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Examination Procedures Core Procedures Expanded Procedures

Bank Secrecy Act Anti-Money Laundering Examination Manual

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Non-Bank Financial Institutions—Overview

Objective.  Assess the adequacy of the bank’s systems to manage the risks associated with accounts of non-bank financial institutions (NBFIs), and management’s ability to implement effective monitoring and reporting systems.

NBFIs are broadly defined as institutions that offer financial services.  The Patriot Act has defined a variety of entities as financial institutions.²¹⁶  Common examples of NBFIs include, but are not limited to:

• Casinos and card clubs.
• Securities and commodities firms (e.g., brokers/dealers, investment advisers, mutual funds, hedge funds, or commodity traders).
• Money services businesses (MSBs).²¹⁷
• Insurance companies.
• Other financial institutions (e.g., dealers in precious metals, stones, or jewels; pawnbrokers; loan or finance companies).

Some NBFIs are currently required to develop an AML program, comply with the reporting and recordkeeping requirements of the BSA, and report suspicious activity, as are banks.  NBFIs typically require a bank account in order to operate.  Although NBFIs maintain operating accounts at banks, the BSA does not require, and neither FinCEN nor the federal banking agencies expect, banks to serve as the de facto regulator of any NBFI industry or individual NBFI customer.  Furthermore, while banks are expected to manage risk associated with all accounts, including NBFI accounts, banks will not be held responsible for their customers’ compliance with the BSA and other applicable federal and state laws and regulations.

Guidance on Providing Banking Services to MSBs

FinCEN and the federal banking agencies issued interpretive guidance on April 26, 2005, to clarify the BSA requirements and supervisory expectations as applied to accounts opened or maintained for MSBs.²¹⁸  The guidance sets forth the following minimum due diligence expectations for banks when opening or maintaining accounts for MSBs:

• Confirm FinCEN registration, if required.²¹⁹  (Note: registration must be renewed every two years.)
• Confirm state licensing, if applicable.
• Confirm agent status, if applicable.
• Conduct a risk assessment to determine the level of risk associated with each account and whether further due diligence is required.

While several specific components of the guidance are unique to MSBs (such as expectations to confirm registration with FinCEN), the fundamental core of the guidance — that banks should apply the requirements of the BSA on a risk-assessed basis — is applicable to accounts held for all NBFI customers, as described in the risk mitigation section below.²²⁰

Risk Factors

NBFI industries are extremely diverse, ranging from large multi-national corporations to small, independent businesses that offer financial services only as an ancillary component to its primary business (e.g., grocery store that offers check cashing).  The range of products and services offered, and the customer bases served by NBFIs, are equally diverse.  As a result of this diversity, some NBFIs may be lower risk and some may be higher risk for money laundering.

Banks that maintain account relationships with NBFIs may be exposed to a higher risk for potential money laundering activities because many NBFIs:

• Lack ongoing customer relationships and require minimal or no identification by customers.
• Maintain limited or inconsistent recordkeeping on customers and transactions.
• Engage in frequent currency transactions.
• Are subject to varying levels of regulatory requirements and oversight.
• Can quickly change their product mix or location and quickly enter or exit an operation.
• Sometimes operate without proper registration or licensing.

Risk Mitigation

Banks that maintain account relationships with NBFIs should develop policies, procedures, and processes to:

• Identify NBFIs relationships.
  
• Assess the potential risks posed by the NBFI relationships.
• Conduct adequate and ongoing due diligence on the NBFI relationships when necessary.
• Ensure NBFI relationships are appropriately considered within the bank’s suspicious activity monitoring and reporting systems.

Risk Assessment Factors

Banks should assess the risks posed by their NBFI customers and direct their resources most appropriately to those accounts that pose a more significant money laundering risk. The following factors may be used to help identify the relative risks within the NBFI portfolio.  Nevertheless, management should weigh and evaluate each risk assessment factor to arrive at a risk determination for each customer and to prioritize oversight resources.  Relevant risk factors include:

• Types of products and services offered by the NBFI.
• Locations and markets served by the NBFI.
• Anticipated account activity.
• Purpose of the account.

A bank’s due diligence should be commensurate with the level of risk of the NBFI customer identified through its risk assessment.  If a bank’s risk assessment indicates potential for a heightened risk of money laundering or terrorist financing, it will be expected to conduct further due diligence in a manner commensurate with the heightened risk.

 

 

 

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