''Know Your Customer'' Section 601.0

‘‘Know Your Customer’’

Section 601.0

INTRODUCTION

One of the most important, if not the most

important, means by which ﬁnancial institutions

can hope to avoid criminal exposure to the

institution by ‘‘customers’’ who use the resources

of the institution for illicit purposes is to have a

clear and concise understanding of the ‘‘custom-

ers’’’ practices. The adoption of ‘‘know your

customer’’ guidelines or procedures by ﬁnancial

institutions has proven extremely effective in

detecting suspicious activity by ‘‘customers’’ of

the institution in a timely manner.

Even though not presently required by regu-

lation or statute, it is imperative that ﬁnancial

institutions adopt ‘‘know your customer’’ guide-

lines or procedures to ensure the immediate

detection and identiﬁcation of suspicious activ-

ity at the institution. The concept of ‘‘know your

customer’’ is, by design, not explicitly deﬁned

so that each institution can adopt procedures

best suited for its own operations. An effective

‘‘know your customer’’ policy must, at a mini-

mum, contain a clear statement of manage-

ment’s overall expectations and establish

speciﬁc line responsibilities. While the ofﬁcers

and staff of smaller banks, Edge corporations,

and foreign branches or agencies may have

more frequent and direct contact with customers

than large urban institutions, it is incumbent

upon all institutions to adopt and follow policies

appropriate to their size, location, and type of

business.

OBJECTIVES OF ‘‘KNOW YOUR

CUSTOMER’’ POLICY

• A ‘‘know your customer’’ policy should

increase the likelihood that the ﬁnancial insti-

tution is in compliance with all statutes and

regulations and adheres to sound and recog-

nized banking practices.

• A ‘‘know your customer’’ policy should

decrease the likelihood that the ﬁnancial insti-

tution will become a victim of illegal activities

perpetrated by its ‘‘customers.’’

• A ‘‘know your customer’’ policy that is effec-

tive will protect the good name and reputation

of the ﬁnancial institution.

• A ‘‘know your customer’’ policy should not

interfere with the relationship of the ﬁnancial

institution with its good customers.

CONTENTS OF ‘‘KNOW YOUR

CUSTOMER’’ POLICY

In developing an effective ‘‘know your cus-

tomer’’ policy it is important to note that

appearances can be deceiving. Potential custom-

ers of a ﬁnancial institution may appear to be

legitimate, but in reality are conducting illicit

activities through the ﬁnancial institution. Like-

wise, legitimate customers may be turned away

from the institution because their activities are

perceived to have a criminal tone. It is also

important to realize that various inﬂuences on

legitimate customers may transform such cus-

tomers into wrongdoers.

At the present time there are no statutorily

mandated procedures requiring a ‘‘know your

customer’’ policy or specifying the contents of

such a policy. However, in order to develop and

maintain a practical and useful policy, ﬁnancial

institutions should incorporate the following

principles into their business practices:

• Financial institutions should make a reason-

able effort to determine the true identity of all

customers requesting the bank’s services;

• Financial institutions should take particular

care to identify the ownership of all accounts

and of those using safe-custody facilities;

• Identiﬁcation should be obtained from all new

customers;

• Evidence of identity should be obtained from

customers seeking to conduct signiﬁcant busi-

ness transactions;

• Financial institutions should be aware of any

unusual transaction activity or activity that

is disproportionate to the customer’s known

business.

An integral part of an effective ‘‘know your

customer’’ policy is a comprehensive knowl-

edge of the transactions carried out by the

customers of the ﬁnancial institution. Therefore,

it is necessary that the ‘‘know your customer’’

procedures established by the institution allow

for the collection of sufﬁcient information to

Bank Secrecy Act Manual September 1997

Page 1

develop a ‘‘customer proﬁle.’’ The primary

objective of such procedures is to enable the

ﬁnancial institution to predict with relative cer-

tainty the types of transactions in which a

customer is likely to be engaged. The customer

proﬁle should allow the ﬁnancial institution to

understand all facets of the customer’s intended

relationship with the institution, and, realisti-

cally, determine when transactions are suspi-

cious or potentially illegal. Internal systems

should then be developed for monitoring trans-

actions to determine if transactions occur which

are inconsistent with the ‘‘customer proﬁle.’’ A

‘‘know your customer’’ policy must consist of

procedures that require proper identiﬁcation of

every customer at the time a relationship is

established in order to prevent the creation of

ﬁctitious accounts. In addition, the bank’s

employee education program should provide

examples of customer behavior or activity which

may warrant investigation.

IDENTIFYING THE CUSTOMER

As a general rule, a business relationship with

a ﬁnancial institution should never be estab-

lished until the identity of a potential cus-

tomer is satisfactorily established. If a potential

customer refuses to produce any of the

requested information, the relationship should

not be established. Likewise, if requested

follow-up information is not forthcoming, any

relationship already begun should be termi-

nated. The following is an overview of general

principles to follow in establishing customer

relationships:

Personal Accounts

1. No account should be opened without satis-

factory identiﬁcation, such as:

• a driver’s license with a photograph issued

by the State in which the bank is located;

• a U.S. passport or alien registration card,

together with:

• a college photo identiﬁcation card;

• a major credit card (verify the current

status);

• an employer identiﬁcation card;

• an out-of-State driver’s license; and/or

• electricity, telephone.

2. Consider the customer’s residence or place

of business. If it is not in the area served by

the bank or branch, ask why the customer is

opening an account at that location.

3. Follow up with calls to the customer’s resi-

dence or place of employment thanking the

customer for opening the account. Discon-

nected phone service or no record of employ-

ment warrant further investigation.

4. Consider the source of funds used to open the

account. Large cash deposits should be

questioned.

5. For large accounts, ask the customer for a

prior bank reference and write a letter to the

bank asking about the customer.

6. Check with service bureaus for indications

the customer has been involved in question-

able activities such as kiting incidents and

NSF situations.

7. The identity of a customer may be estab-

lished through an existing relationship with

the institution such as some type of loan or

other account relationship.

8. A customer may be a referral from a bank

employee or one of the bank’s accepted

customers. In this instance, a referral alone is

not sufﬁcient to identify the customer, but in

most instances it should warrant less vigi-

lance than otherwise required.

Business Accounts

1. Business principals should provide evidence

of legal status (e.g. sole proprietorship, part-

nership, or incorporation or association) when

opening a business account.

2. Check the name of a commercial enterprise

with a reporting agency and check prior bank

references.

3. Follow up with calls to the customer’s busi-

ness thanking the customer for opening the

account. Disconnected phone service war-

rants further investigation.

4. When circumstances allow, perform a visual

check of the business to verify the actual

existence of the business and that the busi-

ness has the capability of providing the

services described.

5. Consider the source of funds used to open the

account. Large cash deposits should be

questioned.

6. For large commercial accounts, the following

information should be obtained:

601.0 ‘‘Know Your Customer’’

September 1997 Bank Secrecy Act Manual

Page 2

• a ﬁnancial statement of the business;

• a description of the customer’s principal

line of business;

• a list of major suppliers and customers and

their geographic locations;

• a description of the business’s primary

trade area, and whether international trans-

actions are expected to be routine; and

• a description of the business operations

i.e., retail versus wholesale, and the antici-

pated volume of cash sales.

LOAN TRANSACTIONS

It is important to realize that relationships with a

ﬁnancial institution that take a form other than

deposit accounts can be used for illicit purposes.

Loan transactions have become a common vehi-

cle for criminal enterprises that wish to take

advantage of the proceeds of their illegal activi-

ties. Therefore, prudent ﬁnancial institutions

should apply their ‘‘know your customer’’ pol-

icy to customers requesting credit facilities from

the institution.

SUSPICIOUS CONDUCT AND

TRANSACTIONS

In making a determination as to the validity of a

customer, there are certain categories of activi-

ties that are suspicious in nature and should alert

ﬁnancial institutions as to the potential for the

customer to conduct illegal activities at the

institution. The categories, broadly deﬁned, are:

• Insufﬁcient, false, or suspicious information

provided by the customer.

• Cash deposits which are not consistent with

the business activities of the customer.

• Purchase and/or deposits of monetary instru-

ments which are not consistent with the busi-

ness activities of the customer.

• Wire transfer activity which is not consistent

with the business activities of the customer.

• Structuring of transactions to evade record-

keeping and/or reporting requirements.

• Funds transfers to foreign countries.

The general categories, delineated above, can

be broken down into various functions of the

ﬁnancial institution. Set forth below are more

speciﬁc suspicious activities as related to the

various functions of the ﬁnancial institution:

Tellers and Lobby Personnel

• Customer is reluctant to provide any informa-

tion requested for proper identiﬁcation.

• Customer opens a number of accounts under

one or more names and subsequently makes

deposits of less than $10,000 in cash in each

of the accounts.

• Customer is reluctant to proceed with a trans-

action after being informed that a Currency

Transaction Report (CTR) will be ﬁled, or

withholds information necessary to complete

the form.

• Customer makes frequent deposits or with-

drawals of large amounts of currency for no

apparent business reason, or for a business

whichgenerallydoesnotinvolvelargeamounts

of cash.

• Customer exchanges large amounts of cur-

rency from small to large denomination bills.

• Customer makes frequent purchases of mone-

tary instruments for cash in amounts less than

$10,000.

• Customers who enter the bank simultaneously

and each conduct a large currency transaction

under $10,000 with different tellers.

• Customer who makes constant deposits of

funds into an account and almost immediately

requests wire transfers to another city or

country, and that activity is inconsistent with

the customer’s stated business.

• Customer who receives wire transfers and

immediately purchases monetary instruments

for payment to another party.

• Trafﬁc patterns of a customer change in the

safe deposit box area possibly indicating the

safekeeping of large amounts of cash.

• Customer discusses CTR ﬁling requirements

with the apparent intention of avoiding those

requirements or makes threats to an employee

to deter the ﬁling of a CTR.

• Customer requests to be included on the

institution’s exempt list.

Bookkeeping and Wire Transfer

Operations

• Customer who experiences increased wire

activity when previously there has been no

regular wire activity.

‘‘Know Your Customer’’ 601.0

Bank Secrecy Act Manual September 1997

Page 3

• International transfers for accounts with no

history of such transfers or where the stated

business of the customer does not warrant

such activity.

• Customer receives many small incoming wire

transfers or deposits of checks and money

orders then requests wire transfers to another

city or country.

• Customer uses wire transfers to move large

amounts of money to a bank secrecy haven

country.

• Request from nonaccountholder to receive or

send wire transfers involving currency from

nonaccountholder near the $10,000 limit or

that involve numerous monetary instruments.

• Nonaccountholder receives incoming wire

transfers under instructions to the bank to

‘‘Pay Upon Proper Identiﬁcation’’ or to con-

vert the funds to cashier’s checks and mail

them to the nonaccountholder.

Loan Ofﬁcers and Credit

Administration Personnel

• Customer’s stated purpose for the loan does

not make economic sense, or customer pro-

poses that cash collateral be provided for a

loan while refusing to disclose the purpose of

loan.

• Requests for loans to offshore companies, or

loans secured by obligations of offshore banks.

• Borrower pays down a large problem loan

suddenly, with no reasonable explanation of

the source of funds.

• Customer purchases certiﬁcates of deposit and

uses them as loan collateral.

• Customer collateralizes loan with cash deposit.

• Customer uses cash collateral located offshore

to obtain loan.

• Loan proceeds are unexpectedly channeled

off-shore.

601.0 ‘‘Know Your Customer’’

September 1997 Bank Secrecy Act Manual

Page 4

Wire Transfer Systems

Section 701.0

INTRODUCTION

As ﬁnancial institutions, law enforcement agen-

cies, and ﬁnancial regulators have increased

their scrutiny of cash transactions, money laun-

derers have become more sophisticated in using

all services and tools available to launder cash

and move funds, including the wire transfer

systems. This section will provide some back-

ground and information on how the different

wire transfer systems work, how these systems

are used by money launderers, and how exam-

iners should review a bank’s wire transfers

operations as part of the examination for com-

pliance with the Bank Secrecy Act.

WIRE TRANSFER SYSTEMS

There are three wire transfer systems used in the

United States by ﬁnancial institutions—Fedwire,

CHIPS, and S.W.I.F.T. All three systems share

the same characteristics of high dollar value of

the individual transfers, a real time system, and

a widely distributed network of users. There are

important differences, however, and these will

be discussed below. In order to examine an

institution’s wire transfer function thoroughly, it

is important to understand how the system(s)

works. Each of the three wire transfer systems

will be looked at below.

Fedwire

Fedwire is the funds transfer system operated by

the Federal Reserve System. The Fedwire sys-

tem may be used by any institution holding an

account with a Federal Reserve Bank and it is

principally domestic in orientation. It is a real-

time system characterized by the instantaneous,

irrevocable transfer of funds. As a ‘‘wholesale’’

wire transfer system, Fedwire is primarily used

to transfer funds between ﬁnancial institutions

and their major corporate customers. There are

no restrictions on the minimum dollar size of

Fedwire transfers, and individuals and small

businesses can and do use Fedwire by going

through their ﬁnancial institution.

A ﬁnancial institution can originate a Fedwire

message in one of two ways—‘‘on-line’’ or

‘‘off-line.’’ On-line institutions have an elec-

tronic connection to the Federal Reserve, and

off-line institutions have no such connection

and usually telephone the Federal Reserve

to initiate a transfer. The large, high volume

institutions use a direct computer-to-computer

connection with Fed to originate funds transfers

over Fedwire, and the other on-line institutions

use a leased line connection or a telephone

dial-up system to connect a PC to the Fedwire

system. Because the settlement of all Fedwire

transfers is made through reserve accounts main-

tained at the Federal Reserve Banks, all transfers

go through a Reserve Bank for routing and

settlement.

