By Lee P. Dunham, J.D.
The FHFA failed to support a conclusion in the examination report for one of the FHLBanks.
The Federal Housing Finance Agency Inspector General’s July 2019 audit report (AUD-2019-008) found that the Division of Federal Home Loan Bank Regulation (DBR) planned and conducted most Federal Home Loan Banks’ (FHLBanks) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program examinations in accordance with FHFA and DBR examination guidance. The Inspector General determined that the FHFA conducted BSA/AML program examinations of 10 of 11 FHLBanks during the 2016-2018 review period, in keeping with its guidelines, but failed to support a conclusion in the examination report for the other FHLBank.
The FHLBank System consists of the 11 FHLBanks and the Office of Finance. As of March 31, 2019, the FHLBank System had combined total assets of approximately $1.08 trillion with total consolidated obligations of approximately $1.01 trillion. The FHLBanks’ mission is to provide reliable liquidity to member institutions (generally, federally insured depository institutions, insurance companies, and eligible community development financial institutions) to support housing finance and community investment.
The Bank Secrecy Act (BSA) was enacted: to safeguard the U.S. financial system from illicit use such as for terrorist financing; to combat money laundering and other illegal activity; and to require suspicious activity reporting, including fraud reporting. Further, the BSA was designed to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in U.S. financial institutions. Among other things, the Financial Crimes Enforcement Network (FinCEN) regulations identify regulated financial institutions that are subject to the BSA and require them to establish AML programs, file suspicious activity reports (SARs), and delegate authority to the FHFA to examine the regulated entities’ compliance. FinCEN’s final rule outlines the requirements for the AML program, and each regulated entity is required to develop and implement an AML program that is reasonably designed to prevent it from being used to facilitate money laundering or the financing of terrorist activities, and other financial crimes—including mortgage fraud.
Audit findings, conclusions. During the review period, 2016–2018, examinations of BSA/AML programs were performed at all 11 FHLBanks in accordance with DBR’s established minimum frequency guidelines. DBR planned, performed, documented, and reported on each examination in accordance with FHFA guidance for 10 of the FHLBanks. For the remaining FHLBank, DBR’s examination workpapers did not support a BSA/AML-related conclusion included in the Report of Examination (ROE) that DBR prepared and transmitted to the FHLBank’s board of directors. The Inspector General found that DBR included in its ROE, even though there was not support in the workpapers for that conclusion.
Specifically, for each of the BSA/AML program examinations at 10 FHLBanks:
- DBR prepared a BSA/AML pre-examination analysis memorandum that identified areas of review and defined the examination objectives. DBR included the BSA/AML examination module on the schedule of work in the examination’s scope memorandum.
- DBR’s BSA/AML work program included work steps that addressed the examiner defined objectives from the pre-examination analysis memorandum. These work steps provided for an evaluation of aspects of the program required by regulation, as well as a review of the regulated entities’ SAR filings.
- Documentation of examiner analysis and information obtained from the FHLBank supported conclusion statements made in the BSA/AML work program, activity memorandum, and, when applicable, findings memorandum.
- Summary conclusions regarding the BSA/AML program made in the component rating conclusion memorandum and the ROE were consistent with, and supported by, the conclusion statements made in the work program, activity memorandum, and, where applicable, findings memorandum.
For the remaining BSA/AML program examination at an FHLBank, the Inspector General found that DBR planned and executed work steps to evaluate the Bank’s implementation of a BSA/AML program, and the examination workpapers supported the conclusion presented in the ROE; however, this examination also resulted in a specific conclusion in the ROE that was not supported by examination workpapers. While the BSA/AML examination workpapers documented examiner analysis of certain controls surrounding the Bank’s SAR filing process (e.g., board reporting of SARs, internal audit coverage of the SAR filing process, etc.), the work program did not include a related work step to review the Bank’s SAR filings. The examination workpapers also did not contain evidence that such a review was performed.
Recommendations. As a result of this, and other findings, the OIG recommended that the FHFA:
- revise DBR’s quality control procedures to specifically require that all examination workpapers supporting examination findings, conclusions, and ratings directly prepared by the EIC be reviewed by an individual who did not participate in the examination; and
- take action to either determine whether the unsupported conclusion in the 2016 ROE (for the FHLBank in question) is accurate or inform the board of the FHLBank not to rely on the unsupported conclusion.
FHFA concurs. The FHFA concurred with the Inspector General’s findings and stated that it would take the following corrective actions:
- DBR will revise its written procedures by Sept. 30, 2019, to require examination workpapers prepared by the EIC to be reviewed by the EIC's Associate Director, or have that review delegated by the Associate Director to the team's Supervisory Examiner or to another EIC who did not participate on the examination. While both the Associate Director and Supervisory Examiner may participate in examinations, they do not report to the EIC and can conduct independent reviews.
- DBR will provide an unredacted version of the Inspector General’s report to the FHLBank in question by Sept. 30, 2019. When doing so, DBR will refer the recommendation regarding the 2016 ROE. In follow-up discussions regarding this response, a DBR official told the Inspector General that the agency will also provide an unredacted version of the Inspector General’s audit report to the chairman of the FHLBank’s board of directors, and the Inspector General considers the FHFA’s planned corrective actions to be responsive to the stated recommendations.
MainStory: TopStory BankSecrecyAct CommunityDevelopment FederalReserveSystem Mortgages OversightInvestigations
Interested in submitting an article?
Submit your information to us today!Learn More
Banking and Finance Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on banking and finance legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.