MANAGEMENT RESPONSE

Appendix 3
Page 2 of 3

Individuals trom FinCEN and the IRS Detroit Computing Center (DCC) conducted the training.

We have also substantially increased the number of employees (currently totaling 88) who are
trained to access the SARS and CBRS databases. The DCC is currently working on programming
changes to enable OCC employees to directly download pertinent data. Until the programming
changes are complete. DCC is downloading the data and providing it to the OCC on disk or via
electronic mail. The increased access and direct download capabilities will allow examiners to

* manipulate and analyze data on CTRs and SARs when planning and conducting BSA and anti-
money laundering (AML) examinations.

In addition, we are collaborating with FinCEN to develop ways to utilize their artificial intelligence
ilities to target banks that may be vulnerable to money laundering.

OCC and FinCEN are working together to design a program to identify and
target an customers for expanded review during the examination process. FinCEN
recently developed some analysis reports that we are using in the examination process on a pilot
basis. In addition, we have obtained access to Federal Reserve cash flow figures from FinCEN and
are developing reports from this data that will assist us in planning and conducting examinations.

Interagency Coordination

OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 12


processes and procedures. The objective of this concept is to ensure
compliance with applicable regulations, apply OCC policies
consistently, use resources efficiently, and reduce the regulatory
burden on industry.

OCC has made a concerted effort recently to improve its FBO
examinations for compliance with the BSA. In late 1996, OCC issued
a new handbook, Bank Secrecy Act Comptroiler’s Handbook, that
provided over 100 examination procedures to examiners. In 1997, it
combined the supervision of all FBOs under two Assistant Deputy
Comptrollers in its Northeastern District. That same year, it created a
fraud specialist position in each of its six district offices and
headquarters. It also developed a cadre of about 100 examiners
specializing in compliance, including BSA compliance, and money-
laundering detection. Finally, in 1998 it issued supplemental
examination guidelines extending the procedures for examination of
BSA compliance. In 1998, OCC examined 49 FBOs for compliance
with the BSA and invested over 2,300 staff hours.

Objective, Scope and Methodology

OIG-00-060

The objective of the audit was to determine whether OCC examination
and supervision over FBOs operating in the US was adequate to ensure
compliance with the BSA. The genesis of the OIG audit was an
undercover operation known as Operation Casablanca. This
undercover operation identified that drug cartels were laundering drug
proceeds through foreign banks operating in the US and resulted in
many indictments of bank officials and foreign banks as well as
seizures of millions of dollars.

The OIG conducted its fieldwork between January and

September 1999 at OCC Headquarters in Washington, D.C. and OCC
Districts in New York City, New York and Glendale, California. The
OIG also conducted fieldwork at FinCEN in Washington, D.C.

At OCC headquarters, the OIG discussed with personnel from the
Offices of Chief Counsel and Bank Supervision-Policy the supervision
over foreign bank compliance with the BSA and how it could be
improved. At each field location, the OIG obtained, reviewed and
discussed bank examination strategies, policies and procedures and
reviewed 26 of the 49 FBO compliance examinations conducted in
1998.

OCC BSA EXAMINATIONS OF FBOs Page 3


Management Response and OIG Comment

OCC management concurred with the OIG recommendation and has
already begun working with FinCEN to increase their fraud specialists
training and access to the Suspicious Activity Reporting System. OCC
has also conducted training sessions on the FinCEN systems and
substantially increased the number of employees trained to access the
SARS databases. :

The OIG believes OCC’s actions will address the issues surrounding
the recommendation.

Recommendation 1-2:

Management Response and OIG Comment

The OIG believes OCC’s actions will address the issues surrounding
the recommendation.

Recommendation 1-3:

The Comptroller of the Currency should ensure all BSA examiners
adequately document their examination results to comply with OCC
workpaper standards.

Management Response and OFG Comment
OCC management concurred.with the OIG recommendation and has

taken steps to improve the consistency of workpaper documentation
and supervision. OCC is currently updating its workpaper
documentation guidance and will be performing quality assurance
reviews beginning in the first quarter of 2000.

