Money Laundering

Regulatory Oversight of Offshore Private Banking Activities Gao ID: GGD-98-154 June 29, 1998

Members of Congress have raised concern that high profile money laundering cases have generally involved the use of offshore accounts or transactions to facilitate the movement of illicit funds through the banking system. Law enforcement and bank regulators have also expressed concern about offshore private banking activities and their potential to be the private banking "soft spot" for money laundering. This report reviews the regulatory oversight of offshore private banking activities, focusing on the following areas: (1) regulatory oversight procedures to ensure that offshore private banking activities are covered by banks' anti-money-laundering efforts, (2) deficiencies cited by banking regulators regarding offshore private banking activities and corrective actions that banks have taken, (3) barriers hindering regulatory oversight of offshore private banking activities and efforts to overcome them, and (4) the views of the banking industry on regulatory access to documentation pertaining to offshore private banking activities.

GAO noted that: (1) federal banking regulators may review banks' efforts to prevent or detect money laundering in their offshore private banking activities during compliance or Bank Secrecy Act examinations; safety and soundness examinations; or during targeted examinations of their private banking activities; (2) to guard against offshore entities that maintain U.S. private banking accounts from being used for money laundering or other illicit purposes, examiners are to look for "know your customer" procedures that enable banks to identify and profile the beneficial owners of private banking accounts; (3) GAO's review of bank examination reports prepared under the Federal Reserve Bank of New York's (FRBNY) private banking initiative showed that the most common deficiency relating to offshore private banking was a lack of documentation on the beneficial owners of private investment companies (PIC) and other offshore entities that maintain U.S. accounts; (4) FRBNY and Office of the Comptroller of the Currency examiners noted other deficiencies during their respective examinations; (5) the bank examinations GAO reviewed, along with discussions with examiners and bank officials, indicated that most banks had started to take corrective actions to address deficiencies related to offshore private banking activities, but improvements were needed; (6) the nine offshore jurisdictions GAO identified for review have secrecy laws that protect the privacy of individual account owners, and five of them impose criminal sanctions for breaches of privacy; (7) moreover, federal banking regulators' attempts to work around restrictions associated with these secrecy laws are sometimes hampered; (8) GAO also found that all nine offshore jurisdictions selected for review were engaged in some type of anti-money-laundering activities; (9) although the efforts of individual jurisdictions may contribute to the international fight against money laundering, it is too early to ascertain their impact on money laundering or the extent to which the offshore jurisdictions' secrecy laws will continue to represent barriers to U.S. and other foreign regulators; (10) GAO surveyed officials from 15 banks that were asked by FRBNY to provide documentation on the beneficial owners of PICs and other offshore entities that maintained U.S. accounts; (11) GAO found that the officials had a number of concerns; and (12) in spite of these concerns, most officials indicated that their banks changed how they maintain documentation on offshore private banking activities in response to FRBNY's request for beneficial owner documentation.

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