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Office of Corporate and Regulatory

Compliance

ACSDA Leadership Forum (ALF)

October 8, 2007

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Presentation today

Background

Definition of Money Laundering

Role of Compliance in the Industry

The four Pillars of a Strong Anti-Money Laundering Program

Structure of The Office of Corporate and Regulatory Compliance

Questions

Background

Definition of Money Laundering

Role of Compliance in the Industry

The four Pillars of a Strong Anti-Money Laundering Program

Structure of The Office of Corporate and Regulatory Compliance

Questions

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Background Brief History of USA AML LawYear Regulation Key Provisions

On-going OFAC Treasury declares specific countries and persons as prohibited or limited in having financial transactions with U.S. financial institutions

Lists are updated and conditions may change; licenses may be granted

Strict liability and severe fines for improper dealings.

1970 Bank Secrecy Act Imposed civil and criminal penalties for non-compliance.

Required banks to retain records, create an audit trail and report currency transactions over $10,000.

1986 Money Laundering Control Act

Made money laundering a federal crime and created three offenses:

1.Structuring transactions to avoid BSA reporting

2.Knowingly helping to launder money

3.Knowingly engaging in (or “blind eyeing”) a transaction over $10,000 involving criminal activity.

Mandated requirements procedures for banks. Imposed additional civil/criminal penalties.

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Brief History of USA AML Law (continued)Year Regulation Key Provisions

1992 Annunzio Wiley Act

Required reporting of suspicious transactions within 30 days.

Established “safe harbor” provision.

Required banks to adopt AML policies, procedures, controls, as well as compliance, training, and audit programs.

Required record retention of fund transfers. Strengthened penalties for federally chartered and/or depository institutions.

1996 Funds Transfer Rule

Required banks to collect/retain information on certain wires over $3,000.

Required verification of identity of non-account holder parties (“Joint” rule).

Required identifying information to be sent to each institution handling the payment (“Travel” rule).

1996 Suspicious Activity Reporting

Required financial institutions to file SARs for unusual or suspicious activities.

2001 USA PATRIOT Act

Extended customer identification rules significantly.

Added anti-terrorist financing provisions.

Applied rules to non-bank Financial Services Institutions, including broker dealers.

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Anti- Money Laundering Regulations

• Office of Foreign Assets Control Regulations

• USA PATRIOT Act

• Office of Foreign Assets Control Regulations

• USA PATRIOT Act

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Office of Foreign Asset Control (OFAC) Regulations

• Financial institution must identify and freeze the assets of targeted countries, terrorists, drug cartels and other specially designated persons

• Periodically issued as Specially Designated Nationals and Blocked Entities List (SDN List)

• Financial institution must identify and freeze the assets of targeted countries, terrorists, drug cartels and other specially designated persons

• Periodically issued as Specially Designated Nationals and Blocked Entities List (SDN List)

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USA PATRIOT Act October 25, 2001

• U Uniting and

• SStrengthening

• A America by

• U Uniting and

• SStrengthening

• A America by

• PProviding

• AAppropriate

• T Tools

• RRequired to

• IIntercept and

• OObstruct

• TTerrorism

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The USA PATRIOT Act

• Signed into law October 2001

• Title III addresses implications for financial institutions

• Implemented through changes and additions to the Bank Secrecy Act

• Signed into law October 2001

• Title III addresses implications for financial institutions

• Implemented through changes and additions to the Bank Secrecy Act

“Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and

Obstruct Terrorism”

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Title III of the USA PATRIOT Act

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001

• Most comprehensive anti-money laundering legislation since the 1970 Bank Secrecy Act.

• Far reaching in scope and contains provisions for combating international money laundering and blocking terrorists’ access to the U.S. financial system.

• Relates to U.S. financial institutions’ relationships with foreign banks and with persons who are residents outside the U.S.

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001

• Most comprehensive anti-money laundering legislation since the 1970 Bank Secrecy Act.

• Far reaching in scope and contains provisions for combating international money laundering and blocking terrorists’ access to the U.S. financial system.

• Relates to U.S. financial institutions’ relationships with foreign banks and with persons who are residents outside the U.S.

