The Association of Certified Anti-Money Laundering Specialists recently published a White Paper summarizing an industry survey study of current practices regarding Customer EDD and AML Risk Assessment. The compelling analysis included survey of approximately 500 respondents regarding industry standards for Customer EDD and Bank wide BSA/AML Risk Assessment practices. Evidence suggests that there is real disparity amongst financial institutions regarding the standard approach for completing initial Customer EDD. According to ACAMS, “Respondents indicate there is not an industry standard form or template to meet regulator expectations for AML Risk Assessment or Customer Due Diligence”. As an auditor in the Community Banking industry, we’ve come across various methods for conducting initial Customer Due Diligence, many of which do satisfy regulatory expectations, however differ greatly from one institution to another. Some institutions have standard forms which are completed at the time of account opening while others choose to board such information directly onto the core system. Institutions may choose to complete a customer risk assessment at account opening and base such on the information provided by the customer. Others may decide that is it more beneficial to wait between 1-3 months (and sometimes longer) to analyze the customer’s activity before finalizing the customers risk rating. However, there seems to be a lack of consistency in the approach, which the results of the survey clearly indicate. ACAMS concludes, “Without standardization, financial institutions must create a unique AML Risk Assessment and Customer Due Diligence process. Therefore, financial institutions vary greatly in their processes for the collection, maintenance, updating and systems used during Customer Due Diligence and Risk Assessing.”
The study concluded that greater than half of the respondents stated that they rely on face to face dialogues with new and existing customers when collecting customer due diligence information (ACAMS). This is due in part to the lack of resources available to them. The problem that exists with this method is often customer reluctance to provide information regarding the nature of the business, source of funds, expected use of Bank product/services, and anticipated transaction activity. Thus, in situations where a customer is reluctant to provide information to satisfy due diligence requirements, how can we be so sure that the information the customer does provide is accurate or useful? As we can all agree, bankers are in the business of making money and do not have a real appetite of being positioned in the police-state business which runs contra to their building trusted relationships goals of most community banks.
The survey also asked respondents to respond to several questions regarding the methodology of Bank-wide BSA/AML and OFAC risk assessments. According to survey results, majority of institutions still rely on manual spreadsheets (approximately 62%) and majority update the risk assessment annually opposed to when events warrant a review (only 20%). The industry trend amongst community banks is applying the FFIEC BSA/AML Examination guidance matrices Appendix J: Quantity of Risk Matrix and Appendix M: Quantity of Risk Matrix – OFAC Procedures as a basis for completing the BSA/AML and OFAC risk assessments. Most risk assessments consist of an evaluation of several factors including the Customer Base, Higher risk Products & Services, High-risk customers and businesses, Geography (HIDTA, HIFCA), etc. However, there seems to be a lack of consistency with regard to the analysis of specific risk categories which should be supported by statistics. The need for a more thorough and comprehensive analysis of the factors that the Bank is assessing is ever more relevant in today’s industry. Most importantly, risk assessment often lack the steps needed to mitigate risk as a result of the Bank’s assessment. Those responsible for completing the assessment should be able to support his/her assessment of the Bank’s BSA/AML and OFAC risk, as well as the direction the risk is moving.
So the survey seemed to confirm what we all already know. There is much subjectivity and differences in the way institutions apply the regulatory requirements. While this may perhaps very well have been the regulatory intention, it does create a gap, however, which can give room to an overreaching auditor/examiner to conclude that a given analysis or risk assessment is not consistent with industry practice. But then as this survey clearly indicates, there does not always appear to be consistency in establishing, “industry practice.” Generally, the larger the institution, the greater the need to establish formality and assessments based on statistical data. We recently had a situation where we were engaged to review an institution’s BSA Risk Assessment. This was a $5 Billion plus entity which engaged in international wire transfers and trade finance. Following the community banking risk assessment approach the institution had incorrectly rated its trade finance activity as low risk. Upon down loading data of such activity and analyzing the historical patterns, it was quite obvious that such activity needed to be assessed at a High risk level. Trade finance is currently deemed as a very high risk conduit for suspicious activity and layering.
While there does not seem to be a general consensus or consistency in the format in which institutions elect to document their analysis, it is clear that BSA/AML is receiving a second heightened look from the regulators and we should all take the time to ensure that the analysis and risk assessments are not being updated by rote but do truly represent the risk posture of the institution.
ACAMS (2013). “Anti-money laundering risk assessment and customer due diligence—a global perspective” (ACAMS Survey White Paper)
Senior Manager - BSA/AML
David Lutz is an experienced Audit Supervisor at the Firm for the specialized area of Bank Secrecy Act/AML Compliance reviews. He is a Certified Anti-Money Laundering Specialist (â€œCAMSâ€).