Inspiring Adaptability,

Flexibility and Growth

AML/BSA Update Catherine Livingston, Director

FIS Regulatory Advisory Services

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Agenda

• Risks and Identification

• AML/BSA Timeline

• Compliance Knowledge Base

• Industry Updates

Inspiring Adaptability,

Flexibility and Growth

Risks and Identification

360 Degree System Requirement

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COMPLIANCE IDENTIFICATION

RISK ASSESSMENT

POLICIES & PROCEDURES

TRAINING

MONITORING

AUDIT

REPORTING

REGULATORY REQUIREMENT

Compliance Management System (CMS)

Increased Regulatory Pressure

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• Financial Action Task Force (FATF) recommendations (40+9)

– Scanning for domestic PEPs

– Beneficial owners

• NACHA requirements

– Scanning and reporting requirements around IAT

– Potential scanning and reporting on ACH

• Increase KYC scrutiny

– Senior foreign political officials and domestic PEPs

– Fraudsters, financially exposed persons and insurance fraudsters

– Corrupt foreign practices

Analyst Perspective

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• “Violations of sanctions laws have, to date, resulted in the largest regulatory fines. Our firms’ clients, irrespective of where they are headquartered, are genuinely nervous of the U.S. regulators and often refer to sanctions compliance as a ‘nuclear’ area – an area that could bring the bank down. Unlike AML, sanctions compliance is a strict liability environment, where processing one payment in violation of the sanctions laws has the potential to lead to serious consequences.” www.needtosource

• There were 21 settlements in 2011 totaling over $91 million. http://www.treasury.gov/resource-center/sanctions/CivPen/Pages/civpen-index2.aspx

Inspiring Adaptability,

Flexibility and Growth

AML/BSA Timeline

AML/BSA and Related Changes - Timeline

• Effective date March 1, 2011

– BSA renumbered to 31 CFR 1020 et seq.

• Effective date July 29, 2011

– MSB definition changes for pre-paid access

• Effective date October 11, 2011

– Comprehensive Iran Sanctions, Accountability and Divestment Act

• Effective April 16, 2012 and August 13, 2012

– AML/BSA Program for non-bank RMLOs

• Effective date July 1, 2012

– Mandatory electronic filing of almost all FinCEN BSA forms

AML/BSA and Related Changes - Timeline

• Effective date January 1, 2013

– Regulation remittance transfer rules

• Effective date March 31, 2013

– New specifications for electronic batch filing of CTRs and SARs

• Effective date to be determined

– Addition of prepaid cards to reporting of international transport of currency and monetary instruments (Proposed)

Inspiring Adaptability,

Flexibility and Growth

Compliance Knowledge Base

KYC/CDD Compliance

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• In the U.S., KYC is typically a policy and process implemented to conform to a customer identification program (CIP) mandated under the Bank Secrecy Act and USA PATRIOT Act.

• KYC policies are becoming increasingly important globally to prevent identify theft, financial fraud, money laundering and terrorist financing.

• KYC controls typically include:

– Collection and analysis of basic identity information (CIP)

– Name matching against lists of known parties, such as politically exposed persons (PEP), fraud, financially exposed persons (FEP), etc.

– Determination of the customer’s risk in terms of propensity to commit money laundering or identity theft

– Creation of an expectation of a customer’s transactional behavior

– Monitoring of a customer’s transactions against their expected behavior and recorded profile as well as that of the customer’s peers

Bank Secrecy Act– High Risk Customers • 2010 BSA-AML Examination Manual - EXPANDED EXAMINATION OVERVIEW AND

PROCEDURES FOR PERSONS AND ENTITIES

– Non-Resident Aliens (NRAs) and Foreign Individuals

– Politically Exposed Persons (PEPs)

• Domestic PEPs

– Added by FATF in February 2012

– Consular and embassy accounts

– Non-bank financial institutions (NBFIs)

– Professional service providers

– Non-governmental organizations (NGOs)

– Business entities (especially IBCs, PICs and OFCs)

– Cash intensive businesses

– .

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BSA – High Risk Customers

• Other factors creating high risk scores

– Natural persons residing in a HIFCA/HIDTA and employed in a higher risk occupation.

– Individuals engaged in high volume cash or wires.