The OIG believes OCC’s actions will address the issues surrounding
the recommendation.

OIG-00-060

OCC BSA EXAMINATIONS OF FBOs Page 8


OIG-00-060

Improved Training Could
Enhance Exam Coverage

More and better training for fraud specialists over the access and use of
BSA information could provide OCC an opportunity to enhance FBO
examinations of BSA compliance. Taking full advantage of the BSA
information and the services available at FinCEN could also provide an
opportunity to leverage existing resources, and improve the efficiency
of bank supervision with a smaller, highly skilled workforce. Given
the dwindling foreign branches, it may be difficult to increase
examination resources without affecting other agency priorities.

Currently, district fraud specialists are the primary OCC personnel for
sorting and analyzing BSA information in the examination planning
process. However, OCC officials stated fraud specialists generally do
not ask FinCEN to sort BSA information or provide periodic reports on
suspicious bank currency activities. They agreed their examination
planning could be improved if FinCEN could provide routine reports
such as the institutions’ CTR filings. Also, OCC could improve the
usefulness of BSA information if the specialist received training on
how to request useful periodic reports from FinCEN. - Through better
training, OCC examiners would have access to more information
relating to money laundering trends, emerging issues and other
information useful in planning and conducting examinations.

At the 2 OCC locations visited, examiners and supervisors stated they
were not familiar with accessing the BSA information at FinCEN.
Instead, they relied on the fraud specialist to access the BSA
information and identify suspicious transactions and activities. One
supervisor stated the fraud specialist reviewed CTR and SAR
information and ran the information through filters to identify potential
suspicious activity. Adding, if suspicious activity was identified it
would be shared with the exam team. However, according to the
supervisor, the fraud specialist was also responsible for providing BSA
information for community bank examinations; the majority of OCC’s
examination workload. One fraud specialist stated he could use
additional assistants and still have plenty of work to do. However, the
specialist felt that getting additional support was unlikely given the
shrinking budgets and expanding workload for examiners.

Improved training offers three immediate benefits. First, the fraud
specialist could learn to sort, analyze and synthesize BSA information
to request useful periodic reports on suspicious bank currency
activities. These reports could also be tailored to identify patterns of
currency movements for certain areas such as High Intensity Drug

OCC BSA EXAMINATIONS OF FBOs Page 5


AS

Audit Results

This audit was conducted in accordance with the Government Auditing
Standards issued by the Comptroller General of the United States and
included such tests that were deemed necessary.

A detailed description of the objective, scope and methodology is
presented in Appendix 1.

Overall, the OCC BSA examination procedures were adequate and
being applied to most FBO examinations reviewed by the OIG. The
OIG believes OCC could improve its examinations of FBOs for BSA
compliance by enhancing the use of BSA information and the services
available through FinCEN. In addition, closer coordination and better
sharing of BSA information with other state and Federal financial
regulators could allow OCC to more effectively use BSA information.

Most FBO Examinations Adequately
Addressed BSA Compliance

The OCC examination procedures for determining FBO compliance
with BSA requirements were generally adequate and being applied in
the examinations reviewed by the OIG. The OIG reviewed 26 of the
49 FBO examinations conducted in 1998 and found the procedures in
23 examinations adequately addressed the institutional and examination
tisk at the FBO and that the procedures were consistent with those in
the Comptroller’s Handbook. However, 3 of the 26 examinations were
not adequately documented to show the procedures applied by the
examiners. As such, the OIG could not determine if examination
coverage was adequate for those three examinations. OCC
Northeastern District management agreed the documentation in those
examinations was not adequate. The results of the 26 examinations
reviewed by OIG are presented in Appendix 2.

