Bank Secrecy Act |
Funds Transfers—Overview
Objective. Assess the adequacy of the bank’s systems to manage the risks associated with funds transfers, and management’s ability to implement effective monitoring and reporting systems. This section expands the core review of the statutory and regulatory requirements of funds transfers to provide a broader assessment of AML risks associated with this activity.
Payment systems in the United States consist of numerous financial intermediaries, financial services firms, and non-bank businesses that create, process, and distribute payments. The domestic and international expansion of the banking industry and non-bank financial services has increased the importance of electronic funds transfers, including funds transfers made through the wholesale payment systems. Additional information on the types of wholesale payment systems is available in the FFIEC Information Technology Examination Handbook.162
Funds Transfer Services
The vast majority of the value of U.S. dollar payments, or transfers, in the United States are ultimately processed through wholesale payment systems, which generally handle large-value transactions between banks. Banks conduct these transfers on their own behalf as well as for the benefit of other financial service providers and bank customers, both corporate and consumer.
Related retail transfer systems include automated clearing houses (ACHs), automated teller machines (ATMs), point-of-sale (POS) systems, telephone bill paying, home banking systems, debit cards, and stored value cards. Most of these retail transactions are initiated by customers rather than by banks or corporate users. These individual transactions may then be combined into larger wholesale transfers, which are the focus of this section.
The two primary domestic wholesale payment systems for interbank funds transfers are the Fedwire Funds Service (Fedwire®)163 and the Clearing House Interbank Payments System (CHIPS).164 The bulk of the dollar value of these payments is originated electronically to make large value, time-critical payments, such as the settlement of interbank purchases and sales of federal funds, settlement of foreign exchange transactions, disbursement or repayment of loans; settlement of real estate transactions or other financial market transactions; and purchasing, selling, or financing securities transactions. Fedwire and CHIPS participants facilitate these transactions on their behalf and on behalf of their customers, including non-bank financial institutions, commercial businesses, and correspondent banks that do not have direct access.
Structurally, there are two components to funds transfers: the instructions, which contain information on the sender and receiver of the funds, and the actual movement or transfer of funds. The instructions may be sent in a variety of ways, including by electronic access to networks operated by the Fedwire or CHIPS payment systems; by access to financial telecommunications systems, such as Society for Worldwide Interbank Financial Telecommunication (SWIFT); or e-mail, facsimile (fax), telephone, or telex. Fedwire and CHIPS are used to facilitate U.S. dollar transfers between two domestic endpoints or the U.S. dollar segment of international transactions. SWIFT is an international messaging service that is used to transmit payment instructions for the vast majority of international interbank transactions, which can be denominated in numerous currencies
Fedwire
Fedwire is operated by the Federal Reserve Banks and allows a participant to transfer funds from its master account at the Federal Reserve Banks to the master account of any other bank.165 Payment over Fedwire is final and irrevocable when the Federal Reserve Bank either credits the amount of the payment order to the receiving bank’s Federal Reserve Bank master account or sends notice to the receiving bank, whichever is earlier. Although there is no settlement risk to Fedwire participants, they may be exposed to other risks, such as errors, omissions, and fraud. Participants may access Fedwire by three methods:
- Direct mainframe-to-mainframe (Fedline Direct).
- Internet access over a virtual private network to web-based applications (FedLine Advantage).
- Off-line or telephone-based access to a Federal Reserve Bank operations site.
CHIPS
CHIPS is a privately operated, real-time, multilateral payments system typically used for large-dollar payments. CHIPS is owned by banks, and any banking organization with a regulated U.S. presence may become a participant in the system. Banks use CHIPS for the settlement of both interbank and customer transactions, including, for example, payments associated with commercial transactions, bank loans, and securities transactions. CHIPS also plays a large role in the settlement of USD payments related to international transactions, such as foreign exchange, international commercial transactions, and off-shore investments.
Continuous Linked Settlement (CLS) Bank
CLS Bank is a private-sector, special-purpose bank that settles simultaneously both payment obligations that arise from a single foreign exchange transaction. The CLS payment-versus-payment settlement model ensures that one payment segment of a foreign exchange transaction is settled if and only if the corresponding payment segment is also settled, eliminating the foreign exchange settlement risk that arises when each segment of the foreign exchange transaction is settled separately. CLS is owned by global financial institutions through shareholdings in CLS Group Holdings AG, a Swiss company that is the ultimate holding company for CLS Bank. CLS Bank currently settles payment instructions for foreign exchange transactions in the following currencies: Australian dollar, Canadian dollar, Danish krone, euro, Hong Kong dollar, Japanese yen, New Zealand dollar, Norwegian krone, Singapore dollar, South African rand, South Korean won, Swedish krona, Swiss franc, UK pound sterling, and U.S. dollar, and is expected to add more currencies over time.
