oversight

Private Banking: Information on Private Banking and Its Vulnerability to Money Laundering

Published by the Government Accountability Office on 1997-10-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

unitedstates
GenemlAccom~Oflice
Washington, D.C. 20548

General Government Division


B-Z?6685

October 30, 1997

The Honorable Spencer Bachus
Chairman, Subcommittee on General Oversight
 and Invesugtions
Committee on Bar&ing and FInan& Services
House of Representatives

Subject    P&ate Banklm hformation on Private Banking and Its Wnerahilitv            to
           Monev Laundering



This letter responds in part to your March 5,1997, request that we review private
banking activities in the United States and the vulnerabihity of such activities to
money laundering. Although there is no generally accepted de&&ion, private
banking has been broadly described as financial and related services provided to
wealthy clients As agreed with your office, we are providing in this letter the
information obtained to date in the areas outlined in your request letter: (1) the
nature and extent of private banking activities h-t the United States, (2) regulatory
efforts to monitor private banking act%ties and ensure that these acuvities comply
with the Bank Secrecy Act (BSA), (3) policies and procedures of banks to ensure
that their private banking acuvities comply with BSA, and (4) law enforcement
perspectives on the Wnerability of international private banking activities to money
laundering. As also agreed with your office, we are concentrating the remainder of
our work on efforts of U.S. regulators to oversee the of&hore private banking
activities’ of ban& located in the United States.

Enclosure I contains the prehminaq information we have obtained in the four areas
in which you expressed interest In summary, we observed that

(11    There is no generally accepted definition of the products and services that
       make up private banldng or who constitutes its clients. As a result, it is
       difficult to measure the extent of private banking with any precision A 1996
       overview of private banking issued by an industry publication provided


‘offshore private banking activities include activities such as establishing trusts or
“shell” companies in Gnancial secrecy jurisdictions like the British Virgin Islands or
the Cayman Islands.
                                                   GAO/MD-98-19R    Rivate Banking
information on 35 institutions -eyed     with reported private bar$@g assets ranging from
$197 million to $300 billion.

(2)    The Federal Reserve, the office of the Comptroller of the mency (OCC), and the
       Federal Deposit Insurance Corporation (FDIC) are to review BSA compliance-of
       private banking activities as part of their overall BSA examir&ons of banks under
       their supervision. In addition to these overall BSA examinations, the Federal Reserve
       Bank of New York recently undertook a focused review of private banking activities in
       its district, including a review of banks’anti-money-launderjng programs and “know
       your customer” policies.2

 (3)   All of the 11 banks we visited told us they had formal programs intended to ensure
       their compliance with BSA These programs included such policies and procedures as
       identi@ing and reporting suspicious trausa&ons and know your customer programs.
       Some bank officials we contacted expressed concern about regulatory oversight of
       how your customer policies noting that the lack of a formal regulation about such
       policies may contribute to inconsistencies in how the regulators review the area

 (4)   Law enforcement views on the vulnerability of international private banking to money
       laundering varied. Some law enforcement officials indicated that private banking was
       no more wlnerable than any other banking area, while others stated that certain
       characteristics of private banking make the area more susceptible to money laundering.

In developing the information in this letter, we (1) conducted a literature search and spoke
with representatives of research and publishing h        with some expertise in private banking
and a private banking schook (2) interviewed officials of the Board of Governors of the
Federal Reserve System and two Federal Reserve Ranks, OCC, FDIC, and state banking
departments in New York and Florida; (3) reviewed regulatory procedures for examMng BSA
compliance and selected exxnination reports; (4) interviewed key officials of 11 banks
engaged in international private banking (6 domestic and 5 foreign-owned, selected because
of the level of their private banking activities and their geographic locations in areas noted to
be particularly vulnerable to money laundering) and 2 bank trade associations~ (5) reviewed
bank policies and procedures related to BSA compliance at the banks we visited; and (6)
obtained perspectives from several law enforcement agencies under the Department of the
Treasury and the Department of Justice? We also interviewed representative of the El


2Such policies enable the institution to understand the kinds of transactions that a parficular
customer is likely to engage in and to identify transactions that may be unusual or suspicious.
3The trade associations contacted were the American Bankers Association and the InsMute of
Intemational Bankers.
4At the Department of the Treasury, we wke with officials from the U.S. Secret Service,
Financial Crimes Enforcement Network, U.S. Customs service, and the Internal Revenue
Service. At the Department of Justice, we spoke with officials from the Drug Enforcement
Admmistmtion, the Federal Bureau of Investigation, and the Executive Of&e for U.S.
2                                                            GAO/GGD-98-19R Private Banking
B-276685
Doxado Task Force in New York and the High IntensiQ Drug ThB5c&ing Area Task Force in
Miami, which are interagency law enforcement groups set up to combat crhinal drug-related
and money laundering activities. We conducted our work in New York, NY, Miami, F& San
Francisco, CA;. and Washington, D-C., between Apri and August 1997 and in accordance with
generally accepted government auditing standards.

