final cdd rule - how we got here and what to do now

BSA/aml webinar

cdd a BRIEF history & Glimpse INto the future

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WHO WE ARECarey Rome - CEO, autoAMLCarey is the CEO of autoAML. Leveraging his 20 years of business and management consulting experience, Carey founded autoAML to help BSA Officers do more with less.

Nick Guest, CAMS - Director of BSA Risk, autoAMLNick has provided BSA/AML risk guidance, project operations oversight and organizational change management services to local, national and international companies across industries in the private and public sectors.

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Key points to be made3 significant events driving the new CDD ruleOne consistent theme in every enforcement action What you can do now to prepare

KEY TERMSBSA Bank Secrecy ActAML Anti-Money LaunderingCFT Combatting the Financing of TerrorismKYC Know Your CustomerCIP Customer Identification ProgramCDD Customer Due DiligenceBOV Beneficial Ownership Verification SAR - Suspicious Activity ReportCTR Currency Transaction Report

History of BSA/AML

1970 - present

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Simplified BSA/AML history timelineBSA1970

9/11Patriot Act

20012008

Great RecessionPanama Papers

2016Final CDD Rule (BOV)

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First Significant Event

How did this get started? - Bags of MoneyWhat did it do?What is its main goal?

1970 Passage of Bank Secrecy Act

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Back Secrecy Act 1970Established requirements for recordkeeping and reporting by private individuals, banks and other financial institutionsDesigned to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutionsRequired banks to (1) report cash transactions over $10,000 using the Currency Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions

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Money laundering Control Act (1986)Established money laundering as a federal crimeProhibited structuring transactions to evade CTR filingsIntroduced civil and criminal forfeiture for BSA violationsDirected banks to establish and maintain procedures to ensure and monitor compliance with the reporting and recordkeeping requirements of the BSA

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Anti-Drug Abuse Act of 1988

Expanded the definition of financial institution to include businesses such as car dealers and real estate closing personnel and required them to file reports on large currency transactionsRequired the verification of identity of purchasers of monetary instruments over $3,000

Annunzio-Wylie AML Act (1992)

Strengthened the sanctions for BSA violationsRequired Suspicious Activity Reports and eliminated previously used Criminal Referral FormsRequired verification and recordkeeping for wire transfersEstablished the Bank Secrecy Act Advisory Group (BSAAG)

Money Laundering Suppression Act (1994)

Required banking agencies to review and enhance training, and develop anti-money laundering examination proceduresRequired banking agencies to review and enhance procedures for referring cases to appropriate law enforcement agenciesStreamlined CTR exemption processRequired each Money Services Business (MSB) to be registered by an owner or controlling person of the MSBRequired every MSB to maintain a list of businesses authorized to act as agents in connection with the financial services offered by the MSBMade operating an unregistered MSB a federal crimeRecommended that states adopt uniform laws applicable to MSBs

Money Laundering and Financial Crimes Strategy Act (1998)

Required banking agencies to develop anti-money laundering training for examinersRequired the Department of the Treasury and other agencies to develop a National Money Laundering StrategyCreated the High Intensity Money Laundering and Related Financial Crime Area (HIFCA) Task Forces to concentrate law enforcement efforts at the federal, state and local levels in zones where money laundering is prevalent. HIFCAs may be defined geographically or they can also be created to address money laundering in an industry sector, a financial institution, or group of financial institutions.

