examination techniques part 2

7/27/2019 Examination Techniques Part 2

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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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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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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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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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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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Accounts Makes inquires with bank rating agencies

Obtains bank references

Complete a customer profile


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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

examination techniques part 2

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