Money Laundering: Regulatory Oversight of Offshore Private Banking
Activities (Letter Report, 06/29/98, GAO/GGD-98-154).

Pursuant to a congressional request, GAO reviewed U.S. regulatory
oversight of private banking activities involving offshore
jurisdictions, focusing on: (1) regulatory oversight procedures to
ensure that offshore private banking activities are covered by banks'
anti-money-laundering efforts; (2) deficiencies identified by banking
regulators regarding offshore private banking activities and corrective
actions taken by banks; (3) barriers hindering regulatory oversight of
offshore private banking activities and efforts to overcome them; and
(4) banking industry views regarding regulatory access to documentation
pertaining to offshore private banking activities.

GAO noted that: (1) federal banking regulators may review banks' efforts
to prevent or detect money laundering in their offshore private banking
activities during compliance or Bank Secrecy Act examinations; safety
and soundness examinations; or during targeted examinations of their
private banking activities; (2) to guard against offshore entities that
maintain U.S. private banking accounts from being used for money
laundering or other illicit purposes, examiners are to look for "know
your customer" procedures that enable banks to identify and profile the
beneficial owners of private banking accounts; (3) GAO's review of bank
examination reports prepared under the Federal Reserve Bank of New
York's (FRBNY) private banking initiative showed that the most common
deficiency relating to offshore private banking was a lack of
documentation on the beneficial owners of private investment companies
(PIC) and other offshore entities that maintain U.S. accounts; (4) FRBNY
and Office of the Comptroller of the Currency examiners noted other
deficiencies during their respective examinations; (5) the bank
examinations GAO reviewed, along with discussions with examiners and
bank officials, indicated that most banks had started to take corrective
actions to address deficiencies related to offshore private banking
activities, but improvements were needed; (6) the nine offshore
jurisdictions GAO identified for review have secrecy laws that protect
the privacy of individual account owners, and five of them impose
criminal sanctions for breaches of privacy; (7) moreover, federal
banking regulators' attempts to work around restrictions associated with
these secrecy laws are sometimes hampered; (8) GAO also found that all
nine offshore jurisdictions selected for review were engaged in some
type of anti-money-laundering activities; (9) although the efforts of
individual jurisdictions may contribute to the international fight
against money laundering, it is too early to ascertain their impact on
money laundering or the extent to which the offshore jurisdictions'
secrecy laws will continue to represent barriers to U.S. and other
foreign regulators; (10) GAO surveyed officials from 15 banks that were
asked by FRBNY to provide documentation on the beneficial owners of PICs
and other offshore entities that maintained U.S. accounts; (11) GAO
found that the officials had a number of concerns; and (12) in spite of
these concerns, most officials indicated that their banks changed how
they maintain documentation on offshore private banking activities in
response to FRBNY's request for beneficial owner documentation.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-154
     TITLE:  Money Laundering: Regulatory Oversight of Offshore Private 
             Banking Activities
      DATE:  06/29/98
   SUBJECT:  Banking law
             Law enforcement
             Money laundering
             Organized crime
             Financial institutions
             Federal reserve banks
             Bank examination

             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on General Oversight and
Investigations, Committee on Banking and Financial Services, House of
Representatives

June 1998

MONEY LAUNDERING - REGULATORY
OVERSIGHT OF OFFSHORE PRIVATE
BANKING ACTIVITIES

GAO/GGD-98-154

Money Laundering

(233542)


Abbreviations
=============================================================== ABBREV

  BSA - Bank Secrecy Act
  CFATF - Caribbean Financial Action Task Force
  FATF - Financial Action Task Force
  FRBNY - Federal Reserve Bank of New York
  KYC - know your customer
  OCC - Office of the Comptroller of the Currency
  PIC - private investment company

Letter
=============================================================== LETTER


B-279710

June 29, 1998

The Honorable Spencer Bachus
Chairman, Subcommittee on General Oversight
 and Investigations
Committee on Banking and Financial Services
House of Representatives

Dear Mr.  Chairman: 

This report responds to your August 26, 1997, request that we review
U.S.  regulatory oversight of private banking activities involving
offshore jurisdictions.  You expressed concern that high profile
money laundering cases have generally involved the use of offshore
accounts or transactions to facilitate the movement of illicit funds
through the banking system.  Law enforcement and bank regulatory
officials have also raised concerns about offshore private banking
activities and their potential to be the private banking "soft spot"
for money laundering.  To assist with your continuing deliberations
on money laundering, you asked that we review the regulatory
oversight of offshore private banking activities and that we
specifically address the following areas: 

  -- regulatory oversight procedures to ensure that offshore private
     banking activities are covered by banks' anti-money-laundering
     efforts,

  -- deficiencies identified by banking regulators regarding offshore
     private banking activities and corrective actions taken by
     banks,

  -- barriers hindering regulatory oversight of offshore private
     banking activities and efforts to overcome them, and

  -- banking industry views regarding regulatory access to
     documentation pertaining to offshore private banking activities. 

To address these areas, we reviewed examination manuals, relevant
agency documents, and examination reports that addressed banks'
anti-money-laundering efforts relative to their private banking
activities.  We also interviewed U.S.  regulators; 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. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Private banking has been broadly defined as financial and related
services provided to wealthy clients.\1 Such products and services
may include deposit-taking, lending, mutual funds investing, personal
trust and estate administration, funds transfer services, and
establishing payable through accounts\2 or offshore trusts.  For
purposes of this review, we defined offshore private banking as
including (1) private banking activities carried out by domestic and
foreign banks operating in the United States that involve financial
secrecy jurisdictions,\3 including the establishment of accounts for
offshore entities, such as private investment companies (PIC)\4 and
offshore trusts; and (2) private banking activities conducted by
foreign branches of U.S.  banks located in these jurisdictions. 
Offshore entities that maintain private banking accounts 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.  Sometimes documentation identifying
the beneficial owners\5 of offshore entities and their U.S.  private
banking accounts is maintained in the offshore jurisdiction rather
than in the United States.  Although banking regulators believe that
offshore private banking activities are generally used for legitimate
reasons, there is some concern that they may also serve to camouflage
money laundering and other illegal acts. 

The government's reliance on financial institutions as the first line
of defense against money laundering activities has increased with the
adoption of enhanced suspicious activity reporting rules for banks
issued jointly by Treasury's Financial Crimes Enforcement Network and
the federal depository institution regulators.\6 The revised rules,
which became effective April 1, 1996, require a bank to file a
suspicious activity report pertaining to money laundering when a
transaction at or above $5,000 (1) involves funds derived from
illegal activities or efforts to disguise the nature of such funds,
(2) is intended to evade the Bank Secrecy Act (BSA) requirements, or
(3) is not a normally expected transaction for a particular customer
and appears to have no lawful business purpose.\7

Federal banking regulators consider "know your customer" (KYC)
policies one of the most important components of an institution's
measures for understanding with whom it is doing business,
recognizing unusual transactions, and detecting illegal or suspicious
activities.  These policies are intended to enable the institution to
identify account owners and to recognize the kinds of transactions
that a particular customer is likely to engage in.  Although such
policies are not currently required by regulation or statute, federal
banking regulators expect institutions to incorporate KYC policies in
their operations, and they have developed examination procedures for
determining whether institutions have implemented such policies and
related procedures.  Federal banking regulators are currently in the
process of developing a joint regulation and accompanying guidance
intended to formally require banks to establish KYC policies. 

