Bank Secrecy Act |
Funds Transfers—Overview
Objective. Assess the adequacy of the bank’s systems to manage the risks associated with funds transfers, and management’s ability to implement effective monitoring and reporting systems. This section expands the core review of the statutory and regulatory requirements of funds transfers to provide a broader assessment of AML risks associated with this activity.
Payment systems in the United States consist of numerous financial intermediaries, financial services firms, and non-bank businesses that create, process, and distribute payments. The domestic and international expansion of the banking industry and non-bank financial services has increased the importance of electronic funds transfers, including funds transfers made through the wholesale payment systems. Additional information on the types of wholesale payment systems is available in the FFIEC Information Technology Examination Handbook.156
Funds Transfer Services
A vast majority of the value of U.S. dollar payments in the United States are ultimately processed through wholesale payment systems, which generally handle large-value transactions between banks and either large financial services providers or non-bank financial institutions. For comparison, retail transfer systems include automated clearing houses (ACHs), automated teller machines (ATMs), point-of-sale (POS) systems, telephone bill paying, home banking systems, debit cards, and stored value cards, which are gaining widespread customer use. Most of these retail transactions are initiated by customers rather than by banks or corporate users. These individual transactions may then be combined into larger wholesale transfers, which are the focus of this section. In addition, banks conduct numerous wholesale transfers on their own behalf as well as for the benefit of other financial service providers and bank customers (corporate and consumer).
The two primary wholesale payment systems for interbank, or large-value, domestic funds transfer payment orders are the Fedwire Funds Service (Fedwire®)157 and the Clearing House Interbank Payments System (CHIPS).158 The bulk of the dollar value of these payments is processed electronically and is used to make large value, time-critical payments, such as the settlement of interbank purchases and sales of federal funds, settlement of foreign exchange transactions, disbursement or repayment of loans; settlement of real estate transactions or other financial market transactions; and purchasing, selling, or financing securities transactions. Fedwire and CHIPS participants facilitate these transactions on their behalf and for their customers, including non-bank financial institutions, commercial businesses, and correspondent banks that do not have direct access.
Structurally there are two components to funds transfers: the instruction, which contains the information on the ultimate sender and receiver of the funds, and the actual movement or transfer of funds. The instructions are sent in a variety of ways, including by electronic access to networks of Fedwire or CHIPS payment systems; by access to financial telecommunications systems, such as Society for Worldwide Interbank Financial Telecommunication (SWIFT); or e-mail, facsimile (fax), telephone, or telex. Fedwire and CHIPS are used for U.S. dollar transfers that are wholly domestic transactions and to facilitate the U.S. dollar leg of international transactions. CHIPS has been used predominantly to facilitate international transactions. SWIFT is an international messaging service that is used to transmit payment instructions for the vast majority of international interbank transactions, which can be denominated in numerous currencies.
Fedwire
Fedwire, operated by the Federal Reserve Banks, allows any bank with a Federal Reserve account to transfer funds from that account to the Federal Reserve account of any other bank. Payment to the receiving participant (receiving bank) over Fedwire is final and irrevocable when the Federal Reserve Bank either credits the amount of the payment order to the receiving bank’s Federal Reserve Bank reserve account or sends notice to the receiving bank, whichever is earlier. Although there is no settlement risk to Fedwire participants, they may be exposed to risk caused by errors and omissions and fraud.
Participants159 may access Fedwire by four methods:
- Direct mainframe-to-mainframe (computer interface).
- Off-line or telephone-based access to a Federal Reserve Bank operations site.
- Dial-up or Internet access over a virtual private network to web-based applications (FedLine Advantage).
- Dial-up access using a DOS-based terminal (FedLine DOS).160
CHIPS
CHIPS is a privately operated, real-time, multilateral payments system typically used for large-dollar payments. Participants submit payment messages to CHIPS, where they are stored in a central queue. Payment messages may be released from the queue individually using participants’ positive balances or on a bilateral or multilateral basis by offsetting against incoming payment messages. Payments are final when released from the CHIPS queue. CHIPS is owned by banks, and any banking organization with a regulated U.S. presence may become a participant in the system. The payments transferred over CHIPS are often related to international interbank transactions, including the dollar payments resulting from foreign currency transactions (such as currency swap contracts) and euro placements and returns. Payment orders are also sent over CHIPS to adjust correspondent balances and make payments associated with commercial transactions, bank loans, and securities transactions.