Opportunities to Strengthen BSA Compliance

OIG-00-060

Opportunities exist for OCC to strengthen its examination of FBO
compliance with BSA requirements. Better training could allow OCC
examiners to identify and focus on suspicious currency transactions.
Better use of FinCEN information could also allow them to identify
trends and patterns useful in the examination planning process.
Further, better sharing of BSA information among financial institution
regulators could identify BSA information at the specific institution
under examination giving examiners useful information for planning or
using the BSA information.

OCC BSA EXAMINATIONS OF FBOs Page 4


OCC officials at the exit conference generally agreed they needed to
“push down” within the examination corps the working knowledge
over using FinCEN information and services. They agreed more
training for examiners and fraud specialists could broaden agency
working knowledge, relieve some of the demands for the fraud
specialists’ time and services and generally improve bank
examinations, especially in the planning phase. They stated
considerable efforts have been made to train examiners since OIG
performed its fieldwork. For example, about 20 examiners from two
districts were recently trained on using the information and services at
FinCEN. The examiners were receptive to the training and are now
using FinCEN information and services in their bank examinations.

OCC officials also agreed better use of FinCEN services could improve
bank examinations. To this end, OCC has been working with the
Detroit Data Processing Center to design special information and
periodic reports that allow OCC to proactively supervise banks’ BSA
activities and compliance rather than just during onsite examinations.

OCC officials were also receptive to coordinating with other Federal
financial institution regulators and agreed better sharing of information
among regulators could improve their examinations.

Recommendation 1-1:

‘OIG-00-060

The Comptroller of the Currency should take full advantage of the
training and artificial intelligence reporting opportunities at FinCEN to
expand district fraud specialists’ and compliance examiners’ knowledge
in accessing and using the BSA information in FBO examinations.

OCC BSA EXAMINATIONS OF FBOs Page 7


Comptroller of the Currency

OCC Examination of Foreign Branch Offices
Compliance With Bank Secrecy Act

OIG-00-060 March 3, 2000

This report has been reviewed for public dissemination by the Office of Counsel to
the Inspector General. Information requiring protection from public dissemination
has been redacted from this report in accordance with the Freedom of Information
Act, 5 U.S.C. section 552,

Office of Inspector General

United States Department of the Treasury


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OBJECTIVE, SCOPE AND METHODOLOGY

Appendix 1

The audit objective was to determine if OCC’s examination and supervision over foreign banks
operating in the U.S. was adequate to ensure compliance with the BSA. Specifically, the OIG
reviewed the adequacy of OCC’s examination and supervision over FBO compliance with the BSA
reporting requirements and determined if those procedures were consistently and adequately
applied during the examination.

The OIG’s audit was initiated, in part, because of a large comprehensive drug money laundering
undercover operation known as Operation Casablanca. This operation uncovered that drug cartels
were laundering drug proceeds through branches of foreign banks operating in the US. One of
many indictments charges foreign bank officials with participating in the drug money laundering,
which ultimately lead to the seizure of over $150 million and the arrest of over 100 individuals.

The audit was conducted in accordance with the Government Auditing Standards issued by the
Comptroller General of the United States and included such tests deemed necessary.

The OIG conducted its fieldwork between January and June 1999 at OCC headquarters in
Washington, D.C. as well as OCC District Offices in New York City, New York and Glendale,
California. At OCC headquarters, the OIG reviewed and discussed with management the BSA
laws and regulations, OCC’s performance plan for 1998 and strategic pian for FY 1997-2002.

The OIG reviewed OCC policies and procedures relating to the BSA and Community Bank
Consumer Compliance, reviewed management reports, background information on foreign banks
and discussed with OCC officials how to improve foreign bank BSA compliance examinations. At
OCC district offices in New York and California, the OIG discussed with officials and personnel
the working relationship between fraud specialists, compliance examiners, bank management and
Jaw enforcement agencies.

