The Treasury Department has issued a four-page fact sheet—developed with the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—to outline and clarify supervisory and enforcement activities regarding anti-money laundering and sanctions in the area of correspondent banking.

In a statement, Treasury Department officials said the document is intended to dispel “certain myths about U.S. supervisory expectations” and it “confirms that there is no general expectation for banks to conduct due diligence on the individual customers of foreign financial institutions.”

 The document stresses that the U.S. “maintains an effective anti-money laundering (AML) and countering the financing of terrorism (CFT) regime, which rests on clear requirements, strong and effective supervision, and meaningful and proportionate enforcement.”

“Correspondent banking relationships help improve livelihoods and foster global economic growth by enabling banks to facilitate international trade, conduct cross-border business and charitable activities, and provide U.S. dollar financing,” a statement from the participating agencies says. “The U.S. financial system is a critical part of the global economy, and the government believes that expanding access to that system and protecting it from illicit activity are mutually reinforcing goals that can and must be addressed simultaneously.”

Banks have been caught between a rock and a hard place when it comes to balancing regulatory expectations with enforcement realities and what may seem to be conflicting messages from the government. Regulators are instructing them to be alert for customers who could be engaged in illegal activities, but at the same time urging them to continue providing banking services to legal, but potentially high-risk businesses. The clear message:  they want to see case-by-case customer due diligence, not wholesale de-risking. International agencies, including the International Monetary Fund, have similarly warned that arbitrary de-risking could be devastating to emerging markets.

The conundrum for banks: slice away potentially risky correspondent banking relationships through de-risking efforts and face criticism; or maintain these relationships  only to be scrutinized and fined if taking on that risk comes back to bite them.

The fact sheet reiterates that federal bank regulators expect U.S. depository institutions to have “robust Bank Secrecy Act and sanctions-related compliance programs that include appropriate customer due diligence.”

Under existing U.S. regulations, there is no general requirement for U.S. depository institutions to conduct due diligence on a foreign financial institution’s (FFI) customers, it says. In determining the appropriate level of due diligence necessary for an FFI relationship, banks “should consider the extent to which information related to the FFI’s markets and types of customers is necessary to assess the risks posed by the relationship, satisfy the institution’s obligations to detect and report suspicious activity, and comply with U.S. economic sanctions.” This may require a request for additional information concerning the activity underlying the FFI’s transactions in accordance with suspicious activity reporting rules and sanctions compliance obligations.

Banking regulators apply “a risk-based approach” to their supervision” and the examination process, including the interaction between the examiners and the bank, “is integral to the process of ensuring compliance with the BSA and Office of Foreign Assets Control sanctions programs.”

“These supervisory communications can spur remediation, and indeed, in the vast majority of instances, deficiencies identified during the examination process are resolved promptly after they are brought to the attention of a depository institution’s management through the issuance of confidential reports of examination and supervisory letters that contain specific language communicating supervisory findings to the institution,” the fact sheet says.

In cases where prompt remedial action is not taken by management, the corrective action is not effectively implemented, or the deficiencies are more serious, regulators can consider a range of measures that “vary in levels of severity.” Enforcement tools can include informal memoranda of understanding, or formal, public, written agreements, and cease-and-desist orders.

The federal banking agencies are required by statute to use their cease-and-desist authority when an institution fails to establish or maintain a BSA compliance program or fails to correct any problem with the program previously reported to the institution. In “very limited instances,” when corrective action has not been achieved within a reasonable amount of time or serious violations or unsafe or unsound practices or breaches of fiduciary duty have been identified, they also have the authority to assess civil money penalties.

Financial institutions may also be subject to criminal enforcement actions by the Department of Justice. Criminal prosecutions for BSA/AML and sanctions violations are typically brought against financial institutions only when there is sufficient evidence of willful wrongdoing. “It is important to note that the largest and most prominent monetary penalties for BSA/AML and sanctions violations in recent years generally involved a sustained pattern of serious violations on the part of depository institutions,” the fact sheet says.

What should banks learn from the new fact sheet? A blog post, posted on the Treasury Department’s website, adds greater narrative and perspective. It was authored by Under Secretary for International Affairs Nathan Sheets, Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin, and Acting Assistant Secretary for Financial Institutions Amias Gerety.

?“Correspondent banking relationships serve as important arteries within the global financial system,” they wrote. “By enabling money to flow both within and across economies, they improve livelihoods, bring more people into the financial system and foster global economic growth. These relationships enable banks to facilitate international trade, conduct cross-border business and charitable activities, send remittances, and provide access to U.S. dollar financing.  They are essential to maintaining an inclusive and open financial system, and we are fully committed to safeguarding that system from abuse.”

The newly released document highlights efforts “to implement a fair and effective regime when it comes to enforcement of AML/CFT and sanctions violation,” they wrote. “Importantly, this regime is not one of ‘zero tolerance.’”  The fact sheet notes that nearly 95 percent of AML/CFT and sanctions compliance deficiencies identified by U.S. authorities are corrected through cautionary letters or other guidance by the regulators to the institution’s management without the need for an enforcement action or penalty.

“The rare but highly visible cases of large monetary penalties or settlements for AML/CFT and sanctions violations have generally involved a sustained pattern of reckless or willful violations over a period of multiple years and a failure by the institutions’ senior management to respond to warning signs that their actions were illegal,” the officials wrote. “These large cases did not represent small or unintentional mistakes.”

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