The Federal Reserve, the Office of the Comptroller of the Currency
(OCC), and the Federal Deposit Insurance Corporation are responsible
for reviewing banks' anti-money-laundering efforts, including their
KYC policies and procedures.  The Federal Reserve and OCC have
primary responsibility for examining and supervising the overseas
branches of U.S.  banks to ascertain the adequacy of their
anti-money-laundering efforts.\8 During the past 2 years, the Federal
Reserve and OCC have focused attention on banks' private banking
activities in an attempt to ensure that they are not used for money
laundering and are not a potential source of reputational or legal
risk\9 to banks.  In 1996, the Federal Reserve Bank of New York
(FRBNY) undertook a focused review of banks' private banking
activities in its district that included coverage of related offshore
activities as well as a review of banks' anti-money-laundering
programs and KYC policies.  This initiative reflected a heightened
supervisory interest in the area arising from the growing market for
private banking, banks' increased reliance on private banking as a
source of income, and a related increase in competition.  Because of
the concentration of private banking activities in the New York
district and its focused efforts in the area, FRBNY assumed a key
role within the Federal Reserve for the oversight of private banking
activities.  FRBNY, on behalf of the Federal Reserve Board, recently
issued a paper on sound practices for private banking activities.\10
At the time of our review, the Federal Reserve Board was also in the
process of issuing a private banking examination manual and
coordinating training for Federal Reserve examiners in the area of
private banking. 


--------------------
\1 See Private Banking:  Information on Private Banking and Its
Vulnerability to Money Laundering (GAO/GGD-98-19R, Oct.  30, 1997). 

\2 Payable through accounts are transaction deposit accounts through
which U.S.  banking entities extend check-writing privileges to
clients of a foreign bank. 

\3 The Internal Revenue Service defines financial secrecy
jurisdictions as jurisdictions having a low or zero rate of 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.  In this report, we use the term "offshore
jurisdictions" to refer to financial secrecy jurisdictions. 

\4 Private investment companies are "shell" companies incorporated in
financial secrecy jurisdictions that are formed to hold client
assets.  Such offshore entities are formed to maintain clients'
confidentiality and for various tax- or trust-related reasons. 

\5 The beneficial owner is the individual or group that controls the
account. 

\6 The federal depository institution regulators involved were the
banking regulators--Federal Reserve Board, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation--and the Office of Thrift Supervision, and the National
Credit Union Administration. 

\7 Banks are also required to file suspicious activity reports for
other types of suspicious activities such as insider abuse. 

\8 The Federal Deposit Insurance Corporation does not routinely
conduct overseas examinations, as the foreign offices of banks under
its direct supervision primarily comprise offshore shell branches or
otherwise represent relatively small operations in terms of their
asset size. 

\9 Reputational risk is the potential that negative publicity
regarding a bank's business practices, whether true or not, will
cause a decline in the customer base, costly litigation, or revenue
reductions.  Legal risk is the potential that unenforceable
contracts, lawsuits, or adverse judgments can disrupt or otherwise
negatively affect the operations or condition of a bank. 

\10 Guidance on Sound Risk Management Practices Governing Private
Banking Activities, July 1997, prepared by FRBNY on behalf of the
Board of Governors of the Federal Reserve System. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Federal banking regulators may review banks' efforts to prevent or
detect money laundering in their offshore private banking activities
during compliance or BSA examinations; safety and soundness
examinations; or, more recently, during targeted examinations of
their private banking activities.  In these examinations, regulators
focus on the bank's compliance program, KYC policies, and internal
controls.  They instruct their examiners to ensure that the bank's
compliance program, and particularly its KYC policies, extend to its
private banking activities.  To guard against offshore entities that
maintain U.S.  private banking accounts from being used for money
laundering or other illicit purposes, examiners are to look for
specific KYC procedures that enable banks to identify and profile the
beneficial owners of private banking accounts.  For private banking
activities conducted by branches of U.S.  banks located in offshore
jurisdictions, examiners rely primarily on the bank's internal audits
to verify that KYC policies are being implemented in offshore
branches where they may be precluded from conducting on-site
examinations. 

Our review of bank examination reports prepared under FRBNY's private
banking initiative showed that the most common deficiency relating to
offshore private banking was a lack of documentation on the
beneficial owners of PICs and other offshore entities that maintain
U.S.  accounts.  FRBNY and OCC examiners noted other deficiencies
during their respective examinations, such as inadequate client
profiles and weak management information systems, that may make it
difficult for banks to monitor client activity for unusual or
suspicious activity.  The bank examinations we reviewed, along with
discussions with examiners and bank officials, indicated that most
banks had started to take corrective actions to address deficiencies
related to offshore private banking activities, but further
improvements were needed.  For example, during follow-up
examinations, examiners found that although banks had started to make
progress on improving client profiles, some of the banks' client
profiles were still inadequate; and other banks were not updating the
profiles for their clients in a timely manner. 

Secrecy laws that restrict access to banking information or that
prohibit on-site examinations of U.S.  bank branches in offshore
jurisdictions represent key barriers to U.S.  oversight of offshore
private banking activities.  The nine offshore jurisdictions we
identified for review have secrecy laws that protect the privacy of
individual account owners, and five of them impose criminal sanctions
for breaches of privacy.  Moreover, federal banking regulators'
attempts to work around restrictions associated with these secrecy
laws are sometimes hampered.  For example, federal banking
regulators' reliance on internal audits to determine how KYC policies
are applied to U.S.  banks' offshore branches is sometimes hindered
by weaknesses in audit coverage of the KYC area.  Regulators also
lacked access to audit workpapers pertaining to branches in certain
offshore jurisdictions and documents containing information on
individual customers.  We also found that all nine offshore
jurisdictions selected for review were engaged in some type of
anti-money-laundering activities.  Their activities ranged from
participating in international task forces aimed at combatting money
laundering to requiring banks to report suspicious activity. 
Although the efforts of individual jurisdictions may contribute to
the international fight against money laundering, it is too early to
ascertain their impact on money laundering or the extent to which the
offshore jurisdictions' secrecy laws will continue to represent
barriers to U.S.  and other foreign regulators. 

