Highlights of Michael Held's Speech at the 1LoD Summit

Michael Held, Executive Vice President of the Legal Group at the Federal Reserve Bank of New York, spoke at the 1LoD Summit in New York on April 2, 2019. In his speech, he thanked the risk managers that act as the first line of defense against financial crime and provided important information about risk management and detecting and preventing financial crimes, specifically Anti-Money Laundering (“AML”)/Countering Terrorist Financing and Economic Sanctions in the banking world. Below are points from his speech financial institutions ("FIs") should consider when reviewing their compliance program.

Beneficial Ownership Rule

The Bank Secrecy Act ("BSA") and other statutes rely on banks and other financial institutions to safeguard the payment system. Mr. Held stressed the importance for firms to think of the “beneficial owner rule, like other ‘know your customer’ rules, (as) a regulatory floor, not ceiling.” FIs should craft their compliance programs so they exceed the requirements set by the Financial Crimes Enforcement Network (“FinCEN”). Mr. Held requests firms to “take the initiative to implement more stringent internal rules based on their risk.” Learn more about how to use technology enhancements for beneficial ownership solution implementation.

Experimenting with Stronger Controls

Mr. Held expanded his thoughts of going above and beyond the regulatory requirements. He speculates that “… the pace of rulemaking is not always commensurate with the pace of rule breaking.” Therefore, “complying with minimum legal thresholds may not be sufficient in all circumstances to appropriately mitigate risk to your firm or the payment system.” While technology has expanded access to the payment system, it has also created new ways for criminals to commit financial crimes. He agreed with the guidance published by the federal banking agencies in December 2018 that pilot programs should be developed in an effort to make compliance more efficient. Just as technology has created new opportunities for criminals, it can also be used to fight such crime. Find out how technology can help combat financial crime.

Focus on Trade-Based Money Laundering

Although technology poses a threat to the payment system, most financial crime stories revolve around more well-established risks – theft, fraud, greed and corruption. Mr. Held is concerned about trade-based money laundering in particular. He spoke about the Department of Homeland Security and Drug Enforcement Administration’s warnings about low-tech solutions to make illegitimate transfers appear ordinary and FinCEN’s warnings against the use of “funnel accounts.”

Where Do We Go From Here?

Mr. Held suggested the following solutions to help combat today’s financial crime:

• Build Good Habits – He suggested that FIs create an environment where red flags are acted upon more frequently because “effective compliance gets better with practice.” Each time an FI looks the other way, it becomes easier to ignore the next red flag, however each time we intervene, the next time intervention becomes easier.
• Just Because It’s Legal, Doesn’t Make it Right – Risk professionals in the first line of defense should, “Consider the bigger picture – the purpose of relevant laws, the client’s needs, common sense, and fairness.” Whether or not an institution does business with a certain client, does not necessarily depend upon the laws and regulations, but rather on the institution’s principles. If a client’s actions are legal, but not within the risk framework an institution has set up, they may choose not to do business with the client.
• Manage Account Relationships – FI need to do this with respondent banks as well as clients. FI need to “ask enough questions when confronted with serious red flags about respondent bank’s activities” to avoid unfairly exposing themselves to risks. FIs also need to know their clients and the ordinary behavior of their clients. Mr. Held suggests this understanding comes from “meeting a customer in person and speaking with her about her business goals.”
• Improve Communication – Communication and information sharing needs work in an number of places:
  • Within a firm, the question needs to be asked whether there are frank discussions taking place between groups or teams about common challenges.
  • Between and among firms FIs need to take advantage of inter-bank information sharing opportunities. For example, “Does your firm insist that customers use the proper SWIFT message type with all the required fields completed in the right format? And, if your firm processes high-risk activity with limited transparency, do you ask respondent banks to supplement payment messages with additional information?”
  • When communicating with the government, a firm should consider how helpful are their suspicious activity reports ("SARs").