charity customers focus on the following factors:
Purpose or ideology
Geographic areas served (including headquarters and operational areas)
Organizational structure
Donor and volunteer base
Funding and disbursement criteria (including basic beneficiary information)
Recordkeeping requirements
Affiliation with other NGOs, governments, and groups
Internal controls and audits
The bank should establish stringent documentation, verification, and transaction. monitoring procedures for NGO and charity customers deemed by management to be high-risk. In the view of U.S. regulators, the highest risk comes from NGOs and charities that operate or provide services internationally, conduct unusual or suspicious activities, or lack proper documentation. Enhanced due diligence for such accounts should include:
Evaluating the principals
Obtaining and reviewing the financial statements and audits
Verifying the source and use of funds
Evaluating large contributors or grantors of the NGO
Conducting reference checks
CONCLUSION
Middle Eastern banks operating in the U.S. face a difficult balancing act. On one hand, they are more likely than domestic banks to be involved with customers and transactions that U.S. regulators consider "high-risk." On the other hand, they must take care not to alienate legitimate customers with onerous documentation and verification regimes. A rigorous and well-designed risk assessment program can help strike a comfortable medium between the two imperatives.
by Mark E. Plotkin, Esq. & B.J. Sanford, Esq.
© ABANA Review 2005
