Sunday, September 20, 2020

The Case of Foreign Banks and Heightened Scrutiny

Posted by OnCourse Staff March 24, 2017 2:35pm

Photo Credit: Kheng Ho Toh

By: David Lutz, CAMS, Senior Manager BSA/AML

There is what appears to be a trend happening in the foreign branch banking market that seems all too consistent. That trend is the influx of MRAs, MOUs, and Consent Orders being handed down by the federal regulators for having insufficient BSA/AML and OFAC compliance programs. It’s not much of a surprise seeing there have been various high-profile cases of banks facilitating and abetting money laundering and terrorist financing. These high-profile cases have a ripple effect on the rest of the foreign branch network, a by-product being greater regulatory scrutiny during the examination process.

Why are exams becoming more difficult for foreign institutions?

The concept of risk management (or the lack thereof in some cases) has a lot to do with why some foreign branches are experiencing difficult examinations, some resulting in serious violations and hefty fines. As we all know, BSA/AML and OFAC is an area that has been an extremely high focus during the examination process. This is because illicit funds from cross-border transactions often make their way into the U.S. financial sector one way or the other. Law enforcement often investigates the trail, which often leads to an institution or group of institutions where those funds passed through. If you’re one of those institutions acting as an intermediary, merely processing the transaction and sending it off to another institution by way of FED or SWIFT, there may be some difficult questions to face regarding why a flag wasn’t raised, or, at the very least, the validity of the transaction. Here is where we’ve seen many foreign institutions fall short in their attempts to interdict illicit funds seeking to make their way into the U.S. financial system, thus enabling criminals to further disguise the source and purpose of the transaction.

Do foreign branches possess sufficient knowledge of U.S. AML rules and regulations?

Often those institutions processing thousands of transactions a day without the requisite knowledge and/or resources (e.g., AML system technology, knowledge of red flags) are not asking or requesting information from the originating institution in the attempt to interdict and stop a transaction. One could imagine how dangerous this could be if local branches do not have the adequate level of resources and risk management tools necessary to monitor the activity. Requesting information is an essential component in putting two and two together. In essence, that’s how an institution could rightly justify the purpose of the transaction and ensure the parties involved in the transaction make sense.

Do domestic branches of foreign banks face pressure from the Head Office to process transactions?

The pressures from regulators have set a level of fear in the foreign branch community, some resulting in closing business altogether or terminating correspondent relationships. What impact does this have on the U.S. financial system? It limits international commerce for one thing. It has created an abundance of de-risking in order to mitigate further scrutiny, which also adversely impacts international commerce, as mentioned in my previous blog, “De-Risking of Foreign Correspondent Banks”.

We often hear from local branch personnel that Head Office personnel do not understand why a NY branch needs the level of resources to process such activity in comparison with its other international branches.  That comparison of cost can be an immense hurdle for the local NY branch to get budget approval for resources.  What we see is that there is only a budget shift when the branch receives an unfavorable exam report. The stricter the exam findings, the more there is the need to spend.  Yet many seem to operate in a vacuum banking on the last exam report as if it’s a good indicator of the next exam.  In essence, most branches therefore operate by outsourcing the risk management to the next regulatory exam team instead of taking ownership and making a realistic assessment of the current regulatory needs.

Risk Management: The Key to Success

Establishing an adequate control framework to question the validity of transactions entering the bank is an essential component to any bank’s success. This includes having a sufficient level of staffing, segregation of duties, technological resources, and a fundamental knowledge of U.S. BSA/AML requirements. There have been so many examples of foreign branches not knowing the expectations of the regulators and not asking enough questions about the parties involved in the transaction. Might such inquiries hold up the flow of funds? Of course. But this puts our management of risk to work in order to protect institutions and our country from accepting and processing funds that could have originated from human trafficking, drug trafficking, and terrorist financing. The United States is at the forefront of international commerce, but do institutions have the appropriate tools and resources to intercept and report potentially suspicious activity?  



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