OSFI is warning Canadian banks not to enter correspondent banking relationships with shell banks.

In a letter to the banks, Michael Hafeman, OSFI assistant superintendent, notes that the USA Patriot Act prohibits certain financial institutions operating in the United States from establishing, maintaining, administering or managing correspondent accounts on behalf of foreign banks that do not have a physical presence in any country (i.e. a “shell bank”).

Financial institutions operating in the U.S. are required to seek certifications from their correspondent banks to the effect that they are not shell banks and that they are regulated in the jurisdiction in which they have a physical presence.

It also notes that the Basel Committee on Banking Supervision has issued a paper entitled Customer Due Diligence for Banks which sets out guidance for banks and bank supervisors, including correspondent banking. The BIS paper calls upon banks to refuse to enter into, or continue, correspondent-banking relationship with shell banks.

It says, “In light of these two initiatives, we believe that Canadian deposit-taking institutions should be aware of the enhanced BIS standard for dealing with correspondent banking accounts and encourage them to adopt measures which will ensure that they do not enter into correspondent banking relationships with shell banks.”

And, it notes, “OSFI is of the view that the customer due diligence standards identified in the BIS paper represent a sound basis for ensuring that deposit-taking institutions have adequate controls and procedures in place to know whom their customers are. Accordingly, in the course of this year, we will be contacting various industry associations for input regarding the implementation of these standards in Canada.”