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A quick look at AML transaction Look Backs

Responding to regulatory demands for transactions reviews

RFP
A foreign banking organization (FBO) doing business in the U.S. may be ordered to conduct a transactions review (or “Look Back”) by a banking regulator to independently assess the effectiveness of their Suspicious Activity Report (SAR) process. Grant Thornton provides the independence, expertise and analytics that enable FBOs to respond effectively to these regulatory demands.

What is a Look Back?
A Look Back is a formal review mandated by a federal or state regulatory agency to determine the nature and propriety of certain transactions, the adequacy of transaction monitoring and the steps needed to remediate any inadequacies. While the regulator has the authority to conduct the Look Back, they can also mandate the bank to conduct it. In practice, the regulator will usually order the bank to engage an independent third party to conduct this review using an approved methodology to ensure objectivity.

Transactions most often subject to Look Backs include those governed by the Bank Secrecy Act (BSA), specifically Anti Money Laundering (AML) regulations involving the transmittal of funds flowing to, from, and through an institution. The BSA requires banks to file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) on transactions that could potentially relate to money laundering, fraud, terrorist financing or other criminal activity.

Look Backs emanate from regulatory reviews of the unusual activity identification, disposition and SAR filing process within the bank’s documented AML Program. The reviews arise from issues detailed within regulatory examinations, such as Matters Requiring Attention (MRAs), Cease & Desist Orders, Consent Orders and Memorandums of Understanding. In addition, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which prohibits transactions potentially involving individuals, entities or countries subject to financial or economic sanctions, can also mandate Look Backs.

Look Backs present many complexities. They can cover periods ranging from a few months to several years and focus on systems and controls related to a wide range of transactions, including deposits, withdrawals, fund transfers, currency exchanges, credit extensions and securities transactions. Look Backs generally must be supported by detailed documentation and include a remediation plan.

These mandated reviews can be costly, feel intrusive and burden a bank’s compliance, operations, security, and accounting and information technology functions. While the upside may appear minimal, a Look Back does provide an opportunity to reconsider and enhance the bank’s compliance programs, policies, procedures, systems and controls in question. Also, the BSA levies significant penalties for the failure to file SARs, which can amount to $25,000 for every occurrence.

How Grant Thornton can help
An effective response depends heavily on the third party you choose to plan and implement the review process. Grant Thornton has the independence, experience, expertise and capabilities needed to assist your institution in Look Backs of all types.

Specifically, Grant Thornton provides:

  • Independence: We have the proven ability to work with your institution and regulators while maintaining our independence and objectivity. We can also provide an independent review of your bank’s internal transactions review or of another third party’s review.
  • Expertise: Many Grant Thornton professionals joined our firm after careers in the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) or Office of the Comptroller of the Currency (OCC), including individuals involved in issuing regulatory guidance. (As a federal bank examiner at the Federal Reserve, one team member played a key role in drafting the initial edition of the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti Money Laundering Examination Manual.) Our team provides unparalleled insight into regulators’ methods and expectations and accelerates the review process.
  • Experience: Grant Thornton has planned and conducted numerous Look Backs arising from the full range of incidents that prompt these reviews. This enables us to efficiently scope, plan, implement and document the review process.
  • Operational protocols: Our operational protocols set forth our methods of developing, prioritizing, investigating and dispositioning identified SAR cases. This enables your compliance staff and other affected functions to understand the process and quickly provide all required information.
  • Technology platform: Our technology platform supports transaction reviews through an extensive library of rules we have developed into an unusual-activity identification methodology to address specific banking services and situations. This platform significantly accelerates the Look Back process.
  • Analytics: Grant Thornton provides analytics specifically designed to handle the vast amounts of complex information these reviews generate. As a result, we can efficiently track and classify all data required to develop and support the observations and recommendations coming out of the review.
  • Documentation: Our protocols, platform and analytics enable us to document the review in detail without waste or rework—a key consideration in controlling costs and satisfying the regulator.

