Definition
A Pass-through Entity, often termed a Pass-through Account, Payable-Through Account, or Pass-By Account in Anti-Money Laundering (AML) contexts, refers to a bank account held by a financial institution—typically a U.S. bank—that allows customers of a foreign financial institution to conduct transactions directly, such as writing checks or initiating payments. This setup enables foreign bank clients to access the domestic banking system without becoming direct customers of the intermediary bank, creating a “pass-through” mechanism for funds. In AML terms, these entities pose elevated risks due to limited visibility into the ultimate beneficial owners and transaction origins, complicating efforts to detect money laundering or terrorist financing.
Compliance officers must recognize this definition distinguishes it from tax-related pass-through entities like LLCs or partnerships, focusing instead on banking relationships vulnerable to illicit fund flows.
Purpose and Regulatory Basis
Pass-through Entities serve to facilitate cross-border access to banking services, particularly for foreign institutions lacking direct U.S. presence, supporting legitimate international trade while exposing systems to AML vulnerabilities through obscured customer oversight. Their significance lies in mitigating “blind spots” where intermediary banks cannot fully apply Know Your Customer (KYC) or monitor end-user activities, potentially enabling criminals to layer funds across jurisdictions.
Key regulations underscore their scrutiny. The Financial Action Task Force (FATF) Recommendations mandate enhanced due diligence (EDD) for correspondent banking, including payable-through accounts, to curb misuse. In the U.S., Section 311(b)(4) of the USA PATRIOT Act targets these accounts, requiring rigorous due diligence to prevent facilitation of laundering. EU Anti-Money Laundering Directives (AMLD) impose similar cross-border transparency obligations, ensuring institutions verify nested relationships. These frameworks collectively aim to close gaps in global financial transparency.
When and How it Applies
Pass-through Entities apply primarily in correspondent banking where a domestic bank (cover bank) opens an account for a foreign respondent bank, granting the latter’s customers direct transaction privileges like check-writing or wire transfers. Triggers include high-volume, opaque cross-border flows or relationships with high-risk jurisdictions, prompting AML alerts during onboarding or monitoring.
Real-world examples: A Latin American bank maintains a pass-through account at a U.S. institution, allowing its corporate clients to issue U.S. dollar checks for trade payments; if the U.S. bank lacks end-customer data, suspicious patterns like rapid fund inflows from high-risk sources activate reviews. Another case involves Middle Eastern remitters using such accounts for high-value transfers, where layering techniques obscure origins, leading to regulatory interventions. Institutions apply controls reactively via transaction monitoring systems flagging anomalies.
Types or Variants
Pass-through Entities primarily manifest as Payable-Through Accounts in banking, but variants include Pass-By Accounts, which function similarly by routing payments without full intermediary oversight. Nested correspondent relationships represent a subtype, where multiple layers of foreign institutions dilute visibility further.
Examples: Traditional payable-through accounts for check privileges contrast with wire-focused variants for electronic transfers. Hybrid forms emerge in fintech, blending with virtual asset service providers (VASPs), amplifying risks under evolving FATF guidance. No formal classifications exist beyond these, but risk tiers vary by jurisdiction and volume.
Procedures and Implementation
Financial institutions implement compliance through structured steps. First, conduct pre-onboarding EDD on respondent banks, verifying licenses, ownership, and AML programs, including site visits if high-risk. Second, formalize agreements stipulating respondent obligations for customer data sharing and suspicious activity reporting (SAR) protocols.
Ongoing processes involve deploying automated transaction monitoring systems tailored to detect velocity checks, geographic mismatches, or structuring. Annual reviews update risk ratings, with audits ensuring control efficacy. Technology like AI-driven analytics enhances pattern recognition, while training equips staff to escalate alerts.
Impact on Customers/Clients
Customers of respondent banks using Pass-through Entities face indirect restrictions, such as enhanced verification demands relayed through their institution, including source-of-funds proof. Legitimate clients may encounter transaction delays or limits during reviews, protecting the system but increasing operational friction.
Rights include appeal processes for blocks, with transparency on holds mandated by regulations. High-risk clients risk account closures, prompting shifts to direct relationships. Overall, these measures safeguard access while imposing diligence.
Duration, Review, and Resolution
Relationships lack fixed durations but require annual risk reassessments or event-driven reviews, such as geopolitical shifts. Ongoing obligations encompass continuous monitoring and data updates from respondents.
Resolution involves mitigation plans or termination if risks persist, with 30-90 day notice periods per contracts. Post-termination, file SARs if warranted and retain records for five years.
Reporting and Compliance Duties
Institutions must document all due diligence, monitoring logs, and decisions, submitting SARs for suspicious patterns within 30 days under U.S. Bank Secrecy Act (BSA) rules. Annual AML program certifications to regulators affirm controls.
Penalties for lapses include multimillion-dollar fines (e.g., past cases against major banks), cease-and-desist orders, or correspondent access bans. Compliance duties extend to board reporting on high-risk accounts.
Related AML Terms
Pass-through Entities interconnect with correspondent banking, where cover banks service respondents. They heighten layering risks, a laundering stage obscuring trails.
Links to beneficial ownership identification prevent concealment, while EDD applies heightened scrutiny. Nesting and payable-through accounts overlap in FATF contexts.
Challenges and Best Practices
Challenges include data-sharing resistance from foreign banks and overwhelming transaction volumes straining systems. Jurisdictional conflicts and tech lags exacerbate blind spots.
Best practices: Adopt shared utility platforms for pooled due diligence, integrate RegTech for real-time screening, and foster public-private partnerships for intelligence. Conduct tabletop exercises simulating scenarios and prioritize high-risk corridors.
Recent Developments
Technological shifts feature blockchain analytics for tracing pass-through flows, with FATF 2025 updates emphasizing virtual asset integrations. U.S. regulators issued 2025 guidance on de-risking, urging balanced approaches amid geopolitical tensions.
EU AMLD6 (effective 2025) mandates unified registries for correspondent data, reducing opacity. AI tools now predict misuse patterns proactively.
Pass-through Entities demand vigilant AML controls to prevent illicit exploitation in correspondent banking. Robust due diligence, monitoring, and regulatory adherence safeguard financial integrity amid global flows. Compliance officers must prioritize these high-risk structures for enduring program efficacy.