What Is a Concentration Account?
A concentration account is a deposit account used to aggregate funds from several locations into one centralized account. Institutions use concentration accounts to process and settle internal bank transactions, often with same-day settlement.
- A concentration account is a deposit account at a bank used to aggregate funds from multiple accounts into one centralized account.
- The primary purpose of a concentration account is for cash management that allows for a simple and efficient movement of cash across multiple funds.
- Concentration accounts are useful for accounts that need to maintain minimum balances or for sweeping accounts at the end of the business day.
- Money laundering may be facilitated through the use of concentration accounts via the ability of quickly moving funds around.
- The U.S. Patriot Act established certain banking guidelines to thwart illicit activity in concentration accounts.
Understanding a Concentration Account
The intended goal of concentration accounts is to make cash management for customers simple and efficient, allowing them to move funds from one account to another depending on their business needs. Having a centrally located account allows for the quick disbursement of funds as needed.
Banks may employ concentration accounts for fund transfers, private banking transactions, trust and custody accounts, and international transactions. Fund transfers generally occur among checking accounts and savings accounts or from savings to an individual retirement account (IRA); however, these can occur on a larger scale than individual retail transfers.
Concentration accounts are extremely beneficial when some accounts need to maintain minimum balances. If these accounts fall below their requirement threshold then the funds in a concentration account can quickly be moved to the account with a shortfall and thereby satisfying the minimum requirement and avoiding costly penalty fees.
The reverse function of cash management is also an advantage of concentration accounts. Certain clients wish to have a zero end of day balance in an account for a variety of reasons, primarily earned interest, and so sweep accounts at the end of the day, moving funds back to the concentration account or another account that earns higher interest.
Concentration Accounts and Money Laundering
Money laundering is the process of concealing the movement of large amounts of money, obtained from criminal activity, such as drug trafficking or terrorist projects. Organized criminals know that dealing in cash is highly inefficient and risky. Money laundering creates the appearance that these funds originated from a legitimate source.
U.S. authorities heavily scrutinize concentration accounts due to the possibility of money laundering in these vessels. For example, it may be difficult to trace the money trail if funds are being collected in one central source, but customer-specific information is separate. In concentration accounts, transactions from multiple customers may be grouped together. The United States Patriot Act requires banks to establish clear policies for detecting and reporting suspicious transactions. It also prohibits customers from moving their own funds into, out of, or through the concentration accounts.
Money laundering generally has three steps: placement, layering, and integration. Placement refers to the act of introducing "dirty money" (or money obtained by criminal means) into the financial system. Layering is the act of concealing the source of these funds via complex transactions and bookkeeping tricks. Integration involves acquiring placed monies via legitimate means.