Given our global reach and capabilities, we can conduct Look Backs within our U.S. offices or offshore, with potential added cost benefits from the latter.

Benefits beyond the obvious

The most obvious benefit of engaging Grant Thornton in a Look Back is satisfying the regulator that your bank has conducted an independent, thorough, fully documented transactions review.

The review will also generate specific remediation plans that address gaps or weaknesses in your control environment and monitoring systems related to the banking products and systems under review.

In addition, a proactive transaction review—in advance of an examination—can identify and address potential problems beforehand. As in most situations of this type, prevention is simpler, faster, less expensive and less intrusive than remediation.

So, another common benefit of our work will be plans to address underlying data issues. Given that a monitoring system is only as good as the data it is monitoring, this can improve your bank’s control environment, reduce the risk of future regulatory intervention and ease the burdens of any future reviews.

Solving data problems can also provide operational and cost benefits, as well as accelerate adoption of advanced analytics and predictive analytics in your institution.

Taking action
The volume of transactions and complexity of operations at any major institution almost guarantee that it will sooner or later be subject to a mandated transaction review. A regulator typically allows an institution 90, 120 or 180 days to respond to a request for a Look Back. The sooner you initiate a response, the more resources (and trouble) you can save.

In addition, a proactive transaction review—in advance of an examination—can identify and address potential problems beforehand. As in most situations of this type, prevention is simpler, faster, less expensive and less intrusive than remediation.

Look closer

A correspondent banking transactions review

The problem:
The bank was required to perform an independent two-year review of specific types of correspondent banking transactions to determine if additional SARs should have been filed.

The engagement: We assessed the bank’s AML program and performed data analytics on three months of data to determine the risks the bank was subject to and what models were required. We leveraged our technology platform and inventory of models as well as our joint business partner’s case management tool. We then customized more than two dozen of our existing models to address the specific requirements of the bank and analyzed more than 700,000 transactions and over 6,000 legal or “focal” entities which resulted in excess of 50,000 alerts and 6,000 cases.

We also developed detailed protocols for the investigation, quality assurance and dispositioning of cases. Management reporting was bi-weekly and included key metrics on all aspects of the project.

The value: The engagement identified the SARs that should have been filed in prior periods and positioned the bank to complete its Consent Order requirements. The bank also realized significant AML-related improvements in its operating procedures and recommendations for changes to their transaction.

A dollar clearing “wire room” transactions review

The problem: A bank was under regulatory scrutiny for potential BSA/AML program pillar violations related to internal controls which relates to monitoring international wire transactions. The FDIC required the bank to perform a Look Back of their customer credit wires (MT103, MT202 and MT202COV) for a two-year period to determine whether additional SARs should have been filed.

The engagement: We extracted approximately 100,000 transactions with a value in excess of $5.25 billion from the client's AML platform and processed these against a customized set of transaction monitoring rules in our Look Back environment. Alerts generated were risk scored (low, medium or high) and a team of investigators assessed the alerts to determine if in fact any were suspicious.

Our technology platform enabled smooth management of the review, documentation, approval and quality assurance of alerts and transactions the bank had generated. Additionally, Grant Thornton assessed whether alerts and other data should have been converted to SARs and filed with FinCEN. The investigation led to our recommendation that the bank file additional SAR reports.

We provided recommendations to strengthen the bank’s BSA/AML transaction monitoring rules, internal controls and risk-based policies and procedures for overseeing international customer credit wire transactions.

The value: Our work enabled the bank to respond to regulators with the required information that should have produced SARs to be filed with FinCEN. The bank became better positioned to assess and strengthen their infrastructure and oversight of wire transactions.

Contact

Tariq Mirza
Principal, National Leader
Regulatory Center of Excellence
Compliance Risk Management Services
T +1 202 251 8677

Chris Recor
Managing Director
Regulatory Center of Excellence
Compliance Risk Management Services
T +1 212 542 9676