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

Bank Secrecy Act/ Anti-money Laundering (BSA/AML) October 22, 2019 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 1

Agenda Background International and USA BSA/AML Regulatory Framework BSA/AML Program Requirements and Examination Processes Recent Trends and Emerging Issues RESTRICTED FR 2

Money Laundering 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. 3

Challenges to Effective AML 4

Key AML/CFT International Bodies Financial Action Task Force (Global AML/CFT standard setter) World Bank and IMF (Development organizations) Basel Committee on Banking Supervision (Supervisory coordination) Wolfsberg Group (Global banking standards) Egmont Group (Financial Intelligence Unit coordination) Financial Stability Board (AML/CFT coordinating role) 5

US BSA/AML Supervision Under the US Department of Treasury: The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. Administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. The tax administrator for the US. The role of the Internal Revenue Service is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share. The Office of the Comptroller of the Currency charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. Ensures that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. 6

US Supervisory Agencies Federal Banking Agencies Other Agencies 7

Federal Reserve System Oversight Responsibilities Bank, Financial and Thrift (Savings and Loan) Holding Companies Foreign Banking Organizations with U.S. offices Nonbank subsidiaries of Holding Companies State Member Banks 8

Federal Reserve System – Reserve Banks 9

Evolution of US BSA/AML legislation 1986 Money Laundering Act of 1986Criminalized Money Laundering 1970 Bank Secrecy Act – 1st AML Law 1984 Tax Reform Act of 1984included in Tax Law 1992 AnnunzioWylie Money Laundering Act of 1992Established Safe Harbor 1988 Anti-Drug Abuse Act of 1988increased penalties 2018 CDD Final Rule 2001 USA PATRIOT Act 10

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 355 SAR 11

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. Pre-examination Process: Review bank’s risk profile and define the scope of the examination including areas to conduct transaction testing In practical terms – The Federal Reserve, along with other supervisors, is responsible for meeting the statutory mandate for these institutions. 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 12

BSA/AML Program Requirements Designate a Responsible Individual(s) System of Internal Controls Independent Testing of the Program Training for Appropriate Personnel CDD Rule 13

AML Lifecycle Risk Assessment Filing of SARs Suspicious Activity Monitoring Customer Identification & Due Diligence Enhanced Due Diligence 14

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 15

Internal Controls—Risk Assessment Identify Risk Categories Analyze each category to assess level of risk Products, services, customers, types of entities, transactions, jurisdictions Factors that affect each categories level of risk: Transaction value & volumes, delivery channels, legal restrictions, regulatory environment and requirements, law enforcement concerns, product complexity 16

Internal Controls—Customer Due Diligence KYC Customer Due Diligence & Beneficial Ownership Rule (May, 2018) Customer Identification Program Customer Due Diligence and Beneficial Ownership 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. Enhanced Due Diligence 17

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 18

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 19

Training Continuous and updated Tailored and directed to appropriate employees Documented Customer Contact Personnel Internal Auditors Compliance Officer and Staff Operational staff Board and Senior Management 20

Office of Foreign Assets Control 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 21

OFAC Examination 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 22

Penalties for Non-Compliance Limitations on Activities & Bank Applications Rating Downgrades Enforcement Actions Damage to Reputation Revocation of Banking License Civil Money Penalties Criminal Penalties 23

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 antimoney-laundering compliance program at Banamex USA. 2019: Fined 1.1 billion for poor money-laundering controls and breaching sanctions against countries including Iran. 24

Emerging AML Risks & Issues Cryptocurrencies as money laundering vehicle Fintech/Regtech Advanced Data Analytics/Machine Learning Evolution of Sanctions requirements BSA regulatory reform 25

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 26

Questions? 27

Bank Secrecy Act - 1st AML Law. 1984. Tax Reform Act of 1984-included in Tax Law. 1986. Money Laundering . Training OFAC Compliance Officer: OFAC Examination: 23: Penalties for Non-Compliance: Damage to Reputation: . PowerPoint Presentation Author: