The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
■0
Federal
Reserve
B a n k o f N e w Yo r k
N E W Y O R K , N. Y. 1 0 0 4 5 - 0 0 0 1
AREA CODE
FACSIMILE
212
212
720-6375
720-6742
C h e s t e r B. F e l d b e r g
E x e c u t i v e V ic e P r e s i d e n t
at
-
lonosfr')
March 20, 1995
To:
The Chief Executive Officer of Each State Member Bank, Bank
Holding Company, Edge Corporation, and U.S. Branch and
Agency of a Foreign Bank
Subject: Payable Through Accounts
Over the past year, the Federal Reserve 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
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
2
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.
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.
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.
>*
3
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
4
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: 1) your
existing policies and procedures related to payable through
account activities, to the extent that you conduct such
activities; 2) any improvements or enhancements that you may make
in light of the aforementioned guidelines; and 3) 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.
► A
5
Should you have any questions with regard to this
matter, please contact Mr. Dean Ungar, Senior Bank Examiner,
Domestic Bank Examinations at (212) 720-2198.
-
Yours Truly,
Chester B. Feldberg
Executive Vice President
@FedFRASER