This blog was co-authored by Perficient Project Manager: Alicia Lawrence
As a global organization headquartered in St. Louis, Perficient is committed to supporting current and future clients by monitoring federal and state regulations and alerting them of changes that may impact them. In 2024, Perficient published a blog highlighting insights gathered through continuous monitoring a of the New York State regulations impacting financial services firms:
NYDFS Part 500 Cybersecurity Amendments – What You Need to Know
This blog highlights key observations and implications of the latest changes to the NYDFS 500 regulations and builds on the previously published blog to inform financial services executives that the NYDFS Part 504 Transaction Monitoring and Filtering Certification is a significant annual regulatory requirement for any institution regulated under New York’s Banking, Insurance or Financial Services Law. The regulation imposes an annual certification on senior officers and board members that their organization’s transaction monitoring and sanctions filtering programs are designed, maintained, and tested to effectively detect money laundering, terrorist financing, and sanctioned-party transactions.
What is Part 504 Certification?
Under 3 NYCRR Part 504, regulated institutions are legally obligated to:
- Operate an Anti-Money Laundering (“AML”)-compliant Transaction Monitoring Program, tailored to their risk profile.
- Run a Watchlist/Sanctions Filtering (i.e., Office of Foreign Assets Control “OFAC” compliance) Program.
- Annually certify, by April 15th, that these programs meet the Part 504 control standards, even if an institution finds and is actively remediating deficiencies.
The certification itself covers the prior calendar year and is a standalone submission via DFS’ portal. The certification doesn’t require and actually prohibits the submission of supporting documentation. However, institutions must maintain records supporting their certification for potential DFS review. Such documentation includes internal/external audit results, scenario logic, testing strategy and results, and if necessary, documentation of remediation efforts and remediation plans.
A link to the page is available here:
Transaction Monitoring Certification (3 NYCRR 504) | Department of Financial Services
Who Must Certify?
Part 504 applies to any institution regulated by NYDFS under its financial services law, including:
- State-chartered banks
- Non-bank entities (e.g., money transmitters, Money Services Businesses “MSBs”)
- Insurance firms offering financial products
- Other licensed financial service providers
Why Part 504 Matters
Part 504 enhances financial integrity by ensuring senior-level accountability, mirroring Sarbanes-Oxley-style executive attestations. Even if an executive or Board member leaves a regulated financial institution, they could still be liable for false certifications made the institution, should fraud be found after the fact. The NYDFS enacted this after uncovering weaknesses in AML controls across state-supervised banks and nonbanks, underscoring a need for robust governance.
The regulation aims to:
- Elevate governance and oversight of AML/OFAC programs.
- Standardize program controls, including testing, validation, vendor oversight, and qualified staffing.
- Improve defenses against financial crime and regulatory infractions.
Key Transaction Monitoring Requirements
Getting further into the weeds, as required by Section 504.3, an effective program must include the following core components:
- Risk-Based Design: Align thresholds and detection logic with your institution’s assessed AML and OFAC risks.
- Periodic Testing & Updates:
- Incorporate regular reviews (including model validation and data flows).
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- Update parameters based on evolving regulatory guidance or business changes.
- Comprehensive Detection Scenarios: Create alert rules targeting suspicious behaviors aligned with your AML risk appetite.
- Full Testing Regimen:
- End-to-end testing (pre/post-implementation).
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- Governance oversight, data quality checks, and scenario validation.
- Documentation:
- Maintain records of detection scenarios, assumptions, thresholds, testing outcomes, and remediation.
- Alert Handling Protocols:
- Define investigative workflows, decision points (clear vs escalate), roles, and documentation processes.
- Ongoing Monitoring:
- Continuously review scenario relevance, threshold efficacy, and real-world performance.
These requirements also extend to sanctions filtering – ensuring timely name screening, alerts, and case management controls are in place.
Risks of Non–Compliance
Non-compliance with Part 504 can lead to:
- DFS enforcement actions, including fines or directives, under Banking Law §37 or Financial Services Law §302.
- Reputational damage, aka “Headline Risk” if AML or sanctions failures become public.
- Operational vulnerabilities, including weakened AML controls and potential for financial crime.
Best Practices for Compliance
Perficient consultants and compliance SMEs have seen and helped firms build and maintain a rock-solid Part 504 posture by helping design and build the following best practices:
- Governance Oversight: Including AML leadership and internal/external audit in program reviews.
- Periodic Program Testing: Conducting fresh scenario validations, testing the design and operation of existing controls, performing data assembly testing, and model verification no less than annually.
- Issue Remediation: Prioritizing issues for remediation using a risk-based approach and performing issue validation testing.
- Risk Assessment: Execute risk assessments of key business processes and determine inherent and residual risks.
- Staff Training: Ensuring business line staff and compliance leads understand Part 504 requirements and manage alerts effectively.
- Comprehensive Documentation: Keeping complete audit trails including logs of monitoring system updates, testing reports, governance minutes, and remediation plans.
- Vendor Oversight: If using third-party monitoring systems, conducting due diligence and regularly reviewing vendor performance.
- Senior Executive and Board Engagement: Encouraging frequent executive-level reviews, not just during certification preparation aka April 14th.
Conclusion
Navigating Part 504 certification isn’t just an annual checkbox. It’s a significant piece of an institution’s AML and OFAC defense. By embedding risk-based monitoring, rigorous testing, and senior-level accountability, regulated institutions in New York not only fulfill their regulatory obligations but also strengthen their ability to deter and detect financial crimes.
Through consistent governance, meticulous documentation, and leadership engagement, Part 504 becomes more than compliance—it becomes a strategic shield for safeguarding financial integrity. For institutions governed by DFS, this certification confirms that all necessary steps have been taken to comply with Part 504 posture, reputation, and resiliency requirements —all by April 15 each year.
If you would like to have Perficient SMEs work with you on your Part 504 preparation work – or just have a conversation – reach out to us here.
