We do know, however, that domestic and foreign banks operating in the United States have been increasing their private banking activities and their reliance on income from private banking. Regulatory Efforts to Oversee Private Banking Activities

Federal banking regulators may review banks’ efforts to prevent or detect money laundering in their private banking activities during examinations,including recent examinations focused on their private banking activities. Instead of monitoring formal compliance, U.S. banking regulators try to identify what efforts the branches are making to combat money laundering and to determine whether the banks’ corporate KYC policies are being applied to activities, such as private banking activities, that the offshore branches may engage in. Offshore Jurisdictions’ Bank Secrecy Laws Represent Key Barriers to U.S. Regulators’ Oversight of Offshore Banking Activities

The third major area for our work was barriers to regulators’ efforts to oversee offshore banking activities in general. We found that secrecy laws in many offshore jurisdictions represent key barriers to U.S. oversight of offshore banking activities. For example, a limitation in some jurisdictions is that since regulators have been precluded from conducting on-site examinations, they rely primarily on banks’ internal audits to determine how well KYC policies and procedures are being applied to offshore branches of U.S. banks. Future Challenges That Confront Efforts to Combat Money Laundering

Several challenging questions confront U.S. policymakers and others involved in ongoing domestic and international efforts to combat money laundering through offshore banking activities. Other questions remain, related to the domestic oversight of banking and money laundering—especially with regard to the adequacy of current examination procedures, including knowing your customer. Does the jurisdiction require banks to report suspicious transactions?
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed money laundering in relation to private banking and highlighted some regulatory issues related to the vulnerability of selected offshore jurisdictions to money laundering, focusing on: (1) regulators' oversight of private banking in general; (2) regulators' oversight of private banking in selected offshore jurisdictions; (3) barriers that have hampered regulators' oversight of offshore banking; and (4) future challenges that confront regulators' efforts to combat money laundering in offshore jurisdictions.

What GAO Found

GAO noted that: (1) federal banking regulators have overseen private banking through examinations that, among other things, focus on banks' "know your customer" policies; (2) these policies enable banks to understand the kinds of transactions a particular customer is likely to engage in and to identify any unusual or suspicious transactions; (3) federal banking regulators have examination procedures that cover private banking activities conducted by banks operating in the United States; (4) in cases that involve private banking activities conducted by branches of U.S. banks operating in offshore jurisdictions, examiners rely primarily on banks' internal audit functions; (5) GAO found that the key barriers to U.S. regulators' oversight of offshore banking activities are secrecy laws that restrict access to banking information or that prohibit on-site examinations of U.S. bank branches in offshore jurisdictions; and (6) an important challenge that confronts efforts to combat money laundering is the extent to which such secrecy laws will continue to be barriers to U.S. and foreign regulators.