Bank Secrecy Act/ Anti-money Laundering (BSA/AML)

October 22, 2019

1Restricted FR

The views that I express in this presentation are strictly my own and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System

RESTRICTED FR 2

Agenda

• Background• International and USA BSA/AML Regulatory Framework• BSA/AML Program Requirements and Examination Processes• Recent Trends and Emerging Issues

3

The process of making funds derived from criminal activity appear as though they have no connection with the illicit activity and were generated from legitimate sources.

Money Laundering

4

Challenges to Effective AML

5

Key AML/CFT International Bodies

Financial Action Task Force(Global AML/CFT standard setter)

Basel Committee on Banking Supervision

(Supervisory coordination)

Egmont Group(Financial Intelligence Unit

coordination)

World Bank and IMF(Development organizations)

Wolfsberg Group(Global banking standards)

Financial Stability Board(AML/CFT coordinating role)

6

US BSA/AML Supervision

The mission of the Financial Crimes EnforcementNetwork is to safeguard the financial system from illicituse, combat money laundering, and promote nationalsecurity through the strategic use of financial authoritiesand the collection, analysis, and dissemination offinancial intelligence.

The tax administrator for the US. The role of theInternal Revenue Service is to help the large majorityof compliant taxpayers with the tax law, while ensuringthat the minority who are unwilling to comply pay theirfair share.

The Office of the Comptroller of the Currency charters,regulates, and supervises all national banks andfederal savings associations as well as federalbranches and agencies of foreign banks. Ensures thatnational banks and federal savings associationsoperate in a safe and sound manner, provide fairaccess to financial services, treat customers fairly, andcomply with applicable laws and regulations.

Administers and enforces economic and trade sanctionsbased on US foreign policy and national security goalsagainst targeted foreign countries and regimes, terrorists,international narcotics traffickers, those engaged inactivities related to the proliferation of weapons of massdestruction, and other threats to the national security,foreign policy or economy of the United States.

Under the US Department of Treasury:

7

US Supervisory Agencies

Federal Banking Agencies Other Agencies

8

Federal Reserve System Oversight Responsibilities

Bank, Financial and

Thrift (Savings and Loan) Holding

Companies

Nonbank subsidiaries of

Holding Companies

Foreign Banking

Organizations with U.S. offices

State Member Banks

9

Federal Reserve System – Reserve Banks

10

Evolution of US BSA/AML legislation

1970Bank

Secrecy Act – 1st AML

Law

1984Tax Reform Act of 1984-included in

Tax Law

1986Money

Laundering Act of 1986-Criminalized

Money Laundering

1988Anti-Drug

Abuse Act of 1988-

increased penalties

1992Annunzio-

Wylie Money Laundering Act of 1992-Established Safe Harbor

2001USA

PATRIOT Act

2018CDD Final

Rule

11

USA PATRIOT Act of 2001

311 Special Measures

312 Enhanced Due

Diligence

313 Restrictions on Shell

Bank Account

314(a & b) Information Sharing

319 Availability of

Recordkeeping Requirements

326 Customer

Identification

351 Safe Harbor

352 Anti-Money

Laundering Program Requirements

355SAR

12

Examination Approach

BSA/AML Examination Mandate General Examination Approach

Statutory Mandate: Under 12 USC §1818(s)(2)(A), a review of compliance with BSA is required for all insured depository institutions, as defined by the statute, which includes state member banks, branches and agencies of foreign banking organizations, and Edge and Agreement corporations.

In practical terms – The Federal Reserve, along with other supervisors, is responsible for meeting the statutory mandate for these institutions.

