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Financial Institution Letters

   
[Federal Register: September 26, 2002 (Volume 67, Number 187)]
[Rules and Regulations]               
[Page 60562-60579]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se02-9]                         

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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1505-AA87

 
Financial Crimes Enforcement Network; Anti-Money Laundering 
Requirements--Correspondent Accounts for Foreign Shell Banks; 
Recordkeeping and Termination of Correspondent Accounts for Foreign 
Banks

AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury), through the 
Financial Crimes Enforcement Network (FinCEN), is issuing this final 
rule to implement new provisions of the Bank Secrecy Act that: Prohibit 
certain financial institutions from providing correspondent accounts to 
foreign shell banks; require such financial institutions to take 
reasonable steps to ensure that correspondent accounts provided to 
foreign banks are not being used to indirectly provide banking services 
to foreign shell banks; require certain financial institutions that 
provide correspondent accounts to foreign banks to maintain records of 
the ownership of such foreign banks and their agents in the United 
States designated for service of legal process for records regarding 
the correspondent account; and require the termination of correspondent 
accounts of foreign banks that fail to comply with or fail to contest a 
lawful request of the Secretary of the Treasury (Secretary) or the 
Attorney General of the United States (Attorney General).

DATES: This final rule is effective October 28, 2002.

FOR FURTHER INFORMATION CONTACT: Office of the Chief Counsel (FinCEN), 
(703) 905-3590; Office of the Assistant General Counsel for Banking & 
Finance (Treasury), (202) 622-0480, or Office of the Assistant General 
Counsel for Enforcement (Treasury), (202) 622-1927 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (Public Law 
107-56) (the Act). Title III of the Act makes a number of amendments to 
the anti-money laundering provisions of the Bank Secrecy Act (BSA), 
which is codified in subchapter II of chapter 53 of title 31, United 
States Code. These amendments are intended to promote the prevention, 
detection, and prosecution of international money laundering and the 
financing of terrorism. Two of these provisions became effective on 
December 26, 2001.
    First, section 313(a) of the Act added a new subsection (j) to 31 
U.S.C. 5318 that prohibits a ``covered financial institution'' from 
providing ``correspondent accounts'' in the United States to foreign 
banks that do not have a physical presence in any country (foreign 
shell banks). Section 313(a) also requires those financial institutions 
to take reasonable steps to ensure that correspondent accounts provided 
to foreign banks are not being used to provide banking services 
indirectly to foreign shell banks.
    Second, section 319(b) of the Act added a new subsection (k) to 31 
U.S.C. 5318 that requires any covered financial institution that 
provides a

[[Page 60563]]

correspondent account to a foreign bank to maintain records of the 
foreign bank's owners and to maintain the name and address of an agent 
in the United States designated to accept service of legal process for 
the foreign bank for records regarding the correspondent account. 
Subsection (k) also authorizes the Secretary and the Attorney General 
to issue a summons or subpoena to any foreign bank that maintains a 
correspondent account in the United States and to request records 
relating to such account, including records maintained outside the 
United States relating to the deposit of funds into the foreign bank. 
If a foreign bank fails to comply with or to contest the summons or 
subpoena, any covered financial institution with which the foreign bank 
maintains a correspondent account must terminate the account upon 
notice from the Secretary or the Attorney General.
    Under the Act, Treasury is authorized to interpret and administer 
these provisions. On November 20, 2001, Treasury issued Interim 
Guidance \1\ to banks, savings associations, and other depository 
institutions to assist them in meeting their compliance obligations 
under sections 5318(j) and (k).\2\ The Interim Guidance included 
definitions of key terms in sections 5318(j) and (k) and a model 
certification that depository institutions were authorized to use as an 
interim means to assist them in meeting their obligations related to 
dealing with foreign shell banks under section 5318(j) and 
recordkeeping under section 5318(k).
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    \1\ 66 FR 59342 (Nov. 27, 2001).
    \2\ Treasury issued the interim guidance after consultation with 
the staffs of the Office of the Comptroller of the Currency, the 
Office of Thrift Supervision, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the 
Commodity Futures Trading Commission, the Securities and Exchange 
Commission, and the Department of Justice. Treasury also consulted 
with staffs of these agencies in preparing the NPRM defined below 
and this final rule.
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    On December 28, 2001, Treasury published for comment a notice of 
proposed rulemaking (NPRM) \3\ to codify the Interim Guidance, with 
some modifications, as regulatory standards, and proposed to apply the 
requirements of these two provisions to securities brokers and dealers 
in the same manner as they apply to depository institutions.\4\ The 
NPRM also carried forward from the Interim Guidance, with some 
modifications, the model certification that covered financial 
institutions may use to assist them in meeting the requirements of 
sections 5318(j) and (k), and that would provide a covered financial 
institution with a safe harbor for purposes of compliance with those 
sections. Treasury also proposed that covered financial institutions 
must verify the information provided by a foreign bank, or otherwise 
relied upon for purposes of sections 5318(j) and (k), every two years 
or at any time a covered financial institution has reason to believe 
that the previously provided information was no longer accurate. The 
NPRM included a model recertification that would provide a covered 
financial institution with a safe harbor in connection with the 
updating of previously provided information. The NPRM also provided 
special rules and safe harbors for a covered financial institution 
that, consistent with the Interim Guidance and the NPRM, requests 
information from a foreign bank before the effective date of the final 
rule and receives such information not later than the date that is 90 
days after the publication of the final rule.
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    \3\ 66 FR 67460 (Dec. 28, 2001).
    \4\ When issuing the Interim Guidance, Treasury deferred 
addressing the compliance obligations of securities brokers and 
dealers with respect to the requirements of sections 5318(j) and 
(k), because the Act requires Treasury to define by regulation, 
after consultation with the SEC, the types of accounts maintained by 
brokers and dealers for foreign banks that are similar to 
correspondent accounts that depository institutions maintain for 
foreign banks.
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    As an administrative matter, the NPRM proposed to codify its 
provisions in a new part 104 of title 31 of the Code of Federal 
Regulations.\5\ Treasury has since determined to codify the final rule 
with Treasury's other BSA regulations in part 103.
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    \5\ The proposed sections were 104.10 (Definitions); 104.40 
(Records concerning owners of foreign banks and agents and 
prohibition on correspondent accounts for foreign shell banks); 
104.60 (Summons or subpoena of foreign bank records); and 104.70 
(Termination of correspondent relationship).
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II. Summary of Comments

    Treasury received 23 comments regarding the proposed rule, 
including ten from financial services trade associations, four from 
U.S. financial institutions, four from foreign financial institutions, 
three from regional development banks, and two from members of 
Congress. Although comments were received on many issues, by far the 
most significant issues addressed by the commenters were the breadth of 
the definition of ``correspondent account'' in the NPRM and the 
treatment of foreign branches of U.S. depository institutions as 
covered financial institutions. Other commenters raised issues 
concerning the means for obtaining and using the certification, 
requirements for termination of accounts, and certain other 
definitions. These issues are discussed below in the section-by-section 
analysis.

III. Section-by-Section Analysis

A. Section 103.175 Definitions

Certification and Recertification
    Treasury has included ``certification'' and ``recertification'' as 
defined terms in the final rule for ease of reference. These terms 
refer to the certification and recertification forms in appendices A 
and B to Subpart I of 31 CFR Part 103. These forms have been revised 
consistent with the substantive changes in regulatory text. In 
addition, in response to comments, the certification appended to the 
final rule includes the definition of the term ``foreign bank.''
Correspondent Account
    The term ``correspondent account'' is defined in the Act for 
sections 313 and 319(b) by reference to the definition in section 311. 
The definition in the NPRM was taken verbatim from section 311 (but 
made applicable to ``foreign banks'' rather than ``foreign financial 
institutions'').\6\ More comments dealt with this definition than any 
other single subject. Every comment letter from the private sector 
regarding this topic took the position that the definition in the 
proposed rule was too broad. The commenters stated that this 
definition, and particularly the clause ``or handle other transactions 
related to such bank,'' extends well beyond the commonly understood 
meaning of the term \7\ (and even beyond the meaning of the term 
``account''), to bring within its scope numerous types of accounts, as 
well as many types of transactions that don't involve an account as 
such, and that pose little or no risk of money laundering. Some 
commenters stated that, although such a broad definition may be 
appropriate for section 313, which prohibits correspondent accounts 
with foreign shell banks, the definition should be refined and narrowed 
for other provisions of the Act, including section 319(b). The 
commenters urged that it could actually be counterproductive to apply a 
broad statutory definition to all provisions of the Act dealing with 
correspondent accounts, in that it would require

