Risks Associated with Money Laundering and Terrorist Financing
Objective. Assess the adequacy of the bank’s systems to manage the risks associated with brokered deposit relationships, and management’s ability to implement effective due diligence, monitoring, and reporting systems.
The use of brokered deposits is a common funding source for many banks. Recent technology developments allow brokers to provide bankers with increased access to a broad range of potential investors who have no relationship with the bank. Deposits can be raised over the Internet, through certificates of deposit listing services, or through other advertising methods.
Deposit brokers provide intermediary services for banks and investors. This activity is considered higher risk because each deposit broker operates under its own guidelines for obtaining deposits. The level of regulatory oversight over deposit brokers varies, as does the applicability of BSA/AML requirements directly on the deposit broker. However, the deposit broker is subject to OFAC requirements regardless of its regulatory status. Consequently, the deposit broker may not be performing adequate customer due diligence or OFAC screening. For additional information refer to the core overview section, "Office of Foreign Assets Control," page 142, or "Customer Identification Program" core examination procedures, page 53.227For the purpose of the CIP rule, in the case of brokered deposits, the "customer" is the broker that opens the account. A bank does not need to look through the deposit broker's account to determine the identity of each individual subaccountholder, it need only verify the identity of the named accountholder. The bank accepting brokered deposits depends on the deposit broker to sufficiently perform required account opening procedures and to follow applicable BSA/AML compliance program requirements.
Money laundering and terrorist financing risks arise because the bank may not know the ultimate beneficial owners or the source of funds. The deposit broker could represent a range of clients that may be of higher risk for money laundering and terrorist financing (e.g., nonresident or offshore customers, politically exposed persons (PEP), or foreign shell banks).
Banks that accept deposit broker accounts or funds should develop appropriate policies, procedures, and processes that establish minimum CDD procedures for all deposit brokers providing deposits to the bank. The level of due diligence a bank performs should be commensurate with its knowledge of the deposit broker and the deposit broker’s known business practices and customer base.
In an effort to address the risk inherent in certain deposit broker relationships, banks may want to consider having a signed contract that sets out the roles and responsibilities of each party and restrictions on types of customers (e.g., nonresident or offshore customers, PEPs, or foreign shell banks). Banks should conduct sufficient due diligence on deposit brokers, especially unknown, foreign, independent, or unregulated deposit brokers. To manage the BSA/AML risks associated with brokered deposits, the bank should:
- Determine whether the deposit broker is a legitimate business in all operating locations where the business is conducted.
- Review the deposit broker’s business strategies, including customer markets (e.g., foreign or domestic customers) and methods for soliciting clients.
- Determine whether the deposit broker is subject to regulatory oversight.
- Evaluate whether the deposit broker’s BSA/AML and OFAC policies, procedures, and processes are adequate (e.g., ascertain whether the deposit broker performs sufficient CDD including CIP procedures).
- Determine whether the deposit broker screens clients for OFAC matches.
- Evaluate the adequacy of the deposit broker’s BSA/AML and OFAC audits and ensure that they address compliance with applicable regulations and requirements.
Banks should take particular care in their oversight of deposit brokers who are not regulated entities and:
- Are unknown to the bank.
- Conduct business or obtain deposits primarily in other jurisdictions.
- Use unknown or hard-to-contact businesses and banks for references.
- Provide other services that may be suspect, such as creating shell companies for foreign clients.
- Refuse to provide requested audit and due diligence information or insist on placing deposits before providing this information.
- Use technology that provides anonymity to customers.
Banks should also monitor existing deposit broker relationships for any significant changes in business strategies that may influence the broker’s risk profile. As such, banks should periodically re-verify and update each deposit broker’s profile to ensure an appropriate risk assessment.
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