Be Prepared! Quarterly Compliance Update. 2 nd Quarter 2016 Update. BSA/AML Emerging Issues. Presented by:

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1 Practical solutions Solutions driving Driving tangible Tangible Results results Be Prepared! Quarterly Compliance Update 2 nd Quarter 2016 Update BSA/AML Emerging Issues Presented by: Rhonda Coggins, CRCM - National Compliance Services Director Matthew Hovis, CAMS, CFE BSA / AML Manager Copyright Sheshunoff Consulting + Solutions. All rights reserved..

2 Speaker Information Rhonda Coggins, CRCM, is the National Compliance Services Director at Sheshunoff Consulting + Solutions. She provides expert compliance-related advice and guidance to banks and credit unions all over the country. With over 31 years of experience in various capacities, Ms. Coggins previously served as a Compliance Engagement Manager in SC+S s Risk Management Services Division, and supervised the quality control process for the Southwest Region. She has conducted numerous consumer compliance audits and fair lending assessments. She also delivers training programs and presentations on various risk management and compliance topics. Ms. Coggins was a Vice President, State of Texas Compliance Officer, for one of the largest commercial banks in the United States. She has also served as a BSA Officer and worked in Commercial and Consumer lending. Ms. Coggins has attended various ABA Compliance Schools and has the ABA designation of Certified Regulatory Compliance Manager. In 2010, Ms. Coggins was a speaker at the ABA Regulatory Compliance Conference in San Diego, California. She currently serves as President of the Dallas Area Compliance Association. 2

3 Speaker Information Matthew Hovis, CAMS, CFE, is the BSA / AML Manager at Sheshunoff Consulting + Solutions. Before joining Sheshunoff, Mr. Hovis was the BSA Officer at a $3.3B bank located near Boston. He is a Certified Anti-Money Laundering Specialist (CAMS) and a Certified Fraud Examiner (CFE) with a Master of Science in Economic Crime Management and a Bachelor s degree in Criminal Justice. Matt also has a strong systems background with extensive experience validating AML models including Patriot Officer, Fiserv FCRM, Verafin and Yellow Hammer. Matt began his career as a Loss Prevention Systems Specialist and then Senior BSA Analyst at Sovereign Bank. He currently serves on the Association of Certified Anti-Money Laundering Specialists Greater Boston Chapter Steering Committee, previously served on the ACAMS Greater Boston Chapter Executive Board, and cofounded the New England Bank Secrecy Act Workgroup, a community bankingbased network group for Bank Secrecy Act professionals. 3

4 Agenda The Panama Papers New CDD Final Rule Recent Enforcement Actions FATF & FinCEN Update 4

5 The Panama Papers 5

6 The Panama Papers Billed as the Biggest Leak in History 6

7 Documents how the rich and powerful hide wealth The Panama Papers cont. Laundering money, tax evasion, dodging sanctions Cartoon source: Bryan, 7

8 Outcomes: The Panama Papers cont. Information Revealed Activities of Various Politically-Connected Persons & World Leaders Spurred Global Investigations Helps Push for Increased Financial Transparency Cartoon source: Hajo, CagleCartoons.com 8

9 A Slide From our 2015 BSA Presentation Financial Action Task Force (FATF): 2006: United States Mutual Evaluation: - Two relevant comments: - CIP requirements could be strengthened particularly in relation to the identification of beneficial owners. - Company formation procedures and reporting requirements are such that the information on beneficial ownership of legal persons may not, in most instances, be adequate, accurate or available on a timely basis. 2012: Updated 40 Recommendations: - Increased focus on beneficial ownership 2016: Next FATF / US Mutual Evaluation Scheduled 9

10 New CDD Final Rule 10

11 FATF 2006 USA Mutual Evaluation - FATF assessed USA AML laws and regulations - Key deficiencies noted - No explicit obligation to conduct ongoing due diligence in most circumstances - No obligation in law or regulation to identify beneficial owners in most circumstances - 10 year FATF USA Mutual Evaluation ongoing 11

12 FATF Beneficial Ownership Assessment - Three approaches outlined by OECD*: - Up-front disclosures to authorities - Weak area - Intermediaries that form entities - Weak area - Investigative system *Organisation for Economic Co-operation and Development 12

