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 Correspondent banking is the product type that is subject to US extra-jurisdictional reach over non-US banks and non-US persons under the USA PATRIOT Act. This is because correspondent banking involves the provision of banking services by one bank (the correspondent) to anotherbank (the respondent) or to the respondent’s customers. Correspondent banking enables cross-border transactions and access to foreign financial systems, but also poses significant money laundering and terrorist financing risks due to the lack of transparency and accountability of the parties involved. The USA PATRIOT Act requires US financial institutions to apply enhanced due diligence measures to correspondent accounts for certain foreign banks, such as those operating under offshore banking licenses, those owned or controlled by foreign governments, or those of primary money laundering concern. These measures include obtaining information about the ownership, management, and anti-money laundering controls of the foreign bank, as well as the identity and activity of the customers using the correspondent account. The USA PATRIOT Act also authorizes the US Treasury to prohibit or impose conditions on the opening or maintaining of correspondent accounts for foreign banks that are involved in money laundering or terrorist financing activities.

TheBasel Committee on Banking Supervision (BCBS)setsglobal standards for bank governanceand states that theBoard of Directors plays a critical rolein AML oversight.

Option D (Correct):The Board is responsible for:

Establishing and approving the AML compliance function.

Ensuring the compliance function has adequate authority and resources.

Overseeing risk management efforts and policies.

Option A (Incorrect):The Board should be actively involved, not just informed when required.

Option B (Incorrect):The compliance function must have direct access to the Boardto ensure independent oversight.

Option C (Incorrect):The Board must be involved in policy establishmentfor effective compliance management.

Why Board Oversight is Critical:

Ensures effective AML governance and accountability.

Reduces regulatory risks and potential financial penalties.

Strengthens financial institution stability and reputation.

Best Practices for Board Oversight in AML Governance:

Establish independent compliance reporting lines to the Board.

Ensure regular AML risk assessments and policy reviews.

Mandate regular AML training for senior management.