As anyone in the banking sector well knows, the financial industry is one of the most highly regulated in the world. This is because banks play such an important role in the global economy. Banks not only provide a gateway into the financial system, but they also facilitate the movement of funds and the processing of large amounts of personal data. The nature of their business makes banks a target for a range of crimes from identity theft and money laundering to ransomware attacks and other threats. As a result, banks are subject to strict government oversight and intense regulatory scrutiny.
Numerous and ever-changing laws and regulations are meant to protect consumers, the banks themselves, and the financial system as a whole. However, the requirements can sometimes be confusing, or even redundant and the resulting compliance burdens can overwhelm even the most sophisticated institutions. A banking regulatory compliance checklist, containing anti-money laundering/counter financing of terrorism (AML/CFT) measures, cybersecurity regulations, and other applicable requirements, is a useful resource that can provide compliance professionals with a strategic blueprint by which to prioritize and manage their day-to-day risks and responsibilities as well as ensure the adequacy of their compliance program.
Violations of AML laws and regulations, including things such as sanctions breaches, deficiencies in know your customer (KYC) processes and procedures, and failure to file suspicious activity reports (SARs), can result in criminal and civil fines and penalties as well as reputational damage and loss of business. Understanding regulatory obligations, such as those contained in the checklist below, is essential for preventing financial crime and avoiding the high costs of non-compliance.
The following AML/CFT Compliance checklist, paired with compliance professionals equipped with robust bank compliance software that includes regulatory reporting, are the essential elements needed to build a solid AML infrastructure. This checklist is based on the requirements of the Bank Secrecy Act (BSA), the USA PATRIOT Act, and key FATF recommendations. The items below include the five pillars of a risk-based AML compliance program.
1. Risk Assessment and Risk-Based AML Measures
Risk-based measures are a fundamental component of AML legislation in the U.S. and in most other jurisdictions. The implementation of risk-based AML measures requires that banks conduct a risk assessment to identify specific risks posed to their institution and design their AML response in proportion to the risks they face. AML responses commensurate with risk include the application of additional measures such as enhanced due diligence, more frequent sanctions screening, or more intensive transaction monitoring to higher-risk customers, and simplified measures to lower-risk customers.
2. Tailored Internal Policies, Procedures, and Controls
Appropriately tailored policies, procedures, and internal controls constitute the first pillar of an effective AML compliance program. When designing their AML compliance program, banks will also need to take into consideration things such as the size of the institution, the products and services offered, and its customer base. A bank’s internal AML compliance policies, procedures, and controls should be reflective of its business operations. As a result, the AML compliance program at a domestic community bank will look different from the AML compliance program implemented by a larger bank with a global presence.
3. Designation of Compliance Officer
The second pillar requires the bank’s board of directors to designate a qualified AML compliance officer (or officers) responsible for coordinating and monitoring day-to-day AML compliance, including compliance with regulatory requirements. This individual must have sufficient knowledge and experience to perform this function, as well as appropriate authority, independence, and access to resources to adequately administer the program. However, the board of directors is ultimately responsible for the bank’s AML compliance and should provide oversight to senior management and the AML compliance officer. The AML compliance officer should regularly report to the board, or a designated board committee, regarding the status of the program along with other pertinent information.
4. AML Training
The third pillar of an effective AML compliance program requires that bank employees receive consistent AML training on a periodic basis. Although some elements of the training will be common to all bank staff, training should take into account employees’ different roles and responsibilities and be tailored accordingly, including details on the bank’s AML program and its controls. Training should also be given to senior management and the board of directors. It is important that AML training is refreshed on a regular basis, and that impacted employees receive timely training when significant changes are made to the compliance program. Documentation of the training must be maintained and should include details on who received training, the content of the training, and the dates the training was given.
5. Independent Testing and Review
Independent testing and review constitute the fourth pillar of an AML compliance program and are necessary to ensure that the program controls are functioning effectively and that the program is operating as intended. The testing should be performed at least annually. Testing may be conducted by independent third parties or by bank staff with no responsibility for establishing or managing the program. The testers are expected to have sufficient knowledge and experience with AML compliance to fully and properly assess the program. The program assessment should include a review of the policies and procedures for compliance with existing regulations, testing of internal controls, and an evaluation of training program elements and training records.
6. Customer Due Diligence (CDD) or Identity Verification
Conducting Customer Due Diligence (CDD) for purposes of identity verification is a crucial component of risk-based AML practices and comprises the fifth pillar of a risk-based AML compliance program. As part of a bank’s overall KYC program, CDD processes and procedures assist banks in understanding the nature and purpose of customer relationships, including who their customers are, what type of transactions they are likely to engage in, and that their customers are not acting illegally. It also enables banks to identify higher-risk customers and apply appropriate responses, such as enhanced due diligence (EDD) measures, to those customers. CDD entails accurately establishing the following customer information:
- Name, address, date of birth, and identification number
- Beneficial ownership information for legal entity clients
- The nature of the business in which a customer is involved
7. Politically Exposed Person (PEP) Status
A Politically Exposed Person (PEP) is an individual who poses a high risk for money laundering and other financial crime due to their political status and connections. As part of their risk-based AML measures, banks must determine whether their customers are PEPs and apply appropriate measures such as EDD. PEP screening should be conducted at onboarding and throughout the business relationship to identify any changes in status.
