1. Bank Examinations Techniques Part Two James Wright Office of Technical Assitance U.S. Department of Treasury

2. Examiners Role Prevents banking system use by money launders Assists law enforcement in building a strong case Not a law enforcement professional

3. Banks Compliance Program Purpose: –Monitor banks compliance with money laundering laws Benefits to examiners: –Help determine banks compliance Benefits to bank: –Protects bank from fraud penalties, asset forfeitures and criminal activities

4. Compliance Program Elements Senior management commitment Compliance officer Internal Audit Internal controls Independent testing Training

5. Senior Management Commitment Program approved by the board Informed of compliance efforts, audits, deficiencies and corrections Make compliance –Condition of employment –In the job description

6. Internal Audit Program Can be based on exam procedures Includes testing of transactions Assesses employees knowledge Compares performance with procedures

7. Compliance Officer Appointed with: –Day to day responsibility –Broad knowledge of banking functions and activities –Access to upper management

8. Training Must cover : –All laws and regulations and bank procedures –Placement, layering, and integration –Examples Must be: –Ongoing and cover new schemes –Tailored to specific activities of financial institutions

9. Personnel Training For: Tellers, service representatives, Lending officers, staff administering: –Private banking –International correspondent department, –Wire transfer, –Foreign exchange –Trade –Investment –Trust –Credit card –Internet

10. Bank Examination Approaches Top down approach –Generally used in large banks –Risk oriented –Focus on policies and procedures –Evaluate risk management practices –Limited transaction testing performed

11. Examination Approach Transaction - based approach –Performance oriented –For smaller banks –Less comprehensive policies and programs –Focuses on testing of transaction records –Focuses on results of operations

12. Know Your Customer Examine for coverage of Citizens accounts Business accounts And monitoring

13. Examine Banks Compliance Program For: Written polices and procedures approved by the board of directors Internal Audit Internal controls Transaction testing Compliance officer Appropriate training

14. High Risk Areas Deposit taking Sale of official checks and negotiable instruments Wire transfers Loans International correspondent banking Special use accounts Private banking Trust department Brokerage operations Trade financing Internet banking Credit Cards

15. Review Internal Audit Does audit cover all risk areas? Did audit include transaction testing? Did audit uncover suspicious activity? Did audit uncover violations? Where corrective actions taken?

16. Cash shipments –Analyze 3 months of cash shipments from Central bank and corespondent banks Large cash transactions –Examine records of large cash deposits –From teller operations Transaction Testing

17. –Examine an appropriate number of ctrs for a period in time i.E..Months (appropriate for bank size, activity) –Determine correctness and timely filing, consistency with type of business. –Look for suspicious activity Examine Large Cash Transactions Using Currency Transaction Reports (ctrs)

18. Look for Structuring Signs Placed in concentration accounts Slightly less than limit for reporting Foreign address Post office address Request for holding statements

19. Compare Transaction With Other Reports Teller proof sheets Demand deposit activity reports Wire transfer log Loans listed by collateral exception reports

20. Examine Wire Transfers Using a sample of accounts based on dollar amounts, high-risk or other characteristic; review the wire transfer log for an appropriate time period. Follow-up with a review of wire transfers, messages and customer files and account statements, for a three month period or other appropriate period of time.

21. Wire transfer Analyze wire transfers to determine whether the amounts, frequency and countries of origin/destination are consistent with the nature of the business or occupation of the customer and be alert for any suspicious or unusual activities.

22. Suspicious Wire Transfers Examine wire transfer log, payment orders, accounts and other information and compare to the following lists of suspicious activities: Wire transfer activity from high-risk countries where the customer has no apparent business purpose or when the activity is inconsistent with a customers business or activity

23. Suspicious Wire Transfers Periodic wire transfers from a personal account to high-risk countries; Large incoming wire transfers on behalf of a foreign client with little or no explicit reason;

24. Suspicious Wire Transfers Frequent or large dollar volume of wire transfers to and from high risk countries; Frequent wire transfers of large dollar amount Funds transferred in and out of an account on the same day or within a relatively short period of time;

25. Suspicious Wire Transfers Wire transfer payments or receipts with no apparent links to legitimate contracts, goods or services; Transfers routed through multiple foreign or domestic banks. Deposits of funds into several accounts, usually in amounts of less that a required reporting threshold.

26. Suspicious wire transfers Payment instructions to financial institutions to wire funds abroad and instructions to expect an incoming wire transfer of funds in equal amounts of dollars or other currency from other sources; Regular deposits or withdrawals of large amounts of cash using wire transfer to, from or through countries that either are known sources of narcotics or whose money laundering laws are ineffective;

27. Suspicious Wire Transfers Large volume of wire transfers from persons or businesses that dont hold accounts.

28. Wire Transfer Controls Determine the effectiveness of the banks wire transfer controls for detecting and preventing money laundering via wire transfers.

29. International Correspondent Accounts Focus on: –The banks due diligence for New accounts and periodic review –Wire transfers –Pouch activity

30. International Correspondent Accounts. Review files of selected correspondent relationships with other banks Focus on the correspondent banks due diligence and monitoring of new accounts

31. International Correspondence Accounts Determine to what extent the bank performs the following due diligence Tasks: –Obtains information on bank ownership and management –Obtains information on the nature, and volume of transactions expected –Reviews financial statements

32. International Correspondent Accounts Evaluate credit worthiness Determine the bank applicants primary line of business Verifies the banks license Determines that the bank applicant has a fixed, operating office in the licensing jurisdiction

33. International Correspondent Account Evaluates the overall adequacy of banking supervision in the jurisdiction of the respondent bank including anti-money laundering laws and bank regulatory procedures Makes inquires to the correspondents local branch bank

34. International Correspondent Accounts Makes inquires with bank rating agencies Obtains bank references Complete a customer profile

35. International Correspondent Accounts Determine if the bank applicant has relationships with shell banks Determine how the bank monitors international correspondent accounts Determine how often site visits are made Form an opinion about the banks money laundering controls on correspondent accounts

36. Sale of Negotiable Instruments For non customers, does bank require: –Address, social security number and date of birth Does the bank have a program for capturing: – Multiple purchases –Cash purchases

37. Safe Custody or Deposit Boxes Review bank policies: –Does management understand potential for money laundering? –Does bank have identification procedures for non-account holders? –Do customers declare content of boxes for insurance purposes? –

38. Safe Custodial or Deposit Boxes Does bank recognize suspicious activities such as: –Frequent customer visit prior to transmission of funds –Packages or sealed envelopes –Customer requests to be unattended or unobserved

39. Lending Function Does the bank have procedures covering this function? Review types of credit offered, private, international, commercial, retail. Does the bank have a Know your customer policy for this function?

40. Lending Function Examine banks policies –Does the bank set requirements for loans not secured by real estate? Examine collateral list for cash secured loans –Has the bank established procedures for reporting suspicious activities in the lending area?

41. Review the banks internal reports which could identify suspicious activities such as: Unusual loans which are cash secured and dont fit the business character Lending Function Testing

42. Lending Function Review for: –Sudden change in loan demand over previous quarter; –Sudden change in collateral requirements, repayment terms by wire; and –Surrender of cash.

43. Lending Function Select a sample of loans from: –High risk countries –High risk businesses –Examine originator or beneficiaries legitimate business need –Determine what management knew or should have known

44. Lending Function Answer the following questions: –Was the loan repaid unexpectedly? –Was the loan dormant while other accounts active? –Was the problem loan identified by the bank? –Was it included in the supervision report? –Was the loan inconsistent with the earnings capacity of the borrower? –Were there any penalties for early pay-off? –Were other assets sold to make a reimbursement?

45. Private Banking Defined –No set definition but banks want to attract high net worth individuals and their businesses Why high risk? –Greater emphasis on privacy and confidentiality –Serves international customers as well as domestic customers –Large amounts of money

46. Private Banking Asset management trust and advice Investment management account Offshore facilities Custodial services Funds transfer Lending Checking Over draft privileges Letter of credit,etc. Bill paying services

47. Private Banking Procedures Review banks procedures for: –Acceptance and approval of new accounts, –Know your customer policies, verification of legal status – Knowing where funds are derived –Knowing the expected type and level of cash flow Examine a few accounts which have: –Customers from high risk countries or businesses in high risk countries

48. Potentates Does bank have procedures for monitoring potentates accounts: –Individuals holding important public positions –Foreign heads of state, ministers, influential public officials, judges and military commanders –Persons or companies clearly related to them

49. Foreign Exchange Procedures –Interview foreign exchange department staff to determine their knowledge of money laundering schemes –Examine identification requirements –Examine report of exchange –Look for unusually large exchanges inconsistent with business –Determine adequacy of coverage

50. Letters of Credit Review files to determine if customers business normally require letters of credit Scrutinize the instrument being used –Are they standard? –Are they for less tangible activities such as services? –Are documents reasonable?

51. Letters of Credit Scrutinize the instrument being used: –Are goods shipped in line with known business activity of the customer? –Are instruments amended or extended frequently? –Does customer pass-up more favorable arrangements remittance, transfer or foreign trade terms?

52. Investments Review investments of customers introduced by foreign banks from high risk countries: –Is there buying and selling of securities with no discernable purpose? –Are securities transactions across a number of jurisdictions? –Are purchase trades settled in cash or checks? –Does client specify which broker dealers to use in foreign countries?

53. Investments Review bearer securities: –Are certain securities held outside a recognized custodial system? –Is client the type that would make use of bearer securities? –Are deliveries made in person?

54. Insurance Review a sample of insurance polices: –Are policies and terms in keeping with the type of business? –Are there track records of cancellations? –Are a number of these policies with same insurer? –Are there refunds by cash or transfer?

55. Cards Credit Cards and Debit Cards Loading up cards and payments Use of cards for purchases

56. Internet Banking Does the bank require additional identification from non face- to -face customers? Look for suspicious signs such as: –Numerous accounts –Frequent wire transfers of large amounts

57. Results of Exam Write-up exam results Determine any violations Contact authorities if appropriate Convey findings to bank management and board of directors

58. Non-Bank –Securities dealers,brokers –Insurance companies –Credit Unions –Savings institutions –Cooperatives and NGOs –Exchanges –Money transmitters –Credit card companies –Leasing firms –Privatization agencies –Factoring firms –Pawnshops –Casinos, lotteries & gaming rooms –Dealers in precious metals and jewels –Accountants –Auto dealers –Lawyers –Notaries –Artwork dealers –Antique dealers –Real estate sales –Pension funds –Investment advisors

59. Similarities and Differences in the Regulation of Non- bank Entities Like banks, the key to good compliance is a good compliance plan which consists of: – Compliance officer – Internal audit – Internal controls – Transaction testing –Training

60. Differences Size Schemes Risk areas