We surveyed officials from 15 banks that were asked by FRBNY to
provide documentation on the beneficial owners of PICs and other
offshore entities that maintained U.S.  accounts.  We found that the
officials had a number of concerns.  One common concern related to
perceived inconsistencies within and among federal banking regulators
regarding requests for access to beneficial owner documentation. 
Bank officials also expressed concerns regarding the compromising of
customer confidentiality, potentially violating offshore secrecy
laws, and potentially losing business to other financial institutions
not subject to the same documentation requirements.  In spite of
these concerns, most officials indicated that their banks changed how
they maintain documentation on offshore private banking activities in
response to FRBNY's request for beneficial owner documentation. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine how regulators oversee offshore private banking
activities, we reviewed BSA examination manuals and other agency
documents pertaining to the oversight of private banking and offshore
banking activities.  We also reviewed information on examination
methodology in examination reports and, in a few cases, supporting
workpapers.  We spoke with FRBNY examiners; Federal Reserve Bank of
Atlanta examiners; and OCC examiners in California, New York, and
North Carolina to discuss specific monitoring practices related to
banks engaged in offshore private banking activities. 

To identify deficiencies related to offshore private banking
activities and corrective actions taken by banks, we reviewed 35
examination reports for 21 banks included in FRBNY's private banking
initiative.  We also reviewed 21 OCC examination reports\11

for 6 banks identified as actively involved in offshore private
banking activities.  The banks reviewed do not represent all banks
that may be involved in offshore private banking activities.  They
are a subset of banks with a significant level of offshore assets in
certain jurisdictions identified to be particularly susceptible to
money laundering.  (See app.  I for more information on the
methodology we used to identify banks actively involved in offshore
private banking.) For the most part, examinations reviewed were
conducted during 1996 and 1997.  We interviewed FRBNY and OCC
examiners to determine the extent to which general private banking
deficiencies identified during examinations applied to the banks'
offshore private banking activities or to obtain their perspectives
on the adequacy of corrective actions taken by banks.  In addition,
we followed up with selected banks to obtain an update on the status
of corrective actions that were planned or in process during the last
examination. 

To identify barriers associated with overseeing offshore private
banking activities, we interviewed federal banking regulators and
officials from the Financial Action Task Force (FATF),\12 the
Caribbean Financial Action Task Force (CFATF),\13 the Basle Committee
on Banking Supervision,\14 and the Offshore Group of Banking
Supervisors.\15 We also interviewed officials of the Central Bank of
the Bahamas, Cayman Islands Monetary Authority, and International
Monetary Fund.  In addition, we reviewed reports issued by FATF,
CFATF, and the Offshore Group of Banking Supervisors.  We also
conducted literature searches on the laws of nine offshore
jurisdictions selected for review and on their KYC policies and
policies for reporting suspicious activity.  The nine jurisdictions
are the Bahamas, Bahrain, Cayman Islands, Channel Islands, Hong Kong,
Luxembourg, Panama, Singapore, and Switzerland.  (See app.  I for
more information on how we selected the nine offshore jurisdictions
for review.) 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. 

To obtain industry views about regulatory access to beneficial owner
documentation, we conducted a survey of 15 banks examined by FRBNY
during its recent private banking initiative.  We inquired about
actions the banks had taken or planned to take to comply with FRBNY's
request for access to beneficial owner documentation, the impact of
this request on the banks' private banking business, and the
potential impact on them if regulatory access to beneficial owner
documentation became a requirement. 

Our work was done primarily in New York, NY; San Francisco, CA; and
Washington, D.C., between December 1997 and April 1998 in accordance
with generally accepted government auditing standards. 


--------------------
\11 These reports covered safety and soundness, consumer and BSA
compliance, and KYC policies. 

\12 FATF was established by the G-7 Summit in Paris in 1989 to
examine measures to combat money laundering.  The membership of FATF
comprises 26 countries and 2 regional organizations. 

\13 CFATF is an organization of 19 member states of the Caribbean
basin that have agreed to implement common countermeasures to address
the problem of money laundering.  It was established as a result of
meetings convened in 1990 and 1992. 

\14 The Basle Committee on Banking Supervision is a committee of
banking supervisory authorities that was established by the
central-bank Governors of the Group of Ten countries in 1975.  It
consists of senior representatives of bank supervisory authorities
and central banks. 

\15 The Offshore Group of Banking Supervisors was established in 1980
as a forum for supervisory cooperation among the banking supervisors
in offshore financial centers. 


   REGULATORY EFFORTS TO OVERSEE
   OFFSHORE PRIVATE BANKING
   ACTIVITIES
------------------------------------------------------------ Letter :4

Federal banking regulators may review banks' efforts to prevent or
detect money laundering in their offshore private banking activities
during overall compliance or BSA examinations; safety and soundness
examinations; or, more recently, during targeted examinations of
their private banking activities.  Regulatory oversight of banks'
anti-money-laundering efforts during these examinations reflects an
attempt to assess the commitment of senior bank management to
combatting money laundering while focusing on bank programs for
complying with BSA, corporate KYC policies, and internal controls. 

In the course of these examinations, examiners are to ensure that
banks' anti-money-laundering programs identify high-risk activities,
businesses, and transactions associated with foreign countries viewed
to be particularly susceptible to money laundering.  OCC's BSA
Manual, for example, cites transactions involving private banking and
those involving offshore secrecy jurisdictions as warranting
particular attention during examinations.  The Federal Reserve also
identifies private banking activities, including the establishment of
offshore shell companies, as warranting supervisory attention; and it
provides specific guidance to banks on sound practices for
documenting and exercising due diligence in their conduct of such
private banking activities.  During examinations, examiners are also
tasked with ensuring that banks' compliance programs and KYC policies
extend to their private banking activities, including those that
involve offshore jurisdictions. 


      OFFSHORE PRIVATE BANKING
      ACCOUNTS
---------------------------------------------------------- Letter :4.1

Recognizing that offshore entities, such as PICs, that maintain U.S. 
private banking accounts tend to obscure account holders' true
identities, examiners are to look for specific KYC procedures that
enable banks to identify and profile the beneficial owners of these
offshore entities and their private banking accounts.  In the course
of examinations, examiners may test the adequacy of beneficial owner
documentation maintained in the United States.  However, with the
recent exception of FRBNY, we found no evidence that examiners have
attempted to examine the documentation that banks maintain in
offshore secrecy jurisdictions. 

Examiners we contacted expressed varying views about accessing such
documentation for examination purposes.  Some examiners said that
they do not see a need to examine documents maintained offshore if
they are confident about the bank's commitment to combatting money
laundering and to exercising due diligence when establishing offshore
entities through private banking accounts.  A few examiners expressed
reservations about their ability to compel banks, without the
leverage of a KYC regulation, to obtain documents maintained in
offshore jurisdictions.  Others were uncertain about whether a
request to export documents from certain offshore jurisdictions could
violate their secrecy laws. 