me Federal &serve, FDIC, and OCC provided written comments on a draft of this letter.
(See encls. II, III, and IV.) The three agencies generally agreed that the letter represents an
accurate portrayal of private bankin~activities and the re,gulatory oversight of the area. FDIC
provided additional information on current efForts to enhance its exami&ion procedures to
address private banking issues. OCC provided information on its efforts to combat money
laundering, such as establishing a “task group” to provide a focal point for the agency’s anti-
money-laundering efforts. We also obtained oral comments of a technical nature from the
Federal Reserve and OCC that have been incorporated in the letter where appropriate.

As agreed with you, unless you publicly release its contents earlier, we plan no further
distribution of this letter until 8 days from its issue date. At that time, we will provide copies
of this letter to the Ranking Minor@ Member of your Subcommi~ and to the Chahnen and
Ranking Minority Members of other House and Senate Committees with jurisdiction over
banking matters, the Federal Reserve, OCC, and FDIC. We will also make copies of this
letter available to other interested parties on request

If you or your staff have any questions about the information in this letter, please contact me
on (202) 5128678 or Kane Wong, Assistant Director, on (415) 9042000. Other major
contributors to this letter are listed in enclosure V.

Sincerely yours,




Thomas J. McCool
Director, Fmancial Institutions
 and Market Issues




Attorneys. We also spoke with assistant U.S. attorneys and other staff from the Southern
District of New York, Eastern District of New York and Southern District of Florida
3                                                            GAOIGGD-SS-l9B Private Banlcixg
ENCLOSURE I                                                                 ENCLOSURE I
                         INFORMATION ON PRIVATE BANKING AND
                       lTSTMMERAB~      TO MONEY LAUNDERTNG

NATURE AND 33XI’ENT OF PRIVATE BANKlNG                              .;-.-
         ..
Common agreement is lacking among private banking providers on exactly what products and
services make up private banking or who constitutes its clients. However, private banking
has been broadly defined as financial and related services provided to wealthy clients. Within
this general d&tion,    distinctions can be made between domestic and international private
banking domestic private banking involves services provided within the bank client’s main
country of residence, and international private banking involves services in countries outside
the client’s main country of residence.

Private Banking Products and Services

According to the Federal Reserve, the hallmark of private banking is the personal delivery of
financial products and services to sffiuent clients. Although a few private banking providers
limit their services to traditional trust administration, others offer an array of products and
services that extend Tom basic banking products such as loans to investment counseling.
These products and setices may include deposit-taking; lending; mutual funds investing
personal trust and estate -0%               funds transfer services; and estabhshing payable
through account~,~private investment companies,6 or offshore trusts. Banking analysts
observed that private banking providers have also been increasingly offering their wealthy
clients more sophisticated products, such as risk management products, due to their clients’
desire for higher returns and diversification of their assets.

Private Banking clients

Private banking providers use varying thresholds for identifying wealthy clients. According to
banking analysts, the threshold tends to be defined by the geographic market the provider
serves. They noted that although some large banks located in metropolitan areas like New
York may require $1 million to $5 million in investable assets, smaller community banks in
more rural areas may require as little as $100,000in such assets. According to a register of
private banking providers,’ the minimum amount required for opening an account ranged




‘Payable through accounts are transaction deposit accounts through which U.S. banking
entities extend check-writing privileges to clients of a foreign bank.
%bate investment companies are “shell” companies incorporated in fmancial secrecy
jurisdictions that are formed to hold client assets. Such companies are formed to maintain
 clients’ confidentiali~ and for various tax- or trust-related reasons.
iPrivate Banking Register, 1996, Worth Magazine Supplement
4                                                            GAO/GGD-9&19R Private Banking
ENCLOSURE I                                                                 ENCLOSURE I

from $25,000 for an owner-managed private bank to $50 million for s longestablished private
banking provider that specialized in servicing the very ~ealt.hy.~

Industry stud&s suggest that some private banking providers have adopted more inclusive
criteria for iden-      their private banking clients as they have cast a wider net to include
the emerging affluent This trend is supported by a reduction of minimum account
requirements. One private banking provider, for emple, that once required $2 million in
total investable assets has reduced this requirement to a $250,000minimum to open a wealth
management account A large money-center bank, which once required $5 million in total
investable assets, has started to accept private banking clients with $1 million Another
private banking provider, which previously had a $5 million minimum, has eliminated its
minimum requirement altogether.

