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New York banks may face tougher anti-money laundering scrutiny

Banks in New York state may face tougher measures to verify their anti-money laundering systems are working properly, according to the head of the state’s Department of Financial Services.

Benjamin M. Lawsky said his agency is considering making senior executives “personally attest to the adequacy and robustness of those systems,” akin to how the Sarbanes-Oxley Act holds them responsible for the content of financial reports.

The agency is also considering random audits of its regulated firms’ transaction monitoring and filtering systems, he said.

“We expect to move quickly on these ideas and, to the extent they are effective, we hope that other regulators will take similar steps,” Lawsky said in a copy of prepared remarks delivered Wednesday at Columbia Law School in New York City.

Lawsky described improving anti-money laundering systems as “critical to stopping dangerous criminal activity, including terrorism.” He acknowledged that banks rely heavily on automatic transaction monitoring and filtering systems to spot suspicious payments for additional review by personnel.

But Lawsky said those systems could be flawed, either through poor design or oversight, or possible misconduct by employees who might “turn down the sensitivity” of filters, allowing suspicious transactions to go unnoticed.

Regulators have not actively tested the effectiveness of banks’ filtering systems, and have instead relied on banks to report problems themselves. He said that practice needs to change.

“A whack-a-mole approach – simply bringing enforcement actions when we find problems – is not, by itself, enough,” he said. “Particularly because we believe there are likely widespread problems with transaction monitoring and filtering systems throughout the industry.”

Lawsky referred to problems uncovered last year with “faulty filters” at Standard Chartered, without mentioning the bank by name. Lawsky said an independent monitor installed by the agency found the bank “failed to flag millions of suspicious transactions.”

Standard Chartered paid $300 million to the state, which said the bank failed to detect a large number of “potentially high-risk transactions” for further review. A significant number of those transactions originated from the bank’s Hong Kong subsidiary, and at branches in the United Arab Emirates, the agency said.