Chief Compliance Officers are at particular risk due to the nature of their position and should be increasingly diligent to maintain a proper understanding of the expectations of compliance. Additionally, Chief Compliance Officers and the operations department should be aware of the current weaknesses within their own AML programs.

In an effort to minimize these risks, HSBC Bank USA has recognized the need for more purposeful measurement and management of compliance risk.

Legal and operational risk can quickly and efficiently hamper the activities of any bank. However, it is reputational risk that poses the greatest risk to HSBC Bank USA. Banks that are associated with money laundering, terrorism, and criminal activity in the media experience severely negative responses associated with their brand.

Since trust is one of the most valued concepts in the banking industry, the public opinion that a bank is lax on matters of terrorism and crime can essentially crush a bank's ability to conduct business.

Creating an efficient AML program is the best way for HSBC Bank USA to address these internal pressures and risks. Further, HSBC recognizes that it plays an important role to play in the fight against terrorism.

By addressing these risks and managing a functioning, well-run organization, HSBC protects both itself and the community from risk.

Chapter 2: AML Requirements and HSBC Compliance

Under the United States Patriot Act and Bank Security Act, American banking institutions are held to specific rules concerning monitoring and preventing money laundering and terrorist funding. Further, they are both encouraged and expected to play a major role in prevention by conforming to and improving upon these regulations. HSBC Bank USA, as part of HSBC International and The Wolfsburg Group, supports these measures, while also aiming to protect the rights of its clients.

Anti-money laundering (AML) programs are the greatest feature by which banks manage data to prevent illicit use of funds. AML programs are required under current federal banking law. The key features of a banking AML program include: committing the program to writing; developing internal policies, controls, and procedures; designating a compliance officer; implementing ongoing employee training; and instituting an independent audit function for testing the program itself. Controls concerning due diligence are also required. The methodology of these programs leads to the submission of Suspicious Activity Reporting, perhaps the greatest tool in identifying and preventing illegal financial activity.

The Bank Secrecy Act

The Patriot Act

Bank Compliance and AML Program Expectations

Due diligence

Suspicious Activity Reporting

HSBC and the Rights of the Individual

The Bank Secrecy Act (BSA) was initiated by Congress in order to prevent financial services (like those offered by banks) from being used as intermediaries in the efforts to hide or move money intended for illegal or criminal activities.

The BSA placed controls and monitoring expectations on banks. Banks were given the responsibility of identifying when their customers' accounts were being used in a manner that suggested suspicious activity.

In the October following the terrorist attacks of September 11, 2001, The Patriot Act amended the BSA in order to strengthen the actions and reporting or banks.

The Patriot Act required banks to conduct increased due diligence.

Extreme pressure, both socially and legally, was put on banks to increase their monitoring and identification processes. Additionally, security was increased to regulate interaction with foreign entities and to control account opening in the United States. In essence, banks were drafted into the service of the American government in a manner not unknown to European and Asian countries.

HSBC has since made a contract with the Federal Reserve to establish its intent to meet the compliance standards and requirements.

The main area of bank compliance under the United States Patriot Act is in the adoption and management of an Anti-Money Laundering (AML) program. The designation of a compliance officer, ongoing employee training, and an independent audit function are the main tenets of an AML Program. AML programs must additionally be developed in writing, outlining internal policies, procedures and controls.

Corporate-level policies and procedure guidelines should address: clearly defined explanations of terrorist financing, money laundering and identification; the roles and responsibilities of staff and management; the AML training program; the upkeep of and current listings of watched or restricted individuals; AML risk assessment methods; controls on account opening procedures; controls on monitoring and reporting suspicious activities; information-sharing concerns; and compliance with the Office of Foreign Assets Control (OFAC).

Matters of due diligence are among the top priorities of HSBC Bank USA and other American financial institutions. In accordance with The Wolfsberg Group, HSBC (International) and its subsidiaries except that clients and customers who...

Additionally, all banking matters will be subject to the identity and verification due diligence standards required by the United States Patriot Act.
If enhanced due diligence is warranted, HSBC Bank USA has established principles for dealing with clients in a straightforward, fair, and secure manner. When considering the initiation of a banking relationship, HSBC will consider a client's location, nature of business, customer base, and background. A business' products and services, history, and anti-money laundering controls (if necessary) will additionally be considered. The industry-promoted idea of "Knowing Your Customer" (KYC) allows banks like HSBC to make sure that due diligence is undertaken with a clear idea of how much risk is involved with the client.

If a high level of due diligence is recognized, banks are likely to address individuals of groups that are suspect in criminal activities. Suspicious Activity Reports (SAR) are the major tool by which banks contribute identify these individuals to the federal government. Monitoring, as will be discussed further in Chapter 3, allows HSBC to identify changes in activity, high levels of questionable activity, or activity that is not linked with certainty to a legal income source.

Cash transactions over $10,000 are subject to reporting, as are frequent wire transfers. Banks must also monitor and report on monetary instrument records and velocity of funds reports.

Monitoring takes a great amount of personnel and organizational support, as banks are given the responsibility of identifying which cases get reported by an SAR in most cases. Each individual bank must delineate controls and procedures for which potentially unusual or suspicious transactions warrant more investigation. This is essential, as the number of questionable transactions is sizable, yet few are actually criminal.

This task is assisted by banks' due diligence procedures, since knowing the business and customer will allow banks to understand the financial transactions associated with the business or customer.

HSBC Bank USA and its affiliates aim to continue their activities with the government and international community to fight terrorism and crime without sacrificing the rights of the individual. Supporting the identification of criminal transactions should not hinder legal businesses, yet it sometimes does. Through technology, communication, and cooperation with customers, HSBC intends to protect customers' identities and personal information through clear internal guidelines and controls on information sharing.

Chapter 3: Technology Issues

HSBC USA is aware that technology is one of the greatest issues involved in money laundering and terrorist funding. Technology offers many new opportunities for terrorists and illegal operators. This poses new issues in the protection of funds and also of client privacy and security. Yet, it also offers opportunities to those within the banking industry as filtering options and monitoring techniques improve means of detecting illegal activity.

HSBC handles numerous technological issues in its efforts to prevent money laundering and terrorist funding. Maintaining a high level of data quality and instituting effective data filtering are of the greatest concern to HSBC in their efforts to avoid false positives. Significant attention is also given to the maintenance of a technology system that is secure, dependable, and affordable, so that HSBC clients can be confident in how their accounts and information are managed.

Technology-related challenges

Technological advances aiding in prevention

Data quality and data filtering issues

Maintaining an affordable, secure, and dependable technology system

Technology-related challenges

Technology is at the forefront of any well-managed banking AML program. There are many challenges in creating and maintaining a technology system for monitoring and filtering data in the banking industry. Because all areas of risk (operational, legal, and reputational) depend on the success and quality of data quality, filtering, and monitoring, every bank must devote adequate resources to technology in order to protect itself from the consequences of non-compliance and terrorist association.

The sheer number of transactions that must be monitored by financial institutions makes it prohibitively expensive and impractical to review transactions manually.

That means that transaction monitoring is primarily a technological concerned. Criminals and money launderers are aware of the technology available, and will continually search for ways to continue their transactions in a way that does not flag them as questionable or suspect.

Money laundering and terrorist funding call for different approaches. Money laundering often incorporates the placement of criminally obtained monies into accounts, where it can be transferred to…