– Individuals or entities subsequently engaged in activity inconsistent to their profile

– Customers identified as the subject of a 314a review or 311 sanctions

– Customers who were the subject of a subpoena

– Customers who are the subject of a SAR Filing

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Compliance Landscape

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• “With all the focus on senior ‘foreign’ political figures, it leaves open the question of whether PEPs should include domestic persons as well. The Financial Action Task Force (‘FATF’) recently issued a consultation paper that recommended including domestic PEPs into the scope of what financial

institutions should consider.” SAR Activity Review — Trends, Tips & Issues, 2011, p.59.

Retrieved from http://www.fincen.gov/news_room/rp/files/sar_tti_19.pdf

• “Of those financial institutions that have adopted a risk-based approach to KYC, 96 percent use PEP status as a risk factor (up from 81 percent in 2007).” KPMG (2011). Global anti-money laundering survey 2011. Retrieved from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Anti-money-laundering.pdf

Compliance Landscape

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• “Retail Banking: PEP accounts are not limited to large or internationally focused banks. A PEP can open an account at any bank, regardless of its size or location, and may utilize any of its products and services. Accordingly, financial institutions should have risk-based procedures for identifying PEP accounts and assessing the degree of risk involved, which will vary.”

SAR Activity Review — Trends, Tips & Issues, 2011, p.36.

Retrieved from http://www.fincen.gov/news_room/rp/files/sar_tti_19.pdf

• “Of those financial institutions that have adopted a risk-based approach to KYC, 96 percent use

PEP status as a risk factor (up from 81 percent in 2007).” KPMG (2011). Global anti-money laundering survey 2011. Retrieved from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Anti-money-laundering.pdf

SAR Activity Review — Trends, Tips & Issues, 2011, p.7. Retrieved from http://www.fincen.gov/news_room/rp/files/sar_tti_19.pdf

Emerging Considerations

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• Mobile banking

– Micro-transactions

– High volumes

– Person-to-person transactions

• Identifying customer with the highest potential of risk

– Identifying PEPs

– Identifying fraudsters

– Identifying financially exposed persons

– Identifying insurance fraudsters

Inspiring Adaptability,

Flexibility and Growth

Industry Updates

BSA E-Filing and New Forms

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• Mandatory electronic filing July 1, 2012 for CTRs, SARs, other BSA Forms

– Exceptions for CMIR and FinCEN Form 8300

– FBAR Forms E-Filing delayed until June 30, 2013

• Institutions may apply for Temporary Hardship Exemption

– http://www.fincen.gov/whatsnew/html/20120221.html

• New CTR (FinCEN Report 112) and SAR (FinCEN Report 111) mandatory utilization date of March 31, 2013 http://www.fincen.gov/whatsnew/pdf/20111220.pdf

• Updated E-Filer System’s User Test System for test submissions of batch and computer-to-computer filings of the new forms

– Contact Your IT Dept. gurus and send them to this link: http://www.fincen.gov/news_room/nr/html/20120217.html

Suspicious Activity Reporting – Mortgage Fraud

• July 2002 – June 2008, 180,000 SARs filed citing mortgage fraud

• 2010 – 70,472 MLF-related SARs

• 2011 - 92,028 MLF SARs – 31% increase over 2010

• Loan modification scams and foreclosure rescue scams

– FinCEN Advisory FIN-2009-A001

• Red flags indicating possible loan modification scam or foreclosure rescue scam

• Home Equity Conversion Mortgage Fraud Schemes

– AKA reverse mortgage fraud

– FinCEN Advisory FIN-2010-A005

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Residential Mortgage Loan Originators

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• RMLO – “person” who accepts a residential mortgage loan application or that offers or negotiates terms of a residential mortgage loan

– Purposely broader than that in the SAFE Act

• Requirements

– Develop and implement a written AML Program

• Provides for the four pillars

– Filing of Suspicious Activity Reports

• RMLOs excludes any GSE regulated by the FHFA

• Dates

– Effective April 16, 2012

– Mandatory compliance August 13, 2012

Inspiring Adaptability,

Flexibility and Growth

Catherine Livingston, FIS

Director, Regulatory Advisory Services

catherine.livingston@fisglobal.com

Thank You