Securities accounts create sanctions-busting risk -U.S official

Mon Mar 18, 2013 5:40pm EDT

HOLLYWOOD, Florida, March 18 (Thomson Reuters Accelus) - U.S. efforts to prevent Iran and other countries from evading international security sanctions may potentially be thwarted by the use of opaque institutional accounts at brokerages that can shield such participation from regulators, a U.S. Treasury official warned on Monday.

So-called "omnibus accounts" comprise multiple institutional accounts held by a brokerage on behalf of other clients. Such a structure makes it hard to tell whether they contain any links to a sanctioned country, said Adam Szubin, director of Treasury's Office of Financial Assets Control.

"Where we see institutions getting into trouble is when there are areas of their business models that are opaque," Szubin told a Florida conference of the Association of Certified Anti-Money Laundering Specialists conference.

Sub-accounts "nested," or hidden within an omnibus institutional account, may be able to escape the close ownership scrutiny that firms normally give their customers, Szubin said.

"You're hosting business for a customer, a beneficial owner, that may be four or five degrees removed from your know-your-customer practice," he said. "At that point, you don't know who your customer is."

The United States has led international efforts to freeze Iran out of the global economy in an attempt to restrain its nuclear-development program. The effort includes restrictions on financial transactions linked to Iran.

Szubin suggested the sanctions-evasion potential was similar to that posed by banking-industry payment practices which in recent years led to a U.S. crackdown and more than $2 billion in penalties against major international banks.

But he did not say whether a similar crackdown was likely focused on such accounts, or whether any investigations were underway. A Treasury spokesman did not immediately return a request for comment.

Before a May 2009 rule change by the Belgium-based SWIFT electronic payment system, which facilitates the bulk of global cross-border payments, some foreign banks used so-called cover payments to hide information about parties sending and receiving international wire transfers from clearing banks in New York.

As a result of these practices, the U.S. banks unwittingly processed transactions that benefited entities in Iran and other sanctioned countries. Cover payments are closely tied to the "stripping" penalties levied against several British and European banks including HSBC Holdings, Standard Chartered, ING, Barclays and Credit Suisse.

"U.S. institutions that were being so scrupulous about opening accounts and asking the right questions of customers would at the same time allow cover payments to go through their institutions without asking any questions," Szubin said. "That lack of transparency is where risk comes from."

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