WASHINGTON - In an effort to curb money laundering, the Federal Reserve is urging U.S. banks to keep closer tabs on customers who set up checking accounts through foreign institutions.
The Fed's 12 district banks have devised new requirements to make sure that member banks know the identities of people and businesses opening "payable-through" accounts.
The rules, which the district banks have been mailing out this week, take effect immediately.
With a payable-through account, a U.S. bank opens a checking account for a foreign bank. Then, for a fee, the foreign bank offers customers outside the United States the use of the account to conduct transactions here.
The foreign bank provides the customers with checks that enable them to draw on its account at the U.S. institution, just as if they had an account at the American bank. The group of "sub-account holders," as they are called, can number several hundred for one account.
In a March 3 letter to the district banks, the Fed said banks have been lax in guarding against money laundering through these accounts.
"It appears that some U.S. banking entities are not exercising the same degree of care with respect to payable-through accounts that they exercise for domestic customers," the letter said.
Most banks, it added, make little or no effort to verify information about the people and businesses that are using their accounts.
"We are concerned because people who are offshore get access to U.S. accounts without going through know-your-customer procedures," Rick Small, the Fed's point man on money laundering, said in an interview.
The new requirements call for U.S. banks to make sure that foreign institutions carefully identify users of the accounts. Alternatively, U.S. banks must gather the information themselves.
The rules may mean U.S. bankers will have to review foreign banks' procedures for identifying the account holder, the central bank said. U.S. banks also may have to analyze foreign laws and rules to monitor the transactions.
In addition, under the new rules, banks are expected to watch account activities conducted in the payable-through accounts and report suspicious activity the same way they file domestic account suspicions.
In some cases, said the Fed, the bank should stop the arrangement as fast as possible.
A bank should end the relationship if it can't obtain information about the users of the account, of if the foreign bank can't identify its own customers.
Mr. Small said while some banks already have such identification policies in place, it will be a burden on other banks.
"Even the best banks in the world may have to do a little work," he said.
Each of the Fed's district banks has been asked to start examining for compliance immediately.
New examination procedures developed for the rules will be sent soon to the banks.
The new exams, said Mr. Small, will focus on banks' internal policies. The Fed will take samplings based on those procedures, he said. "We're really relying on banks to do the work," Mr. Small said.
But at least for a while, the Fed will focus on suggestions for improvements rather than enforcements. The central bank has instructed its examiners to not include criticisms of payable-through accounts on the exam report until July 1.
The Fed has also asked examiners to hold off on recommending any supervisory action until the second half of 1995, unless they find violations of the Bank Secrecy Act or indications of criminal conduct.