Off-line institutions usually telephone the Fed

and give instructions over the phone using a

prearranged codeword. The Fed veriﬁes the

codeword and enters the message into the elec-

tronic system for processing and sending to the

receiving institution. Fedwire transfers sent to

an off-line institution are credited immediately,

and the institution is either notiﬁed by phone

from the Fed or by copy of the Fedwire message

sent to the institution the next day.

The actual transfer of funds in the Fedwire

system takes place on the books of the Federal

Reserve. For a transfer to an institution in the

same Federal Reserve District, the Federal

Reserve Bank, upon receiving the Fedwire

instructions from the originating institution, deb-

its the account of the originator and credits the

account of the receiving institution. For interd-

istrict transfers, the ‘‘local’’ FR Bank debits the

account of the originator and credits the account

of the ‘‘receiving’’ FR Bank, which, in turn,

credits the account of the receiving institution.

CHIPS

CHIPS (Clearing House Interbank Payments

System) is a privately owned and operated funds

transfer system. It is owned and operated by the

New York Clearing House Association. CHIPS

currently has 128 members who are primarily

money center banks in New York, Chicago, and

San Francisco as well as large international

banks.

CHIPS has its own communications network

and processes its own messages for member

institutions. During the day CHIPS maintains

Bank Secrecy Act Manual September 1997

Page 1

the net credit and debit positions of members

while routing messages from sender to receiver.

Although used primarily for international trans-

fers, CHIPS is used to a small extent for

domestic transfers between U.S. banks and can

be used as an alternative to Fedwire if both the

sending and receiving institutions are CHIPS

members.

In CHIPS the transfer of funds does not occur

with the sending of the message. Rather, at the

end of each day any of the 30 CHIPS settlement

participants that are in a net debit position wire

funds by Fedwire to the CHIPS account at the

New York Fed and CHIPS sends these funds to

the banks in a net credit position by Fedwire.

This end of day settlement feature is the biggest

difference between Fedwire and CHIPS, and it

also puts CHIPS participants at risk if a partici-

pating bank should fail or is unable to cover its

position.

S.W.I.F.T.

SWIFT stands for the Society for Worldwide

Interbank Financial Telecommunications. It is a

cooperatively owned, non-proﬁt organization

which was founded in 1973 to serve the data

processing and telecommunications needs of its

members. SWIFT currently has members in

most countries throughout the world. The mem-

bership base is very broad and includes com-

mercial banks, investment banks, securities

broker/dealers, and other ﬁnancial institutions.

As its name implies, SWIFT handles all sorts

of telecommunications for its member institu-

tions. Transfers of funds are only one use of

SWIFT, others being securities transfers, letters

of credit, advices of collection, foreign exchange,

and free format information messages. All mes-

sages are sent through the SWIFT network,

SWIFT’s privately owned, worldwide telecom-

munications network. Because of the availabil-

ity of Fedwire and CHIPS, SWIFT is used

almost exclusively by U.S. banks for interna-

tional funds transfers and messages.

A SWIFT funds transfer message is simply

notiﬁcation that funds are being transferred. The

actual movement of funds is independent of the

message, and transfers are effected in two com-

mon ways. The ﬁrst method is to transfer the

funds by transferring balances through mutual

correspondent banks, and the second method is

to settle through Fedwire or CHIPS.

A bank’s SWIFT operations are usually

located in its international department, although

additional terminals with SWIFT access could

be located in the foreign exchange department

or the securities trading department.

HOW A COMMERCIAL BANK’S

WIRE ROOM WORKS

In order to examine the Fedwire operations of a

commercial bank, it is important to understand

how the ‘‘wire room’’ of a commercial bank

operates. In the larger banks with a signiﬁcant

volume of wire trafﬁc, there may be a depart-

ment dedicated to this function. In most banks,

however, the Fedwire volume does not justify a

full time staff or person, and the sending and

receiving of wires may be part-time responsi-

bilities for one or several people. Every bank has

its own procedures for handling wires, but there

are enough features in common to allow for

generic descriptions for large and small banks.

Large Banks

Large banks with a Fedwire volume of several

hundred messages per day will most likely use

dedicated computer resources for Fedwire—

either part of the bank’s host computer or a

separate minicomputer. These banks utilize a

computer-to-computer (computer interface) elec-

tronic link with the Fed, which allows for faster

transmission of high volumes. The software

used for wire transfers, either developed in-

house or purchased from a vendor, allows for

automatic posting to DDA and general ledger.

The wire room may receive payment orders

from several different sources, including autho-

rized personnel from within the bank and cor-

porate customers who may either call the bank,

fax instructions, or even have an on-line con-

nection with the bank to send wire instructions

and access other bank services. Phone calls to

the wire room are recorded for security and

audit reasons, and the tapes are usually main-

tained for a 30 day period. The bank should have

procedures in place to verify payment orders.

These procedures usually include the use of

code words, call backs, and corporate resolu-

tions authorizing certain employees to send

wires. Veriﬁcation and security procedures are

701.0 Wire Transfer Systems

September 1997 Bank Secrecy Act Manual

Page 2

extremely important in light of the potential for

high losses.

After a payment order is received, a Fedwire

message is entered into the bank’s system at an

on-line terminal. Before the wire is sent to the

Fed, it is sent to a second terminal to be veriﬁed

for accuracy as well as proper authorization.

Only after the payment order is reviewed by the

second staff member is it sent to the Fed for

processing. This separation of duties is extremely

important to ensure security.

The bank’s software will maintain data on

each day’s transfers in several different ways.

These might include a listing by wires sent and

received, wires listed by amount, wires listed by

sequence number, and wires listed by account

holder. Most software systems maintain the

work of several previous days, often the last 5 to

7 days, to allow for on-line access to trace errors

and problems. After the 5 to 7 days, the data

may be maintained on microﬁche or paper

listing.

Smaller Banks

Smaller banks with a low volume of Fedwire

transactions will typically have one or several

staff members handling the sending and receiv-

ing of wires over a connection from the bank’s

PC to the Fed’s mainframe. The PC connection

is called Fedline, and the software is supplied by

the Fed. The basic procedures for sending and

receiving wires are similar to those for the large

banks, but the degree of sophistication and

separation of duties is not as great. A ﬁnancial

institution should have other back-up controls in

place if separation of duties is a problem. These

controls can include rotation of duties and ofﬁ-

cer review of all transactions.

Payment orders to send a wire are received

from bank personnel and corporate customers.

Individuals who wish to wire funds usually go

through their loan ofﬁcer or account representa-

tive who notiﬁes the wire room. Here again,

veriﬁcation is an important security procedure,

and records should be kept of all payment order

requests, by tapes of phone calls, written records

of requests, or other means.

After receiving the payment order, the termi-

nal operator keys the wire message into the PC.

Before the message can be sent, it must be

veriﬁed by a second person (this is the recom-

mended procedure—some small banks allow the

same person to key in the wire and verify for

sending). Most on-line PC connections to the

Fed have two printers attached, one which prints

copies of the outgoing messages and the other

which prints incoming messages. The bank

should maintain the copies of these messages in

the continuous paper form for recordkeeping

purposes. The unbroken sheet ensures that all

messages are accounted for; however, the

sequence numbers of the messages should also

be checked because messages can occasionally

be skipped because of communication prob-

lems. In addition, each incoming and outgoing

message is assigned a sequence number that also

provides an audit trail ensuring that all messages

are accounted for.

How Money Launderers Use the Wire

System

While there are many ways for money launder-

ers to use the wire system, the objective for most

money launderers is to aggregate funds from

different accounts and move those funds through

accounts at different banks until the origins of

the funds cannot be traced. Most often this

involves moving the funds out of the country,

through a bank account in a country with strict

bank secrecy laws, and possibly back into the

U.S. Money laundering schemes uncovered by

law enforcement agencies, for instance through

Operation Polar Cap, show that money launder-

ers use the wire system to aggregate funds from

multiple accounts at the same bank, wire those

funds to accounts held at other U.S. banks,

consolidate funds from these larger accounts,

and ultimately wire the funds to offshore

accounts in countries such as Panama.

Unlike cash transactions, which are closely

monitored, Fedwire transactions and banks’ wire

rooms are designed to quickly process approved

transactions. Wire room personnel usually have

no knowledge of the customer or the purpose of

the transaction. Therefore, once cash has been

deposited into the banking system, money laun-

derers use the wire system because of the

likelihood that transactions will be processed

with little or no scrutiny.

HOW TO READ A WIRE

TRANSFER MESSAGE

A wire transfer message contains, by design, a

Wire Transfer Systems 701.0

Bank Secrecy Act Manual September 1997

Page 3

minimal amount of information. As discussed in

more detail below, Fedwire messages must con-

tain primary information consisting of the send-

er’s and receiver’s name and ABA routing

number, the amount of the transfer, a reference

number, and certain other control information.

These messages may contain certain supple-

mentary information, such as the name of the

originating party, the name of the beneﬁciary,

the beneﬁciary’s account number, a reference

message for the beneﬁciary, and other related

information.

For the purposes of these examination proce-

dures, it is important to be able to identify

certain information on the message. The supple-

mentary information is identiﬁed using three

letter codes. These codes are identiﬁed below,

but not all information will appear in all mes-

sages. In some messages, there may not be any

supplementary information at all.

Product Codes—These codes identify the type

of transfer and are followed by a backslash.

BTR/ Bank Transfer, the beneﬁciary is a bank.

CTR/ Customer Transfer, the beneﬁciary is a

non bank.

DEP/ Deposit to Sender’s Account

DRW/ Drawdown

FFR/ Fed Funds Returned

FFS/ Fed Funds Sold

Field Tags—These codes identify certain supple-

mentary information about the transfer and con-

sist of three letters followed by an equals sign.

ORG= Originator, initiator of the transfer.

OGB= Originator’s Bank, bank acting for the

originator of the transfer.

IBK= Intermediary Bank, the institution(s)

between the receiving institution and

the beneﬁciary’s institution through

which the transfer must pass, if speci-

ﬁed by the sending institution.

BBK= Beneﬁciary’s Bank, the bank acting as

ﬁnancial agent for the beneﬁciary of

the transfer.

BNF= Beneﬁciary, the ultimate party to be

credited or paid as a result of a transfer.

RFB= Reference for the Beneﬁciary, refer-

ence information enabling the beneﬁ-

ciary to identify the transfer.

OBI= Originator to Beneﬁciary Information,

information to be conveyed from the

originator to the beneﬁciary.

BBI= Bank to Bank Information, miscella-

neous information pertaining to the

transfer.

INS= Instructing Bank, the institution that

instructs the sender to execute the trans-

action.

Identiﬁer Codes—Two letter codes preceded by

a backslash and followed by a hyphen used to

identify or designate a number important to the

transfer.

/AC- Account number

/BC- Bank identiﬁer code

/CH- CHIPS universal identiﬁer

/CP- CHIPS participant identiﬁer

/FW- Federal Reserve routing number

/SA- SWIFT address

Advice Method Codes—Three letter codes pre-

ceded by a backslash used to identify the method

of advising the beneﬁciary of transfer.

/PHN advise by telephone

/LTR advise by letter

/WRE advise by wire

/TLX advise by telex

The following sample message illustrates the

format of a Fedwire message and the use of the

above codes:

mode status mdc error-intercept

PRODUCTION FT INCOMING MSG

rcvr type

121000358 1040

sndr ref # amt

021000089 4092 $1,000,000.00

CITIBANK NYC/ORG=J.DOE, LONDON OGB=BANK OF THE NORTH, LONDON

BANK AMER SF/CTR/IBK=B OF A LOS ANGELES BBK=BK OF SAN PEDRO, CA

BNF=H.L. INDUSTRIES/AC-12-34567/PHN/(415)555-1212 RFB=INV8123

OBI=EQUIP PURCH

imad omad

0504 B1Q0216K 209 05041233 FTB1 0504 L1Q11339K 1391 05041235

This Fedwire message shows a transfer from

Citibank, NYC, to Bank of America, San

Francisco, for $1,000,000.00. Under the ‘‘rcvr’’

heading is Bank of America’s routing number,

701.0 Wire Transfer Systems

September 1997 Bank Secrecy Act Manual

Page 4

and under the ‘‘sndr’’ is Citibank’s routing

number. The transfer was originated by J. Doe in

London through his bank (the originating bank),

the Bank of the North, London. Bank of the

North sent the funds to Citibank, which in turn

sent the funds to Bank of America. The funds

will be sent to the intermediary bank, Bank

of America’s Los Angeles bank for credit to

the bank of the beneﬁciary, Bank of San Pedro,

San Pedro, CA. The beneﬁciary of the transfer

is H. L. Industries, and the message contains

instructions to credit the amount to H. L. Indus-

tries’ account and advise the company by phone

of receipt of the transfer. Mr. Doe sends infor-

mation that the wire is for payment of invoice

number 8123, which was for the purchase of

equipment. The ‘‘imad’’ and ‘‘omad’’ numbers

at the bottom of the message are added by the

Fed and identify the date, time, and receiving

and sending terminal.

For the purposes of examining for money

laundering, most of the important information

will be contained in the supplementary portion

of the message with the ﬁeld tags. Bank person-

nel can help decipher messages.

