February 10, 2012 Michelle Hemerley Director, Compliance Consulting

1. February 10, 2012 Michelle Hemerley Director, Compliance Consulting

2. Introduction and Overview • Introduction • Board Reporting • Best Practices Report Format • Scorecard • Board Training • Various Methods of Training • Topics to Include • Recent FinCEN information • The new Consumer Financial Protection Bureau

3. Board Reporting • At least Annually • Effectiveness of the BSA/AML Program • Approve Policy and Risk Assessment • Best Practices – At least Quarterly BSA Report • Program, Policy, Risk Assessment update • Examination and Audit update • SAR Reporting • Number and Dollar Amounts • General Summary of Suspicious Activity • Any issues with SAR Reporting

4. BSA/AML Board Report • Scorecard Example

5. BSA/AML Report • Additional Scorecard Items • Monetary Instruments purchased with cash greater than $3,000 • High-Risk customer numbers and percentages • OFAC matches • 314(a) matches • Accounts opened / Loans Closed

6. Additional BSA/AML Report Items • High-Risk Customer information • Reviews and Monitoring information • Visits to High-Risk Customers • BSA/AML Training Conducted

7. Board Training • Types of Training • Computer Based • In-Person • Documentation • Annual BSA/AML Training • Initial • Refresher/Risk Based/Recent Enforcement Actions

8. Annual Board Training • What is Money Laundering? • Placement – Introduce unlawful proceeds into the banking system without attracting attention • Layering – Moving funds around to create confusion and complicate the paper trail • Integration – Ultimate goal to create the appearance of legality • Terrorist Financing

9. BSA/AML & OFAC Requirements • Currency Transaction Report (CTR) • Purpose is to create a “paper trail” for transactions (deposit, withdrawal, etc.) conducted with cash • Required to complete a CTR for all cash transactions over $10,000 • Monetary Instrument Log • Purpose is to create a “paper trail” for monetary instruments (cashier’s checks, money orders, traveler’s checks, etc.) purchased with cash • Required to maintain a record of all monetary instruments purchased with cash between $3,000 and $10,000

10. BSA/AML & OFAC Requirements • Suspicious Activity Report (SAR) • Purpose is to assist in combating terrorist financing, money laundering, and other financial crimes. • Required to identify, research and report suspicious activity • Office of Foreign Asset Control (OFAC) • The office that administers and enforces economic and trade sanctions against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to weapons of mass destruction. • Prohibited from opening an account or conducting a transaction with anyone on the OFAC list.

11. Role of Board of Directors • Establish culture of compliance - set the tone • Approve BSA/AML Compliance Program and appoint BSA/AML Officer • Provide direction and support to management • Discuss BSA/AML significant concerns • Maintain knowledge of BSA/AML requirements • Ensure necessary corrective action is taken

12. Role of Senior Management • Manage the enterprise-wide BSA/AML program • Report Quarterly to Board of Directors • Establish a structure to identify, monitor and manage BSA/AML risk for the Bank • Clearly assign responsibility and accountability • Provide appropriate resources • Integrate BSA/AML compliance objectives into management goals

13. Key Components of BSA/AML Program • BSA/AML Compliance Program Requirements: • Internal controls – policies, procedures, and processes to control risks and achieve compliance • Independent testing • Designated BSA/AML personnel • Training • Board of Directors Oversight • Customer Identification Program (CIP)

14. Key Components (Cont’d) • Risk assessment • Customer & Enhanced Eue diligence • Suspicious activity detection, monitoring and reporting • OFAC • USA PATRIOT Act - section 314 (a) and (b) • Information and communication

15. BSA/AML Compliance Program • BSA/AML Officer – Michelle Hemerley • Assistant BSA Officers • BSA/AML Department • High Risk Account Specialist • FinCEN 314 & OFAC Compliance Officer • Independent Audit completed by X

16. Customer Identification Program • Most Important Key – Know Your Customers • Required to Verify the Customer’s Identity and obtain required documentation (Name, Address, DOB, SS#) • Run against X list

17. Due Diligence • Initial Customer Due Diligence • Identification • Proof of Business • Anticipated Activity & Returns • Google • Enhanced Due Diligence • Contact customer to discuss business • Visits • Monitoring

18. Money Laundering Red Flags • Customers Who Provide Insufficient or Suspicious Information • Activity Inconsistent with the Customer’s Business • Other Suspicious Activity (I.e., wire transfers, increase in activity or returns) • Employee Activity

19. High-Risk Customers • Cash Intensive Businesses • International Businesses/PEPs • Third Party Processors • Outbound Telemarketing • Debt Consolidation • Privately Owned ATMs

20. High-Risk Customers • Money Service Business • A Business that conducts more than $1,000 in business with one person in one or more transactions on the same day in one or more of the following services: • Money orders, Traveler’s checks and Stored Value / Prepaid Access Cards • Check cashing / Payday Lending • Currency dealing and exchange OR • Providing money transfer service IN ANY AMOUNT

21. Product Information • Remote Deposit Capture (RDC) • Scan checks and transmit images • Remotely Created Checks (RCC) • Check authorized by customer remotely via phone or on-line without signature • Automated Clearing House (ACH) • Network for electronic alternative to paper checks – governed by NACHA rules • Third Party Payment Processor • Provide payment processing to merchants and other business entities

22. Identifying Suspicious Activity • Risk analyzed at initial account opening • Risk score based on: • Type of business and volume of activity • Geographic location • Average Ticket • Previous Returns • Customers are monitored by the BSA/AML Department accordingly

23. Identifying Suspicious Activity • BSA/AML Department Monitoring • MSB Monitoring – Structuring, commercial check cashing, microstructuring as well as site visits and annual reviews • Cash Vault Monitoring – Monthly review of cash withdrawal fluctuations • Remote Deposit Capture Monitoring – Daily, monthly and periodic reviews of variances, returns, and unusual trends or activity • ACH Monitoring - Monthly review of activity variances and analysis of returns

24. Reporting Suspicious Activity • If suspicious activity is noted, complete Unusual Activity Form and send to BSA/AML Department immediately • Be sure to explain “Who”, “What”, “When”, “Where”, “How” and “Why” you are suspicious • Keep CONFIDENTIAL – never discuss with anyone

25. Refresher/Risk Based Training • Recommend still cover BSA/AML requirements and Board responsibilities • Bank’s specific BSA/AML Risks according to Risk Assessment • Recent Examination Findings and Enforcement Actions • Latest Money Laundering Schemes • Check Fraud • Mortgage & R/E Fraud • Illegal Aliens • Internet Gambling • Human Trafficking

26. Recent FinCEN Information • Sign up for FinCEN e-mails / AMLA membership • Law Enforcement Case Examples • FinCEN Requires AML Program and SAR Filing for Non-Bank Mortgage Lenders and Originators • FinCEN Extends Deadline for Adopting New CTR and SAR

27. The New Consumer Financial Protection Bureau (CFPB) • CFPB Authority • Bank’s over $10 Billion and Non-Bank Financial Institutions • Consumer Complaints • Various Consumer Regulations – not BSA/AML • New Examinations • Product Life Cycle • Consumer Perspective • UDAAP and Fair Lending

28. Final BSA/AMLComments & Questions