oversight

Money Laundering: Observations on Private Banking and Related Oversight of Selected Offshore Jurisdictions

Published by the Government Accountability Office on 1999-11-09.

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

                        United States General Accounting Office

GAO                     Testimony
                        Before the Permanent Subcommittee on Investigations
                        Committee on Government Affairs
                        U.S. Senate


Not to Be Released
Before 9:30 a.m., EST
Tuesday                 MONEY LAUNDERING
November 9, 1999



                        Observations on Private
                        Banking and Related
                        Oversight of Selected
                        Offshore Jurisdictions
                        Statement for the Record of Thomas J. McCool, Director
                        Financial Institutions and Markets Issues
                        General Government Division




GAO/T-GGD-00-32
Statement

Money Laundering: Observations on Private
Banking and Related Oversight of Selected
Offshore Jurisdictions
                 Ranking Minority Member Senator Levin and Members of the
                 Subcommittee:

                 This statement provides an overview of money laundering in relation to
                 private banking and highlights some regulatory issues related to the
                                                                                       1
                 vulnerability of selected offshore jurisdictions to money laundering.
                 Specifically, this statement covers four areas:

             •   regulators’ oversight of private banking in general,
             •   regulators’ oversight of private banking in selected offshore jurisdictions,
             •   barriers that have hampered regulators’ oversight of offshore banking, and
             •   future challenges that confront regulators’ efforts to combat money
                 laundering in offshore jurisdictions.

                 Federal banking regulators have overseen private banking through
                 examinations that, among other things, focus on banks’ “know your
                 customer” (KYC) policies. These policies enable banks to understand the
                 kinds of transactions a particular customer is likely to engage in and to
                 identify any unusual or suspicious transactions. Federal banking regulators
                 have examination procedures that cover private banking activities
                 conducted by banks operating in the United States. In cases that involve
                 private banking activities conducted by branches of U.S. banks operating
                 in offshore jurisdictions, examiners rely primarily on banks’ internal audit
                 functions. We found that the key barriers to U.S. regulators’ oversight of
                 offshore banking activities are secrecy laws that restrict access to banking
                 information or that prohibit on-site examinations of U.S. bank branches in
                 offshore jurisdictions. An important challenge that confronts efforts to
                 combat money laundering is the extent to which such secrecy laws will
                 continue to be barriers to U.S. and foreign regulators.

                 To address these areas, we reviewed the Federal Reserve’s and Office of
                 the Comptroller of the Currency’s (OCC) regulatory activity related to
                                                                             2
                 private banking and reported our observations in June 1998. At that time,

                 1
                  For purposes of our review, we defined offshore private banking activities as including (1) private
                 banking activities carried out by banks operating in the United States that involve financial secrecy
                 jurisdictions, such as establishing private banking accounts for offshore entities that maintain U.S.
                 accounts, and (2) private banking activities conducted by foreign branches of U.S. banks located in
                 these jurisdictions. The Internal Revenue Service has defined financial secrecy jurisdictions as
                 jurisdictions having a low rate of tax or no tax, a certain level of banking or commercial secrecy, and
                 relatively simple requirements for licensing and regulating banks and other business entities.
                 Examples of such jurisdictions include the Cayman Islands and the Channel Islands. This statement
                 uses the term “offshore jurisdictions” to refer to financial secrecy jurisdictions.
                 2
                  Money Laundering: Regulatory Oversight of Offshore Private Banking Activities (GAO/GGD-98-154,
                 June 29, 1998).




                 Page 1                                                                              GAO/T-GGD-00-32
                      Statement
                      Money Laundering: Observations on Private Banking and Related Oversight of Selected
                      Offshore Jurisdictions




                      we reviewed examination manuals, relevant agency documents, and
                      examination reports that addressed banks’ anti-money-laundering efforts
                      related to their private banking activities. We also interviewed U.S.
                      banking regulators, law enforcement authorities, and representatives of
                      bank trade associations; conducted a limited survey of banks; and spoke
                      with officials from key offshore jurisdictions, international bank
                      supervisory groups, and international anti-money-laundering task forces.
                      Recently, we updated some of our work and recontacted the Federal
                      Reserve, OCC, the State Department, and Treasury’s Financial Crimes
                      Enforcement Network. We also spoke with the Offshore Group of Banking
                      Supervisors and three international groups established to combat money
                                  3
                      laundering. This update was focused on the 9 offshore jurisdictions we
                                                                                            4
                      had previously reviewed and 11 jurisdictions added at your request. The
                      information on foreign laws and policies in this report does not reflect our
                      independent legal analysis but is based on interviews and secondary
                      sources.

