Loyola University Chicago School of Law, JD 2020
In a recent effort to strengthen the money-laundering defenses across the U.S. financial system, small banks and credit unions are being given the option to pool their resources. In a statement issued by the federal depository institutions regulators and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) the federal regulators detail that certain banks and credit unions can enter into collaborative agreements to pool resources for anti-money-laundering compliance purposes. The new regulation will help smaller community banks address the risk of financial crime while keeping the costs low and ultimately help prevent money-laundering.
Federal Agencies Issue a Joint Statement
On October 3, 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, FinCEN, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a rare joint statement focusing on smaller financial institutions. The statement indicated that it was time to offer more resources to financial institutions with similar risk profiles in order for them to experiment and create more aggressive protections against criminal, terror, and cyber groups. The regulation allows “community-focused banks and credit unions to share certain anti-money laundering resources in order to better protect against illicit actors seeking to abuse those types of institutions.” The statement describes banks that are most suitable for these arrangements as community focused, less complex operations, and lower-risk profiles for money laundering or terrorist financing.
Regulators Increasingly Begin to Help Credit Unions and Community Banks
The recent statement stems from an overall heightened focus by U.S. agencies to improve the results of anti-money laundering (“AML”) programs. Previously, AML programs would spend billions of dollars every year, yet they would only be able to “identify, seize, freeze or forfeit” a very small percent of the trillions of dollars in illicit finance. In other words, the programs were costing an enormous amount of money and only identifying a very small percent of the money-laundering occurring within major financial institutions. Furthermore, this regulation comes on the heels of federal investors seeing a shift of risk from domestic and foreign high-risk entities that have more sophisticated AML transaction monitoring systems to smaller and medium-sized banks with less resources.
The regulators’ hope is that with the help of these collaborative arrangements, smaller banks and credit unions can access AML program trainers with more expertise than they would have originally been able to afford. High quality AML trainers are expensive, and with two banks pooling their resources to contribute funds, they would be able to afford a higher quality trainer and be able to share that resource. In addition, regulators hope that this type of arrangement can create a dual employee. For example, the AML officer could also have oversight of certain business functions within the bank. This may prove beneficial because the banks would not only be getting a trainer, but also another employee.
The Pros and Cons
The statement provides a few examples of why the use of shared resources in a collaborative arrangement would be beneficial for banks. First, to assure ongoing compliance with the Bank Secrecy Act (BSA), banks must provide for a system of internal controls. With shared resources, two or more banks can conduct the internal controls. This could mean sharing the responsibilities of reviewing and drafting AML policies, reviewing and developing customer identification and account monitoring, or tailoring the monitoring systems for the current risks. In addition, banks are required to perform independent testing for compliance. The federal regulators state that such testing could be performed by the other bank in the collaborative agreement and vice versa thus decreasing the cost and hassle for banks. Additionally, banks must ensure that appropriate personnel are trained in BSA regulatory requirements and in internal AML/BSA policies and procedures.
Although the thought of collaborative agreements sounds cost effective and more efficient, the statement does warn that “resource sharing must be approached with careful due diligence and thorough consideration of the risks and benefits.” The statement pointed out that a confidentiality issue could arise with BSA officers being shared between banks. This could stress the confidential nature of the officer who must file suspicious activities reports and also monitor each bank’s day-to-day compliance. In addition, there is the issue of which bank bears the liability if a mistake is made. The statement squarely states “sharing resources in no way relieves a bank of this responsibility. Nothing in this interagency statement alters a bank’s existing legal and regulatory requirements.” Therefore, the blame falls on the bank where the error was made, and an institution cannot be held responsible for the individual acting on its behalf from the other bank.
To conclude, this statement may greatly benefit banks in helping them more efficiently and effectively manage certain BSA/AML obligations. However, these benefits must also be weighed against the risks. Banks should approach this new opportunity with due diligence and consider the risks of liability and confidentiality.