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AML compliance after the USA PATRIOT Act

• Requirements to understand, assess and monitor customer base

• Increased role of financial institutions in reporting suspicious activities

• Requirements to understand, assess and monitor customer base

• Increased role of financial institutions in reporting suspicious activities

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Know Your Customer (KYC)/Enhanced Due Diligence (EDD)

The objective of a KYC policy and procedures is to:

•Help detect suspicious activity in a timely manner;

•Comply with applicable laws and regulations;

•Minimize the risk that financial Institutions will be used for illegitimate activities; and

•Protect the financial institution’s reputation.

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What is Suspicious Activity?

Examples:

• Sudden/Unexplained transaction volume or type;

• Lack of concern about risks/transaction costs;

• Transactions with money changers or off-shore banking centers; or

• No reason for maintaining relationship or apparent business purpose.

• Important for employees to understand the “red flags” inherent in their particular product area.

Willful Blindness

• Where there are prominent “red flags” that signal that criminal activity is afoot, a jury may infer that a defendant deliberately ignored facts which would have otherwise been obvious to a reasonable person.

Examples:

• Sudden/Unexplained transaction volume or type;

• Lack of concern about risks/transaction costs;

• Transactions with money changers or off-shore banking centers; or

• No reason for maintaining relationship or apparent business purpose.

• Important for employees to understand the “red flags” inherent in their particular product area.

Willful Blindness

• Where there are prominent “red flags” that signal that criminal activity is afoot, a jury may infer that a defendant deliberately ignored facts which would have otherwise been obvious to a reasonable person.

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Financial Crimes Enforcement Network (FinCEN)

• Created in 1990 as part of the US Treasury Department.

• Supports and cooperates with global law enforcement and similar agencies (e.g.. FATF) to combat international financial crimes.

• Provides strategic analysis.

• Enforces USA Patriot Act (e.g.. Section 314).

• Reviews Non-Cooperative Countries and Territories (NCCTs).

• Created in 1990 as part of the US Treasury Department.

• Supports and cooperates with global law enforcement and similar agencies (e.g.. FATF) to combat international financial crimes.

• Provides strategic analysis.

• Enforces USA Patriot Act (e.g.. Section 314).

• Reviews Non-Cooperative Countries and Territories (NCCTs).

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What is Money Laundering?

Patriot Act Expanded Definition:

• Flow of legitimately derived funds for illicit purposes, usually cross border.

Patriot Act Expanded Definition:

• Flow of legitimately derived funds for illicit purposes, usually cross border.

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Three Stages Of Money Laundering?

•Layering : Crossing borders, ownership, custody.

•Integration: Buying securities, apartment houses, annuities

•Placement: Going from the money bag to the bank.

•Layering : Crossing borders, ownership, custody.

•Integration: Buying securities, apartment houses, annuities

•Placement: Going from the money bag to the bank.

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Key Role of Depositories

•Depository financial institutions (which include banks, savings & loan associations or thrifts, and credit unions) form the financial backbone of the United States.

•In almost every money laundering typology, a bank is employed domestically or abroad to hold or move funds.

•Depository financial institutions (which include banks, savings & loan associations or thrifts, and credit unions) form the financial backbone of the United States.

•In almost every money laundering typology, a bank is employed domestically or abroad to hold or move funds.

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Correspondent Banking

•Seen as a money laundering gateway to the U.S. financial markets.

•Vulnerable to “nesting”.

•Seen as a money laundering gateway to the U.S. financial markets.

•Vulnerable to “nesting”.

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Role of Compliance to the industry

• To promote compliance of industry laws and regulations.

• To emphasize interest in contributing to investor protection and the integrity of the financial industry.

• Effective compliance is good business.

When scandal follows in the wake of compliance failure, customers question the integrity of their financial service provider. The question does not require a conclusive answer from the customers’ perspective. When clients begin to question the firm’s integrity, they walk and the value of the company leaves with them.

• To promote compliance of industry laws and regulations.

• To emphasize interest in contributing to investor protection and the integrity of the financial industry.

• Effective compliance is good business.