The OIG reviewed the workpapers for 26 of the 49 FBO BSA examinations OCC conducted in FY
1998 to determine the adequacy of the BSA examination coverage and the use of the BSA
information available at FinCEN in those examinations. In evaluating the examination adequacy,
the OIG determined OCC’s @@@aERMMBPrating and the examination hours relating to BSA
compliance. The OIG also evaluated the institutional and examination risk in relation to the
examination procedures applied to the examination.

The OIG also discussed the collection of BSA information with FinCEN officials in Washington,
D.C. and its data processing center in Detroit, Michigan. The OIG obtained from FinCEN the
number and dollar amount of CTRs and SARs filed for 1997 and 1998 by each foreign bank
regulated by OCC. This information was incorporated into the OIG’s review of selected BSA
examinations. The OIG did not verify the accuracy, completeness or reliability of the information
received from FinCEN.

ee -
OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 9


Trafficking Areas that could be valuable in planning BSA
examinations. Second, this training could save the specialist time by
having FinCEN provide periodic reports. And third, the specialist
could cross train examiners on how to use this information in planning
and conducting their examinations. FinCEN offers training to many
users of its information, including OCC.

FinCEN’s Technology Could
Enhance Examination Process

Better use of FinCEN information and services could improve BSA
examinations at minimal added cost to OCC. FinCEN analysts stated
its artificial intelligence system is very sophisticated and can organize,
analyze, and synthesize information contained in over 60 million BSA
reports. With this system, FinCEN can sort BSA information by dollar
amount, type of business, location and many other categories. By
setting parameters tailored for specific agency needs, OCC could
discern suspicious relationships between individuals and businesses.
The system could also be used to develop benchmarks to measure and
report suspicious activities useful to the BSA compliance examination.

OCC officials in the Northeastern District generally agreed they could
improve their examinations by making better use of FinCEN’s
technology to analyze the massive amounts of BSA information.

Better Interagency Coordination Could
Increase Usefulness of BSA Information

OIG-00-060 ‘OCC BSA EXAMINATIONS OF FBOs Page 6



Hee ee ee aaa ans an enamel

OIG-00-060

Bank Secrecy Act Reporting Requirements

BSA legislation was passed to address Congressional concerns that
large sums of cash were being deposited and laundered through the US
banking system. All banks operating in the US must comply with the
BSA. The implementing regulation (31 CFR 103) requires financial
institutions to file certain currency and suspicious activity reports and
to maintain certain records for criminal, tax, and regulatory
proceedings.

Enacted in October 1970, the BSA contains three basic reporting
requirements to monitor currency moving into and out of the country.
The principal reports for monitoring currency movements are (1) the
Currency Transaction Reports (CTR), (2) the Suspicious Activity
Report (SAR) and (3) the Currency or Monetary Instrument Report
(CMIR). Information from these BSA reports is reported and recorded
in the US Treasury Department’s FinCEN, the Government’s custodian
and manager of BSA information.

Congress created FinCEN in 1990 to administer the Government’s
anti-money laundering policies. As part of the Treasury Department,
its mission is to collect and provide law enforcement and regulatory
agencies with BSA information useful in detecting suspicious money
movement activity. Every year FinCEN receives millions of the
principal reports. In addition, FinCEN has developed an artificial
intelligence system that can sort and analyze information contained in

over 60 million BSA reports.
OCC Strengthening Its BSA Compliance Efforts

OCC has established four strategic goals to support its mission. One
goal is to improve the efficiency of bank supervision and reduce the
regulatory burden by streamlining supervisory procedures and
regulations. In 1997, there were seven objectives established to
accomplish these strategic goals. One of these objectives was to
enhance workforce skills, abilities and resources. To meet this
objective OCC is evolving towards a smaller, more highly skilled
workforce to better supervise the banking industry of the future.

