Despite repeated government warnings, many foreign banks have failed to install adequate risk-management systems in their U.S.-based branches, according to the General Accounting Office.
Inadequate external and internal audits were among the most serious problems that the congressional watchdog agency identified in its report, released Tuesday.
Audits at 34% of the 498 foreign bank branches did not cover all of the activities at the office and did not delve far enough into specific businesses to ensure compliance with U.S. laws, the agency said.
Also, 104 branches did not conduct audits frequently enough. The GAO criticized the internal controls at foreign bank branches. For instance, 72 branches, or 14%, did not adequately separate their trading and securities settlement duties.
GAO also scolded the Federal Reserve Board, which is the primary regulator for most foreign bank branches. The Fed does not collect enough data to know whether foreign banks are following the law, the agency said.
The Fed cracked down on foreign bank branches in 1995 after Japan's Daiwa Bank admitted that a rogue trader covered up more than $1 billion in losses. Regulators revoked Daiwa's U.S. banking license and ordered other foreign banks to beef up their internal controls.
"The Fed and other regulators are better at finding problems, but the question is whether they are able to improve things," said Thomas J. McCool, GAO director of financial institutions and markets.
Rep. Marge Roukema, who is chairwoman of the House Banking Committee's financial institutions subcommittee, has scheduled a hearing on the report for Oct. 8.
"Foreign banks operating here are not using the same controls as American banks," she said. "We need the regulators to be more active in enforcing equal standards."