Data on Private Banking

Industry representatives, regulatory officials, and banking analysts we contacted were not
aware of any comprehensive database available for determming the extent of private banking
activities by banks or other Wcial institutions operating in the United States. Banking
analysts e@ained that the private banking industry is hard to quauHy with any degree of
accuracy due to the di&uUy involved in apturing data for an area that has not been clearly
defined. One consultant pointed out that some small rural banks may be providing
specialized services to their most wealthy clients but may not refer to these services as
private banking, let alone track the extent of such activities.

Itisalsodif@ulttomeasure        the extent of private banking because &tsncial institutions do
not consistently capture or publicly report such information How private banldng data are
captured at a particular institution can be affected by differences in how they are structured
to deliver private banking services. In some instances, private banking functions may
represent the sole business of an institution, and, iu these cases, data collection is not likely
to be a problem. Private ban&g may also be performed by specifx departments of a
commercial bank, Edge Act ~orporaiion,~ nonbank subsidiary, or branch or agency of a
foreign bank. Although in many cases these departments may represent stand-alone private
banking units, data on such matters as the extent of their private banking assets may not
always be readily available. Pinally, private banking may be conducted in multiple aress of
an institution along with, for example, other commercial, retail, and fktancial services. In
these instances, a bankiug analyst explained that it is highly unlikely that private banking data
are separately reported.




‘A study of private banks conducted by EPMG Peat Mar-wick for the American Bankers
Association found that private banking clients have, on average, a minimum investment
account of $300,000, au annual income of $270,000,and a net worth of $2.3 million.
‘An Edge Act corporation is a banking corporation that finances international commerce and
is chartered by the Board of Governors of the Federal Reserve System.
5                                                            GAO/GGD-98-19R Private Banking
ENCLOSURE I                                                                    ENcLosuREI

Despite the dif6culties involved in determining the overah extent of private banking, we
found that sll of the 11 banks we contacted had separate units q&&h&g       in private banking,
and most were able to compile information on the amount of their total private banking
assets. Their reported total private banking assets ranged from $5&.m3lion for an Edge Act
corporation ilo $150 billion for a large commercial bank                              :

The most recent information we identiCed on private banking in the United States was a
general overview of private bariking providers published by Worth Magazine in 1996.” It
showed that private banking providers in the United States represented a range of distinct
institutions, each with its own culture, client mix, and philosophy. Jn addition to banks, they
included such companies as asset-managementMns and trust companies. Among other
things, the overview presented brief proCles of 35 private banking providers and highlighted
key differences among them For example, total private banking assem of profiled providers
ranged from $197 million for a relatively new entrant into the market to $300 billion for a
large, established Swiss bank operating in the United States. Table 1 shows reported asset
ranges and other selected features for p&ate banking providers.

Table 1: General Overview of 35 private Bank Providers Pro&d bv Worth Magazine


    Selectedfeatures                            Range of reported values in 1996
    Minimum account                             $25,000to $50 milliona
    private barking assets                      $197 million to $300 billion
 Yeas in private banking                        5yearsto212yearsb
    Clients per “prhte   banker”’               23 clients to 240 clients

TXs range represents providers that had a minimum account requirement
?his private banking provider represents one of the oldest banks in the United States that
has been engaged in private b&g     services since 1734.
‘Private bankers, also referred to as relationship managers, are assigned to private bar&ing
clients and are responsible for coordinating the institution’s services for the benefit of the
client
Source: private Banking Register. 1996, Worth Magazine Supplement.




‘Private Banking Re&ter, 1996,Worth Magazine Supplement
6                                                             GAO/GGD-9819R      Private Banking
    ENCLOSURE1                                                                   ENCLOSURE1
    REGULATORYEF'F0RTSTOMONiTOR                                             .
    COMPLJANCEWITHTKEBANKSECRECYACT

    The Federal Reserve, the OiWe of the Comptroller of the Currency -(OCC}, and the Federal
    Deposit Insurance Corporation (FDIC) are to review Bank Secrecy Act (BSA) compliatxe of
    private banking activities as part of their overall BSA examinations of banks under their
    supervisior~ These examinations are to focus mainly on the adequacy of banks’ compliance
    programs and related internal controls as they pertain to BSA regulations. BSA regulations
    require all banks to develop a written compliance program that must be formally approved by
    the bank’s board of directors.11 During examinations, regulators are to review these programs
    to ensure that, at a minimum, they (1) establish a system of internal controls to ensure
    compliance with BSA, (2) provide for independent compliance testing, (3) identify individuals
    responsible for monitoring day-to-day compliance, and (4) provide training for appropriate
    personneL

    Examiners are also required to determine whether the bank’s compliance program includes
    appropriate procedural guidelines for recording and reporting large currency transa&ons and
    for detecting, preventing, and reporting suspicious transactions related to possible money
    laundering activities. Regulators recognize that among the most important components of an
.   institution’s guidelines for detecting suspicious activity are know your customer policies.
    Such policies enable the institution to understand the kinds of transactions that a particular
    customer is likely to engage in and to identify eons           that may be unusual or suspicious.
    Although such policies are not required by regulation or statute, all three regulators have
    developed exammation procedures to determine whether institutions have, in factj
    implemented sound lmow your customer policies and procedures.

