Session 5 - ACFCS

Session 5

Innovation Nation

The Shift to Innovation from Regulators and How to Apply It to Your Compliance Program

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INNOVATION NATIONThe Shift in Regulators and Compliance

Jon ElvinEVP, Chief AML Officer

PNC Bank

INNOVATION NATIONThe Shift in Regulators and Compliance

Gary ShiffmanCEO

Giant Oak

INNOVATION NATIONThe Shift in Regulators and Compliance

Jim VivenzioSenior Counsel for BSA/AML

OCC

Comptroller of the Currency

Administrator of National Banks

Structuring SAR Letter

OCC Interpretive Letter #1166

Sept. 27, 2019

James F. Vivenzio

Senior Counsel for BSA/AML

Office of the Comptroller of the Currency

[email protected]

202-649-5561

What is “Structuring”

Structuring is the practice of executing a series of financial transactions in a manner designed to evade the reporting requirements of the Bank Secrecy Act.

Generally involves multiple cash transactions below the $10,000 CTR amount.

See 31 USC 5324 (defining structuring as a criminal offense) and 31 CFR 1010.100(x) (defining structuring for purposes of FinCEN’s regulations).

What is a “Structuring SAR”

A “Structuring SAR” is a SAR that has one of the seven structuring boxes checked on item 29 of the SAR form. ◼ Alters transactions to avoid BSA recordkeeping

requirement;

◼ Alters transactions to avoid CTR requirement;

◼ Customer cancels transaction to avoid BSA reporting and recordkeeping requirements;

◼ Multiple transactions below BSA recordkeeping threshold;

◼ Multiple transactions below CTR threshold;

◼ Suspicious inquiry by customer regarding BSA reporting or recordkeeping requirements;

◼ Other.

Automated Process for Structuring SARs

Identifies structuring transactions involving U.S. consumer customers based on alerts generated based on a set of pre-determined and limited set of structuring scenarios.

Leverages national language processing to populate the SAR form and narrative fields using available customer and transaction information and data.

Bank would no longer conduct manual investigations or reviews into the subset of alerts associated with the streamlined process.

Summary of Legal Analysis

Proposal is consistent with the OCC’s

SAR rule and BSA program rule.

Focused on the automated completion of

the report and the lack of investigation.

Automated completion of the form must

be consistent with the instructions.

Alerts must involve determinations

readily capable of being automated with

low risk of unreported suspicious activity.

OCC SAR Regulation 12 CFR 21.11

SAR shall be filed on the form proscribed by the OCC and in accordance with its instructions.

Transactions aggregating $5,000 that involve potential money laundering or violate the BSA.

If the bank knows, suspects, or has reason to suspect that the transaction:

◼ involves funds derived from illegal activities;

◼ is designed to evade the BSA regulations;

◼ has no business or apparent lawful purpose or is not the sort the customer would normally be permitted to engage and there is no reasonable explanation after examining the available facts, including the background and possible purpose.

Legal Determinations - SAR Regulation

SAR narrative must comply with instructions.

With regard to manual investigations, the scope of investigations and review vary depending on the nature of the suspicious activity in question.

With respect to structuring, the regulation requires filing if the bank knows, suspects or has reason to suspect that the transaction is designed to evade the BSA.

The due diligence standard in the SAR regulation requires greater scrutiny and more involved judgments for higher risk and more complex transactions.

Legal Determinations - SAR Regulation

Structuring is less susceptible to errors in an automated process given the lack of complexity of the underlying judgments.

Automated filing is only permissible to the extent that it is supported by strong risk governance.

The OCC will continue to review the effectiveness of the risk governance processes (guardrails) during the development and implementation process.

Risk of Undetected Suspicious Activity

Automated filing only permissible to the extent that it is supported by strong risk governance (guardrails) that removes higher risk transactions from the automated processes:

◼ U.S. consumer accounts only

◼ Clearly identify the structuring alerts at issue

◼ Presence of any non-structuring alerts

◼ Prior customer case and SAR history

◼ Other high risk activities in close proximity

◼ Follow up requests from law enforcement

OCC BSA Program Rule 12 CFR 21.21

Banks are required to have a BSA

compliance program that includes the

four pillars and CIP.

A reasonably designed automated

process must be subject to appropriate

oversight to ensure proper functioning.