When scandal follows in the wake of compliance failure, customers question the integrity of their financial service provider. The question does not require a conclusive answer from the customers’ perspective. When clients begin to question the firm’s integrity, they walk and the value of the company leaves with them.

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The Anti-Money Laundering Program

• Designation of a BSA/AML Officer

• System of policies, procedures and internal controls

• Training

• Independent Testing

• Designation of a BSA/AML Officer

• System of policies, procedures and internal controls

• Training

• Independent Testing

Four Requirements for the Program:

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The BSA/Anti-money Laundering Program

The program must be tailored to the risk of the bank

Customer base

Geographies

Products and services

The program must be tailored to the risk of the bank

Customer base

Geographies

Products and services

Documented

Risk

Assessment

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Governance, Controls and Oversight

InternalComplianceCommittee

InternalComplianceCommittee

TrainingTraining

Monitoring,Testing and

Reporting

Monitoring,Testing and

Reporting

Policies andProcedures

Policies andProcedures

RiskAssessment

and Mitigation

RiskAssessment

and Mitigation

Framework Pre-Cursers

COMPLIANCE DEPARTMENTCOMPLIANCE DEPARTMENT

Larry ThompsonExecutive Managing Director

Larry ThompsonExecutive Managing Director

Donald F. DonahueChairman and

Chief Executive Officer

Donald F. DonahueChairman and

Chief Executive Officer

Compliance Program Framework

RelationshipManagement

RelationshipManagement

Credit & Market Risk

Credit & Market Risk

Membership Services

Membership Services

OperationsOperations

Support / Interface

Compliance Department - GovernanceOVERVIEWCompliance Department - Governance

Compliance Program Framework

Governance, Controls and Oversight

InternalComplianceCommittee

InternalComplianceCommittee

Board of DirectorsBoard of Directors SAR

Sub-Committee

SAR Sub-Committee

Policies andProcedures

Policies andProcedures

Suppo rt

Compliance Coordinators

Compliance Coordinators

Internal RiskManagementCommittee

Internal RiskManagementCommittee

AuditCommittee

AuditCommittee

Internal Audit

COMPLIANCE DEPARTMENTCOMPLIANCE DEPARTMENT

GCOGCO

CISOCISO

T&D

Frame wo rkPre -Curs e rs

Training

Monitoring,Testing andReporting

Monitoring,Testing andReporting

Corp Communications

Corp Communications

Chief PrivacyOfficer

Chief PrivacyOfficer

Product MgmtProduct Mgmt

RiskAssessment

AndMitigation

Jill ConsidineChairman and

Chief Executive Officer

Jill ConsidineChairman and

Chief Executive Officer

Richard NessonExecutive Managing

Director

Richard NessonExecutive Managing

Director

Board of

Directors

Board of

DirectorsSAR

Sub-Committee

SARSub-Committee

Internal RiskManagementCommittee

Internal RiskManagementCommittee

Audit Committee

Audit Committee

Compliance &OP Risk

Committee

Compliance &OP Risk

Committee

AMLSteering

Committee

AMLSteering

Committee

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Department Mission

•To protect DTCC from regulatory and reputational damage and harm.

•Provides enterprise-wide oversight and support to DTCC’s subsidiaries and business areas in the establishment and implementation of procedures to ensure compliance with the applicable laws and regulations, including all AML laws and regulations.

•To protect DTCC from regulatory and reputational damage and harm.

•Provides enterprise-wide oversight and support to DTCC’s subsidiaries and business areas in the establishment and implementation of procedures to ensure compliance with the applicable laws and regulations, including all AML laws and regulations.