During examinations conducted under its private banking initiative,
FRBNY took a different supervisory approach that involved examiners
seeking 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, verifying whether banks
had the ability to identify and profile the beneficial owners of
offshore entities that maintained U.S.  private banking accounts was
viewed as particularly important, according to officials.  A senior
FRBNY examiner explained that seeking out beneficial owner
documentation was also a way to encourage banks to develop or improve
their systems for maintaining appropriately detailed information on
the beneficial owners of offshore entities that maintain U.S. 
accounts. 


      PRIVATE BANKING ACTIVITIES
      BY OFFSHORE BRANCHES OF U.S. 
      BANKS
---------------------------------------------------------- Letter :4.2

Offshore branches are extensions of U.S.  banks and are subject to
supervision by host countries as well as U.S.  regulators.  However,
they are generally not subject to the BSA and, therefore, U.S. 
banking regulators do not attempt to determine whether offshore
branches are in compliance with this U.S.  anti-money-laundering law. 
Instead, U.S.  banking regulators attempt to identify the branches'
anti-money-laundering efforts and to determine whether the banks'
corporate KYC policies are being applied to activities, such as
private banking activities, that these U.S.  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 or
have restricted access to individual customer information.  They may
also rely on external audits, but they are apparently less prone to
do so, because external audits tend to focus on financial rather than
KYC issues.  In our review of 56 examinations, we noted only 1
instance in which examiners relied on the work of an external auditor
for a review of KYC procedures at a bank's offshore branches. 
Regardless of whether examiners rely on internal or external audits,
officials explained they can bring any significant or recurring
problems identified in an offshore branch's anti-money-laundering
efforts to the attention of the bank's board of directors for
corrective action. 


   DEFICIENCIES RELATED TO
   OFFSHORE PRIVATE BANKING
   ACTIVITIES AND CORRECTIVE
   ACTIONS TAKEN BY BANKS
------------------------------------------------------------ Letter :5

Our review of 1996 and 1997 examinations conducted under the FRBNY's
private banking initiative found that the most prevalent deficiency
related to offshore private banking activities was a lack of
documentation on the beneficial owners of PICs and other offshore
entities that maintained U.S.  accounts.  Our review of FRBNY and OCC
examinations and discussions with examiners indicated that some
deficiencies they identified that were related to private banking in
general, such as inadequate client profiles and weak management
information systems, also pertained to offshore private banking
activities.  We found that banks had started to take corrective
actions to address the deficiencies, but improvements were still
needed. 


      DEFICIENCIES RELATED TO
      OFFSHORE PRIVATE BANKING
      ACTIVITIES
---------------------------------------------------------- Letter :5.1

We found that 9 of the 21 banks whose FRBNY examinations we reviewed
were identified by examiners as lacking information on the beneficial
owners of PICs and other offshore entities that maintained U.S. 
accounts.  FRBNY identified this deficiency at seven foreign banks
and two domestic banks.  Although there is no current regulation
mandating that banks retain information on the beneficial owners of
these offshore entities in the United States, 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. 

We also found in our review of FRBNY and OCC examinations that
examiners identified two U.S.  banks with inadequate KYC policies at
their offshore locations.  Examiners found that one of the banks had
insufficient KYC documentation and had not fully implemented a
transaction monitoring process at its Switzerland branch.  At the
other bank, examiners noted inconsistencies between the local KYC
policy in its Switzerland branch and the bank's corporate policy. 
For example, the examiners noted that the local KYC policy did not
address requirements for obtaining references or maintaining a
documentation tracking system. 


      SOME DEFICIENCIES RELATING
      TO PRIVATE BANKING IN
      GENERAL ALSO APPLIED TO
      OFFSHORE PRIVATE BANKING
      ACTIVITIES
---------------------------------------------------------- Letter :5.2

FRBNY and OCC examination reports and our discussions with examiners
indicated that some deficiencies relating to private banking in
general, such as inadequate client profiles, were also applicable to
banks' offshore private banking activities.  Examiners found that
client profiles contained little or no documentation on the client's
background, source of wealth, expected account activity, and client
contacts and visits by bank representatives.  Regulators specify that
adequate client profiles are a key component of a sound KYC policy
because they enable the bank to more effectively monitor for unusual
or suspicious transactions. 

Another general private banking deficiency pertaining to offshore
private banking activities identified by examiners was weak
management information systems.  Examiners found that some banks'
management information systems did not track client activity or
aggregate related client accounts.  Regulatory KYC guidelines
emphasize the importance of a sound management information system
that can enable banks to track clients' account activity and identify
unusual or suspicious activity. 


      MOST BANKS HAD STARTED
      TAKING ACTIONS TO CORRECT
      DEFICIENCIES, BUT
      IMPROVEMENTS WERE STILL
      NEEDED
---------------------------------------------------------- Letter :5.3

FRBNY's private banking initiative established guidelines to be used
during examinations to monitor banks' progress in implementing
corrective actions, and OCC's BSA examination guidelines also provide
for the monitoring of corrective actions.  Our review of FRBNY's and
OCC's 1996 and 1997 examinations and our discussions with examiners
and bank officials indicated that banks had started to take
corrective actions to address deficiencies related to offshore
private banking activities, but further improvements were needed. 

We noted that most banks were in the process of resolving the problem
of a lack of documentation on the beneficial owners of PICs and other
offshore entities that maintained U.S.  accounts.  Seven of the nine
banks that did not have information on the beneficial owners of these
offshore entities in their clients' U.S.  files were attempting to
resolve the problem, with most either asking clients to sign
confidentiality waivers or reconstructing information on the
beneficial owners from documentation already in their U.S.  offices. 
Of the remaining two banks, one provided examiners with the identity
of the beneficial owners of several PICs that maintained accounts
with the bank.  The other bank, which offered services to offshore
mutual funds, provided examiners with documentation certifying that
the administrator of these funds had applied KYC policies to the
shareholders (i.e., beneficial owners) of the funds. 

The two banks with inadequate KYC policies at their offshore
locations were at different stages of correcting the deficiency.  One
of the banks had made changes to its KYC policies for its Switzerland
branch to make them consistent with its corporate policies.  The
other bank had developed a corporate KYC policy and dedicated
resources towards bringing its KYC policies at the Switzerland branch
into compliance with its corporate policy, but both regulators and
bank officials we spoke with indicated that greater progress was
needed.  Regulators told us that they were going to continue
monitoring the situation. 

Most of the banks with inadequate client profiles were making
progress on improving these profiles, but some shortfalls remained. 
Some of the banks were developing strategies to improve the
documentation on their client profiles.  For example, a few banks
prioritized the process for updating their client base by focusing
first on high-risk accounts such as those associated with PICs.  We
found that despite these efforts, regulators noted that some banks'
client profiles were still inadequate, and other banks were not
updating their clients' profiles in a timely manner.  One bank
official we spoke with explained that updating thousands of client
profiles was much more time intensive than the bank had initially
anticipated. 

