Fed Enforcement Actions Again Reveal the Ongoing Compliance Challenges in Virtual Asset Services
The recent Federal Reserve enforcement action against Customers Bank, alongside a Cease and Desist Order issued to United Texas Bank, shines a spotlight on the growing challenges financial institutions face in the virtual asset space.
On August 8th, the Federal Reserve Board, the Texas Department of Banking, and United Texas Bank reached an agreement to address critical compliance failures. Following a May 2023 examination, United Texas Bank was found to have significant gaps in corporate governance, board oversight, and adherence to Anti-Money Laundering (AML) regulations, including the Bank Secrecy Act (BSA).
The bank has been directed to develop a comprehensive plan to strengthen its governance and fully comply with BSA/AML and Office of Foreign Assets Control (OFAC) standards. This includes overhauling board oversight, improving the governance framework, and enhancing its BSA/AML compliance program. The bank will also need to refine its customer due diligence processes, implement stronger monitoring systems, and enhance training to mitigate operational risks related to OFAC regulations.
What Went Wrong?
The Federal Reserve highlighted several areas where United Texas Bank fell short:
- Inadequate Board Oversight: The bank’s leadership failed to provide sufficient oversight and direction for complying with BSA/AML and OFAC regulations.
- Weak Corporate Governance: The governance framework lacked the structure and expertise needed for proper supervision and compliance management.
- Deficient BSA/AML Compliance: The compliance program was missing critical elements like internal controls, independent testing, and adequate training.
- Inadequate Customer Due Diligence: The policies for assessing customer information were insufficient for effectively managing risk.
- Ineffective Suspicious Activity Monitoring: The systems in place for monitoring and escalating suspicious activities were inadequate.
- Non-Compliance with OFAC: The bank’s screening procedures and risk assessments failed to meet OFAC requirements, increasing its exposure to sanctions-related risks.
This enforcement action serves as a reminder to all financial institutions of the vital need for robust compliance frameworks, especially as the industry integrates more digital and virtual assets.
How CENSE Can Help
In response to these challenges, financial institutions must enhance their AML/CTF frameworks to meet regulatory expectations and protect against financial crime. CENSE offers a powerful solution tailored to the needs of institutions engaged in digital asset services:
- Enhanced Customer Due Diligence: CENSE enables seamless connectivity between centralized and decentralized wallets, providing institutions with a comprehensive view of customer interactions on the blockchain. This allows for a thorough assessment of customers’ source of funds (SoF) and source of wealth (SoW), ensuring a deep understanding of financial profiles.
- Advanced Risk Assessment: CENSE collaborates with blockchain-based transaction monitoring tools to offer detailed counterparty analysis and identify high-risk transactions. This capability supports accurate risk ratings for customers and helps determine the necessary level of due diligence.
- Efficient Monitoring and Reporting: Leveraging blockchain data, CENSE automates transaction monitoring and flags suspicious activities that may require the filing of Suspicious Activity Reports (SARs). The platform ensures well-documented processes, supporting regulatory compliance without demanding excessive resources.
- Scalable Compliance Solutions: CENSE’s tools are scalable, allowing institutions to efficiently manage AML/CTF compliance as their digital asset operations grow. This scalability ensures institutions can continue innovating while maintaining strong compliance practices.
By implementing cutting-edge solutions, financial institutions can stay ahead of the regulatory curve while continuing to innovate in the virtual asset space.