13 Response to Mutual Evaluation - Increased regulatory emphasis on customer due diligence - Joint Guidance on Obtaining and Retaining Beneficial Ownership Information 3/5/ Advance Notice of Proposed Rulemaking 2/29/ Notice of Proposed Rulemaking 8/4/ Rulemaking 5/11/

14 # of Orders Practical Solutions Driving Tangible Results Response to Mutual Evaluation FDIC - Public Enforcement Actions Involving Customer Due Diligence Year 14

15 Customer Due Diligence Rule - Issued: May 11, Effective: July 11, Deadline: May 11,

16 Customer Due Diligence Rule - Establishes Fifth Pillar of AML Programs: - 1. Internal controls - 2. Independent testing - 3. Designation of a personnel responsible for program - 4. Ongoing training - 5. Customer Due Diligence 16

17 Customer Due Diligence Rule - Customer Due Diligence Requirements - Nature of customer and purpose of accounts ( risk profile ) - Perform ongoing monitoring and updating of risk profile - Identifying and verifying beneficial owners 17

18 Customer Risk Profile - Information gathered at account opening and throughout customer relationship: - Nature of business or occupation - Purpose of account - Anticipated activities - Beneficial owners of legal entity customer - Risk rating or customer classification 18

19 Ongoing Monitoring and Updating - Use customer risk profile: - Detect potentially suspicious activity - Identify changes and re-assess risk level - Updates: - Event-based, no periodic update requirements 19

20 Ongoing Monitoring and Updating - No new requirements in most key areas of CDD: - No direct rule to record and retain NAICS, SOC, expected transaction volumes - Continues risk-based approach governed by regulators - Beneficial ownership only new information directly required 20

21 Beneficial Ownership - Equity Interest Prong ( Equity Holder ): - Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer. - If a Trust is an Equity Holder, the Trustee is considered the natural person that owns that stake in the legal entity - If an entity exempt from definition of legal entity customer owns 25 percent or more, no individual needs to be identified 21

22 Beneficial Ownership - Control Prong ( Controller ): - A single individual with significant responsibility to control, manage, or direct a legal entity customer, including: - An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); - Any other individual who regularly performs similar functions. 22

23 Beneficial Ownership - Identifying and verifying beneficial owners: - Perform at opening of new account or other triggering events - Drill-down to natural persons - Controllers and Equity Holders can overlap 23

24 Beneficial Ownership - Identifying and verifying beneficial owners: - May rely upon customer self-certification - Apply Customer Identification Program procedures - May rely upon reproduced (e.g. faxed, scanned) documents 24

25 25 Practical Solutions Driving Tangible Results

26 Beneficial Ownership - Recordkeeping requirements: - Identifying information: - Must be retained for 5 years after account is closed - Verification records: - Must be retained for 5 years after record is made 26

27 Beneficial Ownership - Reliance on other financial institutions: - May rely on other financial institutions: - Reliance is reasonable - Other financial institution is federally regulated and requires AML Program - Enters into contract requiring annual certification of AML Program 27

28 Beneficial Ownership Examples #1. ABC Corporation is owned by John Doe, Jim Doe, Jane Doe, and Janet Doe. Each have an equity interest of 25%. John Doe is the President of the company. QUESTION - Who must the Bank identify as Equity Holders? All of the individuals QUESTION - Who must the Bank identify as the Controller? John Doe 28

29 Beneficial Ownership Examples #2. XYZ Incorporated is owned by John Doe (10% equity), Jim Doe (20% equity), Jane Doe (30% equity), and Janet Doe (30% equity). John Doe is the CEO and Jim Doe is the CFO. QUESTION - Who must the Bank identify as Equity Holders? Jane Doe and Janet Doe QUESTION - Who must the Bank identify as the Controller? Either John Doe or Jim Doe 29

30 Beneficial Ownership Examples #3. Main Street LLC is owned by The Doe Family Trust (40% equity), Jim Doe (30% equity), and Jane Doe (30% equity). John Doe is the Trustee of The Doe Family Trust. Janet Doe is the President of the company. QUESTION - Who must the Bank identify as Equity Holders? John Doe, Jim Doe, and Jane Doe John Doe is included due to his role as the Trustee of The Doe Family Trust. QUESTION - Who must the Bank identify as the Controller? Janet Doe 30

