Significant changes to U.S. anti-money laundering and financial-transparency laws are giving American authorities substantially greater reach over foreign banks that maintain correspondent banking relationships with U.S. financial institutions.

The developments are particularly important for foreign financial institutions that depend upon access to the U.S. dollar clearing system. A foreign bank does not necessarily need a branch, office or other physical presence in the United States to have significant exposure to U.S. regulatory and enforcement requirements. A correspondent account with a U.S. bank can be sufficient to create a powerful connection.

The provisions discussed in this article arise principally from the Anti-Money Laundering Act of 2020 (AMLA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021.

The official legislation is Public Law 116-283, enacted January 1, 2021. Most importantly for foreign banks, Section 6308 — Obtaining Foreign Bank Records from Banks with United States Correspondent Accounts amended Section 5318(k) of Title 31 of the United States Code.

This is an important distinction because these measures are not technically FATCA. FATCA principally addresses reporting by foreign financial institutions concerning financial accounts held by U.S. taxpayers. The provisions examined here instead arise from the AMLA and expand the ability of U.S. authorities to obtain records from foreign banks maintaining U.S. correspondent accounts.

Nevertheless, both regimes form part of the same broader movement toward greater international financial transparency.

The Growing Reach of U.S. Financial Regulation

The international financial system has become increasingly interconnected.

A bank in Europe, Asia or the Middle East may have customers and operations entirely outside the United States while nevertheless depending upon a U.S. correspondent institution to facilitate dollar transactions.

That relationship is commercially valuable.

It is also a potential source of regulatory exposure.

The Anti-Money Laundering Act of 2020 represents one of the most significant expansions of the U.S. anti-money-laundering framework in years. Among its many provisions, Section 6308 specifically addresses the ability of U.S. authorities to obtain records from foreign banks with U.S. correspondent accounts.

The January 27, 2021 analysis by Curtis, Mallet-Prevost, Colt & Mosle, “New AML Subpoena Power over Foreign Bank Records and New Enforcement Standards of the Anti-Money Laundering Act of 2020” described the new subpoena authority as one of the provisions taking effect immediately upon enactment.

This development should be viewed alongside the broader movement toward beneficial-ownership transparency discussed in US Ends UBO Privacy.

The direction is clear: governments are increasingly seeking to identify who ultimately owns, controls and benefits from internationally held assets.

U.S. Dollar Correspondent Accounts

Correspondent banking is fundamental to international finance.

A correspondent account permits a U.S. financial institution to provide banking services to a foreign bank, including receiving deposits, making payments and facilitating other financial transactions.

The statutory definition recognizes a correspondent account as an account established to receive deposits from, make payments on behalf of, or handle other financial transactions for a foreign financial institution. 31 U.S.C. § 5318A and related provisions

The U.S. dollar’s central role in international commerce makes these relationships particularly important.

Foreign financial institutions that require access to the dollar-clearing system often depend upon relationships with U.S. banks. That creates a point of leverage that does not depend upon the foreign institution maintaining a physical presence in America.

The Covington & Burling January 13, 2021 alert, “New U.S. AML Legislation — Five Provisions for Foreign Banks to Watch” identified the new correspondent-account rules as one of the provisions that foreign banks should pay particular attention to.

The implication is straightforward: access to the U.S. financial system increasingly carries obligations that can reach beyond the physical borders of the United States.

Expanded Subpoena Powers

The most consequential change is the expansion of the U.S. government’s ability to obtain records from foreign banks.

Previously, Treasury and Justice Department authorities could subpoena a foreign bank maintaining a U.S. correspondent account for records relating to that correspondent account.

The AMLA substantially broadened that authority.

Under amended 31 U.S.C. § 5318(k)(3), the Secretary of the Treasury or the Attorney General may issue a subpoena to a foreign bank maintaining a correspondent account in the United States and request records relating to the correspondent account or any account at the foreign bank, including records maintained outside the United States, when the statutory investigative conditions are satisfied.

The Cohen & Gresser January 22, 2021 analysis, “Anti-Money Laundering Act of 2020 Significantly Expands Reach of Subpoenas of Non-U.S. Banks That Have U.S. Correspondent Accounts” described precisely this expansion, noting that non-U.S. banks maintaining U.S. correspondent accounts now face substantially broader subpoenas from the Department of Justice and Treasury.

This is a significant expansion of jurisdictional reach.

The records do not have to be physically located in the United States.

The customer does not necessarily have to be a U.S. person.

And the relevant account does not necessarily have to be the correspondent account through which the foreign bank accesses the U.S. financial system.

The existence of the correspondent relationship can itself provide the connection.

The Scope Goes Beyond Money Laundering

The significance of the new authority is also found in the circumstances in which a subpoena may be issued.

The statute encompasses investigations of violations of U.S. criminal law, violations of the Bank Secrecy Act, civil forfeiture proceedings and investigations under the special-measures provisions of the Bank Secrecy Act.

