Strengths & Weaknesses noted in recent examinations September 16, 2016

 Three main elements ◦ Products and services ◦ Customers and entities ◦ Geographic locations  Drivers: ◦ Nature and extent of internal controls ◦ Scope of independent testing ◦ BSA Officer skills required ◦ Training

 Positives: ◦ Annual review ◦ Addressing the three main elements, OFAC (either separate or joint), supplementary risk assessments  Room for improvement: ◦ Not restricted to only an annual update  Updates for significant events  Dynamic approach ◦ Staffing- turnover, expertise/experience, vacancies, growth ◦ Analyzing the updated transaction volume numbers  Trend analysis ◦ Consideration of geographic location of transactions (e.g. frequent wire locations) ◦ Coordination and collaboration with other departments

 Training  Positives: ◦ Training based on roles & responsibilities ◦ Internal referral systems / forms in place ◦ Multiple individuals involved  Room for Improvement: ◦ Documentation ◦ Complete narratives ◦ Too heavy reliance on automated systems

 Documentation ◦ When and why activity was initially flagged ◦ Items reviewed as part of the investigation ◦ Date decision rendered ◦ Hard copy or electronic  Narratives (not filed) ◦ All factors reviewed and considered ◦ How activity is explained, or determined not suspicious ◦ Plans for ongoing monitoring

 Narratives (filed) ◦ What ◦ When ◦ Where ◦ Why  Ongoing monitoring ◦ Documented timeline ◦ Continuous SARs prior to maximum deadline

 Too heavy reliance on systems ◦ Does not replace CDD and EDD efforts  Federal Reserve SR 11-7 and OCC Bulletin : Guidance on Model Risk Management  Key elements of guidance ◦ IV. Model development ◦ V. Model Validation ◦ VI. Governance, Policies, and Controls

 Model Validation ◦ Ongoing process ◦ Independent ◦ Commensurate with: overall use, complexity and materiality of model, and size and complexity of institution ◦ Initial validation of all models ◦ Ongoing monitoring ◦ Determination if most current validation remains sufficient (at least annually)

 Vendor models ◦ Vendor management program ◦ Recommend obtaining documentation from vendor ◦ Customization should be documented and validation ◦ Use of default settings should be supported  Internal Audit ◦ Evaluating framework

 Positives: ◦ BSA Officer; policies, procedures, internal controls; training  Areas for improvement: ◦ Review of engagement letter ◦ Review of audit workprograms and workpapers

 Contact information: ◦ Gabriela Webber ◦ Federal Reserve Bank of Boston ◦ 600 Atlantic Ave, Boston, MA ◦ (617) ◦