[Federal Register Volume 72, Number 153 (Thursday, August 9, 2007)]
[Rules and Regulations]
[Pages 44768-44775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-15467]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA29


Financial Crimes Enforcement Network; Anti-Money Laundering 
Programs; Special Due Diligence Programs for Certain Foreign Accounts

AGENCY: Financial Crimes Enforcement Network, Treasury.

ACTION: Final rule.

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SUMMARY: The Financial Crimes Enforcement Network is issuing this final 
rule to implement the enhanced due diligence requirements for 
correspondent accounts for certain foreign banks set forth in section 
312 of the Uniting and Strengthening America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA 
PATRIOT Act), Pub. L. No. 107-56. Section 312 requires U.S. financial 
institutions to establish due diligence and, where necessary, enhanced 
due diligence, policies, procedures, and controls reasonably designed 
to detect and report money laundering through correspondent accounts 
and private banking accounts established or maintained by U.S. 
financial institutions for non-U.S. persons. We issued final rules 
implementing the due diligence requirements for correspondent accounts 
and the due diligence and enhanced due diligence requirements for 
private banking accounts for non-U.S. persons on January 4, 2006. This 
final rule completes the section 312 rulemaking process.

DATES: This final rule is effective September 10, 2007.
    Applicability Dates: On February 5, 2008, the enhanced due 
diligence provisions of this final rule will apply to correspondent 
accounts for certain foreign banks established on or after such date. 
On May 5, 2008, the enhanced due diligence provisions of this final 
rule will apply to correspondent accounts for certain foreign banks 
established before February 5, 2008. See 31 CFR 103.176(f) of this 
final rule.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, Financial Crimes Enforcement Network, (800) 949-2732.

SUPPLEMENTARY INFORMATION

I. Background

    Section 312 of the USA PATRIOT Act amended the Bank Secrecy Act \1\ 
to add new subsection (i) to 31 U.S.C. 5318. This provision requires 
each U.S. financial institution that establishes, maintains, 
administers, or manages a correspondent account or a private banking 
account in the United States for a non-U.S. person to subject such 
accounts to certain anti-money laundering measures. In particular, a 
covered financial institution \2\ must establish appropriate, specific 
and, where necessary, enhanced due diligence policies, procedures, and 
controls that are reasonably designed to enable the financial 
institution to detect and report instances of money laundering through 
these accounts.
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    \1\ Bank Secrecy Act, Pub. L. No. 91-508 (codified as amended at 
12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314 and 
5316-5332).
    \2\ 31 CFR 103.175(f) (defining a ``covered financial 
institution'' as any one of a number of specific U.S. financial 
institutions, including banks, broker-dealers, futures commission 
merchants, and mutual funds).
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    On May 30, 2002, we published a notice of proposed rulemaking in 
the Federal Register, proposing to implement the requirements of 
section 312 in their entirety.\3\ In that proposal, we set forth a 
series of specific measures that covered financial institutions could, 
and in some instances would be required to, apply to correspondent 
accounts and private banking accounts established or maintained for 
non-U.S. persons. We received comments on that proposal raising 
concerns about the definitions in the proposal, the scope of the 
requirements contained in the proposed rule text, and the types of 
financial institutions that would be subject to the proposal's 
requirements.
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    \3\ Due Diligence Anti-Money Laundering Programs for Certain 
Foreign Accounts, 67 FR 37736 (May 30, 2002) (First Proposed Rule).
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    To have adequate time to review the comments we received in 
response to the proposal, to determine the appropriate resolution of 
the issues raised, and to give direction to financial institutions that 
would be subject to section 312,\4\ we issued an interim final rule on 
July 23, 2002.\5\ In the interim final rule, we exercised our authority 
under 31 U.S.C. 5318(a)(6) to defer temporarily the application of 
section 312 to certain financial institutions.\6\ For those financial 
institutions that were not subject to the deferral,\7\ we provided 
interim guidance for compliance with the statute by generally 
describing the scope of coverage, duties, and obligations under that 
provision, pending issuance of a final rule.
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    \4\ Section 312(b)(2) of the Act provides that section 5318(i) 
of the Bank Secrecy Act would take effect on July 23, 2002, whether 
or not final rules had been issued by that date.
    \5\ Due Diligence Anti-Money Laundering Programs for Certain 
Foreign Accounts, 67 FR 48348 (July 23, 2002).
    \6\ Pursuant to the interim final rule, banks, savings 
associations, and credit unions had to comply with the correspondent 
account and private banking account provisions of section 312. 
Securities broker-dealers, futures commission merchants, and 
introducing brokers had to comply with the private banking account 
provisions of section 312. We deferred the application of section 
312 to all other financial institutions.
    \7\ See id.
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    Thereafter, on January 4, 2006, we issued final rules implementing 
section 312, excepting the enhanced due diligence provisions for 
correspondent accounts established or maintained for certain foreign 
banks.\8\ Also on January 4, we published a second notice of proposed 
rulemaking (Second Proposed Rule or proposed rule),\9\ seeking comment 
on a new approach to implementing the enhanced due diligence provisions 
of section 312 with respect to correspondent accounts established or 
maintained for certain statutorily designated foreign banks 
(``respondent banks'').\10\
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    \8\ Anti-Money Laundering Programs; Special Due Diligence for 
Certain Foreign Accounts, 71 FR 496 (January 4, 2006).
    \9\ Anti-Money Laundering Programs; Special Due Diligence for 
Certain Foreign Accounts, 71 FR 516 (January 4, 2006).
    \10\ Section 312 contains enhanced due diligence provisions for 
both correspondent accounts and private banking accounts for non-
U.S. persons. Unless otherwise provided in this release, the term 
``enhanced due diligence provisions'' relates exclusively to the 
correspondent account provisions of section 312.
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    As required by section 312, the enhanced due diligence measures 
proposed would apply to correspondent accounts maintained for a foreign 
bank operating under an offshore banking license,\11\ under a license 
issued by a country that has been designated as being non-cooperative 
with international anti-money laundering principles or procedures by an 
intergovernmental group or organization of which the United States is a 
member and with which designation the United States representative to 
the group or organization concurs,\12\ or under a license issued by a 
country designated by the Secretary of the Treasury

