Definition
A Feeder Account in AML is a secondary or intermediary account that receives deposits from various sources, such as client transactions or third-party transfers, before consolidating those funds into a main concentration or master account. This structure facilitates the movement of funds in a way that can mask their true origin, ownership, or destination, making it a high-risk element in money laundering schemes. Unlike standard transactional accounts, feeder accounts are characterized by high-volume, repetitive inflows followed by swift transfers to a central account, triggering enhanced scrutiny under AML frameworks.
Purpose and Regulatory Basis
Feeder accounts serve to streamline fund collection in legitimate operations like cash pooling or treasury management but are prime targets for criminals due to their obfuscating potential in the layering stage of money laundering. Their monitoring is essential to disrupt the integration of dirty money into the legitimate economy, protecting financial system integrity. Key regulations include the Financial Action Task Force (FATF) Recommendations, particularly Recommendation 10 on customer due diligence and 13 on correspondent banking, which mandate risk-based controls for such accounts.
In the United States, the USA PATRIOT Act Section 312 requires enhanced due diligence for private banking and correspondent accounts, explicitly covering feeder-like structures in foreign financial institutions. The EU’s Anti-Money Laundering Directives (AMLD5 and AMLD6) emphasize transaction monitoring for accounts exhibiting feeder patterns, with Article 18 of AMLD5 requiring suspicious activity reporting. Nationally, frameworks like Pakistan’s Anti-Money Laundering Act 2010, under State Bank of Pakistan regulations, classify feeder accounts as payable-through accounts, demanding strict oversight.
When and How it Applies
Feeder accounts apply when transaction patterns show multiple small-to-medium deposits aggregating into large outflows to a single destination, often across borders or involving high-risk jurisdictions. Triggers include rapid fund accumulation without clear economic purpose, links to shell companies, or mismatches between account holder profiles and activity. Real-world use cases involve trade-based laundering, where exporters deposit proceeds into feeders before consolidating into offshore accounts, or virtual asset service providers funneling crypto conversions.
For example, a domestic bank notices a corporate account receiving daily wires from high-risk regions totaling $500,000 weekly, then transferring the lump sum to a foreign correspondent account; this flags as a feeder, prompting investigation. Application involves real-time monitoring systems scanning for velocity checks—ratio of inflows to outflows—and geographic risk scoring.
Types or Variants
Feeder accounts manifest in several variants, each with distinct risk profiles. Nested feeders occur in correspondent banking, where a respondent bank’s clients access the correspondent’s accounts directly, creating sub-feeder layers. Concentration feeders aggregate retail or corporate deposits into a zero-balance master account daily, common in multinational cash management but vulnerable to structuring.
Payable-through accounts (PTAs), a FATF-defined variant, allow third-party access to a respondent’s account at a correspondent bank, often used in sanctions evasion. Offshore feeders in master-feeder fund structures channel investor funds from tax havens into a central fund, blending legitimate hedge fund operations with laundering risks. Hybrid feeders combine wire transfers and cash deposits, heightening commingling risks.
Procedures and Implementation
Institutions implement feeder account controls through a multi-step compliance process. First, conduct risk assessment during onboarding, classifying accounts as feeder-prone based on expected activity profiles. Deploy automated transaction monitoring systems (TMS) with rules for aggregation thresholds, such as inflows exceeding 50% of balance daily, integrated with customer relationship management (CRM) for holistic views.
Key steps include:
- Daily reconciliation of inflows/outflows against business purpose.
- Enhanced due diligence (EDD) for flagged accounts, verifying source of funds via invoices or contracts.
- Segregation of duties, with AML officers reviewing alerts and legal teams handling freezes.
Controls encompass blockchain analytics for crypto feeders, API integrations with sanctions screens, and periodic stress-testing of TMS efficacy. Training ensures staff recognize feeder patterns in customer interactions.
Impact on Customers/Clients
Customers with flagged feeder accounts face immediate transaction holds, account freezes, or closures, disrupting legitimate operations like payroll or supplier payments. Rights include the ability to provide source-of-funds documentation within 72 hours, appeal decisions via internal ombudsman, and access to redress mechanisms under regulations like FATF Recommendation 37. Restrictions may involve lowered transaction limits or mandatory pre-approval for outflows.
From a client perspective, transparency is key: institutions must notify in writing within 24 hours of flagging, explaining triggers without compromising investigations. Legitimate users, such as SMEs using concentration feeders, benefit from streamlined compliance via client portals for real-time document submission.
Duration, Review, and Resolution
Initial holds on feeder accounts last 5-10 business days pending EDD, extendable to 30 days with regulatory notice. Reviews occur bi-annually for ongoing monitoring or upon alert resolution, involving independent audit teams assessing control effectiveness. Resolution requires clean source verification, after which accounts resume normal operations with heightened monitoring for 12 months.
Ongoing obligations include annual recertification of account purpose and continuous TMS surveillance. Unresolved cases escalate to account termination, with 90-day wind-down periods for outflows.
Reporting and Compliance Duties
Institutions must file Suspicious Activity Reports (SARs) within 30 days of feeder confirmation, detailing inflows, beneficiaries, and risk indicators per FATF standards. Documentation includes alert logs, EDD files, and management reports, retained for 5-10 years. Penalties for non-compliance range from fines—e.g., $1 million+ under US Bank Secrecy Act—to criminal sanctions, as seen in HSBC’s $1.9 billion settlement.
Compliance duties extend to board-level oversight, with quarterly reporting on feeder detections and false positive rates below 95%.
Related AML Terms
Feeder accounts interconnect with structuring, where deposits are fragmented to evade thresholds; layering, as feeders obscure trails; and smurfing, involving multiple small deposits. They parallel concentration accounts in legitimate use but contrast with PTAs in third-party access. Links to customer due diligence (CDD), enhanced due diligence (EDD), and transaction monitoring systems (TMS) form the detection backbone. Politically exposed persons (PEPs) using feeders amplify risks, tying into beneficial ownership registries.
Challenges and Best Practices
Challenges include high false positives from legitimate treasury operations, cross-border data gaps, and evolving crypto feeders. Address via AI-driven TMS reducing noise by 40%, consortium data-sharing for nested feeders, and scenario-based training.
Best practices:
- Implement machine learning for pattern recognition beyond rules.
- Conduct tabletop exercises simulating feeder scenarios.
- Partner with fintechs for real-time global screening.
- Benchmark against peers via Wolfsberg Group questionnaires.
Recent Developments
As of 2026, AI and blockchain analytics dominate feeder detection, with tools like Chainalysis integrating feeder mapping. FATF’s 2025 updates emphasize virtual asset feeders under Recommendation 15, mandating travel rule compliance. US FinCEN’s 2025 advisory targets crypto feeders, while EU AMLR (2024) requires public-private partnerships for feeder intel. Trends include quantum-resistant encryption for TMS and predictive analytics forecasting feeder risks.
Mastering feeder accounts fortifies AML defenses, ensuring institutions detect and deter laundering while minimizing disruptions. Prioritizing robust monitoring upholds regulatory compliance and safeguards the financial ecosystem.