March 04, 2005

Call it poetic justice.

Banks doing business in the United States are required by law to check the names of their customers against lists maintained by the Office of Foreign Assets Control (OFAC), a division of the U.S. Treasury. These lists contain the names of known and suspected terrorists, money launderers and other entities whose activities concern law enforcement.

Complications arise when there's a questionable "hit," such as a customer name that almost but not quite matches a name on the OFAC list. In those cases, banks have the option of calling OFAC for advice. But compliance officers at banks are more likely to reach OFAC's automated hotline than a human operator.

With only 14 employees at OFAC working the phones out of 133 in total, that's unavoidable, said Dennis P. Wood, who heads up OFAC's compliance programs division. "There have been horror stories," he admitted. "We try to get back within hours or the same day."

OFAC faces constraints in its resources in part because of the common practice of "defensive filing" that occurs when banks submit an inordinate number of false positives simply to ensure that no situation arises where a bank did not file something it should have filed. This situation was taken to its extreme immediately following 9/11, related Wood, when one bank filed OFAC reports involving organizations with the term "baseball" in their names - a red flag because the English translation of "al Qaeda" is "The Base."

"We were overwhelmed," said Wood.

Now, OFAC's automated system steps banks' compliance officers through the most pertinent criteria and frequently asked questions involved with filing a report in a way that avoids false positives.

But the unintended result of the complexity of the process is that banks may have become less willing to test the line between what is legally acceptable and what is not, especially in terms of deciding whether to deal with someone that might pose a thorny OFAC question. That's a business decision, noted Wood. "Business decisions are often stricter than the requirements."

Wood spoke at the International Money Laundering Conference (Hollywood, Fla.) on March 3, 2005.

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