The goal of OCC’s “supervision by risk” concept is to reduce

regulatory burden by concentrating on banking activities that pose the
highest risk and by focusing on bank operating results rather than

OCC BSA EXAMINATIONS OF FBOs Page 2


MANAGEMENT RESPONSE

Appendix 3
Page of 3

Workpaper Documentation

‘The report identified three instances where the OIG believed that the workpaper documentation was
insufficient to support conclusions reached. In order to improve the consistency of our workpaper
documentation and to ensure appropriate follow up to the OIG concerns, the OCC will:

¢ Inctude the workpaper documentation guidance (PPM 5400-8) in the Examination Planning &
Control Handbook. which is currently being updated:

* Expand the discussion of workpaper retention in the handbook to ernphasize minimum standards
of documentation: and

¢ Instruct the Northeastern District to perform periodic quality assurance reviews beginning in the
first quarter of 2000 to ensure workpaper documentation for FBOs is consistent with OCC
policies and procedures.

We are committed to ensuring that our supervisory efforts with respect to the Bank Secrecy Act and
anti-money laundering activities are comprehensive and effective. We believe we have
demonstrated that commitment through our expanded examination programs, establishment of a
National Anti-Money Laundering Group to serve as a focal point for BSA/AML supervision,
development of training programs to increase examiner expertise, and increased cooperation with
other regulators and Jaw enforcement agencies. While we feel we have made significant progress
in this area, we will continue to address identified shortcomings and strengthen our policies and
practices.

Technical corrections and editorial suggestions were provided to your auditors separately. We
appreciate the opportunity to review and comment on the report.

OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 13



REPORT DISTRIBUTION

Appendix 5

U.S. Department of the Treasury

Office of the Assistant Secretary for Financial Institutions

Office of Strategic Planning and Evaluations, Departmental Offices
Office of Accounting and Internal Control, Departmental Offices

Office of Budget, Financial Management Division, Departmental Offices

Office of Comptroller of the Currency
Comptroller of the Currency .

Senior Deputy Comptroller, Bank Supervision-Operations
Senior Deputy Comptroller, Bank Supervision-Policy
Chief Counsel

Director, Enforcement and Compliance

Assistant Director, Enforcement and Compliance

District Deputy Comptroller, Northeastern District
District Deputy Comptroller, Western District

Assistant Deputy Comptroller’s, New York Fed Branches
Director, Special Supervision/Fraud

District Fraud Specialist, Northeastern District

OIG Liaison

Financial Crimes Enforcement Network
Director
Chief Counsel

Office of Management and Budget
OIG Budget Examiner

OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 15



Overview

Background

The Office of Comptroller of the Currency (OCC) Bank Secrecy Act
(BSA) examination procedures were adequate and being applied in
most Foreign Branch Office (FBO) examinations reviewed by the
Office of Inspector General (OIG). However, the OIG believes OCC
could improve its examination of FBO compliance with the BSA by
enhancing its use of BSA information and the services available
through the Financial Crimes Enforcement Network (FinCEN). In
addition, closer coordination and better sharing of BSA information
with other state and Federal financial institution regulators could allow
OCC to more effectively use BSA information.

Many foreign banks operate branches in the United States (U.S.) to
promote commerce and provide service to its foreign and domestic
account holders. Although the permissible activities of an FBO are
similar to a national bank, an FBO operation is strikingly different.
Many branches offer basic banking services in the U.S. to corporations
and individuals. Some foreign branches are often small as to asset
size, have little or no retail operations, conduct relatively few cash
transactions and serve a select but well known customer base.
Therefore, OCC compliance examinations at FBOs are generally less
time consuming and smailer in scope than at domestic banks.

As of December 31, 1998, there were over 300 foreign banks doing
business in the US. These foreign banks reported assets totaling over
$1 trillion in 750 branches operating in the US. Each FBO is licensed
and supervised by a state or the Federal Government. As of June
1998, OCC supervised 64 of those branches, which reported about $75
billion of assets. According to OCC personnel, regulations prohibit
these FBOs from obtaining Federal Deposit Insurance Corporation
(FDIC) insurance. However, seven were FDIC insured under
grandfather provisions in the regulations.

The OCC is responsible for ensuring nationally chartered FBOs comply
with BSA requirements. To accomplish this, OCC examines BSA
compliance by the FBOs every 12 months.