Pre-examination Process: Review bank’s risk profile and define the scope of the examination including areas to conduct transaction testing

Examination:Conduct the examination to evaluate and test the effectiveness of the bank’s AML risk management program and determine compliance with legal and regulatory requirements

Examination Conclusions:Present findings verbally at exit meeting and provide a written examination report to management

13

BSA/AML Program Requirements

System of Internal Controls

Independent Testing of

the Program

Designate a Responsible Individual(s)

Training for Appropriate Personnel

CDD Rule

14

AML Lifecycle

Risk Assessment

Customer Identification & Due Diligence

Enhanced Due Diligence

Suspicious Activity

Monitoring

Filing of SARs

15

BSA Officer, Management Oversight & Governance

Lines of Authority/Empowerment

Appropriate Staffing and Resources

Control Structure

•Culture of Compliance•Board of Director/Compliance Committee Oversight

•BSAO authority and independence•Board ultimately responsible•Program Continuity

•Adequate staffing for risk profile•Comprehensive training to staff and Board•Appropriate MIS to execute program

•Dual controls •Segregation of duties•Controls and Systems for detecting suspicious activity and regulatory reporting

16

Internal Controls—Risk Assessment

Identify Risk Categories

• Products, services, customers, types of entities, transactions, jurisdictions

Analyze each category to

assess level of risk

• Factors that affect each categories level of risk:• Transaction value & volumes, delivery channels,

legal restrictions, regulatory environment and requirements, law enforcement concerns, product complexity

17

Internal Controls—Customer Due Diligence

KYC

Customer Identification

Program

Customer Due Diligence and

Beneficial Ownership

Enhanced Due Diligence

Customer Due Diligence & Beneficial Ownership Rule (May, 2018)

• Identify and verify the identity of customers;

• Identify and verify the identity of the beneficial owners of companies opening accounts;

• Understand the nature and purpose of customer relationships to develop customer risk profiles; and

• Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

18

Internal Controls—Suspicious Activity Monitoring

Identification or alert of unusual activity

Managing Alerts & Cases

SAR Decision Making

SAR Completion and Filing

Monitoring and SAR filing on

continuing Activity

19

Independent Testing

Provide an overall AML program assessment

Evaluates ability to identify and control high-risk areas

Assesses AML system’s ability to monitor, detect, report suspicious

activity

Reports all findings to the board of directors and senior management

Follows up to ensure corrective action

20

Training

Continuous and updated Documented

Tailored and directed to appropriate employees

Customer Contact

Personnel

Operational

staff

Board and Senior

Management

Compliance Officer and

Staff

Internal Auditors

21

OFAC - Office of the U.S. Treasury Administers and enforces economic and trade sanctions

based on U.S. foreign policy and national security goals. OFAC Requirements: Block Accounts Reject Transactions

Risk-based OFAC Compliance Program

Office of Foreign Assets Control

22

Review Risk Assessment Review Global Policies and Procedures Test Internal Controls Reference data screening & alert disposition Transaction screening & alert disposition Blocked/Rejected reporting

Independent Testing Training OFAC Compliance Officer

OFAC Examination

23

Penalties for Non-Compliance

Damage to Reputation

Limitations on Activities

& Bank Applications

Enforcement Actions

Civil Money Penalties

Criminal Penalties

Revocation of Banking

License

RatingDowngrades

24

Penalties for Non-Compliance

2002: Fined $1.9 billion for allowing itself to be used to launder a river of drug money flowing out of Mexico and other banking lapses.

2007: Fined $65 million for failure to detect drug-related money transactions laundered through a subsidiary over several years.

2010: Fined $60 million for failure to stop more than $100 million of Colombian and Mexican drug traffickers’ money being laundered through accounts at the bank.

2015: Fined $8.9 billion for violations of U.S. economic sanctions concerning Sudan, Cuba and Iran.

2017: Fined $97 million for willfully failing to maintain an effective anti-money-laundering compliance program at Banamex USA.

2019: Fined $1.1 billion for poor money-laundering controls and breaching sanctions against countries including Iran.

25

Cryptocurrencies as money laundering vehicle Fintech/Regtech Advanced Data Analytics/Machine Learning Evolution of Sanctions requirements BSA regulatory reform

Emerging AML Risks & Issues

26

Examination Resources

• Primary source of guidance for examiners

• Provides guidance on risks associated with money laundering and terrorist financing

• Contains:• Overview of BSA/AML

compliance program requirements

• BSA/AML risks and risk management expectations

• Industry sound practices• Examination Procedures

27

Questions?