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OCRC Organizational Structure

Chairman and CEO

Executive ManagingDirector - Legal,Regulatory and

Compliance

Chief AML OfficerDeveloping, implementing, monitoring and

maintaining DTC’s AML compliance program

Executive Assistant

Regulatory LiaisonLiaising with the FRBNY/NYSBD

on a day-to-day basis and internal audit onAML related matters

Deputy AML Compliance OfficerOverseeing the day-to-day implementation

of DTC’s AML program

Project OfficePlanning and overseeing AML related

project initiatives and activities

AML DirectorOverall KYC/CIP Programs

FinCEN 314; BSA Reporting;Products/Service Risk Assessment; OFAC Program

Key Focus = Participant risk assessments

Project Director Project Director

RegulatoryAssociate

RegulatoryAnalyst

RegulatoryAssociate

RegulatoryAssociate

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

AML DirectorTraining Program; Monitoring Program; Written

Policies/Procedures; Testing ProgramKey Focus = Implementation Automated Monitoring

Tool and Interim Transaction Monitoring

Current AML Compliance Roles and ResponsibilitiesChairman and CEO

Executive ManagingDirector - Legal,Regulatory and

Compliance

Chief AML OfficerDeveloping, implementing, monitoring and

maintaining DTC’s AML compliance program

Executive Assistant

Regulatory LiaisonLiaising with the FRBNY/NYSBD

on a day-to-day basis and internal audit onAML related matters

Deputy AML Compliance OfficerOverseeing the day-to-day implementation

of DTC’s AML program

Project OfficePlanning and overseeing AML related

project initiatives and activities

AML DirectorOverall KYC/CIP Programs

FinCEN 314; BSA Reporting;Products/Service Risk Assessment; OFAC Program

Key Focus = Participant risk assessments

Project Director Project Director

RegulatoryAssociate

RegulatoryAnalyst

RegulatoryAssociate

RegulatoryAssociate

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

RegulatoryAnalyst

AML DirectorTraining Program; Monitoring Program; Written

Policies/Procedures; Testing ProgramKey Focus = Implementation Automated Monitoring

Tool and Interim Transaction Monitoring

Current AML Compliance Roles and Responsibilities

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OCRC General Responsibilities

• Training/Awareness

• Monitoring/Testing

• SAR/Other Reporting

• Policies and Procedures

• Self-Assessments/Participant Assessments

• OFAC Screening/Reporting

• Ongoing Assessment of Products/Services/Enhancements/Business Areas

• Training/Awareness

• Monitoring/Testing

• SAR/Other Reporting

• Policies and Procedures

• Self-Assessments/Participant Assessments

• OFAC Screening/Reporting

• Ongoing Assessment of Products/Services/Enhancements/Business Areas

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OCRC General Responsibilities

•Ongoing Guidance to Business Areas

•Research and Investigation of Reported Incidents and Inquiries

•Monitoring of Employee Gift Reports

•Ongoing Guidance to Business Areas

•Research and Investigation of Reported Incidents and Inquiries

•Monitoring of Employee Gift Reports

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Key Internal Partners

• Internal Audit - Identify gaps and deficiencies in compliance program before the regulators do

• Relationship Management - have the most contact with participants. They “Know our Customers” (KYC).

• Account Administration - perform DTCC on-boarding function. Verify the identify of Participants (CIP).

• Credit and Market Risk - prepare an AML risk assessment of prospective participants at the on-boarding stage

• Operations - help perform OFAC screening and are our eyes and ears on the field

• Internal Audit - Identify gaps and deficiencies in compliance program before the regulators do

• Relationship Management - have the most contact with participants. They “Know our Customers” (KYC).

• Account Administration - perform DTCC on-boarding function. Verify the identify of Participants (CIP).

• Credit and Market Risk - prepare an AML risk assessment of prospective participants at the on-boarding stage

• Operations - help perform OFAC screening and are our eyes and ears on the field

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Key Internal Customers

• Operations

• Relationship Management

• Credit and Market Risk

• Account Administration

• We advise on applicability of regulations and help provide internal controls to ensure compliance

• Operations

• Relationship Management

• Credit and Market Risk

• Account Administration

• We advise on applicability of regulations and help provide internal controls to ensure compliance

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Key External Customers

• The Financial Industry as a whole

• ALL of our regulatory bodies

• Federal Reserve Bank

• New York State Banking Authorities

• The Securities and Exchange Commission

• Financial Services Authority (EuroCCP Only)

• The Financial Industry as a whole

• ALL of our regulatory bodies

• Federal Reserve Bank

• New York State Banking Authorities

• The Securities and Exchange Commission

• Financial Services Authority (EuroCCP Only)

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Questions and Answers