Electronic Check Processing Under Increased Scrutiny By U.S. Bank Regulators Because Of Increased Risk of Money Laundering

Apr 30, 2012   

As banking and payment processing technology continually evolve, so too does the threat that such technology may be used for illicit and illegal purposes, such as money laundering. One such technology that has recently come under increased scrutiny is electronic check processing, specifically through a procedure known as Remote Deposit Capture (“RDC”).

In 2004, U.S. banks dramatically increased their capacity to process checks. With the passage of the Check Clearing for the 21st Century Act, (“Check Clearing Act”) banks were permitted to process check images through RDC instead of the physical paper check itself. Prior to the Check Clearing Acts passage, in order for paper checks to be processed, the physical check was required to move from the location where it was deposited to the bank from which it was written. Thus, by allowing U.S. banks to process check images electronically, check-cashers from around the world could now avoid the hassle and expense of transporting large bundles of checks to banks as part of their daily operations.

However, while RDC has allowed for the faster processing of checks, the susceptibility of electronic check processing to be used unlawfully because of the difficulties and limitations which currently exist in data mining scanned checks for suspicious activity has come under scrutiny. As a result, regulators, such as the Financial Crimes Enforcement Network (“FinCEN”) and the Office of the Comptroller of the Currency (“OCC”), have increased their scrutiny of U.S. Banks electronic check processing activities.

For example, on April 5, 2012, the OCC and Citibank, N.A., entered into a Consent Order after the OCC identified numerous AML compliance program deficiencies at the bank. Among the OCCs findings were that: 1) the Bank failed to adequately monitor its [RDC]/international cash letter instrument processing in connection with foreign correspondent banking; and 2) as a result the inadequate monitoring, “the Bank failed to file timely [Suspicious Activity Reports (“SARs”)] involving RDCs. . . .” In order to comply with the Consent Order, within 90 days of the order, Citibank must develop, implement and maintain clear written policies, procedures and processes governing the use of RDCs by all clients of the bank, including policies and procedures pertaining to the issuance of SARs in relation to RDC activity. A copy of the Consent Order can be read here.

Additionally, in its October 2011 SAR Activity Review, FinCEN found that, while “SAR filings indicated no real differences in the various fraud and money laundering schemes perpetrated through the RDC check deposit channel when compared with check deposits completed through more traditional means, . . . the choice of the RDC deposit channel may have facilitated certain schemes or the expansion of services to non-traditional customers somewhat more effectively than traditional check deposit channels.” Thus, while the type of illicit activity may not vary between RDC deposits and paper deposits, the ability to be detected may.

As RDC technology evolves, FinCEN encourages banks to develop robust AML compliance programs to address these technological issues. As stated by FinCEN:

In some cases, special precautions and commensurate due diligence efforts may be appropriate when processing items from non-U.S. correspondent accounts or foreign-located customers. Banks may wish to perform periodic reviews of and generate risk management reports on the AML issues associated with RDC. Banks also may wish to ensure that their transaction monitoring systems adequately capture, monitor and report on suspicious activities occurring through RDC, especially as transactional levels increase.

See also Federal Financial Institutions Examination Council, Risk Management of Remote Deposit Capture for a more detailed analysis of risk factors that RDC providers should consider when developing an AML compliance program.

As electronic banking technology evolves, so too must financial institutions AML compliance programs. If you have questions pertaining to anti-money laundering compliance, the BSA, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.