                      Private banking has been broadly defined as financial and related services
Private Banking Has                                 5
                      provided to wealthy clients. It is difficult to measure precisely how
Drawn Attention       extensive private banking is in the United States, partly because the area
                      has not been clearly defined and partly because financial institutions do
                      not consistently capture or publicly report information on their private
                      banking activities. We do know, however, that domestic and foreign banks
                      operating in the United States have been increasing their private banking
                      activities and their reliance on income from private banking. The target
                      market for private banking—individuals with high net worth—is also
                      growing and becoming more sophisticated with regard to their product
                      preferences and risk appetites.

                      During the past few years, private banking has become a focus of law
                      enforcement and regulatory attention as a number of high-profile cases
                      have come to light involving private bankers and money laundering. A
                      notable example is the American Express case that resulted in the
                      conviction of two private bankers for money laundering and the imposition
                      3
                       The international groups we recontacted were the Financial Action Task Force, the Caribbean
                      Financial Action Task Force, and the Council of Europe Select Committee on Money Laundering.
                      4
                       The original jurisdictions we reviewed were the Bahamas, Bahrain, Cayman Islands, Channel Islands,
                      Hong Kong, Luxembourg, Panama, Singapore, and Switzerland. The 11 jurisdictions added to our
                      review were Anguilla, Antigua and Barbuda, Barbados, Liechtenstein, Montserrat, Nauru, Netherlands
                      Antilles, Russia, St. Vincent and the Grenadines, Turks and Caicos, and Vanuatu.
                      5
                       Such financial and related services include a wide array of products and services that extend from
                      basic banking products such as loans to investment counseling services and more sophisticated
                      products such as risk management products, including derivatives.




                      Page 2                                                                            GAO/T-GGD-00-32
                        Statement
                        Money Laundering: Observations on Private Banking and Related Oversight of Selected
                        Offshore Jurisdictions




                        of the largest monetary penalty ever imposed on a bank in a money
                                                 6
                        laundering-related case. More recent investigations of private bankers at
                        Citibank and BankBoston continue to keep private banking in the forefront
                        of public attention. Such cases, which can involve the illicit transfer of
                        millions of dollars, underscore the crucial importance of private banking
                        and its potential vulnerability to money laundering.

                        Federal banking regulators may review banks’ efforts to prevent or detect
Regulatory Efforts to   money laundering in their private banking activities during examinations,
                                                                                                  7


Oversee Private         including recent examinations focused on their private banking activities.
Banking Activities      During these examinations, regulators focus on a bank’s compliance
                        program; internal controls; and, in particular, on its KYC policies.
                        Regulators instruct their examiners to determine whether banks have
                        implemented sound KYC policies in general and to ensure that these
                        policies extend to their private banking activities. Until recently, U.S.
                        regulators were attempting to incorporate KYC requirements as uniform
                        regulations. However, the proposed KYC regulation, which was published
                        for comment in December 1998, was met with an overwhelming public
                        response that raised concerns about the government’s scrutiny of
                        personal banking accounts. In the face of these concerns, U.S. regulators
                        have since withdrawn the proposed regulations. Nevertheless, regulators
                        we interviewed for this statement told us that, during the course of
                        examinations, they continue to verify that banks have prudent banking
                        policies, including KYC policies, that ensure compliance with the Bank
                        Secrecy Act.

                        Although regulatory efforts to establish uniform KYC requirements have
                        stopped, Congress continues to look for ways to reinforce current anti-
                        money-laundering laws and, more specifically, to promote due diligence in
                        customer banking relationships. For example, the Chairman of the House
                        Committee on Banking and Financial Services recently introduced
                        legislation that would, among other things, require financial institutions
                        that open or maintain a U.S. account for a non-publicly-traded foreign
                        entity to maintain a record of identity for each beneficial owner of the
                        account. The legislation would also prohibit U.S. depository institutions
                        from maintaining banking relationships with banks that are not licensed to
                        provide services in their home countries.


                        6
                         American Express Bank International paid over $35 million in forfeitures, fines, and civil penalties,
                        but was not charged with a criminal offense.
                        7
                         Such examinations include compliance or Bank Secrecy Act examinations and safety and soundness
                        examinations.