The Holland & Knight January 2021 analysis, “Key Provisions of the Anti-Money Laundering Act of 2020” explained that the government can now seek records relating to “any account at the foreign bank” in circumstances covered by the statute, rather than being limited to records concerning the correspondent account itself.

The FFIEC BSA/AML examination guidance similarly describes the amended authority and confirms that the subpoena can encompass records maintained outside the United States.

This means the authority is broader than a narrowly defined money-laundering investigation.

A foreign bank maintaining a U.S. correspondent account therefore has to consider the possibility that its records could become relevant to a wider range of U.S. investigations.

Foreign Banking Secrecy

The legislation also creates a potentially difficult conflict between U.S. demands for information and the laws of the foreign jurisdiction in which the bank operates.

A foreign bank may seek to challenge or modify a subpoena.

However, amended Section 5318 expressly provides that an assertion that compliance would conflict with a provision of foreign secrecy or confidentiality law cannot, by itself, constitute the sole basis for quashing or modifying the subpoena.

This provision is contained in 31 U.S.C. § 5318(k)(3)(A)(iv).

The Holland & Knight January 2021 analysis likewise highlighted the potential conflict between U.S. demands and foreign banking-secrecy laws.

This creates a potential conflict of laws.

The foreign bank may have obligations to protect customer information under its domestic legal framework while simultaneously facing an American demand backed by access to the U.S. financial system.

That is an increasingly important issue for internationally active financial institutions.

Compliance Has a Price

The legislation creates substantial financial consequences for non-compliance.

A foreign bank that fails to comply with an applicable subpoena can face a civil penalty of up to $50,000 per day.

The Holland & Knight analysis identified the $50,000-per-day civil penalty as one of the most significant enforcement consequences of the new law.

The Chambers and Partners January 2021 analysis, “The United States Anti-Money Laundering Act 2020” likewise noted that a bank can face a civil penalty of up to $50,000 for each day it fails to comply.

The penalty is therefore not merely symbolic.

For a continuing failure to comply, the exposure can accumulate rapidly.

More importantly, however, the financial penalty is only one part of the enforcement mechanism.

The legislation also places pressure on the U.S. correspondent bank.

The Ten-Day Termination Mechanism

If a foreign bank fails to comply with the subpoena, the law provides the U.S. authorities with a further mechanism: termination of the correspondent relationship.

A U.S. financial institution maintaining a correspondent account for the foreign bank can be ordered to terminate the relationship.

Under the amended statute, failure to terminate the relationship can result in a civil penalty of up to $25,000 per day.

The Chambers and Partners January analysis specifically identified the 10-day termination period and the potential $25,000-per-day penalty for failure to terminate.

This creates a powerful incentive structure.

The U.S. government does not have to rely solely upon imposing a penalty directly against the foreign bank.

It can potentially place the foreign bank’s access to the U.S. banking system at risk.

For a foreign financial institution that depends upon dollar clearing, the commercial consequences of losing a correspondent relationship could be considerably greater than the statutory fine.

The Confidentiality Requirement

The legislation also addresses disclosure of the subpoena.

Under 31 U.S.C. § 5318(k)(3)(C) officers, directors, employees and other relevant persons at the foreign bank are prohibited from notifying the account holder or another person named in the subpoena about its existence or contents, subject to the statutory framework.

The 2020 Chambers and Partners analysis notes that violating the nondisclosure requirement can itself carry substantial civil consequences.

The law therefore combines several mechanisms: greater access to foreign banking records, significant penalties for non-compliance, potential termination of the correspondent relationship and restrictions on notifying affected account holders.

Taken together, these provisions give U.S. authorities considerable practical leverage.

FATCA and the Broader Transparency Movement

It is important to distinguish these AMLA provisions from FATCA itself.

FATCA—the Foreign Account Tax Compliance Act—was enacted in 2010 as part of the HIRE Act. Its principal purpose is to require certain foreign financial institutions to report information concerning financial accounts held by U.S. taxpayers, with withholding consequences for institutions that do not comply.

The Internal Revenue Service’s FATCA overview explains the framework and its purpose.

The AMLA provisions discussed here have a different focus.

They strengthen U.S. law-enforcement and Treasury authorities’ ability to obtain records from foreign banks maintaining U.S. correspondent accounts.

Nevertheless, both regimes form part of a larger transformation in international financial transparency.

The direction has been clear for years.

As I discussed in US Ends UBO Privacy, governments have increasingly sought information concerning beneficial ownership and internationally held assets.

The United States was simultaneously tightening its approach to foreign financial accounts and offshore wealth.

FATCA, FBAR and Foreign Accounts

The distinction between FATCA and the Bank Secrecy Act’s FBAR regime is also important.

FATCA can require certain U.S. taxpayers to report specified foreign financial assets to the IRS on Form 8938. Separately, the Bank Secrecy Act requires qualifying U.S. persons with foreign financial accounts exceeding the applicable threshold to file an FBAR.

The IRS Foreign Account Tax Compliance Act guidance and its related foreign-account reporting materials illustrate the increasingly comprehensive reporting framework surrounding foreign financial assets.