[[Page 44769]]

(Secretary) as warranting special measures due to money laundering 
concerns.\13\ With respect to these accounts, we proposed that a 
covered financial institution would be required to conduct risk-based 
enhanced due diligence with regard to a correspondent account 
maintained for or on behalf of such a foreign bank to guard against 
money laundering and to report suspicious activity; to ascertain 
whether such a foreign bank maintains correspondent accounts for other 
foreign banks \14\ and, if so, to conduct appropriate due diligence; 
and to identify the owners of such a foreign bank if its shares are not 
publicly traded. This final rule adopts the risk-based enhanced due 
diligence rule that we proposed on January 4, 2006.
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    \11\ See 31 U.S.C. 5318(i)(4)(A) and 31 CFR 103.175(k) (defining 
``offshore banking license'').
    \12\ The Financial Action Task Force (FATF) is the only 
intergovernmental organization of which the United States is a 
member that has designated countries as non-cooperative with 
international anti-money laundering principles (no such countries 
currently are designated). The United States has concurred with all 
FATF designations to date.
    \13\ The Secretary is authorized under section 311 of the USA 
Patriot Act, after finding that reasonable grounds exist for 
concluding that a foreign jurisdiction, foreign financial 
institution, international class of transaction, or type of account 
is of ``primary money laundering concern,'' to require domestic 
financial institutions and domestic financial agencies to take 
certain statutorily defined ``special measures'' against the primary 
money laundering concern. Section 311 requires the Secretary to 
consult with various Federal agencies before making such a finding 
or imposing special measures. For a listing of findings and 
rulemakings issued pursuant to section 311, see http://www.fincen.gov/reg_section311.html.
    \14\ In the preamble to the Second Proposed Rule, we referred to 
these relationships as nested accounts or nested banks. It has been 
suggested that the term ``nested'' is not synonymous with indirect 
use of a correspondent account. We have not employed the terminology 
in this final rule.
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    Finally, section 312(b)(1) of the USA PATRIOT Act provides that the 
Secretary shall issue implementing regulations under this section ``in 
consultation with the appropriate federal functional regulators (as 
defined in section 509 of the Gramm-Leach-Bliley Act) of the affected 
financial institutions.'' This final rule was developed in consultation 
with the staffs of the federal functional regulators.\15\
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    \15\ Section 509 of the Gramm-Leach-Bliley Act defines federal 
functional regulators to include the Federal Deposit Insurance 
Corporation, the Board of Governors of the Federal Reserve System, 
the Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, the National Credit Union Administration Board, and the 
U.S. Securities and Exchange Commission. See 15 U.S.C. 6809. The 
Commodity Futures Trading Commission was defined in section 321 of 
the USA PATRIOT Act as a federal functional regulator for the 
purposes of implementing that Act.
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II. Summary of Comments and Revisions

A. Comments

    We received seven comment letters on the Second Proposed Rule. 
Commenters included U.S. banks, an association of state banking 
supervisors, and trade associations representing U.S. banks, foreign 
banks, the futures industry, investment companies, the securities 
industry, and the bond markets.\16\ Eleven trade associations 
representing covered financial institutions jointly signed one of the 
comment letters. In general, commenters expressed support for the risk-
based approach elaborated in the Second Proposed Rule. We respond to 
the submitted comments in the Section-by-Section Analysis, below.
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    \16\ The comment letters may be inspected at the Financial 
Crimes Enforcement Network reading room in Vienna, Virginia between 
10 a.m. and 4 p.m. Persons wishing to inspect comments must request 
an appointment by telephone at (202) 354-6400 (not a toll-free 
number). The comment letters are also available on our Web site at 
http://www.fincen.gov/71fr516.htm.
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B. Revisions

    This final rule is substantially similar to the Second Proposed 
Rule. The following revisions to the rule, which we will explain more 
fully in the Section-by-Section Analysis below, have been made in 
response to comments received on the Second Proposed Rule.
    First, the provisions requiring covered financial institutions, in 
appropriate circumstances, to obtain and review ``documentation'' 
relating to a respondent bank's anti-money laundering program and to 
``consider[ ] whether such program appears to be reasonably designed to 
detect and prevent money laundering'' have been revised to require 
covered financial institutions, in appropriate circumstances, to obtain 
and consider ``information'' relating to a respondent bank's anti-money 
laundering program in order to assess the risk of money laundering 
presented by the respondent bank's account.
    Second, the provision requiring a covered financial institution, in 
certain circumstances, to take reasonable steps to assess and 
``minimize'' money laundering risks related to the customers of their 
respondent banks has been revised to require a covered financial 
institution, in certain circumstances, to take reasonable steps to 
assess and ``mitigate'' such money laundering risks.

