Anti-Money Laundering Program–Requirements

QUESTION 
I am the Anti-Money Laundering Program officer. I want to know three things: what are the required sections of the program, how to determine the core procedures that need to be in the program, and what are my responsibilities as the AML officer?

ANSWER 

There are four elements to the Anti-Money Laundering Program (“AML”) required by Financial Crimes Enforcement Network (“FinCEN”). 

These are:
1. Policy and Procedures
2. AML Compliance Officer
3. Training
4. Independent Testing

In order to determine the core procedures that an organization requires, it is necessary to assess its size, complexity, and risk profile, with respect to exposure to money laundering activity and terrorist financing schemes. Generally, the policy statement should contain actionable and measurable implementations in accordance with the Bank Secrecy Act (“BSA”). For instance, if the residential mortgage lender or originator obtains its loan applications not only through a retail channel but also through a wholesale or correspondent channel, or any other channel, its agents, brokers, or any similarly situated entity, must be included in the operational structure of its AML compliance requirements. Methodologies for reviewing all internal and agent relationships for compliance with the AML guidelines are part of the AML program.

The AML officer’s responsibilities are considerable. The primary responsibility is to oversee the implementation of the AML program. To accomplish this, the AML officer monitors compliance with AML guidelines in all loan origination channels as well as internally among employees, promptly updating and ratifying the program, when required, implementing training initiatives, and ensuring that independent testing is effectuated. Additionally, the AML officer’s oversight includes taking actions to assure that Safe Harbor guidelines are always followed.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Anti-Money Laundering–Red Flags and the SAR Narrative

Even though AML compliance for nonbanks has been in effect since August 13, 2012, many Residential Mortgage Lenders and Originators (RMLO) still seem to have considerable difficulty in two specific areas: how to determine when a Suspicious Activity Report (SAR) should be filed, and which suspicious activity events or features may trigger the SAR filing requirement.

In one article, entitled Anti-Money Laundering Debuts for Nonbanks, I unpack the AML Program in a way that will provides some familiarity with the AML Compliance scope, while perhaps also making its implementation a bit less daunting than it might otherwise seem to be.

In another article, entitled Anti-Money Laundering Program: Preparation is Protection, I outlined many of the so-called Red Flags and other triggering events. In addition, I offered a way to construct a SAR narrative - the description to FinCEN about the alleged suspicious activity - that, based on years of experience auditing and implement AML compliance on behalf of our clients, best meets FinCEN's expectations of an informative statement. 

To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over fifty pages – which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures – the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.

So, a word of caution is due: do not take the chance of buying an abbreviated or defective AML Program, in the hope of merely satisfying the “basic” FinCEN requirements. Obtaining a boilerplate document with your company’s name on it is regressive, and it is a tactic that Examiners are now regularly criticizing in adverse findings. 

These days, regulators are fully aware of this ‘short cut’ to compliance. An insufficient AML Program may cause adverse examination findings. Indeed, in some cases, template-driven policy and procedures may cause Examiners to escalate their regulatory review of an RMLO’s anti-money laundering implementation. 

AML compliance is a specialized area of mortgage compliance, necessitating genuine, practical, hands-on, regulatory compliance and experiential knowledge, and an AML Program must reflect precise policies and procedures that not only implement the SAR regulations but also conform to a company’s way of doing business. 

Therefore, an AML Program is one policy statement and set of procedures where the purchase price should not be an operative consideration. Caveat Emptor!

This is why I want to further outline the descriptive process of completing the SAR narrative, emphasizing a simple method I call The 5 W's and the How, and I will also provide details regarding both so-called Red Flags and triggering events. So, even if a company has a skimpy or defective AML policy and procedures, at least those who implement AML Compliance may be offered some rudimentary guidelines to consider in the practical experience of actually filing a SAR.

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IN THIS ARTICLE

The 5 W's and the How

Triggering Events

Documentation Red Flags

Applicant Red Flags

RMLO's Employee Red Flags

Library Resources

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The 5 W's and the How

If I were to choose the central feature of the SAR, I would select the SAR narrative. 

Each SAR requires a narrative to be provided by the SAR filer. 

Over time, my firm has compiled numerous examples of common patterns of suspicious activities from our audit and due diligence reviews. Based on our experience and FinCEN’s own stated guidance, we believe that there are five interrogative categories to be considered when writing a SAR narrative: who? what? when? where? and why?

Interview: Anti-Money Laundering Program for Nonbanks

Monday, August 13, 2012, marks the commencement of the Anti-Money Laundering Program.

 

Specifically, this is the effective date for implementing the regulatory compliance requirements for Residential Mortgage Lenders and Originators (RMLOs). 

 

From August 13, 2012 forward, RMLOs must have established an Anti-Money Laundering Program (AML Program) and, as required, file Suspicious Activity Reports (SARs).   

