Correspondent Banking Staple of Financial System or a Shadow? Moderator Guillermo Horta Managing Director / Latin America, Global AML & Economic Sanctions, Bank of America Speakers Darren Donovan Principal, KPMG Gabriel Romo Navarrete Director General for Prevention of Transactions with Resources from Illicit Proceeds, Comision Nacional Bancaria y de Valores Mexico Natasha Taft NY Chief Compliance Officer, Bank Hapoalim PK Prakash International Banking/Group BSA Manager, Wells Fargo Rick MacNamara Director, Anti Money Laundering, Federal Reserve Bank of Atlanta, Miami Branch February 13, 2013

Correspondent Banking Staple of Financial System or a Shadow? GABRIEL ROMO NAVARRETE GENERAL DIRECTOR OF PREVENTION OF TRANSACTIONS WITH ILLICIT RESOURCES NATIONAL BANKING AND SECURITIES COMMISSION

CORRESPONDENT BANKING

New responsibilities for CNBV on AML/CFT Supervision Law Reforms AUGUST 3rd 2011 3,694

NON BANK BANKS SOFOMES ENR

1,570

CURRENCY EXCHANGE CENTERS

Subject to AML/CFT provisions by December 2011

Subject to CNBV´s supervision by April 2012 MONEY 61 TRANSMITTERS

3

CORRESPONDENT BANKING

CHALLENGES AML/CFT CULTURE

ISSUANCE OF BEST PRACTICES

BIMONTHLY MEETINGS WITH ASSOCIATIONS

• AML/CFT Manual • AML/CFT Audit

VIDEOTUTORIALS

ROADTRIPS

INTERNET WEBPAGE

AML/CFT PROCESSES AUTOMATIZATION

• AML/CFT Manual • Compliance Officer • Communications Control Committee • Transactions Reports

4

and

CORRESPONDENT BANKING

INSPECTION VISITS

4

SOFOMES ENR

2

CURRENCY EXCHANGE CENTERS

2

MONEY TRANSMITTERS

OPPORTUNITIES FOR IMPROVEMENT

• • • •

AML/CFT Manual Automated systems Agents & related third parties Training

5

International Correspondent Banking 6

R I C K M AC N A M A R A D I R EC TO R , A M L R I S K S U P E RV I S I O N F E D E R A L R ES E RV E BA N K O F AT L A N TA

International Correspondent Banking Risks 7

Potential concerns about the foreign financial institution (FFI)   



Corruption/insider dealing Improper regulatory oversight Unsatisfactory management, including poor risk management practices Weak or nonexistent AML/CFT compliance program (lax internal controls and processes, poor due diligence)

International Correspondent Banking Risks 8

Inconsistent or inadequate customer due diligence (CDD) standards - common CDD deficiencies  Due diligence processes not commensurate with FI risk

profile 

Market footprint, strategic profile, customer base, product offering, asset size, jurisdiction, AML/CFT Regulatory framework

 Improper or lack of expected use profile 

Average balances; amounts, volume and types of expected transactions; countries or other jurisdictions for frequent transactions

 Limited identification of beneficial owner(s)

International Supervisory Challenges 9

 Weak AML/CTF legal framework, e.g., limited powers

for financial intelligence units or supervisors  Weak supervision and regulatory oversight (particularly

in AML/CFT area); lack of resources or authority  Bank Secrecy/Privacy laws that impede or restrict

information exchange, e.g., cross border transaction information

International Correspondent Banking Risks 10

 Structuring Transactions to Avoid Reporting  Nested Activity– high risk financial intermediaries

gaining access to U.S. Financial System  Illegal proceeds converted to monetary instruments  High Risk (PEPS, NGOs)  Potential violations of OFAC and other global sanctions

Risk Mitigants 11

 Written agreements  Defined standards for client acceptance  Establish limits based on FI profile– expected

activity asset size  branch network  footprint  market segment 

Risk Mitigants 12

 Monitor activity– automated process and/or manual sampling

methodology  Validate actual activity is consistent with expected activity/customer profile  Assess respondent’s AML program and controls        

Customer acceptance Daily/monthly transaction limits Account activity monitoring suspicious activity monitoring program Credit limits and controls Endorsement standards Secure scanning equipment Global sanctions monitoring

