Banks Help Fight Terrorism—
But at a Cost
by Bob Monroe
Banks spend millions each year to help prevent and detect money laundering, terrorist financing, and other criminal acts and the misuse of our nation’s banking system.
Regulatory burdens on banks and other financial institutions are nothing new, as banks are in the most regulated industry in the country. To meet such burdens, banks spend millions each year to help prevent and detect money laundering, terrorist financing, and other criminal acts and the misuse of our nation’s banking system.
The cornerstone of the federal government’s anti-money laundering efforts is the Bank Secrecy Act (“BSA”). Enacted in 1970, BSA is primarily a recordkeeping and reporting statute that is designed to ensure that banks provide relevant information to law enforcement in a timely fashion. BSA has been amended several times, most recently through the passage of the USA Patriot Act in the wake of the 9/11 tragedy.
Bank regulators have issued regulations implementing BSA requiring all banks to have a BSA compliance program, and to file reports on suspicious activities (“SARs”) and currency transactions.
A bank’s BSA compliance program must be written, approved by its board of directors and noted in board minutes. A BSA compliance program also must contain:
• a system of internal controls to ensure ongoing BSA compliance;
• daily coordination and monitoring of compliance by designated person(s);
• training for appropriate personnel; and
• independent testing of compliance (by internal auditors or an outside party).
An effective weapon to thwart banks from being used unwittingly to launder money or to support terrorist financing is to know customers and other users of bank services, requiring appropriate identification, and being alert to unusual or suspicious transactions. Banks are required to report transactions that have no apparent lawful purpose or are not the sort in which the particular customer would be expected to be involved.
Banks must obtain satisfactory customer identification, consider the proximity of the customer’s residence or place of business, call-verify the customer’s residence or place of employment, consider the source of funds used to open the account and check prior banking references for larger accounts. Additional steps may include third-party references, verification services and the use of Internet search techniques. Finally, banks should determine the source of funds and the beneficial owners of all accounts.
Millions of bank transactions occur daily. In addition, thousands of new bank accounts are opened daily, many of which can be opened through the Internet. The sheer magnitude of the transactions and account openings requires banks to have effective BSA compliance programs.
Banks must file SARs within prescribed time frames when a suspicious transaction is discovered. SARs must be filed if the bank knows, suspects or has reason to suspect that the transaction:
• involves funds from illegal activities or is conducted to hide illicit funds or assets in a plan to violate or evade any law or regulation or to avoid transaction reporting requirements under federal law;
• is designed to evade any BSA regulations; or
• has no business or apparent lawful
purpose or is not the sort in which the customer normally would be expected to engage, and the board knows of no reasonable explanation for the transaction after examining available facts. SARs are filed with a national depository and copies are sent to local enforcement officials for review and possible investigation by the FBI.
If a bank is determined to have a deficient BSA compliance program, then bank regulators can seek monetary penalties against the bank and take other actions that may be deemed appropriate. Riggs Bank, in Wash-ington, D.C., was assessed a $25 million civil penalty, pleaded guilty to a federal criminal charge and paid a $16 million fine for failing to prevent money laundering at the bank. The duties and obligations upon banks are indeed burdensome, with significant potential liability for failure to maintain adequate BSA compliance programs.
Bob Monroe is a Partner with Stinson Morrison Hecker. He can be reached at bmonroe@stinsonmoheck.com or at 816.691.3351.