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BSA/AML FOR INTERNATIONALLY
HEADQUARTERED BANKS – HOW TO DEAL
WITH OTHER FINANCIAL INSTITUTIONS
Presented to
Institute of International Bankers
Conference of State Bank Supervisors
United States Regulatory Compliance Program
550 S. Hope Street
Suite 2150
Los Angeles, CA 90071
Tel: (213) 243-3700
Fax: (213) 243- 3710
Email: [email protected]
Websites: www.lecg.com
www.securagroup.com
By:
Walter J. Mix III, Managing Director
The Secura Group, of LECG, LLC
July 16, 2008
2
How to Deal with other Financial
Institutions-Summary
 Background
 Risk Factors
 Risk Mitigation
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Wire Activities
Cash Activities
Loan Participations
Do’s and Don’ts
 Conclusion / Takeaways
[email protected]
3
Background

Secura/LECG’s market coverage is international. Types of financial
services engagements include: Strategic and Financial Advisory, ERM,
Credit Risk, BSA/AML, Compliance Risk Management, ALM/MARKET Risk,
Basel II, Fair Lending, Capital Requirement/Allocation, various litigation
matters, and others.

Secura/LECG is a global expert services firm with over 800 experts and
professionals in 13 countries. The firm provides independent expert
testimony, original authoritative studies, and strategic advisory services to
clients, including Fortune Global 500 corporations, major law firms, and
local, state, and federal governments and agencies around the world.
[email protected]
4
Background

Banks must have a Fully Integrated/Implemented
BSA/AML Program
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Enterprise level compliance program

Risk assessment

Policies and procedures
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Proper staffing
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Technology / software
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Training

Audit/testing

Surrounding documentation – Important!

Continuously assess / rebalance as needed
[email protected]
5
Background
Potential Negative Sanctions –
“Unsatisfactory Rating”
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FHC status
No acquisitions/expansion in United States (well managed, well capitalized,
satisfactory CRA rating and effective BSA/AML Program)
Criminal sanctions by prosecutors
Exposure to civil litigation
Forfeiting bank license
Civil money penalties
Effective AML program
Reputation and strategic risk
Cost of developing BSA Program while operating under a regulatory order
[email protected]
6
Background Getting Started

Involve the Board, management, operations, lines of business,
branches, legal, information technology, and others
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Must be a “team effort” that is enterprise-wide and integrates system
capabilities, regulatory compliance and customer activity
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Must have “buy-in” from the Board, senior management and lines of
business/departments
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Empower your risk management team and BSA Officer – important!
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Compliance culture
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Communicate with your regulator
[email protected]
7
Risk Factors
 Customer Risk Factors to Consider
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No history or business relationship

Unable to validate business practices or expertise
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Unable to validate BSA/AML Program:

Policies
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Operating procedures
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System of controls
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Qualifications of staff
[email protected]
8
Risk Factors
Additional Risk Factors

Foreign and domestic institutions/entities:
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Verifying ownership or control maybe difficult
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Public records may not reveal beneficial owners
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Corporate governance and controls may be minimal
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Financial reporting and records may be minimal
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Supervision may be minimal
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Never assume based on size or reputation!
[email protected]
9
Risk Mitigation
 “Know Your Customer”
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What is the purpose of the transaction?
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Does the transaction make sense?
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Is the transaction normal or a “one-off?”
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What is the customer’s history with your bank?
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What is the customer’s history with the other institutions?
[email protected]
10
Risk Mitigation

Do you or the bank have experience with other the
institution?
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Conduct due diligence – pre & post transaction
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Query news articles, review financial statements, review primary
bank regulators’ website
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Understand and assess the risks of the transaction
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Establish a “score card” for the other financial institution
[email protected]
11
Risk Mitigation
 Wire Activities

Normal or unusual transaction (for customer & with other bank)

Evaluate and monitor the volume of wires (sent/received) from
specific institutions
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Type of other institution:
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Bank, S&L, Thrift, Credit Union

Money transmitter
 Licensed to conduct the transaction or not
[email protected]
12
Risk Mitigation
 Wire Activities (cont.)

Due diligence of the other institution:
 Prior experience – good or bad
 Regulated or non-regulated
 Location/geography
 Domestic or foreign entity
[email protected]
13
Risk Mitigation
 Cash Activities (retail operations – some foreign
banks)
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Purpose of the cash transfers
 Ongoing or single transfers
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Regulated or non-regulated entity
 Level of regulatory review
 Check cashers
 Licensed to conduct the transaction
 Security
[email protected]
14
Risk Mitigation
 Cash Activities (cont.)
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Evaluate the number and volume of transfers to specific
entities
Due diligence requirements:
 Written BSA/AML Program
 Site review/visitation
 Internet search/query
 Domestic or foreign entity
[email protected]
15
Risk Mitigation
 Loan Participations
 Does the loan participation make sense?
 Who is initiating the participation (credit union or other institution)?
 Who is the “Lead Bank?”
 Are they experienced?
 Who will service the credit?
 Have they serviced similar loans/participations?
[email protected]
16
Risk Mitigation
 Loan Participations (cont.)
 Does the underlying loan transaction make sense?
 Independently review and underwrite the credit
 Conduct and document OFAC
 Verify and document CIP
 Verify that loan documents support the purpose of the credit and borrower’s
capacity to repay
[email protected]
17
Risk Mitigation
 Loan Participations (cont.)
 Independently evaluate and underwrite the other participants
 Review the Participation Agreement
 Review ongoing servicing and transactions
 If appropriate, conduct a BSA/AML Risk Assessment
 Evaluate and monitor loan participations with specific institutions
[email protected]
18
Risk Mitigation: Do’s and Don’ts
 Examples of BSA Failures
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Poor management oversight/accountability
Weak risk assessment
Failure of controls
Poor reporting/ineffective communication
Ineffective monitoring program
Lack of enhanced due diligence
Not responding to prior examination issues/findings
Not preparing for the regulatory examination
Failing to communicate with examiners
[email protected]
19
Conclusion / Takeaways

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Be sure your bank’s BSA/AML Program addresses “Other Institution”
transactions, among other requirements
Determine if a transaction makes sense
Know the transaction participants (KYC)
Conduct BSA/AML Risk Assessments
Monitor and document transactions/participants
Think critically and ask questions
“Proof is in the Pudding”
Lesson from recent BSA/AML and “subprime” meltdown: Analyze “Worst
Case” scenarios and properly implement your program
[email protected]