ABA BANKING LAW COMMITTEETrust and Investment Services Subcommittee:Anti-Money Laundering Developments in the Trust Area Janis PentonJonathan A. WrightUnion Bank of California San Francisco August 11, 20007
AGENDA BSA/AML Refresher Special Considerations for the Trust Department Special Considerations for Affiliated Broker/Dealers and Investment Advisors Practical Issues Q & A Session
Requirements for BSA/AML Compliance Programs • Four elements: • Compliance officer • Written policies, procedures and internal controls to comply with the BSA and to prevent and detect money laundering and terrorist financing • Training of appropriate personnel • Independent testing (audit) • Risk-Based Approach • Within the Bank, business lines • Types of clients • Geographic risk
Regulatory Requirements • Bank Secrecy Act, as amended by the USA PATRIOT Act • Purpose of the BSA: • Provides authority to the Secretary of the Treasury to require reporting, recordkeeping and compliance program measures useful in criminal, tax and regulatory investigations and prosecutions and to fight terrorism. • What is a financial institution? • Traditionally and currently: Banks, securities broker-dealers, MSBs, casinos (including Indian casinos and card clubs) • Since the USA PATRIOT Act: Futures commission merchants, mutual funds, jewelry and precious metal dealers, and soon, insurance companies, hedge funds, loan and finance companies, and potentially others • Penalties: • Separate and stringent civil and criminal penalties and the possibility of regulatory enforcement actions
BSA Requirements • Currency Transaction Reporting and Structuring • Currency Transaction Reports – CTRs are required for transactions in currency greater than $10,000 (U.S. or foreign) by, through or to the bank, by or on behalf of the same person on the same day. • Structuring – There is a prohibition on structuring transactions to evade the CTR or other BSA reporting and some recordkeeping requirements. Structuring means breaking down transactions in smaller amounts and conducting transactions at one or more financial institutions on one or more days. • Note: Assistingin structuring is a crime and a regulatory violation. Example: U.S. Trust • Related requirement -- $3,000 identification requirement for cash purchases of monetary instruments (money orders, travelers checks, cashier’s checks, and bank drafts). • If you know, suspect or have reason to suspect that a client is structuring or is engaging in currency transactions in amounts not usual for the client or if the client is depositing or purchasing large amounts of monetary instruments, you must alert the unit responsible for filing a SAR.
Customer Identification Program (CIP) • FinCEN amended the BSA regulations to require banks to include CIPs as part of their AML Programs effective October 1, 2003. • CIP only is a building block for due diligence and enhanced due diligence and should be incorporated in the trust BSA/AML policy. • CIP requires banks to obtain and maintain certain basic information about customers before opening an account and to verify customers’ identification at account opening or within a short time thereafter through documentary (viewing reliable, current government-issued identification, driver’s licenses or passports) or non-documentary means (credit report, web page verifying incorporation, etc.) • The information that must be obtained prior to account opening: • Name • Street address • Date of birth (individuals) • Taxpayer identification number (U.S. persons) or passport or other government identity number (for non-U.S. persons) • All CIP does is tell you that the customer before you is who the customer says the customer is, not that the customer is reputable or has a legal source of funds. • Note:Failure to obtain every element of the information and verify the customer’s identify is a clear regulatory violation. No exceptions.
Enhanced Due Diligence Requirements • Section 312 –Due Diligence and Enhanced Due Diligence for Private Banking Accounts of Non- U.S. Persons(Good guidance for trust department as well) • Due diligence for foreign private banking clients – Effective July 23, 2002, banks are required to have due diligence policies, procedures and internal controls for private banking accounts “requested or maintained by or on behalf of” non-U.S. persons to ensure that reasonable steps are taken to identify the nominal and beneficial owners and sources of funds as needed to guard against money laundering and to report suspicious activity. • Enhanced due diligence for Senior Foreign Political Figures (“SFPFs”) – Banks also are required to implement enhanced due diligence for any accounts requested or maintained by or on behalf of any SFPF or immediate family member or close associate of a SFPF or any entity formed by or on behalf of a SFPF reasonably designed to detect and report transactions that may involve the proceeds of public corruption.
