Bank Examinations Techniques Part Two James Wright Office of Technical Assitance U.S. Department of...
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Transcript of Bank Examinations Techniques Part Two James Wright Office of Technical Assitance U.S. Department of...
Bank Examinations Techniques Part Two
James WrightOffice of Technical AssitanceU.S. Department of Treasury
Examiner’s Role
• Prevents banking system use by money launders
Assists law enforcement in building a strong case
Not a law enforcement professional
Bank’s Compliance Program
• Purpose:– Monitor bank’s compliance with money
laundering laws
• Benefits to examiners:– Help determine bank’s compliance
• Benefits to bank:– Protects bank from fraud penalties, asset
forfeitures and criminal activities
Compliance Program Elements
• Senior management commitment
• Compliance officer
• Internal Audit
• Internal controls
• Independent testing
• Training
Senior Management Commitment
• Program approved by the board
• Informed of compliance efforts, audits, deficiencies and corrections
• Make compliance– Condition of employment– In the job description
Internal Audit Program
• Can be based on exam procedures
• Includes testing of transactions
• Assesses employees’ knowledge
• Compares performance with procedures
Compliance Officer
• Appointed with:– Day to day responsibility– Broad knowledge of banking functions and
activities– Access to upper management
Training
• Must cover :– All laws and regulations and bank procedures– Placement, layering, and integration– Examples
• Must be:– Ongoing and cover new schemes– Tailored to specific activities of financial
institutions
Personnel Training For:
• Tellers, service representatives,
• Lending officers, staff administering:
– Private banking
– International correspondent department,
– Wire transfer,
– Foreign exchange
– Trade
– Investment
– Trust
– Credit card
– Internet
Bank Examination Approaches
• Top down approach– Generally used in large banks– Risk oriented– Focus on policies and procedures– Evaluate risk management practices– Limited transaction testing performed
Examination Approach
• Transaction - based approach– Performance oriented– For smaller banks– Less comprehensive policies and programs– Focuses on testing of transaction records– Focuses on results of operations
Know Your Customer
• Examine for coverage of
• Citizens accounts
• Business accounts
• And monitoring
Examine Bank’s Compliance Program For:
• Written polices and procedures approved by the board of directors
• Internal Audit
• Internal controls
• Transaction testing
• Compliance officer
• Appropriate training
High Risk Areas
• Deposit taking
• Sale of official checks and negotiable instruments
• Wire transfers
• Loans
• International correspondent banking
• Special use accounts
• Private banking
• Trust department
• Brokerage operations
• Trade financing
• Internet banking
• Credit Cards
Review Internal Audit
• Does audit cover all risk areas?
• Did audit include transaction testing?
• Did audit uncover suspicious activity?
• Did audit uncover violations?
• Where corrective actions taken?
• Cash shipments– Analyze 3 months of cash shipments from
Central bank and corespondent banks
• Large cash transactions– Examine records of large cash deposits
– From teller operations
Transaction Testing
– Examine an appropriate number of ctrs for a period in time i.E..Months (appropriate for bank size, activity)
– Determine correctness and timely filing, consistency with type of business.
– Look for suspicious activity
Examine Large Cash Transactions Using Currency
Transaction Reports (ctrs)
Look for Structuring Signs
• Placed in concentration accounts
• Slightly less than limit for reporting
• Foreign address
• Post office address
• Request for holding statements
Compare Transaction With Other Reports
• Teller proof sheets
• Demand deposit activity reports
• Wire transfer log
• Loans listed by collateral
• exception reports
Examine Wire Transfers
• Using a sample of accounts based on dollar amounts, high-risk or other characteristic; review the wire transfer log for an appropriate time period. Follow-up with a review of wire transfers, messages and customer files and account statements, for a three month period or other appropriate period of time.
Wire transfer
• Analyze wire transfers to determine whether the amounts, frequency and countries of origin/destination are consistent with the nature of the business or occupation of the customer and be alert for any suspicious or unusual activities.
