Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches

The Federal Reserve has devoted most of its supervision resources dedicated to foreign banking organizations (FBOs) operating in the U.S. to the largest FBOs, that are included in the Federal Reserve's Large Complex Banking Organization program because they pose the most risk. In this context, The Federal Reserve has devoted much of its attention to tracking operational risk at these institutions. It is in its assessments of operational risk that the Federal Reserve tracks institutions' internal control and audit weaknesses. Federal Reserve staff said that this is a focus of their recent examination efforts, including efforts to explicitly track institutions' internal control and audit functions. The Federal Reserve announced FBO Supervisory enhancements in SR 00-14, dated Oct. 23, 2000. On Oct 16. 2008, the Federal Reserve issued SR 08-9: Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of FBOs. The primary objectives of this letter and the attached supervisory guidance are to specify principal areas of focus for consolidated supervision activities and thereby provide for consistent Federal Reserve supervisory practices and assessments across organizations with similar activities and risks. Consistent with these objectives, the attached guidance details specific expectations for Federal Reserve staff for understanding and assessing primary governance functions and risk controls, material business lines, non-bank operations, financial condition, and other key activities and risks at banking organizations; addresses unique aspects of supervising the combined U.S. operations of FBOs; and highlights the supervisory attention that should be paid to risk management systems and internal controls used by BHCs and FBOs that provide core clearing and settlement services (core clearing and settlement organizations) or that have a significant presence in critical or key financial markets.