June 28, 2017
House Financial Services Subcommittee on Financial Institutions and Consumer Credit: Examining the BSA/AML Regulatory Compliance Regime
Key Topics & Takeaways
- Information Sharing: Citing barriers to information sharing across the industry, the Florida Bankers Association’s DeVaux called for ways to the industry to better manage resources by sharing information to meet Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. The Clearing House’s Greg Baer also called for ways to facilitate “more [information] sharing, rather than less.”
- Beneficial Ownership: Rep. Carolyn Maloney (D-N.Y.) claimed that her bill – the Corporate Transparency Act – would help financial institutions meet “know-your-customer” requirements, adding that anonymous companies are a “fundamental vehicle” for money laundering. Baer agreed, adding that banks’ efforts to identify beneficial owners for customer due diligence requirements is a game of “hide and go seek.”
- Faith Lleva Anderson, Senior Vice President and General Counsel, American Airlines Credit Union, on behalf of the Credit Union National Association
- Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
- Lloyd DeVaux, President and Chief Executive Officer, Sunstate Bank, on behalf of the Florida Bankers Association
- Heather A. Lowe, Legal Counsel and Director of Government Affairs, Global Financial Integrity
Rep. Blaine Luetkemeyer (R-Mo.), Chairman, Subcommittee on Financial Institutions and Consumer Credit
In his opening statement, Luetkemeyer said that the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements have disjointed the relationship between law enforcement, financial regulators, and financial institutions. He claimed that regulators have essentially “deputized” credit unions and banks as law enforcement institutions and created an opaque and punitive regulatory regime. Luetkemeyer noted that financial institutions are becoming more risk averse, and cautioned that “rampant de-risking” undermines the effectiveness of the BSA. He emphasized the need to improve the BSA/AML regulatory construct.
Rep. Lacy Clay (D-Mo.), Ranking Member, Subcommittee on Financial Institutions and Consumer Credit
In his statement, Clay noted that, the Justice Department forfeited approximately $1.2 billion for violations of the BSA, according to a 2016 report by the Government Accountability Office (GAO) report. He called for a stronger enforcement regime to address “bad actors,” and encouraged consideration of Rep. Maxine Waters’ (D-Calif.) bill to significantly increase civil monetary penalties for “willful” violations of the BSA, as well as Rep. Carolyn Maloney’s (D-N.Y.) bill that would require companies to disclose their beneficial owners.
Rep. Carolyn Maloney (D-N.Y.), Ranking Member, Subcommittee on Capital Markets
In her opening statement, Maloney emphasized the importance of AML rules for combatting terrorist financing. Maloney highlighted The Clearing House’s support for her bill, the Corporate Transparency Act, and she claimed that the bill helps financial institutions comply with “know-your-customer” (KYC) requirements.
Faith Lleva Anderson, Senior Vice President and General Counsel, American Airlines Credit Union, on behalf of the Credit Union National Association
In her testimony, Anderson stated that the BSA/AML regulations are disproportionately burdensome on smaller financial institutions, and the compliance costs are ultimately payed by the consumers. She encouraged a more flexible regulatory approach, as well as addressing redundant and unnecessarily burdensome aspects of the BSA/AML regulatory regime.
Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House
In his testimony, Baer said that the current AML and counter the financing of terrorism (CFT) regime is inefficient and driven by “perverse incentives.” Baer noted that the large banks have been pushed away from risk-based approaches, because their performance is examined by bank examiners, “who [unlike national security or law enforcement officials] are not permitted to know of their successes.” Baer cautioned that banks are forced to drop more risky clients, which has a diplomatic and economic cost. Baer recommended that the Treasury Department should take a more prominent role through its Office of Terrorism and Financial Intelligence and the Financial Crimes Enforcement Network (FinCEN). He also expressed his support for the Corporate Transparency Act, led by Rep. Carolyn Maloney (D-N.Y.).
Lloyd DeVaux, President and Chief Executive Officer, Sunstate Bank, on behalf of the Florida Bankers Association
In his testimony, DeVaux urged the Committee to update the BSA to provide regulatory relief. DeVaux noted that significant resources are devoted to BSA compliance at financial institutions, and warned that the costs are driving some customers away from the official banking sector.
Heather Lowe, Legal Counsel and Director of Government Affairs, Global Financial Integrity
In her testimony, Lowe made several recommendations to improve the BSA/AML regime, such as: 1) utilizing technology to improve the system; 2) tailoring the regulations to fit all regulated entities tasked with AML compliance and reporting; 3) broadening the scope beyond banks; 4) establishing an information sharing mechanism with appropriate privacy safeguards; and 5) requiring disclosure of beneficial owners to law enforcement and financial institutions, among others.
Question & Answer
DeVaux underscored the significant compliance burden engendered by BSA/AML regulations. For instance, he stated that banks’ investigations into 71,000 alerts only resulted in 21 suspicious activity reports (SARs) filed; and he stressed the significant workload required by each investigation.
DeVaux added that community banks are regulated by the state and Federal Deposit Insurance Corporation (FDIC). He recognized the need for regulation, but added that banks would rather “enable the dreams of [their] community” than jump through “a lot of hoops” to comply with burdensome requirements.
DeVaux highlighted the broken feedback loop between regulators and financial institutions. He explained that banks get “very little feedback” from law enforcement and FinCEN on what compliance strategies work well, but cautioned that if banks “make a mistake, [they] know very quickly” what went wrong. DeVaux called for a safe harbor to help financial institutions develop innovative ways to comply with BSA/AML requirements as well as improve the feedback loop between regulators and regulated entities.
Baer added that banks have created a priority “super SAR” system for notifying law enforcement officials when transactions are “really suspicious.”
No Action Letters
Baer suggested developing a mechanism for financial institutions to clarify whether they are exempt from certain reporting requirements by FinCEN and law enforcement entities. He added that banks face uncertainty but are at risk if they “get it wrong.”
DeVaux explained that banks seldom share information with each other because they must be “certain” that the other institution has already filed with FinCEN on the same offense before they do so. Otherwise, they can face penalties. DeVaux added that it would save the industry a lot of resources if community banks could share information through a database or information sharing agreement. He added that privacy issues must be balanced with the benefits of efficiency.
Baer added that there are currently restrictions on sharing information even within a bank if a foreign person is involved in the transaction. Yet he called for ways to facilitate “more [information] sharing, rather than less.”
Maloney claimed that her bill on beneficial ownership would help financial institutions meet KYC requirements, adding that anonymous companies are a “fundamental vehicle” for money laundering. Baer agreed, adding that criminals know not to use the banking system, so they instead funnel money through limited liability corporations (LLCs) and other corporate forms. He added that banks already have customer due diligence (CDD) requirements from FinCEN, but he added that their efforts to identify beneficial owners is a game of “hide and go seek.” Baer stated that requiring corporations to report to states or FinCEN their beneficial owners would reduce the burden on banks as well as the risk of “getting it wrong.”
Waters maintained that the “seemingly endless” string of AML violations amongst “megabanks” illustrates that banks treat fines as a “cost of doing business” and are “disregarding” CDD requirements. Lowe acknowledged such “egregious cases” and lamented the lack of “criminal” prosecutions pursued for these breaches. She suggested that regulators “focus a lot more on individuals.”
Additional information on this hearing can be accessed here.