Patriot Act due diligence rules finalised

Section 312 demands closer AML inspection of foreign banks

The Financial Crimes Enforcement Network (FinCEN) has issued final rules mandating enhanced risk-based due diligence requirements for US institutions in their relationships with certain foreign banks.

Under the new rules clarifying and finalising Section 312 of the US Patriot Act, US financial institutions must identify the owners of potentially suspect foreign banks if they are not publicly traded and ascertain whether such banks provide correspondent accounts to other foreign banks, thereby providing them with access to the US financial system.

The new provision also mandates that, in making their risk assessments, financial institutions should consider the nature of a foreign bank’s business, available information on the foreign bank’s anti-money laundering (AML) record, and information on the nature of the foreign supervisory regulations under which the bank is operating.

Section 312 of the controversial Patriot Act requires US financial institutions to perform due diligence, and in some cases enhanced due diligence, regarding accounts established for foreign financial institutions and private banking accounts established for non-US nationals.

The final rule applies to the accounts of a small category of foreign banks, including those with offshore banking licences, and certain high-risk banks subject to international or US Treasury determinations.

“As international anti-money laundering standards improve globally, risk assessments for foreign banks should become easier to conduct. Common standards are increasingly protecting both sides of the international relationship and US banks can take comfort in the fidelity of their foreign customers while foreign banks will find it easier to process their US transactions,” says James Freis, director of FinCEN.

The final rule completes the implementation of Section 312, following a lengthy consultation period on appropriate due diligence requirements for the banking activities of non-US persons.

The changes to Section 312 are effective from September 10, 2007. Enhanced due diligence requirements are set to apply from February 5, 2008.