District Circular Letters

February 2, 2001

BANKING SUPERVISION AND REGULATION:
APPLICATION OF CAPITAL ADEQUACY GUIDELINES
TO BANK HOLDING COMPANIES OWNED BY FOREIGN
BANKING ORGANIZATIONS

AND

GUIDANCE FOR ENHANCED SCRUTINY TO
TRANSACTIONS POSSIBLY INVOLVING PROCEEDS OF FOREIGN OFFICIAL CORRUPTION

To State Member Banks,
Bank Holding Companies, U.S. Branches
and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District

Application of the Board's Capital Adequacy Guidelines to Bank Holding Companies (BHC) owned by Foreign Banking Organizations (SR 01-1)

The Federal Reserve applies its capital adequacy standards to the top tier U.S. bank holding company owned by a foreign banking organization. The Federal Reserve is modifying this practice in light of provisions in the Gramm-Leach-Bliley Act that permit a foreign bank to be a financial holding company (FHC).

If the Board has determined that a foreign bank operating a U.S. branch, agency, or commercial lending company is well-capitalized and well-managed under standards that are comparable to those of U.S. banks controlled by FHCs, the Board will then assume that the foreign bank has sufficient financial strength and resources to support its banking activities in the United States. Therefore, a U.S. BHC that is owned and controlled by a well-capitalized and well-managed foreign FHC will not be required to comply with the Board's capital adequacy guidelines.

Relying on the capital strength of the consolidated banking organization, as well as requiring all subsidiary banks to meet appropriate capital and management standards, is consistent with the Federal Reserve's supervisory assessment process for domestic bank holding companies. The Federal Reserve retains its supervisory authority that requires any bank holding company, including a U.S. BHC owned and controlled by a foreign bank that meets the FHC standards, to maintain higher capital levels where such levels are appropriate to ensure that its U.S. activities are operated in a safe and sound manner. This authority may be exercised as part of ongoing supervision or through the application process.

Guidance on Enhanced Scrutiny for Transactions That May Involve the Proceeds of Foreign Official Corruption (SR 01-3)

The Federal Reserve Board has published a guide to assist financial institutions in enhanced scrutiny to transactions that may involve the proceeds of foreign official corruption. It was developed by a working group that includes the departments of Treasury and State, the Board, and other federal banking agencies.

The guidance is a set of suggested sound practices that financial institutions are encouraged to use as they seek to deter money laundering and minimize legal risks and loss of credibility. It is intended to build upon financial institutions' existing anti-money laundering and due diligence programs by providing suggested procedures for account opening and maintenance for persons known to be senior political figures, their immediate family, and close associates. It also contains a list of questionable or suspicious activities that would warrant closer scrutiny.

Copies

Copies of SR 01-3 are available from our Corporate Services Department. To request copies to be sent by mail, please call (415) 974-2060. To request copies to be sent by fax, please call (415) 974-3333, and specify document number 4220.

Supervisory letters are the Federal Reserve's primary means of communicating key policy directives to its examiners, supervisory staff, and the banking industry. Supervisory letters may be viewed on the Board's Web site at http://www.federalreserve.gov/boarddocs/srletters/ .

Additional Information

For questions on the application of the capital guidelines, please call (415) 974-3134. Should you have any questions regarding the guidance for increased transaction scrutiny, please call (415) 974-2242.

FEDERAL RESERVE BANK OF SAN FRANCISCO

Enclosures