FinCEN Guidance Highlights Continued Regulatory Focus on Anti-Money Laundering Risks Posed by MSB Agents
By Lawrence D. Kaplan, Amanda Kowalski & Lauren Kelly D. Greenbacker
In recent years, the federal banking agencies
As the number of MSBs has increased, traditional banking institutions have perceived regulatory problems in providing MSBs with banking services. Although the FBAs’ intent has not been to restrict the banking services available to MSBs, bankers’ perception of MSBs as higher-risk customers has led to the industry “de-risking” and refusing to provide banking products and services to MSB customers.
The BSA requires financial institutions, including MSBs and their agents, to maintain appropriate policies and procedures designed to prevent money laundering and other criminal activity.
In order for an MSB principal’s AML program to satisfy FinCEN requirements, it must include controls for mitigating risks posed by the activities of agents.
The Guidance details the specific factors that an MSB’s AML program must include in order to understand and account for the risks posed by agents.
identify the agent’s owners;
evaluate the operations of agents, including any variations in operations; and
evaluate agents’ implementation of AML policies, procedures, and controls.
These monitoring procedures are intended to ensure that the MSB principal identifies and appropriately responds to any changes in the agent’s business—including the scope of business services offered, clients served, business volume, or geographic reach—that could alter the agent’s risk profile and necessitate corresponding changes to the MSB’s AML program. Both MSBs and their agents are required to conduct reviews of their AML programs “with a scope and frequency commensurate with the risks of money laundering or other illicit activity such principal or agent faces.”
In determining the appropriate scope of agent monitoring that is required in a given agent relationship, the Guidance provides that MSB principals should consider the following risk factors:
whether the owners are known or suspected to be associated with criminal conduct or terrorism;
whether the agent has an established and adhered-to AML program;
the nature of the markets the agent services and the extent to which such markets present an increased risk for money laundering or terrorist financing;
the services an agent is expected to provide and the agent’s anticipated level of activity; and
the nature and duration of the relationship between the principal and the agent.[xiv]
The Guidance also encourages MSB principals that work with the same agent to share information pursuant to Section 314(b) of the USA PATRIOT Act,
Finally, the Guidance emphasizes that, while contractual arrangements between principals and agents “may allocate responsibility for developing policies, procedures, and internal controls, both the principal and its agents remain liable under the rules for the existence of these respective policies, procedures, and controls.”
As summarized above, the Guidance urges MSB principals to ensure that they maintain a culture of compliance that facilitates prudent risk-management for both principals and agents. This language is consistent with previous FinCEN guidance advising MSB principals that the business interest in maintaining a profitable relationship with an agent should not interfere with appropriately addressing risks associated with that agent where illicit activity is suspected, including terminating the agent if determined necessary.
MSBs must continue to evaluate and update their AML policies to appropriately identify and mitigate risks posed by agents. As the Guidance highlights FinCEN’s intention to ensure that agent monitoring is addressed during regulatory examinations of MSBs, MSBs should consider whether their AML programs specifically detail policies, procedures, and controls for managing risks posed by agents. In particular, MSBs should develop a plan for monitoring agent activities that includes the following action items:
establish a system for determining, based on the unique risk profile posed by each agent, the appropriate frequency and scope for examining and reassessing the principal’s relationship with each agent;
develop procedures for internal and independent testing of agent activities for material weaknesses, the frequency and scope of which should be tailored to each agent’s risk profile;
develop internal procedures for the termination of agents that are found to pose unacceptable AML risks;
ensure that documentation is readily available for examiners that details effective risk-based policies, procedures, and controls for monitoring agents;
review FinCEN guidance governing culture of compliance to determine whether improvements are needed to strengthen organizational BSA compliance both for principals and agents;and
evaluate jurisdictional, product-related, service-related, and client-related risks associated with each agent on a regular basis to ensure that the risk associated with each agent is properly understood.
Paul Hastings attorneys are actively working with clients to develop policies and procedures governing appropriate monitoring of agent activities consistent with FinCEN guidance.