The Office of the Superintendent of Financial Institutions in Canada has written to financial firms there asking for “enhanced” due diligence for correspondent accounts.

The letter presumably comes in light of two documents issued late last year, i.e. the USA PATRIOT Act and the Basel Committee on Banking Supervision, Bank for International Settlements’ paper, Customer Due Diligence for Banks (see link below).

The OSFI believes Canadian deposit-taking institutions should be aware of the BIS standard for dealing with correspondent banking accounts. The letter also said the due diligence standards issued by the BIS are a “sound basis” for ensuring banks have adequate know your customer controls and procedures in place. It is understood that the OSFI will be contacting various industry associations for input about implementing the standards in Canada during the year.

The USA PATRIOT Act prohibits certain financial institutions operating in the US from establishing, maintaining, or managing correspondent accounts on behalf of foreign banks that do not have a physical presence, that is, so-called ‘shell banks’. US firms need to seek certifications from their correspondent banks to the effect that they are not shell banks and are regulated in the jurisdiction where they are physically present.

The OSFI letter states that the BIS paper sets out due diligence guidance for banks and their supervisors. One of the topics deals with correspondent banking. The paper calls upon banks to refuse to enter into, or continue correspondent banking with shell banks.

In The Bahamas, the Central Bank has issued Guidelines relating to the requirements for the transition of managed banks to full physical presence. The current policy of the Central Bank states that, beyond 30 June 2004, no licensee will be permitted to operate in or from within The Bahamas without a physical presence appropriate to the business of that institution. Additionally, released have been Guidelines pertaining to requirements for the continuation of the management of branches of foreign banks (currently without a physical presence).