Financial Services Law

September 11, 2013

Money Laundering on the Front Burner

This article was previously published in BankNews (September 2013).

With the bulk of the banking industry’s credit problems resolved or at least more manageable than in the recent past, the regulators appear to be on a new warpath. Over the last year, they have sent strong signals to the banking community that Bank Secrecy Act and anti-money laundering issues have been moved to the forefront of regulatory concerns. High-profile settlements with Standard Chartered Bank and HSBC provided an opportunity for bankers everywhere to pause and consider the ramifications of this new focus on their own institutions, large and small. Then, in May of this year, the Federal Reserve refused to approve the merger of Hudson City Bancorp and M&T Bancorp in the Northeast because of identified issues with the M&T’s anti-money laundering compliance, causing M&T to hire outside consultants to help it address the Fed’s concerns and implement remediation procedures so as to enable the merger to go forward down the road.

Aside from requiring the institution to properly correct identified deficiencies in BSA/AML policies and procedures, the regulatory spotlight has been increasingly placed on the boards of community banks, forcing directors to become more directly engaged in supervising the BSA/AML process — in addition to the other responsibilities placed on directors for supervision of the bank’s activities. What is the best way for management and the board to work together to assure that the bank is properly and effectively managing its compliance responsibilities in the BSA/AML area?

First, the bank should engage in a self-assessment of its profile to measure risk across product and business lines, the customer base and locations. This should be part of the bank’s overall enterprise risk-management process and is intended to provide a comprehensive understanding of the bank’s risk exposure and aid in the development of appropriate BSA/AML policies and procedures. If the bank does not demonstrate that it has done this, the regulators will do it and the result could be enforced requirements of reporting and demonstrated progress, perhaps under the demands of a cease and desist order or other enforcement constraint.

Second, management and the board should evaluate whether the bank’s BSA/AML compliance program, including internal controls, compliance testing, and personnel and training is sufficient given the bank’s risk profile. The bank should become aware of the tools that are available in the marketplace to assist with implementing appropriate BSA/AML policies, particularly techniques designed to be highly effective in identifying possible attempts to use the bank for improper purposes. It should be noted that the vigilance demanded of banks is not merely to identify issues arising in the bank’s daily operations but also to identify possible issues arising out of the new-account opening process as well as in transactions in which the bank is a more passive player with an intermediary bank, all as part of maintaining an effective compliance culture.

Third, the hiring and retention of competent and experienced personnel to manage the BSA/AML effort and to identify and address potential problems on a daily basis is one of the most important decisions to be made in the BSA/AML area. Most importantly, the bank’s identified BSA officer should be approved by the board and be given the freedom of the bank, with authority to pursue potential problems throughout the institution. A designation of a BSA officer without giving that officer the authority to act broadly within the bank is a frequent criticism by regulators. Moreover, the BSA officer should have direct reporting authority to the relevant board committee, such as an audit and compliance committee, and should meet with the committee regularly to report on recent developments and possible trends that bear corrective action.

Fourth, the BSA officer has to implement and manage on an active basis an ongoing training program for bank employees to sensitize them to circumstances that might suggest problems that could lead to the need to file a suspicious activity report. This should include a mechanism by which bank employees can transmit details of possible BSA/AML violations to the BSA department on an anonymous basis, thereby encouraging the flow of information within the organization. In most community banks, training on BSA matters is essential in the branch retail network because this is where identified BSA issues are most likely to surface. However, training should be broad-based and cover all areas of the bank identified as higher risk. Directors should receive BSA/AML training, as well.

Harold P. Reichwald is a partner at Manatt in Los Angeles. Contact him at 310-312-4148 or hreichwald(at)manatt.com.