Compliance: Anti-Money Laundering Regs Remain

More audits, trade finance diligence ahead

Bank Technology News | October 2007
By Glen Fest

Banks hoping for some deregulatory AML/BSA relief apparently found few traces of U.S. Treasury Secretary Hank Paulson's magic dust in the updated FFIEC examination manual.

After the issuance of the third edition of the examiners' how-to for following the edicts of the Patriot Act and Bank Secrecy Act, past critics of the guidance still found it wanting in terms of specifics about how and for who institutions should perform "enhanced" due diligence. "I think, unfortunately, the final rules with respect to enhanced due diligence leave a lot to be desired," laments Al Avila, a Florida attorney and former general counsel with the Florida International Bankers Association (FIBA). "It doesn't really give as much guidance as one would hope in terms of the types of activities, or the types of actions, that a bank can take."

Instead, the FFIEC guidelines instill a few more auditing check-offs that might have set off groans in compliance offices in banks nationwide, where institutions spent $147 million on new compliance IT systems last year. One of the key additions to the manual, according to New York-based AML/BSA consultant Ellen Zimiles, was a new standard for judging the validity of trade finance letters of credit. "They really want financial institutions to understand their trade finance transactions, and what, in fact, is happening," says Zimiles, a former federal prosecutor of anti-money laundering cases and now CEO of Daylight Forensic & Advisory. Banks basically must now be responsible for understanding the current market value of any product they finance. "It could be antiques, rugs, anything ... . It's not that easy to figure out if something fishy is going on," says Zimiles.

"You have to understand the products that are involved; what is the financing for; and is the amount involved reasonable given what the product is. The bank doesn't always know that," she adds.

Additional layers of independent compliance risk auditing are another potential sore spot, and Zimiles also sees the regulatory agencies looking for more information on stored-value cards.

What makes banks fret about the guidance are not only the expenses of meeting those compliance guidelines, but also the cost of failing to do so. The feds hit Union Bank of California last month with a $31.6 million fine for failing to adequately monitor suspicious activity on wire transfers from Mexican money services businesses (the casas de cambrios). The 2007 examination manual arrives in the aftermath of a record $65 million fine imposed this summer on the international banking unit of American Express. AMEX last month sold the business to UK-based Standard Chartered, a move analysts attributed to the regulatory headaches involved in U.S. AML compliance.

FIBA has been a vocal proponent of more guidance in the exam process since 2005. It's easy to understand its interest when 400 members line up for the organization's new AML certification program, or when an AML prevention conference last February drew 1,200 attendees-all from outside the U.S., says FIBA executive director Pat Roth.

Avila says FIBA institutions are frustrated that the updated rules on Section 312 compliance (covering correspondent banking) have only three specific bank relationships outlined: international "limited license" banks (in the Cayman Islands, Bahamas, etc.); countries on the U.S. terrorism/AML blacklist; and banks in designated "special measures" nations under watch by the U.S. Treasury. "The problem is, most bankers will tell you that's not an exhaustive list," Avila says. "If you're dealing with a bank from almost any other place in Latin America or Central America that's not within those three categories...most examiners will tell you have to treat those with an enhanced due diligence [anyway]."

Many of FIBA's member institutions have dropped or curtailed correspondent banking and trade finance operations rather than risk an ominous cease and desist letter. Avila says losing that business hurts U.S. banks. It also defeats the purpose of 312 by prompting foreign banks shut out of correspondent relationships to funnel money into nested accounts that roll in through U.S. branches of international banks. While legitimate, Avila says, "if you've got that activity buried inside an account at another bank, it makes it more difficult to watch it."

One aspect of the guidance that did offer some clarification involved the "politically exposed persons" category. According to Linda Wolosz, a senior officer with compliance software firm QUMAS, new rules allow banks to take a deeper look. "Just saying if someone is on a PEP list, they are automatically high risk - well, that's not necessarily so," says Wolosz.

A global KPMG survey found compliance costs shot up 43 percent over three years, with a 28 percent hike expected through 2008. Paulson made waves this year promoting his idea of instituting risk- or "principles"-based regulation for lower-cost AML compliance, but ironically, a PriceWaterhouseCoopers study on the British experiment with its risk-based guidelines through the Financial Services Authority found 82 percent of UK institutions had no cost benefits. (c) 2007 Bank Technology News and SourceMedia, Inc. All Rights Reserved. http://www.banktechnews.com http://www.sourcemedia.com