Examinations During the Pandemic

No Deja Vu[1]

Examiners will consider the unique, evolving, and potentially long-term nature of the issues confronting institutions and exercise appropriate flexibility in their supervisory response. Stresses caused by COVID-19 can adversely impact an institution’s financial condition and operational capabilities, even when institution management has appropriate governance and risk management systems in place to identify, monitor, and control risk.[2]

We are all guilty of saying something along the lines of “wow, this has never happened before” and occasionally we are right. Next year will be twenty years since 9/11, a direct attack on the US; now we have this pandemic which is the first event of such magnitude since 1918. So, for 90% of us, this has never happened before. As such, all responses are new and there are no parallels. Given that fact, we wanted to ask our AML community how the regulatory examination process has been going and here is what we found:

Community Banks

We decided not to reference the exam focus by any particular agency, but the responses were taken from exams performed by all three federal bank agencies.

• The scope of the examinations seemed more limited or risk focused, especially during the Payroll Protection Program (PPP). Many bankers indicated that the examiners were patient and understood the workload during this remote work time.
• Examiners were leveraging their access to FinCEN to download information, instead of having the financial institutions provide the information. That process seemed to help with gathering responses to the requested items in the First Day Letter.
• Examiners were relying more on independent testing/audit results and less on field transaction testing.
• FI’s with upcoming exams were told by some of the agencies to plan for full remote BSA exams.
• BSA examiners did ask about SBA-PPP activity, focusing on how CIP, CDD, and SARs were being handled. There were general questions from the examiners on the status of compliance and the impact on programs and staff from the pandemic.
• Another identified examination challenge is the elevated difficulty in establishing rapport/partnership with examiners, especially if they are new examiners, when all communications are by email or conference call; Banks also noted that the examination teams seemed to be from varied geographic regions, which resulted in less exam nuance and most responses seemed very black and white.
• Many of the bankers we contacted said their preference is to have exams in-person but others say, “that ship has sailed” for a variety of reasons.

Large Banks

When we reached several of our peers from larger institutions and asked them for responses to several categories of exam coverage, here is what they shared:

1. How does basic preparation for virtual or remote exam oversight impact your institution?
   • The banks have said they have had ongoing communications both in the form of new examinations and what is now referred to as “Ongoing Monitoring.” There was no change at all in terms of requests for documentation or questions from examiners and meetings; this is different than for community banks we spoke to. The only difference for the larger banks appears to be that they are meeting with examiners by phone rather than onsite. Other than that, they have not seen any change in both frequency of exams, as well as detailed reviews. An interesting comment from one compliance officer is that with everything being remote, the documents needed a very careful review to prevent inaccuracies since the examiners were so focused on that part of communication. Not being naïve, but shouldn’t that always be the case?
2. How do the entire bank or the relevant divisions get ready for exams?
   • There was no change in preparation for exams. Banks still receiving First Day Letters, still pulling all requested documentation and having internal prep sessions if their business partners are going to present on some of the information.

As for unique challenges, the banks didn’t note any, and since remote communication was part of the process before COVID, the only change is everything is remote and no face-to-face interaction with examiners.

One final note, while the FFIEC statement mentioned above speaks to the need for examiner sensitivity given the current environment, and several of the community bankers spoke of this as well, that is not a universal experience from all banks.

If you review the comments of the acting Comptroller and some of the wordsmithing in the interagency statement, there appears to be an inconsistency that we have also seen with various gubernatorial approaches to COVID. Several banks are not sensing any understanding of the current conditions. Even though some examiners have told banks that “they would be letting up”, they specifically called out BSA/AML as a place that they were not pulling back, at all. There remains a concern that the examiners need to read the various statements for a better understanding of the changed environment and the need for flexibility.

As one banker told me, “Given the current environment – it will be interesting to see, do they really go to true risk-focused exams (what better time than now) and some of the other changes within the exam manual.”

[1] Déjà Vu was the second album of Crosby, Stills, Nash and Young and released in 1970. The line in the song, “we have all been here before” does not apply to 2020…

[2] From “Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions June 2020”