We noted that most of the banks identified by examiners as having
weak management information systems were either reviewing their
systems or in the process of installing software to monitor unusual
or suspicious transactions.  Some bank officials and examiners
indicated that regardless of what changes were being made to their
systems, banks would continue to be unable to aggregate international
accounts because some secrecy laws prohibit them from doing so unless
clients sign confidentiality waivers. 


   OFFSHORE JURISDICTIONS' BANK
   SECRECY LAWS REPRESENT KEY
   BARRIERS TO U.S.  REGULATORS'
   OVERSIGHT OF OFFSHORE PRIVATE
   BANKING ACTIVITIES
------------------------------------------------------------ Letter :6

Bank secrecy laws of offshore jurisdictions represent significant
barriers to U.S.  regulators' efforts to oversee offshore private
banking activities.  These secrecy laws, which are intended to
preserve the privacy of individual bank customers, restrict U.S. 
regulators from accessing information on customers and their accounts
and often prohibit regulators from conducting on-site examinations at
U.S.  bank branches in offshore jurisdictions.  In some offshore
jurisdictions, a bank employee found to have violated secrecy laws
may be subject to criminal penalties, including imprisonment. 


      LIMITED REGULATORY ACCESS TO
      INFORMATION IN NINE OFFSHORE
      JURISDICTIONS
---------------------------------------------------------- Letter :6.1

Our review of nine offshore jurisdictions found some limitations that
hindered U.S.  and other foreign banking regulators' access to bank
information.  Secrecy laws to protect the privacy of individual
accounts were in effect in all nine jurisdictions, and five of them
impose criminal penalties on bank employees found to be in violation
of the law (see table 1).  None of the nine jurisdictions typically
provide foreign regulators with access to individual bank account
information, and only two (Hong Kong and Singapore) have allowed U.S. 
regulators to conduct on-site examinations of banking institutions in
their jurisdictions.  Examinations in Singapore were limited to a
review of bank policies and general operations.  The jurisdiction did
not allow examiners to access individual bank account or customer
information. 

Another jurisdiction, the Cayman Islands, has not permitted foreign
regulators to conduct on-site examinations of bank branches located
within its borders in the past, but a Cayman Islands official told us
that U.S.  and other foreign regulators would be allowed into the
Cayman Islands to assess the safety and soundness of branches of
banks under the regulators' supervision.  The official emphasized,
however, that foreign regulators would continue to be prohibited from
looking at documents or files containing individual customer
information. 

Seven of the nine jurisdictions reviewed provide for an exception to
their secrecy laws when criminal investigations are involved.  In
such cases, officials of offshore jurisdictions explained that they
have established judicial processes in their jurisdictions through
which U.S.  and other foreign law enforcement officials may obtain
access to individual bank account or customer information.\16



                                     Table 1
                     
                     Extent of U.S. Regulatory Access to Bank
                           Information in Nine Offshore
                                  Jurisdictions

                   Jurisdiction    U.S. banking    U.S. banking   U.S. judicial
                     has bank       regulators      regulators     authorities
                   secrecy laws   allowed access    allowed to    allowed access
                   that include   to individual    conduct on-    to individual
                     criminal        customer          site          customer
                    sanctions      information    examinations\    information\
                  --------------  --------------  --------------  --------------
Jurisdiction      Yes     No      Yes     No      Yes     No      Yes\a   No
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Bahamas                                                        

Bahrain                                                                

Cayman Islands                                                 

Channel Islands                                                

Hong Kong                                \b                     

Luxembourg                                                             \\\c

Panama                                                         

Singapore                                       \d      \               

Switzerland                                                    
--------------------------------------------------------------------------------
\a A "yes" 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. 

\b In a recent trip to Hong Kong, a U.S.  examiner noted that access
to information, including individual account information, was
provided at a branch of a U.S.  bank. 

\c A mutual legal assistance treaty has been signed with the United
States but not ratified. 

\d Singapore allows limited-scope examinations. 

Source:  Documents from the Internal Revenue Service, the Department
of State, the Federal Reserve, OCC, and the Economist Intelligence
Unit of the United Kingdom; and interviews with officials from FATF,
CFATF, and offshore jurisdictions. 


--------------------
\16 Two conditions must be met for foreign law enforcement officials
to obtain such information:  (1) a criminal investigation must be
under way, which customarily means that a formal judicial process has
been initiated (e.g., a court order has been issued); and (2) the
offshore jurisdiction must have a mutual legal assistance treaty with
the foreign judicial authority requesting access to the information. 


      FEDERAL BANKING REGULATORS'
      EFFORTS TO WORK AROUND
      SECRECY BARRIERS HAVE
      LIMITATIONS
---------------------------------------------------------- Letter :6.2

U.S.  banking regulators are attempting to work around barriers
related to offshore secrecy laws, but they remain hampered by
limitations associated with these efforts.  For example, in
jurisdictions where they have been precluded from conducting on-site
examinations, U.S.  regulators rely primarily on banks' internal
audits to determine how well KYC policies and procedures are being
applied to offshore branches of U.S.  banks.  In our review of
examination reports, however, we found several instances in which
examiners noted that the bank's internal audit inadequately covered
KYC issues pertaining to its private banking activities.  At one
major bank, we also observed that recurring deficiencies in KYC
documentation, monitoring, and training identified by internal audits
of the bank's key private banking offshore branch were allowed to go
unattended for several years.  An examiner explained that this
particular bank, which was undergoing major changes in its private
banking operations, was in the process of correcting weaknesses
identified by regulators, including branch management's lack of
responsiveness to identified internal audit deficiencies. 

Another difficulty impeding regulators' attempts to rely on internal
audits for overseeing offshore branches stems from U.S.  regulators'
inability to review banks' internal audit workpapers in some offshore
jurisdictions that require the retention of such workpapers 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.  One examiner added that without direct access to
either 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. 

Other, more recent attempts by U.S.  regulators to work around
barriers related to offshore secrecy laws also have encountered
limitations.  For example, FRBNY's previously discussed recent
efforts to review beneficial owner documents represented an attempt
to oversee private banking accounts maintained by banks operating in
the United States for offshore entities.  These efforts could not
cover similar accounts or other private banking activities conducted
on behalf of customers who deal directly with offshore branches of
U.S.  banks that are considered to be outside the purview of U.S. 
regulators.  Finally, during 1998, U.S.  regulators visited U.S. 
bank branches located in Hong Kong and Uruguay,\17 also viewed as a
financial secrecy jurisdiction.  Although examiners were given full
access to information requested in Hong Kong, this was not the case
in Uruguay.  An examiner explained that although U.S.  examiners were
not given complete access to account documentation in Uruguay, they
were able to review the branches' local KYC policies and related
quality assurance reviews to help determine the extent of their
anti-money-laundering efforts. 


--------------------
\17 Uruguay was one of three South American countries visited as part
of an OCC anti-money-laundering initiative to conduct on-site reviews
of foreign branches of U.S.  banks. 


