TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
Background
Over the past year, Board staff has become aware of
the increasing use of an account service known as a "payable
through account" that is being marketed by U.S. banks, Edge
corporations and the U.S. branches and agencies of foreign banks
("U.S. banking entity(ies)") to foreign banks that otherwise
would not have the ability to offer their customers direct
access to the U.S. banking system. This account service has
also been referred to by other names, such as "pass through
accounts" and "pass by accounts." We have worked with
representatives from the Federal Deposit Insurance Corporation,
the Office of the Comptroller of the Currency, and the Office of
Thrift Supervision to monitor payable through account activities
and to ensure that all banking organizations supervised by the
Federal Reserve and the other agencies are advised about the
matters described below.
The payable through account mechanism has long been
used in the United States by credit unions (e.g., for checking
account services) and investment companies (e.g., for checking
account services associated with money market management
accounts) to offer their respective customers the full range of
banking services that only a commercial bank has the ability to
provide. The problems described below do not relate to these
traditional uses of payable through account relationships.
Explanation of "Payable Through Accounts"
The recent use of payable through accounts as an
account service being offered by U.S. banking entities to
foreign banks involves the U.S. banking entity opening a
checking account for the foreign bank. The foreign bank then
solicits customers that reside outside of the United States who,
for a fee, are provided with the means to conduct banking
transactions in the United States through the foreign bank's
account at the U.S. banking entity. Typically, the foreign bank
will provide its customers, commonly referred to as "sub-account
holders," with checks that enable the sub-account holder to draw
on the foreign bank's account at the U.S. banking entity. The
group of sub-account holders, which may number several hundred
for one payable through account, all become signatories on the
foreign bank's account at the U.S. banking entity.1 This
results in individuals and businesses, who may not have been
subject to the same requirements imposed on U.S. citizens or
residents for opening an account at a U.S. banking entity,
possessing the ability to write checks and make deposits at a
U.S. banking entity, as if such individuals and businesses were
the actual account holders at the U.S. banking entity.2
It appears that some U.S. banking entities are not
exercising the same degree of care with respect to payable
through accounts that they exercise for domestic customers that
want to open checking or other types of account relationships
directly with the banking organizations. Our experience has
shown that some U.S. banking entities simply collect signature
cards that have been completed abroad and have been submitted to
them in bulk by the foreign banks, and then proceed to process
thousands of checks issued by the sub-account holders, as well
as other banking transactions, through the foreign banks'
accounts at the U.S. banking entities. These U.S. banking
entities undertake little or no effort independently to obtain
or verify information about the individuals and businesses who
use their accounts. Possible Illegal or Improper Conduct Associated With Payable Through Accounts
The traditional use of payable through accounts by
financial organizations in the United States (i.e., credit
unions and investment companies) has not been a cause for
concern by bank regulators. These organizations are regulated
by federal or state agencies, or are otherwise subject to
established industry standards; and they appear to have adopted
adequate policies and procedures to establish the identity of,
and monitor the activity of, sub-account holders--in essence the
credit union's depositors or the investment company's mutual
fund account holders. The same types of safeguards do not
appear to be present in some U.S. banking entities that provide
payable through account services to foreign banks.
Board staff is concerned that the use of payable
through accounts by foreign banks at U.S. banking entities may
facilitate unsafe and unsound banking practices and other
misconduct, including money laundering and related criminal
activities. Unless a U.S. banking entity is able to identify
adequately, and understand the transactions of, the ultimate
users--all or most of whom are off-shore--of the foreign bank's
account maintained at the U.S. banking entity, there is a
potential for serious illegal conduct. Recent reports from law
enforcement agencies, as well as our own investigatory efforts,
confirm that some money laundering and related illicit schemes
have involved the use of foreign banks' payable through account
arrangements at U.S. banking entities. Should accounts at U.S.
banking entities be used for illegal purposes, the entities
could be exposed not only to reputational risks, but also to
serious risks of financial losses as a result of asset seizures
and forfeitures brought by law enforcement authorities.
Guidelines on Payable Through Account Activities
Because of the possibility of illicit activities being
conducted through payable through accounts at U.S. banking
entities, we believe that it is inconsistent with the principles
of safe and sound banking for U.S. banking entities to offer
payable through account services without developing and
maintaining policies and procedures designed to guard against
the possible improper or illegal use of their payable through
account facilities by foreign banks and their customers.
