Banking Regulators Clarify Expectations Over AML Enforcement

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By Jeff Bater

Aug. 31 — The Treasury Department and other regulators clarified their expectations for U.S. lenders in the fight against money laundering with a fact sheet and a blog that tout the importance of correspondent banking and play down the prevalence of fines for deficiencies.

Treasury, the Federal Reserve, the Federal Deposit Insurance Corp., (FDIC) the National Credit Union Administration and the Office of the Comptroller of the Currency (OCC) released a fact sheet Aug. 30 to convey supervisory expectations on assessing risks posed by their business dealings with foreign institutions.

Those dealings are vital, as are compliance with requirements to combat money laundering and terror financing, according to the regulators.

Correspondent Banking

“The global financial system, trade flows, and economic development rely on correspondent banking relationships,” the fact sheet said.

An accompanying blog by three top-ranking Treasury officials said those relationships serve as “important arteries” within the global financial system. “By enabling money to flow both within and across economies, they improve livelihoods, bring more people into the financial system and foster global economic growth,” wrote Nathan Sheets, Treasury's undersecretary for international affairs; Adam Szubin, acting undersecretary for terrorism and financial intelligence; and Amias Gerety, acting assistant secretary for financial institutions.

They said an effective regime on AML and countering the financing of terrorism (CFT) rests on proportionate enforcement. “Importantly, this regime is not one of ‘zero tolerance,'” the Treasury officials wrote in the blog, which was posted on Treasury's website. “In fact, as the Fact Sheet notes, about 95 percent of AML/CFT and sanctions compliance deficiencies identified by U.S. authorities are corrected through cautionary letters or other guidance by the regulators to the institution’s management without the need for an enforcement action or penalty.”

De-risking by Banks

Regulators have been exploring “de-risking” practices by banks (45 BBD, 3/8/16). De-risking refers to instances in which a bank seeks to avoid perceived regulatory risk by indiscriminately terminating, restricting or denying services to broad classes of clients, without case-by-case analysis or consideration of mitigation options.

Comptroller of the Currency Thomas Curry, in remarks for a conference of the Institute of International Bankers in Washington last March, said decisions to terminate relationships can have regrettable consequences.

“Long-standing business relationships may be disrupted,” he said. “Transactions that would have taken place legally and transparently may be driven underground. Customers whose banking relationships are terminated and who cannot make alternate banking arrangements elsewhere may effectively be cut off from the regulated financial system altogether.”

Global Picture

The release of the fact sheet comes as global leaders prepare to assemble at a Group of 20 (G-20) summit Sept. 4-5 in China, and it follows remarks in July by Christine Lagarde, the managing director of the International Monetary Fund (IMF), for a speech at the New York Fed that addressed correspondent banking and de-risking.

Lagarde gave examples of nations at risk of being cut off from the global financial network, and said there is a need for action by global banks and the countries affected. “Regulators also have an important role to play,” she said. “They should continue their outreach and dialogue with global banks and affected jurisdictions to clarify — and consistently communicate — regulatory expectations.”

During an interview with Bloomberg Television, also in July, Lagarde said if the big banks keep withdrawing activities and correspondent banking relationships, leaving certain territories open to competition, it is a risk for the entire community.

“And what's more is that each and every territory, you talk about the Caribbean islands, you talk about Pacific islands, but you're also talking about Mexico, you're also talking about the Philippines, you're also talking about Colombia, which are under the threat of seeing some of those banks withdrawing activity and withdrawing altogether from those territories,” she said. “And that is just not conducive to activity, to growth, to jobs and to legitimate business.”

Due Diligence and Dispelling Myths

The fact sheet made clear that U.S. banks must comply with AML/CFT requirements set forth in the Bank Secrecy Act (BSA), as well as sanctions programs administered by Treasury's Office of Foreign Assets Control (OFAC). The Financial Crimes Enforcement Network (FinCEN), a Treasury bureau, administers the BSA in promotion of its mission to safeguard the U.S. financial system from illicit use. The federal banking agencies — the Fed, the OCC and the FDIC — conduct examinations of banks for compliance with the BSA and OFAC requirements to ensure the safety and soundness of the financial system.

Furthermore, the fact sheet dispels certain myths about supervisory expectations. For instance, it points out that under existing U.S. regulations, there is no general requirement for U.S. banks to conduct due diligence on a foreign bank's customers. Banks, in determining the appropriate level of due diligence necessary for a relationship with a foreign bank, should consider the extent to which information related to the foreign institution's markets and types of customers is necessary to assess the risks posed by the relationship and comply with U.S. economic sanctions, according to the fact sheet.

The banking agencies said their examination process, including the interaction between the examiners and the bank, is integral to ensuring compliance with the BSA and OFAC sanctions programs.

“These supervisory communications can spur remediation, and indeed, in the vast majority of instances, deficiencies identified during the examination process are resolved promptly after they are brought to the attention of a bank’s management through the issuance of confidential reports of examination and supervisory letters that contain specific language communicating supervisory findings to the institution,” the fact sheet said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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