BSA/AML Compliance Issues

1. BSA/AML Compliance Issues Jane A. Green Relationship Manager Foreign Banking Organizations Federal Reserve Bank of New York

2. Agenda • Guidance – Minimum Standards • BSA/AML Issues • Enforcement Action Triggers

3. BSA/AML Compliance Issues BSA/AML Compliance Program • Regulatory guidance – Examination Manual • Minimum requirements for a BSA compliance program • Internal controls to assure ongoing compliance with BSA • Independent testing for BSA/AML compliance • Compliance Officer responsible for coordinating and monitoring BSA/AML compliance; and • Training for appropriate personnel

4. BSA/AML Compliance Issues Where are the issues? Internal Controls AML Risk Assessment Methodology • Details of the risk assessment and explanations for ratings must be well documented covering clients, products, and geography • Methodology needs to contain objective measurable factors • Controls to mitigate risk for each risk factor should be documented • Changes to client risk rating need to be formally justified • Also required is an overall risk assessment of branch/bank Risk-based Transaction Monitoring Program • Transaction monitoring system must be sufficiently sophisticated to capture the risks in transactions (unusual patterns) and have the capacity to handle the volume of daily transactions. • Client’s expected level of activity must be factored into the monitoring process

5. BSA/AML Compliance Issues Where are the issues? Internal Controls Investigation/Reporting of Unusual Activity • Well documented case investigation process • Appropriate MIS surrounding the case investigation process to assess its effectiveness • Decisions to file or not file Suspicious Activity Reports must be formally explained Client due diligence • Include detailed information such as beneficial ownership, suppliers and expected transaction pattern. • Files must contain sufficient documentation to adequately identify the client and to conform to branch/bank policy.

6. BSA/AML Compliance Issues Where are the issues? Internal Controls Enhanced Due Diligence (“EDD”) • EDD focuses on clients that pose high inherent risk of money laundering, i.e. foreign officials, politically exposed persons, correspondent accounts, private banking clients, money service businesses etc. • EDD rules should be defined in policies and procedures and approved by senior management and board of directors • EDD needs to be applied to all high risk clients

7. BSA/AML Compliance Issues Where are the issues? Compliance Officer • Knowledgeable regarding laws and regulations • Number and quality of AML compliance resources commensurate with the level of risk Independent Testing • Follow up on prior audit and regulatory examination weaknesses • Track outstanding issues for resolution and escalate when not addressed in a timely manner • Comprehensive testing program • Degree of testing must be commensurate with the level of risk • Work papers must document the testing methodology and rationale • Coverage of all critical elements of the BSA program

8. BSA/AML Compliance Issues Where are the issues? Training • All employees must be trained on the importance of AML compliance. • Training must be tailored to each employee’s function and department. • Coverage of all laws and regulations that pertain to the institution’s activities Management Oversight • Head office and local management need to be supportive of BSA/AML initiatives. • Head office must also be familiar with U.S. sanction laws so that entries are not passed through US that are in violation of US law. Altering or deleting message fields to avoid OFAC filters is unacceptable. • Compliance culture must be firm-wide as it is every employee’s job. Appraisals and performance incentives for employees should reflect how well units meet compliance expectations.

9. BSA/AML Compliance Issues Enforcement Actions for BSA/AML • Fails to implement and maintain a BSA compliance program that contains the required elements • Failure to correct a previously reported problem with the BSA Compliance Program • Other enforcement actions for BSA compliance program deficiencies