 

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued regulations earlier this year that require RMLOs to establish AML Programs and report suspicious activities under the mandates of the Bank Secrecy Act.

For additional background information, please refer to my March 2012 article, entitled Anti-Money Laundering Debuts for Nonbanks. *

This month, I am publishing yet another article on AML compliance, this time the subject is about drafting the Anti-Money Laundering Program. The article is entitled Anti-Money Laundering Program - Preparation is Protection. When published, I will notify you and send you the download link.

INTERVIEW: ANTI-MONEY LAUNDERING COMPLIANCE

Recently, I was interviewed by Paul Donohue, the Founder of Abacus Mortgage Training and Education, for his highly-regarded Abacus Mortgage Mastery Series.

I discussed at considerable length the many compliance features and guidelines of the Anti-Money Laundering Program. We had a detailed and engaging discussion about anti-money laundering as it relates to RMLOs.

I suggest that you listen to this interview, because it covers a broad range of issues and will help you to be prepared for implementing FinCEN's Anti-Money Laundering Program for RMLOs.

There are two ways for you to listen to the interview:

• Listen to the full Interview.
  • Click the Interview button on our website.

• Download the full interview (MP3) to save for future reference and AML training plans. 
  • Click the MP3 button on our website.

INTERVIEW

 

Anti-Money Laundering Compliance

 

CLICK

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

Mortgage Fraud in California, Nevada, and Florida

The Financial Crimes Enforcement Network (FinCEN) released its First Quarter 2012 on June 26, 2012, entitled Mortgage Loan Fraud Update - Suspicious Activity Report Filings in 1st Quarter 2012.*

This update of mortgage loan fraud suspicious activity reports, known as MLF SARs, shows that California, Nevada, and Florida lead the nation in the number of MLF SAR subjects per capita.

Of the 50 most populous Metropolitan Statistical Areas (MSAs) ranked by the number of MLF SAR subjects reported, the top nine are MSAs located in California, Nevada, and Florida. The Californian cities of Los Angeles, Long Beach, and Santa Ana ranked first in the nation for mortgage loan fraud SARs.

A closer look indicates that 19% of Q1 MLF SARs report activity that occurred within the past two years. Of this more recent activity, there were sharp increases in debt elimination schemes: comparatively, 14% reported in Q1-2012 versus 9% in Q1-2011. Foreclosure rescue scams show a dramatic increase: comparatively, 8% of these Q1-2012 filings versus less than 2% in Q1-2011.

In total, financial institutions filed 17,651 MLF SARs in the first quarter of 2012, which is down from 25,485 filed in the same quarter of 2011. According to the report, previous record levels were attributable to mortgage loan repurchase demands prompting reviews of dated mortgages. I would expect this trend to continue, inasmuch as 72% of Q1 filings are still reporting suspicious activity that occurred more than four years ago.

An interesting statistic is the extent to which mortgage fraud was prevented: 41% of the mortgage loan transactions were spotted and stopped before completion, up slightly from 40% in the CY 2011. However, that also means 59% of the subject transactions were not prevented before completion.

Let's look at some charts, sourced from the FinCEN report.

IN THIS ARTICLE

CHART 1:
Quarterly MLF Filings, Q1 2006 through Q1 2012
CHART 2:
Mortgage Loan Fraud - MLF SAR
CHART 3:
Mortgage Loan Fraud SAR Subjects-Top 20 States & Territories 
CHART 4:
Categories of Fraud Addressed in MLF SAR Narratives

New Fraud Patterns

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Chart 1: Quarterly MLF Filings, Q1 2006 through Q1 2012

FinCEN reported an unusual spike in MLF SAR filings during 2011 Q1 through Q3, primarily due to mortgage repurchase demands on banks. Those repurchase demands prompted review of mortgage loan origination and refinancing documents, where filers discovered fraud, which was then reported on SARs.

Chart 2: Mortgage Loan Fraud - MLF SARs

During both 2012 and 2011 Q1, a majority of reported activities actually began during or before 2008.

Chart 3: Mortgage Loan Fraud SAR Subjects - Top 20 States and Territories

Based on per capita rankings, California remained the top ranked state, as it was in Q4 and CY 2011. Nevada ranked 2nd, rising from its 5th place ranking in 2011 Q4. Florida's 3rd ranking was consistent with its showings between 2nd and 4th in the 2011 quarterly reports. Arizona and New York rounded out the top five per capita rankings. Arizona jumped into 4th from rankings in the 6th through 11th range during 2011, while New York jumped into 5th from rankings in the low to mid-teens during 2011.

Chart 4: Categories of Fraud Addressed in MLF SAR Narratives

Some noteworthy changes from CY 2011 include an increase in debt elimination schemes, which were addressed in 14% of 2012 Q1 sample SARs, up from 9% in CY 2011. In addition, foreclosure rescue scams (other than debt elimination) were noted in 8% of 2012 Q1 sample SARs, but had been described in less than 2% of CY 2011 reports. Appraisal fraud was described in 3% of 2011 Q1 reports, down from 12% of CY 2011 reports.

 

New Fraud Patterns

 

Homeowners' Insurance Fraud
FinCEN noted two SARs describing homeowners' insurance fraud related to mortgage fraud in the aftermath of home fires. In one instance, a home with two mortgages burned down. The borrower asked that the insurance check be payable to him instead of the mortgage lender, and did repay the first mortgage. But the subject ignored payment requests and subsequent demand letters from the filer on the second mortgage. In the other case, the filer suspected arson on a rental property insured for several times the mortgaged value. This subject repaid his mortgage loan with insurance proceeds and pocketed the additional insurance money.

Keys for Cash
One filer was notified by local law enforcement, based on a confirmed lead from a local realtor, about persons illegally occupying bank owned properties ("REOs"). The subjects moved into various bank owned properties claiming to have long term leases. However, the subjects' true objective appeared to be inducing lenders into paying them to vacate the premises.

Library

Financial Crimes Enforcement Network

Mortgage Loan Fraud Update -
Suspicious Activity Report Filings in 1st Quarter 2012

June 26, 2012

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

Anti-Money Laundering Program for RMLOs

A new era in filing requirements is about to begin. For the first time, the Financial Crimes Enforcement Network, known as “FinCEN,” will require nonbank mortgage lenders and originators to implement an Anti-Money Laundering program (“AML Program”) and file Suspicious Activity Reports (“SARs”) for certain loan transactions.[i] FinCEN is establishing this AML program in accordance with the Bank Secrecy Act (“BSA”).[ii] The guidelines relating to the AML requirement become effective on April 16, 2012, and the AML Program’s effective compliance date is August 13, 2012.[iii] The AML program and SAR filing regulations, which I will refer to as “FinCEN’s rule,” are considered to be “the first step in an incremental approach to implementation of regulations for the broad loan or finance company category of financial institutions.” [iv]

 

The Bank Secrecy Act defines the term "financial institution" to include, in part, a loan or finance company. This terminology, however, can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Thus, nonbank residential mortgage lenders and originators, and mortgage brokers, are grouped into the "loan or finance company" category.[v] However, the term ‘‘loan or finance company’’ is actually not concisely defined in any FinCEN regulation, and there is no legislative history on the term itself. Nevertheless, FinCEN is applying this term to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. [vi] Therefore, residential mortgage lenders and originators (“RMLOs”) are covered by the scope of the ‘‘loan or finance company’’ term. I will use the acronym “RMLO” in this article, inasmuch as my principal focus herein relates to residential mortgage lenders and originators.

 

FinCEN can issue regulations requiring financial institutions to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism. Federally regulated depository institutions have been required to have AML Programs,[vii] and now, as of the aforementioned effective compliance date, RMLOs must also comply with FinCEN’s regulations relating to implementing an AML Program and the filing of SARs.

 

Over the last few years,[viii] FinCEN has issued studies and analyses that used SARs to discover suspected mortgage fraud and money laundering that involved both banks and residential mortgage lenders and originators.[ix] According to FinCEN, these reports “underscore[d] the potential benefits of AML and SAR regulations for a variety of businesses in the primary and secondary residential mortgage markets.”[x]

 

Residential mortgage lenders and originators, the RMLOs, are considered to be the primary providers of mortgage finance, and have a unique position with respect to direct contact with the consumer. Thus, they are presumably able to assess and identify money laundering risks and fraud.[xi] At this time, FinCEN is not proposing a definition of “loan or finance company’’ that would encompass other types of consumer or commercial finance companies, or real estate agents and other entities involved in real estate closings and settlements.

 

In this article, I am going to unpack the AML Program for you in a way that will give you some familiarity with its scope, while perhaps also making its implementation a bit less daunting than it might otherwise seem to be. Nevertheless, many RMLOs will find that setting up the AML Program will be a challenging endeavor. Information, issuances, and relevant documentation are available in the FinCEN section of my firm’s website Library.

 

Please keep in mind that, as is the case with many applications of legal and regulatory compliance, there are aspects and nuances that will require recourse to a competent risk management professional to obtain comprehensive guidance and reliable information.[xii]

 

AML PROGRAM

 

Residential mortgage lenders and originators, the RMLOs, are required to establish an AML Program that includes, at a minimum:

 

(1) Development of internal policies, procedures, and controls.

(2) Designation of a compliance officer.

(3) Ongoing employee training program.

(4) Independent audit function to test for compliance.