These policies and procedures must be fashioned to
enable each U.S. banking entity offering payable through account
services to foreign banks to identify sufficiently the ultimate
users of its foreign bank customers' payable through accounts,
including obtaining (or having the ability to obtain) in the
United States substantially the same type of information on the
ultimate users as the U.S. banking entity obtains for its
domestic customers. This may require a review of the foreign
bank's own procedures for identifying and monitoring sub-account
holders, as well as the relevant statutory and regulatory
requirements placed on the foreign bank to identify and monitor
the transactions of its own customers by its home country
supervisory authorities. In addition, U.S. banking entities
should have procedures whereby they monitor account activities
conducted in their payable through accounts with foreign banks
and report suspicious or unusual activity in accordance with
applicable Federal Reserve criminal referral regulations.
In those situations where (1) adequate information
about the ultimate users of the payable through accounts cannot
be obtained; (2) the U.S. banking entity cannot adequately rely
on the home country supervisor to require the foreign bank to
identify and monitor the transactions of its own customers; or
(3) the U.S. banking entity is unable to ensure that its payable
through accounts are not being used for money laundering or
other illicit purposes, it is recommended that the U.S. banking
entity terminate the payable through arrangement with the
foreign bank as expeditiously as possible.
Notice to U.S. Banking Entities and New Examination Procedures
Because of the existing and potential problems
associated with payable through accounts, we are asking that
U.S. banking entities immediately begin to establish and
maintain policies and procedures designed to guard against the
possible improper or illegal use of their payable through
account facilities, and that your Reserve Bank start to review
such activities during the course of future examinations. To
assist the banking organizations in your District with their
understanding of our concerns in this area, we have attached a
suggested letter to disseminate our payable through account
guidelines to the state member banks, Edge corporations, and
U.S. branches and agencies of foreign banks in your District.
We have also developed new examination procedures that should be
used by your examination staff to review payable through account
activities. The new examination procedures will be sent to you
under separate cover shortly.3
After your Reserve Bank disseminates the attached
suggested letter and begins to use the new payable through
account examination procedures, we ask that, for the next six
months, your examiners concentrate on reviewing U.S. banking
entities' existing policies and procedures related to monitoring
payable through account activities, to the extent that the
banking organizations conduct such activities, and that they
make suggestions for improvements or enhancements, where
appropriate, consistent with our new guidelines in this area.
Because the Federal Reserve, as well as other federal bank
regulators, have not previously issued any guidance regarding
the operation of payable through accounts at U.S. banking
entities, we request that, until September 30, 1995, you focus
on improvements and enhancements at U.S. banking entities where
some deficiencies in this area are discovered and not include
criticisms of U.S. banking entities' payable through account
activities in your reports of examination. In addition, we
request that your Reserve Bank not recommend any follow-up
supervisory actions related to a U.S. banking entity's policies
and procedures regarding its payable through account activities
until the fourth quarter of 1995, unless your examiners find
apparent violations of the Bank Secrecy Act or indicia of other
serious criminal misconduct associated with such activities.
Collection of Data Related to Payable Through Accounts
Board staff is in the process of collecting data on
payable through accounts in order to determine as soon as
possible the extent of such activities in the United States. In
this regard, please provide the following information to Ronald J. Ranochak, Senior Financial Analyst, International
Supervision Section, Mail Stop 182, as soon as such information
becomes available through your upcoming examinations, contacts
with U.S. banking entities following the dissemination of the
attached suggested letter, or through other sources:
1. The name and location of each U.S. banking entity
offering payable through accounts to foreign
banks.
2. For each such banking entity, as identified above:
a. the name, location and licensing authority
of each foreign bank that maintains a
payable through account, to the extent that
such information is available at the U.S.
banking entity;
b. the ownership structure data on each foreign
bank, to the extent that such information is
available at the U.S. banking entity; and
c. the number of sub-account holders in each
payable through account, including the name
and number of foreign banks that are sub-account holders.
In the event that you have any questions concerning
any of the matters described herein, please contact Richard A. Small, Special Counsel, at (202) 452-5235, or Daniel D. Soto, Senior Special Examiner, at (202) 728-5829. For
questions related to the collection of data on payable through
accounts, Mr. Ranochak can be reached at (202) 452-5275.
