Guidance for Managing Third-Party Risk -- by T_Duxbury on Monday, July 7 2008
A financial institution’s board of directors and senior management are ultimately responsible for managing business conducted through third parties. Among their specific responsibilities are identifying and controlling the risks arising from such relationships—to the same extent as though the activities were handled within the institution. It is with these thoughts that the Federal Deposit insurance Corporation has issued a guidance (Financial Institution Letter 44-2008) that describes potential risks arising from third-party relationships and outlines risk-management principles that may be tailored to suit the complexity and risk potential of a financial institution’s significant third-party relationships. The guidance can be found at http://www.fdic.gov/news/news/financial/2008/fil08044.html.

Summer "Supervisory Insights" Issue Available -- by T_Duxbury on Monday, July 7 2008
The summer 2008 issue of the FDIC’s "Supervisory Insights" is now available at http://www.fdic.gov/regulations/examinations/supervisory/insights/index.html. This issue of the journal features articles on topics of “critical interest to bankers, supervisors and examiners,” says the FDIC. It includes the following topics: the development of recommendations for improving transparency of certain securitization products; managing the effects of unprecedented growth in hybrid-adjustable-rate mortgage (ARM) products; an overview of the appropriate use of interest reserves; and the communication of internal control deficiencies as part of the audit process.

Independent BSA/AML Testing -- by T_Duxbury on Thursday, July 3 2008
In Financial Institution Letter 38-2008, the FDIC highlights the importance, and what should be the minimal features of, independent testing for BSA/AML compliance. FDIC feels such testing can both improve the efficiency, and reduce the burden, of the examination process.

The FDIC states that effective independent review is important for a number of reasons, including the following:

• It is valued by regulators for identifying and monitoring a bank’s specific risks and assessing how those risks are managed and controlled.
• Effective audits will assist examiners in determining the BSA/AML examination scope and in identifying areas requiring less review.
• Independent testing (auditing) assists the bank’s board of directors and senior management by identifying areas of weakness or matters requiring stronger controls.

For further information about the importance of effective independent review, including the minimal features that independent testing should include, go to http://www.fdic.gov/news/news/financial/2008/fil08038a.html.

Highly-Focused Targets -- by T_Duxbury on Friday, June 27 2008
A fraud scheme in the upper Northwest has gained popularity because it contains the best of both worlds: it avoids the extra scrutiny that frauds involving new accounts might experience (holds and monitoring), and it takes advantage of a segment of society that has proven to be exceptionally vulnerable. No. Not the elderly.

Purveyors of this fraud recruit people who are young, but not so young that they can’t have established accounts. These fraudsters have found that for a three-figure payoff the young are often eager to become accomplices, readily handing over their debit cards, PINs, and other account information. The fraudsters walk a thin line between too old (the people) and too new (the accounts), and experience a favorable degree of success because of it.

The most popular use of the accounts of the young is to deposit counterfeit checks in them to inflate balances, withdraw the money, and then vanish. The banks cash the checks immediately. One six-member ring alone stole almost a half million dollars using this technique. The recruiting is often done at malls, and people as young as 14 have been used, not all of whom have been knowing accomplices. Some simply try to help those who seem to be in need.

The SAR Activity Review: By the Numbers -- by T_Duxbury on Thursday, June 26 2008



The recently-released tenth issue of FinCEN’s "SAR Activity Review--By the Numbers" is a compilation of statistical data gathered from Suspicious Activity Report forms submitted by depository institutions since April 1996, and certain other entities since then, all up to and including December 31, 2007.
A review of the numerical data generated for Issue 10 of "By the Numbers" reveals some interesting facts. For example, 1) as of December 31, 2007, over 5.4 million Suspicious Activity Report forms (all categories, not just depository institutions) have been filed with FinCEN since 1996; 2) in 2007 the total volume of Suspicious Activity Reports within the Bank Secrecy Act database increased 16 percent from the previous year; 3) the number of depository institution filings depicting mortgage loan fraud as the characterization of suspicious activity has increased significantly since 2003 – at a rate of over 40 percent for the most recent three years – a rate of increase much higher than that of depository institution SARs generally.


STATISTICAL HIGHLIGHTS

Certain statistical data in Issue 10 offers the opportunity to make several observations about SAR reporting:

• More than 5.4 million SARs from depository institutions, money services businesses, casinos, and securities and futures firms were filed from April 1996 through December 31, 2007; 3,409,617 SARs were filed by depository institutions during the same time period.
• BSA/structuring/money laundering continues to be the most prevalent type of suspicious activity reported by depository institutions, increasing 15 percent from 2006. Furthermore, this characterization accounts for 47.56 percent of activity reported overall since 1996.
• The suspicious activity characterization consumer loan fraud increased 19 percent in 2007, with filing years 2006-2007 accounting for 63 percent of all such reports filed in the last five years.
• Since April 1996, 100,324 depository institution SARs identified false statement (in whole or in part) as the characterization of suspicious activity. Of these, 55 percent were filed in the last two years. False statement filings in 2007 increased 42 percent over those filed in 2006.
• Reported instances of terrorist financing decreased 7 percent in 2007, maintaining the downward annual filing trend experienced since 2004. Depository institution filers have submitted 3,863 SARs marked “terrorist financing” since July 2003, when this characterization was added to the form.
• Since July 2003, depository institutions have filed 100,220 SARs citing identity theft (in whole or in part) as the characterization of suspicious activity. Of these, 59 percent were filed in 2006 and 2007.

