Everything I have read indicates that a confirmed letter of credit is an extension of credit, because the confirming financial institution is taking on the credit risk of the the issuing foreign bank. Is this correct, and if it is correct, then would the confirming bank have a foreign coorespondent banking relationship?

yes, and probably.

Then full section 312 of USPatAct would apply, correct?

The definitions of "correspondent account" and "account" provided in the BSA regulation don't give much helpful guidance on this.

"Account" is defined a "formal banking or business relationship established to provide regular services, dealings, and other financial transactions" -- so if you only confirm 1 LC that was issued by a particular foreign bank, should that be interpreted as automatically meeting the definition of an account? The reference in the definition to "regular services, dealings", etc., suggests that the frequency of those types of transactions may dictate what is/isn't considered to be an "account".

The conservative approach would be to treat all such transactions as being subject to Section 312. However, it might be acceptable to set a minimum threshold on the number of such transactions occurring within a particular timeframe to determine what will be considered an "account" subject to Section 312 -- and document that in your procedures.

I would suggest that you have a discussion with your regulator about this to get their buy-in on how you propose to interpret this.

It's vague for this part which I find very intriguing as import/export pricing can be used to facilitate money laundering and the international movement of illicit monies.

Do you think the regulators would let one bad transaction slide if it involved money laundering under a threshold situation?

I hear what you're saying. Then again, one could ask how performing all of the due diligence requirements on the foreign bank under Section 312 helps you to detect trade-based money laundering within specific transactions.

In my opinion, if under/over-pricing were to be used in connection with a trade transaction, it may have more to do with the buyer/seller parties (one of which is most likely your bank's customer) and less to do with the bank that is issuing the LC. Detecting and reporting suspected activity of that nature seems like an independent process.

By confirming a letter of credit, the Bank undertakes a responsibility to pay under the LC regardless of the financial condition of the issuing bank at the time of negotiation, provided that the documents presented are in order. While the issuing bank always has responsibility for payment, the confirming bank is obligated to pay/accept a draft from the beneficiary and may or may not be able to collect from the other bank.

It is foolish to confirm LCs for a bank your bank does not have an existing relationship with, preferably you would want them to have an account that could be debited should payment have to be made under the confirmed LC.

You also should not confirm an LC for a business/individual not already your customer. That is the only way you can assess the risk of the transaction.

I would not enter into such a transaction with unknown parties. The buyer or seller should be the confirming bank's customer - otherwise why would the bank be wiling to take this risk - and a credit assessment should be conducted on the other bank.

For BSA purposes, the risk is not knowing about the issuing bank and not knowing the parties to the LC. Would you want to have to fund a transaction that might not be legitimate?

I couldn't agree more, but I have been told that other large financial institutions and reps from the ABA BSA Conference are endorsing a tiered approach to doing Sect. 312 due diligence for LC confirmations. I have read the exam manual and the act, and I do not see any guidance that would suggest a watered down process for collecting the minimum requirements of Sect 312. There either is a FCB relationship or isn't a FCB relationship.

Beyond the concept of whether a transaction constitutes a foreign correspondent banking relationship, you may also have to address whether the transaction constitutes a customer relationship. I have seen regulators assert that the exchange of SWIFT keys constitutes a customer relationship.