1. HIGH-RISK: FOREIGN CORRESPONDENT BANKING

2. Anti-Money Laundering
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???
1/2004
Anti-Money Laundering

3. Anti-Money Laundering
DEFINITION
Accounts Maintained On Bank’s Behalf
Between Domestic Banks
Between Domestic Banks and Foreign Banks
Correspondent vs. Respondent Bank
1/2004
Anti-Money Laundering

4. 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
1/2004
Anti-Money Laundering

5. POTENTIAL AND UNIQUE ISSUES
Non-Legitimate Purposes
Conduit For dirty money
Gateway to the US financial system
Foreign bank
corrupt
poorly regulated
poorly managed
weak or nonexistent AML controls
1/2004
Anti-Money Laundering

6. MONEY LAUNDERING VULNERABILITIES
Lax Due Diligence
Nested Correspondents
Correspondent Banker or Relationship Manager
Bank Secrecy Laws
Weak AML Laws
Cross Border Difficulties
1/2004
Anti-Money Laundering

7. HIGH RISK PRODUCTS AND SERVICES
Funds Transfer
Pouch Activity
Cash Letter
Payable Through Accounts
1/2004
Anti-Money Laundering

8. HIGH RISK PRODUCTS AND SERVICES: FUNDS TRANSFER
Key Activity
Failure to Monitor
Manual Reviews
1/2004
Anti-Money Laundering

9. HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY
Common Carrier
Currency
Monetary Instruments
Documents
Financial Institution
Individual
1/2004
Anti-Money Laundering

10. 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
1/2004
Anti-Money Laundering

11. HIGH RISK PRODUCTS AND SERVICES: CASH LETTER
High Volume
Failure to Monitor
Manual Reviews
1/2004
Anti-Money Laundering

12. 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
1/2004
Anti-Money Laundering

13. 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
1/2004
Anti-Money Laundering

14. Anti-Money Laundering
DUE DILIGENCE
Noteworthy Due Diligence Failures
Nested respondent banks
Non-credit relationships
1/2004
Anti-Money Laundering

15. ENHANCED DUE DILIGENCE
Factors to Consider
Purpose
Location
Bank license
AML programs
Regulation and supervision
1/2004
Anti-Money Laundering

16. ENHANCED DUE DILIGENCE
Risk Management
Perceived risk
Availability to third parties
Compliance program
SAR detection and reporting
Monitoring
1/2004
Anti-Money Laundering

17. Anti-Money Laundering
BANK LICENSES
Shell Banks
Offshore Banks
Banks in Non-Cooperative Jurisdictions
1/2004
Anti-Money Laundering

18. Anti-Money Laundering
NCCTs
Cook Islands
Philippines
Nauru
Egypt
Guatemala
Indonesia
Myanmar
Nigeria
Ukraine
1/2004
Anti-Money Laundering

19. 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
1/2004
Anti-Money Laundering

20. Anti-Money Laundering
EXAMINATIONS
Pre-Examination
FDL/Officers’ Questionnaire Response
List of Due To/Due From Accounts
Audits
Risk Assessments
Strategic Plans
Exam Scope
1/2004
Anti-Money Laundering

21. 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
1/2004
Anti-Money Laundering

22. 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
1/2004
Anti-Money Laundering

23. 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
1/2004
Anti-Money Laundering

24. Anti-Money Laundering
EXAMINATIONS
Transaction Testing
Sample of accounts
Review agreements
Review account opening and due diligence
Account activity from statements
1/2004
Anti-Money Laundering

25. EXAMINATION PROCEDURES
USA PATRIOT Act: 313/319
Prohibits Shell Banks
Recordkeeping
SR Exam Procedures
1/2004
Anti-Money Laundering

26. 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”
1/2004
Anti-Money Laundering

27. Anti-Money Laundering
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)?
1/2004
Anti-Money Laundering

28. Anti-Money Laundering
QUESTIONS
When reviewing correspondent bank relationships must the file contain a copy of the “banking license from the licensing authority”?
1/2004
Anti-Money Laundering