High Risk Foreign Jurisdictions For Customers and Their Financial Institutions • Secrecy havens, e.g., British Virgin Islands • Drug producing or transshipment countries, e.g., Colombia • Terrorist financing countries, e.g., Lebanon • Countries with a high level of public corruption Example: While Mexico has improved its AML controls, it still should be considered a high money laundering risk because it is a drug producing, drug trafficking and drug money laundering country, with significant official corruption. • Note: Don’t take too much comfort from the fact that a person is not from a high risk jurisdiction. Also, financial accounts in any jurisdiction, domestic or foreign, not logical for a client or the client’s business, should set off alarms.
Authorities for Enforcement Two Sources of Authority for Enforcement of the BSA: • U.S. Department of the Treasury, Financial Crimes Enforcement Network (“FinCEN”) – Bureau responsible for enforcement, issuance of regulations, and interpretation of the BSA. • OCC and the other federal banking regulatory agencies enforce the BSA under a delegation from FinCEN and also directly through parallel regulations for AML/BSA compliance programs and suspicious activity reports under their general authority to protect the safety and soundness of banks.
New Interagency Statement on BSA/AML Enforcement Published July 20, 2007 Attempts to bring uniformity to enforcement of BSA/AML BSA states that if banks fail to establish or maintain a BSA program or fails to correct previously identified problem, a Cease and Desist Order will be issued Statement describes circumstances under which the agencies will issue a C & D; as well as other informal or formal enforcement actions
Special Considerations for the Trust Department Must be aware of OCC Risk priorities Must Coordinate BSA Program with other business units of the Bank and Broker/Dealer Should consider linking trust systems to OFAC and other database screens/searches Make sure Trust staff is aware of special Red Flags for trust money laundering
Trust Areas of BSA/AML Risk Risk Factors • Personal and court-supervised accounts • Trust accounts formed in the private banking department • Asset management and investment advisory accounts • Global and domestic custody accounts • Securities lending • Employee benefit and retirement accounts • Corporate trust accounts • Transfer agent accounts • Other related business lines From the OCC BSA/AML Examination manual.
Trust Areas of BSA/AML Risk Clients of Personal Trust a. Trust clients who have opened a new account after October 1, 2003 b. Charitable trusts and Foundations c. Accounts/ relationships with cash intensive businesses d. Agency and Custody Accounts (whether managed or directed) e. Non-Resident Alien Trust Account owners f. Trust accounts/ relationships presenting negative factors on an internet search g. Trust accounts/ relationships identified with SFPFs h. Trust clients with Non-Residence Alien Status i. Trust accounts with missing Tax Identification Numbers j. Trust accounts or clients with foreign addresses
Suspicious Activity • General Red Flags • Request for excessive secrecy or elaborate structures for assets held in secrecy jurisdictions • Request to bend the rules • Questions about the Bank’s AML/BSA practices • Large or frequent deposits of cash or monetary instruments • Frequent cash withdrawals • Third party payments incoming or outgoing from or to persons with no apparent relationship to the client • Large wires in and out – velocity • Transactions that make no business sense • Transactions with high-risk domestic or foreign jurisdictions • No logical reason to bank here
Suspicious Activity Trust Red Flags • A new relationship with a new customer to the Bank • The account principals or beneficiaries reside abroad, or the trust or its funding mechanism is offshore • Assets/ transactions are atypical for the type and character of client • Account size, type, assets or transactions atypical for Bank • International funds transfers are conducted, particularly through offshore funding sources • Accounts are funded with easily transportable assets such as gems, artworks, negotiable instruments • Accounts or relationships are maintained in which the true identities of the principals or beneficiaries are unknown or cannot be determined • NGO/Charity accounts being used a conduit for illegal activities • Account assets that include PIC’s • SFPFs are parties to any account or transaction
Special Considerations for the Broker/Dealer and RIA Affiliates Must be aware of SEC and OCC examination guidelines, including need to file SARS for brokerage as well as banking activity Must Coordinate BSA Program with other business units of the Bank including Trust and Wealth Management- consider Reliance Agreements for EDD Should consider linking brokerage systems to OFAC and other database screens/searches as well as to Bank alert systems Make sure B/D and RIA staff is trained on BSA/AML and Bank policies so they can assist in detecting suspicious activity
Practical Concerns: Trust indentures Acting as agent for non-client fiduciaries Obtaining information on remote beneficiaries Practical issues with Reliance Agreements