Revisions to the FFIEC BSA/AML Examination Manual and Federal Reserve Board BSA/AML Examination Findings and Issues Timothy P. Leary Senior Special AML Examiner Board of Governors of the Federal Reserve System Washington, DC

Overview Examination Manual Examination Findings – Numbers Examination Issues – Weaknesses Examination Issues – Strengths Emerging Issues

BSA/AML Examinations FRB continues to conduct BSA/AML examinations using the procedures in the interagency FFIEC BSA/AML Examination Manual. Most recent version issued April FRB examiners began using the revised examination procedures for examinations that commenced on May 1, 2010 or later. Infobase:

Purpose of the Manual Promote interagency consistency Consolidate BSA/AML regulatory requirements in one handbook Provide guidance on BSA/AML topics to examiners and banks Clearly and authoritatively communicate regulatory expectations

History of the Manual Original issuance – 2005 –Emphasis: “Living document” Two “lives” to date – 2006 and 2007 Most recent revision – 2 nd Quarter 2010 –Longest time between revisions –Most extensive revisions

Revision Process FFIEC (Federal Banking Agencies/State Liaison Committee) Consultation with FinCEN and OFAC Industry input – meetings, conferences, BSAAG subcommittees Examiner input

2010 FFIEC BSA/AML Examination Manual – Significant Revisions Streamlined and reorganized procedures for reviewing BSA/AML compliance programs; Created a new section on reviewing bulk currency shipments; Redrafted and renamed Enterprise-Wide section to acknowledge the wide variety of programs that exist and enhance specific discussion of consolidated compliance programs (now “BSA/AML Compliance Program Structures”). Reorganized discussion of suspicious activity monitoring and reporting; Updated requirements for CTR exemptions; Clarified expectations for determining the severity of regulatory violations; Updated discussions of recent developments in electronic banking, Automated Clearing House transactions, prepaid cards, cover payments, and third-party processor customers.

The Numbers (1/1/2012 – 5/31/2012) Total BSA/AML reviews by the FRB: 377 Total violations cited: 29 (about 7.5% of total exams) Total number of banks cited: 15 (about 4% of total exams)

The Numbers (1/1/2012 – 5/31/2012) Total Title 12 individual subpart violations: 11 (resulted in 2 program violations). Most common Title 12 violations: System of internal controls. Independent testing. CIP. Total SAR rule violations: 6 Total formal BSA/AML-related enforcement actions: 0

Examination Issues – Weaknesses System of Internal Controls Customer risk ratings, identification of high-risk customers, and periodic reviews. RDC for foreign correspondent accounts. SAR monitoring (calibrating filters and clearing alerts). SAR documentation (to file or not to file). Consolidated (firm-wide) programs. Mainly large, integrated firms with multi-national operations. Effective consolidated approach to BSA/AML compliance risk management (disparate operations, entities, product lines). Importance of adequate policies and procedures, clear reporting lines, and active vendor management. Mergers and acquisitions (systems, data feeds, structures).

Examination Issues – Weaknesses (cont.) Wholesale cash operations. Staff performance – turnover, new BSA officers, resource issues. New product or market development does not adequately consider compliance issues and involve compliance personnel – the earlier the better (e.g., RDC, ACH, remittances). Independent testing – outsourcing, depth and breadth, considers factors set out in the Manual.

Examination Issues – Strengths Systems largely in place for traditional, retail- oriented banking operations. Overall quality of programs has stabilized. Fewer or consistent number of overall violations. Fewer or consistent number of serious violations. Fewer enforcement actions. Risk assessments more formalized and useful – sometimes even automated (notable exceptions – see risk rating weaknesses).

Examination Issues – Strengths (cont.) Improved awareness that U.S. standards apply to U.S. operations. Improved management focus since the crisis on importance of BSA/AML compliance. Greater focus on higher-risk operations and customers. Correspondent banking. Private banking. Politically exposed persons.

Emerging Issue s Beneficial ownership/Customer due diligence. FinCEN ANPRM. IT Modernization. New CTR and SAR forms (March 2013). Mandatory e-filing (June 2012). Iranian sanctions CISADA – “aggressive” implementation. Section 311 designation – Central Bank of Iran. National Defense Authorization Act. Revisions to FATF recommendations (40+9).

Contact information Timothy P. Leary Senior Special AML Examiner Banking Supervision and Regulation Board of Governors of the Federal Reserve System Washington, DC (202)

Thank You! Questions?