HIGH-RISK: FOREIGN CORRESPONDENT BANKING

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HIGH-RISK FOREIGN CORRESPONDENT BANKING
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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???

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DEFINITION

• Accounts Maintained On Banks Behalf
• Between Domestic Banks
• Between Domestic Banks and Foreign Banks

• Correspondent vs. Respondent Bank

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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

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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

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MONEY LAUNDERING VULNERABILITIES

• Lax Due Diligence
• Nested Correspondents
• Correspondent Banker or Relationship Manager
• Bank Secrecy Laws
• Weak AML Laws
• Cross Border Difficulties

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HIGH RISK PRODUCTS AND SERVICES

• Funds Transfer
• Pouch Activity
• Cash Letter
• Payable Through Accounts

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HIGH RISK PRODUCTS AND SERVICES FUNDS TRANSFER

• Key Activity
• Failure to Monitor
• Manual Reviews

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HIGH RISK PRODUCTS AND SERVICES POUCH ACTIVITY

• Common Carrier
• Currency
• Monetary Instruments
• Documents
• Financial Institution
• Individual

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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

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HIGH RISK PRODUCTS AND SERVICES CASH LETTER

• High Volume
• Failure to Monitor
• Manual Reviews

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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

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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

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DUE DILIGENCE

• Noteworthy Due Diligence Failures
• Nested respondent banks
• Non-credit relationships

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ENHANCED DUE DILIGENCE

• Factors to Consider
• Purpose
• Location
• Bank license
• AML programs
• Regulation and supervision

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ENHANCED DUE DILIGENCE

• Risk Management
• Perceived risk
• Availability to third parties
• Compliance program
• SAR detection and reporting
• Monitoring

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BANK LICENSES

• Shell Banks
• Offshore Banks
• Banks in Non-Cooperative Jurisdictions

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NCCTs

• Cook Islands
• Philippines
• Nauru
• Egypt
• Guatemala

• Indonesia
• Myanmar
• Nigeria
• Ukraine

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EXAMINER CONSIDERATIONS Risk Management v.
Compliance

• 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

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EXAMINATIONS

• Pre-Examination
• FDL/Officers Questionnaire Response
• List of Due To/Due From Accounts
• Audits
• Risk Assessments
• Strategic Plans
• Exam Scope

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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

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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

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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

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EXAMINATIONS

• Transaction Testing
• Sample of accounts
• Review agreements
• Review account opening and due diligence
• Account activity from statements

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EXAMINATION PROCEDURES

• USA PATRIOT Act 313/319
• Prohibits Shell Banks
• Recordkeeping
• SR 03-17 Exam Procedures

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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

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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)?

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QUESTIONS

• When reviewing correspondent bank relationships
  must the file contain a copy of the banking
  license from the licensing authority?