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HIGH-RISK: FOREIGN CORRESPONDENT BANKING. 1/2004Anti-Money Laundering 2 OBJECTIVES Define Foreign Correspondent Banking Understand Potential and Unique.

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Presentation on theme: "HIGH-RISK: FOREIGN CORRESPONDENT BANKING. 1/2004Anti-Money Laundering 2 OBJECTIVES Define Foreign Correspondent Banking Understand Potential and Unique."— Presentation transcript:

1 HIGH-RISK: FOREIGN CORRESPONDENT BANKING

2 1/2004Anti-Money Laundering 2 OBJECTIVES Define Foreign Correspondent Banking Understand Potential and Unique Issues Recognize Money Laundering Vulnerabilities Define High-Risk Products and Services Describe Importance of Due Diligence Discuss Examiner Considerations –Risk Management v. Compliance Issues –Examinations (Pre- and On-site) –BSA/AML Exam Procedures for Foreign Correspondent Banking –Questions???

3 1/2004Anti-Money Laundering 3 DEFINITION Accounts Maintained On Banks Behalf Between Domestic Banks Between Domestic Banks and Foreign Banks Correspondent vs. Respondent Bank

4 1/2004Anti-Money Laundering 4 POTENTIAL AND UNIQUE ISSUES Legitimate Business Purposes –International trade and investment –Settlement purposes –Funds transfer activity –Clearing of foreign items –Jurisdictions where bank has no presence

5 1/2004Anti-Money Laundering 5 POTENTIAL AND UNIQUE ISSUES Non-Legitimate Purposes –Conduit For dirty money –Gateway to the US financial system – Foreign bank corrupt poorly regulated poorly managed weak or nonexistent AML controls

6 1/2004Anti-Money Laundering 6 MONEY LAUNDERING VULNERABILITIES Lax Due Diligence Nested Correspondents Correspondent Banker or Relationship Manager Bank Secrecy Laws Weak AML Laws Cross Border Difficulties

7 1/2004Anti-Money Laundering 7 HIGH RISK PRODUCTS AND SERVICES Funds Transfer Pouch Activity Cash Letter Payable Through Accounts

8 1/2004Anti-Money Laundering 8 HIGH RISK PRODUCTS AND SERVICES: FUNDS TRANSFER Key Activity Failure to Monitor Manual Reviews

9 1/2004Anti-Money Laundering 9 HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY Common Carrier Currency Monetary Instruments Documents Financial Institution Individual

10 1/2004Anti-Money Laundering 10 HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY Red Flags: –Same or consecutive days from different locations –Sequentially numbered –Amounts under 3,000 or 10,000 –Little or no purchaser information. –Repetitive beneficiaries or originators or both –Round even dollars

11 1/2004Anti-Money Laundering 11 HIGH RISK PRODUCTS AND SERVICES: CASH LETTER High Volume Failure to Monitor Manual Reviews

12 1/2004Anti-Money Laundering 12 HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH ACCOUNTS US Bank Check-Writing to Foreign Bank Customers Foreign Bank - Master Account Foreign Bank Customers - Sub-Accounts Provide for Enhanced Due Diligence

13 1/2004Anti-Money Laundering 13 HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH ACCOUNTS Traditional Foreign Correspondent Bank Account –No access by foreign customers –Differs from PTA sub-account holders Foreign Bank Uses Traditional Foreign Correspondent Bank Account as PTA –No information on ultimate users –Potential for ML and OFAC violations

14 1/2004Anti-Money Laundering 14 DUE DILIGENCE Noteworthy Due Diligence Failures –Nested respondent banks –Non-credit relationships

15 1/2004Anti-Money Laundering 15 ENHANCED DUE DILIGENCE Factors to Consider –Purpose –Location –Bank license –AML programs –Regulation and supervision

16 1/2004Anti-Money Laundering 16 ENHANCED DUE DILIGENCE Risk Management –Perceived risk –Availability to third parties –Compliance program –SAR detection and reporting –Monitoring

17 1/2004Anti-Money Laundering 17 BANK LICENSES Shell Banks Offshore Banks Banks in Non-Cooperative Jurisdictions

18 1/2004Anti-Money Laundering 18 NCCTs Cook Islands Philippines Nauru Egypt Guatemala Indonesia Myanmar Nigeria Ukraine

19 1/2004Anti-Money Laundering 19 EXAMINER CONSIDERATIONS: Risk Management v. Compliance Risk Management: To assess and protect against undue risk exposure. Includes Oversight Policies/Procedures Internal Controls MIS Compliance: To conduct business according to applicable laws and regulations. Technical aspects Potential fines

20 1/2004Anti-Money Laundering 20 EXAMINATIONS Pre-Examination FDL/Officers Questionnaire Response –List of Due To/Due From Accounts –Audits –Risk Assessments –Strategic Plans Exam Scope

21 1/2004Anti-Money Laundering 21 EXAMINATION PROCEDURES On-Site Examination Risk Focused Decision Factors –Level of business with FCB (offshore or NCCT) –Weak controls/AML efforts concerning correspondent banking –Internal audit coverage/findings –SAR/CTRs

22 1/2004Anti-Money Laundering 22 EXAMINATION PROCEDURES General: Review overall approach to correspondent banking business line (risk management approach) USA PATRIOT Act: 313/319 (SR Letter 03-17) –Prohibit shell banks –Recordkeeping USA PATRIOT Act: 312 (Pending) –Special Due Diligence for Correspondent Accounts and Private Banking Accounts

23 1/2004Anti-Money Laundering 23 EXAMINATION PROCEDURES GENERAL: Review overall approach to correspondent banking business line (risk management approach) Management Oversight –Risk assessment –Strategic Plan/Approved markets, products, and services Policies/Procedures –Marketing/Due Diligence/Account Acceptance –Operations –Monitoring/Compliance Internal Controls –Documentation –Monitoring MIS

24 1/2004Anti-Money Laundering 24 EXAMINATIONS Transaction Testing –Sample of accounts –Review agreements –Review account opening and due diligence –Account activity from statements

25 1/2004Anti-Money Laundering 25 EXAMINATION PROCEDURES USA PATRIOT Act: 313/319 –Prohibits Shell Banks –Recordkeeping SR Exam Procedures

26 1/2004Anti-Money Laundering 26 EXAMINATION PROCEDURES USA PATRIOT Act: 312 –Special Due Diligence for Correspondent Accounts and Private Banking Accounts Exam procedures pending Interim: Use draft procedures: High Risk Areas That May Require Special Scrutiny: Foreign Correspondent Banking

27 1/2004Anti-Money Laundering 27 QUESTIONS What is the focus for 2004? Will work programs be developed for Correspondent Banking and USA PATRIOT Act compliance? How should we review Due From/Due To Affiliate accounts? Should banks obtain certifications for correspondent banking relationships on the asset side? What should examiners look for when reviewing Due From accounts (aside from reconciling differences and stale items)?

28 1/2004Anti-Money Laundering 28 QUESTIONS When reviewing correspondent bank relationships must the file contain a copy of the banking license from the licensing authority?


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