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HIGH-RISK: FOREIGN CORRESPONDENT BANKING 1/2004 Anti-Money Laundering 1 HIGH-RISK: FOREIGN CORRESPONDENT BANKING 1/2004 Anti-Money Laundering 1

OBJECTIVES • • • Define Foreign Correspondent Banking Understand Potential and Unique Issues Recognize 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 2

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

POTENTIAL AND UNIQUE ISSUES • Legitimate Business Purposes – International trade and investment – 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 4

POTENTIAL AND UNIQUE ISSUES • Non-Legitimate Purposes – Conduit For dirty money – Gateway 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 5

MONEY LAUNDERING VULNERABILITIES • Lax Due Diligence • Nested Correspondents • Correspondent Banker or 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 6

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

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

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

HIGH RISK PRODUCTS AND SERVICES: POUCH ACTIVITY • Red Flags: – Same or consecutive 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 10

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

HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH ACCOUNTS • US Bank Check-Writing to Foreign 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 12

HIGH RISK PRODUCTS AND SERVICES: PAYABLE THROUGH ACCOUNTS • Traditional Foreign Correspondent Bank Account 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 13

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

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

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

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

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

EXAMINER CONSIDERATIONS: Risk Management v. Compliance Risk Management: To assess and protect against undue EXAMINER CONSIDERATIONS: Risk Management v. Compliance Risk Management: To assess and protect against undue risk exposure. Includes • Oversight • Policies/Procedures • Internal Controls • MIS 1/2004 Compliance: To conduct business according to applicable laws and regulations. • Technical aspects • Potential fines Anti-Money Laundering 19

EXAMINATIONS Pre-Examination • FDL/Officers’ Questionnaire Response – List of Due To/Due From Accounts – 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 20

EXAMINATION PROCEDURES On-Site Examination • Risk Focused • Decision Factors – Level of business 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 21

EXAMINATION PROCEDURES • General: Review overall approach to correspondent banking business line (risk management 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 22

EXAMINATION PROCEDURES GENERAL: Review overall approach to correspondent banking business line (risk management approach) 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 23

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

EXAMINATION PROCEDURES USA PATRIOT Act: 313/319 – Prohibits Shell Banks – Recordkeeping • SR EXAMINATION PROCEDURES USA PATRIOT Act: 313/319 – Prohibits Shell Banks – Recordkeeping • SR 03 -17 Exam Procedures 1/2004 Anti-Money Laundering 25

EXAMINATION PROCEDURES USA PATRIOT Act: 312 – Special Due Diligence for Correspondent Accounts and 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 26

QUESTIONS • What is the focus for 2004? • Will work programs be developed 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 27

QUESTIONS • When reviewing correspondent bank relationships must the file contain a copy of 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 28