New Areas For BSA Attention: "Payable Through Accounts" and "Private Banking"

Compliance programs for BSA can't stand still. Your program's evolution is driven by two forces. First, criminals need to be creative to find ways to evade existing enforcement and crime tracking systems. After all, if crime doesn't pay, criminals are out of business. They are therefore driven to find new ways to move money.

As fast as criminals change their techniques for moving or concealing money, the enforcement agencies need to develop techniques to stop them. That's why BSA never seems to sit still. In the past year, major actions on CTRs, SARs, and the exemption process have made dramatic changes to compliance programs (to say nothing of training!) and to the effectiveness of enforcement efforts.

Regulatory agencies have identified "payable through accounts" as a challenge to money laundering enforcement. During the coming months, they will be giving attention to these accounts in examinations and in possible rulemaking. Unless and until the agencies take definitive action to adopt rules or provide guidance there are steps you can take to protect your bank.

You can use one or more of three tests to determine whether your bank's practices in opening payable through accounts will pass scrutiny. First, is it your practice to collect "Know Your Customer" information on the ultimate users of the account?

Second, as an alternative to collecting information on the ultimate users, can you assure your regulatory agency that the foreign bank conducts a procedure that is comparable to "Know your Customer?"

Third, can you assure your examiner that the payable through accounts are not being used for illegal purposes? If you can provide your examiner with satisfactory responses to one of these three tests, your program should pass muster. However, if you cannot satisfy at least one of these tests, your bank is at risk.

Private Banking
Regulators are becoming concerned about the practices in private banking departments. Customer service requirements for private banking clients makes compliance with BSA rules extremely difficult. Private bankers cringe at the very suggestion of putting a new client through the Know Your Customer drill. Many private banking clients want or demand anonymity.

Unfortunately, the customer service motivation can subvert the bank's obligations to identify and report large cash transactions and to identify suspicious activity. You can expect your examiner to review procedures and transactions in the private bank in the next examination.

Before the examiner gets there, you will need to work with your private bankers to alert them to the concerns. They need to understand the regulatory perspective. Funds cannot be allowed to move in large amounts in ways that are invisible to law enforcement. At the same time, you need to do all you can to understand the privacy issues for private banking. Your compliance program should not drive good (honest) customers away from the bank.

ACTION STEPS

Review your KYC procedures and determine whether they contain the elements discussed in this article.
Get a list of your payable through accounts. Review the circumstances under which the accounts were opened. Review the account activity and compare it with reasonable expectations for account activity.
Determine whether your bank's procedures can pass any or all of the regulators' tests.
Talk with your private banking department to get a sense of what they do to know their customers and how they deal with situations that could be questionable or suspicious.
Jointly with senior private banking staff, develop a Know Your Customer protocol for private banking that will enable the bank to provide necessary assurances that private banking customers are not using the bank for illegal purposes.