    Although examinersarereqqiredtoensure          that appropriate systems are in place to help
    prevent and detect money laundering, they are not specifically tasked with looking for actual
    cases of money laundering Examiners are responsible for being cognizant of suspicious
    activities,ti since such activities may be au indication of general noncompliance in an
    institution.13 Examiners are also responsible for ensuring that suspicious activities that may
    be identified during au examination are properly reported.




    %ee 12 C.F.R. $8 21.21 (OCC), 208.14 (Federal Reserve), 326.8 (FDIC) (1997). The Bank
    Secrecy Act, contained in Pub. L. 91-508, is codified in subchapter II, chanter 53 of Title 31
    United States Code.
    =An example of a susp’ icrous
                             e    activity involves a customer who conducts periodic wire
    transfers from a personal account to mcial      secrecy jurisdictions, such as the British Virgin
    Islauds or Cayman Islands, with no known legitimate purpose for such trausations.

    130CCofficials explained that their procedures direct examiners, in some instances, to review
    bank documents for suspicious activity.
    7                                                            GAO/GGD-9%19R Private Banldng
RNcLoSuREI                                                                  RNCLOSuRF4I
Federal Reserve Focus on Private Banking
                                                                    :_-
The Federal Reserve Bank of New York (FRBNY) undertook an initiative on behalf of the
Federal Reserve focusing on private banking. In 1996 and 1997, FRBTY conducted a review
of private ba&ing activities at approrrimately 40 domestic and foreign banking institutions
located in its district According to the Federal Reserve, the agency’s heightened supervisory
interest in the area reflected the growing target market for private banking, an increase in the
reliance of banks on private banking as a source of income, and a related increase in
competition The Federal Reserve also indicated that examiners focused on asses&g each
bank’s abiliw to recognize and mauage potential reputational’4 and legalE risks that may be
asoc&ed with inadequate lmowledge of its clients’personal and business backgrounds,
sources of wealth, and uses of private banking accounts. As part of this effort, examiners
reviewed the banks’anti-money-laundering programs and their know your customer policies.

FRBNY officials explained that most of the banks reviewed had satisf&ry      anti-money-
laundering programs for their private banking activities. They found a few programs to be
exceptional, but they also found a few to be autiquated and potentially vulnemble to money
laundering. Deficiencies identified in the private banking area centered primarily on poor
internal controls and procedural wealmesses involving such problems as Hcient
documentation and inadequate due diligence star&~ds?~ They also observed wealmesses in
banks’management information systems that made it difficult to fully monitor clients’ private
banking txsnsa&ons. A senior FRBNY official stated that, mainly, banks have been
responsive to reported d&&n&s        and have developed procedures to address them. The
official explained that FRBNY was in the process of revisiting the banks to verify that
identified wealmesses were being effectively corrected.

FRBNY’s private banking reviews also identified certain essenti elements associated with
sound private banking a&vities that were subsequently described in a recently issued paperI’
According to the Federal Reserve, this paper was intended to provide banking institutions as


14Reputa3ionalrisk is the potential that negative publicity regarding a bat&s business
practices, whether true or not, will cause a decline in the customer base, costly litigation, or
revenue reductions. A Federal Reserve o=cial noted that this type of risk can arise, for
example, when a bank wittingly or unwittingly deals with criminals, such as drug tra&&ers
and money launderers.
‘“Legal risk arises from the p otential that unenforceable contracts, lawsuits, or adverse
judgments can disrupt or otherwise negatively affect the operations or condition of a bank
16Duediligence in private banlrin,= b%nerally refers to verifying the client’s identity,
determining the client’s source of wealth, reviewing the client’s credit and character, and
understanding the type of transactions the client will Qpically conduct
‘?Guidance on Sound Risk Management Practices Governing Private Banking Activities, July
1997, prepared by FRBNY on behalf of the Board of Governors of the Federal Reserve
System.
8                                                            GAO/GGD-9819B Private Banking
    ENCLOSuREI                                                                ElNCLOSuRE I

    wedl as the agency’s examine= with guidance on the basic controls necessary to minimize
    risks and to deter illicit activities, such as money laundering. The F&leral Reserve also plans
    to incorporate lessons learned from the private banking reviews into a new systemwide
    examination manual for private banking activities.                    .-. - .
    OCC Focus on private Banking

 OCC officials told us that they have informally highlighted private banldng by placing
emphasis on reviewing national banks’ lmow your customer policies as they apply to the area
They also stated that OCC has directed more attention to EEA compliance programs covering
national banks’fiduciary services that may, in some cases, be a major part of a private
banking function F5nally, at the time of our review, OCC’s Miami office was developing local
guidelines for focusing examination attention on international private bauldng activities due
to a perceived increase in the potential for money laundering through private banking. An
OCC official explained that the private banking market, particularly in Miami, was rapidly
expauding and becoming more competitive; and, as competition increases, they are concerned
that internal controls, such as due diligence standards, may tend to be relaxed,.

