We also reviewed 21 OCC examination reports for 6 banks identified as actively involved in offshore private banking activities. Regulatory Efforts to Oversee Offshore Private Banking Activities

Federal banking regulators may review banks’ efforts to prevent or detect money laundering in their offshore private banking activities during overall compliance or BSA examinations; safety and soundness examinations; or, more recently, during targeted examinations of their private banking activities. Offshore Private Banking Accounts

Recognizing that offshore entities, such as PICs, that maintain U.S. private banking accounts tend to obscure account holders’ true identities, examiners are to look for specific KYC procedures that enable banks to identify and profile the beneficial owners of these offshore entities and their private banking accounts. Deficiencies Related to Offshore Private Banking Activities and Corrective Actions Taken by Banks

Our review of 1996 and 1997 examinations conducted under the FRBNY’s private banking initiative found that the most prevalent deficiency related to offshore private banking activities was a lack of documentation on the beneficial owners of PICs and other offshore entities that maintained U.S. accounts. Our review of FRBNY’s and OCC’s 1996 and 1997 examinations and our discussions with examiners and bank officials indicated that banks had started to take corrective actions to address deficiencies related to offshore private banking activities, but further improvements were needed. Secrecy laws to protect the privacy of individual accounts were in effect in all nine jurisdictions, and five of them impose criminal penalties on bank employees found to be in violation of the law (see table 1). Federal Banking Regulators’ Efforts to Work Around Secrecy Barriers Have Limitations

U.S. banking regulators are attempting to work around barriers related to offshore secrecy laws, but they remain hampered by limitations associated with these efforts. Impact of Offshore Jurisdictions’ Activities to Combat Money Laundering Remains Uncertain

We found that all nine offshore jurisdictions selected for review were engaged in some type of anti-money-laundering activities. The efforts of individual jurisdictions may contribute to the international fight against money laundering. However, it remains uncertain what impact these efforts may have on how the offshore jurisdictions’ own banking sectors operate or on the extent to which their secrecy laws will continue to represent barriers to U.S. and other foreign regulators. Banks Changing Procedures to Provide FRBNY With Access to Beneficial Owner Documentation

In spite of their concerns, officials from 11 of the 15 banks surveyed indicated that their banks had changed the way they maintain documentation on the beneficial owners of offshore entities that have U.S. accounts. Alternative Approaches to Regulatory Access to Beneficial Owner Documentation

As part of our survey of 15 banks that had been examined by FRBNY during its private banking initiative, we sought the views of bank officials on two approaches that were being considered by the Federal Reserve to regulatory access to documentation on the beneficial owners of PICs and other offshore entities that maintain U.S. accounts.
Why GAO Did This Study

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

What GAO Found

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