31 Beneficial Ownership Examples #4. Patriot Retail Stores LLC is owned by American Capital Ltd (40% equity), Jim Doe (30% equity), and Jane Doe (30% equity). Janet Doe is the President of the company. American Capital Ltd is publicly traded on NASDAQ. QUESTION - Who must the Bank identify as Equity Holders? Jim Doe and Jane Doe American Capital Ltd is exempt from the definition of legal entity customer ; and as such, does not need to be identified as a beneficial owner. QUESTION - Who must the Bank identify as the Controller? Janet Doe 31

32 Beneficial Ownership Examples #5. Nationwide Restaurants LLC is owned by: Smith Ventures LLC (25% equity), ABC Acquisitions Ltd (25% equity), XYZ Capital LLC (25% equity), and Spinning Head Investments Corporation (25% equity). John Doe has an equity share of 25% in each of the aforementioned companies. Jim Doe has an equity share of 50% in both Smith Ventures LLC and ABC Acquisitions Ltd. Janet Doe has an equity share of 75% in Spinning Head Investments Corporation and an equity share of 25% in Smith Ventures LLC. Michael Bolton has a 25% equity share in ABC Acquisitions Ltd. Steve Buscemi is the President of the company. 32

33 Beneficial Ownership Examples QUESTION - Who must the Bank identify as Equity Holders? Note: FinCEN does not expect or require a complex analysis, and the Bank can rely upon the individuals present at account opening to certify ownership. Technically, John Doe (25% aggregated indirect equity), Jim Doe (25% aggregated indirect equity), and Janet Doe (25% aggregated indirect equity). Michael Bolton would not need to be identified as a beneficial owner, as his 25% equity stake in a company with a 25% equity stake would give him an indirect aggregated ownership percentage of 6.25% in Nationwide Restaurants LLC. QUESTION - Who must the Bank identify as the Controller? Steve Buscemi 33

34 Exclusions - Federally regulated financial institutions or state regulated banks - Government agencies - Multi-state government agencies - Publicly-traded companies - Subsidiaries of publicly-traded companies - Registered issues of securities 34

35 - SEC-Registered Entities: - Investment Companies or Advisers - Exchanges or Clearing Agencies - CFTC-Registered Entities Exclusions - Public Accounting Firms registered with the PCAOB - Bank Holding Companies - Pooled Investment Vehicles operated or advised by a financial institution - State-regulated insurance companies - Financial Market Utility 35

36 Exclusions - Foreign financial institutions established in a jurisdiction where the regulator maintains beneficial ownership information - Non-US government department, agency, or political subdivision engaging only in governmental activities - Any legal entity subject to existing regulations due to private banking 36

37 Limited Exclusions - Excluded from identifying owners: - Pooled investment vehicles - Intermediated account relationships (broker-dealers, IOLTA, etc.) - Charities and nonprofit entities - Exclusions based on account purpose: - Private label retail credit cards only usable at the specified retailer with a $50,000 credit limit - Purchase and financing of postage - Insurance premium payment financing - Equipment purchase or lease financing 37

38 Limited Exclusions - Limitations on Account-Based Exclusions: - No payments to or from third parties - If a cash refund is issued, beneficial ownership information must be collected 38

39 Impact on Other BSA Requirements - OFAC - Beneficial ownership information should be used for sanctions compliance purposes (i.e. do OFAC checks) - CTRs - Only aggregate personal accounts with legal entity customers if deemed appropriate - 314(a) - No requirement to search records of beneficial owners 39

40 Impact on Other BSA Requirements - Aggregating Legal Entities with Personal Customers - Only appropriate in very limited circumstances: - Legal entity and individual beneficial owner not operating separately AND - Individual owns all or substantially all of legal entity s interests - Do not aggregate as beneficiary otherwise! - Conductor aggregation still applies 40

41 Recommended Responses Read Federal Register and accompanying materials Attend multiple training sessions Engage in peer group discussions 41

