Warning, Guidelines Issued To Protect Against Improper or Illegal Use of "Payable
The FDIC is joining other federal regulators in
urging U.S. financial institutions to immediately establish and maintain policies and procedures
designed to guard against the possible improper or illegal use of "payable through" accounts. Also
called "pass through" accounts or "pass by" accounts, these generally are checking accounts marketed
to foreign banks that otherwise would not have the ability to offer their customers access to the U.S.
banking system. The attached FDIC guidelines provide more information about these accounts as
well as suggested internal controls and procedures.
Experience has shown, for example, that
some U.S. banking entities process thousands of checks on accounts where signature cards have been
completed abroad and submitted in bulk. These U.S. banking entities may have undertaken little or no
effort to independently obtain or verify information about the individuals and businesses who use the
accounts. Federal regulators are concerned that the use of "payable through" accounts may contribute
to unsafe and unsound banking practices and other misconduct, including money laundering and
related criminal activities. Please note that the traditional use of "payable through" accounts by
financial organizations in the United States, such as by credit unions and investment companies, has
not been a cause for concern.
U.S. banking entities used for
illegal purpose put their reputation at risk and face potentially serious financial losses from asset
seizures and forfeitures initiated by law enforcement authorities. If you have any questions about
"payable through" accounts, please contact your Division of Supervision Regional Office.
Stanley J. Poling
Distribution: FDIC-Supervised Banks
(Commercial and Savings)
March 30, 1995
Guidelines on Use of Payable Through Accounts
Over the past year, the Federal
financial institution regulatory agencies (agencies) have become aware of the increasing use of an
account service known as a "payable through account" that is being marketed by U.S. banks and the
U.S. branches of foreign banks ("U.S. banking entity(ies)") to foreign banks that otherwise would not
have the ability to offer their customers access to the U.S. banking system. This account service has
also been referred to by other names, such as "pass through accounts" and "pass by accounts."
The payable through account mechanism has long been used in
the United States by credit unions (e.g., for checking account services) and investment companies (e.g.,
for checking account services associated with money market management accounts) to offer their
respective customers the full range of banking services that only a commercial bank has the ability to
provide. The problems described below do not relate to these traditional uses of payable through
Explanation of Payable Through Accounts
The recent use of payable through accounts as an account service being offered by
U.S. banking entities to foreign banks involves the U.S. banking entity opening a checking account for
the foreign bank. The foreign bank then solicits customers that reside outside of the United States
who, for a fee, are provided with the means to conduct banking transactions in the United States
through the foreign bank's account at the U.S. banking entity. Typically, the foreign bank will provide
its customers, commonly referred to as "sub-account holders," with checks that enable the sub-account
holder to draw on the foreign bank's account at the U.S. banking entity. The group of sub-account
holders, which may number several hundred for one payable through account, all become signatories
on the foreign bank's account at the U.S. banking entity.¹ This results in individuals and businesses,
who may not have been subject to the same requirements imposed on U.S. citizens or residents for
opening an account at a U.S. banking entity, possessing the ability to write checks and make deposits
at a U.S. banking entity, as if such individuals and businesses were the actual account holders at the
U.S. banking entity .²
It appears that some U.S. banking
entities are not exercising the same degree of care with respect to payable through accounts that they
exercise for domestic customers that want to open checking or other types of account relationships
directly with the banking organizations. Experience has shown that some U.S. banking entities simply
collect signature cards that have been completed abroad and have been submitted to them in bulk by
the foreign banks, and then proceed to process thousands of checks issued by the sub-account holders,
as well as other banking transactions, through the foreign banks' accounts at the U.S. banking entities.
These U.S. banking entities undertake little or no effort independently to obtain or verify information
about the individuals and businesses who use their accounts.
Possible Illegal or Improper
Conduct Associated With Payable Through Accounts
The traditional use of payable through accounts by financial organizations in the United States
(i.e., credit unions and investment companies) has not been a cause for concern by bank regulators.
