Understanding the 2024 Consent Orders

The first quarter of 2024 saw seven alarming consent orders affecting Blue Ridge, Choice, City National, Evolve, First Federal, Piermont Bank, and Sutton Bank. This surge highlights the regulators’ focus areas and critical compliance issues banks need to address. These recent orders follow nearly 30 orders in 2023, underscoring the OCC, Federal Reserve, and FDIC’s demand for a proactive, comprehensive approach to compliance, especially in Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT).

Michael Hsu, Acting Comptroller of the Currency, emphasized the importance of maintaining high standards: “We will not lower our standards, create a special regime, or take an overly expansive view of banking to entice new entrants or in the hope of bringing a particular activity into the bank regulatory perimeter.”

‍

Common Themes and Compliance Strategies

From the recent consent orders, eight common themes have emerged. Here’s how banks and fintechs can prepare for exams or audits:

1. Board Supervision
2. Directors AML/CFT Compliance Committee
3. AML/CFT Program
4. Internal Controls
5. Lookback Review
6. Validation
7. AML/CFT Staffing and Resources
8. Independent Testing (Audit) Program

‍

Board Supervision

Improving Board Supervision: Regulators are mandating that Boards take an active role in overseeing AML/CFT programs, including approving and monitoring sound policies and procedures.

Steps to Increase Compliance

• Structured Agenda for Board Meetings: Focus on AML/CFT oversight with thorough and well-documented discussions.
• Formal Review and Approval Process: Establish a formalized process for reviewing and approving AML/CFT policies and procedures.
• Continuous Education: Provide ongoing education for Board members on BSA/AML regulations and emerging threats.

‍

Directors AML/CFT Compliance Committee

Strengthening Regulatory Compliance: This committee must present detailed reports on adherence to consent orders, the Bank Secrecy Act Officer, and the AML/CFT program at every board meeting.

Effective Strategies:

• Create a Detailed Reporting Framework: Develop a comprehensive framework that guides the AML/CFT Compliance Committee in creating detailed reports for the board. This framework should encompass all facets of the bank's adherence to the BSA, highlighting any issues identified and outlining proposed remediation plans.
• Ensure Access to Real-Time Compliance Data: The AML/CFT Compliance Committee must have access to up-to-the-minute compliance data and analytics. Real-time insights into compliance metrics allow a dynamic approach to managing and mitigating risks.
• Formalize the Escalation Process: Establish a formal procedure for escalating and resolving compliance issues identified by the committee. This process should define clear channels for escalating issues from the committee to the board, ensuring a straightforward path for addressing and rectifying compliance gaps.

‍

AML/CFT Program

Enhancing and reviewing the AML/CFT Program is a pivotal theme in ensuring compliance with regulatory standards. Banks are required to revise their AML/CFT policies and procedures within specified timelines, incorporating comprehensive risk assessments to accurately reflect the bank’s risk profile.

Ensuring Dynamic Compliance and Responsiveness

Adhering to regulatory requirements and fostering a culture of compliance involves a multifaceted approach, encapsulated by the following strategies:

• Conduct Regular and Comprehensive Risk Assessments: Fundamental to a proactive compliance framework is the execution of thorough risk assessments, systematically updated to mirror the bank’s evolving risk profile. By keeping the risk assessment up-to-date, banks can assure regulators that their AML/CFT strategies are grounded in the current risk environment.
• Integrate a Feedback Loop into the AML/CFT Program: Embedding a feedback mechanism within the AML/CFT program is essential for capturing and integrating insights gleaned from audits, compliance reviews, and regulatory feedback. Such a feedback loop not only enhances the program's efficacy but also demonstrates to regulators a commitment to learning and adaptation.
• Focus on Dynamic Policy Development: With rapid changes in threats and regulatory expectations, the ability to quickly adapt AML/CFT policies and procedures is indispensable. Dynamic policy development, informed by the latest risk assessments, audit findings, and regulatory feedback, ensures that the bank's AML/CFT program remains at the forefront of compliance best practices. Emphasizing agility in policy development allows banks to respond to new challenges swiftly, maintaining the integrity of their compliance posture in the face of evolving threats and regulatory landscapes.

Internal Controls

Effective internal controls are the cornerstone of a bank's comprehensive compliance framework, ensuring adherence to the stringent requirements set forth by regulatory bodies. These controls, including Customer Identification Programs (CIP), Customer Due Diligence (CDD), and Suspicious Activity Reporting (SAR), are designed to enable banks to identify, monitor, and report suspicious activities adeptly. By aligning these controls with the outcomes of detailed risk assessments, banks can ensure their compliance efforts are both targeted and effective, thereby safeguarding against financial crimes and regulatory breaches.

Strengthening the Foundation of Compliance

• Develop a Multi-layered Approach for CIP and CDD: By tailoring CIP and CDD processes to accommodate varying levels of risk, banks can ensure a more precise and effective compliance mechanism, adept at identifying potential threats before they materialize into significant issues.
• Establish Robust Procedures for SARs: Establishing a robust framework for SARs not only streamlines the detection and reporting process but also underscores the bank's commitment to maintaining a stringent compliance posture.
• Regular Review and Update of Internal Controls: The dynamic nature of the financial sector, characterized by emerging types of fraud, evolving customer behaviors, and shifts in the regulatory landscape, necessitates the regular review and refinement of internal controls. Banks must stay abreast of these changes, adapting their compliance strategies to mitigate new risks effectively.

