[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Rules and Regulations]
[Pages 39052-39053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19043]


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FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-0916]


International Banking Operations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: This final rule amends Regulation K to implement a provision 
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 
1994 (the Interstate Act) that amended the International Banking Act of 
1978 (the IBA) by adding a new subsection regarding the management of 
shell branches of foreign banks by such banks' U.S. offices. The 
provision prohibits foreign banks from using their U.S. branches or 
agencies to manage types of activities through offshore offices that 
could not be managed by a U.S. bank at its foreign branches or 
subsidiaries. This prohibition applies with respect to those offshore 
offices that are ``managed or controlled'' by a foreign bank's U.S. 
branches or agencies.

EFFECTIVE DATE: August 28, 1996.

FOR FURTHER INFORMATION CONTACT: Sandra L. Richardson, Managing Senior 
Counsel (202/452-6406), Janet S. Crossen, Senior Attorney (202/452-
3281), Legal Division; Michael G. Martinson, Assistant Director, 
Division of Banking Supervision and Regulation (202/452-3640), Board of 
Governors of the Federal Reserve System. For users of Telecommunication 
Device for the Deaf (TDD) only, please contact Dorthea Thompson, (202/
452-3544), Board of Governors of the Federal Reserve System, 20th and C 
Streets, N.W., Washington, DC 20551.

SUPPLEMENTARY INFORMATION: In the Interstate Act, Congress amended 
section 7 of the IBA (12 U.S.C. 3105) to prevent a foreign bank from 
using a U.S. branch or agency to manage types of activities at offshore 
offices that are managed or controlled by the foreign bank's U.S. 
branch or agency if those types of activities could not be managed by a 
U.S. bank at its foreign branches or subsidiaries. The final rule 
adopted by the Board to implement that provision tracks the language of 
section 7(k) of the IBA and defines the term ``managed or controlled'' 
for purposes of the restrictions on activities set out in that section.
    The definition of ``managed or controlled'' for this final rule is 
consistent with the definition of that term adopted by the Federal 
Financial Institutions Examination Council with respect to the 
Supplement (FFIEC 002S) to the quarterly Report of Assets and 
Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), 
which is required to be filed by foreign banks with respect to their 
offshore shell operations that are ``managed or controlled'' from the 
United States. 57 FR 61907, Dec. 29, 1992. For purposes of the FFIEC 
002S and the final rule, a non-U.S. office is considered to be 
``managed or controlled'' by a U.S. branch or agency of a foreign bank 
if a majority of the responsibility for business decisions, including 
but not limited to decisions with regard to lending or asset management 
or funding or liability management, or the responsibility for 
recordkeeping in respect of assets or liabilities for that non-U.S. 
office, resides at the U.S. branch or agency.
    The final rule also specifies that the types of activities that a 
branch or agency may manage through an office located outside of the 
United States include the types of activities authorized to a U.S. bank 
by state or federal charters, regulations issued by chartering or 
regulatory authorities and other U.S. banking laws. Finally, the 
proposed rule states that U.S. procedural or quantitative requirements 
will not apply to non-U.S. offices of foreign banks.
    On February 16, 1996, the Board requested public comment on a 
proposed rule to implement section 7(k) of the IBA. 61 FR 6956, Feb. 
23, 1996. The comment period ended on March 25, 1996. The Board 
received two public comments on the proposal, one by a banking 
organization and the other by a trade association. Both commenters 
generally supported the proposal. Comments received addressed issues 
relating to the definition of ``managed or controlled'' and application 
of the rule to non-U.S. full-service offices. The Board has considered 
the comments and has determined not to make any modifications to the 
final rule from that which was proposed.
    One commenter proposed that the Board should modify its definition 
of ``managed or controlled'' so that a U.S. branch or agency would not 
be subject to the regulation on the sole grounds that recordkeeping 
with respect to the assets or liabilities of a non-U.S. office resides 
at the U.S. branch or agency.
    Alternatively, the commenter requested that if the Board determined 
to retain the recordkeeping prong of the definition, the Board should 
clarify that maintaining records at a U.S. branch or agency would not 
result in the application of the regulation to offshore branches that 
are managed by personnel outside the United States. The commenter noted 
that many international banks maintain data processing centers and keep 
other records in their U.S. offices in order to provide support 
services for non-U.S. branches within the Western Hemisphere.
    The Board has found that the presence of records in a U.S. branch 
or agency relating to an offshore office often is evidence of 
involvement in the management of such offshore office by the U.S. 
branch or agency where the records reside. Eliminating responsibility 
for recordkeeping as a separate prong of the definition of ``managed or 
controlled'' could result in the significant potential for evasion of 
the provision. Accordingly, the Board has determined not to modify the 
definition as suggested by the commenter.
    The Board, however, believes that additional guidance may be 
helpful to assist foreign banks in determining whether maintaining 
records at U.S. branches or agencies for an offshore branch would 
render them subject to the regulation. In this regard, the Board

