Chairman McHenry, Ranking Member Green, and other members of the subcommittee, thank you for the opportunity to testify about the Federal Reserve's supervisory activities pertaining to banking organizations and their account relationships with law-abiding businesses. In my testimony, I will describe the legal framework governing the establishment and maintenance of customer accounts and the regulatory expectations the Federal Reserve has established for the banking organizations we supervise. I will also highlight related aspects of our examination and enforcement process in this area.
Let me begin by saying that the Federal Reserve believes it is important that banking organizations provide services to consumers and businesses whose activities comply with applicable laws. It is equally important that the banks we supervise do not facilitate or participate in illegal activity. Indeed, during the past several years the Federal Reserve has provided information to the banking organizations we supervise to clarify the requirements for providing account services to law-abiding businesses.
Legal Framework and the Federal Reserve's
The Federal Reserve and the other federal banking agencies have published an examination manual intended to provide practical and flexible guidance to examiners and banking organizations regarding acceptable customer due-diligence and risk-mitigation practices as part of an effective BSA program.4 The Federal Reserve expects a banking organization to maintain adequate policies and procedures to address risks associated with customer relationships. The scope of these policies and procedures will depend on the banking organization's ongoing assessment of the risks posed by the particular customer relationship. A banking organization takes many factors into account when conducting a customer risk assessment including, in particular, the standards the customer has in place to ensure compliance with applicable laws and regulations, and the relationship the customer seeks with the banking organization. It is essential that banking organizations make a judgment as to customers with respect to the level of risk they pose.
The purpose of these policies is to ensure banking organizations provide services to law-abiding customers. The decision to establish, limit, or terminate a particular customer relationship is a decision for the banking organization. This decision may be based on various factors, including a banking organization's assessment of the risks associated with offering banking services to a particular customer, and its capacity and systems to effectively manage those risks. It is not the Board's policy to discourage banking organizations from offering services to any class of law-abiding financial services consumers or businesses.
Payment Services Offered by Nonbanks
Many of the questions that have arisen with respect to the customer due-diligence expectations of the federal banking agencies relate to the involvement of nonbanks as intermediaries or providers of financial services, including money services businesses (MSBs) and third-party payment processors (TPPPs). MSBs provide financial services, such as check cashing, money remittance, and other services, to customers that do not have traditional bank accounts. Some MSBs include large, globally active companies while others are small businesses such as gas stations and convenience stores offering financial products and services. By comparison, TPPPs are bank customers that provide payment-processing services to merchants and other entities such as telemarketers and online businesses. Both MSBs and TPPPs engage in transactions with individuals and companies who are not direct customers of the bank.
The Federal Reserve follows guidance issued in 2005 by the federal banking agencies and the
The Federal Reserve also follows the interagency examination manual and related guidance issued by FinCEN when evaluating the procedures banking organizations use to manage account relationships with TPPPs.6 These entities often use their commercial bank accounts to conduct payment processing for their merchant clients. The guidance is designed to assist banking organizations in designing and implementing policies and systems for monitoring and managing the risks associated with the payment and lending products they offer. The objective of the guidance and the Federal Reserve's supervisory activities is to direct banking organizations to take appropriate steps to offer their services to legitimate and law-abiding customers, and to minimize the risk of facilitating money laundering, terrorist financing, or other illicit activity.
Examination and Enforcement Process
Consistent with this mandate, the Federal Reserve generally conducts regular on-site examinations of each bank it is charged with supervising on an alternating basis with state banking supervisors. As part of these examinations, examiners review the institution's AML procedures and its compliance with the BSA. For large, complex banking organizations, the safety and soundness examination process is continuous, and anti-money-laundering and BSA compliance is incorporated into the examination process.
When we find that a bank has not adopted a program and procedures that properly meet the bank's BSA obligations, the matter is discussed with bank management and noted in the institution's report of examination. The Federal Reserve's enforcement actions under the BSA typically are aimed at correcting deficiencies in an organization's policies and procedures for monitoring account activities and identifying unlawful or suspicious transactions.
Recent Justice Department Initiative
Finally, regarding the focus of this hearing,
Thank you very much for inviting me to present the Federal Reserve's views on these important issues. I would be pleased to answer any questions you may have.
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