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Bank Examinations Techniques
Part Two
James Wright
Office of Technical Assitance
U.S. Department of Treasury
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Examiners Role
Prevents banking system use by money launder
Assists law enforcement in building
a strong case
Not a law enforcement professional
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Banks Compliance Program
Purpose:
Monitor banks compliance with money
laundering laws
Benefits to examiners:
Help determine banks compliance
Benefits to bank:
Protects bank from fraud penalties, asset
forfeitures and criminal activities
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Compliance Program Elements
Senior management commitment
Compliance officer
Internal Audit
Internal controls
Independent testing
Training
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Senior Management
Commitment Program approved by the board
Informed of compliance efforts, audits,
deficiencies and corrections
Make compliance
Condition of employment
In the job description
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Internal Audit Program
Can be based on exam procedures
Includes testing of transactions
Assesses employees knowledge
Compares performance with procedures
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Compliance Officer
Appointed with:
Day to day responsibility
Broad knowledge of banking functions and
activities
Access to upper management
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Training
Must cover :All laws and regulations and bank procedures
Placement, layering, and integrationExamples
Must be:Ongoing and cover new schemes
Tailored to specific activities of financialinstitutions
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Personnel Training
For: Tellers, service representatives,
Lending officers, staff administering:
Private banking
International correspondent department,
Wire transfer,
Foreign exchange
Trade
Investment Trust
Credit card
Internet
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Bank Examination Approaches
Top down approach
Generally used in large banks
Risk oriented
Focus on policies and procedures
Evaluate risk management practices
Limited transaction testing performed
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Examination Approach
Transaction - based approach
Performance oriented
For smaller banks
Less comprehensive policies and programs
Focuses on testing of transaction records
Focuses on results of operations
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Know Your Customer
Examine for coverage of
Citizens accounts
Business accounts And monitoring
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Examine Banks Compliance Program For:
Written polices and procedures approved by
the board of directors
Internal Audit
Internal controls
Transaction testing
Compliance officer
Appropriate training
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High Risk Areas
Deposit taking
Sale of official checks and
negotiable instruments
Wire transfers
Loans
International
correspondent banking
Special use accounts
Private banking
Trust department Brokerage operations
Trade financing
Internet banking
Credit Cards
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Review Internal Audit
Does audit cover all risk areas?
Did audit include transaction testing?
Did audit uncover suspicious activity?
Did audit uncover violations?
Where corrective actions taken?
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Cash shipments
Analyze 3 months of cash shipments from
Central bank and corespondent banks
Large cash transactions
Examine records of large cash deposits From teller operations
Transaction Testing
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Examine an appropriate number of ctrs for a
period in time i.E..Months (appropriate for
bank size, activity)Determine correctness and timely filing,
consistency with type of business.
Look for suspicious activity
Examine Large Cash
Transactions Using Currency
Transaction Reports (ctrs)
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Look for Structuring Signs
Placed in concentration accounts
Slightly less than limit for reporting
Foreign address
Post office address
Request for holding statements
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Compare Transaction
With Other Reports Teller proof sheets
Demand deposit activity reports
Wire transfer log
Loans listed by collateral
exception reports
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Examine Wire
Transfers Using a sample of accounts based on dollar
amounts, high-risk or other characteristic;
review the wire transfer log for anappropriate time period. Follow-up with a
review of wire transfers, messages and
customer files and account statements, for athree month period or other appropriate
period of time.
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Wire transfer
Analyze wire transfers to determine whether
the amounts, frequency and countries of
origin/destination are consistent with thenature of the business or occupation of the
customer and be alert for any suspicious or
unusual activities.
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Suspicious Wire
Transfers
Examine wire transfer log, payment orders,
accounts and other information and
compare to the following lists of suspiciousactivities:
Wire transfer activity from high-risk countries
where the customer has no apparent businesspurpose or when the activity is inconsistent with a
customers business or activity
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Suspicious Wire Transfers
Periodic wire transfers from a personal
account to high-risk countries;
Large incoming wire transfers on behalf of
a foreign client with little or no explicit
reason;
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Suspicious Wire Transfers
Frequent or large dollar volume of wire
transfers to and from high risk countries;
Frequent wire transfers of large dollaramount
Funds transferred in and out of an account
on the same day or within a relatively shortperiod of time;
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Suspicious Wire Transfers
Wire transfer payments or receipts with noapparent links to legitimate contracts, goods
or services; Transfers routed through multiple foreign or
domestic banks.
Deposits of funds into several accounts,usually in amounts of less that a requiredreporting threshold.
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Suspicious wire transfers
Payment instructions to financial institutions to
wire funds abroad and instructions to expect an
incoming wire transfer of funds in equal amountsof dollars or other currency from other sources;
Regular deposits or withdrawals of large amounts
of cash using wire transfer to, from or through
countries that either are known sources ofnarcotics or whose money laundering laws are
ineffective;
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Suspicious Wire Transfers
Large volume of wire transfers from
persons or businesses that dont hold
accounts.
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Wire Transfer Controls
Determine the effectiveness of the banks
wire transfer controls for detecting and
preventing money laundering via wiretransfers.