Suspicious Wire Transfers
• Examine wire transfer log, payment orders, accounts and other information and compare to the following lists of suspicious activities:
• Wire transfer activity from high-risk countries where the customer has no apparent business purpose or when the activity is inconsistent with a customers business or activity
Suspicious Wire Transfers
• Periodic wire transfers from a personal account to high-risk countries;
• Large incoming wire transfers on behalf of a foreign client with little or no explicit reason;
Suspicious Wire Transfers
• Frequent or large dollar volume of wire transfers to and from high risk countries;
• Frequent wire transfers of large dollar amount
• Funds transferred in and out of an account on the same day or within a relatively short period of time;
Suspicious Wire Transfers
• Wire transfer payments or receipts with no apparent links to legitimate contracts, goods or services;
• Transfers routed through multiple foreign or domestic banks.
• Deposits of funds into several accounts, usually in amounts of less that a required reporting threshold.
Suspicious wire transfers
• Payment instructions to financial institutions to wire funds abroad and instructions to expect an incoming wire transfer of funds in equal amounts of dollars or other currency from other sources;
• Regular deposits or withdrawals of large amounts of cash using wire transfer to, from or through countries that either are known sources of narcotics or whose money laundering laws are ineffective;
Suspicious Wire Transfers
• Large volume of wire transfers from persons or businesses that don’t hold accounts.
Wire Transfer Controls
• Determine the effectiveness of the bank’s wire transfer controls for detecting and preventing money laundering via wire transfers.
International Correspondent Accounts
• Focus on:– The bank’s due diligence for
• New accounts and periodic review
– Wire transfers– Pouch activity
International Correspondent Accounts.
• Review files of selected correspondent relationships with other banks
• Focus on the correspondent bank’s due diligence and monitoring of new accounts
International Correspondence Accounts
• Determine to what extent the bank performs the following due diligence Tasks:– Obtains information on bank ownership and
management– Obtains information on the nature, and volume
of transactions expected– Reviews financial statements
International Correspondent Accounts
• Evaluate credit worthiness
• Determine the bank applicants primary line of business
• Verifies the bank’s license
• Determines that the bank applicant has a fixed, operating office in the licensing jurisdiction
International Correspondent Account
• Evaluates the overall adequacy of banking supervision in the jurisdiction of the respondent bank including anti-money laundering laws and bank regulatory procedures
• Makes inquires to the correspondent’s local branch bank
International Correspondent Accounts
• Makes inquires with bank rating agencies
• Obtains bank references
• Complete a customer profile
International Correspondent Accounts
• Determine if the bank applicant has relationships with shell banks
• Determine how the bank monitors international correspondent accounts
• Determine how often site visits are made• Form an opinion about the bank’s money
laundering controls on correspondent accounts
Sale of NegotiableInstruments
• For non customers, does bank require:– Address, social security number and date of
birth
• Does the bank have a program for capturing:– Multiple purchases– Cash purchases
Safe Custody or Deposit Boxes
• Review bank policies:– Does management understand potential for
money laundering?– Does bank have identification procedures for
non-account holders?– Do customers declare content of boxes for
insurance purposes?–
Safe Custodial or Deposit Boxes
• Does bank recognize suspicious activities such as:– Frequent customer visit prior to transmission of
funds– Packages or sealed envelopes– Customer requests to be unattended or
unobserved
Lending Function
• Does the bank have procedures covering this function?
• Review types of credit offered, private, international, commercial , retail.
• Does the bank have a “Know your customer” policy for this function?
Lending Function
• Examine bank’s policies– Does the bank set requirements for loans not
secured by real estate?
• Examine collateral list for cash secured loans– Has the bank established procedures for
reporting suspicious activities in the lending area?
• Review the banks internal reports which could identify suspicious activities such as:
• Unusual loans which are cash secured and don’t fit the business character
Lending Function Testing
Lending Function
• Review for: – Sudden change in loan demand over previous
quarter;– Sudden change in collateral requirements,
repayment terms by wire; and– Surrender of cash.
