Protecting the future: why BSA compliance is essential for financial institutions

Money laundering erodes the integrity of a nation’s financial system by reducing tax revenues through underground economies, restricting fair competition with legitimate businesses, and disrupting economic development. Ultimately, laundered money flows into global financial systems where it could undermine national economies and currencies. Thus, money laundering is not only a law enforcement problem, but can pose a serious national and international security threat as well. Based on the AML regulations, are we doing enough?

Anti-money laundering, fraud, and terrorism are issues that have been in the media a great deal recently. How are these issues affecting business for FDIC-supervised financial institutions? Lisa D. Arquette, Associate Director for the FDIC’s Anti-Money Laundering & Financial Crimes Branch explains that the vast majority of FDIC-supervised banks has established and continues to maintain policies, procedures, and processes in compliance with the Bank Secrecy Act (BSA). “For institutions when it is determined that BSA compliance is inadequate, the FDIC has a number of supervisory responses available to address the BSA compliance issues including the issuance of formal and informal enforcement actions.” According to Arquette, during 2006, of the 5200 institutions supervised by the FDIC, there were 12 institutions having supervisory concern relating to BSA compliance to warrant a formal corrective action.

The primary AML law in the United States, the BSA, has been in existence for many years. Since its enactment in 1970, several legislative changes have sought to clarify and enforce the requirements of the BSA. Most significantly the Money Laundering Control Act of 1986, Money Laundering Prosecution Improvement Act of 1988, Annunzio-Wylie Anti-Money Laundering Act of 1992, Money Laundering Suppression Act of 1994, Money Laundering and Financial Crimes Strategy Act of 1998, and, most recently, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act). According to Arquette, amendments to BSA reporting requirements have attempted to “close loopholes in prior rules, broaden legislative applicability, enhance usability of data, and address new money laundering vulnerabilities.”

The Patriot Act was swiftly enacted by Congress in October 2001, primarily in response to the September 11, 2001 terrorist attacks on the U.S. Arquette confirms that the “the Patriot Act established a host of new measures to prevent, detect, and prosecute those involved in money laundering and terrorist financing and expanded the applicability of the statute to other types of financial entities at risk for money laundering abuse, such as insurance companies, securities dealers, and money services businesses. Regulatory changes in the past few years have consisted of the issuance on implementing rules to the Patriot Act including information-sharing, customer identification requirements, and due diligence requirements.”

So when implementing or enforcing AML/fraud compliance programs within their institutions, how are the concerns of US financial services executives addressed? “In order to address concerns voiced by industry, the Federal banking agencies formed the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Working Group through the Federal Financial Institutions Examination Council (FFIEC),” says Arquette. “This working group seeks to enhance coordination of BSA/AML training, outstanding guidance, and policy development, including continuing communication channels between the Federal and state banking authorities and the Financial Crimes Enforcement Network (FinCEN). In recognizing the importance of such joint efforts, the FDIC chaired the working group since its inception in 2004 through January 2007.”

In an important step toward the effort to ensure consistent application of the BSA to all regulated banking organizations, the FFIEC released the BSA/AML Examination Manual in June 2005. According to Arquette, the Manual was the collaborative result of the Federal banking agencies and FinCEN to provide a uniform examination process and publish a compilation of existing regulatory requirements, supervisory expectations, and sound practices in the BSA/AML area. “Subsequent revisions in 2006, included further clarification of supervisory expectations and incorporation of regulatory changes and industry feedback,” she says. “A new Risk Assessment section was drafted to emphasize the importance of the topic, consolidate existing guidance, and provide additional instruction for examiners and bankers. The FDIC is also supervising the review and revision process of the BSA/AML Manual this year.”

The FDIC’s specific mission, according to Arquette, is to preserve and promote public confidence in the US financial system by insuring deposits in banks and thrift institutions for at least $100,000 (higher for limited, specific account types); by identifying, monitoring, and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails. “The FDIC directly examines and supervises more than half of the banks in the United States’ banking system,” she adds. “The FDIC is the back-up supervisor for the remaining insured banks and thrift institutions. In addition, the FDIC insures all depository institutions (banks and thrift institutions) totaling $11.9 trillion in assets and $7.8 trillion in deposits.”

So what does Arquette hope will change in the future to improve AML compliance, fraud detection, and counter-terrorist financing in financial institutions? In the past few years, increased communication among regulatory and law enforcement organizations, interagency collaboration in the banking industry, and information sharing between law enforcement and the banking industry has created an unprecedented level of cooperation. “For the United States, the events of 9/11 required all involved in financial services industries to strengthen their commitment and resolve in the area of AML supervision and enforcement as well as matters related to other financial crimes. Banks and financial service providers must vigilantly continue their focus and commitment to ensure compliance and combat financial crime throughout the world. While not without regulatory burden, the difference that can be made by remaining resound in our efforts in detecting and preventing terrorist financing activity and financial crimes cannot be overstated.”

