Recently, New York’s Department of Financial Services (“DFS”), the State’s banking and insurance regulator, identified two challenges to effective financial regulation: (1) deterrence for individual bad actors and (2) adequate anti-money laundering (“AML”) compliance by banks and other financial institutions. According to the DFS, federal regulation has been insufficient to address these challenges. Thus, like “the state-level reformers of the early 20th century,” the DFS has announced its own solution. In a bid to solve two problems at once, DFS Superintendent Benjamin Lawsky announced that the DFS will propose requiring senior executives at banks and other financial institutions to, “personally attest to the adequacy and robustness” of their AML programs. Such a certification requirement – whether imposed through state regulation or otherwise – could alter the landscape of AML compliance dramatically.
The federal Bank Secrecy Act (“BSA”) already requires financial institutions to maintain AML programs, including policies and procedures to assess and mitigate risk, and to file Suspicious Activity Reports (“SARs”) on transactions possibly related to criminal activity. As Lawsky noted, banks employ complex automated systems that monitor and filter the cascade of daily transactions to identify and flag potentially suspicious transactions for further (human) review for which SARs must be filed. However, these systems have not always been successful at halting the flow of illegally-sourced funds through the financial system, as reflected by recent high-profile alleged compliance failures at Commerz Bank and MoneyGram.
To focus banks’ attention on the perceived need for improved AML programs, Lawsky stated that the DFS will likely require senior executives to certify to the “adequacy and robustness” of their respective institutions’ AML controls. Although details are scant, this proposed certification is explicitly modeled after the Sarbanes-Oxley Act’s executive certification, requiring CEOs and CFOs of publicly traded companies to certify their financial statements’ and disclosures’ accuracy.
The proposed certification requirement would shift AML compliance from its traditional home in compliance and legal departments to the C-Suite.
It also would require significant executive involvement in, and oversight of, AML compliance programs because of the need for executive certification that the bank has an adequate AML program in place, and that it is correctly functioning (“robustness”). False certifications will create personal liability for certifying executives, potentially including fines and other disciplinary actions in the DFS’s arsenal. Violations of the BSA and the Sarbanes-Oxley certification requirement can trigger criminal liability; however, the DFS lacks criminal prosecutorial authority and so cannot impose this sanction.
It currently is unclear on what or whom certifying executives will be entitled to rely, such as representations by senior management or reports from outside auditors and compliance specialists. Without clarification, it also is unclear how much supervision and control bank CEOs and CFOs will be required to exercise over the AML programs. What is clear, however, is that the potential consequences for AML compliance failures will expand – particularly because AML enforcement historically has targeted institutions, not individuals –especially if Congress decides that the BSA should be amended to emulate this proposal.
Peter D. Hardy and Carolyn H. Kendall practice in the Internal Investigations & White Collar Defense Practice Group of the law firm of Post & Schell P.C., in Philadelphia, PA. Peter, a principal in the firm, is the author of a legal treatise entitled Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation (Bloomberg BNA 2010), and is a former federal prosecutor. Carolyn, an associate at the firm, co-authored the 2014 Supplement to Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation. Both conduct internal investigations and defend corporations, officers and other individuals facing criminal and civil investigations.