Revisions to the FFIEC BSA/AML Examination Manual and Federal Reserve Board BSA/AML Examination Findings and Issues

1. Revisions to the FFIEC BSA/AML Examination Manual and Federal Reserve Board BSA/AML ExaminationFindings and Issues Timothy P. Leary Senior Special AML Examiner Board of Governors of the Federal Reserve System Washington, DC

2. Overview • Examination Manual • Examination Findings – Numbers • Examination Issues – Weaknesses • Examination Issues – Strengths • Emerging Issues

3. BSA/AML Examinations • FRB continues to conduct BSA/AML examinations using the procedures in the interagency FFIEC BSA/AML Examination Manual. • Most recent version issued April 2010. • FRB examiners began using the revised examination procedures for examinations that commenced on May 1, 2010 or later. • Infobase: www.ffiec.gov/bsa_aml_infobase/

4. Purpose of the Manual • Promote interagency consistency • Consolidate BSA/AML regulatory requirements in one handbook • Provide guidance on BSA/AML topics to examiners and banks • Clearly and authoritatively communicate regulatory expectations

5. History of the Manual • Original issuance – 2005 • Emphasis: “Living document” • Two “lives” to date – 2006 and 2007 • Most recent revision – 2nd Quarter 2010 • Longest time between revisions • Most extensive revisions

6. Revision Process • FFIEC (Federal Banking Agencies/State Liaison Committee) • Consultation with FinCEN and OFAC • Industry input – meetings, conferences, BSAAG subcommittees • Examiner input

7. 2010 FFIEC BSA/AML Examination Manual – Significant Revisions • Streamlined and reorganized procedures for reviewing BSA/AML compliance programs; • Created a new section on reviewing bulk currency shipments; • Redrafted and renamed Enterprise-Wide section to acknowledge the wide variety of programs that exist and enhance specific discussion of consolidated compliance programs (now “BSA/AML Compliance Program Structures”). • Reorganized discussion of suspicious activity monitoring and reporting; • Updated requirements for CTR exemptions; • Clarified expectations for determining the severity of regulatory violations; • Updated discussions of recent developments in electronic banking, Automated Clearing House transactions, prepaid cards, cover payments, and third-party processor customers.

8. The Numbers (1/1/2012 – 5/31/2012) • Total BSA/AML reviews by the FRB: 377 • Total violations cited: 29 (about 7.5% of total exams) • Total number of banks cited: 15 (about 4% of total exams)

9. The Numbers (1/1/2012 – 5/31/2012) • Total Title 12 individual subpart violations: 11 (resulted in 2 program violations). • Most common Title 12 violations: • System of internal controls. • Independent testing. • CIP. • Total SAR rule violations: 6 • Total formal BSA/AML-related enforcement actions: 0

10. Examination Issues – Weaknesses • System of Internal Controls • Customer risk ratings, identification of high-risk customers, and periodic reviews. • RDC for foreign correspondent accounts. • SAR monitoring (calibrating filters and clearing alerts). • SAR documentation (to file or not to file). • Consolidated (firm-wide) programs. • Mainly large, integrated firms with multi-national operations. • Effective consolidated approach to BSA/AML compliance risk management (disparate operations, entities, product lines). • Importance of adequate policies and procedures, clear reporting lines, and active vendor management. • Mergers and acquisitions (systems, data feeds, structures).

11. Examination Issues – Weaknesses (cont.) • Wholesale cash operations. • Staff performance – turnover, new BSA officers, resource issues. • New product or market development does not adequately consider compliance issues and involve compliance personnel – the earlier the better (e.g., RDC, ACH, remittances). • Independent testing – outsourcing,depth and breadth, considers factors set out in the Manual.

12. Examination Issues – Strengths • Systems largely in place for traditional, retail-oriented banking operations. • Overall quality of programs has stabilized. • Fewer or consistent number ofoverall violations. • Fewer or consistent number of serious violations. • Fewer enforcement actions. • Risk assessments more formalized and useful – sometimes even automated (notable exceptions – see risk rating weaknesses).

13. Examination Issues – Strengths (cont.) • Improved awareness that U.S. standards apply to U.S. operations. • Improved management focus since the crisis on importance of BSA/AML compliance. • Greater focus on higher-risk operations and customers. • Correspondent banking. • Private banking. • Politically exposed persons.

14. Emerging Issues • Beneficial ownership/Customer due diligence. • FinCEN ANPRM. • IT Modernization. • New CTR and SAR forms (March 2013). • Mandatory e-filing (June 2012). • Iranian sanctions • CISADA – “aggressive” implementation. • Section 311 designation – Central Bank of Iran. • National Defense Authorization Act. • Revisions to FATF recommendations (40+9).

15. Contact information Timothy P. Leary Senior Special AML Examiner Banking Supervision and Regulation Board of Governors of the Federal Reserve System Washington, DC (202) 452-2428 Timothy.P.Leary@frb.gov

16. Thank You!Questions?