The current administration has indicated a relaxed stance on regulation when it comes to financial institutions. However, if your organization is a participant, you cannot expect the same attitude toward the regulations for money laundering. Enforcement in this area is alive and well. Since 2017, there have been many criminal, and other penalties plied against the finance industry due to infractions of the Bank Secrecy Act (BSA) and anti-money laundering (AML) regulations.
To that point, this administration has underscored the importance of the AML, which it has slated as a top priority. Let’s take a closer look at what we can take away from recent actions. This can help financial institutions evaluate their BSA/AML programs to prevent similar penalties.
Supervisory Criticisms of AML Programs Must Be a Top Priority
When the bank receives criticism of its AML program following an examination, it is supposed to be escalated to senior management as well as the board of directors. This applies whether the criticism is informal or underlined during the exit process. If your organization lets this process fall by the wayside and remain uncorrected, you are likely to collect further criticisms and risks having enforcement measures enacted against it.
Take the time to review Section 8(s) under the Federal Deposit Insurance Act. All banking agencies have to present a cease and desist order to the implicated parties when an AML-related matter arises and remain unaddressed the next time there is an examination. When you issue a cease-and-desist order, your bank should also hire an independent consultant to audit the original findings and investigate further instances of irregularity and unreported suspicious activity.
Once you have flagged an account for suspicious activity, you can benefit from the gift of hindsight to find other transactions pointing to a violation of AML/BSA regulations. This nearly always results in uncovering additional red flag actions. Further, a look back can identify bad actors that used the bank's AML deficiencies to launder money. When banks continuously miss suspicious activity, they attract unwanted scrutiny from enforcement authorities.
Whatever happens, do not do anything to hinder the examination process. Recent cases show that the government tends to find fault with banks that have concealed information from investigators, especially after regulators have asked for it. To minimize risk, you can educate employees so that everyone understands the protocol if examiners are present.
For instance, you should pinpoint a primary contact for the lead examiner to answer questions promptly and ensure that the desired message is passed along. Firmly communicate that all inquiries from examiners must go through this person. Train employees to get any inquiries in writing and that the responses should only be conducted in memo form rather than informal conversations or interactive written communication.
Maintain Appropriate Staff and Technology
Recently, the government has faulted financial institutions for a gap in staffing and technology, which prevented the ability to find and report suspicious activity. It’s vital that your bank management conducts regular assessments regarding your ability to adequately investigate AML risks.
In regard to staffing needs, you must acquire appropriate employees or contractors with the skillset required to conduct the reviews. Examiners are finding and citing more and more instances of inadequate staffing, in terms of experience or training. These citations have been specific in stating that many BSA officers haven’t received the needed training and have complained that some are underpaid for the AML duties they perform. Don’t let your bank receive unwarranted scrutiny over a staffing issue.
Technology gaps are also a common cause for criticism. Outdated tech can cause you to miss suspicious activity. Keep monitoring systems current to prevent unscrupulous activity from going unnoticed. Another source of criticism includes screening software. It’s vital to maintain an independent system where information is independently validated.
That’s not to say that every bank needs more AML staff or should raise existing staff salaries. Instead, risk mitigation is the key to identifying whether your bank has the right mix of technology and staff. Looking at your customer base activity and demographic can help you determine that. When you get requests for more AML staff, tech or salary, officers and directors need to promptly and properly evaluate them and document the reasoning behind any changes or lack of change planned.
Ensure an Orderly Monitoring Transactions
Many AML enforcement actions of the last several years involve a bank's failure to align monitoring systems to the transactional operations and risk profile suggested by the bank’s current client portfolio. Note that regulators have shown a pattern of reprimanding banks when they improperly tune systems to decrease flags due to a lack of bandwidth to investigate each or have financial intelligence technology that resolves them.
Don’t let your bank be on the receiving end of government allegations that you are manipulating the transaction monitoring systems in order to decrease suspicious activity alerts due to a lack of staff. Other actions cited some banks for instructing staff to void alerts at high rates without sufficient investigation. Such measures always elevate the failure rate for detecting irregular activity. Implement any changes to monitoring systems carefully to make sure the overall effect remains intact. This means that all changes must go through a process of requirements gathering, documentation, testing and careful implementation.
Changes made in haste and without the required safeguards are viewed as shortcuts. If the examiners find that your bank isn’t taking AML compliance seriously, it will take an increasingly stronger interest in the audit.
When an institution can’t find enough staff and compliance resources to ensure a secure risk profile, it should partner with an external staffing resource to reduce this risk immediately.
AML Compliance Trumps New Business Development and Building Your Customer Base
Your senior management and the BOD have to constantly focus on compliance in every line of business. Recently, prosecutors found that some institutions closed accounts very slowly and failed to file suspicious activity reports after noticing that the customers' accounts were probably used for illegal activity.
To avoid this type of laser focus, your bank should adopt more effective policies to communicate new information to the right departments. For example, how should they communicate that they have received a subpoena, national security letter or other AML inquiry at the department level? This lets you evaluate your risk ratings and determine if you should cut off certain customer relationships.
When dealing with matters impacting wealthy clients or those suspected of illicit activity be extremely vigilant. You don’t want to be written up for failing to close accounts or for not flagging transactions that obviously include suspicious activity.
Similarly, banks have been faulted for wooing customers who had their accounts closed by other financial institutions. Any surge of new and high-risk customers who have recently had their accounts closed at other banks is a red flag for examiners.
Cases Against Individuals Rather than Institutions are Rising
In the last ten years, the government issued criminal penalties involving billions in fines against financial institutions for BSA/AML deficiencies. In a little over a year, $2 billion has been levied for AML deficiencies with penalties between $7 million and $600 million. Instead of institutions, they are going after people.
BSA/AML deficiencies are still identified at financial institutions. Regulators and prosecutors have adopted an additional approach during AML enforcement. Since you could now more easily be held personally responsible, awareness is more important than ever. So, avoid individual liability by establishing and following policies that avoid errors in your area.
Starting in 2017, many bank employees have been criminally charged. Even if exonerated, they are blackballed from the financial industry, or at least receive a substantial fine for willful violations of the BSA. We expect this trend to continue.
Are you protected against individual liability? AML staff need to diligently perform their function and stay updated on industry developments (e.g., new regulations, guidance, and enforcement actions) in order to detect and appropriately address the AML risks at their financial institution, as well as to communicate these risks to the executives and directors of the bank, as appropriate.
Recent actions demonstrate that, despite an easing of regulations, the government will continue to rigorously enforce BSA/AML compliance at financial institutions. Don’t let yourself or your bank be caught with inadequate and timely action to BSA or AML. Note that financial institutions failing to meet these standards can expect continued government interest, leading to investigations that stretch out for years. Avoid fines, expensive remediation, and a criminal conviction by making AML compliance a top priority at your financial institution.
When you're ready to hire the appropriate people to execute these changes, contact ICS. Our recruiters are familiar with the latest trends and news in the compliance field. We can provide you with the talent you need and get you the assistance needed to bring your company into full compliance.