FinCEN Responds to Institute Request Clarifying the Application of the AML Rule for Correspondent Accounts to NSCC Fund/SERV

©2006 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete. Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice. [19794] March 2, 2006 TO: AML COMPLIANCE WORKING GROUP No. 6-06 BANK AND TRUST ADVISORY COMMITTEE No. 8-06 BROKER/DEALER ADVISORY COMMITTEE No. 9-06 COMPLIANCE MEMBERS No. 13-06 OPERATIONS MEMBERS No. 5-06 SEC RULES MEMBERS No. 24-06 TRANSFER AGENT ADVISORY COMMITTEE No. 14-06 RE: FINCEN RESPONDS TO INSTITUTE REQUEST CLARIFYING THE APPLICATION OF THE AML RULE FOR CORRESPONDENT ACCOUNTS TO NSCC FUND/SERV We are very pleased to report that in response to the Institute’s request, the Financial Crimes Enforcement Network (“FinCEN”) has clarified the application of the new correspondent account rule1 in the context of the National Securities Clearing Corporation’s Fund/SERV system. The Institute had expressed its view that the rule does not apply to a Fund/SERV account established, maintained, administered, or managed by a mutual fund for an NSCC member firm that is a U.S. financial institution, even if the NSCC member firm’s customer is a foreign financial institution.2 FinCEN responded by stating that: Provided that the NSCC member is a U.S. financial institution subject to the provisions of section 312, we believe that the mutual fund in question is establishing, maintaining, administering, or managing an account for the NSCC member, rather than for the NSCC member’s customer. [Footnote omitted] Consequently, in such circumstances, 1 31 C.F.R. 103.176. See also 71 Fed. Reg. 496 (January 4, 2006). The new rule requires every mutual fund, by April 4, 2006, to establish a due diligence program reasonably designed to enable it to detect and report money laundering activity involving correspondent accounts established, maintained, administered, or managed for foreign financial institutions. The rule also requires mutual funds, by October 2, 2006, to subject all existing accounts to the new due diligence programs for correspondent accounts. 2 See Memorandum No. 19678, dated February 3, 2006. 2 we do not believe that the mutual fund establishes, maintains, administers, or manages a correspondent account for a foreign financial institution. However, in the event that a foreign financial institution becomes an NSCC member, the mutual fund would be required to treat that foreign financial institution as a correspondent account subject to the appropriate level of due diligence and monitoring.3 The Institute’s February 3rd letter requesting the interpretation and FinCEN’s response are attached. Robert C. Grohowski Senior Counsel - International Affairs Attachment (in .pdf format) Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website (http://members.ici.org) and search for memo 19794, or call the ICI Library at (202) 326-8304 and request the attachment for memo 19794. 3 Letter from William D. Langford Jr., Associate Director for the Regulatory Policy and Programs Division of FinCEN, to Robert C. Grohowski, Senior Counsel for International Affairs of the Investment Company Institute, dated March 2, 2006.