                        Page 3                                                                              GAO/T-GGD-00-32
                             Statement
                             Money Laundering: Observations on Private Banking and Related Oversight of Selected
                             Offshore Jurisdictions




Federal Banking Regulators   The growing importance of private banking over the last several years led
                             the Federal Reserve Bank of New York (FRBNY) to undertake a special
Focus on Private Banking     initiative focusing on private banking that disclosed a number of key
                             weaknesses in selected institutions’ internal controls for detecting or
                             preventing money laundering. In 1996 and 1997, FRBNY attempted to
                             review private banking activities at about 40 domestic and foreign banking
                             institutions in the New York district. During the course of these reviews,
                             examiners focused on assessing each bank’s ability to recognize and
                             manage money laundering risks associated with inadequate knowledge of
                             its clients’ personal and business backgrounds, their sources of wealth,
                                                                              8
                             and their use of their private banking accounts.

                             FRBNY officials explained to us that most of the banks reviewed had
                             adequate anti-money-laundering programs for their private banking
                             activities, although a few were antiquated and vulnerable to money
                             laundering. Deficiencies identified in the private banking area primarily
                             involved poor internal controls, such as insufficient documentation and
                                                                  9
                             inadequate due diligence standards. In a systemwide study conducted
                             during 1998, the Federal Reserve assessed the risk management practices
                             at seven banks with private banking activities. The study found that
                             internal controls and oversight practices over private banking activities
                             were generally strong at banks that focused on high-end domestic clients,
                             while similar controls and oversight practices were seriously weak at
                             banks that focused on higher risk Latin American and Caribbean clients.

                             In the latter part of 1997, the Office of the Comptroller of the Currency
                             began targeting national banks’ private banking activities based on law
                             enforcement leads or on the bank activities meeting OCC’s high-risk
                             criteria. A primary focus of these reviews has been the banks’
                             implementation of sound KYC policies and procedures. In these reviews,
                             OCC targeted 10 high risk national banks for expanded Bank Secrecy Act
                             examinations, three of which focused on the banks’ private banking
                             activities. OCC found that only one bank had diligently developed
                             processes to manage the risks associated with anti-money-laundering and
                             KYC issues, while the anti-money-laundering processes of the remaining
                             two banks were classified as weak or needing improvement.



                             8
                                 Such risks include reputational and legal risks.
                             9
                              Due diligence in private banking generally 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 typically conduct.




                             Page 4                                                                               GAO/T-GGD-00-32
                           Statement
                           Money Laundering: Observations on Private Banking and Related Oversight of Selected
                           Offshore Jurisdictions




                           A second major area for our work was regulatory efforts to oversee
Regulatory Efforts to      offshore private banking activities, including the types of procedures
Oversee Offshore           regulators use and the deficiencies they have identified during
Private Banking            examinations. Federal banking regulators and law enforcement officials
                           have raised concerns about offshore private banking activities and their
Activities                 potential to be the private banking “soft spot” for money laundering.

Offshore Private Banking   Although banking regulators believe that customers generally use offshore
                           entities to establish or maintain private banking accounts for legitimate
Accounts                   reasons, they are concerned that this practice may also serve to
                           camouflage money laundering and other illegal acts. Offshore entities,
                                                                     10
                           including private investment companies and offshore trusts, provide
                           customers with a high degree of confidentiality and anonymity while
                           offering such other benefits as tax advantages, limited legal liability, and
                           ease of transfer. Detecting or preventing money laundering by offshore
                           entities can pose special difficulties because documentation identifying the
                           individual or group that controls these offshore entities and their U.S.
                           private banking accounts (referred to as their “beneficial owners”) is
                           frequently maintained in the offshore jurisdiction rather than in the United
                           States.

                           Regulators recognize that the use of offshore entities to establish or
                           maintain U.S. private banking accounts tends to obscure the account
                           holders’ true identities. Consequently, they instruct their examiners to look
                           for specific KYC procedures that enable banks to identify and profile the
                           beneficial owners of these offshore entities. In the course of examinations,
                           examiners may test the adequacy of beneficial-owner documentation
                           maintained in the United States. At the time of our earlier review in 1998,
                           with the exception of FRBNY, we found no evidence that examiners had
                           attempted to examine the documentation that banks maintain in offshore
                           secrecy jurisdictions.