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International
Correspondent Accounts Focus on:
The banks due diligence for
New accounts and periodic review
Wire transfers
Pouch activity
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International
Correspondent Accounts. Review files of selected correspondent
relationships with other banks
Focus on the correspondent banks duediligence and monitoring of new accounts
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International Correspondence
Accounts Determine to what extent the bank performs
the following due diligence Tasks:
Obtains information on bank ownership andmanagement
Obtains information on the nature, and volume
of transactions expected
Reviews financial statements
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International Correspondent
Accounts Evaluate credit worthiness
Determine the bank applicants primary line
of business
Verifies the banks license
Determines that the bank applicant has a
fixed, operating office in the licensing
jurisdiction
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International Correspondent
Account Evaluates the overall adequacy of banking
supervision in the jurisdiction of the
respondent bank including anti-moneylaundering laws and bank regulatory
procedures
Makes inquires to the correspondents localbranch bank
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International Correspondent
Accounts Makes inquires with bank rating agencies
Obtains bank references
Complete a customer profile
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International Correspondent
Accounts Determine if the bank applicant has
relationships with shell banks
Determine how the bank monitorsinternational correspondent accounts
Determine how often site visits are made
Form an opinion about the banks moneylaundering controls on correspondentaccounts
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Sale of Negotiable
Instruments For non customers, does bank require:
Address, social security number and date of
birth
Does the bank have a program for
capturing:
Multiple purchasesCash purchases
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Safe Custody or Deposit Boxes
Review bank policies:
Does management understand potential for
money laundering?Does bank have identification procedures for
non-account holders?
Do customers declare content of boxes forinsurance purposes?
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Safe Custodial or Deposit Boxes
Does bank recognize suspicious activities
such as:
Frequent customer visit prior to transmission offunds
Packages or sealed envelopes
Customer requests to be unattended orunobserved
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Lending Function
Does the bank have procedures covering
this function?
Review types of credit offered, private,international, commercial , retail.
Does the bank have a Know your
customer policy for this function?
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Lending Function
Examine banks policies
Does the bank set requirements for loans not
secured by real estate?
Examine collateral list for cash secured
loans
Has the bank established procedures forreporting suspicious activities in the lending
area?
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Review the banks internal reports which
could identify suspicious activities such as:
Unusual loans which are cash secured and
dont fit the business character
Lending Function Testing
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Lending Function
Review for:
Sudden change in loan demand over previous
quarter;Sudden change in collateral requirements,
repayment terms by wire; and
Surrender of cash.
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Lending Function
Select a sample of loans from:
High risk countries
High risk businesses
Examine originator or beneficiaries legitimate business
need
Determine what management knew or should have
known
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Lending Function
Answer the following questions:
Was the loan repaid unexpectedly?
Was the loan dormant while other accounts active?
Was the problem loan identified by the bank?
Was it included in the supervision report?
Was the loan inconsistent with the earnings capacity ofthe borrower?
Were there any penalties for early pay-off? Were other assets sold to make a reimbursement?
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Private Banking
Defined
No set definition but banks want to attract high net
worth individuals and their businesses
Why high risk?
Greater emphasis on privacy and confidentiality
Serves international customers as well as domestic
customers
Large amounts of money
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Private Banking
Asset management
trust and advice
Investmentmanagement account
Offshore facilities
Custodial services
Funds transfer
Lending
Checking
Over draft privileges Letter of credit,etc.
Bill paying services
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Private Banking Procedures
Review banks procedures for:
Acceptance and approval of new accounts,
Know your customer policies, verification of legal
status
Knowing where funds are derived
Knowing the expected type and level of cash flow
Examine a few accounts which have: Customers from high risk countries or businesses in
high risk countries
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Potentates
Does bank have procedures for monitoring potentates
accounts:
Individuals holding important public positions
Foreign heads of state, ministers, influential public
officials, judges and military commanders
Persons or companies clearly related to them
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Foreign Exchange
ProceduresInterview foreign exchange department staff to
determine their knowledge of money
laundering schemes
Examine identification requirements
Examine report of exchange
Look for unusually large exchanges
inconsistent with business
Determine adequacy of coverage
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Letters of Credit
Review files to determine if customers business
normally require letters of credit
Scrutinize the instrument being usedAre they standard?
Are they for less tangible activities such as
services?
Are documents reasonable?
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Letters of Credit
Scrutinize the instrument being used:
Are goods shipped in line with known business activity
of the customer?
Are instruments amended or extended frequently?
Does customer pass-up more favorable arrangements
remittance, transfer or foreign trade terms?
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Investments
Review investments of customers introduced by foreign
banks from high risk countries:
Is there buying and selling of securities with no discernable
purpose? Are securities transactions across a number of jurisdictions?
Are purchase trades settled in cash or checks?
Does client specify which broker dealers to use in foreign
countries?
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Investments
Review bearer securities:
Are certain securities held outside a recognized
custodial system?Is client the type that would make use of bearer
securities?
Are deliveries made in person?
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Insurance
Review a sample of insurance polices: Are policies and terms in keeping with the type of
business?
Are there track records of cancellations?
Are a number of these policies with same insurer?
Are there refunds by cash or transfer?
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Cards
Credit Cards and
Debit Cards
Loading up cards and
payments
Use of cards for
purchases
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Internet Banking
Does the bank require additional
identification from non face- to -face
customers? Look for suspicious signs such as:
Numerous accounts
Frequent wire transfers of large amounts
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Results of Exam
Write-up exam results
Determine any violations
Contact authorities if appropriate
Convey findings to bank management and
board of directors
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Non-Bank
Securities dealers,brokers
Insurance companies
Credit Unions
Savings institutions
Cooperatives and NGOs Exchanges
Money transmitters
Credit card companies
Leasing firms
Privatization agencies Factoring firms
Pawnshops
Casinos, lotteries & gamingrooms
Dealers in precious metalsand jewels
Accountants Auto dealers
Lawyers
Notaries
Artwork dealers
Antique dealers
Real estate sales
Pension funds
Investment advisors
Similarities and Differences in
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Similarities and Differences in
the Regulation of Non- bank
Entities Like banks, the key to good compliance is a
good compliance plan which consists of:
Compliance officer Internal audit
Internal controls
Transaction testingTraining
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Differences
Size
Schemes
Risk areas
Recommended