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Board Report:  September 28, 2007

Inspection Of Federal Reserve Examination Practices For Assessing Financial Institutions' Office Of Foreign Asset Control (OFAC) Compliance Programs


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We completed an inspection of Federal Reserve Examination Practices for Assessing Financial Institutions' Office of Foreign Asset Control (OFAC) compliance programs. OFAC, an entity within the U.S. Department of the Treasury, administers and enforces economic and trade sanctions against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. Although not required by specific regulation, financial institutions are expected to maintain a written, risk-focused program of compliance with OFAC requirements as a matter of sound banking practice. While federal bank regulatory agencies do not have a primary role in identifying OFAC violations, they are responsible for evaluating the sufficiency of policies, procedures, and processes that a bank follows to comply with OFAC laws and regulations. Federal Reserve examiners perform OFAC reviews as part of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) assessments that they conduct during safety and soundness examinations. The Federal Financial Institutions Examination Council's Bank Secrecy Act/Anti-Money Laundering Examination Manual (Manual) establishes the principles and procedures governing OFAC reviews.

The objective of this inspection was to assess Federal Reserve examiners' compliance with the OFAC examination guidance set forth in the Manual. We conducted our fieldwork at the Board and three Federal Reserve Banks-Atlanta, New York, and San Francisco-and selected a judgmental, representative sample of OFAC examinations based on criteria that included geography, asset size, and degree of international exposure. Out of a universe of 420 examinations performed from September 1, 2005, through June 1, 2006, we selected forty-nine examinations to be reviewed. The sample included state member banks, bank holding companies, Edge Act corporations, foreign banking organizations, and institutions with BSA/AML or OFAC programs that were rated as inadequate. These institutions had asset sizes ranging from $7 million to $500 billion.

In general, we found that Federal Reserve examiners were performing OFAC reviews in accordance with the guidance contained in the Manual, and in a manner that was commensurate with the financial institution's BSA/AML and OFAC risk profiles. Examination workpapers contained documentation indicating that examiners reviewed OFAC-related policies and procedures, risk assessments, the results of transaction testing, and prior deficiencies identified by OFAC, bank internal and external auditors, or regulators. Accordingly, nothing came to our attention to indicate material examiner noncompliance with the guidance contained in the Manual, and we concluded our work without making any recommendations. We discussed the results of our inspection with senior staff members in the Division of Banking Supervision and Regulation (BS&R) prior to issuing the final report.