Bank Robbery Clearance Rate -- by T_Duxbury on Monday, June 23 2008
We’re lucky in the banking industry that our most serious—most dangerous—crime, bank robbery, has such a high clearance rate as compared to other major crimes. This is presumably one of the reasons why the number of crimes nationally has remained in the 6,500-9,000 range for the past two decades or so.

According to Terry Baumer, associate professor of criminal justice at Indiana and Purdue Universities, bank robbery has a higher clearance rate than any other major felony, including murder, rape, aggravated assault, burglary, or theft. About 75-80 percent of bank robberies are solved, Baumer says, compared to a clearance rate for all other crimes of around 20 percent. A big part of the reason? Help from the banking industry.

Americans Sue: Claim Bank Funded Terrorism -- by T_Duxbury on Friday, June 20 2008
Several American victims of terrorist attacks in Israel, along with 50 victims from other countries, have filed a lawsuit against Swiss bank UBS for $500 million. They claim the bank made it possible for Iran to fund the terrorists by providing dollars to the country in violation of trade sanctions.

The plaintiffs maintain that UBS knew full well that the “cash dollars” it was providing to a state sponsor of terrorism such as Iran would be used to cause and facilitate terrorist attacks by Iranian-sponsored terrorist organizations. They list several suicide bombings and rocket attacks that occurred between 1997 and 2001 and attribute them to Hamas and Hezbollah, which the U.S. considers terrorist organizations.

Plaintiffs further claim that UBS, which has offices in the United States, violated an American law that prohibits “any United States person from knowingly engaging in financial transactions with the government of a country designated as a state sponsor of terrorism.”

This is another way a financial institution can encounter adversity from engaging in business dealings with individuals and business entities that have been sanctioned. Not only does the institution face a lawsuit of one-half billion dollars in compensatory damages, but it also faces a penalty of an unspecified amount in punitive damages.

Laundering in the Real Estate Industry -- by T_Duxbury on Wednesday, June 18 2008
Treasury’s Financial Crimes Enforcement Network (FinCEN) has reported in the recent past that money is being laundered in the mortgage and commercial real estate industries. Now FinCEN reports that money laundering is also a crime entrenched in America’s residential real estate industry. FinCEN thanks chiefly one source for all this new information about current abuses of the nation’s financial system: Suspicious Activity Reports (SARs).

Those who seek to launder money through residential real estate generally show certain patterned characteristics that FinCEN would like all financial institutions to be acquainted with. Some of the traits are as follows:

• Those who seek to launder money through residential real estate generally attempt to make timely payments and seek to make their transactions appear as unremarkable as possible in order to disguise the source of their funds.
• The real estate money launderer turns the proceeds of crime into the use or ownership of real property with either outright purchases or periodic rental payments.
• Most of the suspects had no professional relationship with the residential real estate industry; any SARs that alleged collusion with real estate or construction professionals were rare.
• Residential real estate money launderers typically structured large transactions into smaller amounts to avoid detection.
• “Straw Buyers” were used as a front for the true purchasers.
• Fraudulent documentation relating to purchases, titles, collateral, appraisals, and qualifications was used in abundance.
• Laundering through residential real estate was often linked to other crimes, such as tax evasion, fraud, and identity theft.

This information speaks cogently about the important role SARs play in researching financial crime in our nation and Treasury and law enforcement efforts to protect our country’s financial infrastructure.

FBI Bank Robbery Statistics -- by T_Duxbury on Thursday, June 12 2008
Following are highlights of FBI statistics for bank robberies for the period July 1, 2007 to September 30, 2007. These statistics cover the most recent data available from the Bureau.

Violations by Type of Institution

Commercial Banks: 1370
Mutual Savings Banks: 27
Savings and Loan Associations: 29
Credit Unions: 116

Total: 1542

A Matter of Trust -- by T_Duxbury on Monday, June 9 2008
According to a report by the Privacy Rights Clearinghouse, more than 224 million records containing sensitive information have been involved in security breaches since 2005. Although many of the breaches have involved corporations, such as financial institutions, governments have also mishandled confidential information entrusted to them. One, Wisconsin, recently sent thousands of people tax forms that had their Social Security numbers on the mailing labels!

Other states make documents such as wills, deeds, and divorce papers available to the public over the Internet. Moreover, some states do not have policies and procedures for protecting sensitive information, or for responding to security breaches, including timely consumer notification. Does your financial institution have written policies and procedures for these potential eventualities? The Hannaford Corp. was very publicly criticized for not informing consumers of the breach in a timely manner.