SWIFT
The SWIFT network is a messaging infrastructure,166 not a payments system, that provides users with a private international communications link among themselves. The actual funds movements (payments) are completed through correspondent bank relationships, Fedwire, or CHIPS. Movement of payments denominated in foreign currencies occur through correspondent bank relationships or over funds transfer systems in the relevant country. In addition to customer and bank funds transfers, SWIFT is used to transmit foreign exchange confirmations, debit and credit entry confirmations, statements, collections, and documentary credits.
Informal Value Transfer Systems
An informal value transfer system (IVTS) (e.g., hawalas) is a term used to describe a currency or value transfer system that operates informally to transfer money as a business.167 In countries lacking a stable financial sector or with large areas not served by formal banks, IVTS may be the only method for conducting financial transactions. Persons living in the United States may also use IVTS to transfer funds to their home countries.
Payable Upon Proper Identification Transactions
One type of funds transfer transaction that carries particular risk is the payable upon proper identification (PUPID) service. PUPID transactions are funds transfers for which there is no specific account to deposit the funds into and the beneficiary of the funds is not a bank customer. For example, an individual may transfer funds to a relative or an individual who does not have an account relationship with the bank that receives the funds transfer. In this case, the beneficiary bank may place the incoming funds into a suspense account and ultimately release the funds when the individual provides proof of identity.
Risk Factors
Funds transfers may present a heightened degree of risk, depending on such factors as the number and dollar volume of transactions, geographic location of originators and beneficiaries, and whether the originator or beneficiary is a bank customer. The size and complexity of a bank’s operation and the origin and destination of the funds being transferred will determine which type of funds transfer system the bank uses. The vast majority of funds transfer instructions are conducted electronically; however, examiners need to be mindful that physical instructions may be transmitted by other informal methods, as described earlier.
IVTS pose a heightened concern because they are able to circumvent the formal system. The lack of recordkeeping requirements coupled with the lack of identification of the IVTS participants may attract money launderers and terrorists. IVTS also pose heightened BSA/AML concerns because they can evade internal controls and monitoring oversight established in the formal banking environment. Principals that operate IVTS frequently use banks to settle accounts.
The risks of PUPID transactions to the beneficiary bank are similar to other activities in which the bank does business with noncustomers. However, the risks are heightened in PUPID transactions if the bank allows a noncustomer to access the funds transfer system by providing minimal or no identifying information. Banks that allow noncustomers to transfer funds using the PUPID service pose significant risk to both the originating and beneficiary banks. In these situations, both banks have minimal or no identifying information on the originator or the beneficiary.
Risk Mitigation
Funds transfers can be used in the placement, layering, and integration stages of money laundering. Funds transfers purchased with currency are an example of the placement stage. Detecting unusual activity in the layering and integration stages is more difficult for a bank because transactions may appear legitimate. In many cases, a bank may not be involved in the placement of the funds or in the final integration, only the layering of transactions. Banks should consider all three stages of money laundering when evaluating or assessing funds transfer risks.
Banks need to have sound policies, procedures, and processes to manage the BSA/AML risks of its funds transfer activities. Such policies may encompass more than regulatory recordkeeping minimums and be expanded to cover OFAC. Funds transfer policies, procedures, and processes should address all foreign correspondent banking activities, including transactions in which U.S. branches and agencies of foreign banks are intermediaries for their head offices.
Obtaining customer due diligence (CDD) information is an important mitigant of risk in providing funds transfer services. Because of the nature of funds transfers, adequate and effective CDD policies, procedures, and processes are critical in detecting unusual and suspicious activities. An effective risk-based suspicious activity monitoring and reporting system is equally important. Whether this monitoring and reporting system is automated or manual, it should be sufficient to detect suspicious trends and patterns typically associated with money laundering.
Originating and beneficiary banks should establish effective and appropriate policies, procedures, and processes for PUPID activity including:
- Specifying the type of identification that is acceptable.
- Maintaining documentation of individuals consistent with the bank’s recordkeeping policies.
- Defining which bank employees may conduct PUPID transactions.
- Establishing limits on the amount of funds that may be transferred to or from the bank for noncustomers (including type of funds accepted (i.e., currency or official check) by originating bank).
- Monitoring and reporting suspicious activities.
- Providing enhanced scrutiny for transfers to or from certain jurisdictions.
- Identifying disbursement method (i.e., by currency or official check) for proceeds from beneficiary bank.