      IMPACT OF OFFSHORE
      JURISDICTIONS' ACTIVITIES TO
      COMBAT MONEY LAUNDERING
      REMAINS UNCERTAIN
---------------------------------------------------------- Letter :6.3

We found that all nine offshore jurisdictions selected for review
were engaged in some type of anti-money-laundering activities.  Their
activities ranged from participating in international task forces
aimed at combatting money laundering to requiring their financial
institutions to report suspicious activities.  The efforts of
individual jurisdictions may contribute to the international fight
against money laundering.  However, it remains uncertain what impact
these efforts may have on how the offshore jurisdictions' own banking
sectors operate or on the extent to which their secrecy laws will
continue to represent barriers to U.S.  and other foreign regulators. 

All nine of the offshore jurisdictions reviewed are members of either
the Basle Committee on Banking Supervision or the Offshore Group of
Banking Supervisors (see table 2).  Both of these international
supervisory groups place special emphasis on the on-site monitoring
of banks to ensure, for example, that they have effective KYC
policies.  Seven of the nine offshore jurisdictions reviewed are also
members of either FATF or CFATF, international task forces created to
develop and promote anti-money-laundering policies.  Both of these
task forces have agreed on recommendations that establish a basic
framework for anti-money-laundering efforts in individual countries,
including standard measures intended to increase the due diligence\18
of financial institutions.  For example, one of the recommendations
adopted by the two task forces advocates that financial institutions
be required to report suspicious activity to competent authorities. 



                                Table 2
                
                Nine Offshore Jurisdictions' Membership
                 in International Supervisory Groups or
                   Anti-Money-Laundering Task Forces

                        Basle       Offshore
                        Committee   Group of                Caribbean
                        on Banking  Banking     Financial   Financial
                        Supervisio  Supervisor  Action      Action
Jurisdiction            n           s           Task Force  Task Force
----------------------  ----------  ----------  ----------  ----------
Bahamas                                                    

Bahrain                                        \a

Cayman Islands                                             

Channel Islands                     

Hong Kong                                      

Luxembourg                                     

Panama                                                     

Singapore                                      

Switzerland                                    
----------------------------------------------------------------------
\a Bahrain is not a member country of FATF.  It is, however, a member
of the Gulf Cooperation Council, one of two regional organizations
that participate in FATF. 

Source:  Reports from FATF, CFATF, the Basle Committee on Banking
Supervision, and Offshore Group of Banking Supervisors. 

Membership in such organizations implies that the jurisdiction
intends to work towards the organization's principles and
recommendations, including those related to financial institutions,
such as establishing KYC policies and policies to report suspicious
transactions.  Membership, however, does not necessarily mean that
these principles and recommendations are being adequately followed by
the financial institutions or monitored by the jurisdiction's
government authorities.  We found that eight of the nine offshore
jurisdictions selected for review required banks to report suspicious
transactions to their supervisory authorities (see table 3). 
However, according to CFATF officials, only a few of its members have
an established authority that is capable of monitoring and acting on
such reports.  We also noted that eight of the nine offshore
jurisdictions had established some form of KYC policies or guidelines
for banks operating in their jurisdictions, but the extent to which
such policies are actually being implemented and enforced in these
jurisdictions has yet to be determined. 

Mutual evaluations periodically conducted by FATF or CFATF represent
one indication of how well the organizations' recommendations are
being addressed by individual jurisdictions.\19

All seven offshore jurisdictions that are members of FATF or CFATF
have been assessed through a mutual evaluation (see table 3).  Four
jurisdictions were evaluated by FATF and three by CFATF.  According
to summaries of these evaluations, the Cayman Islands, Luxembourg,
and Switzerland were viewed as having adequately addressed applicable
recommendations, but Hong Kong and Singapore were noted as still in
the process of implementing recommendations.  The summary for Hong
Kong identified some gaps in the jurisdiction's legislative framework
for combatting money laundering.  The summary for Singapore indicated
that although it had begun to address most of the recommendations,
the extent to which they would be implemented was still uncertain. 
The mutual evaluations for Panama and the Bahamas had not been
formally summarized at the time of our review. 



                                Table 3
                
                   KYC Policies, Suspicious Activity
                   Reporting Requirements, and Mutual
                     Evaluations for Nine Offshore
                             Jurisdictions

                         Jurisdiction    Jurisdiction
                           has KYC      requires banks   Jurisdiction
                         policies or      to report       has had a
                        guidelines for    suspicious        mutual
                            banks        transactions    evaluation\
                        --------------  --------------  --------------
Jurisdiction            Yes     No      Yes     No      Yes\a   No
----------------------  ------  ------  ------  ------  ------  ------
Bahamas                                               \b      \

Bahrain                                                       N/A

Cayman Islands                                        1996

Channel Islands                                               N/A

Hong Kong                                             1994    \\

Luxembourg                                            1995

Panama                                                \b

Singapore                                             1995    \

Switzerland                                           1993
----------------------------------------------------------------------
Note:  N/A indicates not applicable because the jurisdiction is not a
country member of either FATF or CFATF. 

\a Year noted in this column indicates the year in which the mutual
evaluation was summarized in the task force's annual report. 

\b At the time of our review, a mutual evaluation had been conducted
but not formally summarized, according to a CFATF official. 

Source:  International Financial Law Review, documents published by
the Institutional Investor, Inc., and various papers presented during
the 7th International Conference on Money Laundering, Cyberpayments,
Corporate and Bank Security, and International Financial Crimes. 
Also, interviews with officials from FATF, CFATF, and offshore
jurisdictions. 


--------------------
\18 Examples of due diligence include determining the client's source
of wealth and understanding the types of transactions the client will
typically conduct. 

\19 FATF and CFATF have developed a peer review process known as
mutual evaluations to monitor members' adherence to the groups'
recommendations.  The results of these evaluations are summarized in
the two groups' annual reports.  Individual evaluation reports by
jurisdictions are also issued, but we were unable to review these
individual reports because they are subject to restricted access. 


   INDUSTRY CONCERNS REGARDING
   REGULATORY ACCESS TO BENEFICIAL
   OWNER DOCUMENTATION
------------------------------------------------------------ Letter :7

Officials from 15 banks we surveyed expressed a number of concerns
over FRBNY's request that they provide its examiners with
documentation on the beneficial owners of PICs and other offshore
entities that maintain U.S.  accounts.  One of their most prevalent
concerns related to perceived inconsistencies within and among
regulators regarding requests for access to beneficial owner
documentation, which was of concern to 10 of the 15 bank officials. 
Some officials observed that only banks supervised by FRBNY were
asked to provide access to this documentation, but banks supervised
by the Federal Reserve in Atlanta and OCC were not. 