                           During examinations conducted under FRBNY’s private banking initiative,
                           examiners sought to review beneficial owner documentation regardless of
                           where it was maintained. Because this was the Federal Reserve’s first
                           focused review of private banking activities, officials believed that it was
                           particularly important to verify whether banks had the ability to identify
                           and profile the beneficial owners of offshore entities that maintained U.S.
                           private banking accounts. A senior FRBNY examiner explained that it was

                           10
                              Private investment companies are “shell” companies, incorporated in financial secrecy jurisdictions,
                           formed to hold client assets, to maintain clients’ confidentiality, and to carry out various tax- or trust-
                           related intentions.




                           Page 5                                                                                 GAO/T-GGD-00-32
                               Statement
                               Money Laundering: Observations on Private Banking and Related Oversight of Selected
                               Offshore Jurisdictions




                               also a way to induce banks to develop or improve their systems for
                               maintaining appropriately detailed information on the beneficial owners of
                               offshore entities that maintain U.S. accounts.

                               Other Federal Reserve and OCC examiners we contacted in 1998
                               expressed different views about accessing such documentation during
                               examinations. Some examiners, for example, said that they do not see a
                               need to examine offshore documents if they are confident about the bank’s
                               commitment to combating money laundering. Since that time, according
                               to a Federal Reserve official, its examiners have routinely attempted to
                               examine documents maintained in offshore jurisdictions.

Private Banking Activities     Offshore branches are extensions of U.S. banks and are subject to
                                                                                                      11
                               supervision by U.S. regulators, primarily the Federal Reserve or OCC, as
by Offshore Branches of        well as host countries. However, such branches are generally not subject
U.S. Banks                     to this country’s Bank Secrecy Act. For this reason, U.S. banking
                               regulators do not attempt to determine whether offshore branches are in
                               compliance with specific anti-money-laundering provisions contained in
                               the Bank Secrecy Act, such as the one requiring that suspicious
                               transactions be reported to U.S. authorities. Instead of monitoring formal
                               compliance, U.S. banking regulators try to identify what efforts the
                               branches are making to combat money laundering and to determine
                               whether the banks’ corporate KYC policies are being applied to activities,
                               such as private banking activities, that the offshore branches may engage
                               in.

                               Although examiners are able to review the written policies and procedures
                               being used in these branches, they must rely primarily on the banks’
                               internal audit functions to verify that the procedures are actually being
                               implemented in offshore branches where U.S. regulators may be precluded
                               from conducting on-site examinations. They may also rely on external
                               audits, but are less prone to do so because external audits tend to focus on
                               financial, rather than anti-money-laundering, issues.

Identified Deficiencies and    We found in our review of examinations conducted by FRBNY that the
                               most common deficiency relating to offshore private banking was a lack of
Status of Corrective Actions   documentation on the beneficial owners of private investment companies
                               and other offshore entities that maintain U.S. accounts. While there is no
                               requirement that banks retain documentation in the United States on the

                               11
                                  The Federal Deposit Insurance Corporation does not routinely conduct overseas examinations,
                               because the foreign offices of banks under its direct supervision are primarily offshore shell branches
                               or otherwise represent relatively small operations in terms of their asset size.




                               Page 6                                                                             GAO/T-GGD-00-32
                          Statement
                          Money Laundering: Observations on Private Banking and Related Oversight of Selected
                          Offshore Jurisdictions




                          beneficial owners of these offshore entities, maintaining such information
                          in clients’ U.S. files, or having the ability to bring it on-shore in a
                          reasonable amount of time, promotes sound private banking practices,
                          according to the Federal Reserve.

                          Our review in 1998 of FRBNY and OCC examinations found that examiners
                          identified a number of general private banking deficiencies that also
                          pertained to the banks’ offshore private banking activities. Two such
                          deficiencies were inadequate client profiles and weak management
                          information systems. For example, examiners found that some banks’
                          client profiles contained little or no documentation on the client’s
                          background, source of wealth, or expected account activity, or on client
                          contacts and visits by bank representatives. Examiners also found that
                          some banks’ management information systems did not track client activity
                          or did not allow bankers to systematically examine all accounts related to
                          a given client. Both of these deficiencies make it difficult for banks to
                          monitor clients’ accounts for unusual or suspicious activity, according to
                          the banking regulators.

                          At the time of our review in 1998, we noted that most banks with
                          deficiencies identified during FRBNY’s private banking initiative had
                          started to take corrective actions to address these deficiencies. For
                          example, during follow-up examinations, examiners found that banks had
                          started to make progress on improving client profiles.

