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From Banking and Finance Law Daily, August 31, 2016

Regulators clarify supervisory expectations for correspondent banking

By Lisa M. Goolik, J.D.

The Treasury Department, in coordination with the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, has released a joint fact sheet that outlines the regulators’ supervisory expectations and enforcement processes with respect to anti-money laundering (AML) and sanctions in the area of correspondent banking. The "Joint Fact Sheet on Foreign Correspondent Banking" describes the expectations of federal regulators, the supervisory examination process, and the use of enforcement actions.

AML requirements. Financial institutions must comply with the AML requirements set forth in the Bank Secrecy Act (BSA), as well as sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control (OFAC). Depository institutions that maintain correspondent accounts for foreign financial institutions (FFI) are required to establish "appropriate, specific, and risk-based due diligence policies, procedures, and processes that are reasonably designed to assess and manage the AML risks inherent with these relationships."

Accordingly, U.S. depository institutions must monitor transactions related to correspondent accounts to detect and report suspicious activities. These policies, procedures, and processes will depend on the level of risk posed by the correspondent FFI.

Clarified expectations. According to the fact sheet, the federal regulators expect U.S. depository institutions to have "robust BSA and OFAC compliance programs that include appropriate customer due diligence so that the institutions have a clear understanding of FFI risk profiles and expected account activity."

In addition, while there is no general requirement under existing regulations for U.S. depository institutions to conduct due diligence on the individual customers of FFIs, the regulators do expect depository institutions to obtain and review sufficient information about their FFI relationships, including the types of customers the FFI serves and the markets in which the FFI is active.

Examination process. The regulators believe that the examination process "is integral to the process of ensuring compliance with the BSA and OFAC sanctions programs." To that end, the regulators employ a risk-based approach to supervision that guides the scoping, planning, and transaction testing portions of federal depository institutions’ BSA and OFAC examinations. The approach allows the regulators to appropriately allocate supervisory resources based on money laundering and terrorist financing risks.

Notably, the supervisory process is not one of "zero tolerance"—95 percent of BSA/AML deficiencies found in the examination process are resolved through the supervisory process. Most deficiencies are resolved after they are brought to the attention of a depository institution’s management through the issuance of confidential reports of examination and supervisory letters that contain specific language communicating supervisory findings to the institution.

Enforcement actions. Enforcement actions are "an extension of the supervisory process and are used to address more serious deficiencies, or situations where deficiencies have not been corrected in the course of the supervisory process," states the fact sheet. Enforcement tools include: informal memoranda of understanding, or formal, public, written agreements, and cease-and-desist orders. The regulators are required to use their cease-and-desist authority when an institution fails to establish or maintain a BSA compliance program or fails to correct any problem with the program previously reported to the institution.

In addition, when institutions fail to take corrective action within a reasonable amount of time or when serious violations or unsafe or unsound practices or breaches of fiduciary duty have been identified, the regulators may also assess civil money penalties. However, in a Treasury Notes blog post, Nathan Sheets, Under Secretary for International Affairs, points out that large monetary penalties or settlements have generally involved a "sustained pattern of reckless or willful violations over a period of multiple years and a failure by the institutions’ senior management to respond to warning signs that their actions were illegal."

MainStory: TopStory BankingOperations BankSecrecyAct

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