Director
ATTACHMENT TRANSMITTED ELECTRONICALLY BELOW
To the Chief Executive Officer of Each State Member Bank, Edge
Corporation, and U.S. Branch and Agency of a Foreign Bank
Subject: Payable Through Accounts
Dear _____________________ :
The payable through account mechanism has long been
used in the United States by credit unions (e.g., for checking
account services) and investment companies (e.g., for checking
account services associated with money market management
accounts) to offer their respective customers the full range of
banking services that only a commercial bank has the ability to
provide. The problems described below do not relate to these
traditional uses of payable through account relationships.
The recent use of payable through accounts as an
account service being offered by U.S. banking entities to
foreign banks involves the U.S. banking entity opening a
checking account for the foreign bank. The foreign bank then
solicits customers that reside outside of the United States who,
for a fee, are provided with the means to conduct banking
transactions in the United States through the foreign bank's
account at the U.S. banking entity. Typically, the foreign bank
will provide its customers, commonly referred to as "sub-account
holders," with checks that enable the sub-account holder to draw
on the foreign bank's account at the U.S. banking entity. The
group of sub-account holders, which may number several hundred
for one payable through account, all become signatories on the
foreign bank's account at the U.S. banking entity.4 This
results in individuals and businesses, who may not have been
subject to the same requirements imposed on U.S. citizens or
residents for opening an account at a U.S. banking entity,
possessing the ability to write checks and make deposits at a
U.S. banking entity, as if such individuals and businesses were
the actual account holders at the U.S. banking entity.5
It appears that some U.S. banking entities are not
exercising the same degree of care with respect to payable
through accounts that they exercise for domestic customers that
want to open checking or other types of account relationships
directly with the banking organizations. Our experience has
shown that some U.S. banking entities simply collect signature
cards that have been completed abroad and have been submitted to
them in bulk by the foreign banks, and then proceed to process
thousands of checks issued by the sub-account holders, as well
as other banking transactions, through the foreign banks'
accounts at the U.S. banking entities. These U.S. banking
entities undertake little or no effort independently to obtain
or verify information about the individuals and businesses who
use their accounts.
Possible Illegal or Improper Conduct Associated With Payable
Through Accounts
The traditional use of payable through accounts by
financial organizations in the United States (i.e., credit
unions and investment companies) has not been a cause for
concern by bank regulators. These organizations are regulated
by federal or state agencies, or are otherwise subject to
established industry standards; and they appear to have adopted
adequate policies and procedures to establish the identity of,
and monitor the activity of, sub-account holders--in essence the
credit union's depositors or the investment company's mutual
fund account holders. The same types of safeguards do not
appear to be present in some U.S. banking entities that provide
payable through account services to foreign banks.
Federal Reserve staff is concerned that the use of
payable through accounts by foreign banks at U.S. banking
entities may facilitate unsafe and unsound banking practices and
other misconduct, including money laundering and related
criminal activities. Unless a U.S. banking entity is able to
identify adequately, and understand the transactions of, the
ultimate users--all or most of whom are off-shore--of the
foreign bank's account maintained at the U.S. banking entity,
there is a potential for serious illegal conduct. Recent
reports from law enforcement agencies, as well as the Federal
Reserve's own investigatory efforts, confirm that some money
laundering and related illicit schemes have involved the use of
foreign banks' payable through account arrangements at U.S.
banking entities. Should accounts at U.S. banking entities be
used for illegal purposes, the entities could be exposed not
only to reputational risks, but also to serious risks of
financial losses as a result of asset seizures and forfeitures
brought by law enforcement authorities.
Guidelines on Payable Through Account Activities
Because of the possibility of illicit activities being
conducted through payable through accounts at U.S. banking
entities, we believe that it is inconsistent with the principles
of safe and sound banking for U.S. banking entities to offer
payable through account services without developing and
maintaining policies and procedures designed to guard against
the possible improper or illegal use of their payable through
account facilities by foreign banks and their customers.
These policies and procedures must be fashioned to
enable each U.S. banking entity offering payable through account
services to foreign banks to identify sufficiently the ultimate
users of its foreign bank customers' payable through accounts,
including obtaining (or having the ability to obtain) in the
United States substantially the same type of information on the
ultimate users as the U.S. banking entity obtains for its
domestic customers. This may require a review of the foreign
bank's own procedures for identifying and monitoring sub-account
holders, as well as the relevant statutory and regulatory
requirements placed on the foreign bank to identify and monitor
the transactions of its own customers by its home country
supervisory authorities. In addition, U.S. banking entities
should have procedures whereby they monitor account activities
conducted in their payable through accounts with foreign banks
and report suspicious or unusual activity in accordance with
applicable Federal Reserve criminal referral regulations.
In those situations where (1) adequate information
about the ultimate users of the payable through accounts cannot
be obtained; (2) the U.S. banking entity cannot adequately rely
on the home country supervisor to require the foreign bank to
identify and monitor the transactions of its own customers; or
(3) the U.S. banking entity is unable to ensure that its payable
through accounts are not being used for money laundering or
other illicit purposes, it is recommended that the U.S. banking
entity terminate the payable through arrangement with the
foreign bank as expeditiously as possible.
Even though we are asking that you begin immediately
to establish and maintain policies and procedures designed to
guard against the possible improper or illegal use of payable
through account facilities, we understand that such new policies
and procedures will take some time to implement fully. As a
first step, you should contact each foreign bank that maintains
any type of payable through account relationship with your
banking organization in order to bring the records related to
its accounts into conformity with the aforementioned guidelines.
Over the next several months, during our regular
examinations, Reserve Bank examiners will be reviewing your
existing policies and procedures related to payable through
account activities, to the extent that you conduct such
activities, any improvements or enhancements that you may make
in light of the aforementioned guidelines, and your efforts, if
needed, to contact foreign banks that maintain payable through
accounts at your institution.
In order to provide your banking organization with
sufficient time to implement our guidelines in this area, our
examiners will not include criticisms of any U.S. banking
entity's payable through account activities in reports of
examinations until the fourth quarter of 1995. Also, we will
not recommend any follow-up supervisory actions addressing
deficiencies in this area until the fourth quarter of 1995,
except in those situations where examiners find apparent
violations of the Bank Secrecy Act or indicia of other serious
criminal misconduct associated with such activities.
Should you have any questions with regard to this
matter, please contact __________________ at the Reserve Bank.
Footnotes 1. In a recent adaptation of the payable through account service, foreign banks have opened accounts at U.S. banking entities and then solicited other foreign banks, rather than individuals, to use their accounts at the U.S. banking entities. These second tier foreign banks then solicit individuals as customers. This has resulted in thousands, rather than hundreds, of individuals having signatory authority over a single account at a U.S. banking entity. Return to text 2. Payable through account activities should not be confused with traditional correspondent banking relationships. Under typical correspondent banking arrangements, a smaller bank will enter into an agreement with a larger bank to process and complete transactions on behalf of the smaller bank's customers or the smaller bank itself. In such an arrangement, the smaller bank's customers are not aware of the correspondent banking relationships their bank has with other financial institutions. The smaller bank's customers certainly do not have access to their bank's account at the larger correspondent bank. This differs significantly from the payable through account situation where the sub-account holders have direct control of the payable through account at the U.S. banking entity by virtue of their signatory authority over the foreign bank's account at the U.S. banking entity. Return to text 3. It should be noted that the payable through account-related examination procedures will shortly become part of the new Bank Secrecy Act examination procedures that were recently distributed to the Reserve Banks. Return to text 4. In a recent adaptation of the payable through account service, foreign banks have opened accounts at U.S. banking entities and then solicited other foreign banks, rather than individuals, to use their accounts at the U.S. banking entities. These second tier foreign banks then solicit individuals as customers. This has resulted in thousands, rather than hundreds, of individuals having signatory authority over a single account at a U.S. banking entity. Return to text 5. Payable through account activities should not be confused with traditional correspondent banking relationships. Under typical correspondent banking arrangements, a smaller bank will enter into an agreement with a larger bank to process and complete transactions on behalf of the smaller bank's customers or the smaller bank itself. In such an arrangement, the smaller bank's customers are not aware of the correspondent banking relationships their bank has with other financial institutions. The smaller bank's customers certainly do not have access to their bank's account at the larger correspondent bank. This differs significantly from the payable through account situation where the sub-account holders have direct control of the payable through account at the U.S. banking entity by virtue of their signatory authority over the foreign bank's account at the U.S. banking entity. Return to text |
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