Bank Examinations Techniques
Part Two
James Wright
Office of Technical Assitance
U.S. Department of Treasury
Examiner’s Role
• Prevents banking system use by money launders
Assists law enforcement in building
a strong case
Not a law enforcement professional
Bank’s Compliance Program
• Purpose:
– Monitor bank’s compliance with money
laundering laws
• Benefits to examiners:
– Help determine bank’s compliance
• Benefits to bank:
– Protects bank from fraud penalties, asset
forfeitures and criminal activities
Compliance Program Elements
• Senior management commitment
• Compliance officer
• Internal Audit
• Internal controls
• Independent testing
• Training
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
Internal Audit Program
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Can be based on exam procedures
Includes testing of transactions
Assesses employees’ knowledge
Compares performance with procedures
Compliance Officer
• Appointed with:
– Day to day responsibility
– Broad knowledge of banking functions and
activities
– Access to upper management
Training
• Must cover :
– All laws and regulations and bank procedures
– Placement, layering, and integration
– Examples
• Must be:
– Ongoing and cover new schemes
– Tailored to specific activities of financial
institutions
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
Bank Examination Approaches
• Top down approach
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Generally used in large banks
Risk oriented
Focus on policies and procedures
Evaluate risk management practices
Limited transaction testing performed
Examination Approach
• Transaction - based approach
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Performance oriented
For smaller banks
Less comprehensive policies and programs
Focuses on testing of transaction records
Focuses on results of operations
Know Your Customer
• Examine for coverage of
• Citizens accounts
• Business accounts
• And monitoring
Examine Bank’s Compliance Program For:
• Written polices and procedures approved by
the board of directors
• Internal Audit
• Internal controls
• Transaction testing
• Compliance officer
• Appropriate training
High Risk Areas
• Deposit taking
• Sale of official checks and
negotiable instruments
• Wire transfers
• Loans
• International
correspondent banking
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Special use accounts
Private banking
Trust department
Brokerage operations
Trade financing
Internet banking
Credit Cards
Review Internal Audit
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Does audit cover all risk areas?
Did audit include transaction testing?
Did audit uncover suspicious activity?
Did audit uncover violations?
Where corrective actions taken?
Transaction Testing
• 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
Examine Large Cash
Transactions Using Currency
Transaction Reports (ctrs)
– 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
Look for Structuring Signs
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Placed in concentration accounts
Slightly less than limit for reporting
Foreign address
Post office address
Request for holding statements
Compare Transaction
With Other Reports
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Teller proof sheets
Demand deposit activity reports
Wire transfer log
Loans listed by collateral
exception reports
Examine Wire
Transfers
• Using a sample of accounts based on dollar
amounts, high-risk or other characteristic;
review the wire transfer log for an
appropriate time period. Follow-up with a
review of wire transfers, messages and
customer files and account statements, for a
three month period or other appropriate
period of time.
Wire transfer
• Analyze wire transfers to determine whether
the amounts, frequency and countries of
origin/destination are consistent with the
nature of the business or occupation of the
customer and be alert for any suspicious or
unusual activities.
Suspicious Wire
Transfers
• Examine wire transfer log, payment orders,
accounts and other information and
compare to the following lists of suspicious
activities:
• Wire transfer activity from high-risk countries
where the customer has no apparent business
purpose or when the activity is inconsistent with a
customers business or activity
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;
Suspicious Wire Transfers
• Frequent or large dollar volume of wire
transfers to and from high risk countries;
• Frequent wire transfers of large dollar
amount
• Funds transferred in and out of an account
on the same day or within a relatively short
period of time;
Suspicious Wire Transfers
• Wire transfer payments or receipts with no
apparent 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 required
reporting threshold.
Suspicious wire transfers
• Payment instructions to financial institutions to
wire funds abroad and instructions to expect an
incoming wire transfer of funds in equal amounts
of 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 of
narcotics or whose money laundering laws are
ineffective;
Suspicious Wire Transfers
• Large volume of wire transfers from
persons or businesses that don’t hold
accounts.
Wire Transfer Controls
• Determine the effectiveness of the bank’s
wire transfer controls for detecting and
preventing money laundering via wire
transfers.
International
Correspondent Accounts
• Focus on:
– The bank’s due diligence for
• New accounts and periodic review
– Wire transfers
– Pouch activity
International
Correspondent Accounts.
• Review files of selected correspondent
relationships with other banks
• Focus on the correspondent bank’s due
diligence and monitoring of new accounts
International Correspondence
Accounts
• Determine to what extent the bank performs
the following due diligence Tasks:
– Obtains information on bank ownership and
management
– Obtains information on the nature, and volume
of transactions expected
– Reviews financial statements
International Correspondent
Accounts
• Evaluate credit worthiness
• Determine the bank applicants primary line
of business
• Verifies the bank’s license
• Determines that the bank applicant has a
fixed, operating office in the licensing
jurisdiction
International Correspondent
Account
• Evaluates the overall adequacy of banking
supervision in the jurisdiction of the
respondent bank including anti-money
laundering laws and bank regulatory
procedures
• Makes inquires to the correspondent’s local
branch bank
International Correspondent
Accounts
• Makes inquires with bank rating agencies
• Obtains bank references
• Complete a customer profile
International Correspondent
Accounts
• Determine if the bank applicant has
relationships with shell banks
• Determine how the bank monitors
international correspondent accounts
• Determine how often site visits are made
• Form an opinion about the bank’s money
laundering controls on correspondent
accounts
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 purchases
– Cash purchases
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 for
insurance purposes?
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Safe Custodial or Deposit Boxes
• Does bank recognize suspicious activities
such as:
– Frequent customer visit prior to transmission of
funds
– Packages or sealed envelopes
– Customer requests to be unattended or
unobserved
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?
Lending Function
• Examine bank’s 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 for
reporting suspicious activities in the lending
area?
Lending Function Testing
• Review the banks internal reports which
could identify suspicious activities such as:
• Unusual loans which are cash secured and
don’t fit the business character
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.
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
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 of
the borrower?
– Were there any penalties for early pay-off?
– Were other assets sold to make a reimbursement?
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
Private Banking
• Asset management
trust and advice
• Investment
management account
• Offshore facilities
• Custodial services
• Funds transfer
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Lending
Checking
Over draft privileges
Letter of credit,etc.
Bill paying services
Private Banking Procedures
• Review bank’s 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
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
Foreign Exchange
Procedures
– Interview 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
Letters of Credit
• Review files to determine if customer’s business
normally require letters of credit
• Scrutinize the instrument being used
– Are they standard?
– Are they for less tangible activities such as
“services”?
– Are documents reasonable?
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?
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?
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?
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?
Cards
• Credit Cards and
Debit Cards
• Loading up cards and
payments
• Use of cards for
purchases
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
Results of Exam
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Write-up exam results
Determine any violations
Contact authorities if appropriate
Convey findings to bank management and
board of directors
Non-Bank
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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 & gaming
rooms
– Dealers in precious metals
and jewels
– Accountants
– Auto dealers
– Lawyers
– Notaries
– Artwork dealers
– Antique dealers
– Real estate sales
– Pension funds
– Investment advisors
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:
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Compliance officer
Internal audit
Internal controls
Transaction testing
Training
Differences
• Size
• Schemes
• Risk areas