III. Section-by-Section Analysis

A. Section 103.176(b)--Enhanced Due Diligence for Certain Foreign Banks

    Section 103.176(b) of this final rule requires a covered financial 
institution to establish enhanced due diligence procedures that, at a 
minimum, include taking reasonable steps to (1) Conduct risk-based 
enhanced scrutiny of correspondent accounts established or maintained 
for respondent banks to guard against money laundering and to identify 
and report suspicious transactions, (2) determine whether the subject 
respondent bank in turn maintains correspondent accounts for other 
foreign banks that enable those other foreign banks to gain access to 
the respondent bank's correspondent account with the covered financial 
institution and, if so, to take reasonable steps to obtain information 
to assess and mitigate the money laundering risks associated with such 
accounts, and (3) determine the identity of each owner of a respondent 
bank whose shares are not publicly traded, and the nature and extent of 
each owner's ownership interest.
    The commenters generally expressed support for the risk-based 
approach of the Second Proposed Rule. One commenter suggested that the 
five risk factors enumerated in our rules implementing the due 
diligence requirements for correspondent accounts contained in section 
312 should also be applied to determine the appropriate extent of 
enhanced due diligence.\17\
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    \17\ As part of its general due diligence program for foreign 
correspondent accounts, a covered financial institution is expected 
to establish policies, procedures, and controls that include 
assessing the money laundering risk of a correspondent account based 
upon consideration of all the risk factors, including (1) The nature 
of the foreign financial institution's business and the markets it 
serves; (2) the type, purpose, and anticipated activity of the 
correspondent account; (3) the nature and duration of the covered 
financial institution's relationship with the foreign financial 
institution; (4) the anti-money laundering and supervisory regime of 
the jurisdiction that issued a charter or license to the foreign 
financial institution, and its owners if applicable, to the extent 
that such information is reasonably available; and (5) information 
known or reasonably available to the covered financial institution 
about the foreign financial institution's anti-money laundering 
record. 31 C.F.R. 103.176(a)(2).
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    As these five risk factors are meant to apply to all respondent 
banks, including those subject to the enhanced due diligence provisions 
of section 312, it would be appropriate to consider the five factors 
listed in subsection (a)(2) when assessing the risk posed by a 
respondent bank subject to the provisions of this final rule to help 
determine the level of enhanced due diligence required. The fourth risk 
factor in particular--the anti-money laundering regime of the 
jurisdiction that issued a charter or license to the foreign bank and, 
to the extent reasonably available, of the home jurisdiction of the 
foreign bank or its parent \18\--may be especially relevant in a 
covered financial institution's determination of the nature and extent 
of the risks posed by the correspondent

[[Page 44770]]

accounts for the foreign banks covered by this rule and the extent of 
the enhanced due diligence that is necessary and appropriate to 
mitigate these risks.\19\
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    \18\ 31 CFR 103.176(a)(2)(iv).
    \19\ See Second Proposed Rule, 71 FR at 517 (adopting a risk-
based approach to enhanced due diligence as an alternative to 
creating exceptions to the enhanced due diligence provisions for 
foreign banks operating under an offshore banking license).
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    1. 103.176(b)(1)--Enhanced scrutiny to guard against money 
laundering. Section 103.176(b)(1) of the Second Proposed Rule would 
have required a covered financial institution to conduct risk-based 
enhanced scrutiny of correspondent accounts established or maintained 
for respondent banks to guard against money laundering and to identify 
and report suspicious transactions. This provision is adopted in the 
final rule without substantial change.
    Section 103.176(b)(1)(i) and (ii) of the Second Proposed Rule would 
have required covered financial institutions, as part of their enhanced 
due diligence programs when appropriate, to obtain and review 
documentation related to a respondent bank's anti-money laundering 
program and consider whether the program appears to be reasonably 
designed to detect and prevent money laundering. Several commenters 
questioned the utility of the requirement and expressed concern about 
the cost of complying with it.
    One commenter read the Second Proposed Rule as effectively 
requiring a covered financial institution to perform an audit of a 
respondent bank's anti-money laundering program, despite guidance in 
the preamble stating that an audit was not required. Another commenter 
similarly expressed concern that this and other provisions of the 
Second Proposed Rule would cause covered financial institutions to 
become policemen and regulators. A third commenter was concerned that 
this provision ultimately would be enforced as a default or mandatory 
requirement.
    Other commenters additionally suggested that obtaining and 
reviewing documentation frequently would be a difficult and expensive 
proposition, as such documents may be written only in the native 
language of a respondent bank. One commenter questioned the utility of 
reviewing the documentation of a respondent bank's anti-money 
laundering program and suggested that other due diligence measures, 
such as reviewing and monitoring transactions conducted by the foreign 
bank, would be more productive. Other commenters offered that 
