United States: Bank Secrecy Act And Anti-Money Laundering Programs Continue To Result In Significant Penalties

Bank Secrecy Act ("BSA") compliance, and in particular anti-money laundering ("AML") controls, remains a focus of regulators as evidenced by record fines levied in recent weeks. On February 7, 2014, the Financial Industry Regulatory Authority, Inc. ("FINRA") suspended a former AML compliance officer at Brown Brothers Harriman ("BBH") and assessed a record $8 million fine against the firm for its inadequate AML program and lack of oversight. In addition, BBH's former Global AML Compliance Officer was personally fined $25,000 and suspended for one month as a result of the AML program's failures. FINRA found that BBH's AML program failed to adequately monitor and detect suspicious penny stock transactions, even after such activity had been brought to its attention. BBH also failed to fulfill its Suspicious Activity Reporting filing requirements and lacked an adequate supervisory system to prevent transactions involving unregistered securities.

FINRA also recently took formal disciplinary action against a New York-based broker-dealer that is affiliated with a Mexican broker-dealer and Mexican bank for inadequate AML systems, finding that the broker-dealer failed to register foreign finders who functioned as the firm's primary points of contact with its customers over a period of five years. According to FINRA's Letter of Acceptance, Waiver and Consent, the firm's former AML officer and Chief Compliance Officer was suspended for 30 days and only escaped monetary sanctions due to his inability to pay. The firm was fined $475,000 and required to certify within 90 days that it had established systems and procedures reasonably designed to achieve compliance with all of its AML and registration obligations, including but not limited to remediating the deficiencies identified by FINRA.

Similarly, regulators outside of the United States continue to crack down on poor AML controls. Standard Bank Group became the first commercial bank to be penalized by the Financial Conduct Authority for such an offense when it was fined $12.6 million in mid-January. In December 2012, HSBC agreed to pay $1.92 billion to settle charges that it allowed Mexican and Colombian drug cartels to launder the proceeds of their illegal operations.

The timing of these record fines could not be worse for financial institutions and their compliance executives. According to a recent KPMG survey, one in three senior bank executives believes that their institution has poor AML controls. Out of 317 AML and compliance professionals surveyed representing 48 countries, 35 percent said their transaction monitoring system is neither efficient, nor effective and only half believed their monitoring systems were able to provide a complete picture by monitoring transactions across businesses and jurisdictions. KPMG's report also reflected that despite concerns about a lack of control and oversight, institutions continue to outsource and off-shore AML program functions. Approximately one-third of institutions surveyed by KPMG had outsourced a portion of their AML program functions and nearly half perform certain AML program functions off-shore.

AML Risk Assessment

The recent regulatory actions described above, combined with the findings of the KPMG survey, highlight the need for management, with appropriate board oversight, to review and test the adequacy of their institution's AML policies, procedures, and processes. The board of directors, acting through senior management, is ultimately responsible for ensuring that the institution maintains an effective AML internal control structure, including suspicious activity monitoring and reporting.

In order to establish an effective AML program, a financial institution must first assess the risks that it faces, which are dynamic and depend on a variety of factors. Each financial institution must assess the level of risk that is inherent in (i) its customer base; (ii) its products and services; and (iii) the geographic areas in which it and its customers conduct business. Certain products and services are deemed to be high risk, such as international private banking, foreign correspondent banking, accounts maintained by, or on behalf of, Senior Foreign Political Figures, and international funds transfers. In addition, a financial institution should consider the sophistication and knowledge of its staff, and prior audit and examination findings related to BSA/AML compliance. The AML risk assessment must be documented by the financial institution.

In addition, the federal banking agencies expect that the AML risk assessment be reviewed on a periodic basis. The Federal Financial Institution Examination Council ("FFIEC") states that a financial institution should update its risk assessment to identify changes in its risk profile, as necessary (e.g., when new products and services are introduced, existing products and services change, high-risk customers open and close accounts, or the institution expands through mergers and acquisitions). However, even in the absence of any such changes, "it is a sound practice for banks to periodically reassess their BSA/AML risks at least every 12 to 18 months."

Fundamental AML Compliance Risks

AML compliance is an area that creates a clear risk to the integrity of an institution's operations. These risks typically include:

  • failure to identify risks associated with certain customers or transactions;
  • a compliance program not proportionate with the unique risks of an institution;
  • a lack of appropriate resources and expertise to effectively manage risk;
  • failure to provide for dual controls and appropriate segregation of duties;
  • a lack of clearly defined lines of authority and responsibility;
  • a compliance framework that is inconsistent with regulatory requirements or expectations;
  • undue reliance on risk models;
  • poor risk-based model controls;
  • failure to comply with recordkeeping requirements or inconsistent documentation and analysis to support risk management activities;
  • ineffective or insufficient compliance program testing; and
  • failure to identify certain internal changes that may impact risk management.

Compliance Culture

Creating a culture of compliance is critical to an effective AML program. The board is responsible for setting an appropriate culture of compliance as it relates to AML obligations, establishing clear policies regarding AML risk management and ensuring that these policies are followed. Senior management is responsible for communicating and reinforcing this culture of compliance and implementing and enforcing the board-approved AML compliance program. An institution must have comprehensive risk management policies, procedures, and processes in place across the institution to address the entire institution's risk. The importance of AML compliance must be understood and communicated across all levels of the institution.

Although some smaller institutions may be able to maintain an effective centralized compliance department that is responsible for all compliance functions, larger institutions may be better served by organizing AML compliance by business and/or geographic region, and sometimes at the enterprise level. Regardless, institution-wide integration of an AML compliance program helps balance compliance obligations across teams to meet the changing business and regulatory obligations.

Coordination of Compliance Efforts

AML compliance should be a coordinated effort. Compliance no longer needs to be viewed as a burden by business managers. In fact, understanding AML compliance may benefit business managers by allowing them to identify ways in which the AML compliance program can be used to their benefit. For example, business managers may be able to use certain customer due diligence information to better identify customer risk, develop targeted cross-selling opportunities and identify additional products and services that may fit a particular customer's profile.

Business managers should also play a significant role in the culture of compliance. It is critical for institutions to have their business managers work closely with their BSA compliance officer in connection with the development of new products or services so that potential risks can be identified, understood and communicated early on in the process.

Similarly, an AML compliance program not only benefits from regular specialized AML training but also from product and service training targeted towards the institution's compliance testing staff. The involvement and training of compliance testing staff on an institution's products and services will allow AML compliance testing to better identify how AML issues interact with the products and services of the institution's business.

Benefits of an Integrated AML Program

An integrated approach to an institution's AML compliance not only provides a more effective AML program and reduces the potential for regulatory and reputational risk, but also results in an increase in the number of well-rounded business managers, compliance department personnel and compliance testing staff. It also may serve as an important retention tool, as an institution is able to provide more opportunities for learning and advancement in connection with its integrated AML program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Aaron M. Kaslow
Michael Mancusi
Erich Hellmold
Kevin Toomey
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