Lending Function
• Select a sample of loans from:
– High risk countries
– High risk businesses
– Examine originator or beneficiaries legitimate business need
– Determine what management knew or should have known
Lending Function
• Answer the following questions:– Was the loan repaid unexpectedly?– Was the loan dormant while other accounts active?– Was the problem loan identified by the bank?– Was it included in the supervision report?– Was the loan inconsistent with the earnings capacity of
the borrower?– Were there any penalties for early pay-off?– Were other assets sold to make a reimbursement?
Private Banking
• Defined
– No set definition but banks want to attract high net worth individuals and their businesses
• Why high risk?
– Greater emphasis on privacy and confidentiality
– Serves international customers as well as domestic customers
– Large amounts of money
Private Banking
• Asset management trust and advice
• Investment management account
• Offshore facilities• Custodial services• Funds transfer
• Lending• Checking• Over draft privileges• Letter of credit,etc.• Bill paying services
Private Banking Procedures
• Review bank’s procedures for:
– Acceptance and approval of new accounts,
– “Know your customer” policies, verification of legal status
– Knowing where funds are derived
– Knowing the expected type and level of cash flow
• Examine a few accounts which have:
– Customers from high risk countries or businesses in high risk countries
Potentates
• Does bank have procedures for monitoring potentates’ accounts:
– Individuals holding important public positions
– Foreign heads of state, ministers, influential public officials, judges and military commanders
– Persons or companies clearly related to them
Foreign Exchange Procedures
– Interview foreign exchange department staff to determine their knowledge of money laundering schemes
– Examine identification requirements– Examine report of exchange– Look for unusually large exchanges
inconsistent with business– Determine adequacy of coverage
Letters of Credit
• Review files to determine if customer’s business normally require letters of credit
• Scrutinize the instrument being used– Are they standard?– Are they for less tangible activities such as
“services”?– Are documents reasonable?
Letters of Credit
• Scrutinize the instrument being used:
– Are goods shipped in line with known business activity of the customer?
– Are instruments amended or extended frequently?
– Does customer pass-up more favorable arrangements remittance, transfer or foreign trade terms?
Investments
• Review investments of customers introduced by foreign banks from high risk countries:– Is there buying and selling of securities with no discernable
purpose?
– Are securities transactions across a number of jurisdictions?
– Are purchase trades settled in cash or checks?
– Does client specify which broker dealers to use in foreign countries?
Investments
• Review bearer securities:– Are certain securities held outside a recognized
custodial system?– Is client the type that would make use of bearer
securities?– Are deliveries made in person?
Insurance
• Review a sample of insurance polices:– Are policies and terms in keeping with the type of
business?
– Are there track records of cancellations?
– Are a number of these policies with same insurer?
– Are there refunds by cash or transfer?
Cards
• Credit Cards and Debit Cards
• Loading up cards and payments
• Use of cards for purchases
Internet Banking
• Does the bank require additional identification from non face- to -face customers?
• Look for suspicious signs such as:– Numerous accounts– Frequent wire transfers of large amounts
Results of Exam
• Write-up exam results
• Determine any violations
• Contact authorities if appropriate
• Convey findings to bank management and board of directors
Non-Bank
– Securities dealers,brokers– Insurance companies– Credit Unions– Savings institutions– Cooperatives and NGOs– Exchanges– Money transmitters– Credit card companies– Leasing firms– Privatization agencies– Factoring firms– Pawnshops
– Casinos, lotteries & gaming rooms
– Dealers in precious metals and jewels
– Accountants– Auto dealers– Lawyers– Notaries– Artwork dealers– Antique dealers– Real estate sales– Pension funds– Investment advisors
Similarities and Differences in the Regulation of Non- bank
Entities • Like banks, the key to good compliance is a
good compliance plan which consists of:– Compliance officer– Internal audit– Internal controls– Transaction testing – Training
Differences
• Size
• Schemes
• Risk areas