administering a questionnaire to a respondent bank about its anti-money 
laundering practices, when appropriate, would be more effective than a 
review of its anti-money laundering program documents.
    In response to these comments, section 103.176(b)(1)(i) of the 
final rule now requires a covered financial institution, in appropriate 
circumstances, to obtain and consider information related to the anti-
money laundering program of the respondent bank to assess the risk of 
money laundering presented by the respondent bank's correspondent 
account. This provision of the final rule is not meant to be a 
mandatory requirement. Rather, it is intended to be risk-based. We 
emphasize that whether enhanced due diligence should include a 
reasonable inquiry into the anti-money laundering program of a 
respondent bank will depend on the extent to which reviewing the anti-
money laundering program of the respondent bank would be appropriate 
based upon the nature of the correspondent account.\20\ While covered 
financial institutions have discretion with respect to implementing 
this provision, as with other risk-based provisions of the BSA and its 
implementing regulations, a covered financial institution is 
responsible for reasonably demonstrating that it is effectively 
exercising that discretion on a risk-assessed basis.
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    \20\ For example, a covered financial institution may maintain a 
correspondent account for a respondent bank with which it has had a 
longstanding relationship, for a respondent bank that only conducts 
proprietary transactions through the correspondent account, for a 
respondent bank that is controlled by a U.S. institution, or for a 
respondent bank whose licensing or home jurisdiction is known for 
maintaining a comprehensive anti-money laundering regime. In such 
circumstances, a covered financial institution may determine through 
experience and due diligence that reviewing information related to 
the anti-money laundering program of the respondent bank will not 
provide information that is relevant to the covered financial 
institution's risk-assessment or monitoring of the respondent bank's 
correspondent account. In contrast, a respondent bank that permits 
or conducts transactions on behalf of other foreign banks, or 
operates payable-through accounts, through the covered financial 
institution may pose a greater money laundering risk. In such 
circumstances, conducting due diligence that includes a review of 
information related to the respondent bank's anti-money laundering 
program may be appropriate.
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    We revised this due diligence provision of the Second Proposed Rule 
to clarify that covered financial institutions are expected neither to 
conduct an audit of the anti-money laundering programs of their 
respondent bank customers, nor to determine the extent to which the 
respondent bank's anti-money laundering program is ``reasonably 
designed to detect and prevent money laundering,'' which may be 
difficult to determine without conducting an audit.\21\ Rather, under 
the final rule, a covered financial institution is required to consider 
and assess more generally the extent to which it may be exposed to 
money laundering risk by the respondent bank's correspondent account. 
The revision also was made to reduce the burdens associated with 
reviewing documents, such as language barriers, as well as to provide 
covered financial institutions with flexibility to determine how to 
conduct due diligence with respect to a respondent bank's anti-money 
laundering efforts.
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    \21\ See, e.g., Second Proposed Rule, 71 FR at 518 (``[w]e do 
not contemplate that the covered financial institution would conduct 
an audit of the foreign correspondent bank's written anti-money 
laundering program'').
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    For example, a covered financial institution may, in appropriate 
circumstances, use a questionnaire, as several commenters suggested, to 
gather information related to the anti-money laundering program of a 
respondent bank, provided that the questionnaire and the responses 
thereto enable a covered financial institution to assess effectively 
the risk of money laundering presented by the respondent bank. In 
appropriate situations, such as where a covered financial institution 
has a sufficient transaction history with a respondent bank, a covered 
financial institution may also conduct a review of that transaction 
history to assess the money laundering risk presented by the respondent 
bank.
    As one commenter suggested, a covered financial institution may 
also, in appropriate circumstances, incorporate its enhanced due 
diligence efforts into the certification process available under the 
rules implementing sections 313 and 319(b) of the USA PATRIOT Act.\22\ 
Incorporating a questionnaire into the certification form would not 
alone affect the safe harbor provided under the rules implementing 
sections 313 and 319(b),\23\ provided that the covered financial 
institution also obtains and maintains all of the information required 
under those rules.
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    \22\ See 31 CFR 103.177.
    \23\ 31 CFR 103.177(b).
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    We caution, however, that the certifications are subject to renewal 
only every three years. Waiting until the next certification is 
required before obtaining information about the respondent bank's anti-
money laundering program may not be reasonable for purposes of 
complying with the enhanced due diligence provisions of section 312. We 
also remind covered financial institutions incorporating a 
questionnaire into their certifications that doing so will not extend 
the section 313 and 319(b) safe harbor to this final rule.