Wire Transfer Systems 701.0

Bank Secrecy Act Manual September 1997

Page 5

Amendment to Regulation H

Procedures for Monitoring Bank Secrecy Act

Compliance—February 1987*

Section 801.0

Effective January 27, 1987, section 208.14 is

added to read as follows:

SECTION 208.14—PROCEDURES

FOR MONITORING BANK

SECRECY ACT COMPLIANCE

(a) Purpose. This section is issued to ensure

that all state member banks establish and

maintain procedures reasonably designed to

ensure and monitor their compliance with

the provisions of subchapter II of chapter 53

of title 31, United States Code, the Bank

Secrecy Act, and the implementing regula-

tions promulgated thereunder by the Depart-

ment of Treasury at 31 CFR part 103,

requiring recordkeeping and reporting of

currency transactions.

* The complete regulation as amended effective

January 27, 1987, consists of—

• a regulation pamphlet dated May 1942 and

• this slip sheet.

13. Recordkeeping requirements contained in this

section have been approved by the Board under

delegated authority from the Ofﬁce of Management

and Budget under the provisions of chapter 35

of title 44, United States Code, and have been assigned

OMB No. 7100–0196.

(b) Establishment of compliance program.On

or before April 27, 1987, each bank shall

develop and provide for the continued

administration of a program reasonably

designed to ensure and monitor compliance

with the recordkeeping and reporting

requirements set forth in subchapter II of

chapter 53 of title 31, United States Code,

the Bank Secrecy Act, and the implement-

ing regulations promulgated thereunder by

the Department of Treasury at 31 CFR

part 103. The compliance program shall be

reduced to writing, approved by the board of

directors, and noted in the minutes.

pliance program shall, at a minimum—

(1) provide for a system of internal controls

to ensure ongoing compliance;

(2) provide for independent testing for com-

pliance to be conducted by bank person-

nel or by an outside party;

(3) designate an individual or individuals

responsible for coordinating and moni-

toring day-to-day compliance, and

(4) provide training for appropriate

personnel.

Bank Secrecy Act Manual September 1997

Page 1

Internal Compliance Program

Section 802.0

Essential to the ﬁnancial institution’s ability to

comply with the rules and regulations of the

Bank Secrecy Act and ensure that the institution

does not become involved in illicit activities, is

an effective internal compliance program. It

should be noted that, by statute (12 U.S.C.

1818(s)), Federal banking agencies are required

to issue orders requiring an institution to ‘‘cease

and desist from its violation’’ when an institu-

tion has failed to establish and maintain ade-

quate internal compliance procedures or an

institution has failed to correct any problem with

the internal compliance procedures that were

previously identiﬁed as being deﬁcient.

At a minimum, an internal compliance pro-

gram must:

• Provide for a system of internal controls to

ensure ongoing compliance;

• Provide for independent testing of compliance;

• Designate an individual responsible for day-

to-day coordination and monitoring of com-

pliance; and

• Provide training for appropriate personnel.

These items are the basic elements of a good

compliance program. In order to maintain a

program that ensures compliance on an ongoing

basis and helps to prevent abuse of the institu-

tion by those who might wish to use the insti-

tution for illegal purposes, ﬁnancial institutions

must involve several areas of operation and

administration.

SENIOR MANAGEMENT

Senior management must show a commitment

to compliance by the ﬁnancial institution by:

• Establishing a strong compliance plan that is

fully implemented and approved by the board

of directors of the institution;

• Requiring that senior management be kept

informed of compliance efforts, audit reports

and any compliance failures with corrective

measures instituted;

• Including regulation compliance within the

job description and job performance evalua-

tion of institution personnel; and

• Conditioning employment on regulation

compliance.

INTERNAL AUDITORS

An internal auditing department within the ﬁnan-

cial institution should be established with

responsibilities which include:

• Performing transaction testing to ensure

that the institution is following proscribed

regulations;

• Performing testing of employees to assess

knowledge of regulations and procedures;

• Reviewing written procedures and training

programs for completeness and accuracy; and

• Reporting all ﬁndings to senior management.

LARGE CURRENCY INTERNAL

CONTROL

Financial institutions should have the ability to

detect and monitor large currency transactions

occurring at the ﬁnancial institution to ensure

that such transactions are not being conducted

for illegitimate purposes. With the advent of the

‘‘$3,000 rule’’ imposing recordkeeping require-

ments for cash purchases of certain monetary

instruments of between $3,000 and $10,000, the

same principles of currency transaction monitor-

ing should be applied to this function, as well.

EXEMPTION PROCEDURES

For those ﬁnancial institutions that maintain

exemptible customers from the CTR reporting

requirements under the existing rules (as opposed

to the interim exemption rule), it is imperative

that regular monitoring of the exemption pro-

cess be undertaken. The institution must be able

to ensure that exempted customers are comply-

ing with the limitations of their exemption and

that, on a regular basis, exempted customers

transactions are reviewed. Any abnormalities in

the exemption process by the institution or the

customer should be readily identiﬁable through

the internal compliance program.

TRAINING

Financial institution personnel should be trained

in all aspects of regulatory and internal policies

Bank Secrecy Act Manual September 1997

Page 1

and procedures. An effective training program

should include:

• All compliance ofﬁcers, audit and/or indepen-

dent review personnel and other customer

contact personnel, including tellers, customer

service representatives, lending ofﬁcers and

private or personal banking ofﬁcers, should be

trained regarding policies and procedures, as

well as common money laundering schemes

and patterns;

Continuous and updated training to ensure per-

sonnel is provided with the most current and up

to date information.

COMPLIANCE RESPONSIBILITY

An individual should be designated as a com-

pliance contact, with day-to-day responsibility

for the compliance program.

802.0 Internal Compliance Program

September 1997 Bank Secrecy Act Manual

Page 2

Internal Revenue Service Currency and Banking Retrieval System

Currency and Banking Reports System (CBRS) Section 901.0

The Bank Secrecy Act and Money Laundering

Statutes were passed by Congress to help facili-

tate the identiﬁcation and prosecution of indi-

viduals involved in illegal activities for proﬁt.

In 1984, the Detroit Computing Center (DCC)

was chosen to collect, perfect and input to the

CBRS Data Base, millions of documents

required to be furnished under the laws. These

documents consist of the following: Currency

Transaction Reports (CTR’s - Form 4789)

required to be ﬁled by Financial Institutions

on cash transactions over $10,000; Currency

Transaction Reports by Casinos (CTRC -

Form 8362) required to be ﬁled by casinos on

cash transactions over $10,000; Report of Cash

Payments Received in a Trade or Business

(Form 8300) to be ﬁled by anyone in a trade

or business receiving payments in cash totalling

$10,000 or more in a single or related trans-

action; Report of Foreign Bank and Financial

Accounts (FBAR - TDF 90-22.1) required to be

ﬁled annually by any U.S. citizen having ﬁnan-

cial interest in or signature authority over any

foreign bank account exceeding $10,000 in total

value at any time during the calendar year, or

multiple accounts that in the aggregate exceed

$10,000; Report of International Transporta-

tion of Currency or Monetary Instrument

Reports (CMIR - Form 4790) are loaded from

tapes received from U.S. Customs Service, these

documents are ﬁled when amounts greater than

$10,000 in cash or monetary instruments are

taken across any U.S. Borders; Suspicious

Activity Report (SAR) are ﬁled by Financial

Institutions on any unusual or suspicious cash

transactions of any amount; and Form CF-7501

Entry Summary is received from Customs

electronically for any commodity subject to

Excise Tax. In early 1994, the Information

Return for Federal Contract Document (Form

8596) was added to the CBRS. This Collection

document allows for tracking of contracts being

issued by different Federal Agencies. As of

the end of January 1996, the CBRS Data

Base contained over 90,000,000 information

documents.

The CBRS Data Base can be accessed by

special agents, revenue agents and revenue ofﬁ-

cers through portable computers through a tele-

phone system or CDN lines. There are approxi-

mately 15,000 user-id/passwords assigned to

users of the CBRS, including staff of the Board

of Governors of the Federal Reserve System.

Additionally, tapes of all documents, except

8300s, are furnished to U.S. Customs and sub-

sequently added to the Treasury Enforcement

Communications Service’s (TECS) data base

for use by law enforcement agencies. Tape ﬁles

are also sent to the states of California, Arizona,

New York, Florida, Illinois and Texas for CTR

documents ﬁled in their respective states. Project

GATEWAY has been established to allow

selected ofﬁcials from all states to have hands-on

access to the query data base.

The system can be used to identify bank

accounts, secret cash, leads to assets and foreign

bank accounts, and a myriad of other useful

information for compliance and other law

enforcement personnel. For example, Federal

Reserve staff utilize the data base to verify

timely ﬁlings by ﬁnancial institutions.

The CBRS Data Base is maintained at the

DCC, where the processing of the data is con-

trolled. Three branches comprise the working

group for the project: Systems, Edit/Error Reso-

lution, and the Compliance Branch. The Com-

pliance Branch has the overall responsibility of

providing authoritative information and assis-

tance in person, by telephone, or by correspon-

dence to ﬁnancial institutions and their repre-

sentatives as they apply to the provisions of the

Bank Secrecy Act.

Banks, as deﬁned in the regulations, have the

authority to exempt from reporting transactions

of certain types of entities speciﬁcally enumer-

ated in the regulations. These entities are main-

tained on bank exempt lists. The Compliance

Branch corresponds with banks to obtain these

exempt lists and conducts a limited review on

such lists once received.

If a bank believes that certain circumstances

warrants the exemption of an entity not speciﬁ-

cally enumerated in the regulation, it must

request a ‘‘Special Exemption’’ from IRS. These

requests for ‘‘Special Exemptions’’ are granted

or denied by the Compliance Branch.

Research of various data bases and ﬁles is

done so that certiﬁed transcripts/documents can

be prepared by use in grand jury investigations

and criminal/civil court cases. Periodically, the

employees may be called upon to serve as

witnesses (court testiﬁers) to introduce these

documents as evidence during a trial.

Bank Secrecy Act Manual September 1997

Page 1

Also, as a part of the document processing

function, many documents are perfected by

telephone contact and/or correspondence. Tele-

phone contact is made with ﬁnancial institutions

when an unsatisfactory response is received as a

result of computer generated correspondence on

an incomplete Currency Transaction Report.

The objective is to make the Form 4789

processable. If the telephone contact is unsuc-

cessful, the Form 4789 is deemed unsatisfactory

and thus forwarded to Treasury for further

review.

BSA COMPLIANCE BRANCH,

DETROIT COMPUTING CENTER

The BSA Compliance Branch of the Currency

Reporting & Compliance Division has been

delegated responsibility for providing authorita-

tive information on certain provisions of the

Bank Secrecy Act (‘‘BSA’’). This guidance is

provided in person, by telephone or through

correspondence to ﬁnancial institutions and their

representatives.

The BSA Compliance Branch will verify

receipt of CTRs at the request of a ﬁnancial

institution. There is a research fee charged for

this service of $20.00 for up to ten documents

and $2.00 for each additional document. To

receive copies, add 15 cents per document

requested.

A synopsis of the duties of the BSA Compli-

ance Branch as follows:

Outreach Program:

• Speakers for Banking/Professional Seminars

Financial Institution Services

• Customer service lines for answering techni-

cal and form completion questions

• Grant/deny request for special exemptions

• Process requests for backﬁling determinations

• Review bank Exemption Lists

• Provide veriﬁcation of receipt and copies of

CTRs

• Staff a toll-free suspicious transaction report-

ing hot line

CID Agents, IRS and Other Law

Enforcement Services

• Copies of BSA/Title 26 documents including

true copy certiﬁcations for court

• Research and certiﬁcation of ‘‘negative’’ or

‘‘no document ﬁled’’ results

• Testify at trials as Custodian of the Record

BSA Compliance Branch—Contact

Points

BSA Compliance Branch Ofﬁce

David Gooding, Chief

Tamika Brown, Secretary

P.O. Box 32063

Detroit, Michigan 48232-0063

Voice (313) 234-1576

Fax (313) 234-1614

BSA Compliance Review Group

Candace Walls, Chief (313) 234-1597

Vergary Fortune, Secretary

Outside Customers

(ﬁnancial institutions) (313) 234-1613

IRS Employees/law

enforcement (313) 234-1597

Lead BSA Representative

Marion Formigan (313) 234-1602

BSA Representatives (BSAR)

Freda Allen (313) 234-1610

Phyllis Brown (313) 234-1599

Yvonne Covington (313) 234-1600

Lyndon Ford (313) 234-1601

Wanda Hampton (313) 234-1612

Elva Jackson (313) 234-1603

Elizabeth Johnson (313) 234-1604

Ronald Kaczynski (313) 234-1605

Marian Kirkland (313) 234-1607

Linda Krych (313) 234-1608

Annie McCarty (313) 234-1609

Marie Morris (313) 234-1610

Linda Townsend (313) 234-1611

BSA Support Group I

Chief, Yvonne Davis (313) 234-1594

Tax Examining Assistants (TEA)

Minnie Blair (313) 234-1580

Cynthia Drew (313) 234-1590

Sharon McMorris (313) 234-1585

901.0 Internal Revenue Service Currency and Banking Retrieval System

September 1997 Bank Secrecy Act Manual

Page 2

Mary Rogers (313) 234-1586

Linda Taylor (313) 234-1588

Other Numbers/Addresses of Interest

Jim Bahnke

Chief, Tax Systems Division (313) 234-1066

Pat Donaldson

Chief, CTR Branch (313) 234-1401

(voice)

(313) 234-1402

(fax)

Henry James

Chief, Currency Rep.