[[Page 39053]]

considers that the phrase ``responsibility for recordkeeping'' entails 
formal responsibility for the maintenance of records relating to the 
offshore operations. Simple data processing activities such as 
compiling and sorting data entries that were originated, approved and 
confirmed by personnel outside the United States and routing and 
distributing such processed data to destinations outside the United 
States would ordinarily not constitute ``responsibility for 
recordkeeping.'' If the U.S. branch or agency, however, originates the 
underlying information or utilizes the information for making business 
decisions or for the purpose of notifying or confirming transactions 
with customers, such activities could no longer be considered merely 
data processing. In addition, the Board considers that a U.S. branch or 
agency would have responsibility for recordkeeping within the meaning 
of the rule if it is the sole full-service office at which such records 
are maintained. Foreign banks that maintain records in the United 
States but do not believe they have ``responsibility for 
recordkeeping'' may consult with Board staff for guidance in 
determining whether they fall within the scope of the rule.
    One commenter also recommended that the Board modify the regulation 
to make clear that it applies to offshore shell offices rather than 
offshore offices generally. The Board notes that the preamble to the 
proposed rule stated that the restrictions in that rule generally would 
not apply with respect to offshore branches that are full-service 
facilities managed or controlled by staff located at the offshore 
office or at locations other than in the United States. In addition, 
the title of the proposed rule, which is identical to the title of the 
statutory provision, refers to ``shell'' branches. In view of the 
foregoing, the Board has determined that no modification to the rule is 
necessary.
    As the Board noted in the preamble to the proposed rule, section 
7(k) of the IBA does not confer upon foreign banks any right to manage 
activities at an offshore office from a U.S. office. The Board will 
continue to monitor relationships between the U.S. and offshore offices 
of foreign banks in the supervisory process in order to determine 
whether such activities are consistent with considerations relating to 
the safety and soundness of the U.S. operations of the foreign bank and 
its affiliates and compliance with law.

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the rule under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the rule.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601-612), the Board certifies that the this final rule will not 
have a significant economic impact on a substantial number of small 
entities.

List of Subjects in 12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, the Board of Governors 
amends 12 CFR Part 211 as set forth below.

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for 12 CFR Part 211 continues to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et 
seq., 3901 et seq.

    2. Section 211.20 is amended by removing ``and'' at the end of 
paragraph (b)(8), by removing the period at the end of paragraph (b)(9) 
and adding ``; and'' in its place, and by adding a new paragraph 
(b)(10) to read as follows:


Sec. 211.20  Authority, purpose, and scope.

* * * * *
    (b) * * *
    (10) The management of shell branches (12 U.S.C. 3105(k)).
* * * * *
    3. Section 211.24 is amended by adding a new paragraph (g) to read 
as follows:


Sec. 211.24  Approval of offices of foreign banks; procedures for 
applications; standards for approval; representative office activities 
and standards for approval; preservation of existing authority.

* * * * *
    (g) Management of shell branches. (1) A state-licensed branch or 
agency shall not manage, through an office of the foreign bank which is 
located outside the United States and is managed or controlled by such 
state-licensed branch or agency, any type of activity that a bank 
organized under the laws of the United States or any State is not 
permitted to manage at any branch or subsidiary of such bank which is 
located outside the United States.
    (2) For purposes of this paragraph (g), an office of a foreign bank 
located outside the United States is ``managed or controlled'' by a 
state-licensed branch or agency if a majority of the responsibility for 
business decisions, including but not limited to decisions with regard 
to lending or asset management or funding or liability management, or 
the responsibility for recordkeeping in respect of assets or 
liabilities for that non-U.S. office, resides at the state-licensed 
branch or agency.
    (3) The types of activities that a state-licensed branch or agency 
may manage through an office located outside the United States that it 
manages or controls include the types of activities authorized to a 
U.S. bank by state or federal charters, regulations issued by 
chartering or regulatory authorities, and other U.S. banking laws, 
including the Federal Reserve Act, and the implementing regulations, 
but U.S. procedural or quantitative requirements that may be applicable 
to the conduct of such activities by U.S. banks shall not apply.

    By order of the Board of Governors of the Federal Reserve 
System, July 17, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-19043 Filed 7-25-96; 8:45 am]
BILLING CODE 6210-01-P