Ensuring Compliance in a BSA/AML Compliance Program: Independent Testing

July 18, 2023

By: Edward Pugh, AAP, CAMS, CAMs-Audit, CFE

One of the key components of a financial institution’s compliance with BSA/AML regulatory requirements is independent testing of the BSA/AML Program. Independent testing may be performed by an institution’s internal audit department, outside auditors, consultants, or other qualified independent parties. There is no regulatory requirement establishing the frequency of BSA/AML independent testing; rather, the frequency should be commensurate with the money laundering/terrorism financing risk profile of the institutions. Many institutions conduct independent testing every 12 to 18 months, increasing frequency if there are any significant changes in the risk profile, such as changes in systems, compliance staff, products, mergers/acquisitions, or an institution’s size. Significant errors or deficiencies may also warrant more frequent independent testing to validate mitigating or remedial measures.

Often, the need for a truly independent assessment, combined with limitations in staffing capacity, prompts institutions to engage an external entity to conduct a comprehensive evaluation of their BSA/AML program compliance. Thus, it is critical to ensure that the independent review provides an unbiased assessment of an institution’s BSA/AML compliance efforts, identifies potential risks or weaknesses, and offers recommendations for improvement. Some key components of a satisfactory BSA/AML independent program audit or testing include the following:

  • Scoping and Planning: The scope of the review should be based on a risk assessment of the institution’s products, services, customers, and geographic locations. The scoping and planning phase often relies on the institution’s own BSA/AML risk assessment, but if it is inadequate, the external auditor may determine the scope. Additionally, any changes in the business or regulatory environment, as well as any issues identified in previous audits or examinations, should be taken into account.
  • Independence: The audit/testing should be conducted by individuals who are independent of the BSA/AML compliance program. While internal auditors may be acceptable, a BSA Officer or assistant would not be. This ensures that any findings are objective and unbiased.
  • Qualifications and Training of Auditors: Persons conducting the independent testing should have sufficient knowledge and understanding of the BSA, AML, and related regulations. They should be trained in auditing principles and procedures and understand the various risks financial institutions face.
  • Review of the BSA/AML Compliance Program: The audit should include a comprehensive review of the BSA/AML Compliance Program, including its policies and procedures, risk assessment, internal controls, training programs, and the role and performance of the BSA Officer.
  • Transaction Testing: Thorough transaction testing should be conducted to verify compliance with BSA/AML requirements, such as customer identification, suspicious activity reporting, customer due diligence, currency transaction reporting, and record keeping requirements.
  • Assessment of Training Programs: The institution’s BSA/AML training programs should be reviewed to ensure they are adequate, up-to-date, and effective in educating employees about the BSA/AML responsibilities. The Board of Directors training should also be reviewed.
  • Reporting: An audit report should be produced that clearly communicates findings, including any weaknesses or deficiencies in the compliance program. Appropriate recommendations for improvement should also be provided where necessary.

A comprehensive and effective BSA/AML independent program audit is essential for financial institutions to ensure compliance with the various laws and regulations pertaining to BSA/AML. Some issues pertaining to independent testing that are frequently found in Reports of Examination include lack of independence on the part of the auditor(tester), insufficient scope, and insufficient transaction testing. A comprehensive and independent audit of an institution’s BSA/AML compliance program not only facilitates regulatory adherence, but also pinpoints and highlights any existing program deficiencies.

Additional Resources: FFIEC BSA/AML Assessing the BSA/AML Compliance Program – BSA/AML Independent Testing

Young & Associates works with financial institutions of all sizes to help them avoid regulatory pitfalls and develop strong BSA/AML compliance programs. For more information, contact me at [email protected] or 330.422.3475.

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