42 Recommended Responses Evaluate vendor capabilities Update policies and procedures 42

43 Recent Enforcement Actions 43

44 Enforcement Actions FinCEN / OCC Action Gibraltar Private B&T February 2016 Assessment of CMP Findings Failure to implement an adequate AML program. Lacked effective internal controls - transaction monitoring, risk assessment Inappropriate training (Board Members received teller training) Failure to develop an adequate CIP program. Failure to detect and report suspicious activities. Civil Money Penalty - $4 million 44

45 Enforcement Actions OCC Action Charles Sanders March 2016 Consent Order for CMP Comptroller Findings Sanders served as CCO and CRO to a Bank. The Bank failed to timely file SARs on a set of accounts for a customer that was later convicted of crimes. Due to this conduct and resulting violations, the OCC found that Sanders engaged in reckless, unsafe or unsound practices. Civil Money Penalty - $2,500 Sanders must fully comply with laws and provide Board of Directors a copy of the Consent Order. With regard to any future employment, must provide President or CEO with copy of the Consent Order. 45

46 Enforcement Actions OCC Action - Stearns Bank April 2016 Consent Order for CMP Comptroller Findings Beginning in March 2010, the Bank became aware of suspicious transactions associated with the manipulation and fabrication of accounts receivables and factoring invoices. The Bank failed to adhere to it s internal policies and procedures regarding the monitoring and reporting of suspicious activity, including maintenance of documents supporting it s SAR determinations. Failed to file timely SARs. Civil Money Penalty - $1 million 46

47 Enforcement Actions FINRA Action Raymond James & Associates, Raymond James Financial Services & Linda Busby May 2016 Fines & Former AML Compliance Officer Fined/Suspended Findings The firm s significant growth was not matched by commensurate growth in their AML compliance systems and processes Widespread failures related to the firm s AML programs Failures to properly prevent or detect, investigate and report suspicious activity Entity Fines - $17 million Former AML Officer Fine - $25,000 (& 3 month suspension) 47

48 Recap BSA/AML-related Enforcement Actions Action SEC Action Albert Fried & Co. (brokerage firm) FINRA Action Raymond James & Associates, Raymond James Financial Svcs. & Linda Busby OCC Action Stearns Bank, N.A. FinCEN Action Sparks Nugget (casino) OCC Action Charles Sanders (former compliance officer) FinCEN & OCC Action Gibraltar Private B&T SEC action E.S. Financial Services (brokerage firm) Penalty $300,000 $17 million $25,000 $1 million $1 million $2,500 $4 million $1 million TOTAL $24,327,500 48

49 FATF and FinCEN 49

50 FATF & FinCEN Updates - Hot Topics in : - FinCEN Organizational Change - Geographic Targeting Orders - Terrorist Financing - De-Risking of Money Service Businesses

51 FinCEN Organizational Change - Jamal El-Hindi named Deputy Director in March - Director Jennifer Shasky-Calvery resigned in April - El-Hindi has assumed Shasky-Calvery s duties

52 Geographic Targeting Orders - Increased usage since CDD Rule expands authority beyond monetary instruments - Rules can be applied to funds (e.g. wires, ACH, etc.) - Expect more frequent order issuances

53 De-Risking MSBs - Guidance on Existing AML Program Rule Compliance Obligations for MSB Principals with Respect to Agent Monitoring - Increased expectations for monitoring of agents by principals FinCEN, as the agency primarily responsible for administering the Bank Secrecy Act (BSA), does not support the wholesale termination of MSB accounts without regard to the risks presented or the bank s ability to manage the risk. Jamal El-Hindi (FinCEN Deputy Director) Remarks to Conference of State Bank Supervisors

54 - FATF s Actions: Terrorist Financing - International co-operation - Broadening criminalization of terrorist financing worldwide - Multilateral coordination of targeted financial sanctions - Research - Emerging Terrorist Financing Risks in October Financing of the Terrorist Organisation ISIL - Outreach to non-profit sector

55 - FinCEN s Actions: Terrorist Financing - Reviewing numerous queries to identify ISIS-related SARs and CTRs - Issuing Flash Reports to law enforcement and intelligence agencies - Expanding beneficial ownership and GTO authority

56 Practical solutions Solutions driving Driving tangible Tangible Results results More Information Website Copyright Sheshunoff Consulting + Solutions. All rights reserved..