United States: NYS Department Of Financial Services Outlines Requirements For Transaction Monitoring And Filtering Programs Of NY State-Licensed Institutions

On June 30, 2016, the New York State Department of Financial Services ("NYSDFS") adopted a final regulation outlining the attributes of a risk-based transaction monitoring and filtering program that certain New York State-licensed institutions will be required to maintain (the "Final Rule").1 The Final Rule includes several notable departures from the proposal that was issued by the NYSDFS on December 1, 2015 (the "Proposed Rule"). The Final Rule, which is the first significant rulemaking to be finalized under the direction of the new Superintendent of Financial Services, Maria T. Vullo, is another example of the NYSDFS asserting its role in establishing standards for compliance by banks with anti-money laundering, terrorist financing and sanctions laws.

The NYSDFS promulgated the Final Rule in response to shortcomings identified in the course of its investigations into Bank Secrecy Act/Anti-Money Laundering ("BSA/AML") and Office of Foreign Assets Control ("OFAC") compliance at supervised institutions. It attributed these shortcomings to a lack of robust governance, oversight and accountability at senior levels. The Proposed Rule followed a series of record-setting fines and significant enforcement actions against financial institutions for violations of BSA/AML and OFAC laws and regulations. Like the Proposed Rule, the Final Rule requires covered institutions to:

  • Maintain a transaction monitoring program for potential BSA/AML violations and suspicious activity reporting;
  • Maintain a filtering program to prevent transactions that are prohibited by OFAC; and,
  • Submit annually to the NYSDFS a confirmation regarding compliance with the Final Rule's transaction monitoring and filtering program requirements.

The Final Rule makes several notable changes from the Proposed Rule. Perhaps most significantly, and in recognition of serious concerns raised during the comment period, the Final Rule does not include the proposed annual certification by the institution's chief compliance officer attesting to a covered institution's compliance with the regulation, nor does it include a reference to criminal penalties for filing an incorrect or false certification. Instead, the Final Rule requires an annual board resolution or senior officer compliance finding confirming that the covered institution is in compliance with the Final Rule "to the best of the [board's or the individual's] knowledge."

The Final Rule introduces a "reasonably designed" standard into the transaction monitoring and filtering program that an institution must establish. In addition, the Final Rule's filtering program is limited to compliance with OFAC regulations in contrast to the Proposed Rule's broader scope. A blackline of the Final Rule against the Proposed Rule is included as Appendix A.

Observations

  • The NYSDFS has stated that the Final Rule is not intended to change the substantive requirements with which regulated institutions must comply, but rather to create a more "granular framework" in implementing and maintaining a program for compliance. One issue to watch is whether the compliance systems banks currently have in place will be deemed sufficient for the purposes of the Final Rule. Notably, unlike the Final Rule, federal regulations do not require the filing of an annual resolution or finding. Federal law does require that a board of directors-designated, qualified BSA officer be responsible for ensuring overall BSA compliance, and that each bank have a written compliance program that is approved by the bank's board of directors.
  • The transaction monitoring program requires regulated institutions to monitor transactions after they have been processed, while the purpose of the filtering program is interdiction. It is unclear in respect of the transaction monitoring program how long after a transaction an institution would be required to monitor to ensure compliance with BSA/AML requirements and whether intervening information would be part of the monitoring.
  • The Final Rule includes various standards and requirements where the meaning is ambiguous and subjective. This could make compliance difficult and uncertain, especially in light of the intense regulatory enforcement of similar regulations.
  • The Final Rule is another example of the NYSDFS taking an assertive role in its regulation of New York- licensed financial institutions. While many of the requirements of the Final Rule were measures that large New York-licensed financial institutions were already taking, deficiencies observed by the NYSDFS would typically be handled through the supervisory process. The implementation of a separate regulation suggests the NYSDFS's desire to take on a more significant enforcement role in the area of BSA/AML and sanctions compliance.
  • The Final Rule was issued under the authority of New York Banking Law ("NYBL") § 37 which allows the NYSDFS to require special reports from licensed institutions. The Proposed Rule included a citation to NYBL § 672, a statute which states that "any officer, director, trustee, employee or agent of any corporation" who makes a false entry in any book, report or statement with intent to deceive is guilty of a felony, but the Final Rule deleted the citation to section 672.

    • Given the high priority paid to enforcement of these rules, bank personnel should still remain aware of the possibility of criminal prosecution. Even though the Final Rule does not explicitly refer to criminal penalties and the citation to section 672 was deleted, the NYSDFS had stated that if a program is not reasonably designed and if the compliance finding is not based on a review of necessary documents and materials, and if the compliance finding was made with intent to deceive, then the certifying individual(s) may be subject to criminal penalties.
    • However, there is a clear intent element to NYBL § 672, and therefore it should be difficult to prosecute a senior officer or board of directors who signs a Resolution/Finding mistakenly, but with no intent to deceive.

Scope and Effective Date

The Final Rule applies to all "Regulated Institutions," which includes all banks, trust companies, private bankers, savings banks and savings and loan associations chartered under the New York Banking Law, New York-licensed branches and agencies of foreign banking corporations, as well as New York-licensed check cashers and money transmitters. The Final Rule does not appear to apply to the representative offices of foreign banks, although representative offices of foreign banks located in New York are subject to the general AML program requirements of Part 116 of NYSDFS banking regulations.

The Final Rule, which was issued as Part 504 of the Superintendent's Regulations, comes into effect on January 1, 2017. This is a departure from the Proposed Rule that would have come into effect immediately upon finalization.

Annual Board Resolution or Senior Officer Compliance Finding

The Final Rule requires each Regulated Institution to adopt and submit to the Superintendent a board of directors resolution or senior officer compliance finding ("Resolution/Finding") by April 15th of each year. The Resolution/Finding must say that to the best of the knowledge of the individual signing the Resolution/Finding, the transaction monitoring and filtering programs of the Regulated Institution are in compliance with the Final Rule. The first such resolution or finding is due on April 15, 2018. Additionally, each Regulated Institution is required to maintain all records, schedules and data supporting the adoption of the resolution or finding for five years.

  • The "Board of Directors" is defined as "the governing board of every Regulated Institution or the functional equivalent if the Regulated Institution does not have a Board of Directors."
  • "Senior Officer(s)" is defined as the "senior individual or individuals responsible for the management, operations, compliance and/or risk of a Regulated Institution including a branch or agency of a foreign banking organization subject to this Part."

Moreover, the Final Rule requires the Board of Directors or a Senior Officer to "adopt and submit" a Resolution/Finding that states that "to the best of the [board's or the individual's] knowledge" the Regulated Institution is in compliance with the Final Rule after reviewing documents, reports, certifications and opinions and taking all steps necessary to confirm that it is in compliance. The text of the Resolution/Finding is attached to the Final Rule. Notably, the requirement to file the Resolution/Finding as written by the NYSDFS appears to be mandatory and, as such, does not explicitly allow an institution to alter the language, though the NYSDFS may be amenable to requests for exceptions.

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