Bank Name & Logo Employee Compliance Orientation Revised 1/2005
Bank Name & Logo Welcome to Bank Name. As you get used to your new surroundings and try to absorb or remember everything you’re given in your first few days, please take a moment to look over this material. It contains some very important and sometimes critical information that will help you do your job better, and avoid regulatory problems. Think of Bank Name as a business. Unlike a retailer who sells shoes, tires, or groceries, Bank Name doesn’t offer goods for sale. What does Bank Name provide? In a word – “TRUST”. Bank Name “sells” money, “offers” integrity, and “is” a forprofit business that depends on customer confidence and the quality delivery of its products and services. That’s where you come in. The way Bank Name operates says a lot about the way it prospers. Safe, sound, and prudent banking is not just the “norm” at Bank Name – it’s the standard by which we operate, and by which we set our expectations. One of the underlying principles of this philosophy is that Bank Name is committed to the spirit and letter of the law and implementing regulations. It means complying with the most minute, tedious and technical detail as well as with the more substantive requirements and restrictions. Banking is one of the most highly regulated industries in the country, and often challenges us to remember the goals of our commitment to compliance. But if it means preserving the customer’s rights, preventing illegal acts such as discrimination or criminal activities, and supporting the integrity of the customer relationship, then “compliance” is more than just abiding by banking rules. It involves meeting our challenges with the delivery of superior products, with unsurpassed quality, customer service, and in a manner that maximizes shareholder value. Several elements of Bank’s Name Compliance Program are summarized in this training session. Please feel free to ask your supervisor about additional questions.
Sit Back, Relax, & Enjoy
Training to Include: • Basic regulatory introduction • Highlights from regulations that require annual training • Internal policies to maintain regulatory compliance • Overview of the internet based training program
What’s in It for Me? Knowledge • • • Is Power Is an Investment Can Lead to Advancement Builds Self-Confidence Stays with You
Compliance Defined Fulfillment (n) • Observance • Conformity • Disobedience (antonym) Obedience (n) • • • Acquiescence Agreement Falling in line Submission Resistance (antonym)
What Is Compliance? Compliance is • Doing it right the first time • Attempting to adhere to internal policies and procedures • Maintaining a standard that is in accordance with the laws and regulations
Let’s Get Started
Basic Regulatory Introduction Laws & Regulations Much of what banks do on a daily basis is dictated by various laws and regulations imposed by federal and state authorities. These rules change with some regularity, and are in place for a variety of reasons – consumer protection, fairness and equal treatment, law enforcement needs, or routine reporting of vital bank – specific or industry related information. The following sections highlight a few of the compliance and community related issues that need to be understood in order to optimize your performance.
Deposit Laws & Regulations
Basic Regulatory Introduction Deposit Regulations Regulation D – Reserve Requirements Regulation D imposes uniform reserve requirements on all depository institutions with transaction accounts or non-personal time deposits; defines “deposits” and requires reports of deposits. It also provides guidance on NOW account eligibility, MMDA and savings account transfer restrictions, and early withdrawal penalties. Regulation E – Electronic Funds Transfers Regulation E establishes rights, liabilities, and responsibilities of parties in electronic funds transfers and protects consumers using EFT systems. Regulation J – Check Collection and Funds Transfers Regulation J establishes procedures, duties, and responsibilities among Federal Reserve Banks and (1) the senders and payers of checks and other items, and (2) the senders and recipients of wire transfers of funds.
Basic Regulatory Introduction Deposit Regulations (cont) Regulation Q – Interest on Deposits Regulation Q provides guidelines and restrictions relating to interest on deposits and advertising. Regulation CC – Funds Availability & Collection of Checks Regulation CC implements the Expedited Funds Availability Act (EFA). Contains rules regarding the duty of banks to make funds deposited into accounts available for withdrawal, including availability schedules plus rules regarding exceptions to the schedules, disclosure of funds availability policies, payment of interest, and liability. Also contains rules to expedite the collection and return of checks by banks, including the direct return of checks, the manner in which the paying bank and returning banks must return checks to the depositary bank, notification of nonpayment by the paying bank, endorsement and presentment of checks, same-day settlement for certain checks, and other matters.
Basic Regulatory Introduction Deposit Regulations (cont. ) Regulation DD – Truth in Savings Regulation DD requires banks to fully and accurately disclose the terms of deposit accounts to consumers and to be completely truthful in its disclosures, calculations, and advertising/promotion to enable consumers to make informed decisions about deposit accounts at depository institutions. Federal Deposit Insurance FDIC regulations for deposit insurance contain complex rules on insurance coverage limitations based on amounts on deposit in a single financial institution, and the ownership structure of those accounts.
Basic Regulatory Introduction Deposit Regulations (cont. ) • • • Check 21 was designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. Affects ALL institutions. Applies to money orders, controlled disbursements, and all government checks, including treasury checks and state warrants. Applies to ALL checks, with the exception of foreign checks. Check 21 will not affect the collection process (items sent for collection). Does not apply to Savings Bonds.
Basic Regulatory Introduction Deposit Regulations (cont. ) Check 21 • • Check 21 creates a new legal concept called the “substitute check. ” It allows banks to convert paper checks into digital images and then back into paper “substitute checks. ” The images will travel through the clearing system electronically, greatly reducing the time and expense of check clearing. Banks, as well as their customers, are required to accept substitute checks. There is no opt-out for consumers and/or banks. While all types of customers may receive substitute checks, it is consumers who get the greatest protections. They are entitled to written disclosures that explain their rights. Their rights include “expedited recredit” if they incur a loss due to a substitute check and make a timely claim. A consumer is a natural person, someone like you. A consumer account is an account held by a natural person for personal, family or household use. Please ask your supervisor further details on how Check 21 currently affects your specific job function.