8. Sanctions Screening
Sanctions screening is an essential part of AML/CFT compliance. Banks must ensure they do not conduct business or process financial transactions with sanctioned individuals, entities, and countries/geographic regions. Therefore, banks need to have a sanctions screening process in place and ensure that they are screening all applicable watchlists, such as the U.S. Office of Foreign Assets Control (OFAC) list and other national and international lists.
9. Transaction Monitoring
Transaction monitoring helps banks identify unusual and suspicious transactions that may be indicative of money laundering, terrorist financing, and other financial crimes. Transaction monitoring includes assessing historical as well as current transactions and other customer information to get a complete picture of customer activity. Transaction monitoring also includes the detection of transactions above regulatory thresholds, transactions in unexpectedly high volumes or amounts, unusual transaction patterns, and transactions with sanctioned third parties. For further information, view our webinar on transaction monitoring in banks.
10. Suspicious Activity Reporting
Banks should have policies, processes, and procedures in place for completing, filing, and retaining suspicious activity reports (SARs) and supporting documentation as well as sharing SAR information as necessary and permissible by law. Banks should also have protocols in place for identifying and evaluating suspicious activity; reporting SARs to the Board of Directors (or a committee) and informing Senior Management; documenting SAR-related decisions, such as the decision to not to file a SAR; escalating issues resulting from SAR filings; and closing accounts related to SAR filings.
All of the bank’s policies, procedures and processes related to its AML compliance program must be written down, approved by the board of directors, and noted in the board minutes.
Cybersecurity and Financial Record-Keeping Laws and Regulations
According to the 2022 IBM Cost of a Data Breach Report, the finance industry had the second highest average cost per data breach, trailing only behind health care, with a staggering average of $5.97 million per breach! Strict compliance with applicable laws and regulations is essential to preventing breaches and mitigating potential losses.
The following key laws and regulations relate to the storage and transmittal of personally identifiable information (PII) and other data to protect consumers and organizations from data breaches, ransomware attacks, identity theft, and other cybersecurity threats.
1. Gramm-Leach Bliley Act (Reg P)
- Requires that banks covered by this Act tell their customers about their privacy practices and explain to them their right to opt out if they don’t want their information shared with third parties
2. Sarbanes-Oxley Act (SOX)
- Imposes stringent record-keeping requirements for public companies related to the secure storage and management of certain electronic financial records, including the monitoring, logging, and auditing of certain activities
3. Payment Card Industry Data Security Standard (PCI DSS)
- Requires that banks limit cardholder information and data access to as few employees as possible
- Requires that banks implement administrative controls that track account activity
4. 23 NYCRR 500
- Applies to banks under the supervision of the New York Department of Financial Services (NYDFS)
- Requires banks to assess their specific risk profile and design a program that addresses its risks in a robust fashion
- Requires senior management to file an annual certification that details the bank’s compliance efforts
5. EU-General Data Protection Regulation (GDPR)
- Applies to all enterprises that process data about EU individuals, whether manually or through automated processes
- Highlights various security guidelines for both data processors and data controllers to provide security throughout the lifecycle of user data
U.S. Federal Laws Applicable to Banks
Other U.S. Federal laws and regulations designed to provide consumer safeguards as well as ensure transparency and fairness within the banking industry include the following:
- Americans with Disabilities Act (ADA)
- Bank Service Company Act
- Community Reinvestment Act
- Consumer Financial Protection Act
- Coronavirus Aid, Relief and Economic Security Act (CARES Act)
- Credit Card Accountability Responsibility and Disclosure Act
- Dodd-Frank Wall Street Reform and Consumer Protection Act
- Economic Growth, Regulatory Relief and Consumer Protection Act
- Electronic Fund Transfer Act (Reg E)
- Equal Credit Opportunity Act (Reg B)
- Expedited Funds Availability Act (Reg CC)
- Fair and Accurate Credit Transactions Act
- Fair Credit Reporting Act (Reg V)
- Fair Debt Collection Practices Act
- Fair Housing Act
- Federal Reserve Act
- Flood Disaster Protection Act
- Garnishment Rule
- Home Mortgage Disclosure Act (Reg C)
- Homeowners’ Loan Act
- Military Lending Act
- NACHA International ACH Transaction Rule
- Real Estate Settlement Procedures Act
- Right to Financial Privacy Act
- Servicemembers Civil Relief Act
- Telephone Consumer Protections Act
- Truth in Lending Act (Reg Z)
- Truth in Savings Act (Reg DD)
- Unlawful Internet Gambling Act (Reg GG)
The frequency and sophistication of financial crimes and cybercrimes continue to increase, making banks and other institutions involved in the movement of funds and the processing of personal information particularly vulnerable. As lawmakers have taken notice, regulatory scrutiny has also intensified. The high stakes and the potential risk of breaches means that compliance must be a top priority.
Although compliance should never simply be a “check the box” exercise, a regulatory compliance checklist, when used flexibly and as part of a holistic approach to compliance, can serve as a practical tool for navigating compliance priorities and ensuring compliance program adequacy. When reviewed frequently, and compared against existing documentation, policies, procedures, and processes, a regulatory compliance checklist can help inform compliance teams of critical issues, identify redundancies, streamline processes, and improve program efficacy and efficiency.