[[Page 60564]]

covered financial institutions to devote limited resources to focus on 
a broad range of accounts and transactions that have little 
susceptibility to money laundering, thereby reducing the attention that 
can be given to the types of accounts and activities presenting more 
serious risks.
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    \6\ The NPRM defined ``correspondent account'' to mean ``an 
account established to receive deposits from, make payments on 
behalf of a foreign bank, or handle other financial transactions 
related to such bank.''
    \7\ A correspondent account is commonly understood to mean a 
deposit account established by one bank for another bank to receive 
deposits and make payments. See Federal Reserve Regulation O (12 CFR 
215.21(c); Dictionary of Finance and Investment Terms, John Downes 
and Jordan Elliot Goodman (5th ed. 1998).
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    Accordingly, many commenters urged Treasury to narrow the 
definition so as to exclude transactions and accounts that do not 
present a meaningful risk of money laundering or terrorist financing. 
Among the types of transactions and accounts that the commenters sought 
to exclude from the definition are the following:
    (a) Transactions in which a foreign bank is acting as principal and 
not for a customer (as is often the case with overnight and short-term 
deposits, foreign exchange, derivatives, and other securities 
transactions), and accounts used exclusively to facilitate such 
transactions. The primary argument for this exclusion is that if there 
are no customer funds contained in accounts, then the accounts are 
functionally no different than accounts maintained by covered financial 
institutions for any nonfinancial company and would seem to pose a 
minimal risk for money laundering.
    (b) Accounts for foreign banks established for a specific purpose 
through which funds are received and disbursed under limited defined 
conditions to identified parties, such as escrow, corporate trust, 
paying agency, custody, and clearing accounts.
    (c) Accounts for foreign banks for which ownership has been subject 
to close scrutiny by a credible authority. Under this approach, 
accounts for foreign banks that are publicly traded, are qualified 
intermediaries (as designated by the IRS), are subject to the laws of 
FATF member countries, or are permitted to hold pension plan assets 
under regulations of the Department of Labor could be exempted from 
this requirement, on the theory that such foreign banks are highly 
unlikely to present a significant risk of money laundering.
    Other commenters noted that covered financial institutions may 
conduct occasional, isolated transactions with a foreign bank with 
which they have no established relationship. They sought clarification 
as to whether the term ``correspondent account'' includes infrequent 
transactions with foreign banks that do not involve an ``account'' 
relationship in any customary sense, and asked that Treasury set forth 
some means of determining the extent to which an isolated or occasional 
transaction would not constitute a ``correspondent account'' under 
these provisions.
    A Congressional commenter stated that the regulations should define 
the term ``correspondent account'' ``broadly to maximize the scope of 
the protections provided by the Act,'' and to use a single definition 
in all the regulations to be issued and then to specify for each 
section the particular subset of correspondent accounts being 
addressed.
    Treasury believes that, for the purposes of sections 313 and 
319(b), the broad statutory definition is appropriate. Congress 
addressed shell banks separately in section 313, determining that they 
pose such a significant risk for money laundering that an absolute ban 
on correspondent accounts is justified. Section 319(b) requires that 
covered financial institutions maintain records regarding the ownership 
and an agent for service of process of any foreign bank for which it 
maintains a correspondent account. There is no clear justification for 
limiting the requirement to only certain foreign banks or to only those 
foreign banks for which certain types of correspondent accounts are 
maintained. Moreover, the principal argument asserted for adopting a 
more restrictive definition is to reduce the compliance burden that 
results from a broad definition, so that industry compliance resources 
may be focused on areas presenting a potentially greater risk. With 
respect to this rulemaking, however, covered financial institutions 
will generally achieve compliance with the requirements of both 
sections 313 and 319(b) by obtaining one certification from the foreign 
bank. Thus, requiring the ownership and process agent information in 
each case where the covered financial institution must already obtain 
the foreign bank's certification regarding its shell bank status should 
impose little additional burden on the covered financial institution. 
Accordingly, Treasury does not believe that the costs of complying with 
section 319(b) for all correspondent accounts outweigh the risks of 
excluding from the scope of coverage of section 319(b) foreign banks 
for which only certain types of accounts are maintained. Thus, for 
purposes of the final rule, Treasury is essentially retaining the 
proposed definition, with technical changes that clarify the 
definition. The final definition for purposes of these sections 
includes accounts for making ``other disbursements'' as well as 
payments ``on behalf of a foreign bank.'' No inference should be drawn 
from this determination concerning the appropriate definition of 
``correspondent account'' for purposes of section 312 of the Act. \8\
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    \8\ Section 312 of the Act, which amends the BSA to add new 
subsection (i) to 31 U.S.C. 5318, requires financial institutions to 
establish due diligence policies, procedures and controls to detect 
and report money laundering through correspondent accounts and 
private banking accounts maintained for non-U.S. persons. See 
FinCEN; Due Diligence Anti-Money Laundering Programs for Certain 
Foreign Accounts, 67 FR 37736 (May 30, 2002).
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    Treasury is further clarifying the definition of ``correspondent 
account'' by defining the term ``account'' for this purpose. With 
respect to banks, section 311 of the Act provides that the term account 
``(i) means a formal banking or business relationship established to 
provide regular services, dealings, and other financial transactions, 
and (ii) includes a demand deposit, savings deposit, or other 
transaction or asset account and a credit account or other extension of 
credit.'' Treasury believes that the use of the term ``regular'' in the 
definition requires an arrangement to provide ongoing services, and 
would generally exclude infrequent or occasional transactions. Inasmuch 
as section 311 specifically applies this definition of ``account'' for 
purposes of section 313, Treasury is modifying the final rule by adding 
this definition of ``account,'' for purposes of defining 
``correspondent account.'' This results in a definition of 
``correspondent account'' that includes any transaction account, 
savings account, asset account, or extension of credit maintained for a 
foreign bank, as well as any other relationship with a foreign bank to 
provide regular services, dealings, and other financial transactions. 
Treasury anticipates that most isolated or occasional transactions that 
a covered financial institution conducts with a foreign bank would not 
constitute a correspondent account for purposes of the final rule.\9\
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    \9\ Treasury notes further that accounts maintained by foreign 
banks for covered financial institutions are not ``correspondent 
accounts'' subject to this regulation.
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    The NPRM proposed the same definition of ``correspondent account'' 
for securities broker-dealers. After consultation with the Securities 
and Exchange Commission (SEC), Treasury is adopting the same definition 
of ``correspondent account'' for purposes of securities brokers' and 
dealers' compliance with sections 313 and 319(b). See 31 U.S.C. 
5318A(e)(2). Treasury is taking this approach in order to ensure parity 
between different types of covered financial institutions and to treat 
functionally equivalent accounts in the same manner. Thus,