[[Page 44771]]

    Finally, one commenter asked whether a covered financial 
institution would be required to formulate additional due diligence 
measures for its accounts for foreign banks that are subject of this 
final rule if the covered financial institution applies the equivalent 
of enhanced due diligence required in this final rule to all of its 
correspondent accounts for foreign financial institutions.\24\ If a 
covered financial institution applies both the due diligence program 
for foreign correspondent accounts \25\ and the enhanced due diligence 
requirements of this final rule to all of its correspondent accounts 
for foreign financial institutions, then the covered financial 
institution would not be required to formulate additional due diligence 
measures for the correspondent accounts it establishes and maintains 
for foreign banks that are the subjects of this final rule.
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    \24\ See 31 CFR 103.175(h) (defining ``foreign financial 
institution'' to include banks, broker-dealers in securities, 
futures commission merchants, and mutual funds).
    \25\ 31 CFR 103.176(a).
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    Section 103.176(b)(1)(iii) of the Second Proposed Rule would have 
required covered financial institutions to monitor transactions to, 
from, or through a respondent bank in a manner that is reasonably 
designed to detect money laundering and suspicious activity. In the 
preamble to the Second Proposed Rule, we emphasized that monitoring is 
an important aspect of enhanced due diligence.\26\ This monitoring may 
be conducted manually or electronically, may be done on an individual 
account basis or by product activity, and should reflect the risk 
assessment conducted by the covered financial institution on each 
respondent bank subject of the enhanced due diligence provisions. 
Section 103.176(b)(1)(iii) has been incorporated into the final rule 
without change, and has been re-designated as Section 
103.176(b)(1)(ii).
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    \26\ Second Proposed Rule, 71 FR at 518.
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    Section 103.176(b)(1)(iv) of the Second Proposed Rule would have 
required covered financial institutions to obtain information from the 
foreign bank about the identity of any person with authority to direct 
transactions through any correspondent account that is a payable-
through account, and the sources and beneficial owners of funds or 
other assets in the payable-through account. This provision has been 
incorporated into the final rule without change, and has been re-
designated as Section 103.176(b)(1)(iii).
    2. 103.176(b)(2)--Foreign bank customers. Section 103.176(b)(2) of 
the Second Proposed Rule would have required a covered financial 
institution to determine whether a respondent bank in turn maintains 
correspondent accounts for other foreign banks that enable those other 
foreign banks to gain access to the respondent bank's account with the 
covered financial institution. If such a situation exists, the Second 
Proposed Rule would have required the covered financial institution to 
take reasonable steps to assess and minimize the potential money 
laundering risk posed by the respondent bank's accounts for those other 
foreign banks.
    Commenters were concerned about the extent to which they would be 
expected to obtain lists of foreign bank customers from their 
respondent banks, for the purposes of complying with section 
103.176(b)(2).\27\ One commenter, for example, stated that it may not 
be possible to obtain a list of the foreign bank customers of 
respondent banks due to strict privacy laws in some countries.\28\ Two 
commenters suggested that there are situations where it is unlikely, 
due to the nature of the correspondent account, that funds transfers 
will be conducted through the account, and therefore the covered 
financial institution should not be required to obtain lists of, or 
other information about, foreign bank customers of their respondent 
banks.
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    \27\ Other commenters requested clarification that the 
provisions of subsection (b)(2) are risk-based.
    \28\ One commenter expressed the view that it should not be 
required to obtain the anti-money laundering programs of the foreign 
bank customers of a respondent bank. Section 103.176(b)(2) does not 
contain such a requirement. Obtaining and considering information 
related to the anti-money laundering program of a foreign respondent 
bank, and not the program of its foreign bank customers, is set 
forth in this final rule as an enhanced due diligence procedure when 
appropriate. See 31 CFR 103.176(b)(1)(i).
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    As a general rule, we do not expect that a covered financial 
institution will request and obtain lists of foreign bank customers 
from their respondent banks. We do expect, however, that covered 
financial institutions, based upon their risk assessment of a 
respondent bank and as part of their enhanced due diligence efforts, 
will make appropriate inquiries about such factors as the nature of the 
foreign bank customers the respondent bank serves (if any) and the 
extent to which transactions for any such foreign bank customer may be 
conducted through the respondent bank's correspondent account. The 
covered financial institution also could consult bank reference guides, 
and monitor or otherwise assess transaction activity to the extent it 
may contain foreign bank customer information.\29\
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    \29\ In situations where it is unlikely that funds transfers 
will be conducted through a correspondent account, covered financial 
institutions may determine that it would not be necessary to obtain 
a list of the respondent bank's foreign bank customers. We note, 
however, that correspondent accounts that may not be used to conduct 
funds transfers nonetheless may be used to launder money and conduct 
other illicit financial activity.
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    There may be circumstances, such as in the highest risk situations, 
where it may be necessary and appropriate to request and obtain the 
identity of a respondent bank's foreign bank customers directly from 
the respondent bank. If obtaining such information in appropriate 
circumstances is not possible--including by monitoring account 
activity--the covered financial institution should determine, pursuant 
to section 103.176(d) of this final rule, how to proceed in light of 
the particular circumstances.
    One commenter expressed concern that covered financial institutions 
may be held responsible, according to the provisions of section 
103.176(b)(2), for monitoring and reporting suspicious activity of the 
foreign bank customers of their respondent banks. The obligation to 
monitor for and report suspicious activity arises from the rules 
implementing 31 U.S.C. 5318(g). Under those rules, covered financial 
institutions must report suspicious activity involving any of their 
accounts to the extent they know, suspect, or have reason to suspect a 
violation of law or regulation, including suspicious activity attempted 
or conducted by, at, or through correspondent accounts they establish 
or maintain for respondent banks.\30\ Such activity may involve the 
respondent bank's foreign bank customers.
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    \30\ See 31 CFR 103.15(a) (suspicious activity reporting 
requirements for mutual funds), 31 CFR 103.17(a) (same for futures 
commission merchants), 31 CFR 103.18(a) (for banks), and 31 CFR 
103.19(a) (for broker-dealers in securities). See also In the Matter 
of the Federal Branch of Arab Bank PLC, FinCEN enforcement action 
2005-2 (Aug. 17, 2005) and In the Matter of the New York Branch of 
ABN Amro Bank N.V., FinCEN enforcement action 2005-5 (Dec. 19, 2005) 
(financial institutions responsible for monitoring the transactions 
through correspondent accounts maintained on behalf of foreign 
financial institutions), available at http://www.fincen.gov/reg_enforcement.html.
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    One commenter was concerned by the level of due diligence that may 
be required by the use of the word ``minimize'' in section 
103.176(b)(2) of the Second Proposed Rule and suggested replacing with 
the word mitigate. Accordingly, in this final rule, we have revised the 
relevant clause to require a covered financial institution to ``take 
reasonable steps to obtain

[[Page 44772]]

information relevant to assess and mitigate money laundering risks 
associated with the foreign bank's correspondent accounts for other 
foreign banks'' \31\ as the commenter suggested.
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    \31\ Emphasis added.
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    Finally, commenters sought clarification as to whether section 
103.176(b)(2) is risk-based. The first part of this sub-paragraph 
requires a covered financial institution to take reasonable steps to 
``[d]etermine whether the foreign bank for which the correspondent 
account is established or maintained in turn maintains correspondent 
accounts for other foreign banks that use the foreign correspondent 
account established or maintained by the covered financial 
institution.'' Making that initial determination is not dependent on 
the risks associated with a particular respondent bank.
    However, once a covered financial institution has taken reasonable 
steps to make such a determination, it may ``take reasonable steps to 
obtain information relevant to assess and mitigate money laundering 
risks associated with the foreign bank's correspondent accounts for 
other foreign banks, including, as appropriate, the identity of those 
foreign banks,'' as section 103.176(b)(2) provides and the authorizing 
statute contemplates. A covered financial institution may take a risk-
based approach when determining what steps to gather due diligence 
information are appropriate.
    3. 103.176(b)(3)--Identification of the owners of foreign banks. 
Section 103.176(b)(3) of the Second Proposed Rule would require a 
covered financial institution to take reasonable steps to identify the 
owners of a respondent bank if the respondent bank's shares are not 
publicly traded. The section defined an owner as ``any person who 
directly or indirectly owns, controls, or has the power to vote 10 
percent or more of any class of securities'' of the respondent bank.
    One commenter suggested that we increase the proposed 10% threshold 
for identifying the interest of the owners of respondent banks to 25% 
for banks that are considered to represent a relatively low level of 
money laundering risk. Other commenters requested clarification that 
the provisions of subsection (b)(3) are risk-based.
    After consideration, we adopted the proposed threshold into the 
final rule without change. The final rule covers three specific and 
relatively small categories of foreign banks that have been designated 
by statute. We believe that tiered ownership thresholds would undermine 
the benefit of identifying the owners of high-risk respondent banks 
while not appreciably reducing the burden of identifying such owners. 
Accordingly, we have not adopted a risk-based approach to section 
103.176(b)(3).

