Pub. 6 2017 Issue 3

The CommunityBanker 18 igh Stakes The stakes for complying with the Bank Secrecy Act (BSA) continue to rise higher and higher. Regulators, including the SEC, are making compliance a priority – anti-money laundering (AML) compliance was listed as a market-wide risk in the agency’s “Examination Priorities for 2017.” Three recent cases where non- compliance was found resulted in substantial fines and even individual liability. In January, Western Union entered into a $586 million settlement agreement with multiple agencies as a result of their failure to maintain an effective AML program. Banamex USA (a bank subsidiary of Citigroup) failed to maintain an effective AML program, resulting in a hefty settlement with the FDIC and California Department of Business Oversight of $140 mil- lion in 2015. Foreign companies aren’t exempt from failures either. In January 2017, Deutsche Bank was fined $41 million for violations by the Federal Reserve. Why is Model Validation Important? The Federal Reserve, OCC and FDIC all agree that the quality of any BSA/AML model output must be evaluated to verify the model’s accuracy. Reliance is placed on the BSA/AML model every time a transaction is processed, but the BSA/ AML monitoring department is not on the front line dealing with customers face-to-face. Instead, the monitoring depart- ment sits in the back office analyzing the outputs of the model for potential illicit behavior that may be happening out front. No matter the size of the institution or level of sophistica- tion of the model, if the model isn’t functioning correctly, the results will be inadequate. As noted above, regulators have honed in on issues related to the failure to maintain an effective program and the failure to identify unlawful activity. Without validating the model, your BSA/AML compliance program cannot be deemed effective because you have no idea of the quality of output. What’s the Validation Process? OCC Bulletin 2011-12 (Supervisory Guidance on Model Risk Management) explains that model validation should be per- formed by someone independent from the development of the model and daily users. While regulatory guidance does not re- quire the model validation to be performed by a specific party (in-house or outsourced), the validation should be conducted by someone with significant expertise and the authority to challenge the model development and specifications. H By Rachel Klein, CPA – Manager on the Community Banking Team; Yount, Hyde & Barbour BSA/AML Model Validation: How to Know