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CRA-like Evaluations for Banks’ BSA/AML Programs? Let’s Give Banks Some Credit for Building and Maintaining an Outstanding BSA Program!

The only time the public (and Congress) hears about a bank’s BSA program is when the program has failed and a regulator issues a public censure. These public censures are rare, but drive the narrative that banks are doing a poor job when it comes to BSA compliance. In the last 12 months we’ve read about Rabobank California’s February $50 million OCC and $369 million forfeiture, US Bank’s February $613 million in penalties from multiple agencies, Danske Bank’s September €775 million in penalties, Société Générale’s November “stripping” penalty of $1.34, UBS’s December $15 million penalty, and Morgan Stanley’s December $10 million penalty. With those as the only narrative, one could imagine an industry out of control.  Which isn’t the case: 99% of financial institutions are doing a pretty good job with their BSA/AML and sanctions programs.  So … why not use a CRA-like approach and publish the evaluations of all bank’s BSA compliance programs?

According to the OCC, “the Community Reinvestment Act of 1977 (CRA) provides a framework for financial institutions, state and local governments, and community organizations to jointly promote banking services to all members of a community. In a nutshell, the CRA: prohibits redlining (denying or increasing the cost of banking to residents of racially defined neighborhoods); and encourages efforts to meet the credit needs of all community members, including residents of low- and moderate-income neighborhoods.” https://www.occ.gov/topics/compliance-bsa/cra/index-cra.html

Again, according to the OCC, the CRA requires each federal financial supervisory agency, when examining financial institutions subject to its supervision, to use its authority to assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution. Upon the examination’s conclusion, the agency must prepare a written evaluation of the institution’s record of meeting the credit needs of its community. This document is an evaluation of the CRA performance of the bank as of the date of the evaluation. The agency rates the CRA performance of an institution consistent with appendix A to 12 CFR part 25 across lending, investment, and servicing using a scale of Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance.  There is also a narrative summarize the major factors supporting the bank’s rating. And when illegal discrimination or discouragement has been discovered (substantive violations, not merely technical) and has affected the rating, the summary should state that the rating was influenced by those violations.

These CRA evaluations are made public. For example, on December 4, 2018 the OCC released CRA Evaluations for 28 National Banks and Federal Savings Associations that became public during the period of November 1, 2018 through November 30, 2018. Of the 28 evaluations, 25 were rated satisfactory and three were rated outstanding. In the last six monthly releases of the OCC’s CRA evaluations, 30 banks received an Outstanding grade, 139 received a Satisfactory grade, 1 received a Needs to Improve grade, and 1 received a “Substantial Needs to Improve” grade. If these were BSA results, and the Needs to Improve and Substantial Needs to Improve results were the equivalent of Consent Orders, the public (and Congress) would only have read about the 2 banks, not the 169 that had satisfactory or outstanding programs.  Not only is this context critical (169 of 171 banks had satisfactory or outstanding programs), but it encourages the regulated banks to strive to build and maintain an outstanding program.  This is important, because currently the only opportunity a BSA Officer has to get his or her program mentioned publicly is in a negative context of a Cease & Desist or Consent Order. There is no upside.  So perhaps the regulators can take a page from the CRA Handbook and publish their results of BSA evaluations. My guess is that 169 of 171 will be satisfactory or outstanding.  And BSA Officers everywhere would have hope …

I know many of you will immediately react that this is a bad idea. But as Arthur Clarke (is alleged to have) said: “New ideas pass through three phases: it’s a bad idea; it may be a good idea, but it’s not worth doing; and … I knew it was a good idea all along!”