& Compl. Div. (313) 234-1062

Derrick Moore

Chief, Edit/Error Res. Br. (313) 234-1636

CTR Corrective

Correspondence (313) 234-1657

Ben McMakin

CID Coordinator (313) 234-1077

Cathy Swickle

Public Affairs Ofﬁcer (313) 234-1052

Magnetic Media Hotline (313) 234-1445

Suspicious Transaction

Hotline (800) 800-2877

Bank Secrecy Act (BSA)

Bulletin Board (313) 234-1453

IRS Forms

(including Form 4789) (800) 829-3676

IRS Taxpayer Service

Toll-Free (800) 829-1040

LOGON CODES

Each organization is required to use speciﬁed

Client and Ofﬁce codes in the Accounting Data

ﬁeld when logging into the CBRS. Federal

Reserve System staff must ﬁrst obtain an autho-

rizaion code in order to access the CBRS sys-

tem. Each Reserve Bank has established a Bank

Secrecy Act contact to access the CBRS system.

Additional requests for logon i.d.’s should be

mailed to:

Mr. Richard Small

Special Counsel

Board of Governors of the Federal Reserve

System

Mail Stop 173

Washington, D.C. 20551

SPECIAL REQUEST PROCEDURE

(REPORTS AND/OR TAPE)

In situations where on-line or download data is

insufﬁcient for your needs, a special report or

data tape may be requested from the DCC.

Non-IRS personnel should mail requests to the

Special Assistant for Financial Enforcement at

the DCC. For Federal Reserve System staff, the

request should be routed through the Special

Counsel at the Federal Reserve Board.

Internal Revenue Service Currency and Banking Retrieval System 901.0

Bank Secrecy Act Manual September 1997

Page 3

Suspicious Activity Report Database

Section 902.0

INTRODUCTION

Pursuant to Federal Reserve regulations, all

institutions supervised by the Federal Reserve

are required to report suspicious transactions

using the Suspicious Activity Report (‘‘SAR’’).

The SARs are maintained in a computerized

database that is managed by the Internal Rev-

enue Service. All Reserve Banks have on-line

access to the SAR database.

REVIEW OF SUSPICIOUS

ACTIVITY REPORTS

Prior to the start of an examination, the SAR

database should be reviewed as to all SARs

related to the ﬁnancial institution to be exam-

ined. This review should be an integral part of

the examination preparation, as it can provide

valuable information to assist in developing the

appropriate scope of the review.

SEARCHING THE SAR

DATABASE

Instructions for accessing the SAR database can

be found in the ‘‘Internal Revenue Service

User’s Guide.’’ Additional guidance on the use

of the SAR database can be obtained from the

Bank Secrecy Act coordinator at each Reserve

Bank.

IDENTIFICATION OF

SIGNIFICANT SUSPICIOUS

ACTIVITY

When suspicious activity involving senior cur-

rent or former ofﬁcials or highly unusual activity

is identiﬁed, the Board’s Special Investigations

and Examinations Section should be notiﬁed at

202-452-3168.

FAST TRACK CRIMINAL

REFERRAL ENFORCEMENT

PROGRAM

Effective April 14, 1995, as detailed in the

Board’s supervisory directive SR 95-23, the

Federal Reserve implemented a Fast Track

Criminal Referral

Enforcement Program (the

‘‘Fast Track Program’’) that uses expedited,

streamlined enforcement procedures to obtain

consent orders of prohibition from banking

ofﬁcials and employees whose cases have been

declined by law enforcement agencies and have

already admitted to criminal acts involving

amounts up to $100,000. When needed, it will

also be used to seek restitution from the

individuals through consent cease and desist

orders. The Fast Track Program also involves

the expeditious issuance of appropriate notices

in those instances where individuals do not

consent to the orders presented to them. Detailed

below are the procedures that Federal Reserve

staff should follow in utilizing the Fast Track

Program.

Procedures

1. Each Federal Reserve Bank should review all

SARs on an on-going basis and, in connec-

tion therewith, should implement the Fast

Track Program to identify those SARs where

law enforcement agencies have declined to

prosecute institution-afﬁliated parties who

have admitted guilt involving criminal activi-

ties with associated losses of less than

$100,000.

2. For those SARs involving losses of under

$100,000, in which an institution-afﬁliated

party has admitted guilt through a signed

confession, an oral admission to a banking

organization ofﬁcial that is recorded, or

otherwise, designated Federal Reserve Bank

personnel should contact federal law enforce-

ment agencies and, where necessary, state or

local law enforcement agencies, or reconﬁrm

prior contacts, to determine the status of any

criminal investigation or prosecution involv-

ing the individual. The Federal Reserve Bank

should ascertain whether the individual has

already been prosecuted and sentenced

through a U.S. Attorney’s or state equivalent

1. Effective April 1, 1996, the Criminal Referral Form was

replaced with the Suspicious Activity Report form.

Bank Secrecy Act Manual September 1997

Page 1

‘‘Fast Track’’ system or otherwise,

whether

the matter is under active investigation, or

whether the matter has been declined for

prosecution.

3. If law enforcement has declined to prosecute

the individual subject to the SAR, the Federal

Reserve Bank should:

a. Gather from the law enforcement agency,

or the banking organization ﬁling the

SAR, or both, all appropriate documents

related to the SAR, including a copy of the

signed confession, records relating to

any admission made to banking ofﬁcials,

and any other pertinent supporting

materials, such as afﬁdavits and investiga-

tory reports;

b. contact the appropriate banking organiza-

tion representative to ascertain whether

any civil action has been taken by the

organization against the individual, and

whether the ﬁnancial institution has

obtained any restitution, either through

the voluntary cooperation of the indi-

vidual or by means of a court judgment;

c. determine the current home address of the

individual, if possible; and

d. determine whether the individual is cur-

rently employed by a banking organiza-

tion, if possible.

4. When requested information is received and

the Federal Reserve Bank determines with

certainty that the appropriate federal, state, or

local law enforcement agency will not pros-

ecute the institution-afﬁliated party, desig-

nated Federal Reserve Bank personnel should

make a determination regarding whether a

prohibition order, or cease and desist order

seeking restitution, or a combination of both

should be pursued under the Fast Track

Program.

5. In the event a Federal Reserve Bank recom-

mends an institution-afﬁliated party for inclu-

sion in the Fast Track Program, it should

forward to the Board’s Division of Banking

Supervision and Regulation’s Deputy Asso-

ciate Director responsible for enforcement

matters the following:

a. The completed portion of the Fast Track

Program checklist

identiﬁed as ‘‘Federal

Reserve Bank Responsibilities,’’ along

with a copy of the SAR; and

b. documentation supporting the recom-

mendation, such as the signed confession,

or a bank’s record of an individual’s

admission.

6. Upon the submission of a Federal Reserve

Bank’s recommendation and completed

checklist, designated staff of the Division of

Banking Supervision and Regulation, in

coordination with the Board’s Legal Divi-

sion, will:

a. Obtain the necessary approvals of senior

Board staff required for the initiation of an

enforcement action using the Fast Track

Program checklist in the place of a stan-

dard ‘‘ﬁnal approval’’ memorandum;

b. notify the other federal ﬁnancial institu-

tions supervisory agencies regarding the

proposed enforcement action under cur-

rent interagency notiﬁcation procedures;

c. in consultation with Federal Reserve Bank

staff, ﬁnalize a proposed order, using pre-

approved formats, and send it to the indi-

vidual for his or her consideration of

entering into the order on a consent basis

by means of a cover letter signed by the

Deputy Associate Director, which desig-

nates an Enforcement Section attorney as

the contact person for discussions regard-

ing the consent order;

d. upon receipt of a signed consent order,

obtain the necessary senior Board staff

approvals, have the order executed by the

Board’s Secretary, prepare and send all

necessary interagency notiﬁcation letters,

and, in consultation with the Board’s pub-

lic information ofﬁce, prepare an appro-

priate press release; and

e. in the event the individual does not agree

to the consensual issuance of an order of

prohibition, or cease and desist order, or a

combined order, where necessary, coordi-

nate with designated Federal Reserve Bank

staff in order to prepare the appropriate

notice under existing Federal Reserve

enforcement procedures.

2. In those cases where an individual has already been

prosecuted and sentenced, Federal Reserve Banks should

follow current procedures and ensure that the individual

receives a letter from the Federal Reserve Bank explaining the

restrictions and limitations contained in section 19 of the

Federal Deposit Insurance Act, as amended (12 U.S.C. 1829).

3. Not included in this Manual. Refer to SR Letter 95-23

for a copy of the checklist.

902.0 Suspicious Activity Report Database

September 1997 Bank Secrecy Act Manual

Page 2

These are internal procedures for the Federal

Reserve’s Fast Track Program. They do not

create or confer any substantive or procedural

rights on third parties, which would be enforce-

able, in any manner, in a proceeding of any

nature.

QUESTIONS

For questions regarding the use of the SAR

database you may telephone the Board’s Special

Investigations and Examinations Section at

202-452-3168.

Suspicious Activity Report Database 902.0

Bank Secrecy Act Manual September 1997

Page 3

Federal Reserve Enforcement Actions

Section 903.0

The Federal Reserve supervises the following

entities and has the statutory authority to take

formal enforcement actions against them:

• State member banks

• Bank holding companies

• Nonbank subsidiaries of bank holding

companies

• Edge and agreement corporations

• Branches and agencies of foreign banking

organizations operating in the U.S. and their

parent banks

• Ofﬁcers, directors, employees, and certain

other categories of individuals associatied with

the above banks, companies and organizations

(referred to as ‘‘institution afﬁliated parties’’)

Generally, the Federal Reserve takes formal

enforcement actions against the above entities

for violations of laws, rules, or regulations,

unsafe or unsound practices, breaches of ﬁdu-

ciary duty, and violations of ﬁnal orders. Formal

actions include cease and desisit orders, written

agreements, removal and prohibition orders, and

orders assessing civil money penalties. Such

actions can include those for entities who fail to

develop and implement compliance programs

designed to detect, deter and report suspicious

activities possibly associated with money laun-

dering or to meet other technical reporting and

recordkeeping requirements under the Bank

Secrecy Act.

For information regarding enforcement actions

taken by the Federal Reserve, the reader may

refer to the Federal Reserve’s home page at the

following address:

http://www.bog.frb.fed.us/boarddocs/enforcement

Bank Secrecy Act Manual September 1997

Page 1

FinCEN Advisories

Section 904.0

From time to time as deemed necessary, the

Financial Crimes Enforcement Network

(‘‘FinCEN’’) will provide advisories to the banks,

regulators and the general public concerning

money laundering matters, trends and patterns,

or amendments/clariﬁcations to the Bank

Secrecy Act. Access to the Fincen home page to

obtain the advisories and other information can

be found at the following address:

http://www.ustreas.gov/treasury/bureaus/ﬁncen/

advis.html

Other communications can be directed to

FinCEN:

Phone (703) 905-3773

Facsimile (703) 905-3885

Address: 2070 Chain Bridge Road, Vienna,

Virginia 22182

Federal Reserve Examination Staff is advised

that any questions regarding a FinCEN matter

should be directed ﬁrst to the Board’s Special

Investigations and Examinations Section at

(202) 452-3168.

Bank Secrecy Act Manual September 1997

Page 1

Check List to Identify Potential Abuses

1001.0

The following is a list of transactions that could

be considered unusual or suspicious and possi-

bly linked to money laundering or other ﬁnan-

cial crime activities. The list is not intended to

be all inclusive.

MONEY LAUNDERING

• Increase in cash shipments that is not accom-

panied by a corresponding increase in the

number of accounts.

• Cash on hand frequently exceeds limits estab-

lished in security program and/or blanket

bond coverage.

• Large volume of wire transfers to and from

offshore banks.

• Large volume of cashier’s checks, money

orders or travelers checks sold for cash.

• Accounts have a large number of small depos-

its and a small number of large checks with

the balance of the account remaining rela-

tively low and constant. Account has many of

the same characteristics as an account used for

check kiting.

• A large volume of deposits to several different

accounts with frequent transfers of major

portion of the balance to a single account at

the same bank or at another bank.

• Loans to offshore companies.

• A large volume of cashier’s checks or money

orders deposited to an account where the

nature of the account holder’s business would

not appear to justify such activity.

• Large volume of cash deposits from a busi-

ness that is not normally cash intensive.

• Cash deposits to a correspondent bank account

by any means other than through an armored

carrier.

• Large turnover in large bills or excess of small

bills from bank and demand for large bills by

bank which would appear uncharacteristic for

the bank.

• Cash shipments which appear large in com-

parison to the dollar volume of currency

transaction reports ﬁled.

• Dollar limits on the list of the bank customers

exempt from currency transaction reporting

requirements which appear unreasonably high

considering the type and location of the busi-

ness. No information is in the bank’s ﬁles to

support the limits set.

• Currency transaction reports, when ﬁled, are

often incorrect or lack important information.

• List of exempted customers appears unusually

long.

• High volume of sequentially numbered trav-

eler’s checks or postal money orders addressed

to same payee.

OFFSHORE TRANSACTIONS

• Loans made on the strength of a borrower’s

ﬁnancial statement reﬂects major investments

in and income from businesses incorporated in

bank secrecy haven countries.

• Loans to offshore companies.

• Loans secured by obligations of offshore

banks.

• Transactions involving an offshore ‘‘shell’’

bank whose name may be very similar to the

name of a major legitimate institution.

• Frequent wire transfers of funds to and from

bank secrecy haven countries.

• Offers of multimillion dollar deposits at below

market rates from a conﬁdential source to be

sent from an offshore bank or somehow guar-

anteed by an offshore bank through a letter,

telex, or other ‘‘ofﬁcial’’ communication.