FDIC Focus on Private Banking

FDIC had no specific initiatives focused on private banking at the time of our review.
Nonetheless, officials viewed private banking activities, spe&cally those that involved
ofTshore accounts, as vulnerable to suspicious activities.

BANKS’POLICIEX AND PROCEDURES FOR COMPLYING WPI’H BSA

We visited 11 banks engaged in international private banking activities. Of6cials from all of
the banks told us they had formal programs for ensuring their compliance witi BSA, These
programs included policies and procedures for recording and reporting large cutrency
transa&ons as well as for identifying and reporting suspicious activity. In addition, all the
banks had know your customer policies Bank officials told us that their BSA compliance
programs were subject to review and independent testing by their internal auditors as well as
by banking regulators. The banks also had designated compliance officers who were
responsible for ensuring that staB adhered to the BSA comphsnce program and for training
m on their BSA-related responsibilities. Bank officials at 6 of the 11 banks we visited
noted that they had compliance officers who were dedicated solely to the private banking
area.

Most of the banks we contacted viewed lmow your customer policies as one of their most
important means of preventing and detecting money laundering. Of6cials from 8 of the
11 banks we visited told us that they had developed such policies specifically for private
banking. At least six of these eight banks had private banking lmow your customer
policies that contained the following features:




9                                                              GAO/GGD-9&19R Private Banking
ENcLosuREI                                                               ENCLOSUREI
       a requirement that private bankers identify the beneficial owner of the account
       (i.e., the person(s) who has actual control of the account); ‘- -

      a policy whereby the opening of accounts for certain types of..@ems (e.g.,
      pohti&ns) or businesses (e.g., exchange houses) required senior management.
      approval or was disallowed;

       a transaction-monitoring program to flag accounts over a given threshold; and

      a requirement that compliance officers either directly approve the opening of new
      accouuts or retiew due diligence information before their banks open new
      accounts.

Tndustrv Concerns

Some bank officials we contacted expressed concerns about the regulalory oversight of
their know your customer policies. As we desuibed earlier, although these policies are
not required by regulation or statute, banking regulators are examining banks to
determine if they have implemented sound lmow your customer policies and proceduresl*
O&i&       at 3 of the I1 banks we visited indicated that some regulators kept raising the
standard for such policies in the absence of formal regulations. They also indicated that
there were incortsistacies within, as well as among, the regulatory agencies regarding
reviews of banks’kuow your customer policies. For example, some officials noted that
F’RBNY required banks to bring records on the beneficial owners of offshore accounts
into the United States, but the Federal Reserve Bank of Atlanta did not Some bank
officials indicated that they were eager to see lmow your customer regulations, which
they believed would provide them with much-needed guidance in the area and would help
ensure that related regulatory oversight was consistent

Ofticials at 6 of the 11 banks we visited were also concerned that securities
broker/dealers were not subject to the same regulatory requirements covering suspicious
ad&i@ reports (SAR)‘9 or regulatory reviews of know your customer policies that banks
are. Some indicated that this inconsistency created an “uneven playing field,” particularly
since broker/dealers may provide products and services similar to those of banks engaged
inprivate banking.




‘*As of September 1997, the Federal Reserve was in the process of developing know your
customer regulations.
‘gAhhough securities broker/dealers are not curre.ntly required to tie SARs, Treasury has
encouraged them to report suspicious activi~ on a voluntary basis. The Securities and
Exchange Commission and Treasury’s Financial Crimes Enforcement Network (responsible
for promulgatig regulations under BSA) are worldng together to develop SAR regulations for
broker/dealers, according to officials from both agencies.
10                                                          GAO/GGD-98-19R Private Banking
ENCLOSURE I                                                                   ENCLOSURE I
LAW ENFORCEMENT VIEWS ON PRIVATE BANKING                                -
Law enforcement views on the vulnerability of international private banking to money
laundering varied. Some law enforcement officials indicated that private banking was no
more vulnerable than any other banking area They believed that all -areasof banldng, not
just private banking, are vulnerable to money laundering and that all areas needed to be
monitored In contrast, other law enforcement officials stated that certain characteristics
of private banking make the area more susceptible to money launderiug and in need of
greater attention from both a regulatory and law enforcement standpoint According to
these officials, some of the identi6ed features of private banking that make the area more
vulnerable include


       its perceived high profitability and intense competition, which can result in banks
       focusing more on profits than on the type of clients they accept;


       the high level of confidentiality associated with private banking products and
       services, especially offshore products for which it can be difkult to ident@
       benekial owners; and


       the close relationships of trust developed between relationship mangers and their
       clients in which the manager is likely to maintain the client’s confidentiality at all
       cost

