HIGH-RISK: FOREIGN CORRESPONDENT BANKING. 1/2004Anti-Money Laundering 2 OBJECTIVES Define Foreign Correspondent Banking Understand Potential and Unique.

HIGH-RISK: FOREIGN CORRESPONDENT

BANKING

1/2004 Anti-Money Laundering 2

OBJECTIVES

• Define Foreign Correspondent Banking• Understand Potential and Unique Issues• Recognize Money Laundering Vulnerabilities• Define High-Risk Products and Services• Describe Importance of Due Diligence• Discuss Examiner Considerations

– Risk Management v. Compliance Issues– Examinations (Pre- and On-site) – BSA/AML Exam Procedures for Foreign Correspondent

Banking– Questions???

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DEFINITION

• Accounts Maintained On Bank’s Behalf

• Between Domestic Banks

• Between Domestic Banks and Foreign Banks

• Correspondent vs. Respondent Bank

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POTENTIAL AND UNIQUE ISSUES

• Legitimate Business Purposes– International trade and investment– Settlement purposes– Funds transfer activity– Clearing of foreign items– Jurisdictions where bank has no presence

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POTENTIAL AND UNIQUE ISSUES

• Non-Legitimate Purposes– Conduit For dirty money – Gateway to the US financial system– Foreign bank

corruptpoorly regulatedpoorly managedweak or nonexistent AML controls

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MONEY LAUNDERING VULNERABILITIES

• Lax Due Diligence

• Nested Correspondents

• Correspondent Banker or Relationship Manager

• Bank Secrecy Laws

• Weak AML Laws

• Cross Border Difficulties

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HIGH RISK PRODUCTS AND SERVICES

• Funds Transfer

• Pouch Activity

• Cash Letter

• Payable Through Accounts

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HIGH RISK PRODUCTS AND SERVICES: FUNDS TRANSFER

• Key Activity

• Failure to Monitor

• Manual Reviews

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HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY

• Common Carrier

• Currency

• Monetary Instruments

• Documents

• Financial Institution

• Individual

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HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY

• Red Flags:– Same or consecutive days from different

locations– Sequentially numbered – Amounts under 3,000 or 10,000– Little or no purchaser information.– Repetitive beneficiaries or originators or both– Round even dollars

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HIGH RISK PRODUCTS AND SERVICES: CASH LETTER

• High Volume

• Failure to Monitor

• Manual Reviews

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HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH

ACCOUNTS

• US Bank Check-Writing to Foreign Bank Customers

• Foreign Bank - Master Account

• Foreign Bank Customers - Sub-Accounts

• Provide for Enhanced Due Diligence

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HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH

ACCOUNTS• Traditional Foreign Correspondent Bank

Account– No access by foreign customers

– Differs from PTA sub-account holders

• Foreign Bank Uses Traditional Foreign Correspondent Bank Account as PTA– No information on ultimate users

– Potential for ML and OFAC violations

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DUE DILIGENCE

• Noteworthy Due Diligence Failures– Nested respondent banks– Non-credit relationships

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ENHANCED DUE DILIGENCE

• Factors to Consider– Purpose– Location– Bank license– AML programs– Regulation and supervision

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ENHANCED DUE DILIGENCE

• Risk Management– Perceived risk– Availability to third parties– Compliance program– SAR detection and reporting– Monitoring

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BANK LICENSES

• Shell Banks

• Offshore Banks

• Banks in Non-Cooperative Jurisdictions

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NCCTs

• Cook Islands

• Philippines

• Nauru

• Egypt

• Guatemala

• Indonesia

• Myanmar

• Nigeria

• Ukraine

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EXAMINER CONSIDERATIONS: Risk Management v. Compliance

Risk Management: To assess and protect against undue risk exposure.

Includes• Oversight• Policies/Procedures• Internal Controls• MIS

Compliance: To conduct business according to applicable laws and regulations.

• Technical aspects• Potential fines

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EXAMINATIONS

Pre-Examination

• FDL/Officers’ Questionnaire Response– List of Due To/Due From Accounts– Audits– Risk Assessments – Strategic Plans

• Exam Scope

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EXAMINATION PROCEDURES

On-Site Examination• Risk Focused• Decision Factors

– Level of business with FCB (offshore or NCCT)

– Weak controls/AML efforts concerning correspondent banking

– Internal audit coverage/findings– SAR/CTRs

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EXAMINATION PROCEDURES

• General: Review overall approach to correspondent banking business line (risk management approach)

• USA PATRIOT Act: 313/319 (SR Letter 03-17)– Prohibit shell banks

– Recordkeeping

• USA PATRIOT Act: 312 (Pending)– Special Due Diligence for Correspondent Accounts

and Private Banking Accounts

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EXAMINATION PROCEDURES

GENERAL: Review overall approach to correspondent banking business line (risk management approach)

• Management Oversight– Risk assessment – Strategic Plan/Approved markets, products, and services

• Policies/Procedures– Marketing/Due Diligence/Account Acceptance– Operations– Monitoring/Compliance

• Internal Controls– Documentation– Monitoring

• MIS

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EXAMINATIONS

• Transaction Testing– Sample of accounts– Review agreements– Review account opening and due diligence– Account activity from statements

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EXAMINATION PROCEDURES

USA PATRIOT Act: 313/319– Prohibits Shell Banks– Recordkeeping

• SR 03-17 Exam Procedures

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EXAMINATION PROCEDURES

USA PATRIOT Act: 312– Special Due Diligence for Correspondent

Accounts and Private Banking Accounts

• Exam procedures pending

• Interim: Use draft procedures: “High Risk Areas That May Require Special Scrutiny: Foreign Correspondent Banking”

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QUESTIONS

• What is the focus for 2004?

• Will work programs be developed for Correspondent Banking and USA PATRIOT Act compliance?

• How should we review Due From/Due To Affiliate accounts?

• Should banks obtain certifications for correspondent banking relationships on the asset side?

• What should examiners look for when reviewing Due From accounts (aside from reconciling differences and stale items)?

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QUESTIONS

• When reviewing correspondent bank relationships must the file contain a copy of the “banking license from the licensing authority”?