• Presence of telex or facsimile equipment in a

bank where the usual and customary business

activity would not appear to justify the need

for such equipment.

WIRE TRANSFERS

• Indications of frequent overrides of estab-

lished approval authority and other internal

controls.

• Intentional circumvention of approval author-

ity by splitting transactions.

• Wire transfers to and from bank secrecy haven

countries.

• Frequent or large wire transfers for persons

who have no account relationship with bank.

• In a linked ﬁnancing situation, a borrower’s

request for immediate wire transfer of loan

proceeds to one or more of the banks where

the funds for the brokered deposits originated.

• Large or frequent wire transfers against

uncollected funds.

Bank Secrecy Act Manual September 1997

Page 1

• Wire transfers involving cash where the

amount exceeds $10,000.

• Inadequate control of password access.

• Customer complaints and/or frequent error

conditions.

LINKED FINANCING/BROKERED

TRANSACTIONS

• Out-of-territory lending.

• Loan production used as a basis for ofﬁcer

bonuses.

• Evidence of unsolicited attempts to buy or

recapitalize the bank where there is evidence

of a request for large loans at or about the

same time by persons previously unknown to

the bank. Promise of large dollar deposits may

also be involved.

• Promise of large dollar deposits in consider-

ation for favorable treatment on loan requests.

(Deposits are not pledged as collateral for the

loans.)

• Brokered deposit transactions where the bro-

ker’s fees are paid for from the proceeds of

related loans.

• Anytime a bank seriously considers a loan

request where the bank would have to obtain

brokered deposits to be able to fund the loan

should be viewed with suspicion.

• Solicitation by persons who purportedly have

access to multi-millions of dollars, from a

conﬁdential source, readily available for loans

and/or deposits in U.S. ﬁnancial institutions.

Rates and terms quoted are usually more

favorable than funds available through normal

sources. A substantial fee may be requested in

advance or the solicitor may suggest that the

fee be paid at closing but demand compensa-

tion for expenses, often exceeding $50,000.

• Prepayment of interest on deposit accounts

where such deposit accounts are used as

collateral for loans.

THIRD PARTY OBLIGATIONS

• Incomplete documentation on guaranties.

• Loans secured by obligations of offshore

banks.

• Lack of credit information on third party

obligor.

• Financial statements reﬂect concentrations of

closely held companies or businesses that lack

audited ﬁnancial statements to support their

value.

CREDIT CARDS AND

ELECTRONIC FUNDS

TRANSFERS

• Lack of separation of duties between the card

issuing function and issuance of personal

identiﬁcation number (PIN).

• Poor control of unissued cards and PINs.

• Poor control of returned mail.

• Customer complaints.

• Poor control of credit limit increases.

• Poor control of name and address changes.

• Frequent malfunction of payment authoriza-

tion system.

• Unusual delays in receipt of card and PINs by

the customers.

• Bank does not limit amount of cash that a

customer can extract from an ATM in a given

day.

• Evidence that customer credit card purchases

have been intentionally structured by a mer-

chant to keep individual amount below the

‘‘ﬂoor limit’’ to avoid the need for transaction

approval.

MISCELLANEOUS

• Indications of frequent overrides of internal

controls or intentional circumvention of bank

policy.

• Unresolved exceptions or frequently recurring

exceptions on exceptions report.

• Out-of-balance conditions.

• Purpose of loan is not recorded.

• Proceeds of loan are used for a purpose other

than the purpose recorded.

• A review of checks paid against uncollected

funds indicates that the customer is offsetting

checks with deposits of the same or similar

amount and maintains a relatively constant

account balance, usually small in relation to

the amount of activity and size of the

transactions.

Section 1001.0 Check List to Identify Potential Abuses

September 1997 Bank Secrecy Act Manual

Page 2

Suspicious Activity Report

Section 1002.0

For immediate release February 5, 1996

The Federal Reserve Board today announced a final rule to

simplify the process for reporting suspected crimes and

suspicious activities by banking organizations supervised by the

Federal Reserve.

The final rule is effective April 1, 1996.

The rule was developed by the Federal Reserve, the other

federal banking agencies, and the Financial Crimes Enforcement

Network of the U.S. Department of the Treasury (FinCEN).

The rule significantly reduces reporting burdens, while at

the same time enhancing the ability of law enforcement

authorities to investigate and prosecute criminal offenses

involving our Nation’s financial institutions.

The new suspicious activity reporting rule:

• combines the current criminal referral rules of the

Federal Reserve and the other federal banking agencies

with FinCEN’s suspicious activity reporting

requirements relating to money laundering offenses;

• creates a uniform reporting form and instructions--the

new ″Suspicious Activity Report″ or ″SAR″--for use by

banking organizations to report all violations;

• requires the filing of only one form with FinCEN;

• enables a filer, through computer software that will be

provided by the Federal Reserve to all of the domestic

and foreign banking organizations it supervises, to

prepare a SAR on a computer and file it by magnetic

media, such as a computer disc or tape;

(more)

Bank Secrecy Act Manual September 1997

Page 1

• raises the thresholds for mandatory reporting in two

categories and creates a threshold for the reporting of

suspicious transactions related to money laundering and

violations of the Bank Secrecy Act in order to reduce

the reporting burdens of banking organizations; and

• emphasizes recent changes in the law that provide a

safe harbor from civil liability to banking

organizations and their employees for reporting of

known or suspected criminal offenses or suspicious

activities.

Substantially identical suspicious activity reporting rules

are being issued by FinCEN, the Office of the Comptroller of the

Currency, the Federal Deposit Insurance Corporation, the Office

of Thrift Supervision, and the National Credit Union

Administration.

The Board’s notice is attached.

-0-

Attachment

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 2

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 211 and 225

[Regulations H, K and Y; Docket No. R-0885]

Membership of State Banking Institutions in the Federal Reserve

System; International Banking Operations; Bank Holding Companies

and Change in Control; Reports of Suspicious Activity under the

Bank Secrecy Act

AGENCY: Board of Governors of the Federal Reserve System.AGENCY:

ACTION:ACTION: Final Rule.

SUMMARY:SUMMARY: The Board of Governors of the Federal Reserve

System (Board) is amending its regulations on the reporting of

known or suspected criminal and suspicious activities by the

domestic and foreign banking organizations supervised by the

Board. This final rule streamlines reporting requirements by

providing that such an organization file a new Suspicious

Activity Report (SAR) with the Board and the appropriate federal

law enforcement agencies by sending a SAR to the Financial Crimes

Enforcement Network of the Department of the Treasury (FinCEN) to

report a known or suspected criminal offense or a transaction

that it suspects involves money laundering or violates the Bank

Secrecy Act (BSA).

EFFECTIVE DATE: April 1, 1996.EFFECTIVE DATE:

FOR FURTHER INFORMATION CONTACT: Herbert A. Biern, DeputyFOR FURTHER INFORMATION CONTACT:

Associate Director, Division of Banking Supervision and

Regulation, (202) 452-2620, Richard A. Small, Special Counsel,

Division of Banking Supervision and Regulation, (202) 452-5235,

or Mary Frances Monroe, Senior Attorney, Division of Banking

Suspicious Activity Report 1002.0

Bank Secrecy Act Manual September 1997

Page 3

Supervision and Regulation, (202) 452-5231. For the users of

Telecommunications Devices for the Deaf (TDD) only, contact

Dorothea Thompson, (202) 452-3544, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue,

N.W., Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION:SUPPLEMENTARY INFORMATION:

BackgroundBackground

The Board, the office of the Comptroller of the

Currency (OCC), the Federal Deposit Insurance Corporation (FDIC),

and the Office of Thrift Supervision (OTS) (collectively, the

Agencies) have issued for public comment substantially similar

proposals to revise their regulations on the reporting of known

or suspected criminal conduct and suspicious activities. The

Department of the Treasury, through FinCEN, has issued for public

comment a substantially similar proposal to require the reporting

of suspicious transactions relating to money laundering

activities.

The Board’s proposed regulation (60 FR 34481,

July 3, 1995) noted that the interagency Bank Fraud Working

Group, consisting of representatives from the Agencies, the

National Credit Union Administration, law enforcement agencies,

and FinCEN, has been working on the development of a single form,

the SAR, for the reporting of known or suspected federal criminal

law violations and suspicious activities. The Board’s proposed

regulation, as well as those proposed by the OCC, FDIC, OTS and

FinCEN, attempted to simplify and clarify reporting requirements

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 4

and reduce banking organizations, reporting burdens by raising

mandatory reporting thresholds for criminal offenses and by

requiring the filing of only one report with FinCEN.

The Board’s final rule adopts its proposal with a few

additional changes that have been made in response to the

comments received. The changes will result in burden reductions

even greater than those that were proposed. The Board’s, the

other Agencies’, and FinCEN’s final rules relating to the

reporting of suspicious activities are now substantially

identical, and they:

(1) Combine the current criminal referral rules of the

federal financial institutions regulatory agencies with

the Department of the Treasury’s suspicious activity

reporting requirements;

(2) create a uniform reporting form, the new Suspicious

Activity Report or SAR, for use by banking

organizations in reporting known or suspected criminal

offenses, or suspicious activities related to money

laundering and violations of the BSA;

(3) provide a system whereby a banking organization need

only refer to the SAR and its instructions in order to

complete and file the form in conformance with the

Agencies’ and FinCEN’s reporting regulations;

(4) require the filing of only one form with FinCEN;

(5) eliminate the need to file supporting documentation

with a SAR;

Suspicious Activity Report 1002.0

Bank Secrecy Act Manual September 1997

Page 5

(6) enable a filer, through computer software that will be

provided by the Board to all of the domestic and

foreign banking organizations it supervises, to prepare

a SAR on a computer and file it by magnetic media, such

as a computer disc or tape;

(7) establish a database that will be accessible to

federal and state financial institutions regulators and

law enforcement agencies;

(8) raise the thresholds for mandatory reporting in two

categories and create a threshold for the reporting of

suspicious transactions related to money laundering and

violations of the BSA in order to reduce the reporting

burdens on banking organizations; and

(9) emphasize recent changes in the law that provide a safe

harbor from civil liability to banking organizations

and their employees for reporting of known or suspected

criminal offenses or suspicious activities, by filing a

SAR or by reporting by other means, and provide

criminal sanctions for the unauthorized disclosure of

such report to any party involved in the reported

transaction.

Section-by-Section AnalysisSection-by-Section Analysis

Under the Board’s final rule, state member banks, bank

holding companies and their nonbank subsidiaries, most U.S.

branches and agencies and other offices of foreign banks, and

Edge and Agreement corporations need only follow SAR instructions

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 6

for completing and filing the SAR to be in compliance with the

Board’s and FinCEN’s reporting requirements. The following

section-by-section analysis correlates the specific SAR

instruction number with the applicable section of the Board’s

final rule:

Section 208.20(a) (Instruction No. 1 on the SAR)

provides that a state member bank must file a SAR when it detects

a known or suspected violation of federal law or a suspicious

activity pertinent to a money laundering offense.

Section 208.20(b) provides pertinent definitions.

Sections 208.20(c)(1), (2), and (3) (Instructions 1 a.,

b., and c. on the SAR) instruct a state member bank to file a SAR

with FinCEN in order to comply with the requirement to notify

federal law enforcement agencies if the bank detects any known or

suspected federal criminal violation, or pattern of violations,

committed or attempted against the bank, or involving one or more

transactions conducted through the bank, and the bank believes it

was an actual or potential victim of a crime, or was used to

facilitate a crime. If the bank has a substantial basis for

identifying one of its insiders or other institution-affiliated

parties in connection with the known or suspected crime,

reporting is required regardless of the dollar amount involved.

If the bank can identify a non-insider suspect, the applicable

transaction threshold is $5,000. In cases in which no suspect

can be identified, the applicable transaction threshold is

Suspicious Activity Report 1002.0

Bank Secrecy Act Manual September 1997

Page 7

$25,000. These sections were not changed from the proposed

regulations published for public comment in July 1995.

Section 208.20(c)(4) (Instruction 1 d. on the SAR)

instructs a state member bank to file a SAR with FinCEN in order

to comply with the requirement to notify federal law enforcement

agencies and the Department of the Treasury of transactions

involving $5,000 or more in funds or other assets when the bank

knows, suspects or has reason to suspect that the transaction:

(i) involves money laundering, (ii) is designed to evade any

regulations promulgated under the Bank Secrecy Act, or (iii) has

no business or apparent lawful purpose or is not the sort in

which the particular customer normally engages and, after

examining the available facts, the bank knows of no reasonable

explanation for the transaction. Section 208.20(c)(4) has been

modified in the final rule to reflect comments received on the

proposal. Most notably, the circumstances under which a

transaction should be reported under this section were clarified,

and a reporting threshold of $5,000 was added.

Section 208.20(c)(4) recognizes the emerging

international consensus that the efforts to deter, substantially

reduce, and eventually eradicate money laundering are greatly

assisted by the reporting of suspicious transactions by banking

organizations. The requirements of this section comply with the

recommendations adopted by multi-country organizations in which

the United States is an active participant, including the

Financial Action Task Force of G-7 nations and the Organization

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 8

of American States, and are consistent with the European

Community’s directive on preventing money laundering through

financial institutions.