[[Page 60565]]

under the final rule, brokers and dealers must comply with these two 
sections with respect to any account they establish, maintain, 
administer, or manage in the U.S. for a foreign bank that permits the 
foreign bank to engage in securities transactions, funds transfers, or 
other financial transactions through that account. Such accounts would 
include, for example, the following, whether such accounts are for 
transactions by the foreign bank as principal or for its customers: (1) 
Accounts to purchase, sell, lend or otherwise hold securities; (2) 
prime brokerage accounts that consolidate trading done at a number of 
firms; (3) accounts for trading foreign currency; (4) various forms of 
custody accounts; (5) over-the-counter derivatives accounts; and (6) 
accounts for trading futures or commodity options, which would be 
maintained by broker-dealers that are dually registered as futures 
commission merchants.
    Several commenters noted that section 319(b) refers to 
``correspondent relationships'' and requested that the meaning of the 
term be clarified. The final rule defines the term ``correspondent 
relationship'' as having the same meaning as ``correspondent account'' 
for purposes of section 319(b).
    Covered financial institution. The proposed definition of ``covered 
financial institution,'' which includes primarily depository 
institutions and securities broker-dealers, was essentially taken from 
the section 313 statutory definition,\10\ but with the addition of 
foreign branches of insured banks. The inclusion of foreign branches of 
insured banks generated more comments than any issue other than the 
definition of ``correspondent account.'' Commenters cited, as reasons 
for their objections, the plain language of the statute, the history of 
BSA implementation, the anti-competitive impact, and a likely 
ineffective impact on preventing money laundering.
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    \10\ Section 5318(j) defines ``covered financial institution'' 
as ``a financial institution described in subparagraphs (A) through 
(G) of section 5312(a)(2).'' This includes (A) any insured bank (as 
defined in section 3(h) of the Federal Deposit Insurance Act (12 
U.S.C. 1813(h))); (B) a commercial bank or trust company; (C) a 
private banker; (D) an agency or branch of a foreign bank in the 
United States; (E) a credit union; (F) a thrift institution; or (G) 
a broker or dealer registered with the SEC under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.). See 31 U.S.C. 
5318(j)(1), 5312(a)(2). Covered financial institutions include, by 
virtue of the definition of ``insured bank,'' insured banks 
organized in U.S. Territories and Insular Possessions; the term also 
includes corporations acting under section 25A of the Federal 
Reserve Act (12 U.S.C. 611 et seq.).
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    As for the plain language, commenters noted that section 313 of the 
Act provides that a covered financial institution shall not 
``establish, maintain, administer, or manage a correspondent account in 
the United States'' for a foreign shell bank and that any covered 
financial institution that establishes, maintains, administers, or 
manages a correspondent account ``in the United States for a foreign 
bank'' must take reasonable steps to ensure that it is not used to 
indirectly provide banking services to foreign shell banks; and that 
section 319(b), which requires maintenance of records regarding foreign 
bank owners, applies to ``[a]ny covered financial institution which 
maintains a correspondent account in the United States for a foreign 
bank.'' (emphasis added in each case). These commenters urged that 
Congress' repeated use of the phrase ``in the United States'' shows a 
clear intent to limit the application of these provisions to 
correspondent accounts maintained at offices in the U.S. Moreover, 
commenters noted that many accounts maintained by foreign branches of 
U.S. banks for foreign banks are not in fact established, maintained, 
administered or managed in the U.S.
    Furthermore, commenters pointed out that to impose this requirement 
on foreign branches of U.S. financial institutions would place the U.S. 
institutions at a distinct competitive disadvantage with foreign banks 
in foreign countries, which would not be subject to the requirements 
imposed by this rule. If foreign banks wishing to maintain a 
correspondent account at the foreign branch of a U.S. bank must appoint 
an agent for service of process in the U.S., subject themselves to 
subpoena by U.S. authorities, submit information regarding their 
ownership, and make certifications about the use of their accounts, 
they are less likely to use the services of a U.S. bank's foreign 
branch. Commenters also pointed out that U.S. banks would be at a 
particular disadvantage with respect to foreign banks with U.S. 
branches. Such banks could offer their foreign bank customers access to 
the U.S. financial system through their non-U.S. offices without the 
need for such foreign bank customer to complete the certification or to 
appoint a process agent to accept subpoenas from U.S. authorities. This 
construction thus would not prevent foreign banks from gaining access 
to the U.S. financial system, but would more likely result in this 
occurring outside the due diligence process required of covered 
financial institutions.
    In addition, commenters noted that historically, in implementing 
the BSA, Treasury has confined the scope of its coverage to entities 
and activities ``within the United States.'' In the current BSA rules, 
a foreign branch of a U.S. bank is included in the definition of a 
``foreign bank'' \11\ rather than in the definition of a ``bank,'' and, 
as such, is not subject to BSA requirements such as suspicious activity 
reporting. Similarly, foreign offices of securities broker-dealers are 
not subject to this requirement.\12\ Others questioned whether it is 
appropriate or even permissible under general concepts of jurisdiction 
to require a foreign bank with no contacts with the U.S. (other than 
having an account with a foreign branch of a U.S. bank) to agree to be 
subject to subpoena authority and to appoint an agent for process. 
Commenters also noted that this construction could, in certain cases, 
require a foreign branch to be in conflict with local law, such as 
situations where it could be required to close an account with a 
foreign bank.
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    \11\ 31 CFR 103.11(o).
    \12\ 31 CFR 103.19(a)(1), 67 FR 44048, 44052 (July 1, 2002).
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    A Congressional commenter stated that including foreign branches of 
U.S. banks within the definition of ``covered financial institution'' 
is appropriate and is consistent with legislative intent.
    Treasury has determined, based upon the plain language of the Act, 
as well as the policy considerations discussed above, that foreign 
branches of insured banks should not be included within the definition 
of ``covered financial institution,'' and, thus, that correspondent 
accounts for foreign banks that are clearly established, maintained, 
administered or managed only at foreign branches should not be subject 
to the final regulation. Of course, if such an account actually is 
established, maintained, administered, or managed in the United States, 
then it would be subject to the final rule. As a result of this 
determination, a foreign branch of an insured bank is treated as a 
``foreign bank'' under the final rule, and any correspondent account 
maintained for it by a covered financial institution will be subject to 
the final rule. This means that insured banks will be required to take 
reasonable steps to ensure that such accounts they maintain for any of 
their foreign branches are not used to indirectly provide banking 
services to a foreign shell bank.
    Although the Act does not define ``covered financial institution'' 
for purposes of section 5318(k), the NPRM proposed that the term be 
given the same meaning as the identical term in section 5318(j), which 
includes securities brokers and dealers. This was because both sections 
deal with anti-

[[Page 60566]]

