Academic journal article Federal Reserve Bulletin

Statement by Richard A. Small, Assistant Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, before the Subcommittee on General Oversight and Investigations and the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives, April 20, 1999

Academic journal article Federal Reserve Bulletin

Statement by Richard A. Small, Assistant Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, before the Subcommittee on General Oversight and Investigations and the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives, April 20, 1999

Article excerpt

I am pleased to appear before the Subcommittee on General Oversight and Investigations and the Subcommittee on Financial Institutions and Consumer Credit to discuss the Federal Reserve's role in the government's efforts to detect and deter money laundering and other financial crimes with a particular emphasis on matters related to the Bank Secrecy Act and suspicious activity reporting.

OVERVIEW

The Federal Reserve has a long-standing commitment to combating money laundering and ensuring compliance with the Bank Secrecy Act and related suspicious-activity reporting requirements by the domestic and foreign banking organizations that it supervises. Compliance with the Bank Secrecy Act and suspicious-activity reporting requirements by financial institutions provides timely and valuable information to law enforcement and is the best indicator of the existence of satisfactory anti-money-laundering and anti-fraud policies and procedures. Over the past several years, the Federal Reserve has been actively engaged in the government's efforts to deter money laundering through financial institutions by, among other things, redesigning the Bank Secrecy Act examination process, developing anti-money-laundering guidance, regularly examining the institutions we supervise for compliance with the Bank Secrecy Act and relevant regulations, conducting money-laundering investigations, providing expertise to the U.S. law enforcement community for investigation and training initiatives, and providing training to various foreign central banks and government agencies.

Ten years ago the Federal Reserve started its anti-money-laundering program and appointed a senior official to coordinate the Federal Reserve's activities in this area. In 1993, the Federal Reserve established a special investigations unit, with responsibility for, among other things, the oversight of the Federal Reserve's anti-money-laundering program. In the same year, each of the Federal Reserve Banks designated a senior experienced examiner to be the Bank Secrecy Act coordinator.

We have long felt that banking organizations and their employees are the first and strongest line of defense against money laundering and other financial crimes. As a result, the Federal Reserve emphasizes the importance of financial institutions putting in place controls to protect themselves and their customers from illicit activities.

The Congress too has long recognized that a banking organization's best protection against criminal activities is its own policies and procedures designed to identify and then reject potentially illegal or damaging transactions. In 1986, the Congress passed a law (section 8(s) of the Federal Deposit Insurance Act) mandating that the Federal Reserve and the other federal banking agencies issue regulations requiring the domestic and foreign financial institutions that the agencies supervise establish and maintain internal procedures designed to ensure and monitor compliance with the Bank Secrecy Act.

Determining Compliance through Examinations

To understand and properly evaluate the effectiveness of a banking organization's Bank Secrecy Act-related controls and procedures and compliance with the Board's rules issued under section 8(s) of the Federal Deposit Insurance Act, the Federal Reserve has developed comprehensive examination procedures and manuals. In November 1997, the Federal Reserve issued newly revised risk-focused Bank Secrecy Act examination procedures. These enhanced examination procedures specifically address anti-money-laundering compliance. The examination procedures take a multistage "top down" approach.

During every examination of a state member bank and U.S. branch or agency of a foreign bank supervised by the Federal Reserve, specially trained examiners review the institution's previous and current compliance with the Bank Secrecy Act. Examiners first determine whether the institution has included anti-money-laundering procedures in all of its operational areas, including retail operations, credit, private banking, and trust, and has adequate internal audit procedures to detect, deter, and report money-laundering activities, as well as other potential financial crimes. …

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