How rigorous is your BSA/AML/sanctions issue validation process?

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Bank Secrecy Act/Anti Money Laundering and sanctions compliance programs

Check-the-box issue validation is no longer sufficient now that US regulators have intensified their focus on remediation related to Bank Secrecy Act/Anti Money Laundering (BSA/AML) and sanctions compliance programs.

New enforcement actions against financial institutions are now routine, with regulators increasingly requiring an independent and objective validation program to assess closure of management action plans before closure packages can be formally submitted to the regulators.

Even if not specifically stipulated by the regulators, a robust issue validation program has become a fundamental expectation of regulatory authorities.

“In the past two years, more than 80 consent orders totaling in excess of $3 billion in fines have been issued by US regulators on financial institutions over BSA/AML and sanctions.”

Issue resolution

Responding to regulatory findings is management’s responsibility—not the issue validation team’s. However, focusing on certain aspects of a remedial action plan have proven particularly important in the downstream validation effort:

  • Spirit of the issue
  • Granularity of remediation projects
  • Assessment of timeframes and expertise
  • Risk and underlying mitigating controls, including supporting documentation and sustainability

Issue validation

Integrating leading issue validation practices will help establish an effective, efficient and consistent issue validation process across pre-planning, planning, execution and reporting. But even with these leading practices, issue validation efforts are often underestimated in these areas:

  • Number of reports
  • FinCEN’s CDD Rule
  • Structure of control environment
  • Technology

People strategy

Effective issue validation requires dedicated resources, experience and expertise. Regulators also expect that financial institutions will engage specialists as needed. Issue validation teams should be able to:

  • Understand key requirements of BSA/AML and sanctions risk assessment methodology and customer risk rating methodology
  • Assess and determine appropriate disposition of alerts and case reviews
  • Review transaction monitoring (e.g., code logic, threshold tuning)
  • Understand OFAC/sanctions screening results
  • Assess protocols for handling new product approval requirements
  • Assess controls related to customer due diligence and enhanced due diligence activity

Tech and data-driven

Organizations are enhancing their issue validation frameworks by incorporating analytics-based transactional testing into their BSA/AML and sanctions issue validation approach. Using these tools and technologies they are:

  • Identifying and analyzing trends for AML red flags
  • Conducting risk-based stratification of large volumes of data and assessing data lineage
  • Using natural language processing (NLP) capabilities to extract meaningful information from SWIFT, FED and CHIP payment messages for increased effectiveness of testing over transaction datasets

Analytics tools can also be built that make the validation process more efficient and support continuous monitoring moving forward.

Reaping the value of rigor

There are five key benefits to introducing a robust and rigorous issue validation program:

Contact us

Hanh Pham

Hanh Pham

Partner, Internal Audit, Compliance & Risk Management Solutions, PwC US

Vasilios Chrisos

Vasilios Chrisos

Advisory, Financial, PwC US

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