MTRA 16th Annual Conference November 14, 2006 The Banking Environment for Money Services Businesses

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MTRA 16th Annual ConferenceNovember 14,
2006The Banking Environment for Money Services
BusinessesLisa Arquette FDIC Associate
DirectorAnti-Money Laundering Financial
Crimes Section
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U.S. Banking System

• US Banking System is Large, Diverse, and Complex
• Four federal-level bank supervisors
• Fifty state-level bank supervisors
• Nearly 9,000 FDIC-insured banks
• 11.5 trillion in banking assets
• 4 trillion in FDIC-insured deposits
• Three largest banks have 3.5 trillion in
  assets
• Biggest bank gt1.1 trillion in assets
• Smallest bank lt3 million in assets
• 8,138 community banks with total assets lt1
  billion
• Median bank size about 140 million

Data as of June 30, 2006
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U.S. Bank Regulatory System
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FDICs Primary Responsibilities
An independent agency of the United States
government created to provide insurance
protection for depositors in banks and savings
associations throughout the United States.
Provides Federal deposit insurance for banks
and savings associations in the United States.
Supervises state-chartered nonmember banks.
Acts as receiver for failed banks and thrifts and
then liquidates assets.
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Deposit Insurance
2006 Balance 50 Billion
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Why Coordination is Paramount
The FDIC is the primary Federal regulator of over
half of the institutions it insures.

• FDIC supervises 5,241 state-chartered nonmember
  banks and state-chartered savings banks out of
  the total of 8,778 FDIC-insured institutions.
• All Federal Banking Agencies (FBAs) provide
  prudential supervision for these institutions
  through examination and enforcement.
• All FBAs also have delegated authority to examine
  for BSA compliance.

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Risk-Focused Supervision

• Combination of On-Site Examinations and Off-Site
  Surveillance

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Supervision Uniform Standards

• The Federal Financial Institutions Examination
  Council (FFIEC) comprises federal bank and credit
  union regulators. It promotes uniform
  principles, standards, and reporting
• Financial Institution Rating System (CAMELS)
• FFIEC coordination on BSA/AML matters
• Financial reports (Call Reports)
• Definitions for classifying assets
• Examiner training

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Anti-Money Laundering Issues for Depository
Institutions

• FinCENs March 2005 Hearing
• April 2005 Interagency Guidance
• 2005 Revised FFIEC Manual
• FDICs December 2005 AML Conference for Examiner
  Subject Matter Experts
• FinCENs 2006 Request for Comment

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FFIEC BSA / AML Examination Manual Minimum
Due Diligence for MSB Accounts

• Apply Customer Identification Program
• Confirm FinCEN Registration (if applicable)
• Confirm State Licensing (if applicable)
• Confirm Agent Status (if applicable)
• Conduct a Risk Assessment

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FFIEC BSA / AML Examination Manual Risk
Factors for MSB Accounts

• Lack ongoing customer relationships and require
  minimal or no identification by customers.
• Maintain limited or inconsistent recordkeeping on
  customers and transactions.
• Engage in frequent currency transactions.
• Are subject to varying levels of regulatory
  requirements and oversight.
• Can quickly change their product mix or location
  and quickly enter or exit an operation.
• Sometimes operate without proper registration or
  licensing.

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FFIEC BSA / AML Examination Manual Risk
Mitigation for MSB Accounts

• Identify MSB relationships.
• Assess the potential risks posed by the MSB
  relationship.
• Conduct adequate and ongoing due diligence.
• Ensure MSB relationships are appropriately
  considered within the banks suspicious activity
  monitoring and reporting systems.

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FFIEC BSA / AML Examination Manual Risk
Assessment factors for MSB Accounts

• Types of products and services offered.
• Locations and markets served.
• Anticipated account activity.
• Purpose of account.

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Banking Institutions - Lessons Learned

• Not all MSBs pose a heightened risk of money
  laundering.
• Initial Due Diligence is important establish
  and document an expectation of account activity
  based on interviews with the MSB account holder
  and knowledge of the geographical area and
  industry norms.
• Initial Due Diligence should address expectations
  for all account activity including ACH, wires,
  cross-border transactions, sweep transactions,
  and transactions involving secondary lines of
  business.
• The Risk Rating assigned should be based on the
  initial due diligence and subsequent/ongoing
  account reviews.
• Ongoing Due Diligence Periodically review
  account activity to ensure that the initial
  expectation of account activity remains valid.

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Banking Institutions - Lessons Learned (continued)

• The nature and volume of cash, check, wire, and
  ACH activities should be consistent with the
  expectation established during the initial due
  diligence.
• High-risk indicators for MSBs should be
  pre-established as part of the banking
  institution's AML Policies.
• New accounts should generally receive more
  frequent reviews than seasoned accounts that
  have not presented any previous concerns.
• If the activity is not consistent with the
  initial expectation, the account holder should be
  contacted to provide is a reasonable explanation.
• Enhanced Due Diligence - MSBs that exhibit
  high-risk characteristics such as unexplained or
  unusual account activity require increased
  monitoring and scrutiny.

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CONCLUSIONS

• Banks should not treat all MSB accounts as having
  the same degree of risk.
• Obtaining and documenting a thorough initial
  expectation of account activity is extremely
  important.
• Neither FinCEN nor the Federal Banking Agencies
  expect, banking institutions to serve as the de
  facto regulator of the MSB industry.
• Banks that open or maintain accounts for MSBs
  should apply the requirements of the BSA on a
  risk-assessed basis, as they do for all
  customers, taking into account the products and
  services offered and the individual
  circumstances.
• The decision to accept or maintain an account
  with an MSB customer rests with the institutions
  management and should be based on the
  institutions capacity to identify, monitor, and
  manage the associated risks.