The existence of these overlapping regimes demonstrates how far the United States had already moved toward comprehensive visibility over offshore financial activity.

The AMLA provisions add another dimension: rather than simply requiring U.S. taxpayers to report foreign accounts, they increase the government’s ability to obtain records directly from foreign financial institutions under specified circumstances.

Correspondent Banking as a Point of Leverage

The importance of these developments becomes clearer when viewed from the perspective of a foreign bank.

A bank may have no U.S. customers.

It may have no U.S. branch.

Its management and operations may be entirely outside the United States.

Yet if it maintains a U.S. correspondent account, it is connected to an important part of the American financial infrastructure.

That relationship can therefore become a point of regulatory leverage.

This is particularly significant because correspondent banking is not merely a convenience. For many institutions, access to international payment systems and dollar clearing is fundamental to their ability to serve corporate and private clients engaged in cross-border commerce.

The question for a foreign bank is consequently not simply whether it can comply with a U.S. request.

It is whether it can afford not to.

De-Risking and International Banking

There is a further commercial consequence.

Banks have increasingly become sensitive to regulatory and compliance risks associated with correspondent relationships.

A U.S. institution may determine that maintaining a particular foreign correspondent relationship exposes it to disproportionate legal, regulatory or reputational risk.

The AMLA provisions potentially reinforce this tendency.

If a U.S. correspondent bank can face a daily penalty for failing to terminate a relationship after receiving the required notice, the economic incentive to comply is obvious.

The Curtis January 27, 2021 analysis specifically discussed the expanded extraterritorial reach of the new legislation.

For smaller foreign banks, especially those operating in jurisdictions that American authorities regard as presenting elevated compliance risks, maintaining access to correspondent banking can therefore become a strategic rather than merely operational issue.

The Implications for International Wealth

The implications extend beyond banks.

For internationally mobile investors and private clients, the broader message is that the location of an account does not necessarily determine the full extent of the regulatory environment surrounding it.

A foreign bank account may be located outside the United States, but the bank itself may depend upon a U.S. correspondent relationship.

The customer’s assets may therefore exist within a wider regulatory network than the customer initially appreciates.

This reinforces the point that changes in U.S. tax and financial policy can have consequences for internationally mobile capital well beyond the United States itself.

The issue is not simply taxation.

It is access to the financial system.

Financial Transparency and Wealth Management

The trend toward greater transparency also affects how international wealth should be structured.

Traditional wealth planning often focused heavily on jurisdictional tax rates, banking secrecy and asset location.

Those factors remain relevant, but they increasingly have to be considered alongside reporting requirements, beneficial ownership rules, anti-money-laundering obligations and access to international banking infrastructure.

The broader pattern is difficult to ignore.

Governments are seeking greater visibility over wealth while simultaneously developing more powerful mechanisms through which financial institutions can be required to provide information.

The Strategic Importance of U.S. Access

The real strength of the new provisions lies in the position occupied by the United States within global finance.

The United States does not need to regulate every foreign bank directly.

It can exercise influence through the financial infrastructure upon which those banks depend.

A foreign institution that wants continued access to the U.S. dollar system must therefore take seriously the obligations associated with its correspondent relationship.

The result is a form of extraterritorial influence.

The law may be American, but its practical consequences can reach foreign institutions, foreign records and foreign customers.

A Broader Shift in International Banking

This development should therefore be viewed as part of a much larger structural change.

International banking is becoming increasingly transparent.

Beneficial ownership is becoming increasingly important.

Automatic exchange of information has become an established part of the international tax environment.

And major financial centres are increasingly using access to their banking infrastructure as a mechanism for enforcing compliance beyond their physical borders.

The U.S. correspondent banking provisions represent an especially powerful example because of the importance of the dollar.

They demonstrate that jurisdictional boundaries can become considerably less significant when a financial institution depends upon infrastructure controlled by another jurisdiction.

Conclusion

The new U.S. anti-money-laundering provisions represent a significant expansion of American enforcement reach over foreign financial institutions.

A foreign bank does not necessarily need a physical presence in the United States to become subject to meaningful U.S. pressure.

Maintaining a U.S. correspondent account can be enough to create a powerful connection.

Once that relationship exists, Treasury and Justice Department authorities can seek records extending beyond the correspondent account itself, including records relating to other accounts at the foreign bank and records maintained outside the United States, subject to the statutory requirements.

For foreign banks, access to the U.S. dollar system therefore comes with a substantial compliance obligation.

For internationally mobile investors, the broader lesson is equally important.

Financial privacy, jurisdictional choice and access to international banking are becoming increasingly interconnected.

The international financial system is moving toward greater transparency and greater regulatory integration. The practical reach of a jurisdiction can extend well beyond its physical borders when that jurisdiction controls an essential part of the infrastructure through which global capital moves.

For foreign banks and their clients, the question is no longer simply where an account is located.

It is increasingly which financial system the institution ultimately depends upon—and what obligations accompany that dependence.