How The Fed Helps The US Spy On Foreign Governments

It's widely known that the Federal Reserve has been tasked by Congress with a "dual mandate" to maintain stable consumer-goods prices, low unemployment and - oh yes - buoyant equity prices. However, as Reuters revealed on Monday, the central bank has another legally binding obligation that might upset some of its clients: Helping the US intelligence community spy on foreign governments.

Some 250 foreign central banks and governments keep $3.3 trillion of their assets at the Federal Reserve Bank of New York. It is this little-known custodial role, which we have however highlighted frequently to show the true change in foreign holdings of US paper, that allows US intelligence agencies to leverage information about activity in certain accounts.

Specifically, senior officials from the Treasury and other government departments have turned to these otherwise confidential accounts several times a year to analyze 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 who spoke with Reuters.

It was not immediately clear how the "confidential" information differs from the public, except that it likely breaks down the holdings by source nation. The Reuters report surfaced at a time when the value of assets held by the central bank is rapidly expanding as foreign reserve managers scoop up US Treasurys at an aggressive clip, something we first highlighted in February when concerns emerged that foreigners were selling based on data from the delayed Treasury International Capital report.

The terms of the Fed’s custodial agreements stipulate that it can share information with US government entities on a “need to know” basis. Ironically, the service was advertised in a 2015 slide presentation as "safe and confidential,” according to Reuters. However, the “need to know” standard is easily circumvented as the central bank has conveniently avoided creating a working definition of “need to know.”

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

In one example of how the US intelligence community uses the information provided by the Fed, Reuters described how the US monitored the Russian Central Bank’s custody accounts following the approval of sanctions against Russia in March 2014. The data, according to Reuters, helped provide “a sense of the mood in Moscow.”

“While the Kremlin's public response was defiant, Fed and Treasury officials concluded Moscow feared the United States would freeze Russia's assets even though the account was not included in the narrow scope of the sanctions, according to 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, the same source said. 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 Russian Embassy in Washington did not respond to an emailed query.”

Reuters said the central bank also provided information to other US agencies that was instrumental in shutting down an Iraqi money exchange with suspected ties to ISIS and Al Qaeda.

Iraq's central bank stands out among those subject to U.S. scrutiny because of the extent of cooperation between Baghdad and New York. Earlier this month, based on information and instructions from the Fed's foreign accounts team, the Central Bank of Iraq blacklisted a money exchange firm suspected of ties with Islamic State and Al Qaeda. The Al-Kawthar money exchange firm, from the town of Qaim near the Syrian border, had its assets frozen in the action.

Fed officials rely on meetings and conference calls to advise the Iraqi central bank on how to track and freeze out local firms suspected of terrorist connections or of helping Iran bypass sanctions, an Iraq central bank official told Reuters.

And since the 2010 Arab Spring uprisings, for example, the New York Fed has made several inquiries with the State Department about Yemeni and Libyan assets, according to one of these officials. During the uprisings, US government officials were seeking clarity on whether the governments or insurgents were in control of those countries' central banks, the official said.

When approached by Reuters, the Fed acknowledged the practice of disclosing account intelligence, though it declined to speak about individual instances. The central bank maintained that the practice of sharing information is used “on rare occasions.” Reuters claims other major central banks that offer custody services guarantee a higher degree of privacy.

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 in an interview. "It's not just to look at them and to know that."

Meanwhile, US officials maintained that the Fed’s actions have been within the scope of its user agreement.

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 U.S. official circles," Truman, now a fellow at the Peterson Institute for International Economics, said in an interview.

The Fed’s custody unit came under scrutiny last year after transferring $81 million from the Bangladesh central bank's account into the hands of hackers who had stolen the Bangladesh bank’s identifying key in one of the largest cyber heists ever.

The Fed’s custody unit manages mostly Treasury and agency debt. It also oversees more than 500,000 gold bars that have accumulated in underground vaults since the New York Fed first opened accounts for Britain and France a century ago.

According to Reuters, the requests for information became more frequent after the passage of the 2001 U.S. Patriot Act, mostly from the Office of Foreign Assets Control, a Treasury division enforcing sanctions and targeting terrorist financing, money laundering, and weapons and drugs trafficking.

Although the Fed’s custody clients typically have custody accounts at multiple central banks, they are willing to countenance the intrusions in their US-based accounts in exchange for the access to US markets that the New York Fed provides.

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 U.S. debt markets and to the world's reserve currency, the dollar, making the U.S. central bank the top provider of this so-called custodial banking business.

While the report was probably a surprise for some of the Fed’s clients, in the US, where the government surveillance state has been expanding rapidly since 9/11, it’s par for the course. As Wikileaks revealed early last month, the CIA routinely infiltrates electronic devices like smartphones, routers, computers and even televisions. The Reuters report effectively serves as another reminder that in the US, the Deep State is always watching.