Emerging State Anti-Money Laundering Issues [As modeled by the state of New York]: Introduction

Posted on 07-28-2016 by
Tags: Industry Insights & Trends , Banking , LIT , sheshunoff

The below article is part 1 of a 4 part series. 

This Special Alert (available via LexisNexis® Sheshunoff) provides news and analysis of significant state laws that impact your Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. This discussion will not cover every nuance of your state laws. You should review your own state regulations and state banking examinations to determine your institution’s compliance with state law. In general, state banking examiners will look at your overall compliance with BSA rules, such as filing currency transaction reports (CTRs), suspicious activity reporting, and training. State examiners may also look at your federal BSA/AML examination report and follow up on any corrective action you may have promised to your federal regulator.

New York appears to be the first state to propose significant state rules to combat terrorism and money laundering and certainly the first to require compliance officers to certify to the state that their banks are in compliance with the law. However, other states may move to issue similar laws, since one of the recurring themes in BSA enforcement actions is that the programs fail because the BSA officer is not given sufficient authority and funds to comply with the law or is not training properly.

On December 16, 2015, the New York State Department of Financial Services (NYSDFS) published a previously announced proposed rule that could hold bank executives personally responsible for their institutions’ anti-money-laundering controls. Comments on the rule closed on January 31, 2016.

According to the Governor of New York, Andrew Cuomo, and the Superintendent of the NYSDFS, Benjamin Lawsky, New York State has been investigating state charter institutions vigorously over the past four years and found that many institutions had serious issues when it came to monitoring transactions, i.e., customer due diligence (CDD), as it related to the federal Bank Secrecy and anti-money laundering rules. According to the proposal, the NYSDFS has increasingly noted shortcomings in the transaction monitoring and filtering programs of certain institutions and determined that a lack of robust governance, oversight, and accountability at senior levels of those institutions has contributed to the shortcomings. The NYSDFS believes that other financial institutions may also have shortcomings in their programs for monitoring transactions for suspicious activities and in their watch list filtering programs for “real-time” stopping of transactions on the basis of watch lists, including Office of Foreign Assets Control (OFAC) or other sanctions lists, politically exposed persons (PEP) lists, and internal watch lists. (Note that most banks use a third-party vendor for OFAC and PEP reviews.)

The twist here is that the new law proposes to require senior compliance officers to attest to the adequacy and accuracy of their banks’ system for monitoring customer transactions. Chief executive officers (CEOs) and chief financial officers (CFOs) of banks subject to the Sarbanes-Oxley Act (SOX) already have to certify that their companies’ quarterly and annual filings are true and that they omit no material facts. New York officials say that they have modeled their new rule on this SOX requirement.

Section 302 (Corporate Responsibility for Financial Reports) of the Sarbanes-Oxley Act states that the CEO and CFO are directly responsible for the accuracy, documentation, and submission of all financial reports, as well as the internal control structure, to the Securities and Exchange Commission (SEC).

Following is an excerpt from that section of SOX:

The Commission (SEC) shall, by rule, require, for each company filing periodic reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934, that the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed or submitted under either such section of such Act that:

1. the signing officer has reviewed the report;

2. based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

3. based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;

The difference, of course, is that preparing financial statements is not the same as performing customer due diligence or transaction monitoring and filtering, and “accuracy” or “adequacy” may be in the eye of the beholder.

New York State is no stranger to BSA/AML enforcement actions. Described below are some of the actions in which the state was involved in 2015.

• Habib Bank Limited, Karachi, Pakistan and its New York Branch. A cease and desist order from the Federal Reserve Bank of New York based on a joint examination of the branch conducted by the Federal Reserve Bank of New York and the NYSDFS identified an inadequate BSA/AML compliance program. The bank was already under a written agreement with both regulators.

• Bank of Nova Scotia. A written agreement under a joint enforcement action of the Federal Reserve Bank of New York and the NYSDFS requires the bank to “address deficiencies relating to the Agency’s risk management and compliance with applicable federal and state laws, rules, and regulations relating to anti-money laundering compliance, including the Bank Secrecy Act . . . ; the rules and regulations issued thereunder by the U.S. Department of the Treasury . . . ; and the requirements of Regulation K of the Board of Governors to report suspicious activity and to maintain an adequate BSA/AML compliance program . . .

and the regulations issued by the Office of Foreign Assets Control .  .  . ; and the regulations of the NYSDFS.

• Credit Agricole. OFAC, the Federal Reserve Bank of New York, and the NYSDFS levied a total of $787.3 million and a cease and desist order related to multiple OFAC violations. The overall $787.3 million included $385 million to the NYSDFS, $90.3 million to the Federal Reserve, $156 million to the Manhattan District Attorney’s Office, and $156 million to the U.S. Attorney’s Office for the District of Columbia. The OFAC penalty is deemed satisfied by the amounts Crédit Agricole is paying to the other agencies.

Read on, download the full PDF, Emerging State Anti-Money Laundering Issues [As modeled by the state of New York]

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