Bank regulatory agencies

Federal Reserve Bulletin, Summer, 2004

The rule, which will be published shortly in the Federal Register, becomes effective on September 30, 2004.

Bank Secrecy Act Examination Procedures

The federal financial institutions regulatory agencies on July 28, 2004, issued Bank Secrecy Act (BSA) procedures for examining each domestic and foreign banking organization's customer identification program (CIP), which is required by section 326 of the USA Patriot Act (codified in the BSA at 31 U.S.C. 5318(l)). The procedures are designed to help financial institutions fully implement the new CIP requirements and facilitate a consistent supervisory approach among the federal financial institutions regulatory agencies.

The USA Patriot Act, signed into law on October 26, 2001, establishes new and enhanced measures to prevent, detect, and prosecute money laundering and terrorism. The regulation implementing section 326 of the act requires each financial institution to implement a written CIP that includes certain minimum requirements and is appropriate for its size and type of business. The CIP must be incorporated into the financial institution's anti-money laundering compliance program, which is subject to approval by the financial institution organization's board of directors.

Compliance with the regulation was required by October 1, 2003.

Regulatory Agencies Request Comment

Statement Concerning Complex Structured Finance Activities

Five federal agencies on May 14, 2004, requested public comment on a proposed statement describing internal controls and risk management procedures that the agencies believe will assist financial institutions that engage in complex structured finance activities to identify and address the risks associated with such transactions.

As recent events have highlighted, a financial institution may assume substantial reputational and legal risk if the institution enters into a complex structured finance transaction with a customer and the customer uses the transaction to circumvent regulatory or financial reporting requirements, evade tax liabilities, or further other illegal or improper behavior.

The interagency statement describes the types of internal controls and risk management procedures that should help financial institutions effectively manage and address the reputational, legal, and other risks associated with their complex structured finance activities and operate in accordance with applicable law. The statement, among other things, provides that financial institutions engaged in complex structured finance activities should have effective policies and procedures in place to

* identify those complex structured finance transactions that may involve heightened reputational and legal risk;

* ensure that these transactions receive enhanced scrutiny by the institution; and

* ensure that the institution does not participate in illegal or inappropriate transactions.

The statement also emphasizes the critical role of an institution's board of directors and senior management in establishing a corporate-wide culture that fosters integrity, compliance with the law, and overall good business ethics.