Wolfsberg Group: AML Principles for Correspondent Banking 13

 Due Diligence for a Correspondent Bank covers: Domicile/Jurisdiction (including parent company)  Ownership and Management Structure  Business Profile and Customer Base  Product Offering  Regulatory History (enforcement/criminal sanctions)  Quality of AML/CFT Program  No direct or indirect business with shell banks  Site visits 

 Central Banks and Supranational (multilateral)

Organizations are exempt

Wolfsberg Group: AML Principles for Correspondent Banking 14

Enhanced Due Diligence for higher risk FIs  Ownership and management – background,

reputation; beneficial owners

 Identification of PEPs - role/influence  AML Program quality  Downstream correspondent activity – controls, EDD 

Potential for nested activity

Due Diligence Section 312 of USA PATRIOT Act 15

Banks required to establish a due diligence program for each correspondent account to:   

Determine need for enhanced due diligence Assess the level money laundering risk Apply appropriate risk-based procedures and controls

Enhanced Due Diligence 16

Enhanced due diligence is required for correspondent bank accounts of foreign banks operating under:   

An offshore banking license A license issued by a jurisdiction determined by the FATF as having strategic deficiencies A license issued by a foreign country designated as warranting Special Measures (Section 311)

Enhanced Due Diligence 17

If any accounts warrant EDD in accordance with Section 312, the bank must:  Ascertain

the identity of each owner of non-publiclytraded foreign bank, including extent of ownership  Conduct enhanced scrutiny of such accounts Review AML program  Monitor account activity  Identify payable through accounts and beneficial owners 

 Ascertain

whether such bank provides correspondent accounts to other foreign banks  Identify

them and assess and mitigate risks

Examination Considerations 18

Policies, Procedures, and Processes  Prohibit dealings with foreign shell banks  Identify foreign correspondent accounts  Review quality of certifications  Designated AML Officer  SAR filing considerations  Internal controls and ongoing training  Independent testing of the foreign correspondent AML program

Examination Considerations 19

Effective transaction testing  

Review account opening and due diligence processes Sample of accounts Review agreements  Account activity from statements or other related reports  Due diligence documentation 



Account monitoring reports and investigations

QUESTIONS?

20

Key Themes for 2013 .  Managing correspondent relationships under Iran Sanctions and U.S. regulatory requirements (e.g., NDAA)  Challenges identifying beneficial ownership and FATF’s expectations  Increasing expectations of US regulators and impact of recent, very significant enforcement actions  Managing risk of correspondent relationships through change (e.g., FATF assessments, specific country issues, regulatory enforcement actions)  Foreign Corrupt Practices Act in correspondent relationships  FATCA – current expectations and challenges of implementation  Enhanced Due Diligence – for foreign correspondents. Should “boots on the grounds” background investigations be required? Is it necessary to fully understand downstream customers?  PEPs in foreign correspondent bank relationships  Relationship Memos – documenting risk of correspondent relationship 

Offering high risk products



What makes a particular correspondent high risk

Correspondent Banking

Natasha Taft Chief Compliance Officer NY Branches Bank Hapoalim February 13, 2013

Highlights of Risks • • • • •

Jurisdictions and AML Controls Trends in Geographical Risks Volumes and Velocity Traditional Money Laundering and OFAC Risks Innovation and Technology: New Risks

Increased Scrutiny • • • •

Enhanced Due Diligence Considerations On-Going Due Diligence Requirements Risk Assessment of Your Correspondents Defining Robust Monitoring Program

Monitoring Challenges • • • •

Identifying Transaction Counterparties Getting Answers from Your Correspondents Building a Full Transaction Picture Obtaining Supporting Documentation

Future Outlook • • • •

Correspondent Banking - Continues Growth Increasing Cost of Compliance Intensified Competition between Banks Impact of Non-Traditional Banking

Correspondent Banking Darren Donovan. Principal KPMG

Correspondent Banking Questions Moderator Guillermo Horta Managing Director / Latin America, Global AML & Economic Sanctions, Bank of America Speakers Darren Donovan Principal, KPMG Gabriel Romo Navarrete Director General for Prevention of Transactions with Resources from Illicit Proceeds, Comision Nacional Bancaria y de Valores Mexico Natasha Taft NY Chief Compliance Officer, Bank Hapoalim PK Prakash International Banking/Group BSA Manager, Wells Fargo Rick MacNamara Director, Anti Money Laundering, Federal Reserve Bank of Atlanta, Miami Branch February 13, 2013