SWIFT
The SWIFT network is a messaging infrastructure that provides users with a private international communications link among themselves. The actual U.S. dollar funds movements (payments) are completed through correspondent bank relationships, Fedwire, or CHIPS. Movement of payments denominated in foreign currencies occur through correspondent bank relationships or over funds transfer systems in the relevant country. In addition to customer and bank funds transfers, SWIFT is used to transmit foreign exchange confirmations, debit and credit entry confirmations, statements, collections, and documentary credits.
Informal Value Transfer Systems
An informal value transfer system (IVTS) (e.g., hawalas) is a term used to describe a currency or value transfer system that operates informally to transfer money as a business.161 In countries lacking a stable financial sector or with large areas not served by formal banks, IVTS may be the only method for conducting financial transactions. Persons living in the United States may also use IVTS to transfer funds to their home countries.
Payable Upon Proper Identification Transactions
One type of funds transfer transaction that carries particular risk is the payable upon proper identification (PUPID) service. PUPID transactions are funds transfers for which there is no specific account to deposit the funds into and the beneficiary of the funds is not a bank customer. For example, an individual that has an account at a bank may transfer funds to a relative or an individual who does not have an account relationship with a bank at another location (e.g., city, state, or jurisdiction). In this case, the beneficiary bank may place the incoming funds into a suspense account and ultimately release the funds when the individual provides proof of identity.
Risk Factors
Funds transfers may represent a heightened degree of risk, depending on such factors as the number and dollar volume of transactions, geographic location of originators and beneficiaries, and whether the originator or beneficiary is a bank customer. The size and complexity of a bank’s operation and the origin and destination of the funds being transferred will determine which type of funds transfer system the bank uses. The vast majority of funds transfer instructions are conducted electronically; however, examiners need to be mindful that physical instructions may be transmitted by other informal methods, as described earlier.
IVTS pose a heightened concern because they are able to circumvent the formal system. The lack of recordkeeping requirements coupled with the lack of identification of the IVTS participants may attract money launderers and terrorists. IVTS also pose heightened BSA/AML concerns because they can evade internal controls and monitoring oversight established in the formal banking environment. Principals that operate IVTS frequently use banks to settle accounts.
The risks of PUPID transactions to the beneficiary bank are similar to other activities in which the bank does business with noncustomers. However, the risks are heightened in PUPID transactions, because the bank allows a noncustomer to access the funds transfer system by providing minimal or no identifying information. Some banks that allow noncustomers to transfer funds using the PUPID service pose significant risk to both the originating and beneficiary banks. In these situations, both banks have minimal or no identifying information on the originator or the beneficiary.
Risk Mitigation
Funds transfers can be used in the placement, layering, and integration stages of money laundering. Funds transfers purchased with currency are an example of the placement stage. Detecting unusual activity in the layering and integration stages is more difficult for a bank; such transactions may appear legitimate. In many cases, a bank may not be involved in the placement of the funds or in the final integration, only the layering of transactions. Banks should consider all three stages of money laundering when evaluating or assessing funds transfer risks.
Banks need to have sound policies, procedures, and processes to manage the BSA/AML risks of its funds transfer activities. Such policies may encompass more than regulatory recordkeeping minimums and be expanded to cover OFAC. Funds transfer policies, procedures, and processes should address all foreign correspondent banking activities, including transactions in which U.S. branches and agencies of foreign banks are intermediaries for their head offices.
Obtaining customer due diligence (CDD) information is an important mitigant of risk in providing funds transfer services. Because of the nature of funds transfers, adequate and effective CDD policies, procedures, and processes are critical in detecting unusual and suspicious activities. An effective risk-based suspicious activity monitoring and reporting system is equally important. Whether this monitoring and reporting system is automated or manual, it should be sufficient to detect suspicious trends and patterns typically associated with money laundering.
Originating and beneficiary banks should establish effective and appropriate policies, procedures, and processes for PUPID activity including:
- Specifying the type of identification that is acceptable.
- Maintaining documentation of individuals consistent with the bank’s recordkeeping policies.
- Defining which bank employees may conduct PUPID transactions.
- Establishing limits on the amount of funds that may be transferred to or from the bank for noncustomers (including type of funds accepted (i.e., currency or official check) by originating bank).
- Monitoring and reporting suspicious activities.
- Providing enhanced scrutiny for transfers to or from certain jurisdictions.
- Identifying disbursement method (i.e., by currency or official check) for proceeds from beneficiary bank.
