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Industry Letters

Know Your Customer Procedures for Electronic Cash Management Services


December 21, 1999

To The Chief Executive Officer of the Institution Addressed:

Recent events have highlighted how certain bank products offering electronic cash management services may be used by bank customers to launder money and/or conduct other illegal activities. The type of product in question offers customers access to diverse electronic banking services and, most importantly, allows customers to manage their cash balances from their own computers or data terminals. This feature allows bank customers to engage in a wide variety of transactions affecting their accounts from virtually anywhere in the world, without significant bank involvement. These products are available through third party vendors, although some institutions have developed proprietary products.

The particular transactions that are of serious concern to the Banking Department are those in which customers effectuate fund transfers from their accounts solely upon the customers’ own instructions. In these cases, the funds are transferred not by the bank, but by the customers themselves. A product that offers such access and control to customers, and indeed, the ability to conduct illegal transfers, may require more controls and supervision on the part of the bank than other similar products that cannot be utilized without direct involvement by bank personnel. In particular, use of the product should be governed by appropriate bank policies and procedures, and care should be given that such controls not be overridden or subject to shortcuts at the direction of, or in reliance upon, the referral of bank or other personnel. Emphasis should be placed on Know Your Customer concerns, including understanding the business of the customer, whether such an account is appropriate for the customer’s business and the anticipated parameters for use of the account.

To ensure compliance with all applicable policies and procedures and laws and regulations, banks that offer this kind of product must continuously monitor the accounts of customers who utilize this product with properly trained bank compliance personnel. In addition, each bank should ascertain that all of its products and services are tied into bank-wide compliance and audit efforts and that certain products, services or areas of the bank do not operate outside of this system of oversight and control.

All suspicious activities noted by such personnel should be reported immediately to bank officials in accordance with the bank’s policies and procedures. When required, Suspicious Activity Reports should be filed with the appropriate bank regulatory and law enforcement agencies.

Thank you for your cooperation in this matter.

Sincerely,

Elizabeth McCaul
Acting Superintendent of Banks

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