Section 208.20(d) (Instruction 2 on the SAR) provides

that SARs must be filed within 30 calendar days of the initial

detection of the criminal or suspicious activity. An additional

30 days is permitted in order to enable a bank to identify a

suspect, but in no event may a SAR be filed later than 60 days

after the initial detection of the reportable conduct. The Board

and law enforcement must be notified in the case of a violation

requiring immediate action, such as an on-going violation. These

reporting requirements were not changed from the July 1995

proposal, with the exception of the addition of the requirement

that the Board be notified about on-going offenses requiring

immediate notification to law enforcement authorities.

Section 208.20(e) encourages a state member bank to

file a SAR with state and local law enforcement agencies. This

section is unchanged from the July 1995 proposal.

Section 208.20(f) (Instruction 3 on the SAR) provides

that a state member bank need not file a SAR for an attempted or

committed burglary or robbery reported to the appropriate law

enforcement agencies. In addition, a SAR need not be filed for

missing or counterfeit securities that are the subject of a

report pursuant to Rule 17f-1 under the Securities Exchange Act

of 1934. This section of the final rule was not modified from

the version published for public comment in July 1995.

Suspicious Activity Report 1002.0

Bank Secrecy Act Manual September 1997

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Section 208.20(g) requires that a state member bank

retain a copy of the SAR and the original or business record

equivalent of supporting documentation for a period of five

years. The section also requires that a state member bank

identify and maintain supporting documentation in its files and

that the bank make available such documentation to law

enforcement agencies upon their request. The Board made three

changes to this section from the version published for public

comment in July 1995. First, the record retention period was

shortened from 10 years to five years. Second, provision was

made for the retention of business record equivalents of original

documents, such as microfiche and computer imaged record systems,

in recognition of modern record retention technology. The third

change involves the clarification of a state member bank’s

obligation to provide supporting documentation upon request to

law enforcement officials. Supporting documentation is deemed

filed with a SAR in accordance with this section of the Board’s

final rule; as such, law enforcement authorities need not make

their access requests through subpoena or other legal processes.

Section 208.20(h) requires the management of a state

member bank to report the filing of all SARs to the board of

directors of the bank, or a designated committee thereof. No

change was made from the July 1995 proposal.

Section 208.20(i) reminds a state member bank and its

institution-affiliated parties that failure to file a SAR may

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 10

expose them to supervisory action. No change from the July 1995

proposal was made.

Section 208.20(j) provides that SARs are confidential.

Requests for SARs or the information contained therein should be

declined. The final rule also adds a requirement that a request

for a SAR or the information contained therein should be reported

to the Board. With the exception of the added requirement that

requests for SARs be reported to the Board, no changes were made

to this section from the July 1995 proposal.

Section 208.20(k) sets forth the safe harbor provisions

of 31 U.S.C. 5318(g). This new section, which was added to the

final rule as the result of many comments concerning this

important statutory protection for banking organizations, states

that the safe harbor provisions of the law are triggered by a

report of known or suspected criminal violations or suspicious

activities to law enforcement authorities, regardless whether

the report is made by the filing of a SAR in accordance with the

Board’s rules or for other reasons by different means.

Sections 211.8, 211.24(f), and 225.4(f) of the Board’s

rules relating to the activities of foreign banking organizations

and bank holding companies have not been changed in a substantive

manner. Only the references in the sections to ‘‘criminal

referral forms’’ have been changed to reflect the new name for the

reporting form, the SAR. The SAR filing requirements, as well as

the safe harbor and notification prohibition provisions of

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Bank Secrecy Act Manual September 1997

Page 11

31 U.S.C. 5318(g), continue to be applicable to all foreign

banking organizations and bank holding companies and their

nonbank subsidiaries supervised by the Federal Reserve through

these provisions.

Comments ReceivedComments Received

The Board received letters from 44 public commenters.

Comments were received from 15 community banks, 13 multinational

or large regional banks, eight trade and industry research

groups, seven Federal Reserve Banks and one law firm.

The large majority of commenters expressed general

support for the Board’s proposal. None of the commenters opposed

the proposed new suspicious activity reporting rules. A number

of suggestions and requests for clarification were received.

They are as follows.

Criminal Versus Suspicious Activities. Many commentersCriminal Versus Suspicious Activities.

expressed confusion over the difference between the known or

suspected criminal conduct that would be subject to the dollar

reporting thresholds (provided such conduct does not involve an

institution-affiliated party of the reporting entity) and the

suspicious activities that would be reported regardless of dollar

amount. Section 208.20(c)(4) has been revised to add a $5,000

reporting threshold and to clarify that the suspicious activity

must relate to money laundering and Bank Secrecy Act violations.

A threshold for the reporting of suspicious activities was added

to reduce further the reporting burdens on banking organizations.

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 12

Reporting of Crimes Under State Law. A number ofReporting of Crimes Under State Law.

commenters requested clarification of whether activities

constituting crimes under state law, but not under federal law,

should be reported on the SAR. The Board continues to encourage

banking organizations to refer criminal and suspicious activities

under both federal and state law by filing a SAR. Under the new

reporting system designed by the Board, the other Agencies, and

FinCEN, state chartered banking organizations should be able to

fulfill their state reporting obligations by filing a SAR with

FinCEN.

Safe Harbor Protections; Potential Liability UnderSafe Harbor Protections; Potential Liability Under

Federal and State Laws. Some commenters expressed the concernFederal and State Laws.

that banking organizations and their institution-affiliated

parties could be liable under federal and state laws, such as the

Right to Financial Privacy Act, for filing SARs with respect to

conduct that is later found not to have been criminal. Another

concern was that the filing of SARs with state and local law

enforcement agencies would subject filers to claims under state

law. Both of these concerns are addressed by the scope of the

safe harbor protections provided in 31 U.S.C. 5318(g).

The Board is of the opinion that the safe harbor

statute is broadly defined to include the reporting of known or

suspected criminal offenses or suspicious activities, by filing

a SAR or by reporting by other means, with state and local law

enforcement authorities, as well as with the Agencies and FinCEN.

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Bank Secrecy Act Manual September 1997

Page 13

A few commenters requested that the Board make explicit

the safe harbor protections of 31 U.S.C. 5318(g)(2) and (3) on

the SAR. They are included in new Section 208.20(k) of this rule

and on the form.

Record Retention. Several commenters expressed theRecord Retention.

view that the 10-year period for the retention of records in

Section 208.20(g) was excessive, especially in light of a five-

year record retention requirement for records that is contained

in the Bank Secrecy Act. The 10-year period in the Board’s

proposed regulation would have continued the Board’s existing

record retention requirement for criminal referral forms.

However, in recognition of the potential burden of document

retention on financial institutions, the Board has limited the

record retention period to five years.

Dollar Thresholds. A few commenters encouraged theDollar Thresholds.

Board to raise the dollar thresholds for known or suspected

criminal conduct by non-insiders, or to establish a dollar

threshold for insiders. The Board has considered these comments,

but at this time it believes that the thresholds meet and

properly balance the dual concerns of prosecuting criminal

activity involving banking organizations and minimizing the

burden on banking organizations. With respect to the suggestion

that the Board adopt a dollar threshold for insider violations,

it is noted that insider abuse has long been a key concern and

focus of enforcement efforts at the Board. With the development

of a new sophisticated automated database, the Board and law

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 14

enforcement agencies will have the benefit of a comprehensive and

easily accessible catalogue of known or suspected insider

wrongdoing. The Board does not wish to limit the information it

receives regarding insider wrongdoing. Some petty crimes, for

example, repetitive thefts of small amounts of cash by an

employee who frequently moves between banking organizations, may

warrant enforcement action or criminal prosecution.

One commenter suggested an indexed threshold, based on

the regional differences in the various dollar thresholds below

which the federal, state, and local prosecutors generally decline

prosecution. While the Board recognizes that there may be

regional variations in the dollar amount of financial crimes

generally prosecuted, the Board’s concern is to place the

relevant information in the hands of the investigating and

prosecuting authorities. The prosecuting authorities then may

consider whether to pursue a particular matter. In the Board’s

view, the dollar thresholds proposed and adopted in this final

rule best balance the interests of law enforcement and banking

organizations. The Board also believes that indexed thresholds

could create more confusion than benefit to banking

organizations.

Commenters also suggested the creation of a dollar

threshold for the reporting of suspicious activities relating to

money laundering offenses. A $5,000 threshold has been

established for reporting of such suspicious activities.

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Bank Secrecy Act Manual September 1997

Page 15

Questions were raised regarding the permissibility of

filing SARs in situations in which the dollar thresholds for

known or suspected criminal conduct or suspicious activity are

not met and the applicability of the safe harbor provisions of 31

U.S.C. 5318(g) to such non-mandatory filings. It is the opinion

of the Board that the safe harbor provisions of 31 U.S.C. 5318(g)

cover all reports of suspected or known criminal violations and

suspicious activities to law enforcement authorities, regardless

of whether such reports are filed pursuant to the mandatory

requirements of the Board’s regulations or are voluntary.

Notification of On-Going Violations and of State andNotification of On-Going Violations and of State and

Local Law Enforcement Authorities. Proposed Section 208.20(d)Local Law Enforcement Authorities.

required a banking organization to notify immediately the law

enforcement authorities in the event of an on-going violation.

Section 208.20(e) encourages the filing of a copy of the SAR with

state and local law enforcement agencies in appropriate cases.

This requirement and guidance were found by some commenters to be

unclear as to when immediate notification or the filing of the

SAR with state and local authorities would be required. The

Board wishes to clarify that immediate notification is limited to

situations involving on-going violations, for example, when a

check kite or money laundering has been detected and may be

continuing. It is impossible for the Board to contemplate all of

the possible circumstances in which it might be appropriate for

a banking organization to advise state and local law enforcement

authorities. Banking organizations should use their best

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 16

judgment regarding when to alert them regarding on-going criminal

offenses or suspicious activities.

Supporting Documentation. The proposed requirementsSupporting Documentation.

that an institution maintain ″related″ documentation and make

″supporting″ documentation available to the law enforcement

agencies upon request were criticized as inconsistent and vague.

One commenter questioned whether the Board intended a substantive

difference in meaning between ″related″ and ″supporting.″ As a

substantive difference is not intended, the Board has referred to

″supporting″ documentation in the final rule in reference both to

the maintenance and production requirements. The Board believes

that the use of the word ″supporting″ is more precise and limits

the scope of the information which must be retained to that which

would be useful in proving that the crime has been committed and

by whom it has been committed. As to the criticism that the

meaning of ″related″ or ″supporting″ documentation is vague, it

is anticipated that banking organizations will use their judgment

in determining the information to be retained. It is impossible

for the Board to catalogue the precise types of information

covered by this requirement, as it necessarily depends upon the

facts of a particular case.

Scope of Confidentiality Requirement. One commenterScope of Confidentiality Requirement.

correctly noted that the proposed regulation is unclear as to

whether the confidentiality requirement applies only to the

information contained on the SAR itself, or whether the

requirement extends to the ″supporting″ documentation. The Board

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Bank Secrecy Act Manual September 1997

Page 17

takes the position that only the SAR and the fact that supporting

documentation to a SAR exists are subject to the confidentiality

requirements of 31 U.S.C. 5318(g). The supporting documentation

itself is not subject to the confidentiality provisions of

31 U.S.C. 5318(g). The safe harbor provisions of 31 U.S.C.

5318(g), however, apply to the SAR and supporting documentation,

as set forth in Section 208.20(k).

Provisions of Supporting Documentation to LawProvisions of Supporting Documentation to Law

Enforcement Authorities Upon Request. Many commenters noted thatEnforcement Authorities Upon Request.

the guidance provided in the Board’s proposed regulation

regarding giving supporting documentation to law enforcement

agencies upon their request after the filing of a SAR was unclear

or contrary to law. Some questioned whether law enforcement

agencies would still need to subpoena relevant documents from a

banking organization. The Board’s regulation requires banking

organizations filing SARs to identify, maintain and treat the

documentation supporting the report as if it were actually filed

with the SAR. This means that subsequent requests from law

enforcement authorities for the supporting documentation relating

to a particular SAR does not require the service of a subpoena or

other legal processes normally associated with providing

information to law enforcement agencies.

Civil Litigation. The Board was encouraged to adoptCivil Litigation.

regulations that would make SARs undiscoverable in civil

litigation in order to avoid situations in which a banking

organization could be ordered by a court to produce a SAR in

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September 1997 Bank Secrecy Act Manual

Page 18

civil litigation and could be confronted with the prospect of

having to choose between being found in contempt or violating the

Board’s rules. In the opinion of the Board, 31 U.S.C. 5318(g)

precludes the disclosure of SARs. The final rule requires a

banking organization that receives a subpoena or other request

for a SAR to notify the Board so that the Board may, if

appropriate, intervene in litigation or seek the assistance of

the U.S. Department of Justice.

Maintenance of Originals. Proposed Section 208.20(g)Maintenance of Originals.

required the maintenance of supporting documentation in its

original form. A number of commenters noted that electronic

storage of documents is becoming the rule rather than the

exception, and that requiring the storage of paper originals

would impose undue burdens on financial institutions. Moreover,

some records are retained only in a computer database. The

proposed regulation reflected the concerns of the law enforcement

agencies that the best evidence be preserved. However, upon

further consideration, the Board wishes to clarify that the

electronic storage of original documentation related to the

filing of a SAR is permissible. In addition, the Board

recognizes that a banking organization will not always have

custody of the originals of documents and that some documents

will not exist at the organization in paper form. In those

cases, preservation of the best available evidentiary documents,

for example, computer disks or photocopies, should be acceptable.