‍

Lookback Review

The requirement for a Lookback Review highlights the regulatory expectation for banks to retrospectively ensure compliance with CIP, CDD, and SAR requirements. This involves a detailed examination of customers onboarded through third-party relationships and their transactional activities, emphasizing the need for banks to address any historical oversights.

Ensuring Retrospective Compliance and Oversight

To align with regulatory expectations and effectively conduct Lookback Reviews, banks should incorporate the following practices within their compliance strategies:

• Define the Scope of Lookback Reviews: Banks must clearly delineate the scope of their Lookback Reviews, ensuring that these examinations encompass all pertinent customer and transaction data since the inception of third-party relationships. By covering the entirety of the bank’s engagement with third parties, the Lookback Review can offer a complete perspective on the effectiveness and thoroughness of historical compliance efforts.
• Utilize Advanced Data Analytics: Leveraging analytics enhances the bank's ability to uncover subtle indications of non-compliance or illicit activities, thereby bolstering the overall effectiveness of the Lookback Review.

Document Findings and Actions: By maintaining detailed records, banks can also provide regulatory bodies with evidence of their proactive stance toward compliance and their dedication to maintaining the integrity of their operations.

‍

Validation

^Validation underscores the critical need for banks to periodically review and validate the systems and models they utilize for monitoring, detecting, and reporting suspicious activities. This not only involves assessing the effectiveness of these systems but also ensuring they are updated to address any identified deficiencies or changes in the risk landscape.

Enhance the Integrity of your Compliance Systems

To adhere to regulatory standards and bolster the robustness of their compliance frameworks, banks are encouraged to adopt the following validation practices:

• Implement a Systematic Approach to Validation: Establishing a structured methodology for validating monitoring systems and models is crucial. This approach should define clear criteria for assessing performance, accuracy, and reliability, ensuring that the tools in use effectively identify and report suspicious activities.
• Engage in Regular Validation Cycles: Banks need to undertake validation exercises at regular intervals, incorporating tests that are designed to challenge the systems against emerging typologies, new risk scenarios, and evolving regulatory expectations.
• Ensure Independence and Comprehensiveness of Validation Processes: Together, these principles ensure that the validation process offers a clear and accurate picture of the system's capabilities and areas for improvement.

‍

AML/CFT Staffing and Resources

Adequate staffing and resources are foundational to the effective implementation and management of a bank's AML and CFT program. Regulatory bodies emphasize the need for banks to ensure that individuals tasked with these responsibilities, such as the BSA Officer, are well-equipped with the necessary authority, resources, and support staff to efficiently administer the AML/CFT Program.

Building a Strong Compliance Foundation

To align with regulatory expectations and bolster the effectiveness of their AML/CFT frameworks, banks should focus on the following areas:

• Assess Staffing and Resource Adequacy: Adequate staffing and resources are crucial to ensure that the bank can effectively monitor, detect, and report suspicious activities, thereby maintaining compliance with regulatory requirements.
• Develop Clear Roles and Responsibilities: Clear delineation of responsibilities ensures accountability and facilitates the efficient execution of the AML/CFT Program’s operational components.
• Invest in Continuous Training and Development: This proactive approach to training empowers staff to respond adeptly to emerging risks and regulatory expectations.

‍

Independent Testing (Audit) Program

Finally, an independent testing (audit) program must encompass all of the bank’s business activities, including those conducted through third parties. Such a program is essential for not only identifying and addressing compliance gaps but also for validating the effectiveness of the bank’s AML/CFT measures.

Ensuring Comprehensive Oversight

Adherence to regulatory expectations can be achieved through the following audit program enhancements:

• Design a Comprehensive Audit Program: The audit program should encompass a full review of the bank's AML/CFT efforts, including scrutiny of third-party relationships and examining new product offerings.
• Implement Tracking and Verification Mechanisms: This ensures that identified issues are addressed promptly and that the bank continually improves its AML/CFT posture in response to audit findings.
• Engage Expert Auditors: Utilizing independent auditors with specialized expertise in BSA/AML regulations is crucial for conducting thorough and insightful evaluations of the bank's compliance program.

‍

Conclusion

While exploring the landscape of regulatory violations, it becomes evident that not all compliance issues can be resolved through internal measures alone. Integrating independent, third-party solutions is pivotal in achieving full regulatory compliance in 2024 and beyond. This external approach is not just a supplementary measure; it's often necessary to meet the rigorous standards set forth by regulatory bodies, and is almost always easier than building internal solutions that are hard and expensive to maintain.

When considering a third-party solution, you must ensure it addresses current needs and is flexible enough to adapt to the evolving regulatory landscape. Cable serves clients across the Banking, Crypto, and Fintech sectors and addresses a significant number of the regulators recent areas of concern. Get in touch if you’d like to learn more.