LEARNING THE FED’S OTHER FUNCTION

Washington has turned to otherwise confidential accounts to analyse asset holdings of global central banks

THE Federal Reserve’s little-known role housing the assets of other central banks comes with a unique benefit to the United States: It serves as a source of foreign intelligence for Washington.

Senior officials from the US Treasury and other government departments have turned to these otherwise confidential accounts several times a year to analyse the asset holdings of the central banks of Russia, China, Iraq, Turkey, Yemen, Libya and others, according to more than a dozen current and former senior Fed and Treasury officials.

The United States central bank keeps a tight lid on information contained in these accounts. But the officials interviewed by Reuters said, US authorities regularly use a “need to know” confidentiality exception in the Fed’s service contracts with foreign central banks.

The exception has allowed Treasury, state and Fed officials without regular access to glean information about the movement of funds in and out of the accounts, said the people.

Such information has helped Washington monitor economic sanctions, fight terror financing and money laundering, or get a fuller picture of market hot spots around the world.

Some 250 foreign central banks and governments keep US$3.3 trillion (RM14.16 trillion) of their assets at the Federal Reserve Bank, here, about half of the world’s official dollar reserves, using a service advertised in a 2015 slide presentation as “safe and confidential”.

The Bank for International Settlements, other major central banks and some commercial banks offer similar services, and clients usually have more than just one account. But only the Fed offers direct access to US debt markets and to the world’s reserve currency, the dollar, making the US central bank the top provider of this so-called custodial banking business.

In all, the people interviewed by Reuters identified seven instances in the last 15 years in which the accounts gave US authorities insights into the actions of foreign counterparts or market movements, at times leading to a specific US response.

In one relatively recent case, data from these foreign accounts offered US authorities a sense of the mood in Moscow in March 2014, after Russia’s invasion of Crimea prompted the US to respond with economic sanctions.

When foreign holdings at the New York Fed plunged about US$115 billion, US officials confirmed what others could only suspect, according to two former Fed officials: Russia’s central bank had pulled its funds.

While the Kremlin’s public response was defiant, Fed and Treasury officials concluded Moscow feared the US would freeze Russia’s assets even though the account was not included in the narrow scope of the sanctions, said one former official.

After about two weeks, Russia’s central bank returned most of the money to its Fed account, but the incident made officials monitor the account more closely for signs the sanctions had forced Moscow to draw down its reserves, said the same source.

It was unclear what effect the sanctions had.

The Bank of Russia said it would not comment on “details of its operations and interaction with partners.”

The Fed acknowledged the practice of disclosing account intelligence, but declined to comment on individual clients.

“While our account agreement does provide for the sharing of information with the US government in limited circumstances, we require a clearly demonstrated need for the information and a commitment that the information will be treated confidentially,” said a Fed spokesman, here.

“This exception has been used on rare occasions and on a limited basis for such issues as compliance with sanctions requirements and anti-money laundering principles.”

The insights into the Fed operation come at a time when US President Donald Trump threatens new economic sanctions on countries that could again be monitored through the foreign accounts.

It also comes as US intelligence-gathering has come under intense public scrutiny, with agencies investigating Russian meddling in last year’s election and possible collusion with Trump’s campaign.

The Senate this month backed new sanctions on Russia in part to punish it for the meddling, while the Treasury added individuals and entities to those sanctioned over Moscow’s actions in Ukraine.

According to a draft account agreement the New York Fed published online last year, the Treasury or any other US government agency or Fed bank must have “a need to know such information” to access it.

Seven people with knowledge of instances in which this exception was used said there was no working definition of the “need to know,” and that New York Fed lawyers would usually decide on a case by case basis.

The level of scrutiny by US authorities and lack of clarity over what would constitute a “need to know” surprised some former foreign central bankers who spoke to Reuters.

The Bank of France, which also maintains foreign accounts, guarantees “full confidentiality” for its clients unless information is needed in a criminal investigation, said Christian Noyer, who was governor from 2003 to 2015. “It’s only in that case,” he said.

“It’s not just to look at them and to know that.”

Less surprising was the fact that the US leveraged the Fed’s position at the centre of global finance, they said.

“The kinds of powerful central banks that can offer these services ... will want to use that power in ways that benefit their public remit,” said Patrick Honohan,

There is no promise to clients that the information in their accounts will not be shared with US official circles.

EDWIN TRUMAN Former head of Fed Board of Governors

governor of the Central Bank of Ireland from 2009 to 2015.

Edwin Truman, who headed the Fed Board of Governors’ international finance division for more than two decades before joining the Treasury in 1998, said the Fed’s clients should not expect absolute secrecy.

“There is no promise to clients that the information in their accounts will not be shared with US official circles,” said Truman, now a fellow at the Peterson Institute for International Economics. Reuters