MTRA 16th Annual ConferenceNovember 14, 2006

The Banking Environment for Money Services Businesses

Lisa Arquette FDIC Associate Director

Anti-Money Laundering & Financial Crimes Section

U.S. Banking SystemU.S. Banking System

US Banking System is Large, Diverse, and Complex

Four federal-level bank supervisors Fifty state-level bank supervisors Nearly 9,000 FDIC-insured banks $11.5 trillion in banking assets $4 trillion in FDIC-insured deposits Three largest banks have $3.5 trillion in assets Biggest bank: >$1.1 trillion in assets Smallest bank: <$3 million in assets 8,138 community banks with total assets <$1 billion Median bank size about $140 million

Data as of June 30, 2006

U.S. Bank Regulatory SystemU.S. Bank Regulatory System

FDIC Insurer & Regulator

Banks & Thrifts

Federal Reserve

Central Bank & Regulator

Office of the Comptroller of the CurrencyNational Banks

State Banking

Supervisors

Office of Thrift

SupervisionThrifts

FDIC’s Primary FDIC’s Primary ResponsibilitiesResponsibilities

An independent agency of the United States government created to provide insurance protection for depositors in banks and savings associations throughout the United States.

Provides Federal deposit insurance for banks and savings associations in the United States.Acts as receiver for failed banks and thrifts and then

liquidates assets.

Supervises state-chartered nonmember banks.

1933

• 4,000 Banks Fail

• FDIC Created in Banking Act of 1933

• FDIC Authorized to Regulate and Supervise Banks

1934

• 9 Banks Fail • Insurance:

Initially - $2,500Raised to $5,000

• FDIC opens for business

• FDIC pays first insured depositor

1935

• 27 banks fail• FDIC made

permanent

Today

• Last bank failure was in 2004

• FDIC Insurance: $100,000

• New Deposit Insurance Legislation Enacted

Deposit InsuranceDeposit Insurance

PurposePurpose How Funded?How Funded? Insure deposits and Insure deposits and

protect depositors of protect depositors of FDIC member FDIC member institutionsinstitutions

Resolve failed Resolve failed institutions, including institutions, including managing and managing and disposing of assetsdisposing of assets

Interest earned on Interest earned on investments in U. S. investments in U. S. Treasury obligationsTreasury obligations$1.7 Billion in 2005$1.7 Billion in 2005

Deposit insurance Deposit insurance assessmentsassessments$52 Million in 2005$52 Million in 2005

2006 Balance~ $50 Billion

Why Coordination is ParamountWhy Coordination is Paramount

The FDIC is the primary Federal regulator of over half of the institutions it insures. FDIC supervises 5,241 state-chartered

nonmember banks and state-chartered savings banks out of the total of 8,778 FDIC-insured institutions.

All Federal Banking Agencies (FBAs) provide prudential supervision for these institutions through examination and enforcement.

All FBAs also have delegated authority to examine for BSA compliance.

Risk-Focused SupervisionRisk-Focused Supervision

Combination of On-Site Examinations Combination of On-Site Examinations and Off-Site Surveillanceand Off-Site Surveillance

On-Site Exam

Regional Office Follow-up

Off-Site Surveillance

On- or Off-Site Follow-up

Anti-Money Laundering Issues for Anti-Money Laundering Issues for Depository InstitutionsDepository Institutions

FinCEN’s March 2005 HearingFinCEN’s March 2005 Hearing

April 2005 Interagency GuidanceApril 2005 Interagency Guidance

2005 Revised FFIEC Manual2005 Revised FFIEC Manual

FDIC’s December 2005 AML Conference for FDIC’s December 2005 AML Conference for Examiner Subject Matter ExpertsExaminer Subject Matter Experts

FinCEN’s 2006 Request for CommentFinCEN’s 2006 Request for Comment

FFIEC BSA / AML Examination Manual FFIEC BSA / AML Examination Manual Minimum Due Diligence for MSB AccountsMinimum Due Diligence for MSB Accounts

Apply Customer Identification ProgramApply Customer Identification Program

Confirm FinCEN Registration (if Confirm FinCEN Registration (if applicable)applicable)

Confirm State Licensing (if applicable)Confirm State Licensing (if applicable)

Confirm Agent Status (if applicable)Confirm Agent Status (if applicable)

Conduct a Risk AssessmentConduct a Risk Assessment

FFIEC BSA / AML Examination Manual FFIEC BSA / AML Examination Manual Risk Factors for MSB AccountsRisk Factors for MSB Accounts

Lack ongoing customer relationships and require Lack ongoing customer relationships and require minimal or no identification by customers.minimal or no identification by customers.

Maintain limited or inconsistent recordkeeping on Maintain limited or inconsistent recordkeeping on customers and transactions.customers and transactions.

Engage in frequent currency transactions.Engage in frequent currency transactions.

Are subject to varying levels of regulatory Are subject to varying levels of regulatory requirements and oversight.requirements and oversight.

Can quickly change their product mix or location and Can quickly change their product mix or location and quickly enter or exit an operation.quickly enter or exit an operation.

Sometimes operate without proper registration or Sometimes operate without proper registration or licensing.licensing.

FFIEC BSA / AML Examination Manual FFIEC BSA / AML Examination Manual Risk Mitigation for MSB AccountsRisk Mitigation for MSB Accounts

Identify MSB relationships.Identify MSB relationships.

Assess the potential risks posed by the MSB Assess the potential risks posed by the MSB relationship.relationship.

Conduct adequate and ongoing due Conduct adequate and ongoing due diligence.diligence.

Ensure MSB relationships are appropriately Ensure MSB relationships are appropriately considered within the bank’s suspicious considered within the bank’s suspicious activity monitoring and reporting systems.activity monitoring and reporting systems.

FFIEC BSA / AML Examination Manual FFIEC BSA / AML Examination Manual Risk Assessment factors for MSB AccountsRisk Assessment factors for MSB Accounts

Types of products and services Types of products and services offered.offered.

Locations and markets served.Locations and markets served.

Anticipated account activity.Anticipated account activity.

Purpose of account.Purpose of account.

Banking Institutions - Lessons LearnedBanking Institutions - Lessons Learned

Not all MSBs pose a heightened risk of money laundering.

Initial Due Diligence is important – establish and document an expectation of account activity based on interviews with the MSB account holder and knowledge of the geographical area and industry norms.

Initial Due Diligence should address expectations for all account activity including ACH, wires, cross-border transactions, sweep transactions, and transactions involving secondary lines of business.

The Risk Rating assigned should be based on the initial due diligence and subsequent/ongoing account reviews.

Ongoing Due Diligence – Periodically review account activity to ensure that the initial expectation of account activity remains valid.

Banking Institutions - Lessons Learned Banking Institutions - Lessons Learned (continued)(continued)

The nature and volume of cash, check, wire, and ACH activities should be consistent with the expectation established during the initial due diligence.

High-risk indicators for MSBs should be pre-established as part of the banking institution's AML Policies.

New accounts should generally receive more frequent reviews than “seasoned” accounts that have not presented any previous concerns.

If the activity is not consistent with the initial expectation, the account holder should be contacted to provide is a reasonable explanation.

Enhanced Due Diligence - MSBs that exhibit high-risk characteristics such as unexplained or unusual account activity require increased monitoring and scrutiny.

CONCLUSIONSCONCLUSIONS Banks should not treat all MSB accounts as having the Banks should not treat all MSB accounts as having the

same degree of risk.same degree of risk.

Obtaining and documenting a thorough initial expectation Obtaining and documenting a thorough initial expectation of account activity is extremely important.of account activity is extremely important.

Neither FinCEN nor the Federal Banking Agencies expect, Neither FinCEN nor the Federal Banking Agencies expect, banking institutions to serve as the banking institutions to serve as the de factode facto regulator of regulator of the MSB industry.the MSB industry.

Banks that open or maintain accounts for MSBs should Banks that open or maintain accounts for MSBs should apply the requirements of the BSA on a risk-assessed basis, apply the requirements of the BSA on a risk-assessed basis, as they do for all customers, taking into account the as they do for all customers, taking into account the products and services offered and the individual products and services offered and the individual circumstances.circumstances.

The decision to accept or maintain an account with an MSB The decision to accept or maintain an account with an MSB customer rests with the institution’s management and customer rests with the institution’s management and should be based on the institution’s capacity to identify, should be based on the institution’s capacity to identify, monitor, and manage the associated risks.monitor, and manage the associated risks.