Lending Laws & Regulations
Basic Regulatory Introduction Lending Regulations Regulation M implements the consumer leasing provisions of the Truth in lending Act. Regulation O – Loans to Executive Officers of Member Banks Regulation O places restrictions on credit extended by a member bank to insiders which includes executive officers, directors, and principal shareholders and their related interests. Further, the regulation imposes reporting requirements relating to credit extended by a correspondent bank to a member bank’s executive officers and principal shareholders and their related interests. Regulation T regulates extensions of credit by brokers and dealers. It imposes, among other obligations, initial margin requirements and payment rules on certain securities transactions.
Basic Regulatory Introduction Lending Regulations (cont. ) Regulation U imposes credit restrictions upon persons other than brokers or dealers that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by margin stock. Regulation Z – Truth in Lending Regulation Z was designed to help consumers “comparison shop” for credit by requiring uniform methods of computing the cost of consumer credit, disclosure of credit terms, and procedures for resolving errors on certain credit accounts. The regulation gives consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. The regulation requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer’s dwelling. It also imposes limitations on certain home equity and mortgages.
Basic Regulatory Introduction Lending Regulations (cont. ) Flood Disaster Protection Act The Flood Disaster Protection Act establishes a process the federal and local governments to identify flood prone areas and provide flood hazard insurance for properties located in those areas. Lenders are required to determine, before making a loan, whether the property is located in a flood zone and notify the applicant of any need to purchase flood insurance. The lender also must ensure that flood insurance is maintained during the life of the loan. Lending Limits – Limits are placed on the total amount that can be loaned to a single borrower. The act provides a formula for calculating the limit.
Basic Regulatory Introduction Lending Regulations (cont) Real Estate Procedures Act (RESPA) -- HUD’s Reg X RESPA sets forth rules and procedures for pertinent and timely disclosures pertaining to the real estate settlement process. It also protects against illegal kickbacks and abusive practices and places limits on loan servicing and the use of escrow accounts. Servicemembers Civil Relief Act (SCRA) --(amends/rewrites the Soldiers' and Sailors' Civil Relief Act of 1940) The purposes of this Act are-(1) to provide for, strengthen, and expedite the national defense through protection extended by this Act to servicemembers of the United States to enable such persons to devote their entire energy to the defense needs of the Nation; and (2) to provide for the temporary suspension of judicial and administrative p proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service.
Basic Regulatory Introduction Lending Regulations (cont) Fair and Accurate Credit Transactions Act of 2003 (FACT Act) • The FACT Act was implemented to provide an extensive revision to the Fair Credit Reporting Act (FCRA). • The primary purpose of the FCRA is to regulate the consumer reporting industry to ensure fair, timely, and accurate reporting of credit information.
Basic Regulatory Introduction Lending Regulations (cont) Fair and Accurate Credit Transactions Act of 2003 (FACT Act) 1. 2. 3. 4. 5. 6. 7. The seven key provisions of the FCRA address the following: The nature and extent of information that consumer credit report may contain. The duties of financial institutions or other parties that furnish in formation to a consumer reporting agency (CRA). The duties of financial institutions other parties to provide notice of action taken to consumers in connection with the use of a consumer credit report. The procedures that a CRA must follow should a consumer dispute the accuracy of information in a consumer credit report. The activities that involve the use of consumer credit reports for credit or insurance transactions that are not initiated by a consumer. The exchange of information among affiliated institutions. The form of content of the summary of a consumer’s rights that a CRA must provide to a consumer when the CRA provides the consumer with information in the consumer’s credit file.
Basic Regulatory Introduction Lending Regulations (cont) Fair and Accurate Credit Transactions Act of 2003 (FACT Act) • • • The new preemptive provisions of the FACT Act cover the following: Expanded obligations of financial institutions that furnish credit information to CRAs. Notification to consumers of reports of negative information. Risk-based credit pricing programs. Marketing solicitations that involve information from an affiliate. Prevention of identity theft. Other provisions, including the availability of free credit reports and disclosures of credit scores to consumers. s • Reference the FACT Act Policy & the Identity Theft Policy for additional information. • Please check with your supervisor further details on how the FACT Act may affect your current job function.
Community Reinvestment Act (CRA)
Basic Regulatory Introduction The Community Reinvestment Act (CRA) Each federal bank regulatory agency has issued regulations to implement the Community Reinvestment Act. Every commercial bank and thrift in the U. S. is expected to have policies and practices in place to assure that it is lending and investing in such a way as to help meet the credit needs of its local communities. Each institution will be examined periodically, and its performance measured against a series of test criteria. The examination will be determined by the size and type of institution. Regulation BB – Community Reinvestment (CRA) Each federal bank regulatory agency has issued regulations to implement the Community Reinvestment Act and are designed to encourage banks to help meet credit needs of their communities.
Equality
Basic Regulatory Introduction Fair Lending and Equal Treatment The laws and regulations relating to fair lending provide a foundation for fair and equal treatment of ALL creditworthy applicants, regardless of various physical or ingenuous characteristics. There is no single regulation, rather a series of regulations and statues that comprise fair lending. Regulation B prohibits creditor practices that discriminate on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The regulation also requires creditors to notify applicants of action taken on their applications; to report credit history in the names of both spouses on an account; to retain records of credit applications; to collect information about the applicant’s race and other personal characteristics in applications for certain dwelling-related loans; and to provide applicants with copies of appraisal reports used in connection with credit transactions.
Basic Regulatory Introduction Fair Lending and Equal Treatment (cont) Regulation C – Home Mortgage Disclosure (HMDA) Regulation C requires certain mortgage lenders to disclose data regarding their home loan related lending patterns. The information is intended to provide the public with loan data that can be used to help determine whether financial institutions are serving the housing needs of their communities; to assist public officials in distributing public-sector investments so as to attract private investment to areas where it is needed; and to assist in identifying possible discriminatory lending patterns and enforcing anti-discrimination statues. The gathering of the information requires certain lenders to compete Loan Application Registers (LAR) to track home purchase loans, home improvement loans and refinancing. Regulation V implements portions of the Fair Credit Reporting Act (FCRA). Includes model notices that can be used to notify customers either before or immediately following the delivery of negative information.
Basic Regulatory Introduction Fair Lending and Equal Treatment (cont) Regulation AA – Unfair Consumer Credit Practices Regulation AA establishes consumer complaint procedures and defines unfair or deceptive acts or practices of banks in connection with extensions of credit to consumers. Prohibits certain practices, such as taking a non-purchase money security interest in household goods. Americans with Disabilities Act (ADA) The ADA prohibits discrimination against individuals with disabilities and requires banks to take affirmative steps to ensure that individuals with disabilities have access to bank products and services, as well as to bank employment opportunities. Fair Credit Reporting Act (FCRA) FCRA establishes rules and procedures for obtaining and using information about a consumer. The law requires a bank to provide a notice if it denies credit because of information obtained in the applicant’s credit report.
Basic Regulatory Introduction Fair Lending and Equal Treatment (cont) Fair Debt Collection Practices Act (FDCPA) FDCPA, passed to ban abusive practices by debt collectors. The law contains limitations on the time, frequency, and content of permissible communication with the debtor. Fair Housing Act The Fair Housing Act prohibits discrimination on the basis of race, color, religion, handicap, familial status, or national origin, in any aspect of a housing transaction, including sale, rental, and financing.
Bank Secrecy Act
Basic Regulatory Introduction Money Laundering and Anti-Money Laundering Bank Secrecy Act (BSA) and Anti-Money Laundering Program The existence of money laundering to advance the presence and profits of illicit activities has long been a concern in banking. In 1986, Congress created the Money Laundering Control Act, which strengthened the tools used by law enforcement, created the federal crimes of money laundering, and mandated that banks adopt a program of Bank Secrecy Compliance. In 1992, additional legislation prompted the expectation of an effective anti-money laundering component to these bank programs, as now reflected in the examination guidelines used by federal banking agencies. BSA also includes “Know Your Customer” which is the basis for recognizing and responding to the possibility of suspicious or suspected illegal activity. Along with the passage of the USA Patriot Act, BSA was expanded to include a Customer Identification Program (CIP) that is inclusive in the BSA Program.
Security
Basic Regulatory Introduction Bank Protection Act and Bank Security The banking industry has long been expected to maintain systems and procedures to protect against robberies, burglaries, and larcenies. This expectation has been expressed in statutory and regulatory terms. Regulation H (formally Regulation P) -- Bank Protection Act and Security Standards Regulation P sets minimum standards for a security program state-charted member banks must establish to discourage robberies, burglaries, and larcenies and to assist in identifying apprehending persons who commit such acts.
Privacy & Protecting Customer Information
Basic Regulatory Introduction Customer Privacy Right To Financial Privacy The Right to Financial Privacy Act restricts the federal government’s access to a bank customer’s financial records and activities. Note: This is different than Regulation P – Privacy of Consumer Financial Information created from the passage of the Gram Leach Bliley Act (GLBA). Regulation P – Privacy of Consumer Financial Information Regulation P, Privacy, was created from the passage Graham-Leach-Bliley Act (GLBA). Privacy requires a financial institution to provide notice to customers about its privacy policies and practices; describes the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties; and provides a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting out" of that disclosure.
Basic Regulatory Introduction Customer Privacy (cont) Safeguarding Customer Information The Interagency Guidelines Establishing Standards for Safeguarding Customer Information (Guidelines) set forth standards pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (GLBA). The Guidelines apply to customer information maintained by or on behalf of state member banks and bank holding companies and their non-bank subsidiaries, except for brokers, dealers, persons providing insurance, investment companies, and investment advisors. These Guidelines also apply to customer information maintained by or on behalf of Edge corporations, and uninsured statelicensed branches or agencies of foreign banks. The Guidelines require each institution to implement a written information security program that includes administrative, technical, and physical safeguards appropriate to the size and complexity of the bank and the nature and scope of its activities. The program should be designed to ensure the security and confidentiality of customer information, protect against unanticipated threats or hazards to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Each institution must assess risks to customer information and implement appropriate policies, procedures, training, and testing to manage and control these risks. Institutions must also report annually to the board of directors or a committee of the board of directors.
OFAC & the SDN List
Basic Regulatory Introduction International Sanctions Office of Foreign Asset Control (OFAC) OFAC is the agency that administers and enforces the laws of the U. S. pertaining to international sanctions and related activities.
BSA, CTRs, & SARs
Basic Regulatory Introduction Information Reporting Requirements Bank Secrecy Act (BSA)/Money Laundering/Large Currency Transaction Reporting BSA is a “public purpose” statute, which uses banks and other entities to report large currency transactions to the IRS to facilitate the identification and investigation of criminal money laundering activities. The act calls for the monitoring and recording of cash transactions in excess of $3, 000 for the sale of monetary instruments or the aggregate cash transactions of $10, 000 in any given day. Detailed information about customers conducting transactions exceeding $10, 000 must be reported to the IRS on a Currency Transaction Report (CTR). The regulation also specifies the circumstances under which the deposits of certain customers may be exempted from the reporting requirement, and specifies what type of customer may never be exempted.
Basic Regulatory Introduction Information Reporting Requirements (cont) IRS Information Reporting: Lending and Deposits; Backup Withholding; Mortgage Interest Reporting; Foreclosed/Abandoned Property Reporting Financial institutions are required to report certain information to the customer and to the IRS on an annual basis. Major reportable items include interest paid to the depositor, mortgage interest paid by the customer, and miscellaneous payments exceeding $600. The bank must obtain a tax ID number on a W-9, or a comparable certification, whenever an interest bearing account is opened or when a reportable transaction, such as cashing a savings bond, is processed. For certain taxpayers identified by the IRS, the bank must undertake backup withholding.
Basic Regulatory Introduction Information Reporting Requirements (cont) Notice of Branch Closure Financial institutions must adopt policies on branch closings, and give advance notice to their regulator of intent to close a branch office. The advance notice should include a detailed analysis of the reasons for closing the branch. In addition, banks must mail a notice to the customers of the branch at least 90 days before closing, and post a notice in the branch at least 30 days before closing.
Additional Laws & Regulations
Basic Regulatory Introduction Various Laws & Regulations Regulation A relates to extensions of credit by Federal Reserve Banks to depository institutions and others. It establishes rules under which Federal Reserve Banks may extend credit to depository institutions and others. Regulation F is designed to limit the risks that the failure of a depository institution would pose to other insured depository institutions. Provides requirements relating to interbank liabilities. Regulation G provides disclosure and reporting of CRA-Related Agreements.
Basic Regulatory Introduction Various Laws & Regulations (cont) Regulation H provides guidance on a variety of matters relating to state-chartered member banks, from real estate lending standards to standards for safety and soundness. Regulation I implements the provisions of the Federal Reserve Act relating to the issuance and cancellation of Federal Reserve Bank stock upon becoming or ceasing to be a member bank, or upon changes in the capital and surplus of a member bank, of the Federal Reserve System. Regulation K sets out rules governing the international and foreign activities of U. S. banking organizations, including procedures for establishing foreign branches and Edge corporations to engage in international banking and for investments in foreign organizations.
Basic Regulatory Introduction Various Laws & Regulations (cont) Regulation L implements the Depository Institution Management Interlocks Act to foster competition by generally prohibiting a management official from serving two nonaffiliated depository organizations in situations where the management interlock likely would have an anticompetitive effect. Regulation N governs relationships and transactions between Federal Reserve banks and foreign banks or bankers or groups of foreign banks, or bankers, or a foreign State. Regulation R was repealed effective December 6, 1996. It dealt with interlocking relationships between securities dealers and banks.
Basic Regulatory Introduction Various Laws & Regulations (cont) Regulation S establishes the rates and conditions for reimbursement of reasonably necessary costs directly incurred by financial institutions in assembling or providing customer financial records to a government authority pursuant to the Right to Financial Privacy Act. Regulation W implements Sections 23 A and 23 B of the Federal Reserve Act which govern most transactions between banks and their affiliates. The term “banks” includes all national banks, as well as insured state member and nonmember banks and, for certain purposes, US branches and agencies of foreign banks. Regulation Y regulates the acquisition of control of banks by companies and individuals; defines and regulates the non-banking activities in which bank holding companies and foreign banking organizations with United States operations may engage; and sets forth the procedures for securing approval for these transactions and activities.
Basic Regulatory Introduction Various Laws & Regulations (cont) Consumer Protections for Depository Institution Sales of Insurance The Gramm-Leach-Bliley Act (GLBA), Section 305, requires the Agencies jointly to prescribe and publish consumer protection regulations that apply to retail sales practices, solicitations, advertising, or offers of insurance products by depository institutions or persons engaged in these activities at an office of the institution or on behalf of the institution. It directs the “Agencies to include specific provisions relating to sales practices, disclosures, and advertising, the physical separation of banking and non-banking activities, and domestic violence discrimination.
Basic Regulatory Introduction State Laws Alabama Consumer Credit Act (Mini-Code) The apparent purpose of the Mini-Code was to provide Alabama with its first comprehensive consumer protection legislation. The Mini-Code regulated many aspects of consumer transactions including loans, credit sales and leases. It provided for a new system of interest rates for both open and closed-end loans. It provided many restrictions on lenders and credit sellers, and protective measures for consumer borrowers and purchasers. Rev. 1997 Alabama Small Loan Act
Basic Regulatory Introduction State Laws Uniform Commercial Code The UCC underlying purposes is to simplify, clarify, and modernize the law governing commercial transactions. And to make uniform the law among the various jurisdictions. Sections of the Code are as follows: Article 1 – General construction and Subject Matter Article 3 – Negotiable Instruments Article 4 – Bank Deposits and Collections Article 4 A – Funds Transfer Article 8 – Investment Securities Article 9 – Secured Transactions; Sales of Accounts and Chattel Paper Article 15 – Uniform Electronic Transactions Act
More Changes
Upcoming Changes New Upcoming Laws &/or Regulations • None thus far Potential Revisions to Laws &/or Regulations • Expedited Funds Availability Act (Regulation CC) • Check 21 – was effective October 28, 2004 but will continue to bring about new changes • Fair and Accurate Credit Transactions Act of 2003 (FACT Act) – was effective December 1, 2004 but will continue to bring about new changes
To Make Us Stronger & Better
Regulations that Require Annual Training Fair Lending and Equal Treatment The interagency examination council (FFIEC) has issued and subscribes to a general policy statement of what is expected of banks and other financial institutions relating to fair lending practices. Among these expectations are fair and equal treatment of all prospective customers and the avoidance of unequal or disparate treatment. Also called for are expectations of equal outcomes or results of lending practices and policies, including but not limited to: – Underwriting policies – Targeted advertising and promotions – Lender/underwriter hiring practices – Guarding against even subtle forms of illegal discrimination, such as inadvertently discouraging applicants or developing products or services that may have the unintended effect of discriminating on an illegal basis. • The laws and regulations pertaining to fairlending and equal treatment provide for technical as well as substantive compliance requirements. In some cases, even a technical omission may warrant mention in the CRA “Public Evaluation” report. If so, it will reflect a “violation of fair lending laws”, a distinction that no bank wants to receive.
Regulations that Require Annual Training Fair Lending and Equal Treatment (cont) Laws associated with fair lending include Regulation BB – the Community Reinvestment Act, Regulation B – Equal Credit Opportunity Act, Regulation C - Home Mortgage Disclosure Act (HMDA), the Fair Housing Act, and the Americans with Disabilities Act (ADA).
BSA, KYC, CIP, Fin. CEN, OFAC, etc.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Introduction to Bank Secrecy and Money Laundering Deterrence The BSA Program should include four fundamental components: 1. 2. 3. 4. Effective controls to ensure full compliance, including timely and accurate reporting and record keeping of information required by law. The Continuing support of adequate resources to achieve and ensure a satisfactory level of compliance. This extends to the appointment of a senior official to oversee the BSA compliance function, including the maintenance of the BSA program, vigilance as to money laundering dangers, and oversight over relevant policy/procedures issues. Training of appropriate personnel as to Bank Secrecy impact points and awareness of money laundering deterrence opportunities. The training curriculum is developed and implemented by bank management, and is sensitive to the demands of both compliance as well as riskmanagement. BSA training schedules are developed in concert with other bank training needs, and are focused on both the technical as well as substantive aspects of Bank Secrecy Act and Anti-Money Laundering efforts. Independent testing is periodically conducted of the bank’s BSA program and the integrity of its related systems and controls. This is performed by the bank’s internal auditors, and augments the independent review of currency transaction reporting and suspicious transaction activity performed continuously by compliance personnel.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Money Laundering/Anti-Money Laundering Detection and Prevention Programs Money is “laundered” in order to conceal criminal activity associated with it, and/or to finance terrorist activity. It is generally driven by criminal activities and enterprises. Money Laundering is the act of converting dirty money into clean money. Anti-Money Laundering is the act of converting clean money into dirty deeds. Banks are considered to be the key to deterring this type of criminal activity, since access to the financial system generally starts with a bank transaction. As such, banks are expected to recognize this responsibility and to develop practices to identify and respond to possible money laundering and/or anti-money laundering activities. The process usually breaks down into three general areas or “processes”: – – – Placement Layering Integration.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) What is Money Laundering? Money Laundering is the converting of money gained from “Dirty Deeds” into “Clean Money. ” The motivation is Greed. Dirty Deeds 1. “Placement” of funds – Money is placed into the Banking System through deposits, wire transfers, or other means, unlawful proceeds into traditional financial institutions. 2. “Layering” – Funds are moved from account to account, country to country, and/or bank to bank. It is separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; such as converting cash into travelers checks, money orders, letters of credit, stocks and bonds, or purchasing valuable assets such as art or jewelry. 3. “Integration” – The money is placed into the economy. Items are bought to sell for profit, such as real estate or commercial business. It is using an apparently legitimate transaction to disguise the illicit proceeds allowing the laundered funds to be disbursed back to the criminal. Different types of financial transactions such as sham loans or false import/export invoices are used. Clean Money
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) What is Anti-Money Laundering is the use of legitimate funds for illegal activities such as Terrorism. Charities represent all that is good about mankind helping others in need. However, for the terrorist, charities are a perfect cover for collecting money for terrorist acts. It is the usage of “Clean Money” for “Dirty Deed. ” The motivation is Destruction. Clean Money 1. “Integration” – The money is placed into the banking system. 2. “Layering” – Funds are moved into the economy through purchase and/or donation. 3. “Placement” – Money (donation or purchase) is placed into other groups (Terrorists). Dirty Deeds • Note: Employees should request IRS Form 990 for any organizational account either preexisting or newly established. This form serves as verification threat the organization has registered appropriately with the government.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) The first 2 elements, “Placement” and “Layering” represent high risk to the conductor of the transactions ( the likelihood of detection by a bank or law enforcement official). The likelihood of tracing the funds back to the true owner is relatively good. The last element, “Integration” however, is relatively risk-free. Once placed in the financial system, access to the funds would be relatively free from scrutiny and would be unencumbered by probing questions from bankers and law enforcement. The vigilance of bankers at the initiation of these transactions (opening accounts, depositing funds, instructing funds to be wired, engaging in loan or letter of credit activity) is critical to detecting and preventing the bank from being used to access the financial system.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Role of Bank Employees As bankers, it is fully expected that all bank officers, directors, and employees be aware of and abide by the spirit and letter of the law. This demands constant vigilance for evidence of possible money laundering behavior or transaction activity. It extends to being familiar with bank procedures, controls, and “best practices” to assist in this vigilance, as well as being prepared to respond to unusual activity in a manner as called for by bank policy. The bank provides regular training opportunities for all employees affected by BSA and Anti-Money Laundering laws and regulations. This training extends to every employee of affected departments or functions, and covers the various reporting and recordkeeping rules, updates, recent cases or schemes, and any related changes to policy, procedures, controls, or practices. Training is offered through various resources, including but not limited to, web-based sessions, internal meetings, and internet based courses. It is expected that all appropriate personnel attend all such sessions, and that periodic testing or reviews will be conducted.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Bank Secrecy Training Frontier Bank provides regular training opportunities, internally and through the Internet Based Training Program, for all employees affected by the Bank Secrecy Act and Anti. Money Laundering laws and regulations. This training extends to every employee of affected departments or functions, and covers the various reporting and record-keeping rules, updates, recent cases or schemes, and any related changes to policy, procedures, controls, or practices. It is expected that all appropriate personnel participate in training as applicable. In addition to the employee training, all employees are encouraged to review and consider the issues discussed in the Bank Secrecy Act/Anti-Money Laundering Policy/Procedures, Office of Foreign Asset Control Policy/Procedures, and the Customer Identification Policy/Procedures. A thorough understanding of the Bank’s procedures and practices are necessary to ensure an effective Bank Secrecy posture and to minimize the risks of unnecessary exposure.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Internal Controls and Systems Frontier bank uses an extensive set of automated reporting and identifying mechanisms to help capture and analyze data relevant to the monitoring of large currency transactions. Other management reports are utilized to monitor for “structuring”, kiting, money laundering, or other such financial crimes. These are also used to test the accuracy and integrity of the data and system of internal controls. These systems and reports, however, represent only to enhance the primary line of defense – the vigilance of our employees. Firsthand knowledge and customer contact are the best ways to assure that the Bank has not been used as a conduit for illegal activity. By observing multiple transactions, multiple account openings, or a combination of seemingly unrelated transactions or behaviors, the employee is usually in the best position to ask about the nature of the activity, and to determine whether it is reasonable and commensurate with the nature of the customer’s business.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Designated BSA Officer Frontier Bank has established a Regulatory Compliance function to oversee and coordinate the various aspects of the Bank’s compliance program. The Bank’s Compliance Officer is also appointed by the Board of Directors as BSA Officer. By regulation, the BSA Officer is a senior official of the Bank and is in a position to influence bank policy. The BSA Officer regularly reports to management and the Board, as well s to the appropriate standing committees for Compliance and BSA matters. Although employees are encouraged to bring suspicious activity or general questions to the attention of their immediate supervisor, each employee has direct access to the BSA Officer should the need arise. The responsibility for overseeing the BSA Program is that of the BSA Officer, but the direct and ultimate responsibility for full compliance with the regulations and bank policy is that of each employee.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Independent Testing To preserve the integrity of the process and of the components of the BSA Program, and audit should be performed at least annually by the Bank’s Internal Auditor. This involves testing various transactions, the adequacy of internal controls and management reports, and reviews of bank practices against established (and Board-approved) policy, protocol, and procedures. Recommendations may be warranted depending on the findings and the severity of the exposure to risk.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) What is Expected of Banks and Bankers In addition to the program elements required by law, banks are expected to develop and maintain a strong commitment to its bank Secrecy and Anti-Money Laundering efforts. This includes adopting policies and practices to know its customer, refusing to do business with those customers who are reluctant to provide information about their business, and diligently responding to possible indications of suspicious or suspected criminal activity. Regulators encourage all banks to adopt policies and procedures consistent with the regulatory principles. Among others, these principles include knowing the customer, identity verification, cooperating with law enforcement, ascribing to the highest ethical standards, and communicating an awareness of related developments to its employees.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Suspicious Activity Reporting In accordance with regulations calling for mandatory reporting of suspicious or suspected criminal activity, employees should report all suspicious activity or transactions in a series of financial activities to their supervisor immediately. This information is then reported to the Compliance and/or Security Officer, who in turn will investigate or research the allegation. If appropriate, the BSA Officer will file a Suspicious Activity Report (SAR), and maintain records as appropriate. Under no circumstance may any employee ever notify any subject of a SAR (even a suspected SAR) as to the existence of a suspicious activity report or internal maintenance of a file relating to a SAR. Information Reporting, Record-keeping and Retrieval A bank has an obligation to maintain systems which are capable of fulfilling the requirements of BSA and related regulations. Both manual and automated means can be used to capture and report, as well as maintain and retrieve records of this information as required by law. BSA and related regulations have specific retention requirements for maintaining specific documents.
Know Your Customer
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Know Your Customer The basis for recognizing and responding to the possibility of suspicious or suspected illegal activity is in knowing the customer. This extends to knowing the types of business the customer is in, the nature of the expected financial transactions, patterns to the account relationship, and when the tradition relationship has taken a new turn. Without invading anyone’s right to financial privacy, the Bank expects that all employees be aware of and generally familiar with the behaviors and patterns of customer’s routine activity, for the protection of the customer as well as the Bank. Knowing the customer extends beyond the opening account stage, and usually involves an appreciation for what type of account relationship to expect. This helps to provide appropriate levels of customer service, anticipate the customer’s need, and ensure the delivery of high quality customer service. Every employee should be familiar with his or her responsibilities in connection with “KYC”.
Customer Identification Program (CIP)
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Customer Identification Program (CIP) The purpose of the USA PATRIOT Act is to enhance the Country’s ability to protect and defend itself against threats of international terrorism. Section 326 of the Act and accompanying implementing regulations require banks to establish and maintain a written Customer Identification Program (CIP) as a part of the Bank Secrecy Act (BSA) Program. The CIP must: 1. Enable the Bank to form a reasonable belief that it knows the true identity of its customers. 2. Be based upon relevant risks, including the Bank’s: Size Location Type of business or customer base Type of accounts offered Various methods used to open accounts Type of identifying information available to the Bank
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) Policies and Procedures for compliance with Section 326 of the USA Patriot Act and CIP are to include: – Establish identity verification methods for any person seeking to open an account – Establish record retention for information used to verify an individual’s identity, including name, address and other identification – Establish procedures for determining if a customer appears on any government lists – Written or oral customer disclosure notice requirement
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) CIP Applicability The CIP should be applied to the following individuals/entities: 1. All persons (including individuals, corporations, partnerships, associations, trusts, estates, organizations and all other entities cognizable as legal personalities) that open a new account 2. Any individual who opens a new account for: • A person who lacks legal capacity, such as a minor • Any entity that is not a legal person, such as a civic club The CIP is not applicable to the following: 1. Financial institutions regulated by a Federal functional regulator or a bank regulated by a state bank regulator 2. Governmental agencies, instrumentalities and publicly traded companies 3. Any existing FB customer seeking to establish a new account provided there is reasonable belief that identity of the person is know.