money laundering efforts related to correspondent relationships between 
financial institutions and foreign banks, and to treat securities 
broker-dealers otherwise would be inconsistent with the statutory 
scheme and would not reflect a comprehensive approach to implementing 
the Act's money-laundering requirements. This definition is retained in 
the final rule.
    As a result of Treasury's inclusion in the final rule of the BSA 
definition of the ``United States,'' branches of foreign banks in the 
U.S. Territories and Insular Possessions will be treated as ``covered 
financial institutions.'' In the NPRM, they fell within the definition 
of ``foreign banks.''
    Foreign bank. The NPRM proposed to define a ``foreign bank'' as any 
organization that (i) is organized under the laws of a foreign country; 
(ii) engages in the business of banking; (iii) is recognized as a bank 
by the bank supervisory or monetary authority of the country of its 
organization or principal banking operations; and (iv) receives 
deposits in the regular course of its business. The proposed definition 
excluded an agency or branch of a foreign bank located in the United 
States or an insured bank organized in a territory of the United 
States, Puerto Rico, Guam, American Samoa, or the Virgin Islands, as 
those entities are ``''covered financial institutions' under the 
statute. In addition, the definition excluded a foreign central bank or 
foreign monetary authority that functions as a central bank, as well as 
certain other international financial institutions, including 
multinational development banks of which the U.S. is a member.
    A Congressional commenter stated that this definition is too 
narrow, in that it includes the requirement that such an organization 
``(iv) receives deposits in the regular course of its business.'' The 
commenter suggested that this may provide a loophole for an 
organization that is appropriately classified as a foreign shell bank 
but could evade the requirements of this section by not generally 
receiving deposits. Another commenter expressed the view that this 
definition may be too broad, in that it may include nonbank financial 
institutions such as investment companies, investment advisers, 
insurance companies, commodity pools and commodity trading advisers 
within the definition.
    On further consideration, Treasury has determined to adopt the 
existing BSA definition of ``foreign bank.'' \13\ Treasury believes 
that the existing BSA definition, which defines ``foreign bank'' by 
reference to U.S. depository institutions (and includes foreign 
branches of U.S. banks), will generally include the institutions at 
which the statutory provisions are directed, is more precise, and will 
result in fewer interpretive issues. Treasury believes that adopting 
the current BSA definition of ``foreign bank'' for this regulation 
resolves the concerns of the commenters noted above, and will not 
require the exceptions contained in the NPRM for foreign central banks, 
foreign monetary authorities that function as central banks, and 
international financial institutions and regional development banks, 
since they clearly would not fall within this definition. Treasury thus 
confirms that the definition of foreign bank does not include any 
foreign central bank or monetary authority that functions as a central 
bank, or any international financial institution or regional 
development bank formed by treaty or international agreement.\14\
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    \13\ Current BSA regulations define ``foreign bank'' as ``a bank 
organized under foreign law, or an agency, branch or office located 
outside the United States of a bank.'' The term does not include an 
agent, agency, branch or office within the United States of a bank 
organized under foreign law. 31 CFR 103.11(o). The regulations 
define ``bank'' to include U.S. offices of commercial banks or trust 
companies, national banks, thrift institutions, credit unions, other 
organizations (other than money services businesses) chartered under 
state banking laws and supervised by state banking supervisors, 
corporations acting under section 25(a) of the Federal Reserve Act, 
and banks organized under foreign law. 31 CFR 103.11(c).
    \14\ Such institutions include, for example, the Bank for 
International Settlements, International Bank for Reconstruction and 
Development (the World Bank), International Monetary Fund, African 
Development Bank, Asian Development Bank, European Bank for 
Reconstruction and Development, Inter-American Development Bank, 
International Finance Corporation, North American Development Bank, 
International Development Association, Multilateral Investment 
Guarantee Agency, European Investment Bank, Nordic Investment Bank, 
and Council of Europe Development Bank.
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    Foreign shell bank. The proposal defined ``foreign shell bank'' as 
a foreign bank that does not have a physical presence in any country. 
The definition in the final rule is unchanged.
    Owner. The NPRM proposed to define ``owner'' as any ``large direct 
owner,'' ``indirect owner,'' or ``small direct owner,'' each of which 
was in turn defined. Although the definition as proposed was intended 
to reduce reporting burden, many commenters found the definition overly 
complicated, particularly considering that it must be interpreted by 
thousands of foreign banks, and suggested that it be simplified or 
clarified. Treasury agrees that a simpler definition is preferable. 
Accordingly, the final rule adopts, as a definition of owner, any 
person who, directly or indirectly, (i) owns, controls, or has power to 
vote 25 percent or more of any class of voting securities or other 
voting interests of a foreign bank, or (ii) controls in any manner the 
election of a majority of the directors (or individuals exercising 
similar functions) of a foreign bank.
    Treasury continues to believe that the 25 percent ownership 
threshold contained in the NPRM is appropriate based in part on the 
fact that section 312 of the Act amends the BSA to require that, as an 
element of enhanced due diligence, covered financial institutions take 
reasonable steps to ascertain the owners of certain foreign banks whose 
shares are not publicly traded.\15\ As this requirement under section 
312 applies only to foreign banks operating under licenses deemed to be 
of a high risk for money laundering, it is unreasonable to require the 
same level of disclosure regarding the ownership of the thousands of 
other foreign banks for which covered financial institutions maintain 
correspondent accounts that do not operate under high-risk 
licenses.\16\ Similarly, foreign banks whose shares are publicly traded 
will not be required to report their owners.
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    \15\ 31 U.S.C. 5318(i)(2)(B)(i).
    \16\ See 67 FR 37743, supra note 8.
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    For purposes of the definition of ``owner'' in the NPRM, ``person'' 
was defined as any individual, bank, corporation, partnership, limited 
liability company, or any other legal entity, except that members of 
the same family \17\ shall be considered one person, and each family 
member who has an ownership interest in the foreign bank must be 
identified. The term ``voting shares or other voting interests'' was 
defined to mean shares or other interests that entitle the holder to 
vote for or select directors (or individuals exercising similar 
functions). These definitions are unchanged in the final rule, except 
for a technical conforming change of the word ``shares'' to 
``securities.''
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    \17\ The same family means parents, spouses, children, siblings, 
uncles, aunts, grandparents, grandchildren, first cousins, 
stepchildren, stepsiblings, and parents-in-law, and spouses of any 
of the foregoing.
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    Person. The NPRM defined ``person'' (other than for purposes of the 
definition of ``owner'') to have the same meaning as provided in 
section 103.11(z). The final rule adopts the proposed definition 
without change.
    Physical presence. The NPRM proposed the same definition of 
``physical presence'' as that contained in section 5318(j): a place of 
business that (i) is maintained by a foreign bank; (ii) is located at a 
fixed address (other than

[[Page 60567]]

solely an electronic address) in a country in which the foreign bank is 
authorized to conduct banking activities, at which location the foreign 
bank employs 1 or more individuals on a full-time basis and maintains 
operating records related to its banking activities; and (iii) is 
subject to inspection by the banking authority that licensed the 
foreign bank to conduct banking activities.''
    Although no written comments addressed the proposed definition, 
Treasury received questions as to the meaning of the phrase ``subject 
to inspection,'' which is not defined in the Act. For purposes of this 
provision, Treasury generally considers a foreign bank to be ``subject 
to inspection'' if it is subject to the oversight of a government 
agency whose mission is to supervise the operations and condition of 
the foreign bank, including the prevention and detection of money 
laundering and other criminal conduct.
    Regulated affiliate. The NPRM proposed the same definition of 
``regulated affiliate'' as that contained in section 5318(j): a foreign 
bank that (1) is an affiliate of a depository institution, credit 
union, or foreign bank that maintains a physical presence in the United 
States or a foreign country, as applicable, and (2) is subject to 
supervision by a banking authority in the country regulating such 
affiliated depository institution, credit union, or foreign bank. For 
purposes of this definition, the NPRM proposed to define ``affiliate'' 
as any company that controls, is controlled by, or is under common 
control with another company. In the final rule, for consistency, 
Treasury is amending the definition of ``affiliate'' to conform to the 
definition set forth in section 5318(j)(4): ``a foreign bank that is 
controlled by or under common control with a depository institution, 
credit union, or foreign bank.''
    The NPRM proposed to define ``control'' for purposes of the 
``regulated affiliate'' definition to mean: (1) Ownership, control, or 
power to vote 25 percent or more of any class of voting shares or other 
voting interests of another company; or (2) control in any manner of 
the election of a majority of the directors (or individuals exercising 
similar functions) of another company. A Congressional comment takes 
the position that the proposed threshold for affiliation of 25 percent 
ownership is too low, and that a threshold of 80 percent would be more 
appropriate, in order to preclude an entity 75 percent of whose stock 
is not owned by a regulated affiliate from qualifying for the 
``regulated affiliate'' exception. Treasury's selection of the 25 
percent threshold was based in part on the definition of ``control'' 
contained in the Bank Holding Company Act \18\ and the Federal 
Reserve's Regulation Y thereunder,\19\ which define ``control'' to 
exist at the 25 percent threshold. On further consideration, Treasury 
has determined to increase the threshold required to meet the 
``regulated affiliate'' definition from 25 to 50 percent.\20\ Treasury 
notes that, in order to qualify for the exemption, the foreign bank 
also must be ``subject to supervision'' by a banking authority in the 
country regulating the affiliate. Treasury interprets this phrase, 
which is not defined in the Act, as having the same meaning as 
``subject to inspection,'' discussed above in connection with the term 
``physical presence.'' In order for a foreign bank to qualify for this 
exemption, the degree of supervision would not be as high as that 
required in order for the Board of Governors of the Federal Reserve 
System (``Federal Reserve'') to find that the foreign bank is subject 
to comprehensive supervision or regulation on a consolidated basis by 
the supervisor in the country regulating the affiliate.\21\
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 1841(a)(2) and (k).
    \19\ 12 CFR 225.2(a) and (c)(1).
    \20\ The 50 percent threshold is used in 12 U.S.C. 221a.
    \21\ 12 CFR 211.24(c)(1); See 67 FR 37740, supra note 8.
---------------------------------------------------------------------------

    Finally, definitions of the terms ``United States'' and 
``Territories and Insular Possessions'' have been added to the final 
rule in order to simplify and clarify the definitions of ``covered 
financial institution'' and ``foreign bank.'' These terms are defined 
by reference to the current definitions in 31 CFR Part 103.11 (nn) and 
(tt) respectively.