Concerns Regarclixx International Private Banking

Some law enforcement officials said that one of the biggest problems they encounter in
money laundering investigations involving international private bauking is the inability to
reconstruct an audit trail for prosecution pwposes. They observed that to protect client
confidentislity, banks tend to maintsin documentation for offshore accounts in the
offshore afMate. For example, if a client invests in an o-ore       account or corporation,
the private banker creates the originating documents then transfers the documents to the
offshore af%liate. These law enforcement officials explained that this practice makes it
dif6cult for investigators to reconstruct the audit trail for such offshore investments and
to ident@ their beneficial owners. They suggested that transferring documentation that
may serve as potential evidence in an investigation is unnecessary, because U.S. policy
adequately protects the confidentiality of customer account information by making it
available only when a federal investigation is under way.

Some law enforcement officials stated that relying on overseas sources to provide
information for the investigation of money laundering cases is &so a problem. In some
countries, law enforcement officials are impeded by bank secrecy laws that preclude
kancial institutions from providing documents requested by U.S. law enforcement
agencies. They are also hampered by other countries’ laws that prohibit the provision of


11                                                            GAOIGGD-9&19R Private Banking
ENCLOSURE I                                                                RNCLOSIJREI
requested information without proof that a U.S. judicial process has been initiated. A law
enforcement official explained that this prohibition poses problems iri cases where the
information requested is needed to obtain a court order to start the judicial process in the
United States. Finally, law enforcement officials noted that in some cases, information
requested through established mutual legal a&stance tre;zte~” took & inordinate amount
of time to obtain.

Concerns Regarding SA.Rs

Some law enforcement officials expressed concerns that SARs were not being filed f?om
p&ate banking providers as often as these officials believed was warranted. They
pointed to cases of money laundering through private banking providers in which these
reports had not been fled. They suggested that this perceived laxness in Bing SARs may
result from limited enforcement efforts in the private banking ares or from banks’views
that they have an inherent con&t because they would be reporting suspicious act&i@
that they have presumably allowed to occur. Some law enforcement officials said they
believe that banks sometimes turn away potential private banking customers whose
wealth is considered to be of a suspicious nature. In such instsnces, the officials said
that banks may not see the need to submit SARs, since rejected customers do not pose
any risk to the bank. Nevertheless, some law enforcement officials said reports of this
nature could be very useful to them-for example, in identifying potential money
launderers.




%htaal legal assistance treaties are bilateral agreements that the United States has entered
into with other countries that enhance international cooperation in criminal matters, including
those involving money laundering.
12                                                           GAOfGGD-9&19R Private Ikmking
 ENCLOSURE II                                                                                            ENCLOSURE II
                COMMENTS FROM THE FEDERAL RESERVE _-
                        I
                                                                 BOARD OF GOVERNORS
                                                                          oc7°C                  _-_.
                                                             FEDERAL RESERVE SYSTEY
                                                                   ..“.WO..0. c. 1.01




                                                                 October       15,     1997

                Mr.     ThoInas         J.     McCool
                Director
                ?in.ancial         Institutions                and Markets           Issues
                U.S. General                  Accouatiag        Office
                Washiagton.                  D.C.    20548

                Dear     Mr.      McCool:

                               Thank you for the oppottuxity                               to comment     on t:?e CAO's
                draft   report     entitled  "Private   Banking:                           Infonnatioa     on ?=ivate
                Banking    and Its Vulnerability      to Money                            Laundering-.
                                 We are pleased              that tke draft              report      presents          az
                accurate        portrayal          of the private             baaking       acttv:ties            of banks and
                other     financial          iastitutioas,            and the federal              banking          agexies'
                oversight        of this        expanding          aspect       of the bankiag             industry.         We
                are equally          gratified          that     the draft         report       includes         d
                description          of the extensive                efforts       undertaken          by the Federal
                Reserve       ia the private              bazdciag area,           and our leading               role     in
                developing         daation                procedures          that    are specially              taiLc:ed     for
                private      banking        activities,            conducting         targeted         ot-size
                examinations           of mxnerous           private        banking       orgaaizaticas              3ves cbe
                p&St two years,              issuing        msoud practice"               guaaance
                                                                                              . -         cozcerzr~p
                privete      baakiag        activities           this     past July,         and &a&----   e--.-5 proposed
                'Know Your Customer                   regulatioas           that    will     provide         :r.s:r-zioz        to
                the banking          industry         in an important              aspect       of zkezr         ksztess.
                                   In         the   eveat       that Federal         Reserve   szaf5     =a~. prx-zde        any
                additional        assistaace                  to your efforts           in the private       taakxg
                area,      please    coatact                I&. Richard     A.       Small,   Assistar.t     Zrec=or.          at
                (202)        452-5235.