B. Section 103.176(c)--Foreign Banks Subject to Enhanced Due Diligence

    Section 103.176(c) of the Second Proposed Rule set forth the types 
of foreign banks for which enhanced due diligence would be required, as 
provided by section 312 of the USA PATRIOT Act. The enhanced due 
diligence provisions would apply to foreign banks operating under (1) 
An offshore banking license; \32\ (2) a license issued by a country 
designated as being non-cooperative with international anti-money 
laundering principles or procedures by an intergovernmental group or 
organization of which the United States is a member and with which 
designation the United States representative to the group or 
organization concurs; \33\ or (3) a license issued by a country 
designated by the Secretary as warranting special measures due to money 
laundering concerns.\34\ The final rule adopts this provision without 
change.
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    \32\ See supra note 11.
    \33\ See supra note 12.
    \34\ See supra note 13.
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    One commenter suggested that we reinstate the proposed exception 
from the enhanced due diligence requirements of section 312 for an 
offshore bank that ``has been found, or is chartered in a jurisdiction 
where one or more foreign banks have been found, by the Board of 
Governors of the Federal Reserve System under the Bank Holding Company 
Act or the International Banking Act, to be subject to comprehensive 
supervision or regulation on a consolidated basis by the relevant 
supervisors in that jurisdiction.'' \35\ After consideration, we did 
not include such an exception in this final rule.
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    \35\ See First Proposed Rule, 67 FR at 37743.
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    We believe that the risk-based provisions of the final rule are 
better suited to addressing the various risk profiles of respondent 
banks subject to enhanced due diligence than the proposed exception. 
Thus, when dealing with an offshore booking location of a bank located 
in a country with a strong anti-money laundering regime, for example, a 
covered financial institution ordinarily will not be required to 
conduct enhanced due diligence to the same degree as it would with a 
stand-alone offshore bank.\36\
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    \36\ See supra note 19 and accompanying text (recognizing that 
the anti-money laundering and supervisory regime of the jurisdiction 
that issued a charter or license to a foreign bank may be 
particularly relevant in assessing the money laundering risk posed 
by the foreign bank and a mitigating risk factor for the purposes of 
complying with the enhanced due diligence provisions, as also may be 
the regime of the home jurisdiction of the foreign bank or its 
parent to the extent relevant information is readily available).
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    One commenter was concerned that a covered financial institution 
may be cited for a violation of this final rule if it failed to subject 
an account established or maintained for a high-risk foreign bank to 
the enhanced due diligence requirements of the rule even when the 
foreign bank was not in one of the three designated categories of banks 
subject to enhanced due diligence. However, section 103.176(b) is 
expressly limited to the foreign banks enumerated at section 
103.176(c). With respect to high-risk foreign banks not enumerated in 
section 103.176(c), a failure to apply appropriate due diligence to a 
correspondent account maintained for such a foreign bank would 
constitute a violation of the general due diligence provisions of the 
correspondent account rule,\37\ but not the enhanced due diligence 
provisions of this final rule.
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    \37\ See 31 CFR 103.176(a).
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C. Section 103.176(d)--Special Procedures

    According to the provisions of proposed section 103.176(d), a 
covered financial institution would be required to establish special 
procedures for circumstances in which appropriate due diligence or 
enhanced due diligence cannot be performed with respect to a 
correspondent account. We received no comments on this provision of the 
Second Proposed Rule. It has been adopted in this final rule without 
change.

D. Section 103.176(e) and (f)--Applicability Rules

    This final rule revises section 103.176(e) and adds new section (f) 
to reflect the applicability dates of the obligations under this 
section. The Second Proposed Rule did not address the issue of 
applicability dates. We are mindful, however, of the obligations that 
will result from the statutory requirement that enhanced due diligence 
apply to all correspondent accounts maintained for certain foreign 
banks, regardless of when the accounts were opened. Effective 180 days 
after the date of publication of this final rule, the requirements of 
this final rule will

[[Page 44773]]

apply to correspondent accounts opened on or after that date. Effective 
270 days after the date of publication of this final rule, the rule's 
requirements will apply to all correspondent accounts opened prior to 
the date that is 180 days after the date of publication of this final 
rule.
    Section 103.176(f)(2) contains a special implementation rule for 
banks. This special implementation rule requires banks that have been 
subject to the provisions of our interim final rule \38\ to continue to 
comply with the existing enhanced due diligence requirements for 
correspondent accounts of section 312 until the effective dates 
described in section 103.176(f)(1) are triggered.
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    \38\ See supra note 5 and accompanying text.
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    Section 103.176(f)(3) contains a special implementation rule for 
all other covered financial institutions. This section provides that 
securities broker-dealers, futures commission merchants, introducing 
brokers, mutual funds, and trust banks or trust companies that have a 
federal regulator are not required to comply with the enhanced due 
diligence provisions until the effective dates described in section 
103.176(f)(1) are triggered.

E. Section 103.176(g)--Exemptions

    New section 103.176(g) restates and conforms the exemption for 
certain financial institutions from the due diligence and enhanced due 
diligence requirements of section 103.176.

