New York Regulators Speech Contains New AML Proposals
17 Sep 2015

On 25 February 2015 Benjamin Lawsky, Superintendent of Financial Services for the State of New York, gave a fascinating speech on financial regulation at Columbia Law School. Of interest to AML professionals, the speech, entitled “Financial Federalism: The Catalytic Role of State Regulators in a Post-Financial Crisis World”, dealt with: “Wall Street Accountability after the Financial Crisis” and “Preventing Money Laundering, Including Improving Transaction Monitoring and Filtering Systems”.

In talking about the concept of “Financial Federalism”, Mr Lawsky referred to US Supreme Court Justice Brandeis’s idea that US states can act as “laboratories of democracy” and observed that state financial regulators “can and should play a similar role to the state-level reformers of the early 20th century”. He noted that “Ineffective regulation can sometimes be worse than no regulation at all since it breeds a false sense of security” and hoped that the New York Department of Financial Services (‘NYDFS’) and other state regulators could “serve as positive examples and help spur a race to the top”.

In relation to individual accountability of senior executives, My Lawsky noted that:

… we almost always see bank settlements where a corporation writes a big check to the government without any individual Wall Street executives held to account.

It should come as little surprise then that we continue to see fraud, after fraud, after fraud on Wall Street – since the individuals who engaged in the wrongdoing rarely, if ever, face any real consequences.

Financial regulators, according to Mr Lawsky, have a significant role to play in holding individuals to account and observed that “even if there are certain circumstances where the misconduct does not rise to the level of criminal fraud, civil financial regulators can also play a role”. The NYDFS has, of course, already played a leading role in the move towards individual accountability in enforcement actions and, in his speech, Mr Lawsky gave the following examples of this:

NYDFS required the Chief Operating Officer of France’s largest bank, BNP Paribas, and the Chairman of one of the United States’ largest mortgage companies, Ocwen Financial, to step down as part of enforcement actions brought against those companies.

The Department has also banned multiple senior executives from participating in the operations of NYDFS-regulated institutions for engaging in misconduct.

Moving on to deal with the prevention of money laundering, Mr Lawsky concentrated on the “vitally important issue of transaction monitoring and filtering systems”. He noted that the NYDFS believes “there are likely widespread problems with transaction monitoring and filtering systems throughout the industry”. To address this issue the NYDFS is apparently considering the following:

First, we are considering random audits of our regulated firms’ transaction monitoring and filtering systems, employing the same methodology our independent monitor used to spot deficiencies.

Second, since we cannot simultaneously audit every institution, we are also considering making senior executives personally attest to the adequacy and robustness of those systems.

Mr Lawsky stated that the NYDFS expects “to move quickly on these ideas” and they clearly should be noted by all professionals working in the AML sector.

The full text of the speech can be found here.

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