Controlling Money Laundering Risks at Community Banks. (Fraud)

By Beans, Kathleen M. | The RMA Journal, April 2003 | Go to article overview

Controlling Money Laundering Risks at Community Banks. (Fraud)


Beans, Kathleen M., The RMA Journal


Financial services consultants from RSM McGladrey, Inc., discussed the Bank Secrecy Act of 1970 and key compliance issues for community banks during an RMA audioconference in January. Matt Schriner, a certified regulatory compliance manager with RSM McGladrey, who is quoted in this article, was one of the authors of "It's a Regulatory Jungle Out There! The USA PATRIOT Act," which appeared in the February 2003 issue of The RMA Journal.

The Bank Secrecy Act (BSA) requires banks to have a robust anti-money-laundering process in place. Passed in 1970, BSA became a focus issue for regulators and the Treasury Department as a result of the events of September 11,2001.

Basically, the law requires financial institutions to maintain records of personal financial transactions that "have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings." It also authorizes the Treasury Department to require financial institutions to report any "suspicious transaction relevant to a possible violation of law or regulation." Suspicious Activity Reports are filed with the Treasury Department's Financial crimes Enforcement Network.

Financial services consultants from RSM McGladrey, Inc., discussed the BSA and key compliance issues for community banks during an RMA audioconference in January.

"The Act was overlooked by most financial institutions until the mid-1980s," said Matt Schriner, a certified regulatory compliance manager with RSM McGladrey, who explained that Congress wanted the regulators to start enforcing the regulations to help catch drug dealers. "It still was not a big issue for most financial institutions until about five years ago, when we started seeing more enforcement. And, of course, September 11 made it a top regulatory issue for the primary bank regulators."

Post-September 11, the USA PATRIOT Act reemphasized the importance of strong anti-money-laundering (AML) programs with new AML requirements on nonbank financial services companies. Banking regulators have advised banks that the money laundering requirements found in the USA PATRIOT Act are nothing more than what the BSA already required, said Schriner. "Continue to focus on the Bank Secrecy Act,"he said. "Use the USA PATRIOT Act as a guideline."

Why and How Is Money Laundered?

The answer to "why," of course, is that money is laundered to hide illegal activities, such as tax evasion, drug trafficking, terrorism, gambling, and arms trafficking, by layering legitimate proceeds with illegal cash from sham businesses and sham transactions.

There are three ways to launder money, said Schriner.

1. The money is deposited into a legitimate business, essentially getting rid of the cash.

2. The money might also be directly deposited into the individual's consumer or business account.

3. The money might be indirectly deposited through a sham business.

Key Requirements of the BSA

Banks have four key reporting and training requirements to comply with the BSA.

1. Complete Cash Transaction Reports (CTRs). They are the focus of the anti-money-laundering regulations. Banks must accurately and consistently complete CTRs for cash transactions over $10,000.

2. Identify money laundering.

3. Train employees to detect suspicious activity.

4. Report all suspicious activity.

"Ten years ago, all anybody looked at were CTRs," said Schriner. "Is the financial institution reporting all cash transactions over $10,000? Over time, the regulators have assumed you had a good process if there were no rough edges in your reports. But now they question if you have the processes in place to identify money laundering."

Some of the pitfalls that RSM McGladrey sees in banks' processes are:

* An overreliance on technology. "Technology is always a good control. It should provide effective, consistent treatment. …

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