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August 11, 2017

Department of Financial Services (DFS), NY State Rule 504.3

A strategic approach to dealing with the final rule

In June 2016, the Department of Financial Services (DFS) of New York State adopted a new rule that requires financial institutions (both regulated and non-regulated) based in its jurisdiction to strengthen their anti-money laundering (AML) programs. This was driven by negative findings such as shortcomings in the transaction monitoring and filtering programs at these institutions stemming from inadequacies in governance, oversight, and accountability at senior levels.

The regulation came into effect on January 1, 2017, with the first compliance findings due by April 15, 2018. 

To address the shortcomings in the existing AML programs, the final regulation makes it mandatory for regulated financial institutions to implement, maintain, update, and improve their transaction monitoring and filtering programs. They are also required to maintain exhaustive documentation on the process followed. Annually, the governing body or senior compliance officer must personally certify that the AML program is compliant to the best of their knowledge. 

That means the governing body and key senior positions are now exposed to the heightened risk of liability in the AML program. As a result, regulated institutions will have to carefully evaluate various aspects of the final rule and consider their likely impact on operations, compliance cost, and regulatory risks.

The final rule has factored in the comments submitted on behalf of the financial services industry based in New York, and has changed some of the key aspects compared with the proposed rule, mainly:  

  • Criminal liability clause for governing body/officers if the program deficiency has been changed to ‘under any applicable laws’
  • Leniency in terms of tuning the transaction monitoring and filtering systems to manage the number of alerts
  • Filtering programs to the only screen against the Office of Foreign Assets Control (OFAC) sanctions list

Depending on how the final rule is interpreted and applied, it could have a significant impact on the operating costs of regulated institutions, and most certainly will provide the DFS with increased enforcement powers.