B. Section 103.177 Prohibition on Correspondent Accounts for Foreign 
Shell Banks; Records Concerning Owners of Foreign Banks and Agents for 
Service of Process

    Prohibition on correspondent accounts for foreign shell banks. BSA 
section 5318(j) (added by section 313 of the Act) provides that a 
``covered financial institution'' shall not establish, maintain, 
administer, or manage a ``correspondent account'' in the United States 
for, or on behalf of, a shell bank that is not a regulated affiliate. 
This prohibition was set forth in the NPRM, and is unchanged in the 
final rule. As Treasury stated in the NPRM, it expects that covered 
financial institutions will have terminated all correspondent accounts 
with any foreign bank that they know to be a shell bank that is not a 
regulated affiliate.
    As discussed above, for purposes of this section, the term 
``correspondent account'' essentially parallels the broad statutory 
definition. It thus includes, for example, transaction accounts and 
time and money market deposit accounts,\22\ clearing and settlement 
accounts, fiduciary accounts, as well as transactions with foreign 
banks in securities, derivatives, repurchase agreements, foreign 
exchange, and other instruments, to the extent that these transactions 
constitute an ``account.''
    This provision also includes the statutory requirement and NPRM 
requirement that a covered financial institution must take reasonable 
steps to ensure that any correspondent account established, maintained, 
administered, or managed by the covered financial institution in the 
United States for a foreign bank is not being used by that foreign bank 
to indirectly provide banking services to a foreign shell bank that is 
not a regulated affiliate. As Treasury noted in the NPRM, it expects 
covered financial institutions to terminate any correspondent account 
with a foreign bank that it knows is being used to indirectly provide 
banking services to a foreign shell bank. The final rule retains the 
provision of the NPRM that proposed to permit correspondent accounts 
for foreign shell banks that qualify as regulated affiliates. The final 
rule does not include the provision in the NPRM that proposed to 
require that correspondent accounts established, maintained, 
administered, or managed by a foreign branch of a covered financial 
institution be deemed to be established, maintained, administered or 
managed in the United States.
---------------------------------------------------------------------------

    \22\ 12 CFR 204.2(e) and (f)(1).
---------------------------------------------------------------------------

    Records of owners and agents of foreign banks with correspondent 
accounts. The NPRM proposed to codify the requirement contained in BSA 
section 5318(k), as added by section 319(b) of the Act, that any 
covered financial institution that maintains a correspondent account in 
the United States for a foreign bank must maintain records in the 
United States identifying: (1) The owner(s) of such foreign bank; and 
(2) the name and address of a person who resides in the United States 
and is authorized to accept service of legal process for records 
regarding the correspondent account.\23\
---------------------------------------------------------------------------

    \23\ The use of an embassy or consular office as process agent 
is not acceptable.
---------------------------------------------------------------------------

    Section 5318(k) does not define ``owner'' for purposes of this 
requirement. As discussed above,

[[Page 60568]]

Treasury is amending in the final rule the definition of ``owner'' in 
the NPRM for purposes of this provision.
    The NPRM also, as an option, permitted the use of the relevant 
portion of a foreign bank's FR Y-7 to meet the recordkeeping obligation 
for foreign banks that file this form. The form requires disclosure of 
ownership information starting at a threshold of 5 percent of a foreign 
banking organization's stock. Commenters supported the use of the FR Y-
7 as an alternative means to satisfy this requirement, but some 
requested that the regulation be clarified in this regard. Another 
commenter noted that an individual's ownership interest in a foreign 
bank may be confidential in the foreign bank's home country for a 
variety of legitimate reasons, and asserted that the Federal Reserve 
recognizes such concerns and permits the ownership information 
contained in the FR Y-7 to be kept confidential.\24\ The commenter 
requested that, in such cases, the foreign bank should not be required 
to disclose the information to a covered financial institution if the 
information is available to the appropriate U.S. government agencies.
---------------------------------------------------------------------------

    \24\ The FR Y-7 is available to the public upon request on an 
individual basis. A foreign bank may request confidential treatment 
for specific information on the form based on a demonstration that 
public release of such information would be exempt under the Freedom 
of Information Act. Such requests are considered on a case-by-case 
basis.
---------------------------------------------------------------------------

    To minimize recordkeeping burdens, Treasury has modified the final 
rule to except from the ownership recordkeeping requirement any foreign 
bank that is required to file its ownership information with the 
Federal Reserve on Form FR Y-7.\25\ Inasmuch as the ownership 
information filed with the Federal Reserve on Form FR Y-7 will be 
available upon request to the Secretary or Attorney General, there is 
no purpose served in requiring covered financial institutions to 
maintain records separately in these cases.\26\
---------------------------------------------------------------------------

    \25\ A covered financial institution may verify that a foreign 
bank is required to file an FR Y-7 by checking the list of foreign 
banks with U.S. offices at www.federalreserve.gov/releases/ibn/.
    \26\ There is no indication in the Act that the purpose of this 
recordkeeping requirement is other than to provide the information 
to a Federal law enforcement officer.
---------------------------------------------------------------------------

    Safe harbor. In order to comply with the limitations on the direct 
and indirect provision of correspondent accounts to foreign shell 
banks, a covered financial institution must ensure that each foreign 
bank for which it provides a correspondent account is not a shell bank, 
and must take reasonable steps to ensure that correspondent accounts 
provided to such foreign banks are not being used to indirectly provide 
banking services to foreign shell banks.\27\ A covered financial 
institution must also obtain information regarding owners and an agent 
for service of process for foreign banks for which it maintains 
correspondent accounts. Although the NPRM did not prescribe the manner 
in which a covered financial institution may satisfy its obligations 
under sections 5318(j) and 5318(k), it provided a safe harbor with 
respect to both sections if a covered financial institution uses the 
model certifications appended to the NPRM. The certification was 
designed to provide a simple and straightforward means of complying 
with these requirements.\28\
---------------------------------------------------------------------------

    \27\ Treasury interprets this to mean that the foreign bank is 
not using the correspondent account to provide banking services to a 
foreign shell bank that is the foreign bank's direct customer. Thus, 
a foreign bank could certify that it is not using a correspondent 
account with a covered financial institution to provide banking 
services to any foreign shell bank, without in turn asking each of 
its foreign bank customers to provide it with a similar 
certification. To interpret this requirement otherwise would lead to 
an endless chain of certifications.
    \28\ Obtaining the certification is not the only means for 
compliance with the regulation. For example, an insured bank that 
maintains a correspondent account for any of its foreign branches is 
not required to obtain a certification from such branches.
---------------------------------------------------------------------------

    Many commenters posed questions and sought clarification regarding 
the use of the certification. As a threshold matter, nothing in this 
final regulation modifies, limits, or supercedes section 101 of the 
Electronic Records in Global and National Commerce Act, Pub. L. 106-
229, 114 Stat. 464 (15 U.S.C. 7001). Thus, certifications and 
recertifications may be distributed, completed, returned, and stored in 
electronic form so long as the records are maintained in accordance 
with any other applicable regulations, and a foreign bank could post 
and update its certification on its website. In addition, facsimile 
copies are also acceptable as originals.
    Commenters sought clarification regarding the extent to which more 
than one covered financial institution may rely on a certification. A 
separate certification need not be produced for each covered financial 
institution; a certification may be relied upon by each covered 
financial institution that is named or referred to therein (as well as 
each branch of a covered financial institution that maintains a 
correspondent account for the foreign bank executing the 
certification). A foreign bank may also execute a global certification 
that is applicable to all correspondent accounts maintained for it by 
covered financial institutions. Commenters also asked for clarification 
as to whether a covered financial institution must obtain an individual 
certification from each foreign branch of a foreign bank for which it 
maintains a correspondent account. Again, this would be governed by the 
way in which the certification is completed. If a foreign bank wishes 
to complete one certification that covers all its branches, it may do 
so, so long as it expresses this in the certification. In such a case, 
the certification should reflect whether any of the foreign bank's 
branches provides shell banks with access to any correspondent account.
    Commenters also inquired whether a covered financial institution 
must obtain a certification directly from each foreign bank for which 
it maintains a correspondent account, or whether it may satisfy the 
safe harbor in this section by obtaining an electronic copy of such 
certification from a central registry or database that may be organized 
to facilitate compliance with this regulation, or from another covered 
financial institution. A covered financial institution may satisfy the 
safe harbor by obtaining a copy of a foreign bank's certification 
either directly from the foreign bank or indirectly, such as from a 
central database or from another covered financial institution, so long 
as the form and content of the certification is otherwise sufficient 
and reliable. In the case of a certification filed with a central 
database, the foreign bank would presumably complete the certification 
without specifying particular covered financial institutions, but 
rather would certify as to all correspondent accounts maintained at 
covered financial institutions generally.
    Commenters also sought clarification of the meaning of the phrase 
``received, reviewed and accepted'' at the end of the certification, 
and, in particular, whether this implies that covered financial 
institutions must verify or otherwise determine the accuracy of the 
information provided by the foreign bank. Treasury expects the covered 
financial institution to review the form to ascertain that all 
information required by the applicable statutory provisions is included 
(responses to Parts C and D in all cases; names of owners (if required) 
in Part E and name and street address of a process agent in Part F); 
and should seek to obtain any other information that is missing from 
the certification. In addition, the covered financial institution is 
expected to determine that the information provided is internally 
consistent.\29\ To avoid confusion the