Includes a periodic review of the quality

of the Structuring SAR filed, the tailoring

of the structuring alerts, and deploying

appropriate risk governance.

Limits on Scope of Letter

Limited to Structuring SARs related to

U.S. consumer customers.

National banks and Savings

Associations should contact EIC to

determine whether OCC approval letter

is necessary.

OCC open to an agile and transparent

supervisory approach to these issues.

Legal Issues Not Addressed

Regulatory forbearance or “sandbox.”

◼ No. OCC encourages innovation,

however, a pre-requisite is compliance

with laws and regulations.

SAR safe harbor.

◼ The safe harbor is set forth in the

Bank Secrecy Act. As a result,

FinCEN has interpretive authority.

Takeaways

Letter will reduce regulatory burden and

compliance costs;

Law enforcement will receive more

timely SAR filings and better and

additional information;

Human error will be minimized (i.e.

improper case closures, confusing or

erroneous narratives);

Bank’s may need to adjust customer risk

profiles.

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Additional Questions??

Office of the Comptroller of the Currency

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Innovation –A BSA Officer’s Perspective

Jon Elvin, EVP & Chief BSA/AML Officer, PNC

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BSA/AML Programs must adapt, experiment, and innovate – similar to all professions! You must innovate to keep pace – The window of opportunity is there, step forward.

What Innovation Means – BSA Officer Perspective

Core questions you must address:

1. How do you learn about AI, what does it really mean, and how do you choose your target?

2. How do you innovate in a safe and responsible way while maintaining your current state execution?

3. How do you implement AI while balancing costs, existing workload, and staff morale?

4. How do you document and tell your story with anchor points for multiple stakeholders?

Historical Perspective:

▪ Traditional programs: static, primarily rules based, slow to change, likely vendor dependent.

▪ Reactive and targeted almost exclusively to the prior decade’s criminal typologies.

▪ Heavy legacy program demands (execution, audit, regulatory, reputation), limited bandwidth, downsize risk, and “time” to truly innovate.

▪ While well known to data scientist and modelers, asking an AML team what these terms meant 3 - 4 years ago would have produced interesting answers:

Python = snake; Impala = car; Gradient boosting model = some type of rocket fuel; Spark = something that starts a fire; R = letter in alphabet; Random Forest = somewhere you hiked

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What Innovation Means – BSA Officer Perspective

Point 1

Early State Observations of “Next Generation” AML Programs and AI (in all forms)

▪ Don’t make VHS tapes indefinitely.

▪ Value in experimenting in a safe and responsible way.

▪ Be cautious of the hype, projections on savings, and the promises.

▪ “Big Data” environment: necessary and significant program enabler and building block (but quality does matter).

▪ Odds of buy-in and success increase with little victories (take the Shark Tank approach).

▪ Don’t over complicate – sometimes simple is better.

▪ Multiplier impact when combining Advanced Analytics, Robotics Process Automation, and Machine Learning Approaches.

Current State Message: There is only so much time and bandwidth. AML/Financial Crimes Executives must still balance the regulatory and program efficiency/quality drivers and choose the pace and tradeoff.

Point 2

Public/private and hybrid cooperation models can lead to better outcomes, focus, and trust

▪ Work on things that truly matter in financial crimes; align to national priorities, without forgetting your local communities.

▪ Great ideas and instincts are prevalent – learn, share, and advance as a collective ecosystem.

▪ Working meaningful cases is what the thousands of front line analysts and investigators desire.

▪ When we all align on the most important events, the speed in response and quality is impressive.

▪ Protecting case integrity among constituents is a shared accountability that bankers understand; trust is achievable.

Current State Message. It takes a network to defeat criminal networks and several positive partnerships/exchanges are producing immediate value and the foundation for others taking shape. Agents of Innovation are in great demand, get involved!

The Building Blocks of AI

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Human

• Important Context

Data Mining

•Finding Patterns in Data

Big Data

•Adding Columns to Rows

Machine Learning

•Technical Basis for Data Mining in Big Data

• Inductive, needs data

Artificial Intelligence

•Agent that perceives and takes action

Artificial Intelligence

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Existing System: +90% False Positives.

Machine Learning System: • 5.5m customers ranked• 30% False Positive rate on top 25k

– compared to historical data• 12% False Positive rate on top 50 –

human verified.• 44 good of 50

What is the Future of Collaboration?

QUESTIONS?

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