O1G-00-060

es

OCC.BSA EXAMINATIONS OF FBOs Page 1


DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
March 3, 2000

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR JOHN D. HAWKE, JR., COMPTROLLER

OFFICE OF THE COMPTROYLER OF THE Y
FROM: Dennis S. Schindel

Assistant Inspector General for Audit

SUBJECT: Audit Report of the Office of Comptroller of
the Currency Examinations of Foreign Branch
Offices for Compliance with the Bank Secrecy
Act

This memorandum transmits the final report on the Office of
the Inspector General's (OIG) audit of the Office of
Comptroller of they»Currency (OCC) Examinations of Foreign
Branch Offices (FBO) compliance with the Bank Secrecy Act
(BSA) .

Overall, OCC BSA examination procedures were adequate and
being applied to most FBO examinations reviewed by the OIG.
The OIG believes OCC could improve its BSA compliance
examination of FBOs by enhancing its use of information and
services available through the Financial Crimes Enforcement
Network. In addition, closer coordination and better sharing
of BSA information with other state and Federal financial
institution regulators could allow OCC to more effectively
use BSA information in its examinations.

In its response to the draft report, OCC concurred with all
of the recommendations. The final report has been updated to
recognize the additional progress OCC has taken with regard
to increasing their training and intelligence capabilities.

We appreciate the courtesies and cooperation provided to our
staff during the audit. If you wish to discuss this report,
you may contact me at (202) 927-5400 or a member of your
staff may contact Benny W. Lee at (415) 977-8810 in San
Francisco.

Attachment

cc: Laura L. McAuliffe, Director, Management Improvement
Comptroller of the Currency


MANAGEMENT RESPONSE

Appendix 3
Page 1 of 1

6) MEMORANDUM

Comptroller of the Currency
Administrator of National Banks

Washington, OC 20219

To: Dennis S. Schindel. Assistant Inspector General for Soy
~
From: John D. Hawke. Jr.. Comptroller of the Currency

Date: December 17. 1999

Subject: Office of Inspector General (OIG) Draft Audit Report
Bank Secrecy Act Compliance

We have reviewed your draft audit report titled OCC Examination of Foreign Branch Offices’
Compliance with Bank Secrecy Act. We welcome the opportunity to respond to your findings and
recommendations.

The OIG report represents a review of 26 Bank Secrecy Act (BSA) examinations of Foreign Branch
Offices (FBOs) that were conducted by the OCC during 1998. We are pleased with the OIG’s
finding that. in almost all instances, the scope‘of the examinations was consistent with OCC policy
and the risks were appropriately addressed. In addition, we concur with the finding that the
workpaper documentation for three of the examinations should have been more complete. Your
Teport also contains three recommendations to enhance our supervisory activities with respect to
FBOs. These include maximizing the training and artificial intelligence opportunities available
through FinCEN, exploring ways to share BSA information on FBOs with other regulators, and
strengthening our workpaper documentation. As detailed below, we have already implemented
actions to address the first recommendation and will take steps to address the other two
recommendations.

FinCEN Initiatives

Your report recommends that OCC take full advantage of the training opportunities and artificial
intelligence capabilities offered by FinCEN. It is important to note that although we began working
with FinCEN in 1998 to increase training and access to the Suspicious Activity Reporting System
(SARS) and the Currency Banking and Retrieval System (CBRS), we have taken significant steps
during 1999 to enhance this cooperative effort. In February and June of this year, our fraud
specialists received specialized training regarding the FinCEN databases. In addition, in August we
conducted two training sessions on the FinCEN systems for examiners in four of our six districts.

i
OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 11


MAJOR CONTRIBUTORS

Appendix 4
Benny W. Lee, Program Director
Kenneth F. Wicklander, Audit Manager

John E. Carnahan, Auditor

OIG-00-060 OCC BSA EXAMINATIONS OF FBOs Page 14