IV. Regulatory Flexibility Act

    We certified that the January 4, 2006 proposed rule would not have 
a significant economic impact on a substantial number of small 
entities. We made this certification because the proposed rule would 
provide guidance concerning certain mandated enhanced due diligence 
requirements in section 312 of the Act, and because the financial 
institutions that would be covered by the rule tend to be larger 
institutions.
    One commenter expressed concern that the final rule will make it 
prohibitive for smaller institutions to engage in the foreign 
correspondent banking business. However, this final rule does not 
impose significant new burdens on covered financial institutions of any 
size. Since at least 2002, the depository institutions covered by this 
rule have been subject to an interim final rule containing 
substantially similar enhanced due diligence requirements.\39\ Other 
covered financial institutions have been required to establish and 
maintain anti-money laundering programs reasonably designed, among 
other things, to prevent money laundering through correspondent 
accounts generally.\40\
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    \39\ Due Diligence Anti-Money Laundering Programs for Certain 
Foreign Accounts, 67 FR 48348 (July 23, 2002).
    \40\ See Anti-Money Laundering Programs for Financial 
Institutions, 67 FR 21110 (April 29, 2002) (establishing anti-money 
laundering program requirements for federally regulated depository 
institutions, broker-dealers in securities, futures commission 
merchants, and introducing brokers in commodities). See also Anti-
Money Laundering Program for Mutual Funds, 67 FR 21117 (April 29, 
2002).
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    Because the terms of the interim rule and the final rule are 
substantially similar, and because the single comment does not provide 
evidence of any significant economic impact created by the interim or 
final rule, we believe that the final rule will not have a significant 
economic impact on a substantial number of small businesses. We also 
note that even if, as the comment asserts, the rule made foreign 
correspondent banking prohibitive for small entities, this would 
establish neither that a substantial number of small entities engage in 
foreign correspondent banking, nor that any that do derive significant 
revenue from such business.
    Moreover, we have incorporated flexibility into this final rule, 
particularly by shifting from the prescriptive approach to compliance 
proposed in the First Proposed Rule to the risk-based approach adopted 
in this final rule. This flexibility will permit each covered financial 
institution to tailor its enhanced due diligence program for 
statutorily designated foreign banks \41\ to fit its size and the risks 
of its customer base.
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    \41\ See supra text accompanying footnotes 11-13.
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    For these reasons, it is hereby certified, pursuant to the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.), that this final rule 
will not have a significant economic impact on a substantial number of 
small businesses.

V. Executive Order 12866

    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 collection of information contained in this final rule has been 
approved by the Office of Management and Budget in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), and was assigned 
Office of Management and Budget Control Number 1506-0046. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a valid control number 
assigned by the Office of Management and Budget.
    The only requirements in the final rule that are subject to the 
Paperwork Reduction Act are set forth in 31 CFR 103.176(b)(1)(i), 
103.176(b)(1)(iii)(A), and 103.176(b)(3), requiring covered financial 
institutions to obtain information relating to certain foreign banks' 
anti-money laundering programs, when appropriate, to obtain information 
from such foreign banks about the identity of any person with authority 
to direct transactions through a correspondent account that is a 
payable-through account and the sources and beneficial owner of funds 
or other assets in the payable-through account, when appropriate, and 
to obtain the identity of certain owners of any such foreign bank that 
is privately owned and the nature and extent of the ownership interest. 
The estimated annual average burden associated with this collection of 
information was one hour per recordkeeper. We estimated that there 
would be 28,163 recordkeepers, for a total of 28,163 annual burden 
hours.\42\ We received two comments on this burden estimate.
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    \42\ Second Proposed Rule, 71 FR at 519.
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    One commenter argued that the burden would ``number into the 
hundreds of hours, at a minimum.'' The number of burden hours set forth 
under the Paperwork Reduction Act is designed to be an average, 
however, and includes recordkeepers subject to the provisions of this 
final rule that may not maintain correspondent accounts for statutorily 
designated foreign banks. Moreover, the number of burden hours pertains 
only to the collection of information when appropriate, and not to the 
review of the information.
    Another commenter suggested that the number of burden hours may be 
two hours per year instead of one hour. We accept that estimate and, 
accordingly, have adjusted our final estimate of burden hours to two 
hours per recordkeeper.
    Comments concerning the accuracy of this recordkeeping burden 
estimate and suggestions for reducing this burden should be sent 
(preferably by fax (202-395-6974)) to Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, Office 
of Management and Budget, Paperwork Reduction Project (1506), 
Washington, DC 20503 (or by the internet to [email protected]), with a 
copy by regular mail to Financial Crimes Enforcement Network, P.O. Box 
39, Vienna, VA 22183, ``ATTN: Regulation Identifier Number 1506-AA29'' 
or by electronic mail to

[[Page 44774]]

[email protected] with the caption ``ATTN: Regulatory 
Information Number 1506-AA29'' in the body of the text.

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

0
For the reasons set forth above, we are amending subpart I of 31 CFR 
Part 103 as follows:

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

0
1. The authority citation for part 103 continues 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. 311, 312, 313, 314, 319, 326, 352, 
Pub. L. 107-56, 115 Stat. 307.


0
2. In subpart I, amend Sec.  103.176 by adding paragraphs (b) and (c), 
revising paragraphs (d) and (e), and adding paragraphs (f) and (g) to 
read as follows:


Sec.  103.176  Due diligence programs for correspondent accounts for 
foreign financial institutions.