[[Page 60569]]

word ``accepted'' has been deleted from the certification.
---------------------------------------------------------------------------

    \29\ For example, if the foreign bank checks the second box in 
part C, the location of the foreign bank's regulated affiliate 
should be consistent with the designated banking authority that 
supervises the foreign bank and its regulated affiliate.
---------------------------------------------------------------------------

    Recertification and verification requirements. The NPRM proposed to 
require that a covered financial institution obtain a verification of 
the information provided every two years, or any time that it ``has 
reason to believe'' that the information upon which it is relying may 
be inaccurate. The final rule extends from two to three years the safe 
harbor period for obtaining either a new certification or a 
recertification of a prior certification, and changes the operative 
term from ``verification'' to ``recertification'' to avoid confusion. 
In addition, in response to a Congressional comment, the final rule 
requires the covered financial institution to ``take appropriate 
measures'' to verify any information that it ``knows, suspects, or has 
reason to suspect'' may be incorrect. For example, information obtained 
by a covered financial institution in conducting due diligence required 
pursuant to the final rule to be issued implementing section 312 of the 
Act \30\ may provide reason to suspect that the information obtained in 
a certification may not be accurate and may require the covered 
financial institution to either obtain a new certification or to take 
other appropriate measures to verify the accuracy of the information 
provided. In addition to these substantive changes, the final rule 
reorganizes and simplifies these provisions.
---------------------------------------------------------------------------

    \30\ See 67 FR 37736, supra note 8.
---------------------------------------------------------------------------

    Closure of correspondent accounts. The NPRM proposed that, in order 
to obtain the benefit of the safe harbor, a covered financial 
institution must obtain a certification from the foreign banks for 
which it maintains correspondent accounts existing on the date that is 
30 days after the publication of the final rule, within 90 days after 
publication of the final rule. With respect to accounts established 
after the date that is 30 days after the publication of the final rule, 
the NPRM stated that the safe harbor was available if the certification 
was obtained within 60 days of opening for new accounts established 
before January 1, 2003, and within 30 days of opening for accounts 
established thereafter. Commenters focused on two issues relating to 
these requirements: the time period allowed for satisfying the 
requirements after which account closure would be required, and the 
difficulties anticipated when closure is required.
    With respect to existing accounts, commenters requested that, given 
the potentially large number of foreign banks for which they maintain 
correspondent accounts, a longer period of 120 to 180 days should be 
given. A Congressional comment urged Treasury to reduce the period. On 
balance, and considering the fact that covered financial institutions 
have been aware of this pending requirement for many months, Treasury 
is adopting this requirement with the 90 day period as proposed. With 
regard to new accounts, under the final rule covered financial 
institutions will have 30 days to obtain the initial certification and 
to remain within the safe harbor, regardless of whether the new account 
is opened before or after January 1, 2003.
    The NPRM required that, if a covered financial institution does not 
obtain the information necessary to fulfill its obligations under 
sections 5318(j) and (k) within the prescribed time periods, it must 
terminate all correspondent accounts with the concerned foreign bank. 
Many commenters noted significant problems with this requirement, 
including the difficulties of terminating account relationships within 
a limited time when open positions or transaction accounts are 
involved, the potential for economic harm to result in many situations, 
and the potential liability of a covered financial institution 
resulting from such a termination. Commenters also questioned the 
extent to which the safe harbor from liability resulting from closure 
required in these situations that Treasury provided in the NPRM would 
be given effect in litigation, particularly in foreign jurisdictions. 
Due to these concerns, commenters sought greater flexibility in these 
situations, including the ability to keep accounts open pending 
resolution of these issues.
    Because some correspondent accounts at the time of required 
termination may involve transactions that include open securities or 
futures positions, or may involve transaction accounts with outstanding 
checks or other transactions that need to be accounted for, a covered 
financial institution may exercise commercially reasonable discretion 
in determining the time frame for liquidating such open positions or 
otherwise completing the closing of an account. The measures a covered 
financial institution may take would include, but would not be limited 
to, following its customary practices upon the default of a customer, 
including when appropriate taking steps to close out positions in an 
orderly manner or temporarily freezing an account so as to avoid 
suffering a loss or unduly penalizing a foreign bank. However, a 
covered financial institution must ensure that an account that must be 
closed is not permitted to establish new positions.
    As described above, the NPRM provided that if a covered financial 
institution has reason to believe that a foreign bank's certification 
may be inaccurate, it must undertake to verify such information. The 
NPRM also provided that if the covered financial institution has not 
obtained satisfactory verification within 90 or 60 days after 
commencing the process (depending on whether the verification was 
initiated before or after January 1, 2003), it must close all 
correspondent accounts for such foreign bank. The final rule requires 
that, if the covered financial institution has not obtained 
satisfactory verification within 90 days, it must close the accounts 
within a commercially reasonable time.
    The final rule also carries over from the NPRM the provision 
stating that a covered financial institution may not establish a new 
correspondent account with a foreign bank with which it was required to 
close an account under this rule until it obtains the information 
required under this section.
    Recordkeeping requirement. This provision, which sets forth the 
time period for retention of certifications and other information 
relied upon by the covered financial institution, is unchanged in the 
final rule.
    Special rules concerning information requested prior to the 
effective date of the final rule. The NPRM proposed to permit the use 
by a covered financial institution of information described in either 
Treasury's Interim Guidance dated November 20, 2001 or the NPRM, that 
was requested of a foreign bank prior to 30 days after the publication 
of the final rule with respect to accounts in existence on or before 
such date, so long as such information is obtained on or before 90 days 
after the date of publication of the final rule. Several commenters 
sought confirmation that a covered financial institution would be in 
compliance with the final rule if it obtained information pursuant to 
the model certification attached to the Interim Guidance with respect 
to such accounts, so long as the covered financial institution makes 
the request within 30 days following publication of the final rule, and 
receives the information within 90 days following publication. Treasury 
confirms that this is the case. This provision has been clarified and 
condensed in the final rule.

[[Page 60570]]

C. 103.185--Summons or Subpoena of Foreign Bank Records; Termination of 
Correspondent Relationship

    Issuance of process to foreign bank. The NPRM proposed to codify 
the provisions of section 5318(k) that authorize the Secretary or the 
Attorney General to issue a summons or subpoena to any foreign bank 
that maintains a correspondent account in the United States and to 
request records related to such correspondent account, including 
records maintained outside of the United States relating to the deposit 
of funds into the foreign bank. The summons or subpoena may be served 
on the foreign bank in the United States if the foreign bank has a 
representative in the United States, or in a foreign country pursuant 
to any mutual legal assistance treaty, multilateral agreement, or other 
request for international law enforcement assistance. These provisions 
are unchanged in the final rule.
    Issuance of process to covered financial institution. The NPRM 
proposed that, upon receipt of a written request from a Federal law 
enforcement officer for information required to be maintained by a 
covered financial institution under this section, the covered financial 
institution shall provide the information to the requesting officer not 
later than 7 days after receipt of the request. This provision is 
unchanged in the final rule.
    Termination of correspondent relationships upon receipt of notice. 
The NPRM proposed to codify the provisions of section 5318(k) that 
require a covered financial institution to terminate any correspondent 
relationship with a foreign bank not later than 10 business days after 
receipt of written notice from the Secretary or the Attorney General 
(in each case, after consultation with the other) that the foreign bank 
has failed either: (1) To comply with the summons or subpoena issued; 
or (2) to initiate proceedings in a United States court contesting such 
summons or subpoena. This provision is unchanged in the final rule.
    Limitation of liability. The NPRM proposed to codify the provision 
in section 5318(k) that provides that a covered financial institution 
shall not be liable for terminating a correspondent account in 
accordance with the rule. This provision is unchanged in the final 
rule.
    Failure to terminate relationship. The NPRM proposed to codify the 
provision of section 5318(k) that provides that a covered financial 
institution that fails to terminate the correspondent relationship upon 
receiving notice from the Secretary or the Attorney General is subject 
to a civil penalty of up to $10,000 per day until the correspondent 
relationship is so terminated. This provision is unchanged in the final 
rule.