These organizations are regulated by federal or state agencies, or are otherwise subject to established
industry standards; and they appear to have adopted adequate policies and procedures to establish the
identity of, and monitor the activity of, sub-account holders--in essence the credit union's depositors or
the investment company's mutual fund account holders. The same types of safeguards do not appear
to be present in some U.S. banking entities that provide payable through account services to foreign
The agencies are concerned that the use of payable through accounts
by foreign banks at U.S. banking entities may facilitate unsafe and unsound banking practices and
other misconduct, including money laundering and related criminal activities. Unless a U.S. banking
entity is able to identify adequately, and understand the transactions of, the ultimate users--all or most
of whom are off-shore--of the foreign bank's account maintained at the U.S. banking entity, there is a
potential for serious illegal conduct. Recent reports from law enforcement agencies confirm that some
money laundering and related illicit schemes have involved the use of foreign banks' payable through
account arrangements at U.S. banking entities. Should accounts at U.S. banking entities be used for
illegal purposes, the entities could be exposed not only to reputational risks, but also to serious risks of
financial losses as a result of asset seizures and forfeitures brought by law enforcement authorities.
Guidelines on Payable Through Account Activities
Because of the possibility of illicit activities being conducted through payable through accounts at
U.S. banking entities, we believe that it is inconsistent with the principles of safe and sound banking
for U.S. banking entities to offer payable through account services without developing and
maintaining policies and procedures designed to guard against the possible improper or illegal use of
their payable through account facilities by foreign banks and their customers.
These policies and procedures must be fashioned to enable each U.S. banking entity offering
payable through account services to foreign banks to identify sufficiently the ultimate users of its
foreign bank customers' payable through accounts, including obtaining (or having the ability to obtain)
in the United States substantially the same type of information on the ultimate users as the U.S.
banking entity obtains for its domestic customers. This may require a review of the foreign bank's
own procedures for identifying and monitoring sub-account holders, as well as the relevant statutory
and regulatory requirements placed on the foreign bank to identify and monitor the transactions of its
own customers by its home country supervisory authorities. In addition, U.S. banking entities should
have procedures whereby they monitor account activities conducted in their payable through accounts
with foreign banks and report suspicious or unusual activity in accordance with applicable FDIC
criminal referral regulations.
In those situations where (1) adequate information
about the ultimate users of the payable through accounts cannot be obtained; (2) the U.S. banking
entity cannot adequately rely on the home country supervisor to require the foreign bank to identify
and monitor the transactions of its own customers; or (3) the U.S. banking entity is unable to ensure
that its payable through accounts are not being used for money laundering or other illicit purposes, it is
recommended that the U.S. banking entity terminate the payable through arrangement with the foreign
bank as expeditiously as possible.
Even though we are asking that you begin immediately to
establish and maintain policies and procedures designed to guard against the possible improper or
illegal use of payable through account facilities, we understand that such new policies and procedures
will take some time to implement fully. As a first step, you should contact each foreign bank that
maintains any type of payable through account relationship with your banking organization in order to
bring the records related to its accounts into conformity with the aforementioned guidelines.
Should you have any questions with regard to this matter, please contact your
Division of Supervision Regional Office.
¹ In a recent adaption of the payable
through account service, foreign banks have opened accounts at U.S. banking entities and then
solicited other foreign banks, rather than individuals, to use their accounts at the U.S. banking entities.
These second tier foreign banks then solicit individuals as customers. This has resulted in thousands,
rather than hundreds, of individuals having signatory authority over a single account at a U.S. banking
² Payable through account activities should not
be confused with traditional correspondent banking relationships, through which a smaller bank will
enter into an agreement with a larger bank to process and complete transactions on behalf of the
smaller bank's customers or the smaller bank itself. In such an arrangement, the smaller bank's
customers are not aware of the correspondent banking relationships their bank has with other financial
institutions. The smaller bank's customers do not have access to their bank's account at the larger
correspondent bank. This differs significantly from a payable through account, where the sub-account
holders have direct control by virtue of their signatory authority over the foreign bank's payable
through account at the U.S. banking entity.