Correspondent Accounts Defined
The USA PATRIOT Act of 2001 defines a correspondent bank account or a foreign correspondent account as any account that has been opened to establish the following purposes:
- To receive funds, cash or other deposits from a foreign bank or financial institution
- To process payments or transfer funds, proceeds, and wires on behalf of a foreign financial institution
- To handle financial transactions on behalf of a foreign institution
Prohibited Correspondent Foreign Accounts – Requirements
The USA PATRIOT Act prohibits US financial institutions from opening or maintaining a foreign correspondent account on behalf of a foreign shell bank or foreign shell correspondent bank.
A foreign shell bank is any foreign financial banking institution that does not have an actual physical address in any country.
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In the event that a financial institution has an existing relationship with a foreign correspondent bank and it becomes known that the foreign correspondent bank no longer maintains any physical address in any country, then the financial institution is required to terminate the relationship within 20 days of learning that the other party has become a shell bank.
Correspondent Account Requirements
The USA PATRIOT Act requires banking and non-banking US financial institutions to conduct risk-based customer due diligence and enhanced customer due diligence on correspondent banks for a foreign bank:
- That is operating under an offshore banking license
- That is operating in a high-risk jurisdiction that is known to be non-cooperative with international anti-money laundering laws
- That is operating in a jurisdiction found to be a high-risk money laundering location (e.g., Columbia)
Conducting Due Diligence
When performing due diligence on correspondent banks, US financial institutions are required by the USA PATRIOT Act to follow the below correspondent banking requirements:
- Conduct adequate and appropriate enhanced screening of the bank
- Investigate and determine whether the foreign bank itself offers correspondent accounts to other foreign banks (e.g., nested accounts)
- When necessary, a US financial firm should identify the customers of the foreign correspondent bank and perform enhanced due diligence on them
- Identify the owners, beneficial owners, and principals of the foreign bank if its shares are not publicly traded
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