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IMF Releases Policy Paper Addressing Recent Trends and Considerations in Correspondent Banking Relationships
On April 21, the International Monetary Fund (the Fund) announced the release of its policy paper addressing recent trends in correspondent banking relationships (CBRs). According to the Fund, CBRs are facing pressure in some countries as cross-border flows are “concentrated through fewer CBRs or maintained through alternative arrangements.” Decisions made by global banks to terminate CBRs often result from a lack of confidence in the respondent bank’s ability to manage risk. Notably, recent changes in regulatory and enforcement requirements—addressing economic and trade sanctions, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) guidelines, and tax transparency standards—have contributed to this problem. The Fund notes that these “financial fragilities” resulting from the terminations have the potential to increase financial services costs and negatively affect bank ratings—thus creating long-term effects on growth. The paper highlights the Fund’s plan to address withdrawal concerns and the resulting implications, including:
- establishing measures to enhance respondent banks’ capacity for risk management;
- strengthening and effectively implementing regulatory and supervisory frameworks, particularly with respect to AML/CFT;
- improving communication between correspondent and respondent banks;
- removing impediments to information sharing between correspondent and respondent banks; and
- understanding the “feasibility of temporary mechanisms, including public-backed vehicles, to provide payment clearing services” in the event all CBRs are withdrawn from a country.
The Fund also notes collaboration efforts with the Financial Stability Board, World Bank, G20, Financial Action Task Force, Arab Monetary Fund, and the Committee on Payments and Market Infrastructures, among others, to “ensure financial stability and promote financial inclusion.”
Upon Review, NYDFS Requires International Bank to Continue Independent Monitoring
On April 21, the New York Department of Financial Services (NYDFS) announced it had entered into a supplemental consent order with an international bank to modify its 2012 and 2014 consent orders. In 2012, the bank agreed to engage an independent on-site monitor for 24 months to evaluate the New York branch’s BSA/AML and OFAC compliance programs and operations. The bank was also issued a $340 million civil money penalty. The 2014 consent order outlined the monitor’s findings including reports of significant failures in the bank’s transaction monitoring. The 2014 order extended the engagement of the monitor for another two years, outlined remedial measures to address continued deficiencies, and required the bank to pay an additional $300 million civil money penalty.
While NYDFS acknowledged in the 2017 supplemental consent order that the bank has made significant improvements in its BSA/AML compliance program, the engagement of the monitor has been extended until December 31, 2018 with all the other terms and conditions of the 2012 and 2014 consent orders remaining in full effect.
OCC Issues Consent Order to U.S. Branch of International Bank, Requires Development of BSA/AML Program
As previously reported in InfoBytes, on March 17 the OCC released its list of enforcement actions taken in February against national banks, federal savings associations, and current and former affiliated individuals. Among those actions is a consent order issued on February 13 against a U.S. branch of a Curacao-based subsidiary of a United Arab Emirates bank for allegedly failing to comply with the Bank Secrecy Act’s anti-money laundering (BSA/AML) rules and requirements, failing to timely file suspicious activity reports (SARs), and failing to conduct adequate due diligence on foreign correspondent accounts. The consent order, among other things, requires the U.S. branch to: (i) create and submit a comprehensive BSA/AML compliance action plan; (ii) appoint a BSA officer who will “ensure compliance with the requirements of the BSA and the Office of Foreign Assets Control (OFAC)”; (iii) review, update, and implement an enhanced written ongoing BSA/AML Risk Assessment and a separate OFAC Risk Assessment process to timely identify and analyze risk categories; (iv) acquire an independent third-party consultant to conduct a “Look Back” plan to determine whether suspicious activity was timely identified and reported by the branch; (v) develop and implement a written program to ensure the timely review of BSA/AML suspicious activity alerts and filing of SARs; and (vi) create a comprehensive training program for “appropriate operational and supervisory personnel.”
FinCEN Seeks Comments on Proposed Renewal of its AML, Due Diligence Program Requirements for Correspondent Banks
The Financial Crimes Enforcement Network (FinCen) published a notice and request for comments in the March 30 Federal Register. The notice sought public comment on its proposed renewal, without change, of the regulation implementing Section 5318(i)(1) & (2) of the Bank Secrecy Act (found at 31 CFR 1010.610). The regulation generally requires covered financial institutions (as defined in 31 CFR 1010.605(e)(1)) to establish due diligence policies, procedures, and controls reasonably designed to detect and report money laundering through correspondent accounts that covered U.S. financial institutions establish or maintain for certain foreign financial institutions. Written comments must be received on or before May 30.
FDIC Fines Two California Bank Employees for BSA/AML Violations
On March 31, the FDIC released a list of enforcement actions taken against banks and individuals in February 2017. Among those listed was a February 14 stipulated order imposing a $70,000 civil money penalty against an employee of a California bank (Respondent) for allegedly engaging or participating in actions that caused the bank to violate the Bank Secrecy Act, thus resulting in financial loss or damage. According to the FDIC, the violations reflected a “continuing disregard for the safety or soundness of the bank” and were evidence of the Respondent’s “unfitness to serve as a . . . person participating in the conduct of the affairs, or as an institution-affiliated party of the bank [or] any other insured depository institution.” In addition to the civil money penalty, the Respondent is prohibited from further participation “in any manner in the conduct of the affairs of any financial institution or agency.”