IV. Regulatory Flexibility Act

    It is hereby certified that this final rule is not likely to have a 
significant economic impact on a substantial number of small entities. 
Covered financial institutions that are subject to the recordkeeping 
requirements in the statute and the final rule tend to be large 
institutions. Moreover, any economic consequences that might result 
from the prohibition on dealings with foreign shell banks, or from the 
failure of a foreign bank to provide the information necessary for a 
covered financial institution to fulfill its recordkeeping obligations, 
flow directly from the underlying statute. Accordingly, the analysis 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do 
not apply.

V. Executive Order 12866

    The Department of the Treasury has determined that this final rule 
is not a ``significant regulatory action'' as defined in Executive 
Order 12866. Accordingly, a regulatory assessment is not required.

VI. Paperwork Reduction Act

    The collections of information contained in Appendix A to Subpart I 
of Part 103 had been previously reviewed and approved by the Office of 
Management and Budget (OMB) in accordance with the requirements of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.), and assigned OMB 
Control Number 1505-0184.
    The collection of information contained in Appendix B to Subpart I 
of Part 103 and the recordkeeping requirement in section 103.177(e) was 
submitted to OMB for review in conjunction with the issuance of the 
NPRM in accordance with the requirements of the Paperwork Reduction 
Act. These requirements have been approved by OMB and assigned OMB 
Control Number 1505-0184. The estimated average annual reporting burden 
associated with Appendix A is 20 hours per respondent; the estimated 
average annual reporting burden associated with Appendix B is 5 hours 
per respondent; and the estimated average recordkeeping burden 
associated with section 103.177(e) is 9 hours per recordkeeper. 
Comments concerning the accuracy of these burden estimates and 
suggestions on how to minimize the burdens should be sent (preferably 
by fax (202-395-6974)) to the Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Office of 
Management and Budget, Paperwork Reduction Project, Washington, DC 
20503 (or by the Internet to jlackeyj@omb.eop.gov), with a copy to 
FinCEN by mail to P.O. Box 39, Vienna, VA 22183 or by e-mail to 
regcomments@fincen.treas.gov. An agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.

List of Subjects in 31 CFR Part 103

    Banks, banking, Brokers, Counter money laundering, Counter-
terrorism, Currency, Foreign banking, Reporting and recordkeeping 
requirements.

Authority and Issuance

    For the reasons set forth in the preamble, 31 CFR part 103 is 
amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FOREIGN TRANSACTIONS

    1. The authority citation for part 103 is revised to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, secs. 312, 313, 314, 319, 352, Pub. L. 
107-56, 115 Stat. 307.

    2. Add new Sec. Sec.  103.175 and 103.177 to subpart I immediately 
after undesignated centerheading ``SPECIAL DUE DILIGENCE FOR 
CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS'' to read as 
follows:


Sec.  103.175  Definitions.

    Except as otherwise provided, the following definitions apply for 
purposes of Sec. Sec.  103.176 through 103.190:
    (a) Attorney General means the Attorney General of the United 
States.
    (b) [Reserved]
    (c) Certification and Recertification mean the certification and 
recertification forms described in Appendices A and B, respectively, to 
this subpart.
    (d) Correspondent account. (1) The term correspondent account 
means:
    (i) [Reserved]
    (ii) For purposes of Sec. Sec.  103.177 and 103.185, a 
correspondent account is an account established by a covered financial 
institution for a foreign bank to receive deposits from, to make 
payments or other disbursements on behalf of a foreign bank, or to 
handle other financial transactions related to the foreign bank.

[[Page 60571]]

    (2) For purposes of this definition, the term account:
    (i) Means any formal banking or business relationship established 
to provide regular services, dealings, and other financial 
transactions; and
    (ii) Includes a demand deposit, savings deposit, or other 
transaction or asset account and a credit account or other extension of 
credit.
    (e) Correspondent relationship has the same meaning as 
correspondent account for purposes of Sec. Sec.  103.177 and 103.185.
    (f) Covered financial institution means:
    (1) [Reserved]
    (2) For purposes of Sec. Sec.  103.177 and 103.185:
    (i) An insured bank (as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h));
    (ii) A commercial bank or trust company;
    (iii) A private banker;
    (iv) An agency or branch of a foreign bank in the United States;
    (v) A credit union;
    (vi) A thrift institution;
    (vii) A corporation acting under section 25A of the Federal Reserve 
Act (12 U.S.C. 611 et seq.); and
    (viii) A broker or dealer registered or required to be registered 
with the Securities and Exchange Commission under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.).
    (g) Foreign bank. The term foreign bank shall have the meaning 
provided in Sec.  103.11(o).
    (h) [Reserved]
    (i) Foreign shell bank means a foreign bank without a physical 
presence in any country.
    (j) [Reserved]
    (k) [Reserved]
    (l) Owner. (1) The term owner means any person who, directly or 
indirectly:
    (i) Owns, controls, or has power to vote 25 percent or more of any 
class of voting securities or other voting interests of a foreign bank; 
or
    (ii) Controls in any manner the election of a majority of the 
directors (or individuals exercising similar functions) of a foreign 
bank.
    (2) For purposes of this definition:
    (i) Members of the same family shall be considered to be one 
person.
    (ii) The term same family means parents, spouses, children, 
siblings, uncles, aunts, grandparents, grandchildren, first cousins, 
stepchildren, stepsiblings, and parents-in-law, and spouses of any of 
the foregoing.
    (iii) Each member of the same family who has an ownership interest 
in a foreign bank must be identified if the family is an owner as a 
result of aggregating the ownership interests of the members of the 
family. In determining the ownership interests of the same family, any 
voting interest of any family member shall be taken into account.
    (iv) Voting securities or other voting interests means securities 
or other interests that entitle the holder to vote for or select 
directors (or individuals exercising similar functions).
    (m) Person has the same meaning as provided in Sec.  103.11(z).
    (n) Physical presence means a place of business that:
    (1) Is maintained by a foreign bank;
    (2) Is located at a fixed address (other than solely an electronic 
address or a post-office box) in a country in which the foreign bank is 
authorized to conduct banking activities, at which location the foreign 
bank:
    (i) Employs 1 or more individuals on a full-time basis; and
    (ii) Maintains operating records related to its banking activities; 
and
    (3) Is subject to inspection by the banking authority that licensed 
the foreign bank to conduct banking activities.
    (o) [Reserved]
    (p) Regulated affiliate. (1) The term regulated affiliate means a 
foreign shell bank that:
    (i) Is an affiliate of a depository institution, credit union, or 
foreign bank that maintains a physical presence in the United States or 
a foreign country, as applicable; and
    (ii) Is subject to supervision by a banking authority in the 
country regulating such affiliated depository institution, credit 
union, or foreign bank.
    (2) For purposes of this definition:
    (i) Affiliate means a foreign bank that is controlled by, or is 
under common control with, a depository institution, credit union, or 
foreign bank.
    (ii) Control means:
    (A) Ownership, control, or power to vote 50 percent or more of any 
class of voting securities or other voting interests of another 
company; or
    (B) Control in any manner the election of a majority of the 
directors (or individuals exercising similar functions) of another 
company.
    (q) Secretary means the Secretary of the Treasury.
    (r) [Reserved]
    (s) Territories and Insular Possessions has the meaning provided in 
Sec.  103.11(tt).
    (t) United States has the meaning provided in Sec.  103.11(nn).


Sec.  103.177  Prohibition on correspondent accounts for foreign shell 
banks; records concerning owners of foreign banks and agents for 
service of legal process.

