BSAAML Compliance Amber Conley Assistant Vice President Thursday

BSA/AML Compliance Amber Conley, Assistant Vice President Thursday, May 9, 2019 Disclaimer: The views expressed in the following presentation are those of the presenter and the Federal Reserve Bank of Kansas City and do not necessarily reflect the views of the Federal Reserve System.

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Discussion Road Map • Examination expectations – 2018 Common BSA Findings – The Four Pillars – Regulatory Expectations for Higher Risk Accounts • Recent Guidance: New Supervision Regulation (SR) Letters • Regulatory Approach • Emerging Developments in BSA and – Cannabis, Hemp, and Digital Currency 3

Examination Expectations: 2018 Takeaways based on common findings from 73 Examinations More than 70 percent of examinations required no supervisory follow-up. 16 BSA Violations 21 Examinations with MRIAs /MRAs • Most commonly cited: • SAR filing issues • Late CTR filings • 314(a) information sharing • Most commonly related to: • Customer risk rating and due diligence • Suspicious activity monitoring and reporting • Currency transaction reporting 4

Examination Expectations: BSA/AML Program Pillars • Four Pillars of an Effective Program – System of internal controls to ensure ongoing Compliance • Importance of a Risk Assessment and Procedural Updates – Independent testing of BSA compliance • Minimum Independent Testing Expectations – A specifically designated BSA Officer • Sufficient Back-Up Support and Cross Training – Training for appropriate personnel • Including Non-Operational Staff 5

Examination Expectations: High Risk Accounts • Risk Management Efforts around Higher Risk Account Types Require More Attention and enhanced due diligence • Understand the Customer’s Business Operations – – Intended Use of the Account Anticipated Transaction Volume Products and Services Used Geographic Location • Ongoing Due Diligence for Highest Risk – Periodic On-Site Visits – Interviews with Management – Closer Review of Transactional Activity 6

Recent Guidance: New Supervision and Regulation (SR) Letters SR 18 -3 Federal Financial Institutions Examination Council Examination Procedures on Customer Due Diligence and Beneficial Ownership Rule 7

Recent Guidance: New Supervision and Regulation (SR) Letters SR 18 -8 Interagency Statement on Sharing Bank Secrecy Act Resources – Addresses instances in which banks may decide to enter into collaborative arrangements to share resources to manage their BSA/AML obligations SR 18 -10 Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing – Encourages banks to consider, evaluate, and responsibly implement innovative approaches to BSA/AML Compliance 8

Regulatory Approach • Tenor: "We ought to be taking a fresh look at everything. " – Federal Reserve Governor Randal Quarles, Vice Chair of Supervision • Tailoring: The Federal Reserve is in the process of implementing the BETR (Bank Exams Tailored to Risk) Program, which will include BSA. • Transparency: Recent Supervision and Regulation (SR) Letters communicate the Federal Reserve’s continued interest in right sizing expectations and addressing regulatory burden. 9

Emerging Developments: Cannabis Source: https: //www. csbs. org/marijuana-state-policy-map 10

Emerging Developments: Cannabis • Variation of Legality by State As of 1 -1 -19 Medical Marijuana Recreational Marijuana Hemp CBD Oil Federal Prohibited 2018 Farm Bill Legal from Hemp Colorado Legal Research Purposes Legal Kansas Prohibited Research Purposes Legal if 0% THC Missouri Legal Prohibited Research Purposes Under Review Nebraska Prohibited Research Purposes Prohibited New Mexico Legal Prohibited Research Purposes Legal for Medical Use Oklahoma Legal Prohibited Research Purposes Legal for Medical Use Wyoming Prohibited Research Purposes Legal for Medical Use 11

Emerging Developments: Cannabis Future of Cannabis: • Despite State Action, Marijuana Remains Illegal Federally Under the Controlled Substances Act. • Several legislative initiatives currently under consideration by Congress • Secure and Fair Enforcement Banking Act (SAFE Banking Act) • Tracking developments alongside you 12

Emerging Developments: Cannabis Banking Cannabis Customers: • Risk-Based decision making • Proactive Implementation of an Appropriate Program Structure • Adherence to Fin. CEN’s 2014 Guidance on Marijuana Related Businesses • “Ancillary Product” Questions 13

Emerging Developments: Hemp • Agricultural Improvement Act of 2018 (Farm Bill) • Hemp removed from Schedule I Status under the Controlled Substances Act • Creates guidelines by which states and tribes can assume primary regulatory authority over the production of hemp • USDA implementing regulations remain pending 14

Emerging Developments: Digital Currency • Digital currencies continue to garner significant attention. • Digital currencies, such as cryptocurrencies, currently pose limited concerns with respect to monetary control or financial stability. • Anonymity and resilience of cryptocurrency networks make them an easy target for money-laundering. • 2013 Fin. CEN Guidance to those administering, exchanging, or using virtual currencies. 15

BSA/AML Supervisory Contact Information • Jackie Nugent; Assistant Vice President – (816) 881 -2462; Jackie. Nugent@kc. frb. org • Tyler Crouse; Manager – (816) 881 -2452; Tyler. Crouse@kc. frb. org • Phil Magathan; BSA Coordinator – (816) 881 -4736; Phil. Magathan@kc. frb. org • Danielle Warner; Assistant BSA Coordinator – (402) 221 -5752; Danielle. Warner@kc. frb. org 16