Regulations that Require Annual Training Bank Secrecy Act and Anti-Money Laundering Program (BSA) CIP Procedures CIP procedures should include: 1. 2. 3. 4. A system of internal policies, procedures, and controls for verification of the identity of each customer to the extent reasonable and practicable under the circumstances of the bank’s operations. Designation of a BSA Officer and/or Assistant BSA Officer responsible for overseeing compliance with the CIP. Ongoing employee training program that includes CIP. An independent audit function to test the CIP Program. Notice to Customers In addition to the CIP, Section 326 of the USA Patriot Act requires that notice be available to consumers informing them of their duty to comply with the new identification procedures. The notice may be made available to consumers by: – – A lobby poster or any other form of written or oral notice An electronic notice for account openings that do not occur face-to-face, such as over the Internet
OFAC & Penalties
Regulations that Require Annual Training Office of Foreign Asset Control (OFAC) The U. S. engages in practices that occasionally require that it protect the interests of its citizens and related national interests. The U. S. uses economic sanctions to further its interests or comply with the resolutions of the United Nations. These sanctions include trade embargoes, control over blocked assets, and other commercial and financial restrictions. In addition, there are listings of suspected terrorists, narco-terrorists, and “specially-designated national” (SDN) that require banks to monitor regularly. OFAC is the agency of the U. S. that oversees and administers the series of laws and regulations that impose these economic sanctions. OFAC is responsible for putting together, developing, and administering the sanctions, and banking regulatory and supervisory agencies are responsible for ensuring bank compliance with the various regulations. For this reason, most banks have developed a program for monitoring and responding to OFAC responsibilities, and for maintaining systems and records to demonstrate its compliance efforts. What is required is that banks identify any person or property listed by OFAC in connection with one of the U. S. sanctions laws.
Regulations that Require Annual Training Office of Foreign Asset Control (OFAC) (cont) Any transaction involving such a match must be viewed to determine whether the transaction/fund transfer must be blocked or rejected. Failure to do so could subject the bank to significant monetary and criminal fines and penalties. The bank uses an automated system to identify possible customer or property that matches those maintained on the lists provided by OFAC. The system is downloaded regularly from the OFAC listings, and filters are used to scan for matches. OFAC is contacted with any possible matches, and procedures are established to comply with appropriate actions. Employees should contact the Compliance Department for approval before continuing with any type of transaction if an OFAC “hit” arises while performing the transaction. Customers are not to be informed unless instructed otherwise by the Compliance Department. All employees should be familiar with the OFAC SDN List located on the OFAC website at www. ofac. gov for situations when the computer system is down.
Security Manual
Regulations that Require Annual Training Bank Protection Act and Bank Security Regulation H & Regulation P [FDIC Part 326] The banking industry has long been expected to maintain systems and procedures to protect against robberies, burglaries, and larcenies. This expectation has been expressed in statutory and regulatory terms, calling for a formal program of bank security along with the appointment of an officer or senior official to oversee this program. For many years, the regulations imposed a strict set of minimum standards, calling for very specific criteria, such as vault thickness, steel-plated reinforcement, cameras and lighting. This was eventually changed to require that banks “adopt appropriate security procedures to discourage robberies, burglaries, and larcenies and to assist in identifying apprehending persons who commit such acts. ” Today’s bank security program takes into account a variety of risks to the bank, extending beyond the traditional robberies, burglaries, and larcenies. Risks from physical as well as information-security threats are equally important in today’s security program. Risks from check fraud, kiting, money laundering and similar white collar crimes are equally threatening. Threats from within as well as outside are of concern.
Regulations that Require Annual Training Bank Protection Act and Bank Security Regulation H & Regulation P [FDIC Part 326] sets minimum standards for a security program statechartered member banks must establish to discourage robberies, burglaries, and larcenies and to assist in identifying apprehending persons who commit such acts. A bank must appoint a Security Officer to develop and administer a Security Program, which must be in writing and approved and ratified annually by the bank’s board of directors. The Program must include procedures for the following: Opening & closing Safekeeping cash and other valuables Identify possible criminals Preserve evidence (cameras, dye-packs) Employee training Periodic testing of security devices, including lighting, locks, and alarms.
Protecting Customer’s Information
Regulations that Require Annual Training Safeguarding Customer Information In response to consumer concerns about the security and privacy of financial information during a time when electronic banking was growing rapidly, Congress enacted the Gramm-Leach-Bliley Act in November of 1999. In part, this law required that financial institutions must ensure “the security and confidentiality of customer records, and information, protect against any anticipated threats or hazards to the security or integrity of such records, and protect against unauthorized access to or use of such records or information that would result in substantial harm or inconvenience to any customer. ” The law also required that bank regulators establish standards for depository institutions to develop systems and controls to implement the requirements of the law. The agencies issued guidelines in February of 2001. The guidelines require a written security program with internal controls, monitoring, and reporting to the board of directors. July 1, 2002 was the mandatory compliance date.