Combating financial crime on a global level is certainly an important factor in financial services today. Increasingly, fuelled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which ‘megabyte money’ (money in the form of symbols on computer screens) can move anywhere in the world with speed and ease. Criminals are now taking advantage of the globalization of the world economy by transferring funds quickly across international borders. Rapid developments in financial information, technology, and communication allow money to move anywhere in the world with speed and ease. For these reasons, the task of combating money laundering is more urgent than ever.

So how is the FDIC responding to the international challenges of AML, fraud, and terrorist financing? According to Arquette, the FDIC participates in a number of corporate initiatives to advance global knowledge of emerging risks related to money laundering, terrorist financing, and other financial crimes. “For example, the FDIC has a team of specialists available to support international requests for assistance from government bodies or other entities such as the Departments of State and Treasury as well as the Financial Services Volunteer Corps,” she says. “On a number of occasions, FDIC personnel have participated on Financial Systems Assessment Teams (evaluating the AML risks, controls, supervision and enforcement authority of foreign governments), provided consultation for legal AML legislation and rules, and conducted technical assistance related to AML training. Additionally over the past two years the FDIC, in partnership with the Department of State, has hosted three International AML/Anti-Terrorist Financing Schools for individuals from 13 nations. This course, among other functions, is designed to provide an understanding of the importance of reviewing the operational, legal, and reputational risks regarding worldwide money laundering and terrorist financing.”

The deeper ‘dirty money’ gets into the international banking system, the less transparent its sources and more difficult it is to identify its exact origin. Because of the clandestine nature of money laundering, it is difficult to estimate the total amount of money that goes through the laundering cycle. According to the UNODC, estimates of the amount of money laundered globally in one year have ranged between $500 billion and $1 trillion. Making sure your institution is BSA compliant is vital – not only for the safety of your business – but the buoyancy of the global economy.

BIOGRAPHY

Ms. Arquette, Associate Director of the Anti-Money Laundering & Financial Crimes Branch, is responsible for the FDIC’s policy, guidance, and examination procedures related to Bank Secrecy Act (BSA), anti-money laundering (AML), counter-financing of terrorism (CFT), Office of Foreign Assets Control (OFAC), bank fraud, cyber-fraud, and the Federal Deposit Insurance national background check program. Ms. Arquette is also responsible for the FDIC’s international assistance related to AML/CFT initiatives.

Ms. Arquette is a Certified Anti-Money Laundering Specialist and previously served as Chief of both the Special Activities and AML Sections, with responsibility to administer programs that encompassed: BSA/AML policies and procedures; open-bank fraud investigations with the FDIC’s Office of Inspector General; policy related to fiduciary activities, government and municipal securities dealers, and registered transfer agents; industry notification regarding counterfeit items, entities inappropriately operating as financial institutions, improper representation of Federal deposit insurance, and OFAC matters; as well as the national background check program. Ms. Arquette began her FDIC career as a safety and soundness bank examiner in the Dallas Region. Since then, she has also held the positions of Senior Capital Markets Specialist and Risk Management Review Examiner.

The Ten Fundamental Laws of Money Laundering

• The more successful a money laundering apparatus is in imitating the patterns and behavior of legitimate transactions, the less the likelihood of it being exposed.
• The more deeply embedded illegal activities are within the legal economy and the less their institutional and functional separation, the more difficult it is to detect money laundering.
• The lower the ratio of illegal to legal financial flows through any given business institution, the more difficult it is to detect money laundering.
• The higher the ratio of illegal ‘services’ to physical goods production in any economy, the more easily money laundering can be conducted in that economy.
• The more the business structure of production and distribution of non-financial goods and services is dominated by small and independent firms or self-employed individuals, the more difficult the job of separating legal from illegal transactions.
• The greater the facility of using checks, credit cards and other non-cash instruments for effecting illegal financial transactions, the more difficult it is to detect money laundering.
• The greater the degree of financial deregulation for legitimate transactions, the more difficult it is to trace and neutralize criminal money.
• The lower the ratio of illegally to legally earned income entering any given economy from outside, the harder the job of separating criminal from legal money.
• The greater the progress towards the financial services supermarket and the greater the degree to which all manner of financial services can be met within one integrated multi-divisional institution, the more difficult it is to detect money laundering.
• The greater the contradiction between global operation and national regulation of financial markets, the more difficult the detection of money laundering.

Source: United Nations Office on Drugs and Crime, http://www.unodc.org/