THE BSA COALITION PRESENTS: Highlights of and Lessons Learned from the 2014 Landscape

Transcription

1 THE BSA COALITION PRESENTS: Highlights of and Lessons Learned from the 2014 Landscape April 15, 2015 James Candelmo Executive Compliance Director and BSA/AML Officer Ally Financial Amanda Tucker Executive Vice President and Chief Risk Officer Old Dominion National Bank

2 Call information Call-in number: Participant code: This call is being recorded and will be available following the session. A short survey will be delivered via following the call. Please let us know your thoughts about today and ideas for future sessions. Ask a question Use the Ask Question feature in the webinar tool (Ask Question button) Press *1 on your phone to ask a live question 2

3 Disclaimer The views expressed in this presentation are strictly those of the author[s] and do not necessarily represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. 3

4 Changing Role of the Bank Secrecy Act 1970 s Banks as Citizens 1980 s Banks as Witnesses 2000 s Banks as National Security Partners 2010 s Banks as Gatekeepers 4

5 What is de-risking? De-Risking The purposeful rejection or termination of financial relationships with groups of customers or lines of business considered high risk under BSA/AML standards. What customers/lines of business is this impacting? *Money Service Businesses (MSBs) *Marijuana Businesses *Virtual Currency Dealers *Third Party Payment Processors *Foreign Nationals *Casinos 5

6 FinCEN Guidance Highlights of FinCEN s official statement issued on November 10, 2014: Banks are indiscriminately terminating relationships with all MSBs or are refusing to open accounts FinCEN does not support the wholesale termination of MSB relationships De-risking should be case by case vs. an entire industry 6

7 De-Risking: Industry Impact Larger organizations are requiring all customers in a line of business to exit Customers then look to Community Banks for financial services Community Banks are either unable to comply with the due diligence monitoring requirements due to technology and staffing restrictions or are unprepared in that they haven t identified the risk and established a monitoring program 7

8 De-Risking: Consider the Risk Banks can address de-risking at the outset by having the risk conversation internally before the first high risk customer is on-boarded. Risk discussions must include key employees from across the Bank Risk analysis prior to Banking Higher Risk Clients 8

9 De-Risking: Due Diligence Money Service Business On-boarding (additional due diligence): Verification of MSB registration through FinCEN and applicable State, most recent BSA/AML audit, vendor agreements for money transfer services and on-site review Ongoing: Monitor via transaction monitoring software for alerts/spikes in activity, review transactions on an established risk cycle determined by risk rating, negative news, and periodic on-site review(s) 9

10 How to Ask a Question Use the Ask Question button in the webinar Press *1 to ask a live question 10

11 FinCEN defines virtual currency as: Virtual Currency Medium of exchange that operates like a currency in some environments, but does not have legal tender status in any jurisdiction. Virtual currency must be converted into U.S. dollars through the services of an administrator or exchanger prior to deposit into the banking system. An administrator or exchanger of virtual currency is an MSB under FinCEN s regulations, specifically, a money transmitter. FinCEN s position on Virtual Currency: The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA 11

12 Virtual Currency vs. E Money Virtual Currency Digital representation of value that can be digitally traded and functions as a medium of exchange Not tied to legal tender Convertible Currency: Bitcoin, WebMoney, Linden Dollars Non-convertible Currency: World of Warcraft Gold E Money Digital representation of real money used to electronically transfer value Tied to legal tender PayPal, Google Checkout, Starbucks Wallet 12

13 Virtual Currency: Risks Money laundering No central oversight body to establish regulations/requirements, nor is there an existing AML software to monitor transaction patterns Global reach of virtual currency facilitates cross border payments and funds transfers Reliance on complex infrastructures across multiple countries leading to an unclear picture of where compliance responsibilities lie Rapidly evolving technology systems 13

14 Virtual Currency: FinCEN Guidance User-person who obtains virtual currency to purchase goods or services Exchanger-person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency Administrator-person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency 14

15 MSB? Yes or No? Virtual Currency: FinCEN Guidance A user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN s regulations An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is an MSB (money transmitter) under FinCEN s regulations, unless a limitation to or exemption from the definition applies 15

16 Users Virtual Currency: Onboarding & Due Diligence These customers are not considered MSBs, but it remains important to identify, monitor, and form a reasonable belief as to their virtual currency transactions Virtual currency purchases are generally in the ACH medium and may be characterized by the name of the website i.e. coinbase.com, coindesk.com Transaction monitoring systems may allow you to run an alert based of key words such as bitcoin or coin 16

17 Administrators or Exchangers Virtual Currency: Onboarding & Due Diligence Considered to be an MSB, all FFIEC guidelines on banking MSBs are applicable i.e. registration with FinCEN and applicable State, periodic audit review Understand the market universe i.e. to what geographies will the MSB provide transmittal services. International locales with weak or lax AML controls will elevate the risk 17

18 Marijuana-Related Businesses 18

19 Have you considered this? 19

20 What exactly is a Marijuana-Related Business? 20

21 Marijuana-Related Business The Pot Shop How about the convenience store next door to the Pot Shop? How about the supplier of agricultural equipment? How about the warehouse that stores the inventory? What else? 21

22 Governmental Guidance 22

23 FinCEN Guidance, February 14, 2014 Goals: Clarifies how Financial Institutions can provide services to marijuana-related businesses Aligns the information provided by FI s in BSA reports with law enforcement priorities Enhances the availability of financial services and financial transparency of marijuana related business 23

24 Important Points *CSA makes it illegal to manufacture (grow) distribute (sell) or dispense (give away) *DOJ guidance of prosecution of marijuana related crimes (Cole Memo) *Preventing Distribution to Minors *Preventing revenue of the sale to criminal enterprises, gangs and cartels *Diverting of sales to states where it is still illegal *Using marijuana as a pretext or cover for the trafficking of other illegal drugs or activity *Preventing violence and the use of firearms in the cultivation and distribution of marijuana *Preventing drugged driving and other adverse public health associated with use *Preventing growing marijuana on public lands *Preventing marijuana possession or use of federal property 24

25 Provision of Services Decision is made by each FINANCIAL INSTITUTION Business objectives Risks associated Ability to manage those risks Risk Customer Due Diligence Verifying with the appropriate state authority Reviewing License Requesting information from state licensing agency Understanding of normal expected activity Ongoing monitoring of publicly available negative news Ongoing monitoring of suspicious activity Refreshing information Services and Risks 25

26 Suspicious Activity Reports Three Types: 1. Marijuana Limited 2. Marijuana Priority 3. Marijuana Termination Red Flags (partial list) Atypical revenue (vs state law; vs competitors) Cash deposits (vs state law; vs competitors) Structuring Rapid movement of funds Third party deposits/commingling of funds Financial statements not consistent with business Surge in third parties offering goods Owners criminal/civil history Conceal or disguise business Source of funds 26

27 FinCEN Guidance The Issues: FinCEN is doing the best it can with a very difficult situation. However, the landscape creates a very unstable environment: 1. Beyond Know Your Customer, Know Your State and Know the Marijuana Industry 2. Have to be right on Suspicious Activity Reports.... TWICE 3. DOJ priorities change It is called the Cole Memo for a reason 4. Multi-Dimensional Risk 27

28 Culture of Compliance 28

29 Six Main Components 1. An engaged leadership in compliance and BSA/AML 2. Manage and mitigate BSA/AML deficiencies and risk and ensure not compromised by revenue 3. Improved information sharing throughout organization 4. Dedicates adequate resources to BSA/AML compliance function 5. Independent testing by competent party 6. Leadership and staff understand the purpose of BSA efforts and reports 29

30 Culture of Compliance Assessment 1. Each category assessed by AML group AND business 2. Results escalated to leadership with recommendations 3. Performed annually 30

31 Director and Officer Responsibility Regulators warn that D&O Insurance may not cover civil money penalties levied in connection with BSA/AML violations Prior enforcement actions can be a great source for educating our boards and management Connects back to de-risking and having the risk discussion at the top. The Board and Management must be aware of all facets of a new product/service line; in addition to internal controls in the day to day functions With appropriate BSA/AML training (an annual requirement), boards should be well equipped to ask the right questions 31

32 How to Ask a Question Use the Ask Question button in the webinar Press *1 to ask a live question 36

33 Operation Choke Point DOJ/FDIC and others Focused on Third Party Payment Processors (bank customers customer), payday lenders and other business deemed to be higher risk for fraud and money laundering Bank as gatekeeper 33

34 FinCEN s 5 th Pillar July 2014 Notice of Proposed Rulemaking: Addition of a 5 th Pillar for covered institutions on customer due diligence (CDD) Institutions would be required to identify and collect information on the beneficial owners of their legal entity customers Maintain records of information on individuals who own 25% or more of an interest in a customer i.e. legal entity 34

35 Bottom Line Dynamic role of businesses in money laundering Expanding liability for money laundering Increasing fines and penalties Avoidance of sophisticated financial institutions and their surveillance High Tech is the criminals enemy Cash is king 35

36 Changing Role of the Bank Secrecy Act 1970 s Banks as Citizens 1980 s Banks as Witnesses 1990 s Banks as Informants 2000 s Banks as National Security Partners 2010 s Banks as Gatekeepers 36

37 Questions Jim Candelmo: Amanda Tucker:

38 Options to Ask a Question Press *1 to ask a live question Use the Ask Question button in the webinar Q&A/Wrap-Up Wrap-Up Survey/CPE credits Visit the Learning Center (for Fed staff) or the BSA Coalition Website (for Others) to recommend topics for future sessions or learn more about future events

39 Thank You! We appreciate your support and want to make our events better! Please complete the feedback survey and CPE Attestation form if you are interested in CPE credits. Save the Date for the June 16 BSA Coalition Anti-Money Laundering conference. Registration Opens soon!