Officials from 9 of the 15 banks also expressed concerns over
compromising their clients' confidentiality.  They indicated that
providing FRBNY with access to documentation on the beneficial owners
of PICs and other offshore entities that maintain U.S.  accounts
would likely displease their clients, who typically regard
confidentiality as a valuable means of ensuring that their banking
information is inaccessible to their home governments or to litigants
filing lawsuits.  Officials from 6 of the 15 banks were also
concerned that if they complied with FRBNY's request, their banks
could be held liable for breaching confidentiality in the offshore
jurisdictions. 

Another concern, which was expressed by officials from 7 of the 15
banks, involved a potential loss of business because of the "uneven
playing field." They believed beneficial owner documentation
requirements created an additional burden for banks compared to other
financial institutions, including securities broker/dealers, that are
engaged in private banking activities, such as managing and
maintaining accounts for PICs.  Although these firms are engaged in
private banking activities similar to those offered by banks, they
are not yet subject to regulations requiring the reporting of
suspicious transactions.\20

Bank officials also expressed concerns over the effect pending KYC
regulations might have on regulatory access to beneficial owner
documentation.  We sought the views of bank officials on two possible
approaches to regulatory access to such documentation.  The first
approach would be for banks to routinely retain records in the United
States on the beneficial owners of offshore entities that maintain
U.S.  private banking accounts.  The second approach would be for
banks to bring records on the beneficial owners of these offshore
entities into the United States only if requested during an
examination.  We found that both approaches caused a similar level of
concern, with some bank officials stating that the bank would need to
make the same changes to how it maintains documentation on the
beneficial owners of offshore entities in either case.  Bank
officials believed that for the most part, under both approaches,
their banks would be at a competitive disadvantage with other
financial institutions (e.g., securities broker/dealers, foreign
banks) not subject to the same requirement.  To a great extent, bank
officials also said that either of these approaches would cause them
to lose the business of foreign clients.  See appendix II for the
banks' views on these two approaches. 


--------------------
\20 The Securities and Exchange Commission and Treasury's Financial
Crimes Enforcement Network are working together to develop
regulations for broker/dealers regarding suspicious activity reports,
according to officials from both agencies.  At the time of our
review, these regulations had not yet been issued. 


      BANKS CHANGING PROCEDURES TO
      PROVIDE FRBNY WITH ACCESS TO
      BENEFICIAL OWNER
      DOCUMENTATION
---------------------------------------------------------- Letter :7.1

In spite of their concerns, officials from 11 of the 15 banks
surveyed indicated that their banks had changed the way they maintain
documentation on the beneficial owners of offshore entities that have
U.S.  accounts.  Officials from the remaining four banks indicated
that their banks already had such documentation in their U.S.  files
as a matter of bank policy.  We found that 6 of the 11 banks that
changed the way they maintain beneficial owner documentation were in
the process of obtaining confidentiality waivers from their clients
who were the beneficial owners of PICs and other offshore entities. 
Officials from the remaining five banks indicated that their banks
could reconstruct information on the beneficial owners of these
offshore entities from information they already maintain in their
U.S.  files. 


      TOO EARLY TO DETERMINE
      IMPACT OF CHANGES ON BANKS'
      PRIVATE BANKING BUSINESS
---------------------------------------------------------- Letter :7.2

We found that of the 11 banks that changed the way they maintain
documentation on the beneficial owners of offshore entities that have
U.S.  accounts, 9 were unable to provide us with specific information
on the impact these changes have had on their private banking
business.  Officials from five of the nine banks indicated that it
was too early to determine the impact because they had only recently
begun this process.  Officials from two banks were able to provide us
with some preliminary information.  In 1 case, the bank requested
confidentiality waivers from 16 clients and reported that 15 of the
clients agreed to sign waivers.  The single client who refused to
sign a waiver reportedly closed his account.  In another case, the
bank asked 116 clients to sign confidentiality waivers.  In this
case, 31 of the 116 clients, or 27 percent, did not sign the waivers. 
Twenty-six of these 31 clients transferred their accounts to the
bank's offshore affiliates; the other 5 clients closed their
accounts, according to the bank officials we surveyed. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

The Federal Reserve and OCC provided written comments on a draft of
this report.  (See apps.  III and IV).  Both agencies generally
agreed with our analysis and observations on the oversight of private
banking activities involving offshore jurisdictions.  We also
obtained oral comments of a technical nature from the Federal Reserve
and OCC that have been incorporated in the report where appropriate. 


---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you announce the contents of this
report earlier, we plan no further distribution until 30 days after
the date of this letter.  At that time, we will send copies of this
report to the Ranking Minority Member of your Subcommittee and to the
Chairmen and Ranking Minority Members of other interested
congressional committees, the Chairman of the Federal Reserve Board,
the Comptroller of the Currency, and the Chairman of the Federal
Deposit Insurance Corporation.  We will also make copies available to
others on request. 

Major contributors to this report are listed in appendix V.  Please
call me on (202) 512-8678 if you or your staff have any questions
about the report. 

Sincerely yours,

Susan S.  Westin
Associate Director, Financial Institutions
 and Markets Issues


METHODOLOGY FOR IDENTIFYING BANKS
ACTIVELY INVOLVED IN OFFSHORE
PRIVATE BANKING
=========================================================== Appendix I

We found in our prior work on private banking that there was no
comprehensive database on the extent of private banking activities,
let alone offshore private banking activities, by banks or other
financial institutions operating in the United States.\21 We also
found that the most recent information identified on private banking
in the United States was a general overview of the area, which did
not consistently identify the providers that were engaged in
international, specifically offshore, activities.\22 Given this
constraint, we attempted to identify banks that were actively
involved in offshore private banking activities by first identifying
banks with large amounts of assets in selected offshore
jurisdictions, then determining through input from regulators if
these banks were engaged in offshore private banking activities
involving these jurisdictions.  Our methodology is described in
greater detail below. 

We identified 16 banks that were actively involved in offshore
private banking activities.  We supplemented this group of banks with
information from the Federal Reserve Bank of New York (FRBNY) on
banks in its district involved in private banking activities.  This
FRBNY information helped us identify an additional nine banks
actively involved in offshore private banking activities.  In total,
we identified 25 banks for our review.  It should be noted that these
banks do not represent all banks that may be involved in offshore
private banking activities, only a subset of banks with a significant
level of offshore assets in certain jurisdictions identified to be
particularly susceptible to money laundering. 


--------------------
\21 See Private Banking:  Information on Private Banking and Its
Vulnerability to Money Laundering (GAO/GGD-98-19R, Oct.  30, 1997). 

\22 Private Banking Register, 1996, Worth Magazine Supplement. 


      METHODOLOGY TO IDENTIFY
      BANKS ACTIVELY INVOLVED IN
      OFFSHORE PRIVATE BANKING
      ACTIVITIES
------------------------------------------------------- Appendix I:0.1

We applied the following steps to identify banks actively involved in
offshore private banking activities. 