    (a) Requirements for covered financial institutions. (1) 
Prohibition on correspondent accounts for foreign shell banks. (i) A 
covered financial institution shall not establish, maintain, 
administer, or manage a correspondent account in the United States for, 
or on behalf of, a foreign shell bank.
    (ii) A covered financial institution shall take reasonable steps to 
ensure that any correspondent account established, maintained, 
administered, or managed by that covered financial institution in the 
United States for a foreign bank is not being used by that foreign bank 
to indirectly provide banking services to a foreign shell bank.
    (iii) Nothing in paragraph (a)(1) of this section prohibits a 
covered financial institution from providing a correspondent account or 
banking services to a regulated affiliate.
    (2) Records of owners and agents. (i) Except as provided in 
paragraph (a)(2)(ii) of this section, a covered financial institution 
that maintains a correspondent account in the United States for a 
foreign bank shall maintain records in the United States identifying 
the owners of each such foreign bank whose shares are not publicly 
traded and the name and street address of a person who resides in the 
United States and is authorized, and has agreed to be an agent to 
accept service of legal process for records regarding each such 
account.
    (ii) A covered financial institution need not maintain records of 
the owners of any foreign bank that is required to have on file with 
the Federal Reserve Board a Form FR Y-7 that identifies the current 
owners of the foreign bank as required by such form.
    (iii) For purposes of paragraph (a)(2)(i) of this section, publicly 
traded refers to shares that are traded on an exchange or on an 
organized over-the-counter market that is regulated by a foreign 
securities authority as defined in section 3(a)(50) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(50)).
    (b) Safe harbor. Subject to paragraphs (c) and (d) of this section, 
a covered financial institution will be deemed to be in compliance with 
the requirements of paragraph (a) of this section with respect to a 
foreign bank if the covered financial institution obtains, at least 
once every three years, a certification or recertification from the 
foreign bank.
    (c) Interim verification. If at any time a covered financial 
institution knows, suspects, or has reason to suspect, that any 
information contained in a

[[Page 60572]]

certification or recertification provided by a foreign bank, or 
otherwise relied upon by the covered financial institution for purposes 
of this section, is no longer correct, the covered financial 
institution shall request that the foreign bank verify or correct such 
information, or shall take other appropriate measures to ascertain the 
accuracy of the information or to obtain correct information, as 
appropriate. See paragraph (d)(3) of this section for additional 
requirements if a foreign bank fails to verify or correct the 
information or if a covered financial institution cannot ascertain the 
accuracy of the information or obtain correct information.
    (d) Closure of correspondent accounts. (1) Accounts existing on 
October 28, 2002. In the case of any correspondent account that was in 
existence on October 28, 2002, if the covered financial institution has 
not obtained a certification (or recertification) from the foreign 
bank, or has not otherwise obtained documentation of the information 
required by such certification (or recertification), on or before 
December 26, 2002, and at least once every three years thereafter, the 
covered financial institution shall close all correspondent accounts 
with such foreign bank within a commercially reasonable time, and shall 
not permit the foreign bank to establish any new positions or execute 
any transaction through any such account, other than transactions 
necessary to close the account.
    (2) Accounts established after October 28, 2002. In the case of any 
correspondent account established after October 28, 2002, if the 
covered financial institution has not obtained a certification (or 
recertification), or has not otherwise obtained documentation of the 
information required by such certification (or recertification) within 
30 calendar days after the date the account is established, and at 
least once every three years thereafter, the covered financial 
institution shall close all correspondent accounts with such foreign 
bank within a commercially reasonable time, and shall not permit the 
foreign bank to establish any new positions or execute any transaction 
through any such account, other than transactions necessary to close 
the account.
    (3) Verification of previously provided information. In the case of 
a foreign bank with respect to which the covered financial institution 
undertakes to verify information pursuant to paragraph (c) of this 
section, if the covered financial institution has not obtained, from 
the foreign bank or otherwise, verification of the information or 
corrected information within 90 calendar days after the date of 
undertaking the verification, the covered financial institution shall 
close all correspondent accounts with such foreign bank within a 
commercially reasonable time, and shall not permit the foreign bank to 
establish any new positions or execute any transaction through any such 
account, other than transactions necessary to close the account.
    (4) Reestablishment of closed accounts and establishment of new 
accounts. A covered financial institution shall not reestablish any 
account closed pursuant to this paragraph (d), and shall not establish 
any other correspondent account with the concerned foreign bank, until 
it obtains from the foreign bank the certification or the 
recertification, as appropriate.
    (5) Limitation on liability. A covered financial institution shall 
not be liable to any person in any court or arbitration proceeding for 
terminating a correspondent account in accordance with this paragraph 
(d).
    (e) Recordkeeping requirement. A covered financial institution 
shall retain the original of any document provided by a foreign bank, 
and the original or a copy of any document otherwise relied upon by the 
covered financial institution, for purposes of this section, for at 
least 5 years after the date that the covered financial institution no 
longer maintains any correspondent account for such foreign bank. A 
covered financial institution shall retain such records with respect to 
any foreign bank for such longer period as the Secretary may direct.
    (f) Special rules concerning information requested prior to October 
28, 2002. (1) Definition. For purposes of this paragraph (f) the term 
``Interim Guidance'' means:
    (i) The Interim Guidance of the Department of the Treasury dated 
November 20, 2001 and published in the Federal Register on November 27, 
2001; or
    (ii) The guidance issued in a document published in the Federal 
Register on December 28, 2001.
    (2) Use of Interim Guidance certification. In the case of a 
correspondent account in existence on October 28, 2002, the term 
``certification'' as used in paragraphs (b), (c), (d)(1), and (d)(3) of 
this section shall also include the certification appended to the 
Interim Guidance, provided that such certification was requested prior 
to October 28, 2002 and obtained by the covered financial institution 
on or before December 26, 2002.
    (3) Recordkeeping requirement. Paragraph (e) of this section shall 
apply to any document provided by a foreign bank, or otherwise relied 
upon by a covered financial institution, for purposes of the Interim 
Guidance.


(Approved by the Office of Management and Budget under Control Number 
1505-0184.)


    3. Add new undesignated centerheading and Sec.  103.185 to subpart 
I to read as follows:

Law Enforcement Access to Foreign Bank Records


Sec.  103.185  Summons or subpoena of foreign bank records; Termination 
of correspondent relationship.

    (a) Definitions. The definitions in Sec.  103.175 apply to this 
section.
    (b) Issuance to foreign banks. The Secretary or the Attorney 
General may issue a summons or subpoena to any foreign bank that 
maintains a correspondent account in the United States and may request 
records related to such correspondent account, including records 
maintained outside of the United States relating to the deposit of 
funds into the foreign bank. The summons or subpoena may be served on 
the foreign bank in the United States if the foreign bank has a 
representative in the United States, or in a foreign country pursuant 
to any mutual legal assistance treaty, multilateral agreement, or other 
request for international law enforcement assistance.
    (c) Issuance to covered financial institutions. Upon receipt of a 
written request from a Federal law enforcement officer for information 
required to be maintained by a covered financial institution under 
paragraph (a)(2) of Sec.  103.177, the covered financial institution 
shall provide the information to the requesting officer not later than 
7 days after receipt of the request.
    (d) Termination upon receipt of notice. A covered financial 
institution shall terminate any correspondent relationship with a 
foreign bank not later than 10 business days after receipt of written 
notice from the Secretary or the Attorney General (in each case, after 
consultation with the other) that the foreign bank has failed:
    (1) To comply with a summons or subpoena issued under paragraph (b) 
of this section; or
    (2) To initiate proceedings in a United States court contesting 
such summons or subpoena.
    (e) Limitation on liability. A covered financial institution shall 
not be liable to any person in any court or arbitration proceeding for 
terminating a

[[Page 60573]]

correspondent relationship in accordance with paragraph (d) of this 
section.
    (f) Failure to terminate relationship. Failure to terminate a 
correspondent relationship in accordance with this section shall render 
the covered financial institution liable for a civil penalty of up to 
$10,000 per day until the correspondent relationship is so terminated.
    4. Add new appendices A and B to subpart I of part 103 as follows:

BILLING CODE 4810-02-P

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[GRAPHIC] [TIFF OMITTED] TR26SE02.013


    Dated: September 18, 2002.
James Sloan,
Director.
[FR Doc. 02-24142 Filed 9-25-02; 8:45 am]
BILLING CODE 4810-02-C



Last Updated 12/10/2002 communications@fdic.gov