AML Compliance and NYDFS Part 504 Certification

Before discussing the specific aspects of Part 504 certification and how it can be completed adequately, it is important to first discuss the background and some critical elements of Part 504. In a December 2015 press release, then-New York Governor Andrew Cuomo described that over the preceding years, NYDFS identified numerous instances of critical deficiencies in the AML programs of various regulated financial services organizations. These lapses led to the issuance of the NYDFS Part 504 Final Rule, specifically including Section 504.3, “Transaction Monitoring and Filtering Program Requirements.” Part 504 mandates that covered organizations implement transaction monitoring and filtering programs specifically tailored to address the deficiencies that had plagued the industry leading up to the rule’s finalization in June 2016. The rule did not take effect until January 2017. As such, starting April 15, 2018, and on an annual basis thereafter, Part 504 has required that either the board of directors or a senior officer certify the compliance of an organization’s AML program. The certification necessitates that the certifying body or individual has taken all necessary steps to verify the program’s effectiveness and compliance.

Compliance with Part 504 remains a critical focus for financial services organizations in 2024, as regulators continue to emphasize robust AML compliance programs. Organizations should reevaluate their Part 504 certification processes considering evolving money laundering techniques, such as the increased use of digital currencies, and online marketplaces and technological advancements in AML solutions, such as the integration of AI and machine learning. As this digital landscape evolves, regulatory focus likely will intensify in response to changes. As such, organizations that proactively strengthen their Part 504 compliance might find themselves better positioned to meet future regulatory requirements across multiple jurisdictions. Further, the annual recertification requirement by April 15 keeps Part 504 consistently relevant.

Altogether, Part 504 underscores the importance of proactive governance and rigorous oversight in safeguarding the financial system. Compliance with Part 504 helps to protect organizations from potential fines and legal repercussions and solidify their reputation as secure and trustworthy organizations.

Who must comply?

Both bank and nonbank organizations regulated by NYDFS are required to implement transaction monitoring and filtering programs as mandated by Part 504. The umbrella of bank-regulated entities encompasses a wide array of financial services organizations, including but not limited to banks, trust companies, private bankers, savings banks, and savings and loan associations, as well as branches and agencies of foreign banking corporations operating within New York. Similarly, nonbank-regulated entities, such as licensed check cashiers and money transmitters, are also required to uphold these standards as part of their authorized banking operations in New York.

Preparing for Part 504 certification is a meticulous process that requires a comprehensive understanding and evaluation of a financial services organization’s transaction monitoring and filtering systems. The following steps can help organizations define the requirements of the certification process:

Step 1: Understand the regulation. The first step in certification is to thoroughly review the NYDFS Part 504 regulation. This foundational knowledge helps guide organizations in aligning their practices with regulatory standards by focusing on program adequacy, data accuracy, governance, oversight, and the annual certification requirement.

Step 2: Conduct a gap analysis. Once a solid understanding of Part 504 requirements has been established, organizations should rely on internal audit and compliance teams to conduct an independent gap analysis. This analysis can help identify discrepancies between current practices and Part 504 standards. Identifying these gaps early is crucial for addressing them effectively and confirming compliance. This gap analysis should be thoroughly documented, presented to senior management, and retained alongside all supporting documentation, such as policies, procedures, and program-specific documentation.

Step 3: Fill identified gaps. Following the gap analysis, it’s essential for organizations to enhance their transaction monitoring and filtering systems to address identified gaps. This step might involve performing additional testing, integrating advanced technological solutions, or documenting appropriate procedures. Engaging with technology providers can provide the expertise needed to assess whether systems are robust and compliant. Additionally, training relevant employees on Part 504 compliance is critical; training should cover the regulatory requirements of Part 504, operational aspects of the organization’s systems, and procedures for handling potential violations.

Step 4: Document everything. Documentation plays a critical role in compliance. Organizations should analyze and confirm that that all policies and procedures related to their transaction monitoring and filtering programs are thoroughly documented in line with Part 504 requirements. These documents should clearly articulate the processes, controls, and responsibilities within the compliance program. Consistent testing and validation of systems are also vital actions, as required by Part 504. Further, conducting back-testing with historical data helps verify the accuracy and completeness of an organization’s systems. Employing third-party auditors for system validation can provide an objective assessment of an organization’s systems’ effectiveness.

Step 5: File and retain. As organizations approach the final stages of preparation, they should compile the certification document to be signed by a senior officer of the organization. This document should affirm that the organization has adhered to all necessary steps to comply with Part 504 regulations. Prior to submission, this document should be thoroughly reviewed by legal and compliance teams. The certification should be submitted through the official NYDFS portal by April 15 of the relevant calendar year. It is crucial to keep a copy of the submitted certification along with all supporting documentation for organizational records, including the completed gap analysis.

The certification process should be repeatable, and therefore, it is critical to document a process for performing the necessary steps and the certification itself. For example, organizations should clearly record which individuals or departments are tasked with assembling the certification package, detail the specific contents required in the package, and outline the need for a written review and approval of the package. Additionally, the procedures for reviewing and approving the certification package and its supporting documentation should be well documented. Organizations should also establish formal processes for managing changes and addressing issues, particularly if the gap analysis highlights areas needing enhancement.

Once submitted, financial organizations should establish a continuous improvement program to regularly review and enhance transaction monitoring and filtering systems. Keeping abreast of regulatory changes and best practices is essential for ongoing compliance.