Concentration accounts are central locations for holding funds, used by banks for internal transactions or by customers to manage accounts. They can make cash management more efficient, but critics argue they can facilitate illicit activity. Zero balance accounts can be used with a sweep feature to transfer funds to a concentration account. There are concerns that concentration accounts could be used for money laundering.
A concentration account is a central location for holding funds. These accounts allow you to deposit money and make disbursements without each transaction implying immediate access to other accounts. They can be used by banks, usually for internal transactions, or by customers to help manage certain types of other accounts. Many who support the use of concentration accounts argue that they make cash management more efficient. However, there are critics who argue that these accounts can facilitate illicit activity.
To understand a concentration account, it can be helpful to think of a joint checking account. Funds can be deposited and withdrawn by all account holders regardless of whose money is involved in each transaction. Similarly, concentration accounts are pools of funds that financial institutions typically use to process internal transactions, such as funds transfers.
In the banking industry, speed and convenience tend to be important factors. Supporters often single out those features as features of concentration accounts, insisting that they make cash management simpler and more efficient. Some bank customers also use concentration accounts to help manage their individual accounts. This is often seen with companies that have zero balance accounts.
As the name suggests, a zero balance account is one in which the account holder does not normally wish to retain a balance. Through a feature known as a sweep, often at the end of the day, any money left in such an account is transferred to a concentration account. If debits are made between sweeps that leave the account with insufficient funds, the funds can be transferred from the concentration account to the zero balance account.
In some cases, this type of system is established with those who have account goals. When a client sets a goal, he or she determines how much money they would like to keep in a given account. The concentration account is used to maintain that balance, which acts as a funding source or a location to hold funds, depending on the need.
Concentration accounts are sometimes subject to criticism due to the risk that they could be used to facilitate illegal activities, such as money laundering. The processing of a financial transaction usually leaves a trace. After the transaction is made, at a later time, if reviewed, information such as the authorizing party or customer account number can be determined. However, there is concern that adding funds to a concentration account risks separating important information from particular funds or transactions.
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