EFFECTIVE MONITORING: MANAGING INQUIRIES, INVESTIGATIONS

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1 EFFECTIVE MONITORING: MANAGING INQUIRIES, INVESTIGATIONS AND THE REPORTING OF SUSPICIOUS ACTIVITY

2 Managing the Inventory External Inquiries (a) (b) 3 Law Enforcement Inquiries Grand Jury Subpoenas Seizure Order "Search Warrants" 4 Regulatory Inquiries SEC, State Regulators, SRO 5 Civil Subpoenas IRS Civil Civil Actions alleging Fraud 2

3 Managing the Inventory Internal Referrals 1 Media Alerts 2 Legal/Regulatory 3 Operations 4 Surveillance 5 Fraud Departments (e.g. checks, debit cards) 6 Field/Business 7 Account Opening 3

4 Suspicious Activity Monitoring Solutions Rules include coverage for: Velocity - A transaction monitoring model designed to capture accounts displaying repeated withdrawals within a short time period Suspicious i Deposits - A transaction ti monitoring i model designed d to highlight large deposits in new or dormant accounts Variety of reviews for returned checks and ACH payments $25K check review - Prior to deposit, analyst manually reviews all check deposits (for both bank and brokerage customers), to identity counterfeit/altered checks Charge-back review For check deposits that have been returned by the paying bank, analyst reviews the return reason and account history to identity possible fraudulent activity ACH return reports For ACH deposits that have been returned by other institutions, analyst reviews return codes and account history to identity possible fraudulent activity

5 Keys for Transaction Monitoring Have a adequately staffed team, ensure all members are trained and cross trained in various AML functions and responsibilities. Conduct periodic testing and monitoring or process and procedures. Ensure that regulatory changes are properly incorporated and adopted into your program. Do not rely on a third-party technology vendors to do your job. Have someone in your company take ownership of compliance technology. Ensure you get what you re paying for and that you get what you want from a system.

6 Keys for Transaction Monitoring Ensure Transaction Monitoring Profiles are specific to your business and relevant. (Don t use a retail bank s transaction monitor profile in the broker dealer world.) KYC Reviews conduct periodic reviews of your KYC Program, ensure staff is familiar with procedures and the regulations. PEPs o r staff needs to ha e a clear nderstanding of hat a PEP is and PEPs your staff needs to have a clear understanding of what a PEP is, and how often do you review and update your PEP list? (Once your PEP are you always a PEP?)

7 Keys for Transaction Monitoring Why Do We Do It? Although there is not a statutory or regulatory requirement that specifies exactly what must be done, regulators expect that t financial i institutions know the normal/routine activities of their customers, particularly those that present a higher risk for potentially illegal conduct

8 Additional Risk Factors Keys for Transaction Monitoring Politically Exposed Person ( PEP ) PEP) Subject of a Suspicious Activity Report ( SAR ) Filing Type and Number of Transactions Other Miscellaneous Information The risk assessment criteria are not static; they will be periodically updated to reflect any new regulatory guidance and the results of any E*TRADE experience that may have a bearing on the process.

9 High-Risk Account Review What Customers Require Additional Scrutiny? In prioritizing the risk level of the highest risk accounts, several categories are considered to present higher than normal risk (listed in generally descending risk hierarchy). Politically Exposed Persons ( PEPs ) Persons who are, or have been, in an influential political position, as well as family members or close associates. SAR Filings Customers whose account activity has resulted in a SAR filing require enhanced scrutiny; some are escalated for EDD. Results of Previous Customer Reviews Accounts designated for increased scrutiny during gprevious CDD/EDD reviews. This includes accounts brought to the attention of the AML Unit via weekly SAR and Trade Monitoring meetings

10 High-Risk Account Review What Customers Require Additional Scrutiny (cont.)? Customers Engaged in an Internet-Based Business Considered higher risk due to the more than typical number of ACH and third-party processor (i.e., Paypal) transactions that result. Accounts Deemed High-Risk By Internal AML reviews or referrals from other business units. Cases resulting from negative news alerts

11 Potential Review Procedures Identification of any beneficial owners of the account and information regarding their occupation or business Review of types and volume of transactions the customer expects to conduct and/or the types of services the customer expects to utilize (particularly higher risk products such as international wire transfers) Review of customer s primary business/trade area and whether international transactions are expected to be routine Explanation for changes in account activity Internet protocol ( IP ) search Internet research

12 After the Investigation 1 What happens after the SAR is filed? Documentation and Storage Closing accounts/relationships Enhanced Monitoring o Watch List o Ring Fence o Bad Guy list Communicating across the Enterprise o Governance Committees o Senior Management Reporting 90-day review Contacting Law Enforcement or Regulators SAR Sharing Periodic review of surveillance mechanisms 12

13 After the Investigation 1 The investigation resulted in a No SAR. What are the next steps? Documentation of decision o Peer Reviews o Connecting cases Review of expected activity Watch List or enhanced monitoring Monitoring for Patterns, Trends & Key Risk Indicators Consider operational enhancements and tracking 13

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