* * * * *
    (b) Enhanced due diligence for certain foreign banks. In the case 
of a correspondent account established, maintained, administered, or 
managed in the United States for a foreign bank described in paragraph 
(c) of this section, the due diligence program required by paragraph 
(a) of this section shall include enhanced due diligence procedures 
designed to ensure that the covered financial institution, at a 
minimum, takes reasonable steps to:
    (1) Conduct enhanced scrutiny of such correspondent account to 
guard against money laundering and to identify and report any 
suspicious transactions in accordance with applicable law and 
regulation. This enhanced scrutiny shall reflect the risk assessment of 
the account and shall include, as appropriate:
    (i) Obtaining and considering information relating to the foreign 
bank's anti-money laundering program to assess the risk of money 
laundering presented by the foreign bank's correspondent account;
    (ii) Monitoring transactions to, from, or through the correspondent 
account in a manner reasonably designed to detect money laundering and 
suspicious activity; and
    (iii)(A) Obtaining information from the foreign bank about the 
identity of any person with authority to direct transactions through 
any correspondent account that is a payable-through account, and the 
sources and beneficial owner of funds or other assets in the payable-
through account.
    (B) For purposes of paragraph (b)(1)(iii)(A) of this section, a 
payable-through account means a correspondent account maintained by a 
covered financial institution for a foreign bank by means of which the 
foreign bank permits its customers to engage, either directly or 
through a subaccount, in banking activities usual in connection with 
the business of banking in the United States.
    (2) Determine whether the foreign bank for which the correspondent 
account is established or maintained in turn maintains correspondent 
accounts for other foreign banks that use the foreign correspondent 
account established or maintained by the covered financial institution 
and, if so, take reasonable steps to obtain information relevant to 
assess and mitigate money laundering risks associated with the foreign 
bank's correspondent accounts for other foreign banks, including, as 
appropriate, the identity of those foreign banks.
    (3)(i) Determine, for any correspondent account established or 
maintained for a foreign bank whose shares are not publicly traded, the 
identity of each owner of the foreign bank and the nature and extent of 
each owner's ownership interest.
    (ii) For purposes of paragraph (b)(3)(i) of this section:
    (A) Owner means any person who directly or indirectly owns, 
controls, or has the power to vote 10 percent or more of any class of 
securities of a foreign bank. For purposes of this paragraph 
(b)(3)(ii)(A):
    (1) Members of the same family shall be considered to be one 
person; and
    (2) Same family has the meaning provided in Sec.  
103.175(l)(2)(ii).
    (B) Publicly traded means shares that are traded on an exchange or 
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)).
    (c) Foreign banks to be accorded enhanced due diligence. The due 
diligence procedures described in paragraph (b) of this section are 
required for any correspondent account maintained for a foreign bank 
that operates under:
    (1) An offshore banking license;
    (2) A banking license issued by a foreign country that has been 
designated as non-cooperative with international anti-money laundering 
principles or procedures by an intergovernmental group or organization 
of which the United States is a member and with which designation the 
U.S. representative to the group or organization concurs; or
    (3) A banking license issued by a foreign country that has been 
designated by the Secretary as warranting special measures due to money 
laundering concerns.
    (d) Special procedures when due diligence or enhanced due diligence 
cannot be performed. The due diligence program required by paragraphs 
(a) and (b) of this section shall include procedures to be followed in 
circumstances in which a covered financial institution cannot perform 
appropriate due diligence or enhanced due diligence with respect to a 
correspondent account, including when the covered financial institution 
should refuse to open the account, suspend transaction activity, file a 
suspicious activity report, or close the account.
    (e) Applicability rules for general due diligence. The provisions 
of paragraph (a) of this section apply to covered financial 
institutions as follows:
    (1) General rules--(i) Correspondent accounts established on or 
after July 5, 2006. Effective July 5, 2006, the requirements of 
paragraph (a) of this section shall apply to each correspondent account 
established on or after that date.
    (ii) Correspondent accounts established before July 5, 2006. 
Effective October 2, 2006, the requirements of paragraph (a) of this 
section shall apply to each correspondent account established before 
July 5, 2006.
    (2) Special rules for certain banks. Until the requirements of 
paragraph (a) of this section become applicable as set forth in 
paragraph (e)(1) of this section, the due diligence requirements of 31 
U.S.C. 5318(i)(1) shall continue to apply to any covered financial 
institution listed in Sec.  103.175(f)(1)(i) through (vi).
    (3) Special rules for all other covered financial institutions. The 
due diligence requirements of 31 U.S.C 5318(i)(1) shall not apply to a 
covered financial institution listed in Sec.  103.175(f)(1)(vii) 
through (x) until the requirements of paragraph (a) of this section 
become applicable as set forth in paragraph (e)(1) of this section.
    (f) Applicability rules for enhanced due diligence. The provisions 
of paragraph (b) of this section apply to covered financial 
institutions as follows:

[[Page 44775]]

    (1) General rules--(i) Correspondent accounts established on or 
after February 5, 2008. Effective February 5, 2008, the requirements of 
paragraph (b) of this section shall apply to each correspondent account 
established on or after such date.
    (ii) Correspondent accounts established before February 5, 2008. 
Effective May 5, 2008, the requirements of paragraph (b) of this 
section shall apply to each correspondent account established before 
February 5, 2008.
    (2) Special rules for certain banks. Until the requirements of 
paragraph (b) of this section become applicable as set forth in 
paragraph (f)(1) of this section, the enhanced due diligence 
requirements of 31 U.S.C. 5318(i)(2) shall continue to apply to any 
covered financial institutions listed in Sec.  103.175(f)(1)(i) through 
(vi).
    (3) Special rules for all other covered financial institutions. The 
enhanced due diligence requirements of 31 U.S.C. 5318(i)(2) shall not 
apply to a covered financial institution listed in Sec.  
103.175(f)(1)(vii) through (x) until the requirements of paragraph (b) 
of this section become applicable, as set forth in paragraph (f)(1) of 
this section.
    (g) Exemptions--(1) Exempt financial institutions. Except as 
provided in this section, a financial institution defined in 31 U.S.C. 
5312(a)(2) or (c)(1), or Sec.  103.11(n) is exempt from the 
requirements of 31 U.S.C. 5318(i)(1) and (i)(2) pertaining to 
correspondent accounts.
    (2) Other compliance obligations of financial institutions 
unaffected. Nothing in paragraph (g) of this section shall be construed 
to relieve a financial institution from its responsibility to comply 
with any other applicable requirement of law or regulation, including 
title 31, United States Code, and this part.

    Dated: August 2, 2007.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
 [FR Doc. E7-15467 Filed 8-8-07; 8:45 am]
BILLING CODE 4810-02-P