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HIGH-RISK: FOREIGN CORRESPONDENT BANKING

HIGH-RISK: FOREIGN CORRESPONDENT BANKING. 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

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HIGH-RISK: FOREIGN CORRESPONDENT BANKING

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  1. HIGH-RISK: FOREIGN CORRESPONDENT BANKING

  2. 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??? Anti-Money Laundering

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

  4. 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 Anti-Money Laundering

  5. 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 Anti-Money Laundering

  6. MONEY LAUNDERING VULNERABILITIES • Lax Due Diligence • Nested Correspondents • Correspondent Banker or Relationship Manager • Bank Secrecy Laws • Weak AML Laws • Cross Border Difficulties Anti-Money Laundering

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

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

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

  10. 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 Anti-Money Laundering

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

  12. 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 Anti-Money Laundering

  13. 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 Anti-Money Laundering

  14. DUE DILIGENCE • Noteworthy Due Diligence Failures • Nested respondent banks • Non-credit relationships Anti-Money Laundering

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

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

  17. BANK LICENSES • Shell Banks • Offshore Banks • Banks in Non-Cooperative Jurisdictions Anti-Money Laundering

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

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

  20. EXAMINATIONS Pre-Examination • FDL/Officers’ Questionnaire Response • List of Due To/Due From Accounts • Audits • Risk Assessments • Strategic Plans • Exam Scope Anti-Money Laundering

  21. 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 Anti-Money Laundering

  22. 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 Anti-Money Laundering

  23. 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 Anti-Money Laundering

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

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

  26. 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” Anti-Money Laundering

  27. 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)? Anti-Money Laundering

  28. QUESTIONS • When reviewing correspondent bank relationships must the file contain a copy of the “banking license from the licensing authority”? Anti-Money Laundering

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