The FDIC also imposed a $30,000 civil money penalty against the bank’s executive vice president of corporate and international banking for breaching his fiduciary duty during the period of 2011 – 2012 by failing to ensure his staff fully complied with the Bank Secrecy Act and its implementing regulations. And, as previously reported in InfoBytes, in July 2015 the bank was fined $140 million by the FDIC and the Commissioner of the California Department of Business Oversight for allegedly failing to implement and maintain a satisfactory BSA/AML compliance program.
Netherlands-Based Financial Services Company Under Investigation by Dutch and U.S. Authorities for Activities Relating to a Russian Telecom Company
In an annual report filed with the SEC on March 20, 2017, a Netherlands-based financial services company, stated that it is under criminal investigation by Dutch authorities “regarding various requirements related to the on-boarding of clients, money laundering, and corrupt practices,” and that it has also received “related information requests” from U.S. authorities. A spokesperson for the Dutch prosecutor reportedly expressed suspicion that the company failed to report irregular transactions and may have enabled international corruption, including unusual payments made by a Russian telecom company to a government official in Uzbekistan through a shell company. The russian company settled bribery charges with the U.S. and Dutch governments in February 2016, admitting to paying bribes amounting over $114 million to an Uzbek official and agreeing to pay over $397 million in penalties to the DOJ and SEC for violations of the FCPA. The financial services comapny stated that it is cooperating with the ongoing investigations and requests of Dutch and U.S. authorities.
FinCEN and OCC Penalize CA Bank for BSA/AML Violations
On February 27, the Financial Crimes Enforcement Network (FinCEN) announced that it had assessed a $7 million civil money penalty against a bank specializing in providing services for check-cashers and money transmitters, for alleged “willful violations” of several Bank Secrecy Act provisions. The OCC also identified deficiencies in the bank’s practices and assessed a $1 million civil money penalty for “violations of previous consent orders entered into by [the bank].” As noted in the release, the bank’s payment of the $1 million OCC penalty will go towards satisfying the FinCEN penalty. According to FinCEN, the bank allegedly failed to (i) “establish and implement an adequate anti-money laundering program;” (ii) “conduct required due diligence on its foreign correspondent accounts;” and (iii) “detect and report suspicious activity.” Furthermore, FinCEN claims $192 million in high-risk wire transfers were processed through some of these accounts.
BAFT Issues Comments on Proposed AML/CFT Guidance Revisions
On February 22, the Bankers Association for Finance and Trade (BAFT), an international financial services association for organizations engaged in international transaction banking, together with the Institute of International Finance (IIF) issued a letter to the Basel Committee on Banking Supervision (BCBS) with comments on BCBS’ proposed revisions to its risk management guidance related to anti-money laundering and counter-terrorism financing. In the letter, BAFT and IFF note that, while both associations are “particularly pleased with [BCBS’] recognition that not all correspondent banking relationships bear the same level of risk and [BCBS’] acknowledgment of the difference between inherent and residual risk,” they do summarize several areas where enhancements would assist with the “general usefulness” of the final guidance:
- BCBS should “design guidance that explicitly permits a correspondent bank to rely upon appropriate utilities for the vast majority of cases rather than simply permitting a correspondent bank to use a utility as another source of information supporting the due diligence process” with the purpose of “establishing international standards or sound practices for such utilities to create greater assurance of achieving official ALM/CFT goals.”
- BCBS should adopt “regulatory practices [that] include standards for ‘verification’ that national authorities could administer or supervise.”
The “[s]tandardization of information requirements (or templates) for utilities could also be extended to include [the] international standardization of basic due diligence information and ‘enhanced due diligence’ information for higher-risk relationships.” A “basic standardization would give both parties a ground of expectations to build upon in making judgments about how to do business. It could [also] eliminate a degree of unnecessary duplication of effort and costs.”
IRS Releases Annual Criminal Investigations Report for FY2016
On February 27, the IRS announced the release of its Annual Criminal Investigation Report (“Report”), discussing the significant accomplishments and criminal enforcement actions taken by the IRS in fiscal year 2016. Highlights in the Report include case examples on a range of matters, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes, as well as a discussion of a drop in the number of agents and professional staff at the IRS, and a drop in the total number cases brought for the third consecutive year.
State Financial Regulators Release BSA/AML Compliance Tool
On February 1, the Conference of State Bank Supervisors (CSBS) announced the release of its BSA/AML Self-Assessment Tool—a new, voluntary tool to help banks and non-depository financial institutions better manage Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risk. Building upon CSBS’s efforts to help banks understand their risk exposure to third-parties, the self-assessment tool—developed jointly by the CSBS and state regulators—aims to help institutions better identify, monitor, and communicate BSA/AML risk, thereby reducing some of the burden and uncertainty surrounding compliance and facilitating more transparency within the financial sector. The self-assessment tool is available for use by any institution and may be accessed here. A narrated tutorial is also available here. Last year, CSBS released a white paper that outlines state supervision of money services businesses.