Bankers’ Concerns About   Some bank officials we interviewed during this assignment expressed
                          concerns that securities brokers and dealers are not subject to the same
Uneven Regulatory         regulations covering suspicious activity reports or to the same regulatory
Oversight                 reviews of KYC policies that banks are subject to. They indicated that this
                          inconsistency creates an “uneven playing field” that they felt was unfair,
                          particularly since brokers and dealers are engaged in private banking
                          activities similar to those of the banks themselves. Officials from the
                          Securities and Exchange Commission and Treasury’s Financial Crimes
                          Enforcement Network have indicated that they have been working
                          together since 1997 to develop regulations for brokers and dealers
                          regarding suspicious activity reports. As of October 1999, however, such
                          regulations had not yet been issued.




                          Page 7                                                                GAO/T-GGD-00-32
                          Statement
                          Money Laundering: Observations on Private Banking and Related Oversight of Selected
                          Offshore Jurisdictions




                          The third major area for our work was barriers to regulators’ efforts to
Offshore Jurisdictions’   oversee offshore banking activities in general. We found that secrecy laws
Bank Secrecy Laws         in many offshore jurisdictions represent key barriers to U.S. oversight of
Represent Key Barriers    offshore banking activities. According to U.S. and international agencies
                          and organizations, all of the 20 offshore jurisdictions we reviewed have
to U.S. Regulators’       secrecy laws that protect the privacy of individual account owners, and 16
Oversight of Offshore     of them impose criminal sanctions for breaking those laws. While secrecy
Banking Activities        laws are intended to preserve the privacy of bank customers, they also
                          restrict U.S. regulators from accessing individual account information and
                          often prevent regulators from conducting on-site examinations at U.S.
                          bank branches in offshore jurisdictions.

                          In our earlier work in 1998, we reviewed nine jurisdictions in depth
                          because of their private banking activities. Updated information on these
                          nine jurisdictions showed that five would allow U.S. regulators to conduct
                          on-site examinations of banking institutions in their jurisdictions and that
                          only two of these five would provide some access to individual bank
                          account information. Each of the jurisdictions had secrecy laws to protect
                          the privacy of individual account owners. However, some jurisdictions
                          provided for an exception to their secrecy laws when criminal
                          investigations were involved. We were told that these jurisdictions had
                          established judicial processes through which U.S. and other foreign law
                          enforcement officials could obtain access to individual bank account or
                          customer information. However, U.S. law enforcement officials we
                          contacted expressed concerns about the difficulty they have in obtaining
                          information from offshore secrecy jurisdictions, including those with
                          established judicial processes. They noted, for example, that it can take an
                          inordinate amount of time to obtain information requested through mutual
                                                    12
                          legal assistance treaties.

                          None of the 11 jurisdictions added to our list allowed U.S. regulators to
                          access individual customer information or to conduct on-site
                          examinations. However, according to regulators, U.S. banks had little
                          banking activity in these jurisdictions, and regulators had not attempted to
                          access individual account information or conduct examinations in these
                          jurisdictions, with one exception: Russia has been asked by the Federal
                          Reserve whether on-site examinations can be conducted. According to a
                          State Department report, there has been some level of cooperation and
                          progress in integrating Russian monitoring and enforcement into

                          12
                             Mutual legal assistance treaties are bilateral agreements that the United States has entered into with
                          other countries to enhance international cooperation in criminal matters, including those involving
                          money laundering.




                          Page 8                                                                               GAO/T-GGD-00-32
                             Statement
                             Money Laundering: Observations on Private Banking and Related Oversight of Selected
                             Offshore Jurisdictions




                                                                                        13
                             international anti-money-laundering efforts. However, the report notes
                             that (1) a more aggressive legislative approach is needed to address the
                             conditions that encourage a destabilizing level of capital flight and money
                             laundering, and (2) Russia supervises its banks poorly. Details on the 20
                             jurisdictions are presented in attachment I.

Limitations Hamper U.S.      U.S. banking regulators are attempting to work around barriers created by
                             offshore secrecy laws, but limitations hamper their efforts. For example, a
Efforts to Work Around       limitation in some jurisdictions is that since regulators have been
Barriers                     precluded from conducting on-site examinations, they rely primarily on
                             banks’ internal audits to determine how well KYC policies and procedures
                             are being applied to offshore branches of U.S. banks. Our 1998 review of
                             examination reports, however, found several instances in which examiners
                             noted that the bank’s internal audit of the offshore branch inadequately
                             covered KYC issues pertaining to its private banking activities at these
                             branches.

