The Office of the Comptroller of the Currency has issued risk management guidance that addresses periodic reevaluations of the risks associated with foreign correspondent banking accounts. The guidance reiterates the agency’s supervisory expectation that the banks it oversees assess these risks as part of their on-going risk management and due diligence practices.
Foreign correspondent accounts are established by a bank for a foreign financial institution to receive deposits from, to make payments or other disbursements on behalf of, or to handle other financial transactions related to the foreign financial institution.
The new guidance describes a range of best practices for banks to consider when conducting periodic reevaluations and making account retention or termination decisions. They include:
Establishing and maintaining an effective governance function to review the method for periodic risk reevaluation and to monitor the appropriateness of recommendations regarding foreign correspondent account retention or termination.
Communicating foreign correspondent account termination decisions regularly to senior management, with consideration given to the extent to which account closures may have an adverse impact on access to financial services for an entire group of customers or potential customers, or an entire geographic location.
Communication with foreign financial institutions that includes consideration of specific mitigating information these institutions may provide, and providing them sufficient time to establish alternative banking relationships before terminating accounts, unless doing so would be contrary to law, or pose an additional risk to the bank or national security, or reveal law enforcement activity.
Ensuring a clear audit trail of the reasons and method used for account closure.
Having an ongoing due diligence processes for foreign correspondent account relationships that may include periodic site visits based on risk.
Specifying the length of time that foreign correspondent accounts can remain dormant before being subject to closure.
Avoiding the termination of entire categories of foreign correspondent account relationships without regard to the risks presented by individual foreign financial institutions, unless specifically required by law.
The guidance is applicable to all OCC-supervised banks that maintain foreign correspondent banking relationships. Community banks and federal savings associations that engage in foreign correspondent banking and have relatively small portfolios may have different risk considerations than banks with larger correspondent banking portfolios. “Those considerations, as well as the nature of smaller banks’ compliance functions or reporting hierarchies, may warrant modifications to these best practices in line with the bank’s particular risk considerations,” the OCC says.
Banks must choose whether to enter into or maintain business relationships based on their business objectives, an evaluation of the risks associated with particular products or services, and an evaluation of customers’ expected and actual activity.
“As usual when managing risks, banks apply the mandatory requirements of the Bank Secrecy Act and anti-money Laundering laws and regulations,” the guidance adds. “Banks should ensure that decisions to terminate foreign correspondent account relationships resulting from risk reevaluation are based on analysis of the risks presented by individual foreign correspondent account relationships and the banks’ ability to manage those risks.”
As a general matter, however, the OCC “does not direct banks to open, close, or maintain individual accounts,” nor does it encourage banks “to engage in the termination of entire categories of customer accounts without regard to the risks presented by an individual customer or the bank’s ability to manage the risk.”
“Decisions to retain or terminate banking relationships reside with the bank,” the guidance says.