                                                                      Director

                cc:     Mr. Kane A. Wong
                        Assistant   Director
                        U.S. General    Accounting                    Office




13                                                                               GAOIGGD-98-19R Private Banking
ENCLoscJmm                                                                                       ENcLosuRE III
      COMMENTSFROMTHEFEDERALDEFOSlTIW3URANCECORPOR4~ON
                                              ._-

                                                                                      .- = -

     FMC
     Fedemi Dopesit ktwrance   Corporition
     washmgmnD.C.20429                                                      okedlmmarconuolMuugcmem




        oaober 15.1997


        Mr. Thomas J. McCooi
        Dir
        Firmciallns&mions~Markns~
        Gemal Accounting Ofiice
        Was-~       D.C. 20548

        DearMr. McCool:

        Enclosed
               is theFDIC’Sresponse
                                 fo theGeneralAccounting
                                                       cmice’sdraftrepoKentitkd”Rivare
        Banking: lnformarion on Private Banking and is VulnaabiIiry to Money Laundering”. The
        responsewas prepad by the Division of Sqewision. and speci&Uy address the FDIc’s
        focuon@vatebankkg.

        If you need any additional infomation or have additional quesbns, pleasecontact Howard
 .      Fuxaerat (202) 7364304.




                                                  Vijay Deshpande
                                                  Dkctor

        ?3ciosure
        cc: Nicholas J. Ketcha, Jr.
            JamesD. Collins




                                                                            GAO/GGD-SS-19R Private Banking
ENcLosuRE m                                                                                    ENCLOSURE ID




     PRIVATE BANKING AND ITS vuLNE.RABlLITY TO MONEY LAUNDERING


     FDIC staffbas reviewedthe &aft GAO report entitled Private Fhnkina: Wonnation on
     Private Bankinn and Its VuherabiIitv to Monev Launderiq. The report succinctly
     addressesthe issuessurroundingthis facet of banking, and the regulatory efforts to
     monitor Bank SecrecyAct (BSA) compliice in insthiw         that engagein this activity.
     We wouid Iike to off&r the folIosing commens inrespollsetotberepoK

     WbiIetbeFDtCbasaoinihtiw        directed~~atpriMtebankiagactivities, . . our
     anTeataraminationpr-dosddresscaainhansactionsand-
     rssocbdwitbpsivate~sucbaswirenansferacrivities,trustacrivities,and
     payablethrough accouuts. A major focus of ewy BSA examihon is tke review of any
     “knowycurarrcoad’policiesandpracticesthebankmay~~inplace.            Anybank
     cngqinginprivaIebankiPgacIivitjessllouldirlcilldespecific aa;oumopening~
     mo~procedurrsdealingwiththisareainitspolicy.             Addhiody,aaminen~
     trainedtoidQtify~rrponsuspiciwsaaivicieswhichmay~ive~~~
     custom&suchaslargedepositsoflikeaulolmuor          numerouswitepansfatofhm
     oebre accolma




     Inadditiontoour araminationcoverageofptivatebankingactivitits,ufeais0hawtilkm
     stepstoidude -“knowyourtustoma”                   pmvisionsinourapproMisof
     appkations by U.S. bauksto estabfisho%korc hiliities. Suchprovisions quirk the
     applicambankto~veinplawadequate”knowywr~~policicsandprocedures
     for the hcilii’s actSties.




15                                                                          GAOIGGD-98-19R      Private   Banking
ENCLOsmErv                                                                                    ENCLOSURE N
   COMMENTSFROMTHE3OFFiCEOFTHECOMF'TROLLEROFTHECURRENCY
                                             '--



    0                                                                                 ._---
      Compttouer ofme Currency
      Adminisuamr of Nat&al Banks

      washmgam. DC 20239

      Ocmber 28. I997


      Mr. Thomas J. McCool
      DkCCtOLFiilastiamOtlSdMariGersfmrcs
      Getled Govemment Division
      unitedstatesGendAccountitlgmce
      Wasbingm D.C. 20548

      Dear Mr. McCool:

      Webavereviewedyour&aftauditrqxxttihd~
      & Its VW.       ..
                                                   llEEpXTwaSpptCdtOpWi&tiO~
      0bminaitodateinrespometoaco~naI~

      WeconElpwithyourconcl\rsiarrstbat~isnogeDcraliyaccepled~onofppivarebanking
      andthattttc~rrviewpriv;mttranlringMivitiesforcomplianctwiththcBanLSemEyAct
      (BSA). You ah report that banksexpresd concernabout re&rory ovetsigh of “know your
      customer~praaices. Thebauksareconcunedthatlackofconsisterure@amryguidancemay
      contribute to incondent super&ionwitldnandamong~agauies.               WearepartiMy
      sensitive to that concem’Bdasaresuhareammiuedtowo&@withtheo&eragaziestoa&pt
      auaifomsetofguidelinesandacmsismt              Fqqmacb to enfodg %low your customer-
      r-ayimn~.