                             Regulators’ reliance on internal audits for overseeing offshore branches is
                             also impeded by their inability to review banks’ internal audit workpapers
                             in some offshore jurisdictions that require that such workpapers be kept in
                             the jurisdiction. Examiners explained that, without access to supporting
                             audit workpapers, it is difficult to verify that audit programs were followed
                             and to assess the general quality of internal audits of offshore branches.
                             Also, without access to bank documents or internal audit workpapers, it is
                             difficult to explain to bank management the basis for regulatory concerns
                             about particular activities conducted in their offshore branches.

Offshore Jurisdictions’      All but 1 of the 20 offshore jurisdictions we reviewed were engaged in
                             some type of anti-money-laundering activities. Twelve of the 20
Activities to Combat Money   jurisdictions were members of either the Basle Committee on Banking
Laundering                   Supervision or the Offshore Group of Banking Supervisors, two
                             international groups formed to foster cooperation among banking
                             supervisory authorities. Both of these groups place special emphasis on
                             the on-site monitoring of banks to ensure, for example, that they have
                             effective KYC policies. Sixteen of the 20 offshore jurisdictions were also
                             members of the Financial Action Task Force, the Caribbean Financial
                             Action Task Force, or the Council of Europe Select Committee on Money
                             Laundering, three international task forces created to develop and
                             promote anti-money-laundering policies. (See attachment II.)


                             13
                              International Narcotics Control Strategy Report, 1998, U.S. Department of State (Washington, D.C.:
                             February 1999).




                             Page 9                                                                           GAO/T-GGD-00-32
                         Statement
                         Money Laundering: Observations on Private Banking and Related Oversight of Selected
                         Offshore Jurisdictions




                         Membership in any of these three task forces implies that the jurisdiction
                         has stated its intention to work towards the task force’s principles and
                         recommendations, including those related to establishing KYC policies and
                         policies on reporting suspicious transactions. It is important to point out
                         that membership in these task forces does not necessarily mean that these
                         principles and recommendations are adequately being followed by the
                         jurisdiction’s financial institutions or monitored by its government
                         authorities. The State Department’s International Narcotics Control
                         Strategy Report (INCSR) for 1998, for one, identifies 11 of the 20 offshore
                         jurisdictions as having weak or nonexistent regulatory supervisory
                         structures. Attachment III provides information on the 20 jurisdictions’
                         anti-money-laundering practices and the State Department’s classification
                         of the extent to which the jurisdictions may be vulnerable to money
                         laundering.

                         Several challenging questions confront U.S. policymakers and others
Future Challenges That   involved in ongoing domestic and international efforts to combat money
Confront Efforts to      laundering through offshore banking activities. A number of these
Combat Money             questions are specific to offshore private banking activities of banks and
                         offshore banking in general. Despite the recent anti-money-laundering
Laundering               activities of some key offshore jurisdictions, one central question is
                         whether secrecy laws will continue to represent barriers to U.S. and other
                         foreign regulators. A number of related questions follow from this
                         question. For example, do the offshore jurisdictions that have enacted new
                         money laundering laws have the regulatory infrastructure and adequate
                         regulatory and law enforcement personnel to enforce the new laws?

                         Another key question with important implications is how effective are the
                         efforts of international task forces and supervisory groups to combat
                         money laundering. A related question is what needs to be done to ensure
                         that offshore jurisdictions give sufficient emphasis to preventing and
                         detecting money laundering. An equally important, if narrower, question
                         that grows out of the GAO work described here is what needs to be done
                         to ensure that offshore jurisdictions allow the U.S. and other foreign
                         governments adequate access to information needed for supervisory and
                         law enforcement purposes.




                         Page 10                                                               GAO/T-GGD-00-32
Statement
Money Laundering: Observations on Private Banking and Related Oversight of Selected
Offshore Jurisdictions




Other questions remain, related to the domestic oversight of banking and
money laundering—especially with regard to the adequacy of current
examination procedures, including knowing your customer. The National
Money Laundering Strategy for 1999 marks a new stage in the
government’s fight against money laundering. A major goal is to enhance
regulatory oversight while making it cost-effective, with measurable
results. We believe such a goal is worth achieving.