This has been reflected in the final rule by changing the

Suspicious Activity Report 1002.0

Bank Secrecy Act Manual September 1997

Page 19

reference to original documents to ″original documents or

business record equivalents.″

Investigation and Proof Burdens. One commenterInvestigation and Proof Burdens.

expressed the concern that a banking organization would need to

establish probable cause before reporting crimes for which an

essential element of the proof of the crime was the intent of the

actor. The Board does not intend that banking organizations

assume the burden of proving illegal conduct; rather, banking

organizations are required to report known or suspected crimes or

suspicious activities in accordance with this final rule.

Supplementary or Corrective Information; Reporting ofSupplementary or Corrective Information; Reporting of

Multiple Crimes or Suspects. Material information thatMultiple Crimes or Suspects.

supplements or corrects a SAR should be filed with FinCEN by

means of a subsequent SAR. The first page of the SAR provides

boxes for the reporter to indicate whether the report is an

initial, a corrected or a supplemental report.

One commenter requested guidance on the reporting of

multiple crimes or related crimes committed by more than one

individual. The instructions to the SAR contemplate that

additional suspects may be reported by means of a supplemental

page. Likewise, multiple crimes committed by a suspect may be

reported by means of multiple check-offs on the SAR, or if

needed, by a written addendum to the SAR. In the event that

related crimes have been committed by more than one person, a

description of the related crimes may be made by addendum to the

SAR. The Board encourages filers to make a complete report of

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 20

all known or suspected criminal or suspicious activity. The SAR

may be supplemented in order to facilitate a complete disclosure.

Calculation of Time Frame for Reporting. A number ofCalculation of Time Frame for Reporting.

commenters requested that the Board clarify the application of

the deadline for filing SARs. The Board’s proposed regulation

used the broadest possible language to set the time frames for

the reporting of known or suspected criminal offenses and

suspicious activities in order to best guide reporting

institutions. Absolute deadlines for the filing of SARs are

important to the investigatory and prosecutorial efforts of law

enforcement authorities. It is expected that banking

organizations will meet the filing deadlines once conduct

triggering the reporting requirements is identified. Further

clarification of the time frames is not needed in the Board’s

view.

Board Notification Requirements. Several commentersBoard Notification Requirements.

expressed general support for the modification of the reporting

requirement that permits reporting of SARs to a committee of the

board. As a matter of clarification, notification of a committee

of the board relieves the banking organization of the obligation

to disclose the SARs filed to the entire board. It would be

expected, however, that the appointed committee, such as the

audit committee, would report to the full board at regular

intervals with respect to routine matters in the same manner and

to the same extent as other committees report at board meetings.

With respect to serious crimes or insider malfeasance, the

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Bank Secrecy Act Manual September 1997

Page 21

appointed committee likely should consider it appropriate to make

more immediate disclosure to the full board.

Some larger banking organizations expressed the view

that prompt disclosure of SARs to the board or a committee would

impose a serious burden because larger organizations typically

file a larger number of criminal referral forms (now, SARs).

While the Board acknowledges that larger institutions may have

more SARs to report to the board or a committee, this does not

alter the directors’ fiduciary obligation to monitor, for

example, the condition of the institution and to take action to

prevent losses. The final regulation does not dictate the

content of the board or committee notification, and, in some

cases, such as when relatively minor non-insider crimes are to be

reported, it may be completely appropriate to provide only a

summary listing of SARs filed. The Board expects the management

of banking organizations to provide a more detailed notification

to the boards or committees of SARs involving insiders or a

potential material loss to the institutions.

Information Sharing. Commenters suggested that theInformation Sharing.

final regulations should somehow facilitate the sharing of

information among banking organizations in order to better detect

new fraudulent schemes. It is anticipated that the Treasury

Department, through FinCEN, and the Agencies, will keep reporting

entities apprised of recent developments and trends in banking-

related crimes through periodic pronouncements, meetings, and

seminars.

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September 1997 Bank Secrecy Act Manual

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Single Filing Requirement; Acknowledgement of Filings.Single Filing Requirement; Acknowledgement of Filings.

Some commenters requested clarification of the single form filing

requirement. The Board reiterates that the filing of a SAR with

FinCEN is the only filing that is required. Federal and state

law enforcement and bank supervisory agencies will have access to

the database created and maintained by FinCEN on behalf of the

Agencies and the Department of Treasury; thus, a single filing

with FinCEN is all that is required under the new reporting

system.

Commenters also requested that the final rule permit

the filing of SARs via telecopier. Such filings are not

compatible with the system developed by the Agencies and FinCEN.

Banking organizations can file the SAR via magnetic media using

the computer software to be provided to all banking organizations

by the Board and each of the other Agencies with respect the

institutions they supervise. Larger banking organizations that

currently file currency transaction reports via magnetic tape

with FinCEN may also file SARs by magnetic tape.

Regulatory Flexibility ActRegulatory Flexibility Act

The Board certifies that this final regulation will not

have a significant financial impact on a substantial number of

small banks or other small entities.

Paperwork Reduction ActPaperwork Reduction Act

In accordance with Section 3506 of the Paperwork

Reduction Act of 1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix

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Bank Secrecy Act Manual September 1997

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A.1), the Board reviewed the rule under the authority delegated

to the Board by the Office of Management and Budget.

The collection of information requirements in this

regulation are found in 12 CFR 208.20, 211.8, 211.24, and 225.4.

This information is mandatory and is necessary to inform

appropriate law enforcement agencies of known or suspected

criminal or suspicious activities that take place at or were

perpetrated against financial institutions. Information

collected on this form is confidential (5 U.S.C. 552(b)(7) and

552a(k)(2), and 31 U.S.C. 5318(g)). The federal financial

institution regulatory agencies and the U.S. Department of

Justice may use and share the information. The

respondents/recordkeepers are for-profit financial institutions,

including small businesses.

The Federal Reserve may not conduct or sponsor, and an

organization is not required to respond to, this information

collection unless it displays a currently valid OMB control

number. The OMB control number is 7100-0212.

No comments specifically addressing the hour burden

estimate were received.

It is estimated that there will be 12,000 responses

from state member banks, bank holding companies, Edge and

agreement corporations, and U.S. branches and agencies of foreign

banks.

Both the new regulation and revisions made to the

proposed regulation and reflected in this final rule simplify the

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

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submission of the reporting form and shorten the records

retention requirement. However, the same amount of information

will be collected under the new rule. The burden per respondent

varies depending on the nature of the criminal or suspicious

activity being reported. The Federal Reserve estimates that the

average annual burden for reporting and recordkeeping per

response will remain .6 hours. Thus the Federal Reserve

estimates the total annual hour burden to be 7,200 hours. Based

on an hourly cost of $20, the annual cost to the public is

estimated to be $144,000.

Send comments regarding the burden estimate, or any

other aspect of this collection of information, including

suggestions for reducing the burden, to: Secretary, Board of

Governors of the Federal Reserve System, 20th and C Streets,

N.W., Washington, D.C. 20551 and to the Office of Management and

Budget, Paperwork Reduction Project (7100-0212), Washington,

D.C. 20503.

List of SubjectsList of Subjects

12 CFR Part 208

Accounting, Agriculture, Banks, Banking, Confidential

Business information, Crime, Currency, Federal Reserve System,

Flood insurance, Mortgages, Reporting and recordkeeping

requirements, Securities.

12 CFR Part 211

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Exports, Federal Reserve System, Foreign Banking,

Holding companies, Investments, Reporting and recordkeeping

requirements.

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September 1997 Bank Secrecy Act Manual

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12 CFR Part 225

Administrative practice and procedures, Banks, Banking,

Federal Reserve System, Holding companies, Reporting and

recordkeeping requirements, Securities.

For the reasons set forth in the preamble, Parts 208,

211 and 225 of chapter II of title 12 of the Code of Federal

Regulations are amended as set forth below:

PART 208 -- MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THEPART 208 -- MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM (REGULATION H)FEDERAL RESERVE SYSTEM (REGULATION H)

1. The Authority citation for 12 CFR Part 208

continues to read as follows:

Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a,Authority:

371d, 461, 481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o,

1831p-1, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,

781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31

U.S.C. 5318; 42 U.S.C. 4102a, 4104a, 4104b, 4106, and 4128.

2. Section 208.20 and its heading are revised to read

as follows:

§ 208.20 Suspicious Activity Reports.§ 208.20 Suspicious Activity Reports.

(a) Purpose. This section ensures that a state member

bank files a Suspicious Activity Report when it detects a known

or suspected violation of Federal law, or a suspicious

transaction related to a money laundering activity or a violation

of the Bank Secrecy Act. This section applies to all state

member banks.

(b) Definitions. For the purposes of this section:

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Bank Secrecy Act Manual September 1997

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(1) FinCEN means the Financial Crimes Enforcement

Network of the Department of the Treasury.

(2) Institution-affiliated party means any

institution-affiliated party as that term is defined in 12 U.S.C.

1786(r), or 1813(u) and 1818(b)(3),(4) or (5).

(3) SAR means a Suspicious Activity Report on the form

prescribed by the Board.

SAR with the appropriate Federal law enforcement agencies and the

Department of the Treasury in accordance with the form’s

instructions by sending a completed SAR to FinCEN in the

following circumstances:

(1) Insider abuse involving any amount. Whenever the

state member bank detects any known or suspected Federal criminal

violation, or pattern of criminal violations, committed or

attempted against the bank or involving a transaction or

transactions conducted through the bank, where the bank believes

that it was either an actual or potential victim of a criminal

violation, or series of criminal violations, or that the bank was

used to facilitate a criminal transaction, and the bank has a

substantial basis for identifying one of its directors, officers,

employees, agents or other institution-affiliated parties as

having committed or aided in the commission of a criminal act

regardless of the amount involved in the violation.

(2) Violations aggregating $5,000 or more where a

suspect can be identified. Whenever the state member bank

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 28

detects any known or suspected Federal criminal violation, or

pattern of criminal violations, committed or attempted against

the bank or involving a transaction or transactions conducted

through the bank and involving or aggregating $5,000 or more in

funds or other assets, where the bank believes that it was either

an actual or potential victim of a criminal violation, or series

of criminal violations, or that the bank was used to facilitate a

criminal transaction, and the bank has a substantial basis for

identifying a possible suspect or group of suspects. If it is

determined prior to filing this report that the identified

suspect or group of suspects has used an ″alias,″ then

information regarding the true identity of the suspect or group

of suspects, as well as alias identifiers, such as drivers’

license or social security numbers, addresses and telephone

numbers, must be reported.

(3) Violations aggregating $25,000 or more regardless

of a potential suspect. Whenever the state member bank detects

any known or suspected Federal criminal violation, or pattern of

criminal violations, committed or attempted against the bank or

involving a transaction or transactions conducted through the

bank and involving or aggregating $25,000 or more in funds or

other assets, where the bank believes that it was either an

actual or potential victim of a criminal violation, or series of

criminal violations, or that the bank was used to facilitate a

criminal transaction, even though there is no substantial basis

for identifying a possible suspect or group of suspects.

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Bank Secrecy Act Manual September 1997

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(4) Transactions aggregating $5,000 or more that

involve potential money laundering or violations of the Bank

Secrecy Act. Any transaction (which for purposes of this

paragraph (c)(4) means a deposit, withdrawal, transfer between

accounts, exchange of currency, loan, extension of credit,

purchase or sale of any stock, bond, certificate of deposit, or

other monetary instrument or investment security, or any other

payment, transfer, or delivery by, through, or to a financial

institution, by whatever means effected) conducted or attempted

by, at or through the state member bank and involving or

aggregating $5,000 or more in funds or other assets, if the bank

knows, suspects, or has reason to suspect that:

(i) The transaction involves funds derived from

illegal activities or is intended or conducted in

order to hide or disguise funds or assets derived

from illegal activities (including, without

limitation, the ownership, nature, source,

location, or control of such funds or assets) as

part of a plan to violate or evade any law or

regulation or to avoid any transaction reporting

requirement under federal law;

(ii) The transaction is designed to evade any

regulations promulgated under the Bank Secrecy

Act; or

(iii) The transaction has no business or apparent

lawful purpose or is not the sort in which the

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 30

particular customer would normally be expected to

engage, and the bank knows of no reasonable

explanation for the transaction after examining

the available facts, including the background and

possible purpose of the transaction.

(d) Time for reporting. A state member bank is

required to file a SAR no later than 30 calendar days after the

date of initial detection of facts that may constitute a basis

for filing a SAR. If no suspect was identified on the date of

detection of the incident requiring the filing, a state member

bank may delay filing a SAR for an additional 30 calendar days to

identify a suspect. In no case shall reporting be delayed more

than 60 calendar days after the date of initial detection of a

reportable transaction. In situations involving violations

requiring immediate attention, such as when a reportable

violation is on-going, the financial institution shall

immediately notify, by telephone, an appropriate law enforcement

authority and the Board in addition to filing a timely SAR.

(e) Reports to state and local authorities. State

member banks are encouraged to file a copy of the SAR with state

and local law enforcement agencies where appropriate.

(f) Exceptions. (1) A state member bank need not

file a SAR for a robbery or burglary committed or attempted that

is reported to appropriate law enforcement authorities.

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Bank Secrecy Act Manual September 1997

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(2) A state member bank need not file a SAR for lost,

missing, counterfeit, or stolen securities if it files a report

pursuant to the reporting requirements of 17 CFR 240.17f-1.

(g) Retention of records. A state member bank shall

maintain a copy of any SAR filed and the original or business

record equivalent of any supporting documentation for a period of

five years from the date of the filing of the SAR. Supporting

documentation shall be identified and maintained by the bank as

such, and shall be deemed to have been filed with the SAR. A

state member bank must make all supporting documentation

available to appropriate law enforcement agencies upon request.