      TheOCChasalonpaudiqcomdmmt           tocouUingmoneyhmderhginthesmtiondb~
      system. For~yearrmcOCChas~~aspccoofbanks’o~~forpo~~B~
      SecrecyAcrvioiarionsandmoney~.              hadditiontoensurhgtbatbanbunderour
      superv%onhaveadeqmecompiiaaceprogramsandadbaetotheBSAinappropfiate
      e            the OCC rdkrs potmid civil BSA violations to the Fi    Crimes Enforcement
      3kw&(FimcEN)bltheTtwsuty~                 and.suspedcrimiMlviolationstotlleappropri2ue
      CriminallaW        -agencies.


      TheOCChasnccntly~a~ofactionsinthtaaxi-money~arra                         .Alongwiththe
      other bank rep&tory agascies and law edbrcement agencies.the OCC developad the new
      Suspicious Activity Repor@ system and Suspicious Activity Report form. ?ht new system
      becam+opetarionalinApriI19%andmakcsiteasiafor~fiaanrialinr;Emaionsrorrporcpotential
      violations of law or suspiciousactivity that may amountto money iaunderin8. in September 1996.
      the KC issued a new section of the wer.5               Ha&&& for NW




                                                                               GAO/GGD-98- 19B Private Banking
ENCLOL3lJREIv                                                                            ENCLOSUREN




       (Handbook) on Bank Seamy Act compliance. The new Handbook section cwttains enkanced
       proedum designedto identify money hnderiq in accordancewith the mandatein Section 404
       of the Money h&ring       SuppressionAU. The procahcs applytoalihicingunitsofthe
       imirution beingexam&d, ix&ding pime banking.The Handbookseaion also containsguidance
       in areassuch as “know your customer.”wire uansferactivity aud payablethrough accounrs.

       Last spring, we establishedan OCC task group known as the Nationd Anti-Money Laundering
       Group {Group) to provide a fofa point for the EC’s anti-money h&ring     e&r&. We have
       worked~~fhe~~andiaWenfOrCemmtagenciest0                        helpidenti@bankshat&ave
       beenormaybetaqewdbymoney~                 and w develop enmimionproccdurrstoaddressthe
       rrpugtioa wsactionandcomphceri&thatmoneylaund&qposestonationalbarh.

       On an ongoing basis, the Group identihs and analyzesUC& and emerging issuw exchanges
       iIlfbn&on with occ 05ccs and OIheragencies;andnotas the occ district offices of emerging
       ~bcst~~changesin~-mooney~pmcedurrsaedpolicies~riskbanks,and
       bank.quidgimm~aaentioa              inadditio~theGroupcoruinuestoxeviewandevaiuate
       exam&ion proccQPcs in ail area&inchlding privste banking. Your teporz acknowledgesone
       exampleofrhe~~‘sefforts,thedcntapmenrofguidelinesforcxaminasinrheMiamiarrato




       llteOCCalsocontinueswbeapaKicipantinsevaal inttragency working gmups concemedWIh
       money iamdhg, including the Bank SecrecyAct Advisory Group and the newly formed &lone?
       Lau&r&WorkiagGroup.      Recentlywtwrenamedtochairasu@oupoftbeMoneyhndermg
       Working Group assignedto developan inrcragencymining program for examhrs.

       ThtQCC’srrecntefforrs~~tht~thathaskcainplaaforaarrmbcroi!.wrs
       in the OCC 10 detect money hmdahg - spehhd           examinhon procedures. comphancc
       examhn,fiapdarpaR~coopaaeionwithotkagencies.           Rcvcmhgmoney hndenq 1n.m
       mionai badcing systnn is a top priority for the OCC.



       sbxeteiy,



       SeniorDeputy Compuoh for Ad&hasion




17                                                                    GAO/GGD-98-19B Private Banking
ENcLosuRE v                                                    ENcLos;uREv
                      MAJOR CONTRIBUTORS TO THIS REPORT‘_-


GENERAL GOVERNMENT DIVISION. WASHINGTON. D.C.           ._._

Tamara E. Cross, Senior lihhator

SAN FRANCISCO FTELD OFFICE

Evelyn E. Aquino, Ehhator-in-Charge
Jo& R. Peiia, Senior Evaluator
Gerhard C. Brostrom, Communications Analyst




(233516)


18                                                GAO/GGD-98-1932Private Banking
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