United States

7 steps: How to respond effectively to an AML enforcement action


Receiving notice of an enforcement action for a BSA/AML violation is a very stress inducing event for a bank or financial services institution. Marshalling a quick and appropriate response is crucial. Here are seven steps to an effective response:

1. Do not panic and act hastily! Develop an action plan.

It is important that the organizational response to the enforcement action is the result of an effective remediation process and not a poorly executed reflexive action. The first undertaking is to understand that an effective response will take additional time, effort and resources. The remediation plan should include a plan to ensure that the organization continues to operate effectively. The efforts to comply with an AML enforcement action should not divert the requisite attention and resources away from your business-as-usual activities. A large remediation plan can be a major diversion and is a common source of added business risk and lowered controls in the impacted organization - the unintended fallout of a large scale remediation plan.

2. Define the solution.

Every AML enforcement order is comprised of various articles outlining the specific concerns relating to violations of policy or regulatory requirements or weaknesses in the BSA/AML program. The specific articles may focus on a variety of areas within the BSA/AML program, including:

  1. Adequate staffing and training
  2. Independent testing
  3. Know-your-customer (KYC) and monitoring systems
  4. Board oversight
  5. Policies and procedures
  6. Risk assessments
  7. Internal controls
  8. Onboarding and customer identification programs
  9. OFAC and sanctions monitoring
  10. Suspicious activity reporting

Discuss the overall approach to the remediation plan with your legal advisor, senior management and the examiners to gain a clear understanding of exactly what the enforcement action entails, and identify the departments and the specific functions within the organization that will be impacted.  

3. Don't build a "B-Team"! Use your most experienced players.

Establish a board committee that will be charged with the responsibility to make certain the institution complies with all the provisions of the order. This committee should be your "A-Team". The committee should include the best and the brightest from your management team; board members who can dedicate the necessary time to the remediation process; and team members with strong project management experience to ensure timelines are adhered to, that progress reports to the board committee and the regulators are accurate, complete and presented timely. It is important to maintain independence between your remediation team and your internal audit function. Internal audit will be charged with validating and testing your regulatory action response, and therefore, must remain independent of the remediation effort. Finally, senior management and the remediation leader need to draw realistic expectations about how much of the remediation efforts can be effectively completed with internal staff before an outside consultant is retained.

4. Don't be cheap! Focus on quality.

Responding to an enforcement order will be a difficult and intensive process and will likely need to be completed in a tight time frame. Tight deadlines combined with expert advice and overburdened compliance and control staff require that you get outside resources to help manage the remediation. After you've reviewed all the articles in the enforcement action, make a clear estimate of the level of work involved and present and get board approval. Restricting your remediation team to an insufficient budget and tight schedule will either mean shortcuts that will lead to a deficient response or significant delays as the team has to continually renegotiate its budget. Inability to meet deadlines are frequent causes for raising red flags and hackles with the regulators and cause them to investigate deeper and increase the pressure for a timely response. Also, when picking an outside consultant, price cannot be the most important determinant. The level of expertise and the ability to do the work should also be factored.

5. Select a vendor to partner with you.

The workload involved in addressing an enforcement action is daunting. For example, a provision may require a look-back at all transactions involving certain customer relationships for a set period of time ranging from several months to years. It is important to recognize that your management team may need assistance addressing certain provisions and thus hiring an external party becomes critical to a successful completion of any remediation process. In light of recent regulatory actions against vendors, it is important to conduct a proper vetting process for vendors with a proven track record of addressing AML enforcement actions. Vendors should be evaluated properly:  inquire about their experience and reputation with your regulator, discuss their project management and reporting procedures, and assess whether the team that will be "hands on" has the knowledge, skills and experience to work on your enforcement action. At times, vendors may need to subcontract the work to others, be sure you are comfortable with how the vendor chooses and manages these subcontractors; whether the primary vendor ensures that these subcontractors are properly trained, and comply with the bank's hiring requirements (background checks, credentials, experience levels, credit reviews, etc.). As we are all aware, the organization is ultimately responsible for the quality of the remediation as well as vendor selection.

6. Don't procrastinate! Have a plan and meet your deadlines.

AML enforcement actions require a substantial amount of work to be completed, with no margin for error and limited time to respond. Define an accurate scope with the commencement and end date along with exact details of what needs to be done, an experienced remediation team and a project manager to keep a strict schedule for regulatory deliverables. Regulators may require regular progress reports. Therefore, you will want to be sure that key steps are completed ahead of those reporting dates so progress can be reviewed, and accurately reported on schedule. Project management and documentation are vital in the remediation effort as these are what regulators will use as a reflection of the financial institution's progress. Provide audit trails so that progress can be independently validated.

7. Don't look back unless it is mandated in your enforcement action.

Responding to AML enforcement actions requires more than simply fixing previous mistakes. Take this opportunity to uncover weaknesses in your current compliance team, processes, systems and other applicable tools so you can strengthen them going forward. The quality of your remediation response will directly shape your future relationship with regulators. Regulators tend to be more comfortable with organizations when they demonstrate:  accurate and timely progress reports that document all material reporting changes throughout the remediation process, strengthen the control environment, evangelize a culture of compliance and meet the deadline for the final remediation response. A late and ineffective response will likely lead to enhanced regulatory oversight and further actions against your financial institution.

AML compliance is a complex and constantly evolving challenge for every financial institution. If you are targeted for an enforcement action, these seven steps can help you mitigate the risk, enhance the policies, procedures and controls while effectively positioning your compliance efforts going forward.