Step 1:  Identified offshore jurisdictions that represent areas
particularly susceptible to money laundering. 

We identified 17 offshore jurisdictions that were viewed as financial
secrecy havens and particularly susceptible to money laundering.  We
identified these jurisdictions using information from the Internal
Revenue Service, the Department of State, and the Economist
Intelligence Unit of the United Kingdom. 

Step 2:  Identified which of the 17 offshore jurisdictions had a
"significant" amount of assets managed or controlled by banks
operating in the United States. 

We identified nine jurisdictions--the Bahamas, Bahrain, the Cayman
Islands, the Channel Islands, Hong Kong, Luxembourg, Panama,
Singapore, and Switzerland--that had a significant amount of assets
managed or controlled by banks operating in the United States.  We
identified these jurisdictions on the basis of a minimum threshold of
$1 billion in total U.S.  bank branch or subsidiary assets.  Our
source of asset information was a report generated by the Federal
Reserve on foreign branches and subsidiaries of U.S.  banks. 

Step 3:  Identified banks with a significant amount of assets in one
or more of the nine offshore jurisdictions identified in step 2. 

We used two thresholds, one for domestic banks and the other for
foreign banks, to determine which banks had a significant amount of
assets in any of the nine offshore jurisdictions selected for review. 
For domestic banks we identified 29 banks that met a minimum
threshold of $1 billion.  For the foreign banks we identified nine
banks that met a minimum threshold of $10 billion.  Our key sources
of information were reports generated by the Federal Reserve on
foreign branches and subsidiaries of U.S.  banks and on non-U.S. 
branches that are managed or controlled by a U.S.  branch or agency
of a foreign (non-U.S.) bank. 

Step 4:  Determined if banks identified in step 3 were engaged in
offshore private banking activities involving any of the nine
offshore jurisdictions. 

We asked banking regulators to verify whether the banks identified in
step 3 were actively involved in offshore private banking activities. 
They identified 16 banks as actively involved in offshore private
banking activities.  Ten of these banks were supervised by the
Federal Reserve, and the remaining 6 were supervised by the Office of
the Comptroller of the Currency. 


ALTERNATIVE APPROACHES TO
REGULATORY ACCESS TO BENEFICIAL
OWNER DOCUMENTATION
========================================================== Appendix II

As part of our survey of 15 banks that had been examined by FRBNY
during its private banking initiative, we sought the views of bank
officials on two approaches that were being considered by the Federal
Reserve to regulatory access to documentation on the beneficial
owners of PICs and other offshore entities that maintain U.S. 
accounts.  The first approach would be for banks to routinely retain
records in the United States on the beneficial owners of offshore
entities that maintain U.S.  private banking accounts.  The second
approach would be for banks to bring records on the beneficial owners
of these offshore entities into the United States only if requested
during an examination.  We found that bank officials had a similar
level of concern with both approaches, with some officials stating
that the bank would need to make the same changes to how it maintains
documentation on the beneficial owners of these offshore entities
under either approach. 

Below are the questions from our survey that we used to solicit the
views of bank officials on the two approaches to regulatory access to
beneficial owner documentation.  The tables show the number of bank
officials who responded in a given category.  Bank officials did not
consistently provide their input on all of the categories; therefore,
the responses in each row do not always add up to 15, the total
number of banks surveyed. 

"If your bank were to routinely maintain records on the beneficial
owners of offshore accounts in the United States for regulatory
oversight purposes, how likely or unlikely would the following occur? 
(Please check one box in each row.)"

                                                  As
                                              likely              Very
                            Very  Somewhat        as  Somewhat  unlike  No basis
                          likely    likely  unlikely  unlikely      ly  to judge
------------------------  ------  --------  --------  --------  ------  --------
Change the way you do          9                             1       3         1
 business (e.g., ask
 clients to sign
 confidentiality waivers
 up-front)
Lose business to other         8         3                           1         2
 banks and/or financial
 institutions (e.g.
 brokerage houses) that
 do not have this
 requirement
Lose business primarily       11         1         2
 of foreign clients who
 value their
 confidentiality
Transfer accounts of           5         2         3                 1         2
 foreign clients to
 offshore affiliates
Change your approach to        5         2                   2       5
 the private banking
 business (e.g, reduce
 the size or eliminate
 the bank's private
 banking business in the
 United States)
Other changes: Trust           1
 company in offshore
 location would have to
 counsel its clients to
 direct their assets
 elsewhere (i.e.,
 outside of the United
 States)
Other changes: Increase        1
 in civil litigation
 against clients because
 information will be
 readily available.
Other changes: Lose            1
 account officers to
 other financial
 institutions with less
 stringent requirements.
--------------------------------------------------------------------------------
n = 15

Note:  A few officials suggested that other changes were somewhat
likely to occur, including added system requirements to track
accounts and an increase in compliance staff, the cost of doing
business, and the amount of training required of client advisors. 

"Alternatively, if your bank were to bring records on the beneficial
owners of offshore accounts (e.g., PICs, trusts, offshore mutual
funds) into the United States only upon request during an
examination, how likely or unlikely would the following occur? 
(Please check one box in each row.)"

                                                  As
                                              likely              Very
                            Very  Somewhat        as  Somewhat  unlike  No basis
                          likely    likely  unlikely  unlikely      ly  to judge
------------------------  ------  --------  --------  --------  ------  --------
Change the way you do          8                                     2         1
 business (e.g., ask
 clients to sign
 confidentiality waivers
 up-front)
Lose business to other         7         1                   2                 1
 banks and/or financial
 institutions (e.g.
 brokerage houses) that
 do not have this
 requirement
Lose business primarily        8         2                   1
 of foreign clients who
 value their
 confidentiality
Transfer accounts of           6                   1         1       1         2
 foreign clients to
 offshore affiliates
Change your approach to        5         1                   2       3
 the private banking
 business (e.g, reduce
 the size or eliminate
 the bank's private
 banking business in the
 United States)
Other changes: Trust           1
 company in offshore
 location would have to
 counsel its clients to
 direct their assets
 elsewhere (i.e.,
 outside of the United
 States)
Other changes: Increase        1
 in civil litigation
 against clients because
 information will be
 readily available.
Other changes: Lose            1
 account officers to
 other financial
 institutions with less
 stringent requirements.
--------------------------------------------------------------------------------
n = 15




(See figure in printed edition.)Appendix III
COMMENTS FROM THE FEDERAL RESERVE
BOARD
========================================================== Appendix II




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
========================================================== Appendix II


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Tamara E.  Cross, Senior Evaluator

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Rachel DeMarcus, Senior Attorney

SAN FRANCISCO FIELD OFFICE

Kane A.  Wong, Assistant Director
Evelyn E.  Aquino, Evaluator-in-Charge
Jos R.  Pea, Senior Evaluator
Gerhard Brostrom, Communications Analyst


*** End of document. ***