Definition
A Pass-Through Account (also known as a Payable-Through Account or Pass-By Account) in the context of Anti-Money Laundering (AML) refers to a type of bank account maintained by a financial institution, typically a U.S. bank, through which customers of another financial institution, often a foreign bank, can transact directly. In these arrangements, the foreign financial institution’s customers have check-writing or payment initiation privileges over the account, effectively “passing through” their transactions via the intermediary bank’s account.
Such accounts are high-risk from an AML perspective because the bank offering the pass-through account may not have direct visibility or due diligence over the underlying end customers, posing challenges in monitoring for illicit activities like money laundering and terrorist financing.
Purpose and Regulatory Basis
Pass-through accounts are used as a mechanism primarily to provide foreign financial institutions’ customers access to the U.S. or other domestic banking systems, especially where the foreign bank does not have its own branches or correspondent accounts. This facilitates international trade and financial flows but introduces AML risks.
Regulators focus on these accounts because they create potential blind spots in financial crime compliance. Key regulatory frameworks emphasizing controls on pass-through accounts include:
- FATF Recommendations: Call for enhanced due diligence in correspondent banking relationships, including on payable-through accounts, to prevent misuse by illicit actors.
- USA PATRIOT Act (Section 311(b)(4)): Highlights risks associated with payable-through accounts and requires institutions to exercise appropriate due diligence.
- EU Anti-Money Laundering Directives (AMLD): Impose stringent requirements on understanding customer relationships across borders.
These laws seek to ensure that institutions do not inadvertently facilitate money laundering by allowing foreign financial institutions to bypass normal customer identification and monitoring processes.
When and How it Applies
Pass-through accounts apply in scenarios where a U.S. or domestic financial institution offers an account to a foreign bank or institution, which in turn extends transaction rights (checking, wire transfer initiation) to its own customers.
Example: A foreign bank opens a pass-through account with a U.S. bank. Customers of the foreign bank can write checks or transfer funds using this account in the U.S. without being direct clients of the U.S. bank.
Triggers for concern: AML compliance issues arise when the U.S. bank lacks detailed knowledge of the end-users of the pass-through account, limiting its ability to perform adequate Know Your Customer (KYC), Customer Due Diligence (CDD), and transaction monitoring required to detect suspicious activity.
Types or Variants
There are generally two main variants linked to pass-through arrangements:
- Standard Pass-Through Accounts (Payable-Through Accounts): Where foreign financial institutions’ customers use the bank’s account with direct payment initiation rights.
- Nested or Layered Correspondent Accounts: Slightly different from pass-through accounts, these involve a respondent bank allowing its customers to access correspondent accounts directly.
In both cases, the risk and regulatory concerns relate to the dilution of oversight on the actual beneficial users of the funds flowing through these accounts.
Procedures and Implementation
To comply with AML regulations on pass-through accounts, institutions must implement robust controls:
- Comprehensive Due Diligence: Obtain detailed information on the foreign financial institution’s customers who have access to the pass-through account.
- KYC and CDD Measures: Extend customer identification and verification procedures to sub-accountholders.
- Risk Assessment: Perform enhanced risk assessments considering geographic, transactional, and customer profile risks.
- Monitoring and Reporting: Implement transaction monitoring systems tailored to detect unusual activity in pass-through transactions.
- Agreements and Documentation: Establish formal contracts that outline responsibilities and controls with respondent institutions.
- Ongoing Reviews: Conduct periodic audits and reviews to ensure compliance and update risk profiles.
Impact on Customers/Clients
From a customer’s perspective, those using pass-through accounts might experience certain restrictions or enhanced verification requirements due to AML concerns. Customers may need to:
- Provide more detailed identity and transaction information through their foreign institution.
- Comply with additional verification steps imposed indirectly by the intermediary bank.
- Face limitations in transaction volumes or types if suspected of higher risk.
For legitimate customers, these measures protect the integrity of the financial system but may also introduce procedural complexities.
Duration, Review, and Resolution
Pass-through account arrangements require:
- Regular Review: Institutions should review the pass-through account structures periodically (e.g., annually) to reassess risks and compliance effectiveness.
- Duration Management: Such accounts should not remain indefinitely without reassessment, especially if customer profiles or transactional patterns change.
- Termination Procedures: If AML risks cannot be mitigated adequately, institutions may need to terminate the pass-through relationship.
Reporting and Compliance Duties
Financial institutions holding pass-through accounts must:
- File Suspicious Activity Reports (SARs) when suspicious transactions are detected.
- Maintain detailed records about the foreign institutions’ customers transacting on pass-through accounts.
- Adhere to AML record-keeping and reporting timelines as mandated by law.
- Train staff specifically on the risks and controls relevant to pass-through accounts.
- Report and cooperate with regulators on compliance reviews pertaining to these accounts.
Penalties for non-compliance can be severe, ranging from fines to restrictions on correspondent banking capabilities.
Related AML Terms
Pass-through accounts relate closely to other AML concepts such as:
- Correspondent Banking: Traditional arrangements under which one bank provides services to another.
- Layering: A money laundering technique that might exploit pass-through accounts to obscure fund origins.
- Beneficial Ownership: Identifying the true owners of funds transiting through such accounts to prevent concealment.
- Enhanced Due Diligence (EDD): A higher level of scrutiny applied to higher-risk relationships like pass-through accounts.
Challenges and Best Practices
Common Challenges:
- Limited visibility on sub-account holders.
- Insufficient due diligence performed on foreign institution customers.
- Complex international regulatory landscapes.
- Technology gaps in transaction monitoring adapted to pass-through dynamics.
Best Practices:
- Require foreign institutions to provide access to their customer databases for verification.
- Use data analytics and automated AML tools to monitor flow patterns.
- Collaborate with regulators for guidance and transparent reporting.
- Enforce strict policies on opening and maintaining such accounts.
- Conduct enhanced training for AML teams on specific risks associated with pass-through arrangements.
Recent Developments
The regulatory environment, technology, and industry standards are evolving:
- Increased global coordination on correspondent and pass-through account transparency.
- Use of advanced analytics, AI, and blockchain for better tracing and monitoring of pass-through transactions.
- Regulators demanding stricter compliance as part of updated AML/CFT legislation (e.g., amendments following FATF guidance).
- Banks reducing the number of correspondent and pass-through relationships to lower risks.
Pass-through accounts represent a critical area of focus in AML compliance due to their potential to obscure the identity and activities of the true customers using them. Financial institutions must rigorously implement due diligence, monitoring, and reporting to mitigate risks associated with these accounts. Adhering to international and national AML regulations ensures that pass-through accounts do not become conduits for money laundering, terrorist financing, or other illicit financial activities. Ultimately, strong controls around pass-through accounts protect the integrity of the global financial system while enabling legitimate cross-border banking services.