United States: New York Proposes Tough New Anti-Money Laundering And Cybersecurity Measures On Financial Services Companies

Action Item: Benjamin Lawsky, the Superintendent of Financial Services for New York State, one of the country's most aggressive regulators, is seeking to increase regulatory pressures on the financial services industry, beyond the measures imposed by federal regulators. He is proposing new anti-money laundering requirements and cybersecurity procedures that are sure to have significant effects on New York-chartered financial institutions and their top-level business executives.

The New York State Department of Financial Services ("DFS") supervises all New York State-chartered banks, the majority of United States-based branches and agencies of foreign banking institutions, and all insurance companies in New York. It also regulates all of New York State's mortgage brokers, mortgage bankers, check cashers, money transmitters, budget planners, and similar providers of financial services. Entities supervised by DFS number more than 3,800, with assets of more than $7 trillion.

On February 25, 2015, Superintendent Lawsky delivered remarks entitled "Financial Federalism: The Catalytic Role of State Regulators in a Post-Financial Crisis World."Mr. Lawsky recognized the expertise and resources of federal regulators, but noted that federal policing of Wall Street has not always been effective. He proposed that state governments experiment with innovative new regulatory measures in order to combat financial fraud. To enhance enforcement efforts in New York, DFS is proposing new anti-money laundering measures and cybersecurity procedures that are sure to have significant effects on New York-chartered financial institutions.

Random Audits of Transaction Monitoring and Filtering Systems

Every day, hundreds of millions of transactions are processed through bank payment systems, which results in hundreds of billions of dollars being moved around the globe. Because financial firms cannot manually monitor every transaction, the industry relies on automated transaction monitoring and filtering systems ("AML control systems") to identify potential money laundering transactions for further review by compliance professionals. These AML control systems automatically flag transaction activities that exhibit certain criteria commonly associated with criminal activity, including terrorism ("banned transactions").

Mr. Lawsky identified two potential problems with AML control systems. First, they could be inadequate, defective, or improperly managed by the employees responsible for their operation, enabling banned transactions to pass through the banking system without being flagged, investigated, and reported. Second, Mr. Lawsky suggested that bank employees are "turn[ing] down the sensitivity of the filters so the systems do not generate enough alerts and therefore suspicious transactions go undetected." Mr. Lawsky was likely referring to Commerzbank AG, which settled with DFS, the U.S. Attorney's Office, and the Manhattan District Attorney's Office on March 12, 2014, by agreeing to pay $610 million to DFS, terminate employees who engaged in misconduct, and install a monitor in connection with transactions the Bank engaged in on behalf of Iran, Sudan and a Japanese corporation that engaged in accounting fraud. Commerzbank AG employees sought to alter the Bank's transaction monitoring system so that it would create fewer alerts of potential misconduct.

To address potential AML control failures, Mr. Lawsky proposes random audits of financial firms' AML controls, rather than relying upon traditional self-reporting by firms, and the use of independent monitors. DFS may partner with technology consulting firms to audit and independently monitor the robustness of financial firms' AML controls.

Personal Liability of Senior Business Executives for Inadequate AML Control Systems

The other new anti-money laundering enforcement measure proposed by Mr. Lawsky is a regulatory scheme requiring senior business executives—not just legal or compliance employees—to attest personally to the adequacy and robustness of their firms' AML controls. This is a concept modeled on the Sarbanes-Oxley approach to accounting fraud in order to increase personal accountability of senior executives in the financial services industry.

Section 302 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7241, requires that the CEO and CFO of publicly traded companies personally attest to the truthfulness and adequacy of their companies' financial statements. This provision makes top-level executives personally responsible for accounting fraud. Mr. Lawsky wants to implement a similar requirement for a firm's AML controls.

In the case of Commerzbank AG, the Bank agreed with DFS to terminate four individuals who played a central role in the Bank's improper conduct. DFS' investigation had already resulted in the resignation of the Head of AML, Fraud and Sanctions Compliance for the Bank's New York Branch.

Cybersecurity

Mr. Lawsky is concerned that within the next decade we will experience an "Armageddon-type" or "cyber 9-11" event that will cause a catastrophic disruption in the financial system. In order to prevent such an act, DFS is revamping its regular examinations of banks and insurance companies to incorporate new, targeted assessments of those institutions' cybersecurity preparedness. By grading banks and insurers on their defenses against hackers as part of examinations, those companies will be incentivized to prioritize and increase their cybersecurity protections. In addition, DFS is considering steps to address the cybersecurity of third-party vendors. Third-party vendors have access to a financial institution's information technology systems for a broad-range of services, providing an additional way for hackers to infiltrate a company's systems. Therefore, DFS may require that regulated financial institutions receive "robust representations and warranties" from third-party vendors that those vendors have significant cybersecurity protections in place.

Finally, Mr. Lawsky discussed "multi-factor authentication." Generally, banks and insurance companies allow customers to access their accounts after entering a username and password to verify the customer's identity. He believes this system is very vulnerable and should be replaced with a multi-factor authentication system that would include a second layer of security—such as a randomly-generated password sent to a mobile phone—in addition to the username and password.

Conclusion

Superintendent Lawsky's February 25, 2015 remarks indicate that DFS will seek to increase regulatory pressures on the financial services industry, beyond the measures imposed by federal regulators. While Mr. Lawsky has indicated his intent to resign from DFS this year, we anticipate that DFS will continue its more active role in enforcement of AML and cybersecurity rules. In particular, top-level business executives may be subject to personal liability if their companies' AML compliance measures are found to be inadequate. And, regulated entities and their third-party service providers will likely find themselves investing in more comprehensive cybersecurity measures in order to address potential vulnerabilities in information technology systems.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions