New York Proposes to Require Enhanced Anti-Money Laundering Measures for Financial Institutions and Impose Criminal Liability for Non-Compliance

Earlier this month the New York State Department of Financial Services (the "DFS") released a proposed regulation (the "Proposal") which would mandate enhanced anti-terrorism and anti-money laundering ("AML") requirements under the Bank Secrecy Act ("BSA") for financial institutions licensed and regulated by the State.  Furthermore, the Proposal would, for the first time, potentially subject the chief compliance officer (or equivalent) of a New York financial institution to criminal sanctions for noncompliance.  The Proposal would apply to all banks, trust companies, private bankers, savings & loans, savings banks, branches and agencies of foreign banks, check cashers, and money transmitters chartered or licensed by the State.

With its publication in the State Register on December 16, the clock started running for the 45-day comment period, which will end on February 1.  If you have particular concerns regarding the impact of the Proposal on your institution, you should consider filing written comments with the DFS.  Those institutions that are members of the New York Bankers Association ("NYBA") may want to provide input to NYBA's comments as well.  Please let us know if we can assist with this.

The Proposal reflects three current and growing trends of which all New York financial institutions should be aware:

  • The DFS' aggressive approach to enforcement generally - which it has demonstrated a willingness to pursue independently of the federal regulators.  Over the past few years the DFS has assessed fines in excess of $300 million related to AML and sanctions violations by institutions it supervises.

  • The perception that financial institutions are not taking adequate measures to monitor customer transactions to deter money laundering and terrorist financing - especially in light of the recent terrorist attacks here and abroad.  As the nation's financial center, New York is perceived to be at greater risk, providing the rationale for the DFS to be out front on this issue.

  • An increasing emphasis on holding individual officers responsible for the failure of an institution to comply with AML and other requirements.  Like other financial regulators, the DFS is signaling its concern that some financial institutions may be treating monetary penalties as just a "cost of doing business."  Imposing personal liability on individual officers is intended to assure their focus on compliance.  In this regard, the Proposal mimics the federal Sarbanes-Oxley Act of 2002, which required annual certification by principal executives and financial officers of public companies.

The Proposed Rule

The Proposal, which would be codified as Part 504 of the Superintendent's Regulations, would apply to all financial institutions chartered or licensed under New York Banking Law ("Regulated Institutions").  Its preamble states that the DFS has identified "shortcomings in the transaction monitoring and filtering programs" of Regulated Institutions and "a lack of robust governance, oversight, and accountability at senior levels" of these institutions.   To address these perceived deficiencies, the following measures will be required:

1.  Risk Assessment.

Regulators expect that banks and other financial institutions implement a BSA/AML program that is risk-based, in accordance with an internal assessment of money laundering risk.  The Proposal for the first time codifies this requirement, mandating that each Regulated Institution conduct an ongoing and comprehensive assessment of the money laundering risk posed by each customer, product and line of business. 

2.  A Transaction Monitoring Program. 

Reflecting the perceived inadequacies of existing programs at individual institutions, the Proposal spells out the minimum requirements of a transaction monitoring program in granular detail.  Among other requirements, the program should be based on the institution's AML Risk Assessment and mapped to specific businesses, products and customers.

3.  A Watch List Filtering Program.

The watch list filtering program must be designed to intercept transactions that are forbidden by applicable sanctions, including (but not limited to) OFAC, before they are executed.  Like the Transaction Monitoring Program, it must be based on the Institution's ongoing Risk Assessment.  Furthermore, it should incorporate appropriate tools and technology for matching names and accounts.  While the Proposal does not mandate any particular tool, it does note that there are automated tools available that use algorithms based on so-called "fuzzy logic."

The Proposal expressly prohibits "tinkering" with the Transaction Monitoring or Watch List Filtering Programs in order to minimize the number of alerts generated or Suspicious Activity Reports (SARs) filed by the Regulated Institution.  The Proposal states that both Programs may be either automated or manual; however, given the risks involved with non-compliance, most institutions would be well-advised to implement an automated program, if they have not done so already. 

4.  Certification.

Perhaps most significantly, the Proposal explicitly requires that the institution's Chief Compliance Officer (or equivalent) annually prepare and sign a certification, addressed to the DFS, confirming that he/she has reviewed, or caused to be reviewed, the institution's Transaction Monitoring and Watch List Filtering programs and that both programs comply with the requirements set forth in the Proposal.  A form certification is provided with the Proposal.  The Proposal states that an officer who files a false or incorrect certification may be subject to criminal prosecution. 

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In short, while federal law already requires all institutions to have a BSA/AML compliance program in place, the Proposal would raise the bar for New York institutions whose programs are not sufficiently robust, and for the institution's CCO or other officer in charge of implementing the program.

We will be pleased to assist you in preparing for the Proposal.  Please contact David L. Glass at the White Plains office by phone at (914) 694-4102 or via email at for further information.

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