Page 11                                                               GAO/T-GGD-00-32
Attachment I

Extent of U.S. Regulatory Access to Bank
Information in Offshore Jurisdictions


                                                                                                               U.S. law enforcement and
                       Jurisdiction has bank     U.S. regulators allowed            U.S. regulators allowed to judicial authorities allowed
                       secrecy laws that include access to individual               conduct on-site            access to individual
                       criminal sanctions        customer information               examinations               customer information
                                                                                                                                  a
Jurisdiction               Yes          No               Yes              No              Yes              No               Yes               No
Nine initial
jurisdictions
                                b
Bahamas                     x                                              x                                 x                x
Bahrain                                  x                                 x                                 x                                 x
Cayman Islands              x                                              x                x                                 x
Channel Islands                          x                                 x                x                                                  x
Hong Kong                                x                 x                                x                                 r
Luxembourg                  x                                              x                                 x                r
Panama                      x                                              x                                 x                x
                              b                                c                             d
Singapore                   x                           Some                               x                                                   x
                                                                               e
Switzerland                 x                                              x               x                                  x
Eleven additional
jurisdictions
Anguilla                    x                                              x                                x                 x
Antigua & Barbuda           x                                              x                                x                 x
                              b
Barbados                    x                                              x                                x                 r
Liechtenstein               x                                              x                                x                                  x
                              b
Monsterrat                  x                                              x                                x                 x
Nauru                                    x                                 x                                x                                  x
Netherlands Antilles        x                                              x                                x                                  x
                                                                                                              f
Russia                      x                                              x                                x                                  x
St. Vincent & the
Grenadines                  x                                              x                                 x                r
                              b
Turks & Caicos              x                                              x                                 x                x
Vanuatu                     x                                              x                                 x                                 x
                                              a
                                               An “x” in this column indicates that the jurisdiction has a mutual legal assistance treaty in force with
                                              the United States and that it allows access to individual account information if a formal criminal
                                              investigation is under way. An “r” in this column indicates that an agreement has been signed with
                                              the United States but has not been ratified.
                                              b
                                               Criminal sanctions exist for unauthorized disclosures, but “safe harbor” is provided for specific
                                              authorized disclosures to certain entities.
                                              c
                                                  Examiners can review customer records regarding bank assets, but not liabilities.
                                              d
                                                  Singapore allows limited-scope examinations.
                                              e
                                               A process exists that allows foreign supervisors to request this type of information; however, in
                                              regulators’ experience, customer information is rarely provided.
                                              f
                                               Russia has been asked by the Federal Reserve whether on-site examinations can be conducted in
                                              that country.
                                              Source: U.S. Department of State, Financial Crimes Enforcement Network (FinCEN), the Federal
                                              Reserve, OCC, Financial Action Task Force (FATF), Caribbean Financial Action Task Force (CFATF),
                                              Offshore Group of Banking Supervisors, and Council of Europe Select Committee on Money
                                              Laundering.




                                              Page 12                                                                                 GAO/T-GGD-00-32
Attachment II

Membership in International Supervisory
Groups or Anti-Money-Laundering Task
Forces

                                                                                                                           Council of
                       Basle                                              Caribbean                                        Europe Select
                       Committee on   Offshore Group     Financial Action Financial Action Asia/Pacific                    Committee on
                       Banking        of Banking         Task Force       Task Force       Group on Money                  Money
                                                                                                       a
Jurisdiction           Supervision    Supervisors        (FATF)           (CFATF)          Laundering                      Laundering
Nine initial
jurisdictions
Bahamas                                         x                                         x
                                                                    b
Bahrain                                         x
Cayman Islands                                  x                                         x
Channel Islands                                 x
Hong Kong                                       x                  x                                            x
Luxembourg                   x                                     x
Panama                                          x                                         x
Singapore                                       x                  x                                            x
Switzerland                  x                                     x                                                                    x
Eleven additional
jurisdictions
Anguilla                                                                                  x
Antigua & Barbuda                                                                         x
Barbados                                        x                                         x
Liechtenstein                                                                                                                           x
Montserrat                                                                                x
Nauru
                                                                       c
Netherlands Antilles                            x                  x                      x
Russia                                                                                                                                  x
St. Vincent &
 the Grenadines                                                                           x
Turks & Caicos                                                                            x
Vanuatu                                         x                                                               x
                                            a
                                            The Asia/Pacific Group was created to establish cooperation in combating money laundering in the
                                            Asia/Pacific region and to develop principles for application of the FATF 40 recommendations.
                                            b
                                            Bahrain is not a member country of FATF It is, however, a member of the Gulf Cooperation Council,
                                            one of two regional organizations that are members of FATF.
                                            c
                                            Netherlands Antilles is a part of the Netherlands and is associated with FATF through the
                                            Netherlands' membership.
                                            Source: International Narcotics Control Strategy Report, 1998, Bureau for International Narcotics and
                                            Law Enforcement Affairs, U.S. Department of State; FATF; CFATF; Offshore Group of Banking
                                            Supervisors; and Council of Europe Select Committee on Money Laundering.