Regulations that Require Annual Training Safeguarding Customer Information (cont) Coverage 1. All depository institutions and their subsidiaries except for brokers, dealers, persons providing insurance, investment companies, and investment advisors 2. Customer information – All nonpublic personal information about a bank customer whether in paper or electronic form Requirements 1. Implement an information security program – Must write a comprehensive information security program – Must include administrative, technical, and physical safeguards – All parts of the program must be coordinated – Must be appropriate to the size and complexity of the bank
Regulations that Require Annual Training Safeguarding Customer Information (cont) Requirements (cont) – Must be designed to o Ensure the security and confidentiality of information o Protect against anticipated threats or hazards o Protect against unauthorized access to such information 2. Develop the program – Board of directors must oversee the development and approve the written program – Bank must assess risks before program is developed o Identify reasonably foreseeable internal and external threats o Assess the likelihood and potential damage of threats o Assess the sufficiency of policies, procedures, and systems to control the risks
Regulations that Require Annual Training Safeguarding Customer Information (cont) • Requirements (cont) – Bank must create a written program that will manage and control the risks o Design a program to control identified risks o Adopt all measures the bank considers to be appropriate, including § Access controls on customer information § Access restrictions at physical locations § Encryption of electronic customer information while in transit and in storage systems § Procedures designed to ensure that customer information system modifications comply with the security program § Dual control procedures § Segregation of duties § Employee background checks § Monitoring systems to detect actual and attempted attacks on information systems § Response programs that specify action to be taken when the bank suspects unauthorized access has occurred § Measures to protect against destruction and loss of information
Regulations that Require Annual Training Safeguarding Customer Information (cont) Requirements (cont) – Bank must train staff to implement the program – Bank must test key systems on a regular basis – Bank must oversee service provider relationships, including o Exercising due diligence when selecting service providers o Requiring service providers to implement appropriate measures to meet the program’s objectives o Monitoring service providers to confirm that they have satisfied their obligations – Bank must adjust the program as needed – Bank must report to the board of directors annually
Regulations that Require Annual Training Right to Financial Privacy The Right to Financial Privacy Act restricts the federal government’s access to a bank customer’s financial records and activities. This means that the bank may not routinely provide information or bank records unless the requesting government agency has net specific compliance and certification requirements. The Act generally provides that the bank meet one of the following requirements and obtain one of the following before releasing any customer information: – – – • The customer’s signed, written authorization An administrative subpoena or summons A judicial subpoena A search warrant A formal, written request from a government authority The federal agency requesting information must provide written certification of compliance with the Act, a coy of which is retained by the bank.
Regulations that Require Annual Training Right to Financial Privacy (cont) Under no circumstances is any customer information to be volunteered or provided (verbally, written, or electronically) without following the proper internal procedures. Unless approved by management, employees are also prohibited from using customer data for marketing or similar purposes outside the bank. The integrity of customer financial data must be protected as an asset of the bank.
Regulations that Require Annual Training Privacy of Consumer Financial Information Regulation P In the late 1990’s with the increasing popularity of the Internet and ecommerce, the protection of consumers’ financial information became an important issue in Congress. Consumer groups and others wanted individuals to have more control over how their personal information was used and to what parties it was given. In the Gramm-Leach-Bliley Act of 1999, Congress enacted restrictions on the way financial institutions disclose information on customers to third parties. The law also requires financial institutions to provide disclosures, both at the time of establishing the customer relationship and annually thereafter. In certain cases, a consumer can opt out of disclosures of his or her financial information. The federal banking agencies each issued identical regulations in May of 2000. Mandatory compliance with the new regulation began on July 1, 2001.
Regulation CC
Regulations that Require Annual Training Expedited Funds Availability Act Regulation CC The Expedited Funds Availability (EFA) Act was signed into law in 1987 as an attempt by Congress to legislate out of existence certain perceived abusive banking practices. The centerpiece of the law focused on two critical areas: – The practice of placing long holds on customers’ deposits – The many delays and inefficiencies found in the payment system The law is implemented by Federal Reserve’s Regulation CC, which provides for remedies for the above critical issues, along with coverage and operating rules, penalties for noncompliance, and mandatory training for appropriate bank personnel. Regulation CC covers all deposit accounts considered as having unlimited “transaction” capability, and establishes availability schedules, as provided in the EFA Act, under which depository institutions must make funds deposited into transaction accounts available for withdrawal.
Regulations that Require Annual Training Expedited Funds Availability Act (cont) Regulation CC The regulation also provides that depository institutions must disclose their funds availability policies to their customers**. In addition, Regulation CC establishes rules designed to speed the collection and return of checks and imposes a responsibility on banks to return unpaid checks expeditiously. The provisions of Regulation CC govern all checks, not just those collected through the Federal Reserve System. **Reference is made to the specific “Funds Availability Disclosure” provided to all new and prospective customers.
Internal Policies & Procedures
Internal Policies Included with your Employee Handbook, you were provided the following internal Board approved compliance policies for your review along with an Acknowledgement Form for each policy. Once you have reviewed the policies, please sign the Acknowledgement Form and return to the HR Department. Compliance Policies included in your Employee Handbook are: – – – – Bank Secrecy Act (BSA) Bank Security Program Customer Identification Program (CIP) Expedited Funds Availability (Regulation CC) Information Security Office of Foreign Asset Control (OFAC) Privacy of Consumer Financial Information (Regulation P) Other Compliance Policies are in the Operating Policy Manual located within each department &/or branch.
Almost Done!
Internet Based Training Program Overview The Internet Based Training Program was implemented to provide employees with a basic understanding of the laws and/or regulations. Courses are identified for employees by job function and required annual regulatory training. The Program was established to provide managers and/or supervisors with the capability to monitor the employee’s progress on a continual basis with the Compliance Department providing an annual review. The original Program was created for a twenty-four month period but in the future may be adjusted to a 12 month period. You are being provided a Training Curriculum Form that identifies the specific courses relative to your current job function. Courses will be adjusted if your current job function changes in the future.
Internet Based Training Program Additional Information – You can choose to either complete the entire course, including the Review or just take the Fast Track. It is highly recommended for you to complete the entire course, including the Review before taking the Comprehensive Test. – The system has an automatic bookmark so you can exit & enter a course without starting over. – The Comprehensive Test score requires 70% to receive a passing grade. Courses can be retaken at the employee and/or manager’s discretion. – Once the course is completed, you should print a copy of the course certificate and forward to the HR Department to place in your employee file. – You will have more system capabilities if you are a manager &/or supervisor. Please contact the Compliance department if you require additional systems instructions to assist you with monitoring your employee’s progress.
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