Risk Management Manual of Examination Policies - FDIC

BANK SECRECY ACT, ANTI-MONEY LAUNDERING,
AND OFFICE OF FOREIGN ASSETS CONTROL
maintained in a name other than that of the beneficial
owner are subject to the same level of filtering for OFAC
as other accounts. That is, the OFAC screening process
must include the account’s beneficial ownership as well as
the official account name.
Documentation of Source of Funds
Documentation of the source of funds deposited into a
private banking account is also required by Section 312 of
the USA PATRIOT Act. Customers will frequently
transfer large sums in single transactions and the financial
institution must document initial and ongoing monetary
flows in order to effectively identify and report suspicious
activity. Understanding how high net worth customers’
cash flows, operational income, and expenses flow through
a private banking relationship is an integral part of
understanding the customer’s wealth picture. Due
diligence will often necessitate that the financial institution
thoroughly investigate the customer’s expected
transactions.
Enhanced Scrutiny of Politically Exposed Persons
Enhanced scrutiny of accounts and transactions involving
senior foreign political figures, their families and
associates is required by law in order to guard against
laundering the proceeds of foreign corruption.
Illegal activities related to foreign corruption were brought
under the definition of money laundering by Section 315 of
USA PATRIOT Act. Abuses and corruption by political
officials not only negatively impacts their home country’s
finances, but can also undermine international government
and working group efforts against money laundering. A
financial institution doing business with corrupt PEPs can
be exposed to significant reputational risk, which could
result in adverse financial impact through news articles,
loss of customers, and even civil money penalties (CMPs).
Furthermore, a financial institution, its directors, officers,
and employees can be exposed to criminal charges if they
did know or should have known (willful blindness) that
funds stemmed from corruption or serious crimes.
As such, PEP accounts can present a higher risk.
Enhanced scrutiny is appropriate in the following
situations:
• Customer asserts a need to have the foreign political
figure or related persons remain secret.
• Transactions are requested to be performed that are
not expected given the customer’s account profile.
• Amounts and transactions do not make sense in
relation to the PEP’s known income sources and uses.
Section 8.1
• Transactions exceed reasonable amounts in relation to
the PEP’s known net worth.
• Transactions are large in relation to the PEP’s home
country financial condition.
• PEP’s home country is economically depressed, yet
the PEP’s home country transactions funding the
account remain high.
• Customer refuses to disclose the nominal or beneficial
owner of the account or provides false or misleading
information.
• Net worth and/or source of funds for the PEP are
unidentified.
Additional discussion of due diligence procedures for these
accounts can be found in interagency guidance issued in
FDIC FIL-6-2001, dated in January 2001, “Guidance on
Enhanced Scrutiny for Transactions That May Involve the
Proceeds of Foreign Official Corruption.”
Fiduciary and Custody Services within the
Private Banking Department
Although fiduciary and agency activities are circumscribed
by formal trust laws, private banking clients may delegate
varying degrees of authority (discretionary versus
nondiscretionary) over assets under management to the
financial institution. In all cases, the terms under which the
assets are managed are fully described in a formal
agreement, also known as the “governing instrument”
between the customer and the financial institution.
Even though the level of authority may encompass a wide
range of products and services, examiners should
determine the level of discretionary authority delegated to
private banking department personnel in the management
of these activities and the documentation required from
customers to execute transactions on their behalf. Private
banking department personnel should not be able to
execute transactions on behalf of their clients without
proper documentation from clients or independent
verification of client instructions.
Concerning investments, fiduciaries are also required to
exercise prudent investment standards, so the financial
institution must ensure that if it is co-trustee or under
direction of the customer who retains investment
discretion, that the investments meet prudent standards and
are in the best interest of the beneficiaries of the trust
accounts.
Trust agreements may also be structured to permit the
grantor/customer to continue to add to the corpus of the
trust account. This provides another avenue to place funds
Bank Secrecy Act (12-04) 8.1-26 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation