Privacy laws in foreign countries are making it difficult for U.S. regulators to detect money laundering, the General Accounting Office warned.
"Secrecy laws ... represent key barriers to U.S. oversight of offshore private banking activities," the GAO said in its report, which was released last week.
In some cases, U.S. regulators cannot even learn the names of private banking customers who hide behind "shell" companies, the GAO found. Also, the GAO noted that five of the nine host countries reviewed impose criminal sanctions for breaches of an account holder's privacy.
U.S. bank regulators have found some ways to get around the foreign privacy laws, the GAO said. For example, a foreign country may bar regulators from performing on-site examinations of overseas branches of U.S. banks, including safety-and-soundness exams. But the U.S. regulators could discuss the branch's performance with the foreign regulator or review internal audits of the branch's money laundering efforts. For instance, Switzerland bars all on-site exams of U.S. bank branches.
The GAO, which is the investigative arm of Congress, held U.S. banks partly responsible for the dearth of customer information. It said many bankers are reluctant to compromise customers' anonymity because they fear losing them to less-regulated competitors; other banks simply fail to update their client profiles often enough.
The GAO also criticized U.S. regulators. For well over a year, two agencies-the Federal Reserve Board and the Office of the Comptroller of the Currency-have been promising to release "know-your-customer" rules, which would provide banks with uniform guidelines for gathering information on customers.
In the absence of such rules, banks have relied on a hodgepodge of agency guidance and guesswork, leaving some better-prepared than others, the GAO said.
The GAO report was requested last August by Rep. Spencer T. Bachus, R- Ala., chairman of House Banking's oversight and investigations subcommittee.
The GAO gathered data on privacy laws in nine locations: the Bahamas, Bahrain, the Cayman Islands, the Channel Islands, Hong Kong, Luxembourg, Panama, Singapore, and Switzerland. In addition, the GAO interviewed regulators and private bankers and reviewed exam reports.