Fed Aide Moving Laundering Exams from Futile Paperwork to Prevention

Article excerpt

WASHINGTON -- When Rick Small, the Federal Reserve's point man on money laundering, joined up in 1989, he decided to experience a Bank Secrecy Act exam firsthand.

The tedious task of sorting through a stack of teller tickets to see if deposits of $10,000 or more had been reported convinced Mr. Small that regulators were going about catching money launderers the wrong way.

For the past two years, Mr. Small, special counsel in the division of banking supervision, has been working on ways to make the BSA exam more effective.

He and his four-person staff are almost finished. The new exams will be three-pronged, focusing on how well a bank monitors its own compliance.

This shift away from paper trails is testimony to the good job banks are doing, Mr. Small said.

"Banks have seen the light," Mr. Small said. "If their own internal procedures work effectively, we don't have to sit there and go through all that stuff anymore."

Under the new approach, examiners will focus on know'your'customer policies, compliance with the currency transaction reportexemption process, and programs that identify suspicious activity.

If the bank's programs are solid, said Mr. Small. the Fed won't check every detail. The more work the bank does itself, the more likely it can prove its compliance, said Mr. Small.

"If you've got the programs in place, then I think you've built up a very good track record for any problem that might occur," said Mr. Small.

The Fed has been testing the new exam for the past year, asking examiners to give suggestions about the process. That feedback has been used to make the final, revisions in the process, and official manuals will be out within a couple of months, Mr. Small said.

The new manuals will lead examiners through step-by-step inslruclions. Depending on the answers to certain questions, some steps may be skipped. "It gives the examiners a lot of latitude to make on-the-spot decisions," Mr. Small said.

Mr. Small. 39, is well regarded in banking circles. "He's one of the most dedicated government officials," said John Byrne, senior counsel for the American Bankers Association. "He really believes in educating the industry."

Banks have strengthened their Bank Secrecy Act compliance programs in the past few years for two masons, Mr. Small said: fear of penalties and the realization that compliance means better business.

So now, it's time to give banks a little credit, he said.

"Banks are committed to stopping illegal activity at their institutions," Mr. Small said. "They are as committed as we are."

The main problem still dogging banks is the exemption process, which allows banks to skip currency-transaction reports on certain well-known businesses.

Unfortunately, many banks mistakingly exempt businesses that need to be reported. "The exemption process is very bad," Mr. Small said. "Banks that use it and don't use it right get into a lot of trouble."

Mr. Small estimates that 80% of the civil money penalties issued to banks by the Fed and Treasury result from inconect exemptions.

The situation may be improved by a provision in the Community Development amd Regulatory Improvement Act, The law, which awaits President Clinton's signature, calls for Treasury to compile a specific list of exempted businesses.

However, industry experts are pessimistic about the process, saying the creation of such a list will be a mammoth task. …