                                            Page 13                                                                          GAO/T-GGD-00-32
Attachment III

Anti-Money-Laundering Regulatory
Framework in Selected Offshore Jurisdictions


                 Has money       Does the            Does the             Does the
                 laundering      jurisdiction        jurisdiction         jurisdiction have           Does INCSR describe
                 been            have KYC            require banks        corporate secrecy           supervisory
                 criminalized    policies or         to report            laws that include           structure of the              What is the INCSR
                 in the          guidelines for      suspicious           criminal                    jurisdiction as weak          classification for
                                                                                      a                                                               b
                 jurisdiction?   banks?              transactions?        sanctions?                  or nonexistent?               the jurisdiction?
Jurisdiction      Yes     No      Yes       No        Yes       No          Yes         No               Yes          No            JPC JOC OJM
Nine initial
jurisdictions
                                                                                  c, d
Bahamas           x                x                   x                      x                                           x           x
Bahrain                   x                x                      x                         x              x                                   x
Cayman
Islands           x                x                   x                                    x                             x           x
Channel
        e
Islands           x                x                   x                                    x                             x           x
Hong Kong         x                x                   x                                    x                             x           x
Luxembourg        x                x                   x                                    x                             x           x
Panama            x                x                   x                                    x              x                          x
Singapore         x                x                   x                                    x                             x           x
Switzerland       x                x                   x                                    x                             x           x
Eleven
additional
jurisdictions
                                                                                   d
Anguilla          x                        x                      x           x                                           x                            x
Antigua &
Barbuda           x                x                   x                                    x              x                          x
                                                                                   c
Barbados          x                x                   x                      x                            x                                   x
Liechtenstein     x                x                   x                                    x                             x           x
                                                                                   d
Montserrat                x                x                      x           x                            x                                   x
Nauru                     x                x                      x                         x              x                                   x
Netherlands
Antilles          x                x                   x                                    x              x                          x
Russia            x                        x                      x                         x              x                          x
St. Vincent &
the Grenadines            x                x                      x           x                            x                                   x
                                                                                d
Turks & Caicos    x                        x           x                      x                            x                                   x
Vanuatu                   x                x                      x                         x              x                          x
                                               a
                                                For the purpose of this inquiry, the term "corporate secrecy laws” refers to any law that shields the
                                               identities of officers and directors of private entities and serves to either prohibit or restrict foreign
                                               government agencies from accessing such information.
                                               b
                                                The International Narcotics Control Strategy Report assigns priorities to jurisdictions using a
                                               classification system consisting of three categories, titled Jurisdictions of Primary Concern (JPC),
                                               Jurisdictions of Concern (JOC), and Other Jurisdictions Monitored (OJM). This prioritization process
                                               draws upon a number of factors that indicate, among other things, the extent to which the jurisdiction
                                               may be vulnerable to money laundering.
                                               c
                                               Criminal sanctions exist for unauthorized disclosures, but "safe harbor" is provided for specific,
                                               authorized disclosures to certain entities.
                                               d
                                                Criminal sanctions exist for unauthorized disclosures, but information is exchanged under terms of
                                               the Mutual Legal Assistance Treaty.




                                               Page 14                                                                                GAO/T-GGD-00-32
Attachment III
Anti-Money-Laundering Regulatory Framework in Selected Offshore Jurisdictions




e
    Information is for Guernsey, one of four islands known as the Channel Islands.
Source: U.S. Department of State, FinCEN, FATF, CFATF, Offshore Group of Banking Supervisors,
and Council of Europe Select Committee on Money Laundering.




Page 15                                                                              GAO/T-GGD-00-32
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order made
out to the Superintendent of Documents, when necessary. VISA
and MasterCard credit cards are accepted, also. Orders for 100 or
more copies to be mailed to a single address are discounted 25
percent.

Order by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000 or by using
fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any list
from the past 30 days, please call (202) 512-6000 using a touch-
tone phone. A recorded menu will provide information on how to
obtain these lists.

For information on how to access GAO reports on the INTERNET,
send e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested




(233629)