(h) Notification to board of directors. The

management of a state member bank shall promptly notify its board

of directors, or a committee thereof, of any report filed

pursuant to this section.

(i) Compliance. Failure to file a SAR in accordance

with this section and the instructions may subject the state

member bank, its directors, officers, employees, agents, or other

institution-affiliated parties to supervisory action.

(j) Confidentiality of SARs. SARs are confidential.

Any state member bank subpoenaed or otherwise requested to

disclose a SAR or the information contained in a SAR shall

decline to produce the SAR or to provide any information that

would disclose that a SAR has been prepared or filed citing this

section, applicable law (

e.g.

, 31 U.S.C. 5318(g)), or both, and

notify the Board.

1002.0 Suspicious Activity Report

September 1997 Bank Secrecy Act Manual

Page 32

(k) Safe Harbor. The safe harbor provisions of

31 U.S.C. 5318(g), which exempts any state member bank that makes

a disclosure of any possible violation of law or regulation from

liability under any law or regulation of the United States, or

any constitution, law or regulation of any state or political

subdivision, covers all reports of suspected or known criminal

violations and suspicious activities to law enforcement and

financial institution supervisory authorities, including

supporting documentation, regardless of whether such reports are

filed pursuant to this section or are filed on a voluntary basis.

PART 211 -- INTERNATIONAL BANKING OPERATIONS (REGULATION K)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.,

Authority:

3101 et seq., 3901 et seq..

§§ 211.8 and 211.24 [Amended]§§ 211.8 and 211.24 [Amended]

2. In §§ 211.8 and 211.24(f), remove the words

″criminal referral form″ and add, in their place, the words

″suspicious activity report″.

PART 225 -- BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROLPART 225 -- BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)(REGULATION Y)

1. The Authority citation for 12 CFR Part 225

continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i,Authority:

1831p-1, 1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-

3351, 3907, and 3909.

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Bank Secrecy Act Manual September 1997

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§ 225.4 [Amended]§ 225.4 [Amended]

2. In § 225.4, the heading of paragraph (f) is revised

to read ″Suspicious Activity Report.″.

3. In § 225.4(f), remove the words ″criminal referral

form″ and add, in their place, the words ″suspicious activity

report″.

By order of the Board of Governors of the Federal

Reserve System, January 30, 1996.

(signed) William W. Wiles

William W. Wiles,

Secretary of the Board.

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September 1997 Bank Secrecy Act Manual

Page 34

Payable Through Accounts

Introduction Section 1101.0

WHAT IS A PAYABLE THROUGH

ACCOUNT?

A Payable Through Account (PTA) is a demand

deposit account through which banking entities

located in the United States extend check-

writing privileges to the customers of a foreign

bank. Under this PTA arrangement, a U.S. bank,

Edge corporation or the U.S. branch or agency

of a foreign bank (‘‘U.S. banking entities’’),

opens a master checking account in the name of

a foreign bank operating outside the United

States.

The master account subsequently is divided

by the foreign bank into ‘‘sub-accounts,’’ each

in the name of one of the foreign bank’s

customers. The foreign bank extends signature

authority on its master account to its own

customers. The number of sub-accounts permit-

ted under this arrangement is virtually unlim-

ited. See Diagram 1.

Deposits into the master account may ﬂow

through the foreign bank, which pools them for

daily transfer to the U.S. banking entity, or the

funds may ﬂow directly to the U.S. banking

entity for credit to the master account, with

further credit to the sub-account. Checks encoded

with the foreign bank’s account number, along

with a numeric code to identify the sub-account,

provide sub-account holders with access to

the U.S. payments system. Thus, the PTA

mechanism permits the foreign bank operating

outside the U.S. to offer its customers, the

sub-accountholders, U.S. dollar denominated

checks and ancillary services, which may include

the ability to receive wire transfers and deposits

into the sub-accounts, and to cash checks.

U.S. banking entities may require foreign

banks to execute a contract stipulating that all

matters pertaining to sub-accounts are the sole

responsibility of the foreign bank. Sub-account

records are typically maintained by the foreign

Diagram 1

Bank Secrecy Act Manual September 1997

Page 1

bank in the foreign jurisdiction in which it is

chartered and, for the most part, statements and

account activity notices are also issued by the

foreign bank outside of the United States.

Certain aspects of the PTA arrangement may

provide opportunities for illicit activities. First,

weak licensing laws, promulgated by a prolifer-

ating offshore ﬁnancial services sector and com-

pounded by weak or absent bank supervision in

some offshore ﬁnancial centers, have created an

environment in which access to banking licenses

is unencumbered and unregulated.

Second, in the PTA arrangement, the U.S.

banking entity may regard the foreign bank as

its sole customer. This means that even if the

U.S. banking entity has adequate ‘‘know your

customer’’ guidelines in place with respect to

its own customers, such guidelines may not

be extended to the customers of the foreign

bank.

In addition, some U.S. banking entities rou-

tinely permit sub-account holders to have cash

deposit and cash withdrawal privileges from the

foreign bank’s master account. These activities,

especially if they are frequent and involve large

amounts, indicate a potential for abuse, in light

of uncertainty as to the true identity of the

sub-account holders. Finally, PTAs used in con-

junction with a U.S. ofﬁce of the foreign bank,

such as a representative ofﬁce or a subsidiary,

may enable the foreign bank to, in effect, offer

the same services as a branch without being

subject to Federal Reserve supervision.

PTAs have been used for many years by credit

unions, insurance companies and investment

companies. More recently, PTAs have been

marketed to foreign banks that do not have a

U.S. presence as a way to clear U.S. dollar

denominated checks through the U.S. payments

system. This product has also been offered

under different names by a variety of banking

entities. Although the most common alternative

names used by banking entities are ‘‘pass-

through account’’ or ‘‘pass-by account,’’ the

banking entity may have another name for this

product which does not identify it as a PTA. In

this event, a further check into the foreign bank

correspondent relationships existing at the

examined institution may be necessary.

BENEFITS AND RISKS

ASSOCIATED WITH PAYABLE

THROUGH ACCOUNTS

The objectives of U.S. banking entities market-

ing PTAs, and foreign banks which subscribe to

the PTA service, may vary from situation to

situation. However, there are essentially three

beneﬁts that currently drive provider and user

interest: a) permits U.S. banking entities to

attract dollar deposits from the home market of

foreign banks without jeopardizing the foreign

bank’s relationship with its clients; b) provides

fee income potential for both the U.S. PTA

provider and the foreign bank; and, c) the

foreign bank can offer its customers efﬁcient and

low cost access to the U.S. payment system.

The safety and soundness risks most likely to

be encountered by U.S. banking entities provid-

ing PTA services to foreign banks, in addition to

the possible use of the banking entities in money

laundering schemes, are ‘‘reputational,’’ with

the potential related loss of business, and the

payment of legal expenses. Violations of the

Bank Secrecy Act and related statutes, the

International Emergency Economic Powers Act,

and the Trading with the Enemy Act can also

result from the PTA arrangement.

CONTRACTUAL AGREEMENTS

There may be a comprehensive written contract

agreement between the U.S. banking entity

offering the PTA and the foreign bank that

governs their relationship and, among other

things, the requirements of the account and

services offered, eligible sub-account holders,

the accounting and recordkeeping to be done

by both parties, fees, and required minimum

balance, the provision of overdraft lines of

credit, indemniﬁcation for bad checks and losses,

and the legal jurisdiction under which disputes

will be resolved. It is important to note that the

contract is between the U.S. banking entity and

the foreign bank. The written agreement should

be reviewed as it may provide evidence and

documentation for the policies and procedures

that the U.S. banking entity has developed.

1101.0 Payable Through Accounts

September 1997 Bank Secrecy Act Manual

Page 2

Payable Through Accounts

Examination Procedures Section 1102.0

Y N Comments

1. Review the U.S.-based bank’s deposit ledger and

determine if the bank offers payable through

accounts to foreign banks. If so, identify which

banks and country(s) of origin. If no, do not

complete this section.

Advisory #1

The Federal Reserve has established guidelines

for the maintenance of payable through accounts.

(See SR 95-10 (SUP), March 3, 1995, Sec-

tion 1402.0 of the BSA Examination Manual).

The guidelines state that it is inconsistent with

the principles of safe and sound banking for

U.S.-based banking entities to offer payable

through account services without developing

andmaintainingpoliciesandproceduresdesigned

to guard against the possible improper or illegal

use of their payable through account facilities by

foreign banks and their customers.

For each payable through account maintained

for a foreign ﬁnancial institution, the U.S. bank-

ing entity should either: (1) obtain adequate

information about the ultimate users of the

payable through accounts; (2) be able to rely on

the home country supervisor to require the

foreign bank to identify and monitor the trans-

actions of its own customers; or (3) ensure that

its payable through account is not being used for

money laundering or other illicit purposes.

Y N Comments

2. Review the contract with the foreign bank. Does the

contract:

a. address procedures for opening sub-accounts?

b. require the master account holder to provide the

U.S.-based bank with the true identity of sub-

account holders?

c. allow cash transactions by sub-account holders

within the U.S. borders?

d. require the foreign bank to investigate suspi-

cious transactions and report ﬁndings to the

U.S.-based bank?

e. clearly state the liability of both the U.S.-based

bank and the foreign bank to which the payable

through service is being offered?

Bank Secrecy Act Manual September 1997

Page 1

Y N Comments

f. have approval of personnel with appropriate

authority?

g. have approval of the legal department?

3. Does the U.S.-based bank have an effective system

of internal controls for opening and monitoring

payable through accounts that include written poli-

cies and procedures providing for:

a. procedures for opening accounts?

b. operational procedures?

c. staff responsibilities?

d. training?

e. audit?

f. identifying and reporting of unusual or suspi-

cious transactions (e.g., money laundering)?

4. Does the U.S.-based bank apply its ‘‘know your

customer’’ policy to:

a. payable through accounts

b. sub-account holders?

c. Review documentation to determine

effectiveness.

5. Does the U.S.-based bank prohibit foreign banks

from opening sub-accounts (second tier) for other

foreign banks, casas de cambios, ﬁnance companies

or other ﬁnancial intermediaries? If not, what pro-

cedures are in place for the U.S. bank to understand

the identity of these second-tier sub-accounts hold-

ers and the nature of the business transactions (see

Diagram #1 in Section 1101.0)?

6. Does the U.S.-based bank review the listing of

account and sub-account holders to ensure that no

accounts have been opened to individuals or busi-

nesses located in countries that are prohibited with

doing business with the U.S. and Specially Desig-

nated Nationals or Specially Designated Narcotics

Trafﬁckers as determined by the Treasury’s Ofﬁce

of Foreign Assets Control?

1102.0 Payable Through Accounts

September 1997 Bank Secrecy Act Manual

Page 2

Y N Comments

7. Does the U.S.-based bank have written internal

controls policies to monitor account activity for

suspicious transactions? Determine how monitoring

occurs.

8. Do the foreign banks that maintain the payable

through relationship properly review and explain

suspicious transactions to the U.S.-based bank?

Review and determine if written procedures provide

for the explanation of suspicious accounts.

9. Does the U.S.-based bank allow cash transactions

by sub-account holders? If so, does the U.S. bank

properly report CTRs for large cash transactions?

10. Does the U.S.-based bank conduct audits of payable

through accounts to ensure compliance with the

contract and appropriate laws and regulations? If

so, note the scope and frequency of the audit.

11. Does the U.S.-based bank conduct audits of the

foreign bank, or review in some other way:

a. the procedures of the foreign bank for opening

accounts, to determine if they are consistent

with U.S. requirements?

b. the foreign bank’s monitoring of sub-account

holder activities to detect and report suspicious

or unusual transactions?

12. Does the U.S.-based bank maintain adequate docu-

mentary information (i.e. ﬁnancial statements,

licensing conﬁrmation, etc.) regarding the foreign

bank?

13. Has the examiner determined, if possible, whether

the home country supervisor of the foreign bank

requires banks in that jurisdiction to identify and

monitor the transactions of its own customers

consistent with U.S. requirements?

14. Has the U.S.-based bank determined whether the

home country supervisor of the foreign bank requires

banks in that jurisdiction to identify and monitor the

transactions of its own customers consistent with

U.S. requirements?

Payable Through Accounts 1102.0

Bank Secrecy Act Manual September 1997

Page 3

Y N Comments

15. After reviewing the responses to procedures

1 through 14, above, answer the questions listed

below:

a. Does the U.S.-based bank obtain adequate

information about the ultimate users of the

payable through accounts?

b. Is the U.S.-based bank able to rely on the home

country supervisor to require the foreign bank

to identify and monitor the transactions of its

own customers?

c. Can the U.S.-based bank ensure that its payable

through account is not being used for money

laundering or other illicit purposes?

Advisory #2

If procedure 15, a, b and c is answered in the

afﬁrmative, you may stop. In the event that the

answer to procedure 15 a, b, or c is in the

negative, Federal Reserve guidelines recom-

mend that the U.S.-based banking entity termi-

nate the payable through arrangement with the

foreign bank as expeditiously as possible.

Y N Comments

16. Has the U.S.-based bank taken steps to terminate

the account relationship as expeditiously as possible?

Advisory #3

In those cases where the U.S.-based institution

fails to take appropriate steps to terminate the

account relationship, the examiner should so

note this in the ‘‘Examiners Comments and

Conclusions’’ page of the examination report,

and bring the inappropriate practice to the atten-

tion of bank management.

1102.0 Payable Through Accounts

September 1997 Bank Secrecy Act Manual

Page 4