9/14/07

Ted Dreyer Senior Attorney, Wolters Kluwer Financial Services

On August 24, the 2007 version of the BSA/AML Examination Manual was released. The original Manual came out in 2005, and annual updates have been released in 2006 and now in 2007 to keep it current. This year's edition is over 400 pages long! As they did last year, the regulators marked the sections that had changed (by putting the year 2007 in parentheses after the name of the section in the Table of Contents) but did not highlight the specific changes to the text. So, for those of you who are not tempted to wade through all that text to compare this year's version with last year's, here is a brief summary of the major changes.

Risk Assessment

There wasn't much change to this section. The only significant change was the removal of language from the 2006 version that said that institutions might wish to use the NAICS codes in classifying businesses by industry type. While this doesn't mean that NAICS codes can't be used, they are not a very useful tool, since BSA risk within an industry can vary tremendously. (p. 20)

Customer Due Diligence

Language was added to this section making it clear that information should be obtained at account opening enabling the institution to differentiate lower risk customers, who should receive regular monitoring for suspicious activity, from higher risk customers, who will be subject to Enhanced Due Diligence. (p. 57)

Suspicious Activity Reporting

Several significant additions were made to this section:

• When SARs are filed after a grand jury subpoena is received, institutions are discouraged from referring to the existence of that subpoena in the SAR since that information is confidential. The underlying facts should be mentioned without reference to the subpoena. (p. 65)
•  Because law enforcement agencies may want certain accounts to remain open after a reporting of suspicious activity, institutions that are requested to keep such accounts open should have the law enforcement agency put the request in writing and specify the purpose and duration of the request. Ultimately, the institution must decide whether to comply. (p. 69)
• Institutions are allowed to disclose SAR information to "appropriate" law enforcement agencies, but many wondered which agencies would be appropriate. Footnote 72 of the new Manual contains a list of examples of such agencies. (p. 70) 

Foreign Correspondent Accounts

On August 9, 2007 FinCEN published an amendment to the regulations governing the special due diligence that must be done for correspondent accounts maintained for foreign banks. The 2007 Examination Manual contains extensive revisions implementing these amendments. (pp. 111-114)

OFAC

The only significant change to this section is a clarification of the OFAC responsibilities for the Originating and Receiving Depository Financial Institutions (ODFIs and RDFIs) that are involved in ACH transactions. (pp. 143-144) A similar discussion is found in the ACH section. (pp. 202-203)

Electronic Banking

This section was updated to add an entirely new subsection detailing the BSA risk factors arising from Remote Deposit Capture and how those risks can be mitigated. Institutions involved with this technology should update their BSA policies and risk assessment to reflect this new guidance. (pp. 189-190)

Privately-Owned ATMs

The changes here involve the additional risks to financial institutions when an Independent Sales Organization (ISO) that the institution deals with directly either sells ATMs to, or subcontracts with third and fourth level companies (sub-ISOs). This can result in the institution not knowing who the owner of the ATM is. Additional due diligence, including information on the sub-ISOs, is suggested as a means of risk mitigation. (pp. 220-221)

Trade Finance

The risk mitigation part of this section is considerably expanded. It contains information regarding documentation review for trade finance and a list of red flags that should be scrutinized by the institution. (pp. 243-245)
 

Politically Exposed Persons (PEPs)

The primary addition here is a clarification that PEPs are not always high-risk customers. Scrutiny of these relationships is supposed to be risk-based and certainly the risk of dealing with a powerful leader in a country known for money laundering would be very different from dealing with, for example, a relative of an official from a country like Canada. (p. 265)

Non-Bank Financial Institutions

This section was greatly expanded to set out the regulatory expectations for institutions that have Money Services Businesses (MSBs) as customers. Much of this information comes from previously issued guidance, but it brings together information on MSB risk assessments, risk mitigation, and the due diligence expectations that the regulators have for these accounts. (pp. 276-280)

Business Entities (Foreign and Domestic)

Most of the changes here involve the risks associated with shell companies, which is a company that does not have a physical presence in any country. There was a guidance issued by FinCEN back in November of 2006 on the risks associated with shell companies: and some of the risk factors have been added to the Manual. (pp. 290, 294)

Appendix F:  Money Laundering and Terrorist Financing "Red Flags"

This Appendix is a listing of many situations that may be indicators that either money laundering or terrorist financing is happening. It is a valuable tool for conducting BSA training for your employees on what they should look for. The particular sections that have the most new material are for ACH transactions (p. F-3), Lending Activity (p. F-4), Trade Finance (p. F-5), Shell Company Activity (p. F-7), and Other Activities (pp. F-8).

Appendix R:  Enforcement Guidance

Recently, the regulators issued an Interagency Statement on Enforcement of BSA/AML Requirements that describes the circumstances under which the regulators will take formal enforcement actions for BSA violations. That guidance is now incorporated into the Exam Manual as this new Appendix.

Index

For the first time, an index has been added to the Exam Manual. The various subjects covered are listed alphabetically with page references to the locations in the Manual where the subjects are covered. This can be found at the end of the Manual.

The recent changes made to the Manual keep it up to date and incorporate recent guidance. If you are responsible for any of the above-referenced areas, you might want to look at whether the changes necessitate any amendments to your BSA policies or procedures.

As this article illustrates, AML, BSA, and USA PATRIOT Act compliance continue to present major hurdles for financial institutions. To help address these challenges, Wolters Kluwer Financial Services | PCi, has created Wiz Sentri™, a suite of tools and services to support and streamline your existing compliance processes.