By: David Lutz, CAMS, Senior Manager BSA/AML
As institutions continue to face challenging regulatory regimes and examinations, there are certain takeaways that banks, especially domestic branches of foreign banking organizations (“FBOs”), can benefit from, and adapt to, as a result. The vast array of trade-based financing products and services that institutions offer and/or facilitate in the New York foreign banking market has raised a tremendously-increased emphasis by regulators on how institutions are managing their Anti-Money Laundering (“AML”) and terrorist financing risks. With trade-based financing being facilitated by institutions on a global scale, one can empathize with the challenges institutions encounter in managing the risks that transactions present when the Branch is merely acting as an advising bank during the transaction. In most cases, the originator and beneficiary are not the branch’s customers, but rather customers of an affiliate or non-affiliated correspondent bank. This is where the risk is heightened, as the branch only has a limited amount of data and information regarding its customer’s customer. In cases where potential suspicious activity is identified, the branch should immediately contact its customer (the correspondent bank) via a ‘request for information’ to understand the nature of its customer’s business. Once the branch receives information that it can use to reasonably vet the transaction, the transaction would have likely already been processed a week to several weeks prior to receiving the information needed. Why does this raise an issue in the eyes of an examiner and/or auditor?
Considering NY FBOs are placing reliance on the information they gather from their affiliates or correspondent relationships, how can we be sure that the information is reliable or accurate? In many cases, the correspondence that these branches do receive from the customer does not always provide enough detail. It is apparent that the lack of transparency within the SWIFT, CHIPS, and various payment message types has become a problem. In particular, where the NY Branch is processing a transaction relating to trade finance, much of the information detailing the goods and services, pricing points, details included in the bill of lading, and port of discharge may, on occasion, be omitted from the message and not subject to proper filtering. This results in heightened sanctions risk, as there may be circumstances in which the goods are shipped to a sanctioned country without the U.S.-based institution’s knowledge and ability to seize such. Does this example call for a change to the formatting of the SWIFT message through the inclusion of more data on the counterparties and jurisdictions involved in the transaction? Perhaps.
The interim solution may be with SWIFT itself, but is it enough? SWIFT offers a Know Your Customer (“KYC”) Registry that was launched in December 2014, and over 3,000 banks in over 175 countries use it to exchange their KYC data. According to the KYC Registry site, SWIFT worked with a group of international banks in order to define a baseline set of documentation that addresses KYC requirements across multiple jurisdictions.
Examples of such requirements include the following:
This may be an interim solution to the challenges of transparency that many FBOs face, but what about the thousands of institutions that aren’t registered in this information sharing solution? In order to facilitate full transparency, there needs to be some changes to the SWIFT message format. To truly combat money laundering and terrorist financing and mitigate the risk of U.S.-based institutions unknowingly processing a transaction relating to a sanctioned country, there needs to be more granularity in the message format. While this may present tremendous challenges in the mapping of data based on a new and more transparent standardized format, the benefits will likely outweigh the costs.
Senior Manager - BSA/AML
David Lutz is an experienced Audit Supervisor at the Firm for the specialized area of BSA/AML Compliance reviews. He is a Certified Anti-Money Laundering Specialist.