U.S. seeks to ease foreign embassy banking impasse

Thu Jan 13, 2011 6:01pm EST

* Some U.S. banks end services for diplomatic missions

* US officials say talking to banks, advising missions

By Patrick Worsnip

UNITED NATIONS, Jan 13 (Reuters) - Senior U.S. government officials told foreign diplomats on Thursday they were trying to help resolve a banking impasse after several major U.S. banks said they would end services for diplomatic missions.

The decision has caused headaches for many foreign countries, whose diplomats said they were shopping around for other banks to handle their missions' accounts but were having little immediate success. Some diplomats said payments into the U.N. budget could be affected.

One of the banks involved, Chase -- the retail banking arm of JP Morgan Chase & Co (JPM.N) -- said in a Sept. 30 letter to diplomatic missions it had "made the decision to close its division that serves diplomatic and foreign government entities."

The letter, obtained by Reuters, termed it a "business decision" but gave no further explanation. A spokesman for Chase, Thomas Kelly, declined comment on this or other aspects of the decision, which takes effect on March 31 and affects mission accounts but not those of individual diplomats.

However, the Wall Street Journal, which reported the measure last November, said it was due to banks' burden of complying with government money-laundering regulations affecting transfers from abroad. The cut-off affects missions in New York, Washington and other U.S. cities.

U.S. regulations are designed to prevent "dirty" money from corruption, terrorism financing or drug trafficking from being laundered via transfers into the United States from abroad.

More than 100 diplomats attended a meeting at the United Nations on Thursday to hear advice from U.S. under secretary of state for management Patrick Kennedy and Treasury Department strategic policy chief Mark Poncy on dealing with the issue.

Kennedy later told reporters that Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner were both "personally engaged in working on this issue."

He said State and Treasury had "outlined our concerns" to the banking industry but could not tell it what to do.

"We've made it clear that there is a United States national interest in working with embassies in Washington and ... missions to the United Nations in New York," he said.

But he said U.S. banks made decisions based on commercial factors, "not because the bank is saying that the embassy of Xanadu or the mission of Shangri-La is engaged in some nefarious activity."

MONEY LAUNDERING

Kennedy said many banks operated in the United States and he and Poncy had urged countries to tailor their approach.

"We offered a number of suggestions on how approaches could be made to banks based upon factors that we feel would be appealing to the banks to add this nation or that nation as a customer," he said, without elaborating.

Kennedy declined to discuss the reasons for the banks' decision but conceded that he and Poncy had briefed the diplomats on U.S. money-laundering regulations.

It was unclear which banks other than Chase had made the decision. Kennedy said he personally knew of "less than a handful." Banking sources said they understood that some banks had declined to hold accounts for some but not all countries.

It was also not clear how many countries were affected out of the 192 U.N. members. The Wall Street Journal put it at 40 but Kennedy said only that it was a significant number.

Envoys from countries including China, South Africa, Egypt, Turkey, Morocco and Iran, as well as the Palestinian Authority, told reporters they had been hit by the measure. Others from Britain, Germany and Russia said they were not affected.

Egyptian Ambassador Maged Abdelaziz said his country had so far failed to find a new bank. Those it had approached had said they had enough customers already, he said.

"The banks are feeling over-burdened by the requirements of submitting many papers and many reports about every and each account," he said. "So it is something that can be dealt with within the relation between the (U.S.) administration and the banks."

Iranian Ambassador Mohammad Khazaee said the decision "undermines the functionality of the United Nations. Billions of dollars which are paid as contributions to the United Nations for many things -- missions will not be able to fulfill their commitments."

U.N. operations like peacekeeping could be affected, he said. He suggested the United Nations itself should withdraw money it held with Chase and deposit it with another bank that was willing to provide services for missions. (Editing by Philip Barbara)

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