Shell Bank

Danecroft Securities is approached by a foreign bank that has no physical presence in any country, is not affiliated with any regulated financial institution, and wants Danecroft to open a correspondent account for it. Under the USA PATRIOT Act, the firm must:

1. A.open the account but apply enhanced due diligence and review it annually.Enhanced due diligence applies to certain permitted foreign accounts. It does not make a shell bank account allowable.
2. B.open the account if the foreign bank supplies audited financial statements and a list of its owners.No documentation package cures the absence of a physical presence and a regulated affiliate.
3. C.open the account and file a suspicious activity report at the time of opening.Filing a report does not authorise conduct the statute forbids.
4. D.refuse the account outright, because a correspondent account for a foreign shell bank is prohibited.Correct. The prohibition on shell bank correspondent accounts is absolute.

Why: A foreign bank with no physical presence in any country and no affiliation with a regulated financial group is a shell bank. United States financial institutions are prohibited from establishing or maintaining a correspondent account for a foreign shell bank, and they must take reasonable steps to make sure the correspondent accounts they do maintain are not being used indirectly to provide banking services to one. The prohibition is absolute; no level of due diligence makes the account permissible.

Ardmore Securities is asked to open a correspondent account for a foreign financial institution. Diligence establishes that the institution has no physical presence in any country and is not an affiliate of any regulated financial group subject to consolidated supervision. Under the USA PATRIOT Act, Ardmore must:

1. A.Open the account if the foreign institution certifies that none of its customers are senior foreign political figures.Wrong. Senior foreign political figures trigger separate enhanced due diligence obligations. No certification about them permits a shell bank correspondent account.
2. B.Open the account subject to enhanced due diligence and more frequent transaction monitoring.Wrong. Enhanced due diligence applies to permitted foreign correspondent and private banking relationships. It cannot legitimise a shell bank correspondent account.
3. C.Decline the account, because a U.S. institution may not establish or maintain a correspondent account for a foreign shell bank, and must take steps to prevent its correspondent accounts from serving one indirectly.Correct. The shell bank correspondent prohibition is absolute, and it extends to indirect access through other correspondents.
4. D.Open the account and file a suspicious activity report contemporaneously with the opening.Wrong. Filing a report does not cure a prohibited relationship. The account may not be opened at all.

Why: An institution with no physical presence anywhere and no affiliation with a supervised group is a SHELL BANK. U.S. financial institutions are flatly prohibited from establishing or maintaining a correspondent account for a foreign shell bank, and they must also take reasonable steps to ensure their existing correspondent accounts are not being used to provide services to one indirectly - which is why firms obtain certifications from foreign correspondents about shell bank access. This is a prohibition, not a risk to be managed with heightened monitoring.

Kirkbride Securities maintains a correspondent account for Banco Ribeira, a foreign bank that has a genuine physical presence and a banking licence in its home country. Under the USA PATRIOT Act provisions on foreign correspondent accounts, Kirkbride must obtain from Banco Ribeira a certification covering:

1. A.That Banco Ribeira will file suspicious activity reports directly with FinCEN on its own customersA foreign bank is not a United States filer. The reporting obligation on this relationship rests with Kirkbride.
2. B.That Banco Ribeira maintains capital in accordance with United States regulatory standardsForeign banks are regulated at home. The certification addresses shell bank exposure, ownership and process, not capital.
3. C.That Banco Ribeira is not a shell bank and provides no banking services to shell banks, with ownership information and a United States agent for service of process, re-obtained at least every three yearsCorrect. These are the required certification elements, and the certification must be refreshed on that cycle.
4. D.That Banco Ribeira will not accept deposits from persons who are not residents of its home countryThe certification is not about the residency of the foreign bank own depositors.

Why: The required certification confirms that the foreign bank is not itself a shell bank and does not provide banking services to any shell bank, identifies the owners holding specified interests where the bank shares are not publicly traded, and names an agent in the United States for service of legal process. The certification must be re-obtained at least once every three years, and sooner if the firm learns the information is no longer accurate.