31 years of missing the boat on SourceWho conducted the illegal activity versus who benefited from the illegal activity

Until the day we all got blind sided

Second Significant Event

September 11, 2001- The day that changed our world

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PATRIOT Act - 2001

Criminalized the financing of terrorism and augmented the existing BSA framework by strengthening customer identification proceduresProhibited financial institutions from engaging in business with foreign shell banksRequired financial institutions to have due diligence procedures (and enhanced due diligence procedures for foreign correspondent and private banking accounts)Improved information sharing between financial institutions and the U.S. government by requiring government-institution information sharing and voluntary information sharing among financial institutionsExpanded the anti-money laundering program requirements to all financial institutionsIncreased civil and criminal penalties for money launderingProvided the Secretary of the Treasury with the authority to impose "special measures" on jurisdictions, institutions, or transactions that are of "primary money laundering concern"Facilitated records access and required banks to respond to regulatory requests for information within 120 hoursRequired federal banking agencies to consider a bank's AML record when reviewing bank mergers, acquisitions, and other applications for business combinations

Intelligence Reform & Terrorism Prevention Act of 2004

Amended the BSA to require the Secretary of the Treasury to prescribe regulations requiring certain financial institutions to report cross-border electronic transmittals of funds, if the Secretary determines that such reporting is "reasonably necessary" to aid in the fight against money laundering and terrorist financing

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So whats required - AML Program Written internal policies Written procedures & documented processes Internal controls Designated AML compliance officer Ongoing employee training Independent review

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Weve been doing this for almost 50 years How can this still be missed?Identifying the source

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Does anyone think that no one had been thinking of this prior to 9/11?

314(a) : deals with the required sharing of information between banks and federal law enforcement314(b) : voluntary bank-to-bank information sharingPatriot act

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314(a) & 314(b)

314(a) - Law enforcement communicationwith your FI314(b) Communication between banks

So what happened in the following years?

- very little -

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From 9/11/2001 to the day the Great Recession hit, what progress did we make?

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2008 - Great recession

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Great recessionthe aftermath- 2011 (10yr gap)- Regulators see that banks failed - Tighter enforcements follow

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Enforcement actions - THE HIDDEN COST OF NON-COMPLIANCE

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2013 The Senate Permanent Subcommittee on Investigations (PSI)

Regulate by Consent Order, Public Filings & Shareholder Notifications

A change in the tone of consent ordersIn 2013 the OCC was cited by the Senate Permanent Subcommittee for Investigations (SPSI) in a Presentence Investigation Report (PSIR) for ineffective AML oversightThe PSIR called for higher examination standards

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Banks should be aware of the growing number of Eas.Penalties increased 20x in last 5 yearsEnormous feesAverage $34M2009-2015: $5.2B BSA/AML violationsNot including cost of additional staffUnaccounted for reputational damage

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REGULATORS ARE TAKING ACTION IN MAJOR WAYSIn the last 15 years, FIs with less than $10B in assets under management (AUM) received more EAs than larger ones (>$10B)Regulators will go after you even if there has never been any money launderingThey are making sure the structure is in place or in development to prevent it: policies, procedures, processes, and internal controls

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Ratio of Financial Impact to asset sizeFine(Over 5yrs)Cleanup Cost(One-time)Ongoing Staffing Cost (Over 5yrs)Financial Institutions~.05% - 1% of Assets~.05% of Assets~.25% of Assets

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But, bsa/aml is not just for the big guys

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$9.7B in AUM2012 received consent order5 consecutive prior years of complianceHeightened expectations of the regulatorsDoubled BSA staff$4M staffing costs + $5M annual expenditures + $500,000 CMPsOld national bancorp

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Drowning in BSA demandsFew dare talk about their concerns publicly, for fear of alienating regulators. Privately they say that BSA exams have become more rigorous and focused in recent years, digging deeper into the weeds of processes, systems and controls. Foot-dragging and shortcomings are being met with stiffer monetary penalties and lengthy lists of demands for system improvements and additional personnel. American Banker

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SmallER banks singled outExaminers assigned to smaller banks can advance their careers by playing tough.As an examiner, you move to working on the larger, multinational banks by finding problems at smaller institutions.Its a risk for the smaller and midsized banks that you can run into someone whos trying to catch every technical detail to impress their bosses and move up.

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2012 FinCEN consent order - Willful lack of AML programFailure to detect and adequately report evidence of AMLInadequate internal controls, transaction monitoring systems, training, & re