Sed quis custodiet ipsos Custodes
But who will guard the guards themselves? – Roman poet and satirist Juvenal, c. 100 AD
On May 15, 2019 the Senate Banking Committee held a hearing on “Oversight of Financial Regulators”. The link to the hearing is:
https://www.banking.senate.gov/hearings/oversight-of-financial-regulators
The heads of the OCC, FDIC, and NCUA, and the head of regulatory supervision of the Board of Governors of the Federal Reserve, submitted written statements and testified. Anti-money laundering (AML) and its regulatory regime under the Bank Secrecy Act (BSA) were touched on by three of the four witnesses in their written statements.
The OCC’s Comptroller, Joseph Otting, had the following:
“Compliance risk remains elevated as banks seek to manage money-laundering risks in a complex, dynamic operating and regulatory environment.”
“My priorities also include improving the efficiency and effectiveness of Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations, supervision, and examination, while continuing to support law enforcement, protect the financial system from those who seek to exploit it for illicit and illegal purposes, and reduce the burden of BSA/AML compliance.”
And under the heading “Bank Secrecy Act and Anti-Money Laundering”, the Comptroller wrote:
The BSA and AML laws and regulations exist to protect our financial system from criminals who would exploit that system for their own illegal purposes or use that system to finance terrorism. While regulators and the industry share a commitment to fighting money laundering and other illegal activities, the process for complying with current BSA/AML laws and regulations has become inefficient and costly. It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.
The OCC has taken a leadership role in coordinating discussions with the FDIC, Board of Governors of the Federal Reserve System, National Credit Union Administration, Treasury’s Office of Financial Intelligence, and FinCEN to identify and implement ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations, while continuing to meet the requirements of the statute and regulations, support law enforcement, and reduce BSA/AML compliance burden. In October 2018, these agencies released a joint statement clarifying ways in which community banks with a lower BSA risk profile may be able to increase efficiency and reduce burden in their BSA/AML compliance programs by sharing BSA resources. The statement describes how these banks can effectively use collaborative arrangements to share human, technology, or other resources related to BSA compliance to reduce costs, increase operational efficiency, and leverage specialized expertise.
More recently, in December 2018, these agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance. In addition to assisting banks’ efforts to control their costs, innovation is increasingly necessary to counter constantly changing threats, as illicit financing methods evolve to exploit vulnerabilities in existing systems. The statement makes clear the agencies are committed to continued engagement with the private sector to modernize and innovate in their BSA/AML compliance programs. The OCC is actively engaged in discussions with banks and other stakeholders regarding ways to explore enhanced technology usage while maintaining the current strong protections for the financial system.
The OCC also has identified areas in which legislative changes could increase the impact and efficiency of BSA/AML regulation and compliance programs. The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.
The written statements of Jelena Williams, Chair of the FDIC, and Randal K. Quarles, Vice Chair for Supervision for the Federal Reserve, did not include anything on BSA/AML.
The written statement of Rodney E. Hood, Chairman of the National Credit Union Administration (NCUA), included the following on BSA/AML (footnotes omitted):
Ensuring Compliance with the Bank Secrecy Act The NCUA takes seriously its obligations to supervise federal credit unions for compliance with the various BSA and AML laws and regulations. As technology has become embedded in financial systems, even small financial institutions like credit unions can be vulnerable to illicit finance activity. The NCUA examines federal credit union compliance with BSA during every examination that we conduct. Additionally, the NCUA assists state regulators by conducting BSA examinations in federally insured, state-chartered credit unions where state resources are limited. In 2018, the NCUA conducted 3,308 BSA examinations in federal credit unions.
The NCUA’s BSA reviews are risk-focused and include a set of core procedures that cover an institution’s compliance with the pillars of the BSA. These core procedures are based on the FFIEC examination procedures we issue jointly with the other federal financial regulatory agencies. In addition to the core procedures, examiners are trained and directed to tailor examinations based on the unique risk characteristics of each federal credit union. Federal credit unions that have diverse platforms with higher risk activities will receive an expanded review tailored to the unique risk characteristics they present. Conversely, examinations of smaller, low-risk credit unions are appropriately scaled to minimal necessary procedures consistent with their risk characteristics and our obligations under the FCU Act.
The NCUA coordinates regularly with our counterparts as the other federal financial regulatory agencies, as well as the Financial Crimes Enforcement Network (FinCEN). The NCUA actively participates in the Bank Secrecy Act Advisory Group (BSAAG) and the FFIEC BSA Working Group. Additionally, the NCUA is part of a recently established interagency working group to improve effectiveness and streamline, where possible, our regulations and supervisory processes. The working group recently issued a Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing, as well as an Interagency Statement on Shared BSA Resources. Both joint statements provide appropriate information for institutions to leverage resources and new technologies to improve and streamline their BSA compliance obligations. The NCUA intends to continue to foster collaborative working relationships with our regulatory counterparts, including FinCEN. I believe that this is especially important in addressing substantial concerns related to the proliferation of cash-based businesses, which further necessitates reforming and modernizing the BSA regime.
Finally, the NCUA also communicates with the credit union industry through numerous channels, including: BSAAG participation and outreach; assistance and participation in national events applicable to the BSA attended by credit union industry professionals and leaders; and through periodic and ongoing training via webinars. The NCUA continues to maintain transparency in its policy positions. To that end, the agency publishes our examination and policy manuals, as well as nearly all guidance and directives provided to examiners related to the supervisory process or examinations.
I’ve highlighted three excerpts from Comptroller’s Otting’s statement:
It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.
The agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance.
The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.
Comptroller Otting’s testimony – and indeed the actions of the OCC and the other regulators – around the encouragement of innovative uses of technology is a very positive for all financial institutions struggling to balance the competing and sometimes conflicting interests and perspectives of their regulators, their customers, and law enforcement. The promotion of sharing information is also very positive: financial institutions working individually will never fulfill their regulatory obligations effectively or efficiently, and can only do so by sharing information with other institutions. Big data intelligence and collaborative investigations are the future of BSA/AML.