A New Regulatory Paradigm

US Banks Face Unprecedented Scrutiny of Their Anti-Money Laundering Programs

The Anti-Money Laundering (“AML”) programs are seeing unprecedented scrutiny in the banks operating in the U.S. The Act (“The Act”) of 2001 was meant to implement stronger procedures in dealing with money laundering. High profile AML cases have brought into question the federal bank regulatory agency’s authority (“the agency”). The agency must improve their supervision over banks’ AML programs or loose their authority in this area. Although banks and the agency are both against money laundering, a $1.0 billion U.S. dollars (“USD”) per-day problem according to the United Nations Office of Drug Control and Crime Prevention, the current environment has left the regulators and the banks on opposing sides.

In 2004, the regulators imposed over 20 formal, public implementation actions and many more informal actions, with fines ranging from several million to $50 million, dealing with AML inadequacies. This number is expected to increase in 2005.

These regulatory actions have influenced both large and small banks. The Office of the Comptroller of the Currency (“OCC”), which regulates, supervises, and examines national banks in the U.S., recently stated that if a bank fails to create or sustain a program designed to guarantee and monitor the compliance of the bank with the Bank Secrecy Act (“BSA”), or fails to correct a previous compliance problem, the OCC must issue an order to cease and desist, a formal, public enforcement action requiring the bank to either correct the problem immediately or risk losing its banking license. The cease and desist order leaves banks limited time to correct the problem and a stained reputation. The agency is using authority given by Section 327 of the Act to limit or stop mergers or acquisitions that could cause more inadequacies of banks with poor AML programs.

Due to strict regulations the number of Suspicious Activity Reports (“SARs”) filed by banks has increased more than 100 percent since the year 2000 according to the Treasury’s Financial Crime Enforcement Network (“FinCEN”). Most of the SARs show traditional money laundering not terrorist financing. SARs are being filed defensively to avoid problems with the agency. Early in the AML program the main focus of the agency was to examine banks that were not filing enough SARs but the new focus is on banks filing too many SARs comparatively. The excessive filing may show a Know Your Customer (“KYC”) process insufficiency where banks cannot distinguish between possible suspicious activity and activity expected of customers.

Banks with a high AML risk are the main focus of the agency. High AML risk can come from services offered or geographies and types of the customer’s business. Correspondent banking, wire transfers, concentration accounts, brokered deposits, and private banking are just a few of the high-risk products and services that can be offered by a bank. High-risk jurisdictions, included in the Financial Action Task Force (“FATF”) Non-Cooperative Countries and Territories (“NCCT”) lists, countries recently removed from the list, or known secrecy havens, are also being more closely watched. Politically Exposed Persons (“PEPs”), cash-intensive businesses, or offshore companies are predictable high-risk customers for money laundering. There are many more businesses and people not easily spotted for money laundering.

Banks have higher AML program standards that are continuously evolving faster to keep up with the environment. These standards and guidelines are evolving faster than the regulators are able to document. Regulators hope to have all these guidelines documented properly by the end of 2005 with interagency help. Until then, banks are continually asking for insights on how to meet each of the guidelines required.

Management’s commitment to AML in conducting business; policies, procedures and controls; risk based AML programs; training; and testing are proven ways to stay in compliance with the regulations and maintain an effective AML risk management. Each bank should develop their unique AML program. After identifying the higher-risk businesses, services, and customers, banks should construct and apply AML systems. Some high-level considerations for an effective AML program include:

• A board or management committee whose sale or partial responsibility includes oversight of the AML program;
• A written AML policy and program document that combines detailed policy statements with procedures that give practical effect to the policies;
• KYC protocols that address customer identification requirements and knowledge about the customer’s source and uses of funds;
• An AML training program that includes general and customized skills training;
• A ”three-pronged” testing program involving business unit self assessments, compliance reviews, and internal audit testing;
• Human Resource policies that incorporate AML compliance into employee performance measurement;
• Continuous maintenance, assessment, and refinement.

Summarization of article (PDF):
Fitzgerald Peter, John Graetz, and Paul Kurgan. Deloitte and Touche LLP. Financial Services. A New Regulatory Paradigm. March 2005.

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