April 05, 2012

This function, where a bank acts as an agent of a foreign bank to provide services, h as long been seen as a weak spot in the U.S. banking system as smaller, foreign banks often seek access to the U.S. financial system through this business.

A Senate investigative panel, which has identified numerous ways in which illicit funds move globally, in 2001 issued a report specifically targeting gaps in correspondent banking.

That report found that "U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system."

In recent years regulators and law enforcement officials have focused on money laundering problems at other large banks.

For instance, the U.S. unit of HSBC Holdings Plc, ABN Amro Holding NV and Wachovia Corp all were fined or reprimanded in 2010 by federal law-enforcement and bank regulators for lapses in anti-money laundering systems.

In 2009 and 2010, Barclays Plc, Lloyds Banking Group and Credit Suisse Group agreed to settlements totaling more than $1 billion as part of a probe into aiding sanctioned countries, banks or other enterprises.

The issue has also caught the attention of Congress.

A U.S. Senate panel is investigating HSBC and a hearing by the Senate Permanent Subcommittee on Investigations could occur later this year.

That investigation could extend to other banks or gaps in the U.S. regulatory system, according to a person familiar with the Senate probe. It is not known if Citigroup is a part of that investigation. HSBC is cooperating with the probe. (Reporting By Dave Clarke in Washington and Carrick Mollenkamp in New York; Editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)

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