By: David Lutz, CAMS, Senior Manager BSA/AML
As institutions continue to facechallenging regulatory regimes and examinations, there are certain takeawaysthat banks, especially domestic branches of foreign banking organizations(“FBOs”), can benefit from, and adapt to, as a result. The vast array of trade-basedfinancing products and services that institutions offer and/or facilitate inthe New York foreign banking market has raised a tremendously-increasedemphasis by regulators on how institutions are managing their Anti-MoneyLaundering (“AML”) and terrorist financing risks. With trade-based financingbeing facilitated by institutions on a global scale, one can empathize with thechallenges institutions encounter in managing the risks that transactionspresent when the Branch is merely acting as an advising bank during thetransaction. In most cases, the originator and beneficiary are not the branch’scustomers, but rather customers of an affiliate or non-affiliated correspondentbank. This is where the risk is heightened, as the branch only has a limitedamount of data and information regarding its customer’s customer. In caseswhere potential suspicious activity is identified, the branch shouldimmediately contact its customer (the correspondent bank) via a ‘request forinformation’ to understand the nature of its customer’s business. Once the branchreceives information that it can use to reasonably vet the transaction, thetransaction would have likely already been processed a week to several weeksprior to receiving the information needed. Why does this raise an issue in theeyes of an examiner and/or auditor?
Considering NY FBOs are placingreliance on the information they gather from their affiliates or correspondentrelationships, how can we be sure that the information is reliable or accurate?In many cases, the correspondence that these branches do receive from thecustomer does not always provide enough detail. It is apparent that the lack oftransparency within the SWIFT, CHIPS, and various payment message types hasbecome a problem. In particular, where the NY Branch is processing atransaction relating to trade finance, much of the information detailing thegoods and services, pricing points, details included in the bill of lading, andport of discharge may, on occasion, be omitted from the message and not subjectto proper filtering. This results in heightened sanctions risk, as there may becircumstances in which the goods are shipped to a sanctioned country withoutthe U.S.-based institution’s knowledge and ability to seize such. Does thisexample call for a change to the formatting of the SWIFT message through the inclusionof more data on the counterparties and jurisdictions involved in thetransaction? Perhaps.
The interim solution may be withSWIFT 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 over175 countries use it to exchange their KYC data. According to the KYC Registrysite, SWIFT worked with a group of international banks in order todefine a baseline set of documentation that addresses KYC requirements across multiplejurisdictions.
Examples of suchrequirements include the following:
Thismay be an interim solution to the challenges of transparency that many FBOsface, but what about the thousands of institutions that aren’t registered inthis information sharing solution? In order to facilitate full transparency,there needs to be some changes to the SWIFT message format. To truly combatmoney laundering and terrorist financing and mitigate the risk of U.S.-basedinstitutions unknowingly processing a transaction relating to a sanctionedcountry, there needs to be more granularity in the message format. While thismay present tremendous challenges in the mapping of data based on a new andmore transparent standardized format, the benefits will likely outweigh thecosts.
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.